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On behalf of the, say, 204 or 205 Comstock employees and the board of directors, I'll make a few opening comments, and then we'll go to the results.
First, Comstock's shift, I think as Ron Mills has talked about to the analysts, I think Comstock's shift to longer laterals, the 10,500-foot laterals in 2022 versus the 8,800-foot laterals in 2021, you should all know that it's expected to create a great value on a per well basis going forward.
We have better cost efficiencies.
We should have a lower decline curve, thus an increase in well performance.
The higher capital efficiencies associated with the longer laterals did allow us to more than offset the impact of higher service costs in the fourth quarter of 2021.
You can see that in the numbers.
And we have seen higher service costs.
We will use commitment from the board and from management.
We'll use the free cash flow to pay off the revolver and redeem the remaining $244 million of the 2025 bonds.
We do have a target, continue to have this leverage ratio at 1.5 or less.
We think we can get there in the second half of 2022.
And that does open discussions up on returning capital to shareholders.
I know we may have that question.
Our drilling inventory, which is the holy grail of E&P companies, I think that's why you have a lot of M&As in the last year or two years.
But our drilling inventory has never been more valuable or stronger.
Because in 2021, we made great strides in extending our lateral length per location by 25% from our average lateral length at the end of 2020 it was 6,840 feet, and today, it's about 8,520 feet.
If you look at that, 25 years' worth of drilling inventory based upon our 2022 activity, we've got 1,633 net locations.
53% of those were Haynesville, 47% were Bossier.
And just think, I mean 902 net locations with lateral lengths 8,000 feet or longer.
On the operational front, which is I think that's the nucleus of this company, on that front we increased our drilling footage per day by 25%.
We went from 800 feet to 1,001 feet per day, and that's how you make money.
Our average lateral length at the wells in the fourth quarter, 11,443 feet.
And the reason is we drilled four 15,000-foot lateral wells, two Haynesville, two Bossier.
Again, in spite of higher service costs, we're able to lower our drilling and completion costs due to improved operational performance and improved capital efficiencies associated with the longer laterals drilled in the fourth quarter of 2021, which that will be carried over into 2022.
We have a few slides to take you back to 2018 and be accountable for our performance.
That was kind of a turnaround year.
That's the year that Jerry Jones and his family invested in Comstock.
And since that time, Comstock has surfaced as the only pure-play Haynesville producer.
I'm Jay Allison, chief executive officer of Comstock.
With me is Roland Burns, our president and chief financial officer; Dan Harrison, our chief operating officer; and Ron Mills, our VP of finance and investor relations.
While we believe the expectations and such statements will be reasonable, there could be no assurance that such expectations will prove to be correct.
Our fourth quarter 2021 highlights, Slide 3.
We cover the highlights on the fourth quarter on Slide 3.
In the fourth quarter, we generated $105 million of free cash flow from operating activities, increasing our total free cash flow generation for 2021 to $262 million.
Including the impact of our acquisition and divestiture activity, our total free cash flow for the year was $343 million.
For the quarter, we reported adjusted net income of $99 million or $0.37 per diluted share.
Our operating cash flow for the quarter was $250 million or $0.90 per diluted share.
Our revenues, including our realized hedging losses, increased 37% to $380 million.
Our adjusted EBITDAX in the fourth quarter was $297 million, 41% higher than the fourth quarter of last year.
Our production increased 12% in the quarter to 1.348 Bcf a day.
In the fourth quarter, we completed two 15,000-foot Haynesville wells, which had IP rates of 48 million and 41 million cubic feet equivalent per day, both of which are new corporate records that Dan Harrison will review in a moment.
During the quarter, we also closed on the sale of our Bakken properties and closed a bolt-on acquisition for $35 million.
If you'll flip over to Slide 4, we'll go over some of the major accomplishments in 2021.
We significantly reduced our cost of capital by refinancing $2 billion of our senior notes in March and June, which saved us $48 million in cash interest expense and extended our average maturity from 4.7 years to 7.1 years.
We also reduced the amount outstanding under our bank credit facility by $265 million with our free cash flow and asset sale proceeds and improved our leverage ratio to 2.2 times as compared to 3.8 times in 2020.
With another successful year in our Haynesville Shale drilling program, we drilled 64 gross or 51.9 net wells, including four 15,000-foot laterals.
On the wells we put to sales at an average IP rate of 23 million cubic feet equivalent per day, we grew our SEC proved reserves by 9% to 6.1 Tcfe with a PV-10 value of $6.8 billion.
We replaced 199% of our production at a low all-in finding cost of $0.60 per Mcfe.
Highlighting our attractive cost structure, we achieved a 78% EBITDAX margin, one of the highest in the industry.
In addition, we achieved a 12% return on average capital employed and a 27% return on average equity.
In 2021, we added 49,000 net acres to our acreage position prospective for the Haynesville and Bossier through a leasing program and acquisitions totaling $57.7 million or $1,178 per acre.
We took several big steps in 2021 on the environmental front.
Early in 2021, we partnered with BJ Energy Solutions to deploy its next-generation natural gas-powered Titan Frac Fleet, which is expected to be put in service in April.
The most significant step we took was to partner with MiQ to certify our natural gas production under the MiQ methane standard.
Flip over to Slide 5 and we recap the bolt-on acquisition in East Texas that we did close late December for a purchase price of $35 million.
The acquisition included 18.1 net producing wells and 17,331 net acres in Harrison Leon, Panola, Robertson and Rust counties.
With the acquisition, we added 57.9 net drilling locations which represents approximately one year's worth of our drilling inventory.
The acreage is 94% held by production, but the acquisition also added the lateral lengths on 44 of our existing drilling locations to be increased.
Our production increased 12% to 1.35 Bcfe a day.
Adjusted EBITDAX grew 41% to $297 million.
We generated $250 million of discretionary cash flow during the quarter, 62% higher than 2020's fourth quarter.
And our adjusted net income totaled $99 million during the quarter, a 186% increase from the fourth quarter of 2020.
We generated $105 million of free cash flow from operations in the quarter or $204 million if you include the impact of the acquisition and divestiture activity, which most of that occurred in the fourth quarter.
This free cash flow contributed to an improvement in our leverage ratio, which improved to 2.2 times, down from 3.2 times at the end of 2020.
Our cash flow per share during the quarter was $0.90 per share, up from $0.56 in the fourth quarter of 2020, and adjusted earnings per share was $0.37 per share as compared to $0.14 in the fourth quarter of 2020.
On Slide 7, we show how much Comstock has changed since 2018 when Jerry Jones and his family invested in the company.
Production growth has averaged 117% over the last three years.
EBITDAX has gone from $287 million to $1.1 billion at a compounded annual growth rate of 97%.
Cash flow has grown from $206 million back in 2018 to $908 million this year in 2021, averaging 114% over the last three years.
Adjusted net income has grown from $29 million to $303 million at a compounded annual growth rate of 319% and free cash flow from operations has grown to $262 million, and our leverage ratio has improved from four and a half times to 2.4 times.
On a per share basis, cash flow has gone from $1.96 to $3.29 and earnings has gone from $0.27 to $1.16.
On Slide 8, we provide a breakdown of our natural gas price realizations.
And this is an important slide to understand the quarterly results as we've had a very volatile NYMEX contract during the fourth quarter which has continued into the first quarter of this year.
On this slide, we show how the NYMEX contract settlement price, and we show the average NYMEX spot price for each quarter.
During the fourth quarter, there was a very significant difference between the quarter's NYMEX settlement price of $5.83 and the average Henry Hub spot price of $4.74.
During the quarter, we nominated 67% of our gas to be sold at index prices, which are more tied to the contract settlement price or the final price that the contract comes off the market at.
And then we also sold 33% of our gas in the daily spot market.
If you use those percentages, the approximate NYMEX reference price for looking at our activity in the fourth quarter would have been $5.47, not $5.83.
Our realized pricing from the fourth quarter averaged $5.22, which reflects a $0.25 differential from that reference price, which is fairly in line with our historical results.
In the fourth quarter we were also 72% hedged, so that reduced our final realized gas price to $3 per Mcf.
On Slide 9, we detailed our operating cost per Mcfe and the EBITDAX margin.
Operating costs per Mcfe averaged $0.67 in the fourth quarter.
That was $0.02 higher than the third quarter rate.
Our lifting cost and gathering costs were both up by $0.01, but production taxes were down by $0.03.
Higher G&A costs of $0.08 was also higher in the quarter, and that's primarily related to year-end adjustments for bonuses.
We do expect our G&A to go back to average somewhere between $0.06 to $0.07 per Mcfe in 2022.
Our EBITDAX margin including hedging came in at 78% in the fourth quarter, unchanged from our third quarter margin.
On Slide 10, we recap our fourth quarter and full year 2021 drilling and completion costs.
In the fourth quarter, we spent $140 million on development activities, $114 million of that related to our operated Haynesville and Bossier Shale properties.
We also spent $8 million on non-operated wells, and we had $15 million that we spent on other development activity in the Haynesville, in our Haynesville operations.
We spent an additional $3 million for our properties outside of the Haynesville.
For the full year, we spent $628 million on development activities.
$554 million was related to our operated Haynesville and Bossier Shale properties.
We also spent $74 million on non-operated activity and for other development activity outside of just drilling and completion.
We drilled 51.9 net operated Haynesville horizontal wells, and we turned 54.2 net wells to sales in 2021.
We also had an additional 2.2 net wells from our non-operated activity.
In addition to funding our development program, we also spent $58 million on acquisitions.
Most of those acquisitions related by an undrilled Haynesville shale acreage.
Slide 11 covers our proved reserves at the end of 2021.
We grew our SEC proved reserves from 5.6 Tcfe to 6.1 Tcfe in 2021, and we replaced 199% of our production.
Our 2021 drilling activity added 797 Bcfe to proved reserves, and we had about 89 Bcfe of positive price-related revisions.
We also added 203 Bcfe of proved reserves through our acquisition activity.
The reserve additions were offset by a divestiture of 100 Bcfe, which is primarily our Bakken shale properties.
Our all-in finding costs for 2021 came in at a very attractive $0.60 per Mcfe.
Our drill pit finding costs for '21 came in at $0.71 per Mcfe.
Our reserves are almost 100% natural gas following the sale of our Bakken properties.
The PV 10 value of our proved reserves at SEC pricing was $6.8 billion at the end of last year.
In addition to the 6.1 Tcfe of SEC proved reserves, we have an additional 2.4 Tcfe of proved undeveloped reserves which are not included in that number as they are not expected to be drilled within the five-year window required by the SEC rules.
We also have another 4.4 Tcfe of 2P or probable reserves, and we have 7.2 Tcfe of 3P or possible reserves for a total overall reserve base of 20.1 Tcfe on a P3 basis.
Slide 12 shows our balance sheet at the end of 2021.
We had $235 million drawn on our revolving credit facility at the end of the year after repaying $265 million during 2021.
The reduction in our debt and the growth of our EBITDAX drove a substantial improvement to our leverage ratio, which was down to 2.2 times in the fourth quarter on a stand-alone basis as compared to 3.8 times in 2020.
We plan on retiring $479 million of debt in 2022.
That would include redeeming our 2025 senior notes.
We are targeting to be below 1.5 times levered in 2022, and we ended 2021 with financial liquidity of almost $1.2 billion.
Flip over on Slide 13.
This is where we show our average lateral length we drilled by year going back to 2017 along with our estimated average lateral length for this year and also our record longest lateral that we've completed to date.
In 2017, our average lateral length was 6,233 feet as we were drilling primarily a mix of 4,500-foot and 7,500-foot laterals, and we had just started drilling our first 10,000-foot laterals.
In subsequent years through 2020, we slowly increased the number of 10,000-foot laterals that we were drilling, which allowed us to gradually increase the average lateral length.
In late 2020, we successfully drilled and completed our first lateral exceeding 12,500 feet, and our average lateral length in 2020 had increased to 8,751 feet.
Now, through the end of 2021, we have successfully drilled and completed four 15,000-foot laterals with two drilled to the Haynesville and two drilled into the Bossier.
In 2021, our average lateral length increased to 8,800 feet.
Our record longest lateral to date is 15,155 feet and was drilled and completed in the Haynesville in late 2021.
Building on the success of our 15,000-foot laterals, we now anticipate our average lateral length to increase by 19% in 2022 up to 10,484 feet.
In 2022, we anticipate drilling approximately 21 wells with laterals longer than 11,000 feet and nine of these being 15,000-foot laterals.
By continuing to execute our long lateral strategy, we'll be better able to maintain our low-cost structure into the higher price environment.
On Slide 14, we highlight the improvement in our drilling performance, which is based on the total footage drilled divided by the number of days from spud to TD.
Our drilling performance was relatively stable from 2017 through 2019 in the 700-foot per day range.
In 2020, our drilling performance improved 15% to 800 feet a day.
And in 2021, our drilling performance improved an additional 25% to just over 1,000 feet per day, while our record fastest well to date was drilled last year at an average rate of 1,461 feet a day.
The performance improvements have been achieved via drilling the longer laterals combined with sound drilling practices, improved tool reliability and execution at the field level.
With our goal of drilling longer laterals in future years, we expect to maintain our drilling performance at a very high level.
On Slide 15 is our updated D&C cost trend for our Bismarck long lateral wells.
These are wells with an average lateral length greater than -- with a lateral greater than 8,000 feet.
Our D&C cost averaged $1,027 a foot in the fourth quarter, which is a 2% decrease compared to the third quarter and flat compared to our full year 2020 D&C costs.
Breaking this down, our drilling costs remained essentially unchanged for the quarter at $413 a foot, while our completion costs were down 4% quarter over quarter to $615 a foot.
In spite of the higher service costs we began to experience during the last quarter, we were still able to achieve the slightly lower D&C cost due to improved operational performance and improved capital efficiency associated with the longer average lateral length that we drilled during the quarter.
Our average lateral length for the quarter was 11,443 feet.
This is the longest quarterly average lateral length we've achieved to date and was accomplished primarily due to the completion of our first two 15,000-foot laterals that were turned to sales during the fourth quarter.
The higher capital efficiencies associated with the longer laterals allowed us to offset the impact of the higher service costs during the quarter.
While we do continue to see service costs further increase into this year, our ability to execute on the longer laterals with the more robust economics will help cushion and partially offset the negative effects of the higher service costs.
On Slide 16 is a map outlining our fourth quarter well activity.
Since the last call, we have completed and turned 16 new wells to sales.
The wells were drilled with lateral lengths ranging from 8,504 feet to 15,155 feet with an average lateral of 10,508 feet.
The wells were tested at IP rates that range from 12 million up to 48 million a day with a 23 million cubic feet per day average IP.
The results this quarter include our first two planned 15,000-foot Haynesville laterals, the Talley 32-29-20 HC number one and number two wells.
These wells were completed with laterals of 14,685 feet and 15,155 feet and tested at rates of 41 million and 48 million cubic feet a day.
The seven wells with the lower IP rates are in Panola County in the liquids rich area of the Haynesville.
The high BTU gas in this area will generate a yield of 25 to 40 barrels of plant products, which will enhance the economics from a dry gas well with similar production by 20% to 30%.
Also during the quarter, we successfully drilled two additional 15,000-foot laterals into the Bossier as mentioned earlier.
These two wells were turned to sales late last night, and we'll be reporting on those on the next call.
Regarding activity levels, we did finish out 2021 running five rigs and three frac crews.
We're in the process now of adding two rigs, increasing our rig count to seven and will remain at the seven-rig count throughout the remainder of this year.
We plan to continue running three full-time frac crews throughout the rest of the year.
On Slide 17, this is the detail of the 2021 drilling inventory.
The drilling inventory is split between the Haynesville and Bossier locations.
It is divided into four categories.
We've got our short laterals up to 5,000 feet, median laterals at 5,000 to 8,000 feet, our long laterals at 8,000 to 11,000 feet, and we've got a new extra-long category now for the wells beyond 11,000 feet.
Our total operated inventory currently stands at 1,984 gross locations, 1,420 net locations, which represents a 72% average working interest across the operated inventory.
Based on -- our non-operated inventory currently stands at 1,425 gross locations and 213 net locations and this represents a 15% average working interest across the non-operated inventory.
Based on the recent success of our new extra-long lateral wells, we've modified the drilling inventory to take advantage of our acreage position, and where possible, we have extended our future laterals out further to the 10,000 to 15,000-foot range.
In our new extra-long lateral bucket, we capture all our wells that now extend beyond 11,000 feet long, and in this bucket, we currently have 397 gross operated locations and 287 net operated locations.
These are split 50-50 between the Haynesville and the Bossier.
To recap our total gross inventory, we have 436 short laterals, 392 medium laterals, 759 long laterals, and now 397 extra-long laterals.
The total gross operated inventory is split 53% in the Haynesville and 47% in the Bossier.
Also, by extending our laterals, we have increased the average lateral length in the inventory from 6,840 feet now up to 8,520 feet, which is a 25% increase.
And in addition to the uplift in our economics, the longer laterals will help to reduce our surface footprint on future activity and also further reduce our greenhouse gas and methane intensity levels.
In summary, our current inventory provides us with over 25 years of future drilling locations based on our planned 2022 activity levels.
With our ability to execute on the new ultra-long laterals, our drilling economics are more robust and it enhances the value of our acreage position.
I'm going to turn it now back over to Jay to summarize the outlook for 2022.
Well, like we said earlier, our drilling inventory, which Dan just said, it is the holy grail of E&P companies.
It's never been more valuable or stronger than it is today.
If you go to Slide 18, I'd direct you to kind of the summary of our outlook for 2022.
We expect our 2022 drilling program to generate 4% to 5% production growth year over year, and we would expect to generate in excess of $500 million of free cash flow at current commodity prices.
In 2022, the lateral length of the wells in this year's program is expected to be 19% longer than the 2021 wells.
The additional investment we are making this year in our drilling program will pay off in the future years as our lateral length per well will have a lower decline rate than the shorter laterals.
In 2022, our operating plan is focused on repaying $479 million of debt, including redeeming our 2025 senior notes.
We continue to have an industry-leading low-cost structure, which gives us best-in-class drilling returns.
We are working on the certification of our natural gas production as responsibly sourced gas under the MiQ standard.
At the end of 2021, we had financial liquidity of almost $1.2 billion, which is expected to increase further in 2022 as we repay the remaining borrowings outstanding on our bank facility.
On Slide 19, we provide the financial guidance.
As shown on the slide, first quarter production guidance of 1.24 to 1.29 Bcf a day, and the full year guidance is 1.39 to 1.45 Bcf a day.
During the first quarter, we only plan to turn to sales about 15% of the planned wells to be turned to sales for the year.
And those wells have a little bit lower working interest than the wells later in the year.
As a result, the majority of our wells turned to sales and production growth are expected to occur during the second and third quarters of this year.
Development capex guidance is $750 million to $800 million, which is based on a similar number of turned to sales wells as last year, and incorporates an expected 10% increase in service costs and the impact of our average lateral lengths being 19% longer this year.
As a result, if you factor in the 10% inflation and the 19% longer laterals, the midpoint of our guidance would actually represent about 3% to 5% of an improvement in efficiencies, mostly related to the longer laterals.
We've also budgeted for $8 million to $12 million of additional leasing costs.
Our LOE expected to average $0.20 to $0.25 in the first quarter and $0.18 to $0.22 for the full year, while our gathering and transportation costs are expected to average $0.23 to $0.27 in the first quarter and $0.24 to $0.28 for the year.
Production and ad valorem taxes expected to average $0.10 to $0.14 a year based on current price outlook.
Our DD&A rate is expected to average $0.90 to $0.96 per Mcfe.
Cash G&A is expected to total $7 million to $8 million in the first quarter and $29 million to $32 million in 2022, with noncash G&A expected to average almost $2 million a quarter.
Cash interest is expected to come in around $38 million to $45 million in the first quarter and $152 million to $162 million -- $160 million in 2022, and that incorporates the planned redemption of our 2025 notes later this year.
From a tax standpoint, the effective tax rate of guidance of 22% to 27% is in line with what we've been reporting.
And going forward, we expect to defer 90% to 95% of the taxes with the cash taxes being related to state taxes. | q4 adjusted non-gaap earnings per share $2.46.
q4 earnings per share $2.26.
sees fy 2021 sales up about 5 percent.
qtrly u.s. ecommerce comparable sales increased 16%.
sees 2021 adjusted diluted earnings per share growth of approximately 10%.
carter's - for q1 2021, projects net sales to be comparable to q1 2020 & adjusted diluted earnings per share will be about $0.25. | 0 |
If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the Investors section.
On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer; Jim Sheehan, Executive Vice President and Chief Financial Officer; and Jacinth Smiley, Group Vice President of Corporate Strategy.
Jacinth becomes, Executive Vice President and Chief Financial Officer on January 1.
Jim Snee will provide a review of the Company's current and future operating condition and a perspective on fiscal 2022, Jim Sheehan will provide detailed financial results and commentary in the fourth quarter and Jacinth Smiley will provide commentary on the Company's fiscal '22 outlook.
As a reminder, the fourth quarter of fiscal 2021 contained an extra week compared to fiscal 2020.
As a courtesy to the other analysts, please limit yourself to one question with one follow-up.
It will also be posted on our website and archived for one year.
Before we get started, I need to reference the Safe Harbor statement.
It can be accessed on our website.
Additionally, please note the Company uses non-GAAP results to provide investors with a better understanding of the Company's operating performance.
These non-GAAP measures include organic volume, organic sales and adjusted diluted earnings per share.
Jim will be retiring as CFO at the end of the calendar year, so this will be his last earnings call.
Jim has over four decades with our Company and under his tenure has built a world-class finance accounting and technology organization.
Jim was the guiding force behind Project Orion, an initiative that will benefit our Company for decades to come.
For over 43 years, with the last five years as CFO, Jim has been a trusted partner to me and many of my predecessors.
Jim helped complete over $5 billion in strategic acquisitions, including Justin's, Fontanini, [Indecipherable] Columbus, Sadler's, and our largest acquisition ever, Planters.
Equally impressive with Jim's contribution to reshaping our portfolio, as he was was also a guiding force behind many of the divestitures we made to transform our Company.
Jim's oversight to our evolution puts us on a solid foundation for the future growth of our Company.
Additionally, Jim has overseen the distribution of over $2 billion in dividends to our shareholders.
In addition to his business accolades, Jim was the key voice behind our game-changing Inspired Pathways program, which provides free college education for children of our team members.
Jim will be missed, and we wish him well in retirement along with his wife, Jean.
Jacinth Smiley succeeds Jim, and brings a wealth of experience from outside Hormel Foods, she has deep and broad domestic and international experience in areas such as corporate finance, public accounting and compliance.
Most recently, she served as the Group Vice President of Corporate Strategy.
Hormel Foods is fortunate to have Jacinth as CFO, and I'm looking forward to her leadership in her new role.
My sincere congratulations to both Jim and Jacinth.
In an incredibly difficult and rapidly changing operating environment, our team delivered outstanding top line results.
We achieved record sales in fiscal 2021, exceeding both $10 billion and $11 billion in sales for the first time.
For the full year, sales were $11.4 billion, representing 19% sales growth.
On an organic basis, sales increased 14%.
Our top line growth was incredibly balanced as each of our go-to-market sales channels and business segments posted strong double-digit sales gains, underpinned by value added volume growth, pricing and a better mix.
Adjusted diluted earnings per share for the full year increased 4% to $1.73, in spite of inflationary pressure and supply chain challenges.
Diluted earnings per share was $1.66.
We had an excellent fourth quarter and posted numerous records, including a fourth consecutive quarter of record sales, record diluted earnings per share and record cash flow from operations.
I want to commend our entire team for delivering this impressive performance and the numerous fourth quarter records.
Sales increased 43% and organic sales increased 32%.
Volume increased 14% and organic volume increased 8%.
We grew sales in every segment and every channel for the quarter.
Compared to pre-pandemic levels in 2019, all channels grew by over 25%, driven by strong demand and pricing action in almost every category.
It's all time record performance was led by further acceleration in our foodservice businesses.
Our foodservice teams across the organization posted 72% sales growth for the quarter, 33% higher than pre-pandemic levels.
This followed second quarter growth of 28% and third quarter growth 45%.
Strength was broad-based with significant contributions from Refrigerated Foods, Jennie-O Turkey Store and MegaMex.
We also saw a strong recovery in our noncommercial segments, including college and university and K through 12 institutions.
Our foodservice portfolio remains perfectly positioned to meet the needs of today's foodservice operators with labor and time saving products.
I believe our growth in foodservice is a function of our differentiated value proposition in the industry, as well as our dedication during the pandemic.
We have grown with our distributor and operator partners during the recovery, strengthening many of our partnerships and decades long relationships.
The top line performances from our other channels were equally impressive, retail, deli and international each delivered a second consecutive year of growth.
Retail and international sales both increased 34% and deli sales increased 24%.
On an organic basis, each channel posted strong double-digit growth.
Growth came from numerous brands across all areas of our portfolio, including SPAM, Applegate, Columbus, Hormel Black Label, Wholly, Hormel Complete Gatherings and many more.
We continue to see very positive trends for consumer takeaway at retail.
According to IRI, key metrics for our brands such as buy rate and trips per buyer remain favorable, which indicates elevated consumer spending on our products has remained.
We also continue to grow share in many important categories, including Hormel Gatherings, party trays, Hormel pepperoni, SPAM luncheon meat and Hormel Chili.
Our One Supply Chain team has done an excellent job operating in and navigating constant supply chain disruptions.
We've also seen the positive impact of their strategic actions, namely, we're starting to see an increasing number of our open positions being filled, more automation being implemented in our facilities and a more simplified product portfolio.
In total, these actions are allowing us to maximize our throughput to meet the continued strong demand of our customers.
From a bottom line perspective, fourth quarter earnings were a record $0.51 per share, a 19% increase compared to 2020, an acceleration in our top line results and the addition of the Planters business led to the earnings growth.
As we said in the third quarter, we expected margins to improve as pricing actions took effect.
Indeed, margins improve sequentially in all four segments.
Pricing actions, improved promotional effectiveness and a more profitable mix, all contributed to the improvement.
We started to see relief in key raw materials in the fourth quarter compared to prior quarters.
However, labor rates, freight, supplies and raw material costs remain above year-ago levels and in the case of freight, increased further.
Looking at the segments, Grocery Products, Refrigerated Foods and International segments, each posted double digit segment profit growth.
Jennie-O Turkey Store profits declined due to higher feed costs.
A few highlights from the quarter includes the following.
Refrigerated Foods delivered strong volume sales and profit growth.
The team was able to leverage the numerous capacity expansion projects since the start of the pandemic for categories such as pizza toppings, bacon and dry sausage.
Within Grocery Products, our simple meals and Mexican portfolios generated excellent growth, in addition to contributions from the Planters snacks nuts business.
Notably, the SPAM brands delivered its seventh consecutive year of record growth, and we recently announced plans for additional capacity to support future growth.
Our international team achieved a seventh consecutive quarter of record earnings growth with strong results from all of their businesses.
The momentum this business has generated over the last two years supports our plans to aggressively expand internationally.
Lastly, Planters made a positive impact, especially in the fast growing snacking and entertaining space and within the convenience store channel.
This quarter's results were outstanding and we intend to build on this momentum going into 2022.
Over the past decade, Hormel Foods has deliberately evolved from a meet centric commodity-driven company with a heavy focus on retail pork and turkey to a global branded food company with leading brands across numerous channels.
Our Company today is more food forward than ever, with a sharp focus on the needs of our customers, consumers and operators.
As we begin fiscal 2022, we plan to continue our evolution.
First, we will complete the full integration of the Planters business across all functions.
The first of three production facilities was successfully integrated in the fourth quarter and the remaining two facilities are scheduled to be fully integrated in our first quarter.
Since acquiring Planters six months ago, our sales, marketing, innovation and R&D teams have been hard at work, developing new and innovative products and flavors, many of which will be rolled out this coming year.
They've also been working on refreshing the branding and packaging, which will also be launched in 2022.
Seeing the great work of our teams has been even more confident about where we are able to take this brand in the future and further strengthen our conviction of the potential for Planters.
From a financial standpoint, the Planters business is performing at the top end of our expectations and we expect that trend to continue in fiscal '22.
Second, we are also taking a series of actions at Jennie-O Turkey Store.
Over time, we expect these actions to result in a more demand oriented and optimize turkey portfolio that is better aligned to the changing needs of our customers, consumers and operators that will result in long-term growth, improved profitability and lower earnings volatility.
The transformation starts with accelerating our efforts to shift from commodity to branded value-added products.
This is a similar to the successful strategy we have executed in Refrigerated Foods over the past 15 years.
As a result, we will close the Benson Avenue plant located in Willmar, Minnesota in the first half of fiscal 2022.
This plant is an older inefficient facility which produces numerous commodity items.
Value-added products will be consolidated into multiple other facilities.
Team members will transition to our newer and larger facility also located in Willmar, which will supplement staffing levels.
Finally, we will continue to integrate business functions into the Hormel Foods parent organization.
Over the past two years, we have successfully integrated IT services, finance and accounting and HR into the Hormel organization through Project Orion, and we will continue these efforts for other functions.
By doing so, we will bring the Turkey expertise and competitive advantages of the Jennie-O team to the broader organization.
I want to be very clear that Turkey will continue to play an important role in our Company for many brands, including Columbus, Applegate, Hormel Natural Choice, in addition to Jennie-O.
Turkey is vital to our balanced business model, serves to diversify our portfolio and it's important to consumers who are looking for high protein, lean and versatile offering.
We will provide further update and details on the financial components and timing on our first quarter call.
Finally, we made additional progress on optimizing our pork supply chain by signing a new five-year raw material supply agreement with our supplier in Fremont, Nebraska.
This new agreement more closely matches our pork supply with the needs of our value-added businesses, while simultaneously reducing the amount of commodity pork lease out.
Similar to the rationale for selling the Fremont plant in 2018, this new agreement further diversifies us away from commodity sales, increases our flexibility within our supply chain and decreases our earnings volatility.
This agreement should result in a reduction of approximately $350 million of commodity fresh pork sales at very low margin.
The impact is split between the Refrigerated Foods and International segment.
The contract will be effective at the start of calendar year 2022.
The success we are having with the Planters, the actions we are taking at Jennie-O Turkey Store and the continued progress we are making in our pork supply chain, all provide greater insights into how we are continuing to evolve Hormel Foods for next year and beyond.
And not only have we evolved our portfolio, but we will continue to evolve how we operate as a company with initiatives such as One Supply Chain, Project Orion and our Digital Experience group.
Looking at fiscal 2022, we expect net sales to be between $11.7 billion and $12.5 billion, and for diluted earnings per share to be between a $1.87 and $2.03 per share.
We expect growth in excess of our long-term goals due to organic growth across each of our segments and strengthen our Planters business.
I have confidence in our ability to achieve our guidance with all four segments delivering growth.
Jacinth Smiley will provide more color regarding key drivers to our fiscal 2022 outlook.
The company achieved record fourth quarter and full year sales of $3.5 billion and $11.4 billion respectively.
Organic sales increased 32% for the quarter and 14% for the full year.
Planters contributed $411 million in sales for the full year.
Earnings before taxes increased 26% for the fourth quarter, strong results in Refrigerated International and the inclusion of Planters led to the strong finish to the year despite ongoing inflationary pressures.
Earnings before taxes increased 1% for the full year compared to fiscal 2020.
Diluted earnings per share of $0.51 was a record.
This was a 19% increase over last year.
Adjusted diluted earnings per share for the full year was $1.73, a 4% increase from last year.
Diluted earnings per share was $1.66.
SG&A as a percentage of sales was 7.5% compared to 7.9% last year.
Strong sales growth and disciplined cost management contributed to the improvement.
Advertising investments increased 12% compared to last year.
As anticipated, operating margins in the fourth quarter increased compared to the third quarter as a result of effective pricing action.
Segment margins expanded from last quarter by 136 basis points to 10.7% with increases in each segment.
In 2021, inflation, labor shortages in the Planters deal cost all negatively impacted margins.
The fourth quarter results, including the continued strong demand of our products are an indication of improved market conditions as we exit the year.
Net unallocated expenses in 2021 increased primarily as a result of one-time acquisition costs for Planters and higher interest expense.
The effective tax rate for the year was 19.3% compared to 18.5% last year.
Operating cash flow for the fourth quarter was a record, resulting from strong earnings and disciplined working capital management.
Our balanced business model and consistent cash flow provided protection against the complex and challenging business dynamics we navigated during the year, allowing us to invest in numerous capital projects, acquired Planters and grow the dividend.
We paid our 373rd consecutive quarterly dividend effective November 15th at an annual rate of $0.98 per share.
We also announced a 6% increase for 2022, marking the 56th consecutive year of dividend increases.
During 2021, the Company repurchased 500,000 shares for $20 million.
Capital expenditures were $232 million.
The Company ended 2021 with $3.3 billion in debt or approximately 2.5 times EBITDA, although no mandatory debt repayments are required until 2024.
Based on our strong cash flow, we expect to make incremental payments as soon as the second half of 2022.
We remain committed to maintaining our investment grade rating and deleveraging to 1.5 times to 2 times EBITDA by 2023.
Market conditions for pork input cost remained elevated during the fourth quarter.
The USDA composite cut out averaged 33% higher compared to last year, supported by strong demand for pork and historically low cold storage levels.
Hog prices averaged 62% higher than last year, but were down 27% compared to the third quarter.
Belly, pork trim and beef trim markets were also significantly higher for the quarter compared to last year.
The latest estimates from the USDA indicate pork production for the year to decreased 2% compared to 2020, and remain relatively flat in 2022.
Labor shortages may continue to be a significant factor affecting industry production.
Turkey industry fundamentals were strong.
The Whole Turkey and thigh meat markets reached all time highs during the fourth quarter with breast meat prices above a year ago.
Supporting these prices were historically low cold storage levels, lower poult placements and decline in egg sets.
Higher feed cost and labor shortages continue to negatively impact Jennie-O.
The cost increased over 60% from last year in the fourth quarter.
In 2022, we anticipate pork, beef, turkey and feed prices to remain above historical levels.
We delivered strong results in the fourth quarter as the team overcame challenging operating conditions and volatile markets.
The performance is a testament to the strength of our brands, pricing power, balanced model and the team's ability to execute in a dynamic market environment.
I appreciate the support of Jim Snee, the Board of Directors and my team over my tenure as CFO.
I take great pride in the evolution and accomplishments of the Company during my career and leave with the greatest confidence in the future.
I've enjoyed my interactions with the shareholders and analyst community and I wish you will.
I know the Company is an excellent hands with Jacinth, and you will have an opportunity to get to know her better in the coming months.
Jacinth will provide an overview of the fiscal 2022 guidance and further context on our expectations for next year.
For analysts and the investment community on the call, I look forward to meeting you in the coming weeks and months.
I'm excited to be stepping into the Chief Financial Officer role at Hormel Foods, a Company known for its financial strength, it's powerhouse brand and its commitment to employees and communities.
In the time I've been at the Company, I have found that the Hormel Foods is innovative and has a results driven focus for all stakeholders.
As Jim mentioned, allow me to share a bit more commentary regarding key drivers to our fiscal 2022 outlook.
Building on the momentum we established during the second half of the year and the strategic investments we have made throughout the pandemic, we expect to generate sales and earnings growth in fiscal 2022 above the long-term goals we announced at our Investor update in October.
We anticipate growth from all four segments, driven by continued elevated demand for our products, the impact from our pricing actions, improve production throughput, new capacity for key categories such as pizza toppings and dry sausage, and the full-year contribution of the Planters business.
We also expect operating margins to show improvement throughout the year similar to the dynamic, we experienced in the fourth quarter.
It is important to note that rapid changes in raw material input costs can shift profitability between quarters.
In addition to generating strong sales and earnings growth, we will continue to invest in our leading brands through increases in strategic marketing and advertising, capacity expansions for, for high growth platforms and capabilities to drive industry leading innovation.
The Company's target for capital expenditures in 2022 is $310 million.
We are scheduled to open a pepperoni expansion to our newest facility in Omaha during the second quarter, which will provide the needed capacity to meet growing demand in our retail and foodservice businesses.
We are also beginning work on another expansion for the SPAM family of products, scheduled to be operational in 2023.
In addition to these larger projects, we are continuing to invest in cost savings, technology and automation projects to drive long-term savings and efficiency.
Pivoting to innovation, we achieved our 15% goal in 2021.
We have strong innovation platform for brands such as Planters, SKIPPY, Justin's, Herdez, and Hormel Black Label and Retail as well as the Jennie-O and Happy Little Plants brands in the foodservice channel.
In addition to our continuous process and product improvement initiatives give us the confidence going forward to consistently achieve our stated innovation goal.
I want to speak for a moment about the complexities of our operating environment.
The operating environment is expected to remain complex in fiscal 2022 and our guidance accounts for the near-term impacts from labor shortages, higher costs and supply chain disruption.
Our entire team has done an excellent job executing our business strategies in this dynamic environment.
In many ways, we have enhanced our competency for solving the day to day challenges inherent to our industry.
We have increased our efforts higher and maintain team members and have developed many strategies to mitigate the effect of labor shortages to meet elevated demand.
This includes maximizing our flexibility to produce the items that are most in demand and leveraging our manufacturing partnerships to increase throughput wherever possible.
Our One Supply Chain team allows us to continue to actively manage our raw material procurement, logistics network and supply partnerships to minimize the impact of further inflation and supply chain disruption.
We will also benefit from our expanded logistics network which has added capacity for both the Refrigerated and Grocery Products business.
As a result of these actions, we expect improved fill rate and load factors in fiscal 2022.
The announcement of the Jennie-O Turkey Store transformation is another step in our evolution to become and stronger global branded food Company.
Consistent with our long-term strategy, we are continuing our efforts to actively shift away from commodity businesses toward branded, value-added businesses.
We expect our strategic and intentional actions to create a better, more profitable and sustainable business model.
Taking all of these factors into account, as Jim has mentioned, we are setting our full year sales guidance at $11.7 billion to $12.5 billion and our diluted earnings per share guidance at $1.87 to $2.03.
Additionally, this guidance reflects the Benson Avenue facility closure, our a new pork raw material supply agreements and and effective tax rate between 20.5% and 22.5%.
Fiscal 2022 will be 52 weeks.
As we move forward to execute against our strategic imperatives.
In 2022 and beyond, I'm pleased to be with a Company that continues to evolve as a global branded food Company.
Jim often says, we are uncommon.
I have seen that first time in my time with the Company thus far.
This starts with our unwavering commitment to employee safety and remaining an employer of choice in the communities we live and work.
We're taking purposeful actions to transform our Company as we embark on our most ambitious corporate responsibility journey yet, our 20 by 30 challenge, which is certainly important from an ESG standpoint.
Our experienced management team, the tireless work of our team members around the world and the progress made to implement the Project Orion and One Supply Chain initiative, gives us added confidence in our ability to deliver growth in fiscal 2022 and beyond.
I am excited to be with Hormel Foods and be part of this -- its continued success. | q3 revenue $308 million.
qtrly loss per share $1.27.
qtrly adjusted loss per share $1.17.
reiterates its revenue growth and earnings outlook for fiscal year. | 0 |
They can be accessed at ir.
Following our prepared comments, we will open the call for a question-and-answer session.
We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2021.
We will also be referencing non-GAAP financial measures during the call.
We have a lot of new and exciting updates to communicate this quarter.
First, I'll provide a high-level overview of fiscal first quarter results.
After that, I'll walk through our new segment reporting structure, which went into effect this quarter and explain the rationale for this change.
Lastly, I'll update you on our broad-based transformation approach, which is underway and provide examples of the significant opportunities we see to deliver a step change in performance for the business.
Following that, our new CFO, Alex Pease, will provide a deep dive into our quarterly performance for our newly organized segments and other critical financial performance.
We will then move to Q&A and answer any questions you may have.
We started our fiscal year off with a solid quarter that was in line with our expectations and within our guidance range.
Despite continued supply chain disruptions, higher inflation and increased absenteeism related to COVID, we executed well.
For the fiscal first quarter, sales were $5 billion, up 13% year over year.
We delivered consolidated adjusted EBITDA of $680 million, up 2% over the same period and adjusted earnings per share came in at $0.65 per share, up 6.6%.
During the quarter, we also continued to aggressively buyback stock, repurchasing roughly $100 million worth of stock while maintaining net leverage of 2.4 times, well within our desired range of two and a quarter to two and a half times.
As a reminder, the first quarter was a record maintenance quarter for WestRock.
We had a number of projects delayed from previous quarters due to COVID and the ransomware incident last year and I'm pleased to report we completed all scheduled maintenance projects safely.
COVID continues to cause disruptions, impacting labor at our mills and box plants as well as further contributing to ongoing supply chain challenges.
Despite these challenges, we are resilient and continue to execute well, as demonstrated by our strong results.
Finally, demand for our products across consumer, corrugated, machinery and other product lines remain strong and our backlogs are near record levels.
Let me now provide an update on our new reporting structure.
I'm on Slide 4.
As a reminder, WestRock previously reported in two segments: corrugated packaging and consumer packaging.
We are now reporting in four segments to provide greater visibility into the integrated performance of our packaging businesses, while we focus our merchant paper business on critical strategic markets as well as providing material for the packaging converting businesses.
This new structure will help us highlight the performance of all elements of our portfolio.
We reorganized into the following segments.
corrugated packaging, which includes integrated corrugated converting operations and represented 44% of first quarter sales.
Consumer packaging, which includes integrated consumer converting operations and accounted for 23% of first quarter sales.
Paper, which includes all third-party paper sales and made up 27% of first quarter sales and distribution which includes our distribution business, which is roughly 6% of sales.
Perhaps more importantly, this new structure will further enable an enterprise sales approach to drive growth as well as greater efficiency and synergy to improve profitability.
I will describe this in more detail shortly.
Let me now spend a few minutes on where WestRock is today and where we are headed.
We have been driving a comprehensive strategic review of our markets and our go-to-market approach.
In parallel, we have taken a hard look at all our assets to evaluate their merits and their position in the portfolio while also evaluating our ability to drive to a greater level of operational excellence and profitability.
And we're already making progress.
We've made significant strides in the integration of our consumer business and have implemented productivity improvement plans across the company.
And the restructuring of our mill assets into one organization is already providing greater production flexibility across our footprint.
I will share a more fulsome perspective in the future, but suffice it to say, we have significant opportunity.
We have not fully integrated many of the acquisitions we have made.
We need to turbocharge our digital strategy, not just in the back office, but also in manufacturing and innovation.
We have elements of the portfolio that are noncore to our integrated strategy and we have inefficiencies that must be addressed.
Our profitability and our ROIC are not where they need to be.
This is going to change as we implement our transformation plan.
Importantly, our senior leadership team is aligned and is mobilized to drive this change.
Together, we have developed this transformation plan and have shifted into execution.
At a high level, our plan includes three overarching priorities.
Second, drive a step change in our margins through pricing excellence, productivity, mix management and cost control.
We are implementing our new WestRock operating system that standardizes our systems and utilizes our digital tools to identify options to drive efficiency and do things even better.
And third, generate consistent ROIC in excess of our cost of capital through disciplined investment, operational excellence and portfolio optimization where appropriate, while maintaining strong free cash flow, significant balance sheet strength and prudent capital allocation.
Let me provide an update on each of our three strategic priorities.
Our growth agenda is designed to maximize the value of the complete packaging solutions only WestRock can provide.
Our combination of consumer and corrugated packaging, paper, machinery and access to distribution is unique in the industry and a strategic differentiator.
It enables us to sell integrated solutions that are valued by our customers and partner with them to ensure that they are responsive to macro trends such as sustainable packaging.
With our portfolio, we have the capability to deliver full packaging solutions that are unmatched in our industry.
General Motors is a great example of this and we were just recognized as our supplier of the year.
With GM, we have partnered to provide options for brand security that help combat counterfeiting issues in the supply chain process, we produced their primary parts packaging and secondary corrugated packaging using our global manufacturing footprint to ensure they have the right supply and the right place when they need it.
Innovation and plastic replacement continues to be a growth driver.
We also can anticipate customer needs and introduce new products that support enhanced sustainability.
This quarter, we announced a partnership with Grupo Gondi in Mexico to provide our CanCollar product to ABI Mexico Grupo Modelo.
This expansion of CanCollar is an exciting development and one that demonstrates the growth potential of our sustainable products.
Our integrated one enterprise approach is driving value and we are continually working to maximize this value while minimizing our exposure to lower-value markets.
To that end, we've completed the first phase of our portfolio analysis and I look forward to sharing more about this soon.
Let's now turn to how we are going to drive margin improvement.
Historically, our margins in corrugated have been 18% and 16% in consumer, improving both as a key priority.
As we begin our journey of developing an enterprisewide operating system, our first focus has been quantifying the opportunity and identifying areas to tackle.
In recent months, we have standardized the measurement methodology in our operations and have identified significant opportunity to expand capacity without adding capital.
We have evaluated our asset footprint and see warehousing and logistic opportunities that we are optimizing.
We are also investing in our business to increase our level of integration and introduce automation, predictive analytics and other cutting-edge digital capabilities into our network.
To that end, we are constructing a state-of-the-art corrugated converting plant in the Pacific Northwest that will be cutting edge in efficiency and throughput.
This is just one example of many that we are excited to share.
We are aggressively focused on improving our ROIC in excess of our cost of capital.
While improving our productivity is an important part of the equation, capital deployment and capital utilization are equally important.
Through our initial diagnostic work, we have identified opportunities to expand capacity without adding capital.
We have looked at our portfolio and identified noncore assets that don't meet our return thresholds and we have implemented a disciplined approach to capital deployment that directs our resources to only the highest return projects.
We are focused on ongoing efforts to drive best-in-class returns in our portfolio.
And lastly, our senior leadership team now has an explicit ROIC component to our long-term compensation program.
Additionally, we are laser-focused on generating strong and consistent free cash flow and maintaining substantial financial flexibility in our balance sheet.
This strength enables us to invest in our business through all business cycles and also reward shareholders consistently.
To that end, we have aggressively paid down debt over the past several quarters and have increased the dividend twice in the past year.
Our intent is to reinforce our commitment to a stable and growing dividend while also continuing to aggressively repurchase WestRock stock.
As a reminder, in Q4 of 2021 and Q1 of 2022, we have repurchased approximately $223 million of stock as an initial down payment on this strategy.
With our very strong free cash flow generation and our current valuation level, we intend to get more aggressive on our stock buybacks and are targeting repurchases up to $500 million over the next several months.
We will continue to monitor short-term fundamentals that provide the best return opportunities for our capital allocation.
A lot of exciting change is underway at WestRock and I'm convinced about the significant value creation opportunities ahead for our company.
We are committed to executing our plan to drive enhanced shareholder value and our team at WestRock is motivated and enthusiastic about what is ahead.
We are focused on growing through innovation with new sustainable products and digital engagement tools that our customers and our consumers need in today's marketplace.
We have a new transformation office in place that is driving rigor in all that we are doing, including standardizing key operating and performance metrics across the asset base.
We have brought in a new supply chain leader, Peter Anderson, who is aligning our supply chain operations across the company with a focus on greater productivity and cost savings.
And finally, I'm excited to have Alex Pease join us as CFO, effective November 2021.
With over 20 years of experience in corporate strategy, M&A, capital markets, portfolio optimization and broad-based business transformation as well as extensive public company experience, Alex has already proven to be a strong partner.
I'll now ask Alex to provide the detailed rundown on our performance.
I'm excited to be here for my first earnings call as CFO.
Before I review first quarter results in detail, I want to reiterate the diversity of opportunity that David described and reinforce the commitment to a fundamentally different level of performance.
The opportunities to drive a step change in margin as well as significant ROIC improvement are real.
And rarely have I seen the team is aligned behind the vision for the future is this one.
While it's early in the process, I have every conviction that we'll be successful and look forward to supporting David and the team in the journey.
And with that, let's cover results.
Fiscal first quarter sales were up 13% to $4.95 billion and consolidated adjusted EBITDA increased 2% year over year to $680 million.
Consolidated adjusted EBITDA margin was 13.7%.
Price and mix positively impacted earnings by $600 million year over year.
This higher pricing was mostly offset by $520 million in higher costs, including higher fiber, transportation and labor as well as the impact of the previously discussed high planned maintenance conducted in the quarter.
As a reminder, the first fiscal quarter is the highest maintenance quarter of the year.
In addition, we faced challenges with COVID related to freight and raw materials, which impacted our production output.
Turning to Slide 12.
Sales in corrugated packaging, excluding white top trade sales were up 11.5% year over year to $2.1 billion.
Adjusted EBITDA declined 17% to $289 million giving the segment an adjusted EBITDA margin of 13.5%, also excluding white top trade sales.
Price drove an additional $277 million in adjusted EBITDA year over year.
However, this was more than offset by $230 million in inflation due to labor challenges with COVID-related absenteeism and logistics issues as well as $63 million of lower productivity and $43 million of lower volume.
The impact of the high level of downtime, both planned and unplanned, drove much of the volume decline.
Following a strong first fiscal quarter of 2021, we experienced significant supply chain challenges in 2022.
And as well as cost inflation in most input costs and the higher fixed cost impact of the record planned downtime for the scheduled maintenance in our mill system.
This was further impacted by lower productivity due to high COVID absenteeism and the introduction of inexperienced labor into our factories.
We are actively working to address each of these issues and are anticipating that the business will return to more historical levels of profitability over the balance of the year with additional upside as we deploy the WestRock operating system that David discussed.
During the quarter, our North American box shipments were 3.7% lower year over year, driven by our record mill maintenance levels, COVID-related slowdowns and continued disruptions in the supply chain.
However, backlog for the corrugated packaging business remains very strong.
If we could have made more, we certainly would have sold it.
Over the next two quarters, we expect additional pricing to flow through our corrugated packaging business from the previously published price increases.
As a reminder, this only includes pricing that has already been published in pulp and paper week.
Turning to the consumer packaging business on Slide 13.
Sales were up 7% year over year to $1.1 billion, though adjusted EBITDA declined 3.4% to $169 million in the quarter.
Adjusted EBITDA margins were 14.9% for the segment.
As in corrugated, better price and mix added $50 million to adjusted EBITDA.
Also, improved productivity and better volume drove $14 million and $6 million of higher adjusted EBITDA, respectively.
However, higher fiber, transportation and labor costs as well as the high maintenance level negatively impacted earnings with total inflation of $76 million, more than offsetting the other improvements.
Consumer backlog remains very strong at five to seven weeks and we continue to implement the previously published price increases across all consumer grades.
government to offer free COVID test kits to every household in the country.
Turning to Slide 14.
Revenue for our paper business came in at $1.4 billion, up 24% year over year.
Adjusted EBITDA was $232 million with an adjusted EBITDA margin of 17%.
Adjusted EBITDA was up an impressive 53% year over year due to price and mix improvements with the flow-through of previously published price increases.
Export markets were also very strong.
While we face some headwinds with lower production levels and freight inflation, the paper business performed very well this quarter.
Looking forward, demand and profitability for our paper products remain strong, both in the independent domestic and export markets, highlighting the importance of certain strategic markets and the value of our diversified portfolio.
Backlogs continue to be at historically high levels and for the remainder of the year, we expect to achieve significant pricing as recently published pricing flows through our contractual business.
On Slide 15, we show our distribution results.
Those sales were up 7% to $325 million.
Adjusted EBITDA margins fell to 2% from 5.4% last year, mainly due to supply chain issues and the higher cost to service customers driven by higher fuel and labor costs.
Demand remains strong for our distribution business and is outpacing our ability to supply customers due to labor and supply chain challenges.
Our free cash flow for the quarter was down significantly year over year, but much of this change was due to the reversal of the pandemic action plan that we had in place during the first quarter of fiscal 2021.
Specifically, we were negatively impacted by the payment of short-term incentive compensation in cash versus the stock payment made in the previous year.
Compounding that pressure, our strength in fiscal year 2021 led to a larger bonus payment as compared to the previous year when short-term incentive compensation was paid at threshold level.
Finally, we had negative impact from the 401(k) match returning to cash payments rather than stock and the required repayment of the deferred payroll tax as part of the CARES Act.
Though the quarter was highly impacted, we still expect to generate cash flows in excess of $1.3 billion as we progress through the year.
Turning to Slide 17 and our financial guidance for the second quarter of 2022.
We continue to implement all previously published price increases.
We expect roughly flat sequential cost inflation as improvements in energy and OCC costs should be offset by higher freight, wage and other expenses.
Though we are past the highest maintenance quarter due to delays in mill maintenance earlier in fiscal 2021, along with our originally planned outages, we still have approximately 128,000 tons of scheduled downtime across our system in the coming months.
These assumptions result in forecasted consolidated adjusted EBITDA of $780 million to $830 million and adjusted earnings per share of $0.94 to $1.08 per share.
As a note, this guidance does not include any potential benefit from the $70 per ton price increase across our containerboard grades that we have communicated to our customers.
Some additional assumptions behind our outlook include OCC costs down $10 to $15 per ton, natural gas costs down sequentially.
Labor expense up sequentially due to normal Q2 merit increases, continued inflation in freight and logistics expense, a tax rate of 23% to 25% and diluted shares outstanding of approximately 267 million.
In closing, we're in the process of transforming WestRock into an industry leader that delivers consistent, strong results to shareholders through all operating environments.
We are in the beginning phases of our journey to optimize our portfolio through operational efficiency, footprint optimization and growth investments.
We've made substantial progress on these efforts already, made decisions about our path forward and continue to hire and develop key talent to help us advance our vision.
We look forward to providing a deep dive overview of WestRock, our WestRock operating system and long-term targets at our 2022 investor day, which was previously scheduled for February.
Given the current situation with COVID, we have decided to move this important event to May with the hope that we can meet in person.
With that, let's move to Q&A.
Operator, may we take our first question, please? | q1 sales $4.4 billion versus refinitiv ibes estimate of $4.41 billion.
q1 adjusted earnings per share $0.61. | 0 |
Before we begin, let me remind you that the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call.
In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA.
I will begin with highlights for the quarter, and David and Nick will follow up with additional operating detail.
First, let's start with the obvious.
Operating two separate and distinct service business segments with 17,000 employees during a national pandemic brings unique, unpredictable and abrupt challenges.
Fortunately VITAS and Roto-Rooter have been classified as essential services allowing Chemed to operate during the pandemic.
Maintaining operations in this environment is far from business as usual.
First and foremost, our number one focus has been and will remain on the safety and well-being of our employees, patients and customers.
We will maintain this focus regardless of the cost to safely operate during the pandemic.
April 2020 was probably the most challenging month, we have ever seen significant operating issues emerge daily, triggered primarily from incredibly fast-moving and sometimes contradictory federal, state and local government regulations.
Logistical operating issues were identified, analyzed and solutions for put in practice immediately.
We were able to develop and continuously refine effective work arounds on supply chain issues, labor and scheduling issues, patient access restrictions, employee safety, healthcare protocols, technology solutions as well as information security protocols allowing our employees to continuously serve our local communities in a safe agile manner.
We closely followed the myriad of federal, state and local regulations in the development and implementation of infrastructure necessary to safely allow our field, support and corporate support staff to safely limit as much as practical, physical interaction among our 17,000 employees.
On the VITAS segment, the federal government and specifically HHS and CMS have been exceptionally supportive in terms of relaxing regulations, allowing the use of telehealth capabilities where appropriate and providing pragmatic flexibility in caring for our 19,000 plus patient census.
As most of you are aware on March 27, 2020 the CARES Act was signed in the law.
The CARES Act includes financial support for healthcare providers to maintain operational capacity as well as assist providers with issues caused by the coronavirus panic.
On April 10, 2020, VITAS without application received $80.2 million of CARES Act funds, that was formulaically determined by the federal government based on our 2019 Medicare fee-for-service revenue.
These CARES Act funds are specified to be used to prevent, prepare for and respond to the coronavirus, and shall reimburse the recipient for healthcare-related expenses or loss revenues that are attributable to coronavirus.
The ability of VITAS to retain and utilize the full $80.2 million from the relief fund will depend on the magnitude, timing and nature of the economic impact of COVID-19 within VITAS, as well as the guidelines and rules of the relief fund program.
This financial support is material for VITAS in maintaining its operational capacity at the safely care for our 19,000 patients.
In our first quarter earnings conference call, I stated we anticipated disruption within our patient referral and addition patterns due to significant healthcare system service restrictions in the coming quarter.
This disruption did materialize in our second quarter 2020 admissions declined 3.8% over the prior year.
However, the admissions trend did materially improve throughout the quarter.
Our April 2020 admissions were challenging and had a decline of 6.6%, may improve slightly with admission decline of 5.8%.
June showed significant improvement generated in admissions growth of 1.1%.
Roto-Rooter operations were also severely impacted at the start of the pandemic.
In late March 2020, we observed significant disruption in our Roto-Rooter commercial business.
As a reminder, historically, commercial services represented approximately 28% of Roto-Rooters consolidated revenue.
We made the decision for Roto-Rooter to maintain full staffing and operating capacity with no employee layoffs, as we entered the second quarter.
This decision could maintain our full operating strength was potentially an expenses strategic move and we monitored our demand metrics daily.
The decision to operate at full capacity is a classic risk reward calculation weighing brand awareness, customer satisfaction and the financial needs of our employees.
We also wanted to positioned to capitalize on any potential snapback in commercial and residential demand, both to protect existing marketing share as well as maximize our opportunities to grow market share.
I believe this is proven to be the correct strategic course.
Roto-Rooter services demand began to show weekly improvement beginning in the later part of April, and had strengthened unabated throughout the remainder of the second quarter.
This is reflected in our monthly performance with Roto-Rooter and unit-for-unit commercial revenue declining 38.6% in April, improving slightly to 31.8% decline in May and declining 19.7% in June.
Our residential services have proven to be exceptionally resilient, with our unit-for-unit residential revenue declining a modest 1.6% in April, increasing 11.7% in May and 18.7% in June.
All this translated into Roto-Rooter -- I mean unit-for-unit basis, having the second quarter 2020 commercial revenue declining 29.1%, residential revenue increasing 10.4% and Roto-Rooter consolidated unit-for-unit revenue declining a modest 1.6% when compared to the prior year quarter.
Although, we did have a modest decline in unit-for-unit revenue in the second quarter.
Including acquisitions Roto-Rooter generated consolidate revenue -- consolidated revenue growth of 8.6%.
Overall Roto-Rooter solid revenue growth with excellent adjusted EBITDA margins and adjusted EBITDA growth.
Roto-Rooter's adjusted EBITDA in the second quarter of 2020 totaled $46.8 million, an increase of 20.7%.
The adjusted EBITDA margin was 26.8%, which is a 269 basis point increase when compared to, I'm sorry, excuse me.
The have increase in Roto-Rooter's adjusted EBITDA margin is a contributed to our residential services, having a higher margin than commercial services, as well as increased residential excavation and water restoration services, which have a significantly higher direct contribution margin compared to commercial plumbing and drain cleaning services.
I'm very appreciative of the hard work, creative solutions and willingness of our 7,000 employees to adjust our operational routines and embrace new procedures.
With that, I would like to turn the teleconference over to David.
VITAS' net revenue was $327 million in the second quarter of 2020, which is an increase of 4.7% when compared to our prior year period.
This revenue increase is comprised primarily by 2.8% increase in days of care, a geographically weighted average Medicare reimbursement rate increase, including the suspension of sequestration on May 1 of 2020 of approximately 5.4% and acuity mix shift, which reduced the blended average Medicare rate increase by approximately 310 basis points.
The combination of increased Medicare Cap and a decrease in Medicaid net room and board pass-throughs, as well as reductions in other contra revenue activity, reduced total revenue growth in additional 42 basis points in the quarter.
Our average revenue per patient per day in the second quarter of 2020 was $194.02, which including the impact from acuity mix shift is 2.3% above the prior year period.
Reimbursement for routine home care and high acuity care averaged $165.22 and $985.23, respectively.
During the quarter, high acuity days of care were 3.5% of our total days of care, 69 basis points less than the prior year quarter.
This 69 basis points mix shift and high acuity days of care reduce the increase in average revenue per patient per day from 5.4% to 2.3% in the quarter.
VITAS accrued $5.8 million in Medicare Cap billing limitations and then second quarter of 2020.
This $5.8 million of Medicare Cap, includes approximately $2.3 million of cap liability attributed to the pandemic.
The suspension of sequestration resulted in additional 2% increase in reimbursement effective May 1 of 2020.
In Medicare, provider numbers that we're in a Medicare cap liability situation, there is 2% reimbursement increase was effectively eliminated by a corresponding increase in Medicare cap liability in those markets.
In addition, disruption in Medicare admissions and these Medicare cap liability markets resulted in a further increase in the projected fiscal 2020 Medicare Cap billing limitation.
The second quarter 2020 gross margin excluding Medicare Cap increased cost for personal protection equipment or PPE disinfecting facilities and increased costs for additional paid off or PTO for our front-line employees was 27.2%, which is a 352 basis point margin improvement when compared to the second quarter of 2019.
This increase in gross margin for VITAS is attributed to increased reimbursement from the elimination of sequestration on May 1, 2020.
A level of care mix shift to higher margin routine home care as well as efficiencies from utilizing telehealth were appropriate.
And from cost from reduced admissions volume intake and reduced high acuity hospital referred admissions that have short length of stay and in some cases negative gross margins.
Now let's turn to the Roto-Rooter segment.
Roto-Rooter generated quarterly revenue of $175 million in the second quarter of 2020, an increase of $13.9 million or 8.6% over the prior year quarter.
And a unit-for-unit basis, which excludes the Oakland and Hoffman Southwest acquisitions completed in July 2019 and September 2019 respectively.
Roto-Rooter generated revenue of $158 million for the second quarter of 2020 a modest decline of 1.6% over the prior year quarter.
Total Roto-Rooter commercial revenue, excluding acquisitions, decreased 29.1% in the quarter.
This aggregate commercial revenue decline consisted of drain cleaning revenue decreasing 31.2%, commercial plumbing and excavation declining 28%, and commercial water restoration declining 20.3%.
Total residential revenue, excluding acquisitions increased 10.4%.
This aggregate revenue growth for residential consisted of residential drain cleaning increasing 10.2%, plumbing and excavation expanding 14.4% and commercial water restoration increasing 4.3%.
Roto-Rooter's gross margin in the quarter was 51.2%, a 247 basis point increase when compared to the second quarter of 2019.
Now let's look at consolidated Chemed.
As of June 30, 2020 Chemed had total cash and cash equivalents of $20.4 million and no long-term debt.
On our guidance, historically Chemed earnings guidance has been developed using previous year's key operating metrics, which are then modeled and projected out for the calendar year.
Critical within these projections is the understanding of traditional pattern correlations among key operating metrics.
Once, we complete this phase of our projected operating results, we would then modify the projections for the timing of price increases, changing the commission structure, wages, marketing programs and a variety of continuous improvement initiatives that our business segments plan on executing over the coming year.
This modeling exercise also takes into consideration anticipated industry and macroeconomic issues outside of management's control but are somewhat predictable in terms of their timing and impact on our business segments operating results.
The 2020 pandemic has made accurate modeling and providing meaningful earnings guidance for Chemed exceptionally challenging.
Federal, state and local government authorities are forced to make swift decisions within our healthcare system, labor pools and general economy.
These governmental decisions have the potential for an immediate and material impact on VITAS and Roto-Rooter operating results.
However over the past four months, Chemed has been able to successfully navigate within this rapidly changing environment and produce operating results that we believe provide us with the ability to issue meaningful guidance for the remainder of the calendar year.
However, this guidance should be taken with the recognition the pandemic will continue to materially disrupt all aspects of our healthcare system and general economy to such an extent that future rules, regulations and government mandates could materially impact our ability to achieve this guidance.
With that said, revenue growth for VITAS in 2020, prior to Medicare Cap is estimated to be in the range of 5% to 7%.
Our Average Daily Census in 2020 is estimated to expand approximately 2% to 4%.
And our full-year adjusted EBITDA margin prior to Medicare Cap is estimated to be 19% to 20%.
We are currently estimating $17 million for Medicare Cap billing limitations for the calendar year 2020.
We also anticipate the $80.2 million of CARES Act funds that Chemed just -- Kevin described earlier that our formulaically calculated by the federal government based upon our 2019 Medicare fee-for-service revenue will be adequate to cover our increased costs specifically related to operating our healthcare unit during the pandemic, as well as any incremental Medicare Cap billing limitations that are triggered from declines in Medicare admissions.
I should also note that Chemed's full year adjusted earnings per share guidance eliminate any financial benefit from the CARES Act funds that relate to lost revenue.
We anticipate returning any unused CARES Act to the federal government at the end of the pandemic measurement period.
Roto-Rooter is forecasted to achieve the full year 2020 revenue growth of 9% to 10%.
Adjusted EBITDA for Roto-Rooter for 2020 is estimated to be in the range of 23% to 25%, Based upon this discussion, our full-year 2020 adjusted earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock options, cost related to litigation, CARES Act funds used for lost revenue and other discrete items is estimated to be in the range of $16.20 to $16.40.
This 2020 full year, calendar year guidance assumes an effective corporate tax rate of 25.2% and as a comparison Chemed's 2019 reported adjusted earnings per diluted share were $13.96.
The interdisciplinary team approach that is the foundation of the hospice benefit has never been more evident for our organization across the country, then through this entire pandemic.
Coordination of our entire team from our sales team providing pandemic relevant education to our disrupted healthcare partner through our admissions teams responding to referrals, enabling our clinical care teams to provide care around the clock with the support of our care coordination centers, home medical equipment division and back office support has been remarkable.
All of this enabled us to care for 19,185 patients each day within the quarter, while bringing on the service 16,822 patients who needed high quality hospice care during this pandemic.
We lived our internal model that we've been sharing during the pandemic, which is, yes, we can, and together we will.
Now let's discuss our second quarter 2020 operating metrics.
As I mentioned in the second quarter, our average daily census was 19,195 patients, an increase of 2.8% over the prior year.
Total admissions in the quarter were 16,822.
This is a 3.8% decline in admissions when compared to the second quarter of 2019.
Admissions performance in the quarter was primarily impacted by the level of disruption, which occurred at each of our referring partners across the healthcare continuum.
For example, admissions from hospitals were pressured due to the reduction in available bed capacity and elective procedures, resulting in fewer patients accessing and subsequently being discharged from hospitals.
Admissions from physician offices, whom were disrupted but were able to remain operational through telehealth interactions saw an increase due to the number of patients choosing to access the disrupted healthcare system through their primary or specialty physician practice along with medical offices.
Lastly, placement of admissions in the nursing homes and assisted-living facilities were significantly impacted due to the barriers and the restriction of access toward new residents.
These types of admission difficulties are reflected in our actual admission results based upon our patient's pre-admit location.
In the second quarter, our admissions increased 7.1% in our home-based preadmit locations.
However, this admission group -- admission growth was more than offset by the combination of hospital admissions declining 4%, nursing home management's decreasing 22.8% and assisted living facility admissions declining 10.2% when compared to the prior year quarter.
Our average length of stay in the quarter was 90.9 days.
This compares to 91.1 days in the second quarter of 2019, in 90.7 days in the first quarter of 2020.
Our median length of stay was 14 days in the quarter, which is two days less than the 16 day median in the second quarter of 2019 and equal to the first quarter of 2020.
Median length of stay is a key indicator of our penetration into the high acuity sector of the market.
First, we will continue to prioritize the safety of our employees, patients and their families as we have successfully done since March.
We have and will continue to source PPE and we are comfortable with the inventory levels to sustain employee need based upon patient and local circumstances.
Additionally, we will continue to utilize the infrastructure we lifted up to manage testing requirements for certain facilities across the country to allow us to safely access our partners' facilities to care for existing patients and placement of new patients when appropriate.
Our entire team will continue to collaborate safely with our local healthcare partners to successfully navigate patients and their families on to the hospice benefit during this unique time.
Lastly, and most importantly, our team will stay committed to persevere and provide care to all the patients and families in need in the communities we serve.
I will now open this teleconference to questions. | anticipates providing updated 2021 earnings guidance in july 2021. | 0 |
We're coming to you in strange times.
This is the first call that we've ever done where the management team is not together in one location.
So Leslie and Tom are in Miami, I'm in New York, and we are doing this virtually.
Also, I've never done a conference call where we've had more than one or two pieces of paper in front of me with some bullet points on them.
And today, Leslie has put in front of me a 27-page deck and talking points that are several pages long.
So forgive me for all the shuffling that you might hear on the call.
Instead of jumping straight into the earnings for the quarter, I would like to take five minutes of your time to first talk about exactly -- give you kind of a state of the union for BankUnited.
What is it that we've been doing over the last six to seven weeks as the situation has evolved?
What are we prioritizing now and then give you just a lay of the land, and then we'll get into the numbers and discuss in detail what first quarter was like.
So let me start by, first and foremost, giving a big shout out to the BankUnited team.
Every person who comes here calls this home and works hard.
A crisis revealed the character of people.
I think that is true, not just for people, but also reveals the true character of an organization.
And I'm very proud to say that what I have seen over the last six or seven weeks, it really fills me with great pride that I'm leading this organization.
People have come together, as help each other, work ungodly hours while they were under immense amount of personal distress.
So there are too many examples to get into, but I just want to give a big one shout out to everyone in the company, not just people working in PPP, on the branches or keeping our call centers up, but everyone, right down to the person who's making sandwiches in the cafeteria all the way to the last day when we shut down the cafeteria.
We have, as you can imagine, going through this early in March, we made our employees' wellbeing and safety our No.
We enable 97%, as of now, 97% of our employees are working from home.
And this is 97% of our nonbranch employees, of course.
We have extended our paid time off policy.
We have increased our health benefits to cover any expense associated with this COVID.
We have not furloughed any employees.
I'm a very superstitious person, so it is -- I'd say this very carefully.
We were recently awarded by South Florida Business Journal an award for being one of the healthiest employers in South Florida.
And I hope that we can claim this again next year.
So far, we've had only one confirmed COVID case in the employee base.
We do think there are a couple of others who will never get tested but have overcome COVID as well.
It sounds like it, but only one confirmed COVID case, which is pretty good, given though what is going on.
When you take care of your employees, they in turn then take care of your customers.
And if they take care of your customers, then that takes care of the company.
That's sort of the chain that I follow.
So quickly, let me tell you what we've been doing to support our customers.
The most obvious thing is offering the operational resilience that is needed at a time like this.
We activated our business continuity plan.
We beefed up all the back office IT infrastructure that is needed to run the company from afar with no really any significant operational issues on customer service disruptions.
If you'd asked me this -- how I felt about our ability to do this in the first week of March when we were preparing to do this, I was pretty nervous, but I'm happy to say that everything has also gone without a glitch and the bank is working fine from an operational perspective.
Our employees, several hundreds of them, have worked tirelessly now for about three weeks to deliver the PPP program.
We are also -- I think as of last night, are close to $700 million or maybe over $700 million in loans that we've done through the PPP program.
And our estimates are that we've helped retain about 85,000 or 86,000 jobs in our footprint through this program.
And we're not done.
There's more going through as we speak.
The team has been working around the clock, and we will help a few hundred more small businesses before eventually the money runs out on the PPP.
We have approved deferrals for many borrowers who have contacted us and asked for assistance because of pandemic.
And equally importantly, we have honored all our commitments whether they were lines that we've had or a business that was in the pipeline where we had made a commitment to close in our loan.
We did not back away from anyone, and that is equally important.
We have waived select fees, and we have also temporarily halted new residential foreclosure actions.
By the way, while all this is happening, I just want to clarify, when I say 97% of the employees, nonbranch employees are working remotely, 76% of our branches are still open.
They are open on a limited basis, of course, drive-throughs and appointment-only method, but they are open and we are serving clients.
The traffic, as you can imagine has gone down substantially.
Also, we have -- from somewhere in the second week of March or mid-March, we have made sure that we have enough liquidity to take care of any client needs in case somebody would need it.
We continue to hold an excessive amount of liquidity, but we now feel the time is right to start taking it down.
I think beginning next week, we will take down this excess liquidity that we've been sitting on to serve our clients.
Now turning back internally, as you can well imagine, we are prioritizing the risk management and credit quality and credit quality risk management.
We've identified portfolios and borrowers that we believe will be under an increased stress in the environment.
I call these sort of the sort of the -- you're in direct line of fire-type of our portfolios.
We have reached out to every single borrower in these segments, and we will talk in detail about what these segments are and how big they are.
But we have reached out to all borrowers in these segments.
And in other segments, we have reached out to everyone over $5 million in exposure to understand this exactly what the impact will be to our balance sheet.
While we always do stress testing sort of it's a routine business for us, in this environment, we have significantly enhanced these processes that you would expect us to.
But through all of this, I -- it's important while you're managing a crisis, not to forget what the long-term plan is and to keep those long-term plan is and to keep those long-term strategic objectives in mind, and we're doing that while we're fighting the immediate economic crisis.
So again, so I think the biggest question here that you probably have is, what does it mean for our balance sheet, right?
I will start by saying that our balance sheet is strong.
I feel very good about our balance sheet, our capital levels, our liquidity levels.
And you see at March 31, our regulatory ratio, no matter which you look at bank holding company, they're also insignificantly in excess of well-capitalized thresholds.
We are committed to our dividend, which we very recently increased by 10%.
I think it was in the middle of February.
We did, however, stopped our share buyback program.
We were very -- we had an authorization from I guess -- I think it was the fourth quarter, it was authorized $150 million.
We executed about $101 million, and we stopped that, and we're going to put it aside at least until the dust settles on the economy.
A question that we have seen a lot of other bank teams have been asked, who presented earnings in the last week or so, anticipating the same question, we did some analysis for you.
By the way, there's a slide deck.
Like I said, this time around, we've never had a slide in our calls, but at this time, we have provided a lot more disclosure and there's a 27-page slide deck.
So from time to time, I will make references to certain slides.
I'm not going to flip every page, but I will make the references.
So for example, right now, I'm talking about Page 4 in the slide deck, which then takes the DFAST severely adverse scenario for 2018 and 2020 and runs that on the March 31, 2020, portfolio to see what the losses would be.
And by the way, not just 9 quarters of losses, but lifetime losses.
DFAST is a nine-quarter exercise.
But with this, we've actually used lifetime losses.
And we have used those, which we don't think are really relevant.
But nevertheless, since that question will probably be asked, we did that analysis anyway.
We use full 2018 and to 2020 DFAST severely adverse scenario, and said, OK, if -- what are the losses that are generated, and you can see them on Slide 4.
And if those were the -- channels were to be used now, would we still be well capitalized and the capital ratios hold up?
And the answer is yes, they do.
So quickly, one question so I don't forget again about liquidity, which is the next slide.
We have tons of liquidity.
We are -- we currently have over $8 billion, I think it's $8.5 billion of liquidity, safe liquidity available.
A lot of it is in cash.
We will take some of the cash position down as we think things are settling down in the marketplace.
But with that, let me switch over quickly and talk about the quarter.
We reported a net loss of $31 million, $0.33 a share.
This is driven in the large part to the large provision that we do.
The provision for this quarter was $125 million.
This increased our credit losses to $251 million, which is 1.08%.
So we used to be, at December 31st, we were at $109 million or 47 basis points.
On January 1st, under CECL, that number bumped up to $136 million or 59 basis points and now in the end of March, we were at 1.08% or $251 million.
And that obviously was the biggest driver in the $31 million loss that we are posting this quarter.
I will ask Leslie to give you some more detail around CECL and the assumptions that went into calculating that provision.
But I will say, before I hand it over to her, is that we believe this at March 31st, our reserve estimate is based on both data that is current and conservative at that quarter end.
This reflects our best estimate of lifetime credit losses on the portfolio.
In second quarter, we will go through the same exercise.
There are three big areas, which will impact our CECL estimates for the next quarter, which is going to be an update of the macroeconomic outlook.
An update of our portfolio, especially our high-risk sectors.
And also, our assessment of impact of government stimulus because we've seen more stimulus this time around than we've ever seen in the history of the Republic.
So $2.5 trillion and counting in fiscal stimulus and God knows how much on the monetary side.
So I'm going to refer you to Slide 8 in the supplemental deck that talks a little bit about our CECL methodology.
Fundamentally, for the substantial majority of our portfolio segments, we're using econometric models that forecast PDs, LGDs and expected losses at the loan level for those are then aggregated by portfolio segment.
Our March 31st estimate was largely driven by the Moody's March mid-cycle pandemic baseline forecast that was issued on March 27.
This forecast assumes an approximate 20% decline in GDP in Q2, unemployment reaching about 9% in Q2, the VIX approaching 60 and year-over-year decline in the S&P 500 approaching close to 30%.
The forecast path assumes a recovery beginning in the second half of 2020, with unemployment levels remaining elevated into 2023.
I know there's been a lot of focus on GDP and the current unemployment in all the discussions taking place around the CECL forecasts, and those are certainly important reference points.
But I do want to remind you that these are very complex models, and there are, in fact, hundreds, if not thousands, of national, regional and MSA-level economic variables and data points that inform our loss estimates.
Some of the more impactful ones are listed on the right side of Slide 8 there for you.
Another thing that I want to point out about our CECL estimate at 3/31, we did not make a qualitative overlay.
We don't think our models really take into account fully the impact of all of the government assistance that's being provided to our clients, PPP, other deferral programs that we might have in place.
We did not make this qualitative overlay for that at March 31st.
The reason we didn't is we just felt it was premature to really be able to dimension those things at March 31st.
And as Raj pointed out, that's something we'll take into account when we consider our second quarter estimate.
I want to refer you now to Slide 9.
Leslie, just one second.
I just got a text from someone saying that the call cut off for about 20 seconds, and they couldn't hear you for the first 20 seconds.
So you may want to just repeat what you said because I think those are important points because I want to make sure everyone gets those.
So best to start on CECL.
Maybe I'll do better this time.
Hopefully, I won't contradict myself.
So again, I'm referring to Slide 8 in the deck about our CECL methodology.
Fundamentally, for the substantial majority of our portfolio segments, we use econometric models that forecast PDs, LGDs, and expected losses at the loan level, which are then aggregated by portfolio segment.
Our March 31st estimate was largely driven by Moody's March mid-cycle pandemic baseline forecast that was issued on March 27th.
That forecast assumes an approximate 20% decline in GDP in Q2, unemployment reaching about 9% in Q2, the VIX approaching 60, and year-over-year decline in the S&P 500 approaching close to 30%.
The forecast pass assumes a good recovery beginning in the second half of 2020 with unemployment levels remaining elevated into 2023.
And well, there's been a lot of focus on GDP and unemployment, and the discussions taking place around these CECL forecasts, and those are certainly important reference points, these are complex models, and there are, in fact, hundreds, if not thousands, of national, regional and MSA-level economic variables and data points that inform the loss estimates, and some of the more impactful ones of those are listed for you on Slide 8.
I also want to mention briefly that we did not incorporate in our CECL estimates at 3/31 any significant qualitative overlay related to the impact of the government direct assistance, PPP, deferral programs that we may put in place.
At 3/31, we felt we just didn't have enough data to properly dimension the impacts of those, so we did not reduce our reserve levels to take those into account.
And as Raj mentioned, that's something we'll be considering in more detail in Q2.
And now I'll refer you back to the deck and look at Slide 9.
And Slide 9 provides for you a visual picture of what changed our reserve form 12/31/19 to 3/31/20.
We started at $108.7 million.
You can see here the $27.3 million impact of the initial implementation of CECL.
The most significant driver of the increase in the reserve from January 1st after initial implementation to March 31st is not surprisingly, the change in the reasonable and supportable forecast, which increased the reserve by about $93 million.
We've also taken an additional $16 million in specific reserves this quarter, the majority of this related to the franchise finance portfolio.
While the credits that are driving these reserves had been identified as potential problem loans prior to the onset of COVID, we believe the underlying issues and amount of those reserves were certainly further aggregated by the COVID crisis and particularly as workout solutions have become more limited.
I want to reemphasize that we ended at -- for the quarter at 3/31/20 with a reserve of 1.08% of loans, and we certainly don't think that's outside in comparison to other banks whose results we've seen released.
I want to take a minute and just focus you on Slide 10.
And it gives you a distribution of the reserve by portfolio segment at March 31st.
And you can see here that on a percentage basis, the franchise portfolio, not surprisingly, carries the highest reserve, followed by the C&I portfolio.
And you can see the results of those on Slide 4 in the deck.
And what we did here was we took our March 31, 2020, portfolio, and we ran that portfolio through both 2018 DFAST severely adverse scenario and the 2020 DFAST severely adverse scenario.
In the table here showing you total lifetime, not nine-quarter, projected credit losses for our significant portfolio, C&I, CRE, BFG, residential under each of those scenarios as well as the bank's pro forma regulatory capital ratios.
Now those were calculated as if all incremental losses were applied to the March 31, 2020, our capital position.
So they don't really take into account any PPNR that might offset losses over the course of the forecast horizon or any actions management might take to reduce risk weight -- risk-weighted assets during a period of stress, both of which would have been taken into account in a DFAST regulatory submission.
So you can see that our reserves at March 31, 2020, stand at about 44% of severely adverse projected losses under 2018 DFAST and about 56% of some severely adverse projected losses under the 2020 DFAST severely adverse scenario.
And you can see in the box there that all of our capital ratios that remain in excess of our well-capitalized threshold of under those distressed scenarios.
Let's talk PPNR, pre-provision pre-tax net revenue.
It came in at $85 million this quarter, and that compares to $104 million last quarter.
So what was that delta of that $19 million?
So, really three buckets.
First, NII was down by $5 million.
NII really is for two reasons; one, our margin contracted by 6 basis points from 2.41% to 2.35%.
And the reason for that is asset yields came down faster.
Deposit pricing really wasn't changed much until pretty late in the quarter.
You will see a very meaningful impact on deposit pricing going forward.
But for this quarter, that the basis risk between these assets are priced and what things they're tied to versus deposits.
There was that gap of a few weeks, which is what caused margin to come down.
Also, first quarter is not a very strong asset growth quarter for us.
The nature of our business is first quarter tends to be our slowest quarter.
So we didn't see that much in terms of asset growth.
So you combine little-to-no asset growth.
And by the way, a lot of other banks are seeing asset growth coming from time draws.
Our business is not built around that kind of business.
And we did not get that benefit, and we did not see a lot of line growth.
I don't think it's a benefit.
I think it's a good thing that we did not have that business but that creates little bit of asset growth and NIM that compressed 6 basis points leads to a $5 million reduction in NII.
Also on fee income.
Last quarter, we had $7.5 million or so of securities gains.
Well, this quarter, we've had $3.5 million of securities losses.
So that's an $11 million-or-so swing in fee income.
By the way, in the $3.5 million securities losses in this quarter, it includes a $5 million of unrealized losses on equity securities.
We haven't sold them, but the accounting makes us take it through the P&L.
And lastly for expenses, again, first-quarter expenses are always higher because you start to fight the cycle all over again.
HSA contributions, the 401(k) contribution, and all that stuff hits in the first quarter, so that is what drove expenses higher.
If you compare it into expenses from a year ago, that's probably a better way to compare, and those expenses were obviously much lower.
Our first quarter this year, it was much lower.
So what does it really mean for next quarter?
Well, for next quarter, we expect asset growth to pick up for no other reasons, and we're doing a lot of PPP loans.
We'll probably do some Main Street Lending loans.
We expect margin to expand.
Deposit prices have come down very, very aggressively, not just in the middle of this March, but also at the beginning of May.
And that should feed into margin, and we are very positively biased toward our margin in the second quarter and beyond.
Expenses should come down as well because all that five-level stuff that I talked to you about will be behind us after the first quarter.
And naturally, expenses will get better next quarter.
So that's what all the guidance we'll be able to give you, but I do feel it's important to mention these things in some level of detail.
I mentioned a little bit on PPP program.
So I think we could rename BankUnited for the month of April as Bank of PPP.
That's like all we've been doing.
To give you a little comparison, we have an SBA business where we probably do roughly about 200 units of business in a year.
We are now in the process of trying to do over 3,000 loans through the SBA in less than a month or so.
It has -- has been a very large operational challenge that people across the company have been recruited to help in.
And so far, we've already close to $700 million of loans that we've done and we're not done yet.
We still have a few more that we will do over the course of today and tomorrow, or day after, until the money runs out.
We're also now on a case-by-case basis providing deferrals to borrowers, who are being impacted by the pandemic, and that started somewhere in the middle of March.
Those requests have now tapered off somewhat in the last week to two weeks, and Tom can talk about that in a little more.
But before that, Tom, why don't you spend a little time talking about loans and deposits?
Just give a little more detail around that.
So let's start off with deposits, where we've continue to make good progress on our deposit growth initiatives.
As you can see, deposits grew for the quarter by $606 million, and just over 50% of that or $305 million was noninterest DDA, which now stands at the 18.4% of total deposits, compared to 15.9% a year ago.
I guess, as we've talked in all of these calls, growing noninterest DDA is one of the most important things that we're trying to do in the bank right now.
And unlike what some other banks have reported, most of this DDA growth was really core DDA growth.
This wasn't related to draws on lines of credit.
And I'll go into a little bit more detail about that later.
We've consistently been moving down deposit pricing as the Fed has reduced rates.
The cost of total deposits declined by 12 basis points this quarter from 1.48% to 1.36%.
Additional moves by the Fed in late March had minimal impact on our ability to move cost of funds down further in Q1.
But as Raj mentioned, you'll see that impact much larger in Q2.
To give you a better idea of this, the spot rate on total interest-bearing deposits, including our certificates of deposit, declined by 36 basis points of December 31, 2019, to March 31, 2020, and then by another 27 basis points through April 17th of 2020.
So a total of 63 basis points decline during that period of time.
And if you go to Slide 7 in the deck, you'll get a little bit more information and detail on that.
On the loan side, Raj mentioned, loans that are relatively flat for the quarter with net growth of $29 million.
There were some parts of the portfolio where we actually saw very good growth.
The C&I business had total growth of $353 million, which was a good quarter for that segment.
Mortgage warehouse outstandings have also increased by $84 million, but really offsetting that, our CRE book declined by $315 million, which is pretty much in line with what we expected, primarily driven by the continued decline in New York multi-family, which was $249 million.
And unlike a lot of banks, particularly some of the larger banks, we have not experienced any real growth in our line utilization since the onset of this crisis.
The majority of our C&I growth, as I mentioned, was not the result of draws.
Our utilization ratio, which we track consistently throughout this process really hasn't moved too much during this entire thing, only by a few percentage points through the total period of time.
It has generally remained in line with our three-year averages with the exclusion of the mortgage warehouse business.
I would like you to flip to Page 16.
This is what I was talking about at the beginning of the call.
These are the segments that we have sort of circled around and saying these are the portfolios that will have increased stress based on our estimation: this is retail in the CRE book; retail in the C&I book; the franchise finance that we've talked about to you in the last six months; hotels for obvious reasons, airlines, cruise lines and energy.
So in total, it's about 14% of our portfolio.
What we're trying to show you here is what -- as of March, what part of these individual portfolios were past-weighted and what were classified, criticized and nonperforming.
So now let me say something sort of which is obvious, but I'll mention it anyway.
Just because we have highlighted these portfolios, I'm not trying to say that loans on these portfolios are going to go back.
We also expect the large portion of these loans will be just fine.
Sponsors with deep pockets will be able to bear the brunt of the pain here.
But in terms of monitoring, we are calling these sort of the ones what we will monitor on a heightened basis because we think these are in harms' way more than other parts of the portfolio.
By the same logic let me say, it doesn't mean that anything that is outside of this portfolio is all fine.
We have to monitor everything because there will second, third, fourth quarter impacts in other parts of the business as well and we will monitor them, too.
But this is where that the heightened monitoring will be.
So it's too early to really see the impact of the COVID situation on risk rating migration.
And you can see that, with the exception of franchise finance portfolio, substantially, most of these segments are past-rated at March 31st.
We did move a bunch in the franchise portfolio into those lower categories in the quarter.
Let me talk a little bit about NPAs, a little bit of our course of actions and then charge-offs.
NPAs -- of NPLs for this quarter, they were basically flat.
NPAs were down a little bit, a couple of basis points.
NPLs were also down a few basis points from 88 basis points to 85 basis points.
And just to remind you that these numbers in NPAs and NPLs, the way we report them included guarantee portion of nonaccrual SBA loans.
So really just keep that in mind that the criticized classified this quarter went up by $269 million, $207 million of that $269 million was in the franchise portfolio.
And 90% of that $207 million was really attributable to COVID as that kind of play itself out in the month of March.
Charge-offs were 13 basis points.
They elevated from last quarter mostly because of one credit in BFG equipment where we took the charge-off, but we're already seeing recoveries from that situation this quarter.
So more detailed metrics are toward the end of the slide deck, Page 22, 23, 24 and 25.
So I will encourage you to spend some time on to those as well.
Tom, I mentioned these portfolios for heightened monitoring.
So, why don't you spend a few minutes and just give them a little more -- with a little more detail?
So we'd refer you to Slide 14 in the deck, which provides some additional detail around the level of deferrals and segments.
But through April 20, we have received request for deferrals from almost 800 commercial borrowers and approved modifications for about 500 of those borrowers, totaling a little over $2 billion.
We've also processed about $500 million in residential deferrals, excluding the Ginnie Mae that's early buyout portfolio, which would represent about 10% of that portfolio.
These deferrals typically take the form of a 90-day principal and/or interest payment deferrals for commercial loans, and those payments are generally due at maturity.
For residential borrowers, these payments are typically at the end of the deferral period consistent with deferral programs being offered by the GSEs.
Now we'll obviously be reassessing each of these loans at the end of the 90 days and looking in making the best decisions we can at that point in time.
As you can see, the large amount of commercial deferrals is in the commercial real estate portfolio, particularly the hotel subsegment, where 90% of the borrowers, by dollars, have requested and been approved for deferrals, followed by the retail subsegment.
We have also received a high level of deferral requests from borrowers in the franchise finance portfolio, as we've mentioned, where 74% of the borrowers have been approved for deferrals.
On other C&I portfolio subsegments with this -- where we're seeing higher levels of deferral request include accommodation and food services, arts and entertainment and recreation and the retail trade.
At this point, and as of today, modification requests appear to be slowing over the last 10 to 15 days.
Starting on Slide 17, we provide a little bit deeper dive into some of the higher-risk portfolios, subsegments that Raj has already mentioned.
And in the retail segment, the CRE book contains no significant exposure to big box or large shopping malls.
We estimate that about 60% of the CRE retail exposure is supported by businesses that we would categorize as essential or moderately essential and the remainder we would categorize as nonessential businesses.
Within this segment, LTVs averaged 57.5%, and 84% of the total are below the 65% level.
Retail exposure in the C&I book is well diversified with the largest concentration of being to gas station and convenience store owner operators.
I'll refer you to page -- on Slide 18, where you could see further breakdown of the franchise portfolio, which is a fairly diverse portfolio, both by some concept in geography.
We saw over a $200 million increase in criticizing classified assets in this segment during the first quarter.
Approximately 90% of these downgrades were directly related to the COVID-19 crisis.
I'll also mention that the current environment to fitness center -- and to fit this sector, which up until now, has been really the better-performing sector in this book, is coming under stress as most of these are now closed with the social distancing guidelines.
Some of the restaurant concepts actually may fare better, particularly those with heavy drive through exposure and good digital strategies.
On Slide 19, you can see that most of the hotel book represents well-known flags and is within our footprint.
So to be clearly -- on revenues in this segment have declined dramatically with the social distancing measures and travel restrictions that are currently in place.
LTVs in this segment averaged 54% and 78% of this segment has LTVs under 65%.
And finally, referring to Slide 20, our energy exposure, particularly in the loan portfolio, remains somewhat minimal.
The majority of this exposure relates to railcars in our operating lease portfolio.
So with that, I'll go back to Leslie for a little more detail on the quarter.
I want to take a minute to discuss the unrealized losses on the securities portfolio that impacted other comprehensive income and our GAAP capital at March 31st.
I'll remind you that these unrealized losses do not impact regulatory capital, and I'll be referring to Slides 26 and 27 in the deck for this part of the discussion.
The available-for-sale securities portfolio was in a net unrealized loss position of $250 million at March 31st.
These unrealized losses were mainly attributable to market dislocation and widening spreads reflecting the reaction of the markets to the COVID crisis.
As you can see on Slide 26, 90% of the available-for-sale portfolio is in governance, agencies or is now rated AAA.
At March 31st, we stressed the entire nonagency portfolio at the individual security level, modeling collateral losses that we believe to be consistent with levels reflecting the trough of the 2008 global financial crisis.
Based on that analysis, none of the securities in this portfolio are expected to take credit losses.
The majority of the unrealized losses, as you can see, are in the private label CMBS and CLO portfolios.
On Slide 27, we show you the ratings distribution of these portfolio segments along with levels of credit enhancement compared to stress losses, illustrating the high credit quality of these bonds.
We also priced the March 31 portfolio as of April 22, and you can see that our results of that on Slide 26.
And although unrealized losses remain significant, you can see that valuations have started to come back and to recover some.
I also want to point out that none of our holdings have been downgraded since the onset of the COVID crisis.
To Provide a little more color around the NIM.
The NIM declined by 6 basis points this quarter from 2.41% to 2.35% compared to the immediately in the proceeding quarter.
To get a little bit into the components of that, the yield on interest-earning assets declined by 18 basis points.
That reflects a decline of 9 basis points in the yield on loans and a 37-basis-point decline in the yield on investment securities.
These declines related to, obviously, declines in benchmark interest rates and also reflect turnover of the portfolios at lower prevailing rates.
The decline in the yield on securities reflects the very short duration of that portfolio and to an extent, increases in prepayment speeds, which contribute about 5 basis points to the decline.
The cost of interest-bearing liabilities declined by 14 basis points quarter over quarter.
I'll remind you that reductions in deposit costs that we have done in response to the Fed-reducing rates in late March were not fully felt this quarter.
A couple of items I want to mention that impacted noninterest income and noninterest expense for the quarter.
Raj already pointed out the unrealized loss on marketable equity securities that negatively impacted noninterest income in this quarter.
Our largest contributor of the $6.8 million decline in the other noninterest income line compared to the immediately preceding quarter was a reduction in income related to our customer swap program, and this was really attributable just to lower levels of activity in that space during the quarter.
Employee compensation in benefits actually increased by $3 million compared to immediately our preceding quarter.
And as Raj pointed out, there are always seasonal items that impact comp in the first quarter.
So, a better comparison might be to the first quarter of the prior year, and compensation expense declined by $6.3 million compared to the first quarter of 2019.
We'll try and wrap this up and open this up for Q&A.
But let me say regarding guidance, we are withdrawing our guidance that we gave you at the last earnings call.
We generally have a pretty good idea of what we're seeing in the business and the economies where we operate or we can look out about 6 months or so.
But at this time, it is very hard to look at a month or two.
So to try and give you guidance at really an uncertain time, it's very hard.
What we can say is we are -- you will see a growth in PPP loans.
Like I said, -- rough, so somewhere in the $800 million number is what will people end up with.
Main Street Lending facility, we're still waiting a lot of details in that, but we hope to do some of those loans, but it's hard to tell you how much we will be able to do or what we would want to do.
And even deposit growth can be hard to predict.
But so -- our priority is the deposit side will maintain, which is grow DDA and bring down cost of funds.
We feel fairly confident of that into this quarter.
And in fact, I would even go as far to say that maybe for the full year, we'll be higher than what you saw for this quarter.
Any question that you asked about CECL, the only thing we can say about CECL is provisioning going forward in the second quarter as the rest of the year is that it will be very volatile.
Given the fact that the economic environment is extremely volatile.
And very importantly, we have not lost sight.
Once again, I will say, we've not lost sight of what we're trying to build in the long term.
We actually are fighting in this healthcare crisis in the short term, but in the medium and long term, we're still focused on building what we set out to build.
So whether it's BankUnited 2.0 or all the other things that we're working on, they continue.
Some of the initiatives around BankUnited 2.0, especially around revenue might get pushed out by a couple of months because it's new products that are being launched.
It's going to be hard to try and launch them in the next couple of months when we are going through social distancing the way we are.
But overall, the numbers don't change, and it just gets pushed out a little more. | bankunited q1 loss per share $0.33.
q1 loss per share $0.33. | 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 $1,309.9 million versus $ 1,418.8 million.
expect full-year 2020 adjusted ebitda of $1.285 billion to $1.315 billion. | 1 |
David Lesar, our CEO; Jason Wells, our CFO, will discuss the company's third quarter 2021 results.
Actual results could differ materially based upon various factors as noted in our Form 10-Q on their 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.
As you know, we laid out our first ever 10-year plan back at our Analyst Day.
We expressed that and are reiterating today that we are a management team who can execute.
We believe we will continue to demonstrate that for you.
This marks my sixth quarter with CenterPoint and Jason's fifth.
I'd like to first start by laying out how we are building a consistent track record of delivery.
First, if you recall, the CenterPoint value proposition we laid out at our recent Analyst Day focused on our efforts to achieve sustainable earnings growth for our shareholders, sustainable, resilient and affordable rates for our customers and a sustainable positive impact on the environment for our communities.
I believe we are continuing down the path of achieving this value proposition.
Each quarter under the new CenterPoint leadership, we have met or exceeded quarterly utility earnings per share and dividend expectations.
We have increased our annual utility earnings per share guidance for both 2020 and 2021.
And as I will discuss shortly, today, we are increasing our 2021 utility earnings per share guidance once again.
Our 2021 through 2024 annual utility earnings per share growth rates of 8% are top decile among our peers, and we also expect to achieve at the mid- to high end of our 6% to 8% utility earnings per share guidance range each year from 2025 to 2030.
I am confident in our team's ability to achieve that growth.
Last year, we had a $13 billion 5-year capital plan.
We increased that to $16 billion in our 2020 Analyst Day.
In this year, we increased it yet again to $18 billion plus.
We introduced our first ever 10-year capital plan.
CenterPoint remains ripe with opportunities across our footprint to expand and harden our system to benefit customers and shareholders.
Our current 10-year plan contains no external equity issuances.
We will fund the equity portion of our capital needs to internally generated operating cash flows and our already announced strategic transactions.
We are also executing on our plan to become a pure-play regulated utility as we approach the closing of the Enable ET merger expected by the end of this year and then our subsequent sell-down of our midstream stake.
With the recent settlement agreement among the parties in Arkansas, we are also moving toward the completion of our LDC asset sale.
The remaining steps include the Oklahoma approval, which is anticipated to be received in November and the all-party settlement in Arkansas is expected to be approved by mid-December.
And with our newest announcement around our industry-leading ESG targets, we are on the path to executing our goals to be net 0 on direct emissions by 2035.
We continue to believe that this is an achievable path delivering for customers, regulators, investors and the environment.
In the third quarter of 2020, I said that I will not be satisfied until we are recognized as a premium utility.
In the theme of our Analyst Day was again establishing a path toward a premium.
I believe we are making tremendous strides down that path.
The storm headwinds of up to 90 miles an hour, leaving 470,000 of our Houston Electric customers without power.
Within three days, we had 95% of the power restored for those customers.
And within five days, the whole system was back online.
Now for this quarter's headlines.
Our year-to-date financial progress has been strong.
We are reporting a utility earnings per share beat and are raising our full year outlook this quarter.
For the third time this year, we are increasing our 2021 utility earnings per share guidance this time to $1.26 to $1.28 for the full year.
And for the first nine months, we've already achieved nearly 80% of that full year goal.
More importantly, we are still targeting an 8% annual growth rate for 2022 to 2024.
So this raises our guidance for 2022 utility earnings per share to $1.36 to $1.38.
For the third quarter of 2021, we reported $0.25 of utility EPS, which compares to $0.29 in the third quarter of 2020.
In the third quarter of this year, we had a onetime impact to earnings of $0.04 per share related to our most recent Board implemented governance changes.
Jason will get into more detail on the variances shortly.
As I mentioned earlier, we have increased our five-year capital plans to $18 billion plus over the next five years and $40 billion plus over the next 10 years.
This is nearly a 40% increase in our five-year capital investment plan since the third quarter of 2020.
This includes new opportunities that stem from the latest legislative session in Texas.
One of those opportunities was the ability to lease and put into rate base mobile generation units.
We move quickly on this opportunity and procured [Indecipherable] five-megawatt and 30-megawatt mobile generation units, some of which we were able to deploy during Hurricane Nicholas as backup while crews worked to repair our system.
And recently, during an ERCOT forecasted Texas wide load-shedding event, the Texas PUC [Indecipherable] to make sure our units were ready to support customers.
We were the first the utility in the state to act on this legislative opportunity and had them in place to utilize them in the way the law intended.
We look forward to mobilize quickly on the other tools provided to us by the Texas legislature to improve the resiliency of the electric grid and help reduce the risk of prolonged outages.
We already have an outstanding RFP for additional mobile generation, which could bring our total up to 500 megawatts and hope to have this procured in the coming months.
We believe that with the deployment of these additional tools, we will be able to mitigate some of the impacts of future extreme weather events on our customers.
Due to recent weather events in both Louisiana and Texas, we are running slightly behind on our capital spending plans on a year-to-date basis.
These weather events pulled away many of our contract crews, so they could provide mutual assistance to our fellow utilities, especially in Louisiana.
Therefore, while deployed elsewhere, they cannot work on our capital projects, but we have a catch-up plan in place and anticipate making the short fall of.
In anticipation of continued labor shortages and as we ramp up our capital plans in the coming years, we have now moved to procure additional contractor resources from multiple suppliers.
We believe that this will help to support continuity and crews on a long-term basis and reduce the impact of any labor disruptions in executing our $40 billion-plus capital spend over the next 10 years.
We remain committed to our continuous improvement cost management efforts and our target of 1% to 2% average annual reductions.
We've already realized the benefit of some of these improvements this year.
We stated in the second quarter that we could accelerate approximately $20 million of recurring O&M work forward from 2022 into this year if we had the available resources.
So far, we've achieved approximately 20% of this goal year-to-date and remain confident around our team's ability to continue to execute toward this goal for the balance of the year.
This allows us the luxury of reducing near-term run rate O&M costs which helps to mitigate rate pressures while maintaining continued focus on reliability and safety of our service for customers, all while sustaining growth for our shareholders.
In addition to O&M continuous improvement efforts, we are fortunate to operate in growing jurisdictions.
This combination plays a key role in keeping our growth plans affordable for our customers.
As we discussed during our Analyst Day, Houston is the fourth largest city in the U.S. and the only one of those four that's growing.
Houston's organic growth has been multi-decades long.
That organic growth rate continued for yet another quarter.
We are also seeing strong growth in many of our other jurisdictions as well.
On a year-over-year basis, we saw about 2% customer growth for electric and 1% for natural gas through September.
Again, this organic growth is the luxury, most other utilities just do not have.
Now let me shift gears and give a brief regulatory update.
A recent highlight in Indiana happened just this past week.
As part of our long-term electric generation transition plan, we received the CPCN approval from the Indiana Utility Regulatory Commission for the first tranche of solar generation, 75% of which we expect to own and 25% due a PPA.
This approval shows the commission's alignment and support of our 2020 IRP, which bridges our coal generation into a mix of lower carbon and renewable sources.
We anticipate the CPCN decisions for our Gas CT plant in the second or third quarter of 2022 and the incremental solar PPA in the third quarter of 2022.
As outlined in our IRP, we are targeting to own approximately 50% of our total solar generation portfolio.
Our continued build-out of renewables is a key driver in achieving our net zero direct emissions goal by 2035.
Shifting to gas cost recovery from the February winter storm.
We continue to make progress.
And as we previously mentioned, we have mechanisms in place or have begun recovery in all jurisdictions.
We are happy to report that just this past week, we reached a settlement on the prudence proceedings supporting securitization of 100% of gas costs in Texas, including all of related carrying costs.
We look forward to the commission approval of the agreement.
We anticipate a financing order for the securitization bonds by the end of the year.
With this time line, we anticipate receiving the proceeds sometime mid next year.
In Minnesota, we started a recovery as of December and are working with stakeholders on ways to reduce the impact on our customers.
We filed a rate case earlier this week, and also proposed an alternative rate stabilization plan to address the unique set of circumstances customers are experiencing.
The full rate case requests $67.1 million per year, while the rate stabilization plan requests $39.7 million per year and an extended recovery period for winter storm costs.
The proposed rate stabilization plan would resolve the rate case and limit the bill impact on customers, in part by recovering the winter storm costs over a 63-month period.
We're asking the PUC to review and approve the stabilization plan by the end of this year, which would allow rates to take effect on January 1.
To summarize, we are working with stakeholders to align our focus on safety and related investments while minimizing the burden to our customers.
Largely as a result of mechanisms in our Houston Electric in Indiana South gas jurisdictions, we have recently received approval for $40 million of increased incremental annual revenue.
As discussed in our Analyst Day, we anticipate approximately 80% of our 10-year capital plans to be recovered through interim mechanisms, which demonstrates the constructive jurisdictions in which we operate.
In Texas, our PUC is now appointed a fourth commissioner.
Jason and I have now had the opportunity to meet all four commissioners and are very encouraged by the dialogue and expertise that all of these commissioners bring to the PUC.
We look forward to continued engagement with the commissions in all of our jurisdictions.
So those are the headlines for the quarter.
I remain excited about what's to come for CenterPoint.
We have a growing track of execution and believe it more than demonstrates what we can do in the near future and the unique value proposition that CenterPoint offers to you.
This marks my one year of earnings calls with CenterPoint and the story keeps getting better.
To reemphasize Dave's message, we are focused on establishing a track record of consistent execution, and I fully believe the best is yet to come here at CenterPoint.
On a GAAP earnings per share basis, we reported $0.32 for the third quarter of 2021 compared to $0.13 for the third quarter of 2020.
Looking at slide five, we reported $0.33 of non-GAAP earnings per share for the third quarter of 2021 compared to $0.34 for the third quarter of 2020.
Our utility earnings per share was $0.25 for the third quarter of 2021, while midstream investments contributed another $0.08.
Favorable growth in rate recovery, lower interest expense and reversal of the net impacts from COVID last year, each contributed $0.01 of favorability.
Board implemented governance changes recorded this quarter and another $0.03 of unfavorable variance attributable to weather and usage.
For context, we experienced 73 fewer cooling degree day in Houston for the third quarter of 2021 compared to the third quarter of 2020.
We estimate that each cooling degree day above normal has approximately a $70,000 a day impact in our Houston Electric business.
Turning to slide six.
For the first nine months, we've achieved nearly 80% of our full year 2021 utility earnings per share guidance, which we are now raising to $1.26 to $1.28.
And as Dave said, we are also raising our utility earnings per share guidance for 2022 to $1.36 to $1.38, which is an 8% increase from our new 2021 estimates.
Looking beyond that, we are focused on delivering 8% annual utility earnings per share growth through 2024 and at the mid- to high end of our 6% to 8% annual utility earnings per share range over the remainder of our 10-year plan, strong growth each year and every year, no CAGRs for earnings.
The last thing I'll mention for this quarter is the share count.
Our preferred Series B shares converted into 36 million common shares as of September 1, further reducing the number of share classes outstanding.
We expect the conversion will have no impact on earnings as the increase in shares is effectively offset by the termination of our Series B dividends.
Going forward, I want to reiterate we have no external equity included in our current [Indecipherable] and only expect our share count to modestly increase from dividend reinvestment or incentive plans.
Now I want to offer some color on the capital plans supporting our rate base and utility earnings per share growth.
We've spent approximately $2.3 billion year-to-date on capital investments.
As Dave mentioned, we had some slight delays due to recent weather events and are focused on making that up over the coming months.
We outlined on our Analyst Day the three buckets that we are investing in, safety, reliability and growth and enabling clean investments that are included in our $40 billion plus 10-year capital investment plan.
This investment profile should benefit our shareholders, our customers and the environment.
We see those opportunities weighted nearly 60% toward investments in our electric business throughout the plan.
While we are slightly behind the capital plan on a year-to-date basis, we are in the midst of ramping up to a sustained increase in our capital investments and we are restructuring contract crews in a way that helps support our labor needs to execute this level of investment.
We are confident we will make up the shortfall by early 2022.
Moving to the financing updates.
Our current liquidity remains strong at $1.8 billion, including available borrowings under our short-term credit facilities and unrestricted cash.
Our long-term FFO to debt objective remains between 14% and 15%, aligning with Moody's methodology and is consistent with the expectations of the rating agencies.
As mentioned during the Analyst Day, it's our intention to stay within this range throughout the course of our long-term plan.
Lastly, as we near the end of the calendar year, we are getting incrementally closer to the expected closing of the strategic transactions we've announced.
We recently filed a settlement in Arkansas that represents an agreement among all parties.
We anticipate that Arkansas Commission will issue its final approval by mid-December.
In Oklahoma, a hearing was held on November 3, and we expect a final order soon.
Finally, as Energy Transfer expressed on their earnings call earlier this week, the Enable and Energy Transfer merger is also expected to close before year-end.
Once that transaction closes, we will remain absolutely focused on reducing and then eliminating our exposure to midstream through a disciplined approach.
Analyst Day, we anticipate being fully exited from the midstream sector by the end of 2022.
We will then be nearly a pure-play regulated utility.
As we continue to express, we take our commitment to be good stewards of your investment very seriously and realize our obligation to optimize stakeholder value.
And with that, we look forward to more of these shorter earnings calls in the future.
As you heard from us today, and others from our full management team during the Analyst Day, the outlook for CenterPoint just keeps getting better.
As I said, we now have six quarters of meeting or exceeding expectations, but we believe there is much more to come.
We are demonstrating the pathway to premium, and we hope that you will be on board with us as a shareholder when that happens.
We will now take a few questions being mindful of today's earnings schedule and the upcoming EEI conference. | q3 non-gaap earnings per share $0.33.
q3 earnings per share $0.32.
utility earnings per share guidance range for 2022 raised to $1.36 - $1.38.
reiterating 8% utility earnings per share annual growth rate target for 2022 through 2024.
raising 2021 non-gaap utility earnings per share guidance range to $1.26 - $1.28. | 1 |
My name is Aaron Howald and I'm LP's Director of Investor Relations.
I'm joined today by Brad Southern, LP's Chief Executive Officer and Alan Haughie, LP's Chief Financial Officer.
All of these materials are available on LP's Investor Relations website www.
Rather than reading these statements, I will refer you to these supplemental materials.
As you all know, the housing and repair and remodel markets that LP serves continue to show remarkable resiliency despite the ongoing COVID-19 pandemic and demand for our products has remained very strong.
Q4 was another record for SmartSide as sales increased by 30% to $259 million and Siding EBITDA nearly doubled over -- year-over-year to $77 million.
OSB prices remained exceptionally high throughout the quarter, resulting in $250 million in EBITDA for the OSB segment.
All business segments continue to demonstrate outstanding cost control.
As a result, LP ended 2020 with $2.8 billion in sales, $781 million in EBITDA, $660 million in operating cash flow and $4.31 in earnings per share.
It was a very strong ending to a uniquely challenging year that leaves LP well-positioned for continued growth.
Two years ago, we introduced a strategic transformation plan for LP.
That plan included a three-year target of $165 million in cumulative EBITDA improvements from growth, operating efficiency and strategic sourcing.
Today, I am proud to announce that we have exceeded this target a year ahead of schedule with $177 million in cumulative impact delivered in only two years.
I want to stress that we measure these results choosing normalized OSB and raw material prices.
So this achievement is not merely an artifact of unusually high OSB prices or favorable movements in the cost of logs or resins.
Rather, it is a result of the incredible dedication, creativity and grit of our sales, operations, logistics and sourcing teams.
Having to chase significantly greater efficiency, we will not only hold those gains but raise the bar as we continue to drive our growth and value-creation strategy.
Today, to build real progress and to accelerate LP's transformation, I am pleased to announce a series of interconnected strategic initiatives.
First, in order to supply growing demand, we are announcing a two-phase capacity expansion strategy for SmartSide.
Phase 1 will be the conversion of our mill in Houlton, Maine from production of Laminated Strand Lumber and OSB to SmartSide.
Houlton is ideally located for SmartSide production because of its access to an ample and sustainable Aspen wood basket and its proximity to the large and under-penetrated repair and remodel market along the East Coast of the United States.
Houlton will add roughly 220 million square feet of SmartSide capacity with production beginning early in 2022.
With LP converting to SmartSide, we will cease LSL manufacturing there sometime this year; the change that has contributed to a broader reevaluation of our product portfolio.
Due to the loss of LSL from our EWP portfolio, coupled with our inability to consistently earn the cost of capital in EWP, we have decided to evaluate strategic options for our remaining Engineered Wood Products business.
Phase 2 of the SmartSide capacity expansion strategy will be the conversion of our OSB mill in Sagola, Michigan.
Sagola is currently producing OSB and will continue to do so until it is converted to SmartSide manufacturing.
Although the precise timing is yet to be determined, if demand for SmartSide continues to grow at historic rates, we will need to begin to work on the Sagola conversion soon after Siding production begins at Houlton.
This will require OSB production at Sagola to cease sometime in mid-to-late 2023.
These two new facilities will add roughly 520 million square feet of additional SmartSide capacity and remove roughly 670 million feet of OSB capacity.
There is still a long runway for further Siding growth after these conversions with several potential expansions of existing facilities, as well as other conversion opportunities.
In addition to serving our growing customer demand, these conversions will also position the mills for years of growth and improved stability, which will benefit Houlton's and Sagola's employees, their families and the broader communities.
Finally, since we idled our Peace Valley OSB mill in Fort St. John, British Columbia, we have kept the mill ready with the intention to reopen it when we were confident that sustainable market demand would be sufficient to absorb its capacity.
The consensus for 2021 housing starts has climbed for the past several months and is now, in the year, 1.5 million.
On a seasonally adjusted basis, December starts were at 1.6 million and permits were 1.7 million suggesting continued strength in new residential construction.
At these levels of starts, with channel inventories extraordinarily has been, it is clear that our customers need additional volume.
Looking further into the future, long-term demographic data and a structural under-supply of housing suggest continued tailwinds for demand.
As a result, we have begun the process to restart production of OSB at Peace Valley.
Our goal is for Peace Valley to become a low cost leader in the industry.
Our flexible and disciplined operating strategy remains unchanged.
Restarting Peace Valley increases our ability to meet intense customer demand and will add to our strategic options for balancing OSB supply and demand with discipline, agility and efficiency.
With its production of TechShield and long lengths, Peace Valley will also help us reach our goals for Structural Solutions as a percentage of total volume.
As we have been keeping the mill ready for an eventual restart, the cost to resume production shall not exceed $12 million.
We've begun the necessary engineering, capital and rehiring planning to support the restart.
Our least expectation for first press load is sometime in Q3, full production capacity about a year later.
We will continue to monitor the housing outlook, OSB demand and channel inventories to gauge proper timing for the restarts.
As I said previously, continued Siding growth will require more frequent mill conversions.
As a result, as Peace Valley resumes full production as a low-cost leader, it enables our phased capacity expansion plans for SmartSide, while maintaining our current OSB market share.
The blue and orange line show LP's expected OSB in SmartSide capacity over time in millions of square feet.
Houlton's shutdown, its conversion to SmartSide and its ramp up to full capacity are shown as A, C and E on the graph.
Peace Valley will begin production at point B sometime after Houlton ceases making both LSL and OSB in preparation for conversion.
Sagola, Michigan will be the next Siding mill after Houlton.
Sagola's conversion will add roughly 300 million square feet to SmartSide capacity and remove roughly 420 million square feet of OSB capacity.
While the exact timing of Sagola's conversion to SmartSide is still to be determined, the graph illustrates initial SmartSide production in the second half of 2023, which is consistent with an annual demand growth rate of 11%.
Timing for all these steps is based on the assumption that OSB demand and SmartSide growth continue and that the capital projects are completed on schedule.
Should demand slow, which we do not currently anticipate, any or all of these steps can be delayed with minimal costs.
There is little room to significantly accelerate the Houlton conversion or the Peace Valley restart as both of these projects are already under way.
The Sagola conversion, on the other hand, could be brought forward somewhat, should demand growth accelerate.
The plan, once fully implemented, will increase total SmartSide capacity by roughly 520 million square feet or a little over 30%.
The net effect of Houlton and Sagola's conversion and the Peace Valley restart will increase LP's OSB capacity by less than 100 million feet.
More importantly, each of these initiatives will accelerate LP's ongoing transformation, grow our portfolio of SmartSide and Structural Solutions and improve our operational agility as we meet increasing customer demand.
2020 was a year of incredible hurdles that uniquely tested our ability to adapt and work together.
However, I'm incredibly proud of how LP employees came together to not only survive but thrive as a company.
In the face of adversity, LP delivered strong results.
As we turn our attention to a new year, we are focused on meeting customer demand for LP products.
We are excited to share our plans to execute a multiple years' SmartSide capacity expansion project and restart Peace Valley as part of our discipline and agile approach to OSB operations.
This acceleration of our growth and value-creation strategy will build on LP's growing momentum as we transform into a Building Solutions later.
Slide 8 shows summarized results for the quarter, which are very clean and straightforward.
Net sales increased by 60% to $860 million, primarily due to 30% growth of SmartSide and $246 million of higher OSB prices.
The resulting EBITDA of $328 million is 7 times last year's result and translated nearly dollar for dollar to operating cash flow of $321 million with the benefit of $45 million in tax refunds.
We further lowered our year-end share count to 106 million shares after spending $171 million in the quarter to buy back a little over 5 million shares, and with taxes as the only meaningful adjustment to net income, adjusted earnings per share was $2.01 compared to U.S. GAAP earnings per share of $2.34.
Slide 9 is the same data for the full year and is much of the same story, just with bigger numbers.
Net sales increased by 21% to $2.8 billion and EBITDA increased to $781 million, which is 4 times last year's result.
We grew SmartSide revenue by 15% and $481 million of revenue and EBITDA from higher OSB prices and generated $659 million in operating cash flow.
Capital spending of $77 million ended up being about half our original pre-COVID guidance for 2020.
The vast majority of this $77 million was spent on sustaining maintenance, which typically runs in the $80 million to $100 million range per year.
As a result, we ended the year with $535 million in cash after paying $65 million in dividends and $200 million to repurchase shares.
Slide 10 adds detail to the EBITDA impact from growth and efficiency through LP's ongoing strategic transformation.
As Brad said, we exceeded our three-year target of $165 million in cumulative EBITDA impact a year early with $107 million from growth and $71 million from efficiency.
And this is a result of truly remarkable performance by our sales, operations and sourcing teams, especially given the challenges of 2020.
But this is a race with no finish line.
So, we intend to hold these gains and add to them in 2021 and beyond.
Slide 11 shows an ultra-high level roll forward of revenue and EBITDA for the fourth quarter compared with 2019.
The main takeaway here is that higher OSB prices and 30% SmartSide growth tell us all we need to know about the quarter.
Everything else basically nets to zero.
Having said that, and while not shown here, our South America segment had a record quarter with $50 million of sales and $13 million of EBITDA, representing increases of 32% and 62%, respectively even after adverse currency movements.
The waterfalls on Slides 12 and 13 detail the year-over-year revenue and EBITDA growth in the Siding and OSB segments for the quarter.
Slide 12 covers Siding.
In broad strokes, the 30% revenue growth for the quarter reflects a 95% increase in retail revenue and a 20% increase in distribution revenue.
And with an incremental margin of $0.51 on each additional dollar of revenue, this $59 million of SmartSide growth produced $30 million of additional EBITDA.
With low SG&A and higher OEE more than offsetting the discontinuation of Fiber, the Siding segment EBITDA margin increased by 12 percentage points to 30%.
I should mention here that 2021 will be a year of increased investment in both selling and marketing and preventative maintenance to support future growth.
So this margin is probably something of a high watermark.
However, given the operating leverage and pricing power inherent in the business, we are raising our long-term target for the Siding EBITDA margin by 5 percentage points to 25%.
On Slide 13, very high market demand for OSB pushed prices to record levels adding $246 million of revenue and EBITDA in the quarter which rather overshadows both the continued excellence of our cost control and the growth of Structural Solutions, which rose to 49% of total OSB volume.
We are, therefore, raising our long-term target of Structural Solutions volume as a percentage of total OSB volume by 5 percentage points to 55%.
However, during the fourth quarter, we experienced interruptions in the supply chain for MDI, the primary resin used in the manufacture of SmartSide, OSB and LSL.
These issues were triggered by the impact of severe weather on MDI manufacturers in the U.S. Gulf Coast area.
While MDI supply remains constrained, we are prioritizing MDI to SmartSide, substituting alternate phenolic resins for OSB and curtailing LSL production until availability improves.
The use of phenolic resins in OSB lowers line speeds which we estimate lost us $8 million of potential revenue and $3 million of potential EBITDA in the fourth quarter.
Turning to Slide 14 and some commentary on 2021.
As you might expect, given our capacity and growth plans, this will be a year of investments.
The Houlton conversion will cost about the same as the Dawson conversion in 2018, that is about $130 million.
Roughly $80 million to $85 million of that $130 million will be spent in 2021, with the remainder in 2022.
We have other strategic growth projects totaling $30 million to $35 million that will enable us to accelerate our rollout of new products and we have our typical base level of about $100 million in sustaining maintenance.
And as Brad mentioned, the capital required for Peace Valley restart should be around $10 million at most.
As a result, we expect capital expenditures for the year to be in the range $220 million to $230 million.
A word now about capital allocation.
Our strategy remains unchanged.
We will continue to return to shareholders, which is 50% of cash from operations in excess of capital expenditures required to execute our strategy once that cash has been generated.
So, given that we ended the year with $535 million in cash with a $300 million share buyback authorization from our Board, we will be reentering the market to continue buying back shares in a matter of days.
Now I concluded my comments last quarter by saying that absent unexpected reversals in demand or the general housing outlook, the fourth quarter would look a lot like the third.
Given accelerating SmartSide growth and rebounding OSB prices, that turned out to be a bit conservative.
But we have similar visibility into our order file today, so I can share the following.
Halfway through this first quarter of 2021, OSB prices are at least 15% higher than the fourth quarter of 2020 on similar volumes.
SmartSide revenue is trending seasonally higher than the fourth quarter, on pace for at least 35% growth compared to the first quarter of 2020.
Should these trends continue and absent COVID outbreaks or sudden reversals in logistics, raw material availability or OSB prices, we expect EBITDA for the first quarter of 2021 to be at least $380 million. | compname posts q2 adjusted non-gaap earnings per share $4.74.
q2 sales $1.3 billion versus refinitiv ibes estimate of $1.2 billion.
q2 adjusted non-gaap earnings per share $4.74.
sees siding solutions revenue in q3 of 2021 to be about 10% higher than q3 of 2020.
sees osb revenue in q3 of 2021 to be sequentially lower than q2 of 2021 by about 10%.
sees adjusted ebitda for q3 of 2021 to be greater than $530 million.
expect capital expenditures for 2021 to be about $270 million. | 0 |
They can be accessed at ir.
Following our prepared comments, we will open the call for a question-and-answer session.
We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2021.
We will also be referencing non-GAAP financial measures during the call.
We have a lot of new and exciting updates to communicate this quarter.
First, I'll provide a high-level overview of fiscal first quarter results.
After that, I'll walk through our new segment reporting structure, which went into effect this quarter and explain the rationale for this change.
Lastly, I'll update you on our broad-based transformation approach, which is underway and provide examples of the significant opportunities we see to deliver a step change in performance for the business.
Following that, our new CFO, Alex Pease, will provide a deep dive into our quarterly performance for our newly organized segments and other critical financial performance.
We will then move to Q&A and answer any questions you may have.
We started our fiscal year off with a solid quarter that was in line with our expectations and within our guidance range.
Despite continued supply chain disruptions, higher inflation and increased absenteeism related to COVID, we executed well.
For the fiscal first quarter, sales were $5 billion, up 13% year over year.
We delivered consolidated adjusted EBITDA of $680 million, up 2% over the same period and adjusted earnings per share came in at $0.65 per share, up 6.6%.
During the quarter, we also continued to aggressively buyback stock, repurchasing roughly $100 million worth of stock while maintaining net leverage of 2.4 times, well within our desired range of two and a quarter to two and a half times.
As a reminder, the first quarter was a record maintenance quarter for WestRock.
We had a number of projects delayed from previous quarters due to COVID and the ransomware incident last year and I'm pleased to report we completed all scheduled maintenance projects safely.
COVID continues to cause disruptions, impacting labor at our mills and box plants as well as further contributing to ongoing supply chain challenges.
Despite these challenges, we are resilient and continue to execute well, as demonstrated by our strong results.
Finally, demand for our products across consumer, corrugated, machinery and other product lines remain strong and our backlogs are near record levels.
Let me now provide an update on our new reporting structure.
I'm on Slide 4.
As a reminder, WestRock previously reported in two segments: corrugated packaging and consumer packaging.
We are now reporting in four segments to provide greater visibility into the integrated performance of our packaging businesses, while we focus our merchant paper business on critical strategic markets as well as providing material for the packaging converting businesses.
This new structure will help us highlight the performance of all elements of our portfolio.
We reorganized into the following segments.
corrugated packaging, which includes integrated corrugated converting operations and represented 44% of first quarter sales.
Consumer packaging, which includes integrated consumer converting operations and accounted for 23% of first quarter sales.
Paper, which includes all third-party paper sales and made up 27% of first quarter sales and distribution which includes our distribution business, which is roughly 6% of sales.
Perhaps more importantly, this new structure will further enable an enterprise sales approach to drive growth as well as greater efficiency and synergy to improve profitability.
I will describe this in more detail shortly.
Let me now spend a few minutes on where WestRock is today and where we are headed.
We have been driving a comprehensive strategic review of our markets and our go-to-market approach.
In parallel, we have taken a hard look at all our assets to evaluate their merits and their position in the portfolio while also evaluating our ability to drive to a greater level of operational excellence and profitability.
And we're already making progress.
We've made significant strides in the integration of our consumer business and have implemented productivity improvement plans across the company.
And the restructuring of our mill assets into one organization is already providing greater production flexibility across our footprint.
I will share a more fulsome perspective in the future, but suffice it to say, we have significant opportunity.
We have not fully integrated many of the acquisitions we have made.
We need to turbocharge our digital strategy, not just in the back office, but also in manufacturing and innovation.
We have elements of the portfolio that are noncore to our integrated strategy and we have inefficiencies that must be addressed.
Our profitability and our ROIC are not where they need to be.
This is going to change as we implement our transformation plan.
Importantly, our senior leadership team is aligned and is mobilized to drive this change.
Together, we have developed this transformation plan and have shifted into execution.
At a high level, our plan includes three overarching priorities.
Second, drive a step change in our margins through pricing excellence, productivity, mix management and cost control.
We are implementing our new WestRock operating system that standardizes our systems and utilizes our digital tools to identify options to drive efficiency and do things even better.
And third, generate consistent ROIC in excess of our cost of capital through disciplined investment, operational excellence and portfolio optimization where appropriate, while maintaining strong free cash flow, significant balance sheet strength and prudent capital allocation.
Let me provide an update on each of our three strategic priorities.
Our growth agenda is designed to maximize the value of the complete packaging solutions only WestRock can provide.
Our combination of consumer and corrugated packaging, paper, machinery and access to distribution is unique in the industry and a strategic differentiator.
It enables us to sell integrated solutions that are valued by our customers and partner with them to ensure that they are responsive to macro trends such as sustainable packaging.
With our portfolio, we have the capability to deliver full packaging solutions that are unmatched in our industry.
General Motors is a great example of this and we were just recognized as our supplier of the year.
With GM, we have partnered to provide options for brand security that help combat counterfeiting issues in the supply chain process, we produced their primary parts packaging and secondary corrugated packaging using our global manufacturing footprint to ensure they have the right supply and the right place when they need it.
Innovation and plastic replacement continues to be a growth driver.
We also can anticipate customer needs and introduce new products that support enhanced sustainability.
This quarter, we announced a partnership with Grupo Gondi in Mexico to provide our CanCollar product to ABI Mexico Grupo Modelo.
This expansion of CanCollar is an exciting development and one that demonstrates the growth potential of our sustainable products.
Our integrated one enterprise approach is driving value and we are continually working to maximize this value while minimizing our exposure to lower-value markets.
To that end, we've completed the first phase of our portfolio analysis and I look forward to sharing more about this soon.
Let's now turn to how we are going to drive margin improvement.
Historically, our margins in corrugated have been 18% and 16% in consumer, improving both as a key priority.
As we begin our journey of developing an enterprisewide operating system, our first focus has been quantifying the opportunity and identifying areas to tackle.
In recent months, we have standardized the measurement methodology in our operations and have identified significant opportunity to expand capacity without adding capital.
We have evaluated our asset footprint and see warehousing and logistic opportunities that we are optimizing.
We are also investing in our business to increase our level of integration and introduce automation, predictive analytics and other cutting-edge digital capabilities into our network.
To that end, we are constructing a state-of-the-art corrugated converting plant in the Pacific Northwest that will be cutting edge in efficiency and throughput.
This is just one example of many that we are excited to share.
We are aggressively focused on improving our ROIC in excess of our cost of capital.
While improving our productivity is an important part of the equation, capital deployment and capital utilization are equally important.
Through our initial diagnostic work, we have identified opportunities to expand capacity without adding capital.
We have looked at our portfolio and identified noncore assets that don't meet our return thresholds and we have implemented a disciplined approach to capital deployment that directs our resources to only the highest return projects.
We are focused on ongoing efforts to drive best-in-class returns in our portfolio.
And lastly, our senior leadership team now has an explicit ROIC component to our long-term compensation program.
Additionally, we are laser-focused on generating strong and consistent free cash flow and maintaining substantial financial flexibility in our balance sheet.
This strength enables us to invest in our business through all business cycles and also reward shareholders consistently.
To that end, we have aggressively paid down debt over the past several quarters and have increased the dividend twice in the past year.
Our intent is to reinforce our commitment to a stable and growing dividend while also continuing to aggressively repurchase WestRock stock.
As a reminder, in Q4 of 2021 and Q1 of 2022, we have repurchased approximately $223 million of stock as an initial down payment on this strategy.
With our very strong free cash flow generation and our current valuation level, we intend to get more aggressive on our stock buybacks and are targeting repurchases up to $500 million over the next several months.
We will continue to monitor short-term fundamentals that provide the best return opportunities for our capital allocation.
A lot of exciting change is underway at WestRock and I'm convinced about the significant value creation opportunities ahead for our company.
We are committed to executing our plan to drive enhanced shareholder value and our team at WestRock is motivated and enthusiastic about what is ahead.
We are focused on growing through innovation with new sustainable products and digital engagement tools that our customers and our consumers need in today's marketplace.
We have a new transformation office in place that is driving rigor in all that we are doing, including standardizing key operating and performance metrics across the asset base.
We have brought in a new supply chain leader, Peter Anderson, who is aligning our supply chain operations across the company with a focus on greater productivity and cost savings.
And finally, I'm excited to have Alex Pease join us as CFO, effective November 2021.
With over 20 years of experience in corporate strategy, M&A, capital markets, portfolio optimization and broad-based business transformation as well as extensive public company experience, Alex has already proven to be a strong partner.
I'll now ask Alex to provide the detailed rundown on our performance.
I'm excited to be here for my first earnings call as CFO.
Before I review first quarter results in detail, I want to reiterate the diversity of opportunity that David described and reinforce the commitment to a fundamentally different level of performance.
The opportunities to drive a step change in margin as well as significant ROIC improvement are real.
And rarely have I seen the team is aligned behind the vision for the future is this one.
While it's early in the process, I have every conviction that we'll be successful and look forward to supporting David and the team in the journey.
And with that, let's cover results.
Fiscal first quarter sales were up 13% to $4.95 billion and consolidated adjusted EBITDA increased 2% year over year to $680 million.
Consolidated adjusted EBITDA margin was 13.7%.
Price and mix positively impacted earnings by $600 million year over year.
This higher pricing was mostly offset by $520 million in higher costs, including higher fiber, transportation and labor as well as the impact of the previously discussed high planned maintenance conducted in the quarter.
As a reminder, the first fiscal quarter is the highest maintenance quarter of the year.
In addition, we faced challenges with COVID related to freight and raw materials, which impacted our production output.
Turning to Slide 12.
Sales in corrugated packaging, excluding white top trade sales were up 11.5% year over year to $2.1 billion.
Adjusted EBITDA declined 17% to $289 million giving the segment an adjusted EBITDA margin of 13.5%, also excluding white top trade sales.
Price drove an additional $277 million in adjusted EBITDA year over year.
However, this was more than offset by $230 million in inflation due to labor challenges with COVID-related absenteeism and logistics issues as well as $63 million of lower productivity and $43 million of lower volume.
The impact of the high level of downtime, both planned and unplanned, drove much of the volume decline.
Following a strong first fiscal quarter of 2021, we experienced significant supply chain challenges in 2022.
And as well as cost inflation in most input costs and the higher fixed cost impact of the record planned downtime for the scheduled maintenance in our mill system.
This was further impacted by lower productivity due to high COVID absenteeism and the introduction of inexperienced labor into our factories.
We are actively working to address each of these issues and are anticipating that the business will return to more historical levels of profitability over the balance of the year with additional upside as we deploy the WestRock operating system that David discussed.
During the quarter, our North American box shipments were 3.7% lower year over year, driven by our record mill maintenance levels, COVID-related slowdowns and continued disruptions in the supply chain.
However, backlog for the corrugated packaging business remains very strong.
If we could have made more, we certainly would have sold it.
Over the next two quarters, we expect additional pricing to flow through our corrugated packaging business from the previously published price increases.
As a reminder, this only includes pricing that has already been published in pulp and paper week.
Turning to the consumer packaging business on Slide 13.
Sales were up 7% year over year to $1.1 billion, though adjusted EBITDA declined 3.4% to $169 million in the quarter.
Adjusted EBITDA margins were 14.9% for the segment.
As in corrugated, better price and mix added $50 million to adjusted EBITDA.
Also, improved productivity and better volume drove $14 million and $6 million of higher adjusted EBITDA, respectively.
However, higher fiber, transportation and labor costs as well as the high maintenance level negatively impacted earnings with total inflation of $76 million, more than offsetting the other improvements.
Consumer backlog remains very strong at five to seven weeks and we continue to implement the previously published price increases across all consumer grades.
government to offer free COVID test kits to every household in the country.
Turning to Slide 14.
Revenue for our paper business came in at $1.4 billion, up 24% year over year.
Adjusted EBITDA was $232 million with an adjusted EBITDA margin of 17%.
Adjusted EBITDA was up an impressive 53% year over year due to price and mix improvements with the flow-through of previously published price increases.
Export markets were also very strong.
While we face some headwinds with lower production levels and freight inflation, the paper business performed very well this quarter.
Looking forward, demand and profitability for our paper products remain strong, both in the independent domestic and export markets, highlighting the importance of certain strategic markets and the value of our diversified portfolio.
Backlogs continue to be at historically high levels and for the remainder of the year, we expect to achieve significant pricing as recently published pricing flows through our contractual business.
On Slide 15, we show our distribution results.
Those sales were up 7% to $325 million.
Adjusted EBITDA margins fell to 2% from 5.4% last year, mainly due to supply chain issues and the higher cost to service customers driven by higher fuel and labor costs.
Demand remains strong for our distribution business and is outpacing our ability to supply customers due to labor and supply chain challenges.
Our free cash flow for the quarter was down significantly year over year, but much of this change was due to the reversal of the pandemic action plan that we had in place during the first quarter of fiscal 2021.
Specifically, we were negatively impacted by the payment of short-term incentive compensation in cash versus the stock payment made in the previous year.
Compounding that pressure, our strength in fiscal year 2021 led to a larger bonus payment as compared to the previous year when short-term incentive compensation was paid at threshold level.
Finally, we had negative impact from the 401(k) match returning to cash payments rather than stock and the required repayment of the deferred payroll tax as part of the CARES Act.
Though the quarter was highly impacted, we still expect to generate cash flows in excess of $1.3 billion as we progress through the year.
Turning to Slide 17 and our financial guidance for the second quarter of 2022.
We continue to implement all previously published price increases.
We expect roughly flat sequential cost inflation as improvements in energy and OCC costs should be offset by higher freight, wage and other expenses.
Though we are past the highest maintenance quarter due to delays in mill maintenance earlier in fiscal 2021, along with our originally planned outages, we still have approximately 128,000 tons of scheduled downtime across our system in the coming months.
These assumptions result in forecasted consolidated adjusted EBITDA of $780 million to $830 million and adjusted earnings per share of $0.94 to $1.08 per share.
As a note, this guidance does not include any potential benefit from the $70 per ton price increase across our containerboard grades that we have communicated to our customers.
Some additional assumptions behind our outlook include OCC costs down $10 to $15 per ton, natural gas costs down sequentially.
Labor expense up sequentially due to normal Q2 merit increases, continued inflation in freight and logistics expense, a tax rate of 23% to 25% and diluted shares outstanding of approximately 267 million.
In closing, we're in the process of transforming WestRock into an industry leader that delivers consistent, strong results to shareholders through all operating environments.
We are in the beginning phases of our journey to optimize our portfolio through operational efficiency, footprint optimization and growth investments.
We've made substantial progress on these efforts already, made decisions about our path forward and continue to hire and develop key talent to help us advance our vision.
We look forward to providing a deep dive overview of WestRock, our WestRock operating system and long-term targets at our 2022 investor day, which was previously scheduled for February.
Given the current situation with COVID, we have decided to move this important event to May with the hope that we can meet in person.
With that, let's move to Q&A.
Operator, may we take our first question, please? | compname reports q2 sales of $5 bln.
q1 adjusted earnings per share $0.65. | 1 |
Last night, we released results for our third quarter of fiscal year 2021, copies of which are posted in the Investor Relations section of our website.
In order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results.
Any non-GAAP financial measures presented should not be considered to be an alternative to financial measures required by GAAP.
Erica McLaughlin will review the business segment and corporate financial details.
I'm very pleased with our results this quarter as we generated adjusted earnings per share of $1.35.
This marks the second strongest quarterly earnings performance in the company's history.
Demand across all businesses were strong and we continue to leverage our global network of plants to serve our customers while managing the persistent challenges related to the COVID-19 pandemic and disruptions in international transportation and logistics markets.
I'm very proud of the entire Cabot team for demonstrating great operating discipline across all aspects of our business and for their resilience in this very dynamic environment.
Our culture of teamwork and our commitment to commercial and operational excellence serves as the foundation for our strong performance.
While raw material markets remained somewhat volatile during the quarter, we were successful in implementing price increases to maintain robust margins.
I am also very excited about our continued progress across our portfolio of targeted growth initiatives, particularly in the battery application.
I believe the battery market presents one of the most compelling new growth opportunities for the materials sector and our strategic investments over the last several years have positioned Cabot very well to capitalize on this unique opportunity.
Our energy materials business continued to build strong momentum in the quarter as we achieved qualification milestones and began commercial sales to an additional two of the global electric vehicle battery leaders.
The Top 8 EV battery producers represent approximately 90% of the industry and we now have commercial sales to six of these Top 8 manufacturers.
In addition, we are supplying conductive carbon additives to the Top 5 EV battery producers in China.
The Cabot value proposition to the battery market is based on three factors.
First, the breadth of our product line of conductive carbon additives including conductive carbon blacks, carbon nanotubes, carbon nanostructures and blends of conductive carbon additives.
Second, the depth of our application knowledge in our global research and development centers allow us to tailor products for our customers and respond quickly in this fast changing environment.
And finally, our global footprint of manufacturing plants and our sales and technical service support.
As battery producers expand their manufacturing footprints outside of Asia to support auto OEMs with robust regional supply chains, we see the value of our global footprint becoming even more important for our customers.
We believe these capabilities represent a compelling differentiator for Cabot and position our company as a key supplier and innovator to the leading battery manufacturers.
Transitioning now to cash.
Operating cash flow in the quarter was $71 million and $157 million year-to-date.
While EBITDA generation has been very strong, conversion to operating cash has been impacted somewhat by higher oil prices, which contributed to over $100 million of the net working capital increase year-to-date.
While oil price volatility can create short-term fluctuations in working capital balances, history has shown that over the long-term, oil driven working capital fluctuations tend to balance out.
Given the size and strength of our balance sheet, we can easily absorb these changes in working capital without impacting our long-term capital allocation priorities.
As oil prices stabilize, we expect to see a greater level of conversion of our strong EBITDA to operating cash flow.
The strength of the balance sheet and our cash flow is reflected in our investment grade credit rating.
This has long been a priority for us and we remain committed to this posture.
We recently closed on a new $1 billion ESG linked credit facility, which replaces our existing credit facility that was due to mature in October of 2022.
The facility includes two ESG metrics centered around our annual sulfur dioxide and nitrogen oxides emission reduction goals.
This agreement represents one of the first ESG linked credit facilities in the chemical industry and further reinforces our commitment to sustainability.
The facility matures in August of 2026 with key terms largely the same as our prior facility.
In addition, during the quarter, we released our 2020 sustainability report, which provides enhanced transparency on our environmental, social, and governance priorities.
ESG leadership is central to our strategy and the interactive digital report summarizes our progress and accomplishments.
Overall, we had a very strong quarter in terms of financial performance and progress against strategic objectives.
I will start with discussing results in the Reinforcement Materials segment.
The Reinforcement Materials segment delivered strong operating results with EBIT of $85 million, which is up $90 million compared to the same quarter in fiscal 2020.
The increase is primarily due to significantly higher volumes across all regions and improved unit margins driven by favorable pricing in the Asia region.
Globally, volumes were up 71% in the third quarter as compared to the same period of the prior year due to 146% growth in the Americas, 100% increase in Europe, and up 30% in Asia.
Higher volumes were driven by key end market demand that continued to recover from COVID-related impacts in fiscal 2020.
Looking to the fourth quarter, we expect the volumes to remain strong.
Fixed costs are expected to be sequentially higher due to the timing of planned plant maintenance.
Given the very strong demand in the last few quarters and limited inventory in most supply chains, our focus has been on supporting our customers' product needs.
As a result, we have scheduled a higher than normal amount of maintenance in the upcoming quarter.
Another factor that will affect our fourth quarter is the impact of a outage at a plant in the U.S. due to an equipment failure on our recently installed air pollution control system.
Cabot completed this project on schedule according to the consent decree.
However, controlling this level of SOx and NOx emissions is new for the carbon black industry in the U.S. With the start-up of any new technology, there can be unexpected issues and this is the situation we currently face.
We anticipate this site will be down for about one month to repair the equipment.
In addition, we expect margins to moderate from the third fiscal quarter due to higher feedstock differentials.
We anticipate this differentials impact will be approximately $5 million in the fourth quarter and we expect to recover this impact in the first quarter of fiscal 2022 through our DCA mechanisms.
Now turning to Performance Chemicals, EBIT increased by $33 million as compared to the third fiscal quarter of 2020 primarily due to strong volumes across the segment and improved product mix.
The stronger product mix was driven by an increase in sales into automotive applications in our specialty carbons and specialty compounds product lines.
Year-over-year, volumes increased by 17% in Performance Additives and 20% in Formulated Solutions driven by higher volumes across all our product lines underpinned by higher demand levels in our key end markets.
Looking ahead to the fourth quarter of fiscal 2021, we expect overall volumes to remain strong with some impact from lower seasonal demand.
We anticipate higher costs from planned turnarounds and a net unfavorable impact from planned outages.
The first outage is what I just mentioned at a plant in the U.S.
This plant supplies both the Reinforcement Materials segment and the Performance Chemicals segment.
Another planned outage is related to a specialty compounds plant in Belgium.
This plant was severely impacted by the heavy rains and floods in the region in July resulting in this plant remaining offline for the balance of the fourth quarter.
With higher maintenance impacting both the Reinforcement Materials and Performance Chemical segments, we estimate the sequential impact of higher maintenance costs for the company to be in the $8 million to $10 million range.
We expect this elevated level to return to a more normal level in Q1 of fiscal 2022.
With regards to the plant outages, this impact is also across both the Reinforcement Materials and Performance Chemicals segment and we expect the impact across the company to be in the range of $7 million to $10 million in the fourth quarter.
We expect to recover insurance proceeds that will help to offset the financial impact from these outages, but we do not anticipate any proceeds to benefit operating results until fiscal 2022.
Moving to Purification Solutions, EBIT in the third quarter of 2021 increased by $4 million compared to the third quarter of fiscal 2020 driven by volume growth in specialty applications and an insurance reimbursement from a plant outage in the first quarter of this fiscal year.
Looking ahead to the fourth quarter of fiscal 2021, we expect EBIT to decline due to lower volumes in our mercury removal applications and we will not have insurance proceeds in the fourth quarter.
I will now turn to corporate items.
We ended the quarter with a cash balance of $173 million and our liquidity position remained strong at $1.3 billion.
During the third quarter of fiscal 2021, cash flows from operating activities were $71 million which included a working capital increase of $47 million.
The working capital increase was largely driven by the impact of higher raw material costs that cause [Phonetic] higher inventory balances and as we pass these higher costs on in our pricing, which drove accounts receivable higher as well.
Capital expenditures for the third quarter of fiscal '21 were $46 million.
For the full year, we expect capital expenditures to be approximately $20 million.
This estimate includes continued EPA-related compliance spend and the capital related to upgrading our new China carbon black plant to produce specialty products.
We anticipate the new plant in China will be online in the second half of fiscal '22.
Additional uses of cash during the quarter included $20 million for dividends.
Our year-to-date operating tax rate was 28% and we forecast our operating tax rate will be between 27% and 28% for this fiscal year.
I'm very pleased with our third consecutive quarter of strong operating results and we are raising our expected full year outlook of adjusted earnings per share to be in the range of $4.85 to $5.05.
This is truly exceptional performance for our company and reflects our strong commercial and operational execution and the value of the strategic choices we have made in recent years.
Our advancing the core strategy is focused on strengthening our industry-leading positions through great execution and by making smart targeted growth investments.
We've invested aggressively in our operating platform to build excellence in our commercial and manufacturing operations.
On the commercial front, our focus has been on strengthening our capabilities and the disciplines of key account management, data analytics, strategic pricing and voice of the customer and all of these have been underpinned by a world-class CRM platform.
On the manufacturing front, our focus has been on overall equipment effectiveness or OEE, energy recovery process and yield optimization, and capital efficiency.
Through these actions, we have demonstrated the earnings power of our two high-margin segments in Reinforcement Materials and Performance Chemicals and we have enabled this growth in a more capital-efficient manner.
On the growth front, we have a philosophy of building from positions of strength and investing in market spaces where we believe we have a right to win.
This led us to invest for breakout growth in conductive carbon additives for batteries and to complete the Sanshun acquisition and we are growing in the battery space as we expected.
In addition, our capacity investments in Asia over the years have positioned us as a leader in the region across carbon black, fumed silica, and specialty compounds.
These investments are enabling us to drive strong earnings and returns in this high growth area of the world.
Through these foundational capability investments and smart growth choices, we have structurally increased the profitability of the company and have moved the EBITDA base to a new level.
As I look forward, the underlying performance of our business is very strong and customer demand remains robust.
Our growth investments are well positioned to take advantage of macro trends in the area of mobility, alternative energy generation and storage, connectivity, and infrastructure reinvestment.
I feel very good about how Cabot is positioned for fiscal '22 and the coming years.
The strength of our culture and the resilience of our employees has never been more apparent than it has been during these challenging times. | sees fy adjusted earnings per share $4.70 to $4.95.
q2 adjusted earnings per share $1.38.
for h2 of fiscal year, anticipate continued demand strength across our segments.
for h2, expect some impact from flow-through of higher raw material costs in asia.
for h2, expect some impact from moderating volumes into automotive applications due to semi-conductor chip shortage.
for h2, expect some impact from increased fixed costs due to timing of scheduled maintenance activities. | 0 |
As Elaine said, this is Todd Leombruno, Chief Financial Officer speaking.
Reconciliations for all non-GAAP measures are included in today's materials.
Tom will then close with key messages and then Tom, Lee and I will take any questions the group may have.
It's really more than just this quarter, it's really been the whole year and the performance to the pandemic and also the transformation of the company into a top quartile diversified industrial company.
These results are all because of your efforts.
So let's look at the quarter on top of slide three.
Starting with safety, as we always do, we had a 33% reduction in record incidents.
We're still in the stop quartile, the combination of safety, lean, our high-performance team structure in Kaizen, were all driving high engagement and high performance, you see that show up in our results.
Sales grew about 1%.
The organic decline was minus 1%, but in particular, if you take out aerospace and look at the industrial only, industrial segment grew organically almost 4%, so that was significant.
We had 5 all-time quarterly records.
You can net income, EPS, and the segment registered for Parker, North America and international.
EBITDA margin was very strong at 21.6% as reported, 21.8% adjusted a huge increase versus prior 250 basis points, year-to-date cash flow was an all-time record of $1.9 billion and 18 -- a little over 18% of sales.
If you go to the very last row of this page, you see segment operating margin on an adjusted basis, 21.4% and again, a significant improvement versus prior, plus 240 basis points.
So a terrific quarter and really tough conditions.
If you go to the next slide.
I want to talk about the transformation of the company.
The old adage that a picture is worth a thousand words, and so I want to take you to slide five, and this is really the picture that speaks to the transformation of the company.
Let me explain the chart here for a minute.
So you've got in gold Bars, the adjusted EPS.
The blue line is global PMI plotted on a quarterly basis.
If you look at the last six years and look at that dotted green line, and compare that to the blue global PMI line, you see they are much less correlated effect there divergent.
And there's been a step change in performance.
The earnings per share over this time period is more than doubled from $7 to our guidance of $14.80, so approaching $15 and was propelled that over that time period as an EBITDA margin that's grown 600 basis points.
So you might ask how, how that happened?
It's really that blue takeaway at the bottom of the page, it's our people.
That focus the alignment, the engagement that comes when you have people think and act like an owner.
The portfolio, which is a combination of our interconnected technologies and the value they bring and the capital deployment we've done buying some great companies that have added to the strength of the company.
Then our performance, which really sits with the strategy of the company, Win Strategy 2.0, at the kind of the beginning of this journey and then The Win Strategy 3.0 most recently in FY 2020.
So this combination is really transformed the company.
You see that as evidenced in this slide, and we're very proud of it.
But if you go to slide six.
So that's what's kind of in the rearview mirror.
But going forward, we're equally excited about where the company is going to go.
And I call this a convergence of positive inflection point.
So on the left-hand side is kind of those external inflection points.
You're familiar with a lot of these, the macro environment industrial momentum, you see that in our positive orders and positive organic growth industrial we showed in this quarter.
Aerospace is going to recover, question is just what the trajectory will be and the timing?
Vaccines are making progress around the world.
There's going to b e a significant amount of climate investment.
And if you put all that on top of, I didn't write all these down, but low interest rates pent-up CapEx demand and fiscal spending, you have a very attractive environment for industrials for the next several years.
On the right-hand side is really the internal things we've been doing, Win Strategy 3.0, in particular, but that last slide that I just went through, spoke to all those internal actions because that's what's been propelling us.
Remember that last period, last six years, really had very little help from a macro standpoint.
So you look at the three major things I highlight here, performance becoming top quartile strategies to grow faster in the market.
You've seen our margin expansion, great cash flow generation consistently over the cycle.
Portfolio, we've added three great companies, all accretive on growth cash and margins.
And with the rapid debt paydown that we've done, we're positioned to do future capital deployment, which is very exciting.
The technology, I'll get into in the next slide, but the interconnected technologies really is distinctive for us.
And then with a climate investment, we are very well positioned with our suite of clean technologies to take advantage of that.
So I would tell you that my view and the team's view this is about as good an environment as we've seen in a number of years.
Go to slide seven.
You've heard me talk about this page.
The power of this interconnectedness technology brings the value accretion for customers what I want to do today in light of the clean technology discussion is give you four examples of how this suite of technologies helps with a more clean environment, clean technology world.
So the first would be electrification.
And we've got a full portfolio of technologies here, hydraulic, electrohydraulic, pneumatic, electromechanical, no competitors got that breadth of technologies.
And we formed about four years ago, the Motion Technology center, which put the best and brightest of engineers to Motion technologies, things that fly as well as things with wheels underneath them.
So we put the -- the motion and the aerospace teams together.
And this team has come up with a great listing of products around motors, inverters and controllers.
But there's also in addition to the typical motion opportunities, there's other challenges around electrification like light weighting, thermal management, shielding, structural adhesives and noise vibration, all these to accomplish what we have a legacy engineered materials and with the LORD acquisition, we're well positioned to take advantage of those.
Secondary is batteries and fuel cells that utilize most of the technologies see on this page, third would be clean power sources and that kind of falls into two buckets: Renewables, which we do a lot -- we've always have done a lot of wind and solar; Then the hydrogen, we just recently joined the Hydrogen Council, and it's going to be both onboard as well as infrastructure opportunities as you go out for the next many years.
And it's really building in our high-pressure and our cryogenic applications that we have today.
And then we've been a more sustainable company for a long time and really the -- a clean technology example for us that started a lot of things is filtration.
And our filtration business protects and purifies assets and equipment for people for a more sustainable environment.
So we feel very good about this portfolio for climate investment in the future.
Going to slide right.
I just want to remind you of our purpose statement enabling engineering brakes that lead into a better tomorrow it's been very inspirational for our team.
And I think it comes more to light when we give you examples of the purpose in action, which is on slide nine.
And again, kind of following with that clean technology discussion, when I'd highlight electrification, I'm going to highlight in particular, electric vehicles.
On the left-hand side, you see applications that are changed because of an HEV or EV versus a combustion engine.
On the right-hand side, you see the various technologies that Parker has that addresses those applications.
I won't read all those under the Bayou see the major category, safety, related technologies, things that say, weight, thermal management and a variety of things we do critical protection.
The big opportunity for us, so we obviously are in the factories helping to make these vehicles and we'll always do that, but the big opportunity for us is the onboard content around Engineered materials.
Our bill of material for an EV or HEV is 10x what it was in a combustion engine.
And it's one of the key reasons why our LORD business has grown so nicely even despite the pandemic we grew 11% organically in Q3 from LORD.
So we're very happy with the progress so far and our purpose and action around electrification as an example.
I'll just orientate everyone to slide 11, and I'll do a quick review of the financial results for the quarter.
Tom mentioned some of these, so I'll try to move quickly.
Sales for the quarter were $3.746 billion.
That is an increase of 1.2% versus prior year.
We are proud of the fact that the Diversified industrial segment did turn positive organically.
Industrial segment organic growth was 3.7%.
Obviously, that was offset by the Aerospace Systems segment, their organic decline was 19.7%.
So all in, that drove total organic sales to minus 1.0.
Currency was a favorable impact this quarter of 2.2%.
And just a note in respect to acquisitions, this is the first full quarter that we report both LORD and exotic in our organic growth numbers.
So therefore, the acquisition impact was zero.
Moving to segment operating margins, you saw the number, 21.4%, that's an improvement of 240 basis points from prior year.
It's also an improvement of 130 basis points sequentially, strong margin performance there.
And that really was a result of just broad-based execution of the Win strategy.
We continue to manage our cost in a disciplined manner.
The portfolio additions in CLARCOR, LORD and Exotic are all performing soundly.
And you've all been familiar with the restructuring activities that we've done in FY 2020 and in FY 2021.
Those are on track and on planned and generating the savings that we expected.
Adjusted EBITDA margins did expand 250 basis points from prior year, finished the quarter at 21.8%.
And net income is $540 million, which is a 14.4% ROS.
That's increased by 22% from prior year.
Adjusted earnings per share is $4.11 that is $0.72 or 21% increase compared to prior year's results of $3.39.
And as Tom said, it's just really outstanding performance.
And I'd also too like to commend our global team members for generating these results.
If you slide to slide 12, this is really a bridge of that $0.72 increase in adjusted earnings per share versus prior year.
And the story here across the board is just strong execution from all of our businesses.
This produced robust incrementals in our Diversified Industrial segment and really commendable decrementals in the Aerospace Systems segment.
Adjusted segment operating income did increase by $98 million or 14% versus prior year, that equates to $0.58 of earnings per share and really is the primary driver of the increase in our adjusted earnings per share number.
Interest expense was favorable to prior by $0.12 as we posted yet another quarter of sizable repayment of our serviceable debt, and that is really benefiting from our strong cash flow generation.
Other expense, income tax and shares netted to a $0.02 favorable impact compared to prior year.
Moving to slide 13.
This is just an update on our discretionary and permanent cost out actions.
And this is just a reminder these represent both savings recognized in the current fiscal year from our discretionary actions in response to the pandemic and our permanent realignment actions that were taken at the end of FY 2020 and throughout FY 2021.
Discretionary statements came in exactly as we guided, at $25 million for Q3, and now total $215 million year-to-date.
There is no change to our discretionary savings forecast for Q4.
That remains $10 million.
And we continue to forecast the total year to be $225 million in full year savings.
Just to note, with the increased demand levels that we're seeing from our positive order entry, our teams have really pivoted to growth and really now these discretionary actions that we knew would diminish across the calendar year have now really been based in reduced travel expenses.
If you move to permanent savings, we realized $65 million in Q3.
Our total year-to-date is $190 million.
The full year forecast, again, here remains, as previously communicated, at $250 million.
One item to note, we did guide that the cost of the FY 2021 restructuring would come in around $60 million.
It's now expected to be $10 million less or $50 million but there is no change to the expected savings that we are forecasting.
Total incremental impact for the year for both permanent and discretionary savings is $260 million.
And just one other thing to note, this will probably be the last quarter that we detail these items as we anniversary the pandemic-induced volume declines and really focus our attention on growth.
So the takeaway is savings are on track, no changes other than the expense will be a little bit less.
If you go to slide 14, this is just highlighting some items from our segment performance for the third quarter.
In our diversified North America business, sales were $1.76 billion.
That is an improvement in organic sales sequentially from Q2.
It still is down 1.2% from prior year, but if you look at the adjusted operating margins, we did increase those operating margins by 190 basis points versus prior year and reached 21.9% for the quarter.
We were able to increase these margins despite that sales decline due to our disciplined cost management, those portfolio improvements we've talked about and really, margins in this segment are at a record level.
If you slide over to order rates, another positive here, they improved significantly from plus one last quarter, and they're now ending the quarter at plus 11.
Looking at the diversified industrial international sales, robust organic growth here of 11.1%.
Total sales came in at $1.39 billion, and another great story here, adjusted operating margins expanded substantially and reached 21.6%, an improvement of 400 basis points versus prior year.
Clearly, the double-digit organic growth, coupled with the cost containment and the effort from our global team really generated this level of record margin performance as well.
And again, another plus here is order rates accelerated in this segment and are now plus 14% for the quarter.
If you look at aerospace systems, they continue to really perform soundly in the current environment sales were $599 million for the quarter.
Organic sales showed a slight sequential improvement from Q2, but are still down basically 20% from prior year.
Commercial end markets are still under pressure.
However, there is strength in our military end markets.
What's nice here is operating margins were 19.4%, 30 basis points better than prior year, despite that 20% decline in volume.
And if you look at our fiscal year, that performance of 19.4% is the highest they've done all year, so we're really proud about that.
Decremental margins are also impressive here in this segment.
This quarter, they're 18% decremental margins.
Order rates appeared to have bottomed and finished at minus 19% for this quarter.
And just a reminder, that is on a rolling 12-month basis.
So overall, we're pleased about a number of things this quarter.
That diversified industrial segment, organic growth of 3.7% as a positive.
Total segment margins improved 240 basis points from prior year and at record levels.
Orders have turned positive and are plus 6% and our teams really continue to leverage the Win Strategy to drive significant improvements in our business and increased productivity and generate strong cash flow.
So with that, I'll ask you to go to slide 15.
This is just some details on our cash flow.
Year-to-date cash flow from operations is now $1.9 billion.
That's 18.1% of sales.
That's up 45% from prior year, and it is a year-to-date record.
Improved net income margin, as we've talked about before, is really a key driver in this.
It's created a step change in our cash flow generation, but I'd also like to commend our team members' intense focus on our working capital metrics.
Each of our working capital metrics is improving and showing positive results, and I'm really proud about that.
Moving to free cash flow at 16.8% of sales.
That's an increase of 630 basis points over prior year, and our free cash flow conversion is now 141%, which compares to 1.22% in the prior year, so great cash flow generation there.
Moving to slide 16, I just want to mention some things we've done on our capital deployment.
We did pay down $426 million of debt this quarter.
That brings our total debt reduction to a little over $3.2 billion in the last 17 months since the LORD acquisition closed.
This reduced our gross debt-to-EBITDA to 2.4%, it was 3.8% in the prior year, and net debt-to-EBITDA is now 2.2%, and that's down from 3.5% in the prior year.
Last week, you saw our Board of Directors approved a quarterly dividend increase of $0.15 or 17%.
This raises our quarterly dividend from $0.88 to $1.03 per share and extends our record of increasing the annual dividends paid per share to 65 consecutive years.
Have positioned us to increase our full year outlook for sales to a year-over-year increase of 4.5% at the midpoint and the breakdown of that sales change is this.
Organic sales are now expected to be flat year-over-year.
Acquisitions will add 3%, and the full year currency impact is expected to be 1.5%.
We've calculated the impact of currency to spot rates as of the quarter ended March 31 and we held those rates constant to estimate the Q4 21 impact.
Moving to segment operating margins.
Our guidance for the full year is raised to 20.8% and that would equate to an increase of 190 basis points versus prior year.
And just some additional color, some things to note.
Corporate G&A, interest and other is expected to be $381 million on an as-reported basis and $479 million on an adjusted basis.
The main difference between those two numbers is that $101 million pre-tax or $76 million after-tax gain on real estate that we recognized and adjusted in the other income line in Q2.
That's the main item.
If you look at our tax rates down just a little bit.
We're now expecting the full year tax rate to be 22.5% and moving to earnings per share on a full year basis.
Our as-reported earnings per share guidance range has increased from $12.96 to $13.26, that's $13.11 at the midpoint.
And on an adjusted basis, we're increasing the range from $14.65 to $14.95, and that's $14.80 at the midpoint.
For Q4, adjusted earnings per share is projected to be $4.18 per share, that excludes $0.54 or $93 million of acquisition-related amortization expense, the finishing of our business realignment expenses and integration cost to achieve.
If you look at slide 18, this is just a bridge of our increase -- our adjust earnings per share guidance, these results that we just reviewed you can see the outperformance that we had in Q3.
That increases our previous guide by $0.57.
The order strength that we just reviewed and really the exceptional operation and execution by our teams have allowed us to increase Q4 guide by an additional $0.33, and that is exclusively based on increased segment operating income.
This raises our full year earnings per share guide by about 6.5% from prior guide.
So we've got a highly engaged team.
You see that is what's driving our results, the ownership culture that we're building.
Record performance in difficult times, these numbers are historical all-time highs for us and not the best of times.
The convergence of positive inflection points, we feel it points to a very bright future.
And the cash generation and deployment is evidenced by the rapid debt pay down, the acquisition performance.
And our dividend increase, which I would just highlight the first time, we've ever been over at $1.03 on a quarterly dividend, which we're very proud of.
So the Win Strategy 3.0 and our purpose statement is well positioned, in addition to those inflection points for a very strong future. | q2 adjusted earnings per share $3.44.
increases fiscal 2021 earnings per share guidance midpoint to $12.15 as reported, or $13.90 adjusted.
qtrly orders were flat for total parker.
during quarter, company made debt repayments of $767 million.
outlook for key end markets continues to be uncertain in current environment.
increased guidance for earnings per share to range of $11.90 to $12.40, or $13.65 to $14.15 on an adjusted basis for fy 2021. | 0 |
Lexington believes that these statements are based on reasonable assumptions.
Any references in these documents to adjusted company FFO refers to adjusted company funds from operations available to all equity holders and unitholders on a fully diluted basis.
Operating performance measures of an individual investment are not intended to be viewed as presenting a numerical measure of Lexington's historical or future financial performance, financial position or cash flows.
Executive Vice Presidents Lara Johnson & James Dudley will be available during the question-and-answer portion of our call.
Our third quarter results were strong in all areas of our business.
We have transformed the company's portfolio, delivered revenue and adjusted company FFO above consensus, produced strong underlying portfolio performance and increased the dividend by 11.6%.
With 95% of our gross assets now industrial, we have substantially completed our portfolio transformation to a predominantly single-tenant industrial REIT.
In addition, we are executing on a number of value-enhancing initiatives, including pursuing prudent external growth, active asset management, and continuing our disciplined capital allocation.
Our portfolio continues to benefit from healthy fundamentals in the industrial sector, including strong leasing demand and rental growth.
Tenant leasing velocity is being driven by the need to improve supply chain efficiency as transportation costs rise, resulting in a greater desire for additional space to house inventory.
Demand is still outpacing supply, with vacancy at an all-time low, leading to rental rates continuing to rise across the country.
Class A warehouse distribution space in our target markets is benefiting from all of these trends.
In short, it is a great time to be an industrial real estate company with top-quality assets.
Our robust third quarter leasing activity is certainly reflective of the strength of our target markets.
With 2.6 million square feet of space leased in the quarter, we raised our stabilized lease portfolio 110 basis points to 98.9% and increased base and cash base industrial rents on extensions and new leases 6.5% and 4.7%, respectively.
Further, for the nine months ended September 30, we raised base and cash-based industrial rents on extensions and new leases 10.3% and 7%, respectively.
Average rent per square foot in our warehouse distribution portfolio is $3.97, which we view as 6% to 8% below market, as market rents continue to grow considerably faster than the escalations built into our leases.
And we note that rents in our target markets have grown on average approximately 8% over the last year.
Our strategy to purchase vacancy to produce higher stabilized yields is proving successful as evidenced by some notable third quarter leasing activity.
We secured a 5.5-year lease with a new tenant who will occupy the 195,000 square foot vacant property that we recently purchased in the Greenville-Spartanburg market as part of a four-property industrial portfolio acquisition.
The lease term includes 2.75% annual rental escalations, and the lease produces an initial stabilized yield of 5.3% for the property.
Additionally, we leased 68,000 square feet of available space to a new tenant at our Lakeland, Florida warehouse distribution facility for five years, increasing the building's occupancy from 53% to 84%.
The starting rent is $5.70 per square foot with 3% annual escalations.
Other significant leasing outcomes during the quarter that resulted in an increase to cash base rent over the prior lease term included a five-year lease with 3% annual escalations at our 640,000 square foot Statesville, North Carolina warehouse distribution facility and a three-year lease with 2.25% annual escalations at our 1.2 million square foot Olive Branch, Mississippi warehouse distribution facility.
Subsequent to quarter end, we had a huge success at our 908,000 square foot spec development facility in Fairburn, Georgia, executing a seven-year lease with 3% annual escalations and bringing the stabilized yield to 7.2%, excluding our partner promote, which was well above our underwriting assumptions.
This lease illustrates the value creation that our development pipeline is now delivering.
We currently have four spec development projects in process, two of which we added during the third quarter, with an estimated total project cost of $358 million and $270 million left to fund.
Speculative development and the purchase of non-stabilized properties continued to be a principal focus of our investment strategy and highlight how our platform, market presence and warehouse distribution focus are creating shareholder value.
On the purchase front, we acquired $135 million of Class A warehouse distribution product during the quarter, with an additional $76 million purchased subsequently, and we currently have a sizable pipeline under review.
Brendan will discuss investment activity and the development pipeline in greater detail shortly.
Our sales volume as of September 30 totaled $219 million at average GAAP and cash cap rates of 7.6% and 7.9%, respectively.
We sold an additional $25 million after quarter-end and have two other properties under contract to sell for $29 million.
As we focus our strategy on acquiring and developing modern Class A warehouse distribution facilities, we continue to view our manufacturing and cold storage portfolio as a potential source of capital for redeployment.
With the sale of our nonindustrial properties substantially complete, our board announced a dividend increase that brings our payout ratio more in line with our peers after several years of focusing more on retaining cash flow and maintaining a low payout ratio during this period of intensive capital recycling.
The new declared quarterly common share dividend, which will be paid in the first quarter of 2022, will be $0.12 per share, representing an 11.6% increase over the prior quarterly dividend.
Our intent to grow the dividend annually, moving forward, reflects our confidence in the direction of market rent growth and our opportunity to raise future rents.
On the ESG front, I'd like to highlight how pleased we are to have earned the first place ranking for U.S. industrial listed companies in our first 2021 G-res assessment.
ESG is an ongoing priority for us, and we continue to enhance and strengthen our program.
We encourage you to review our most recent ESG disclosures, which highlights many of our 2021 ESG achievements and initiatives.
In closing, by transforming LXP into a predominantly single-tenant industrial REIT, we have created a much stronger, more valuable portfolio.
The compelling growth opportunities we see ahead of us position us well to continue to drive meaningful long-term financial performance and enhanced shareholder returns.
During the third quarter, we purchased five warehouse distribution assets spanning 1.3 million square feet for $135 million at average GAAP and cash stabilized cap rate of 4.9% and 4.6%, respectively.
We briefly discussed the four-property portfolio located in Greenville-Spartanburg on last quarter's call.
We purchased that portfolio with the vacant property, which we leased up shortly after our second quarter call.
Echoing Will, this success demonstrates the value of our strategy of acquiring vacancy in strong markets where we can utilize our market knowledge and expertise to enhance yield.
We also acquired a 293,000 square foot stabilized warehouse distribution facility in Columbus, Ohio, a primary distribution market in the central U.S.
This facility is a recent build occupied by two tenants with a weighted average lease term of seven years and average annual rental escalations of 2.5%.
Subsequent to quarter-close, we purchased a three-property, 878,000 square foot portfolio in the Whiteland submarket of Indianapolis.
Indianapolis is a market we've made a commitment to for several reasons, including its central location and population reach, extensive highway air and rail systems, deep labor pool, business-friendly government and its access to the second largest FedEx hub in the world.
The three properties, all recently constructed, sit along I-65 in the Whiteland Exchange Business Park.
On the development front, we acquired two land sites during the quarter that, when completed, will comprise five buildings, three in the Greenville-Spartanburg market and two in Phoenix.
The 234-acre site in Greenville-Spartanburg is in the Smith Farms Industrial Park, where we own two other warehouse distribution facilities.
Upon completion, which will be staggered in the first half of 2022, the three buildings will total roughly 1.9 million square feet.
The estimated development cost of this project is approximately $133 million, with estimated stabilized cash yields projected to be in the low to mid-5% range.
The Phoenix project is a 57-acre site in the Goodyear submarket along the Southwest Valley Loop 303 industrial hub.
Upon completion, the project will consist of two Class A warehouse distribution facilities totaling 880,000 square feet.
The site is in PV 303, the sub-market's premier master-planned business park that is highly desirable for corporate users.
Like the Greenville-Spartanburg project, the facilities will have varying deliveries in the first half of 2022.
The estimated development cost is approximately $84 million, with estimated stabilized cash yield forecasted to be in the high 4% range.
Phoenix is an area where we've been growing significantly in recent years.
And as a result, we've built a deep knowledge and expertise in this very strong market.
Currently, we have 2.4 million square feet of modern Class A industrial space in Phoenix; and, more specifically, two million square feet in Goodyear, and we'll further increase our footprint there with the completion of this development project.
This square footage also includes our build-to-suit that is largely complete, with the tenant already occupying and operating in most of the space.
We have observed record-breaking activity and continue to like the market's strong fundamentals, driven by Phoenix's fast-growing population, its moderate operating costs, low taxes, affordable labor and proximity to major markets such as Los Angeles, San Diego and Las Vegas.
We'll continue to provide regular updates on the progress of these projects, which we believe provide a very attractive risk return profile.
During the third quarter, we produced adjusted company FFO of roughly $54 million, or $0.19 per diluted common share.
Today, we announced an increase to both the low and top end of our adjusted company FFO guidance range to a new range of $0.75 to $0.78 per diluted common share.
The revised range considers the timing of acquisitions and dispositions and positive leasing outcomes.
Revenues for the quarter were approximately $83 million, with property operating expenses of just over $11 million, of which 84% was attributable to tenant reimbursement.
G&A for the quarter was $8.4 million, and we expect 2021 G&A to be within a range of $33 million to $36 million.
Our same-store portfolio was 98.7% leased at quarter end, with overall same-store NOI increasing 0.7%, which would have been approximately 1.9%, excluding single-tenant vacancy.
Industrial same-store NOI increased 1.2% and would have been 2.5%, excluding single-tenant vacancy.
At quarter-end, approximately 90% of our industrial portfolio leases had escalation, with an average rate of 2.6%.
Our company's balance sheet remains solid, with net debt to adjusted EBITDA of 5.4 times at quarter-end and unencumbered NOI at 91.5%.
During the quarter, we issued $400 million of senior notes due in 2031 with an attractive rate of 2.375%.
The net proceeds and cash on hand were used to fully redeem our 4.25 senior notes due in 2023 and repay the outstanding balance under our revolving credit facility.
Consolidated debt outstanding as of September 30 was approximately $1.5 billion with a weighted average interest rate of approximately 2.9% and a weighted average term of about eight years.
Finally, during the quarter, we settled 3.9 million common shares previously sold on a forward basis, leaving $240 million, or 20.8 million common shares, of unsettled common share contracts available at quarter-end.
The contracts mature at various states, with the majority of these contracts maturing in May 2022. | compname reports q4 earnings per share of $0.44.
q4 earnings per share $0.44.
sees 2022 net sales growth above long-term target range of low-to-mid single digits.
sees net income and adjusted ebitda including joint ventures for 2022 to be pressured during h1 and normalize in h2.
encouraged by pace of recovery in u.s. restaurant traffic, especially at full-service restaurants.
continue to expect that overall u.s. french fry demand will return to pre-pandemic levels around end of calendar 2021.
lamb weston - anticipates significant inflation for key production inputs, packaging and transportation in 2022 compared to fiscal 2021 levels. | 0 |
Overall, the third quarter reflected a continuation of our strategy of investing in our North American assets to further reposition the company with lower cost, sustainable free cash flow and solid returns over longer mine lives.
As you can see, it was a quarter with several significant developments and decisions.
Results were in line with our internal forecast and we're set up to deliver a strong finish to the year and achieve our original production guidance.
Mick will go through the operations in more detail shortly, but I'll quickly touch on a few main points.
Wharf led the pack and achieved its second highest operating cash flow and free cash flow since we acquired the operations 6.5 years ago.
Palmarejo and Kensington were largely on plan and are on track to deliver strong fourth quarters and Rochester's results reflect steady progress despite devoting 38.5 days, or about 45% of the quarter, to crushing and hauling over-liner material to the new Stage VI leach pad before winter.
It's worth pointing out that Rochester's year-to-date results reflect 2.5 months of essentially no stacking on the legacy Stage IV pad as they prioritize activities to support the POA 11 expansion.
On the exploration front, results continue to validate our ongoing commitment to these higher levels of investment.
We invested $20 million in exploration during the quarter alone.
This commitment to drilling has led to double-digit reserve and resource growth over the past few years and we look forward to hopefully delivering further growth again at the end of this year.
We anticipate investing $70 million in exploration in 2021, which is nearly 40% higher than the record we set last year and is one of the largest programs in our sector.
We remain on track to achieve our full year drill footage targets, yet investing slightly less than originally anticipated, which reflects efficiencies we are realizing from these larger programs.
We will plan to provide another exploration update before the end of the year that will focus on exciting new results at our assets in Nevada, both at Rochester and from the Crown district in Southern Nevada where there continues to be a lot of activity.
Switching over to our expansion projects, I want to walk through some updates starting with the Rochester POA 11 expansion.
This project remains our top priority and is a transformative well-funded source of production and cash flow growth for the company.
Things are moving right along.
Overall progress stood at 42% complete at the end of the third quarter.
In addition to completing the crushing of over-liner for the new Stage VI leach pad, the team also kicked off foundation work for the Merrill Crowe plant and the crusher corridor during the quarter.
As we mentioned on our last conference call, we're experiencing the impact of inflation on remaining unawarded work, like most companies are reporting.
Overall, we're fortunate to have had the vast majority of our contracts locked in prior to the current spike in costs and supply and labor disruptions.
We're trying to mitigate some of these impacts by rescoping and rebidding unawarded contracts, but we currently estimate that we're likely to see a 10% to 15% overall increase to the POA 11 construction costs.
We have kicked off detailed engineering and we'll be evaluating the merits of implementing this process improvement over the coming months.
Assuming we elect to pursue this opportunity, it could potentially extend the timetable for completion and commissioning of the crusher by three to six months.
In the meantime, we plan to install pre-screens on the existing crusher during the first half of next year to give us some full scale run time and experience that we can potentially incorporate into the new crusher configuration.
Now switching over to Silvertip.
Given the current inflationary environment and pandemic-driven supply and labor disruptions, it's not an ideal time to be kicking off a new capital project on an accelerated timetable despite multi-year high zinc and lead prices.
Fortunately, Silvertip expansion and restart is still in the early innings, which gives us a lot of flexibility.
Despite the uncertain macro-environment, which contributed to higher-than-expected capital estimates for an accelerated expansion in restart, one thing we are certain of is the quality and prospectivity of the Silvertip deposit.
The exploration results, along with the knowledge and new discoveries the team is generating, have led us in the direction of evaluating a larger Silvertip expansion and restart on a potentially slower timetable.
To take advantage of such a high-grade and significant resource, a 1,750 ton per day processing facility isn't likely large enough to maximize Silvertip's value.
We're going to take some additional time to evaluate what a larger design and footprint could represent in terms of economics and overall flexibility.
This approach will give us time to continue drilling and hopefully keep growing the resource, allow for the dust to settle on many of these current macroeconomic factors and allow us to focus on delivering POA 11 while not straining the balance sheet.
Finishing out the highlights.
We're pleased to announce that we entered into an agreement with Avino Silver & Gold to sell them the La Preciosa project in Durango, Mexico.
This transaction offers some real potential synergies to unlock value from that asset with their nearby Avino mine.
Strategically, the transaction checks a lot of boxes for us with respect to further enhancing our geopolitical risk profile, our metals mix and the timing of our development pipeline.
We can deploy some of the fixed cash consideration into the Rochester expansion and into our highly prospective exploration programs.
The transaction provides a lot of upside to the asset through the equity ownership we will have, along with contingent payments and two royalties we will retain.
Shifting gears, I want to quickly bring your attention to a set of slides starting on Slide 17 that highlight the great culture and diversity efforts we have at Coeur.
To be a high performing organization, a company's culture, strategy and capabilities need to be aligned, something that I believe we've achieved over the past few years.
To that end, I want to recognize our Head of Human Resources, Emilie Schouten, for her efforts on DE&I and for recently winning the industry's Rising Star Award from S&P Global Platts.
We continue to integrate our ESG efforts into our strategy and overall decision making.
Before having Mick provide an overview of our operations, I'd like Hans to follow-up on my Silvertip comment by providing a brief overview of the Silvertip exploration results and why we are so positive about its potential.
We bought Silvertip in late 2017 with the recognition that the asset has excellent growth potential.
We now have almost 3.5 kilometer of potential growth defined based on step-out drill holes or more than triple what we knew in 2017, as highlighted on Slide 8.
This year, we are completing the largest exploration program in the history of the project.
Impressively, Silvertip accounts for roughly 25% of our $70 million overall budget at Coeur.
The site team led by Ross Easterbrook has done an outstanding job managing the 1,000-meter drill program.
Drilling from underground has given us the ability to conduct exploration year-round and test different parts of the ore body from different angles, which has been a crucial part of the Silvertip growth story.
Underground drilling in early 2021 has led to the discovery of the Southern Silver Zone vertical feeder structures and thick manto ore zones and, more recently, vertical feeder structures under the Discovery South Zone.
These structures represent significant resource tonnage potential and demonstrate excellent upside.
We now have two rigs active underground with plans to add a third rig early next year.
We also expect to continue with three surface rigs testing resource growth to the south in the 1.5-kilometer gap between Southern Silver and Tour Ridge zones.
With the larger drill budget this year, we expect to continue significant growth at Silvertip, which will give our development team confidence to right-size the future operation to fit the potentially increased scale of the ore body.
The team reported last week they've cut the best hole ever with 11 mineralized manto horizons.
The hole is located under Silvertip Mountain about 500 meters or 1,500 feet south of the Southern Silver and Camp Creek zones in an area with no resource shapes at this time.
This new step-out hole is the significant indicator of the growth potential we expect for 2022 and beyond.
I'll now pass the call over to Mick.
Before diving into operational results, I want to recognize the team for continuing to prioritize health and safety and driving continuous improvement in this area.
Flipping to Slide 24, I'm proud to report that we recently received the NIOSH Mine Safety and Health Technology Innovation Award for our cross-functional COVID-19 response efforts.
I'm truly honored to be part of such a great team that is relentless in its efforts to work together and look after the well-being of our people.
Now turning to Slide 5 to cover the operations and starting off with Palmarejo.
The team did an excellent job maintaining higher throughput levels and maximizing recoveries to offset some of the lower grades that we've been experiencing with our resequenced mine plant.
We've also continued advancing development while focusing on increasing rehabilitation rates across the mine, which helps ensure that we've appropriately prioritized the health and safety of our workforce.
Quarterly operating costs remain within guidance helping to counterbalance lower realized prices and generate $15 million of free cash flow.
We expect a strong finish to the year at Palmarejo and we're excited to see how much production growth we can achieve here in this fourth quarter.
Switching over to Rochester.
We crushed just under 1.3 million tons of over-liner for the new Stage VI leach pad during the quarter, completing the necessary requirements for POA 11.
It's important to note, when we are generating over-liner, we were not crushing materials stacked on the legacy Stage IV leach pad, which had a knock-on effect for production during the third quarter.
Despite the near-term production impact, all-time energy and resources used to finish crushing overlay now was an important step toward completing this highly anticipated expansion project.
Now turning to Kensington.
Production was slightly higher during the quarter as better agreed [Phonetic] help to offset lower mill throughput caused by stope sequencing and drill parts availability.
The good news is that we anticipate more high grade Jualin material over the coming months and have already received the necessary spare parts for stope drills, leaving us very well positioned for strong production growth in the fourth quarter.
The Kensington team did an excellent job balancing multiple priorities and maintaining solid cost controls throughout the quarter, which helped generate nearly $15 million of free cash flow.
Finishing with Wharf, I want to start by acknowledging the tremendous achievement.
On October 3, the team at Wharf celebrated one year without a recordable safety incident, truly an amazing accomplishment.
From a results standpoint, Wharf put together yet another great quarter, which marks back to back periods of strong performance.
Gold production was up 17% and cash flow figures was the second highest since Coeur's acquisition back in 2015.
With that, I'll pass the call over to Tom.
First, I wanted to add a bit of color on the non-cash adjustments that impacted our third quarter earnings.
We wrote off $26 million of Mexican VAT refunds, to which we strongly believe we are entitled, but like many other multinational companies doing business in Mexico, we have experienced significant challenges from SAT in the Mexican courts in obtaining these payments.
We also had a mark-to-market adjustment on our equity investments, primarily related to Victoria Gold.
However, the carrying value of the investment remains above our original cost.
Turning over to Slide 4, I'll quickly run through our quarterly consolidated financial results.
Revenue of $208 million was driven by relatively stable metal sales and a lower average realized silver price versus the second quarter.
Operating cash flow totaled $22 million, which was lower than last quarter but also negatively impacted by changes in working capital.
Removing working capital, operating cash flow improved by more than 10% quarter-over-quarter.
Like most companies, we've seen cost pressures related to consumables and labor across all of our operations.
With stronger expected Q4 production, we anticipate operating cash flow levels to continue climbing as we finish out the year.
Turning over to Slide 12 and looking at the balance sheet, we ended the quarter with approximately $330 million of liquidity, including $85 million of cash and $245 million of availability under our revolving credit facility.
Also, it's worth highlighting that these numbers do not include the $140 million of equity investments on our balance sheet.
We did draw down modestly on the revolver.
We ended the period with a net debt to EBITDA leverage ratio of 1.4 times.
We will continue adhering to our disciplined capital allocation framework and remain focused on our goal of keeping net leverage below 2 times and maintaining liquidity of at least $100 million throughout the entire Rochester construction period.
However, we expect the revised timeline for Silvertip, along with the current robust metals price environment, will leave us well positioned to maintain a strong and flexible balance sheet.
I'll now pass the call back to Mitch.
Before moving to the Q&A, I want to quickly highlight Slide 13 that outlines our near-term priorities as we approach the end of the year.
With production guidance reaffirmed and a strong expected fourth quarter underway, we're feeling confident about our 2021 results and in our ability to carry this momentum into next year.
We'll continue pursuing a higher standard and execute at a high level to deliver consistent results and industry-leading organic growth from our balanced portfolio of North American-based precious metals assets. | q3 revenue $208 million versus $229.7 million.
reaffirms production guidance; updates cost and capital expenditure guidance.
full-year 2021 capital expenditures are expected to be slightly lower at about $35 million - $40 million. | 1 |
I'm joined today by Scott Buckhout, CIRCOR's president and CEO; and Abhi Khandelwal, the company's chief financial officer.
These expectations are subject to known and unknown risks uncertainties and other factors, and actual results could differ materially from those anticipated or implied by today's remarks.
You can find a full discussion of these factors in CIRCOR's Form 10-K, 10-Qs and other SEC filings also located on our website.
2020 was another transformational year for CIRCOR.
And despite the continued challenges presented by COVID-19, our team made significant progress on executing our strategic plan.
I'm proud of the resilience and efforts of the entire CIRCOR team in navigating such a challenging year while continuing to deliver for our customers and shareholders.
s we saw throughout the year, our diversified product portfolio across multiple end markets and geographies helped mitigate the impact of a weaker macro environment.
Our defense business delivered strong results for the year, which mostly offset lower demand for our commercial products.
Our differentiated technology and market positions enabled us to increase prices across the portfolio.
We executed well throughout this year's downturn and exited the year with positive momentum.
With the health and safety of our employees as our foundation, we focus on the things we control.
We achieved decremental margins of 25% for the year through value-based pricing and difficult but necessary cost actions of $45 million.
Aerospace and defense improved their margins by 290 basis points despite lower volume.
Notably, aerospace and defense won 20 new programs, including 60 defense and four in commercial.
We continue to implement the CIRCOR operating system across the company, resulting in improved operational performance.
CIRCOR is well positioned to take advantage of an eventual market recovery in 2021 and beyond.
With the sale of instrumentation and sampling and distributed valves earlier in the year, our exit from upstream oil and gas is complete.
We continue to invest in innovation, launching 49 new products in 2020 versus 33 in 2019.
We delivered on our free cash flow commitments throughout the year and ended with strong free cash flow of $20 million in the fourth quarter.
And finally, we reduced our debt by $126 million or 22%.
I want to highlight some new mission-critical technology we introduced in 2020.
On the defense side, our new missile arming switches are designed to operate in more severe environments with respect to temperature, radiation and G-force.
We launched self arming switches in support of various missile programs, including hypersonic applications.
On the commercial side, we introduced a switch, which activates the aircraft's location transmitter in case of an in-flight emergency.
In industrial, we launched a series of new gas pressure reduction systems to help our customers in Marine, Medical and public utility industries.
These systems help our customers transport and manage high-pressure industrial gas, LNG and CNG, biomethane fuels and medical oxygen.
Now, I'd like to provide some financial highlights from the fourth quarter.
We booked orders of $168 million in the quarter, which was flat sequentially and down 25% organically.
Sequentially, industrial was up 12% in the quarter.
A&D had lower orders sequentially, down 21% and due to the timing of large naval program orders that pushed into 2021.
Revenue in the quarter was $208 million, up 10% sequentially, driven by strong defense deliveries, mainly on U.S. Naval programs and moderate growth across most end markets in industrial.
Adjusted operating income was $23 million, representing a margin of 11.2%, up 200 basis points from the prior quarter.
Margin improvement was driven by sequential volume recovery, pricing, cost actions and productivity.
As a result of improved operating income, the company delivered $0.66 of adjusted earnings per share.
Finally, we generated strong free cash flow of $20 million during the fourth quarter, as we exited the year with operational cash flow unencumbered by transformation disbursements.
We are providing both comparisons due to the significant impact of COVID-19 on our end markets and year-over-year comparison.
Starting with industrial on Slide 4.
In Q4, industrial segment orders were up 12% sequentially, down 22% organically.
The industrial segment saw a sequential recovery in all major end markets, driven by opening economies.
Revenue in the quarter was $131 million, up 4% from prior quarter and down 13% organically.
Sequential improvement was primarily driven by strength in aftermarket sales across the portfolio.
We exited the year with an operating margin of 9%, a sequential improvement of 160 basis points, driven by price increases and cost actions taken throughout the year.
Lower sales volume continued to drive a lower operating margin versus prior year.
Turning to Slide 5.
Our aerospace and defense segment booked orders of $47 million in the quarter, down 21% sequentially and down 33% versus prior year.
Both declines are primarily driven by timing of large defense program orders and the ongoing impact of COVID-19 on our commercial business.
We remain confident in the segment's growth outlook in 2021.
Revenue in the quarter was $78 million, up 25% from prior quarter.
Strong defense deliveries mostly offset the COVID-19 impact, on commercial Aerospace, resulting in only 3% lower revenues versus by year.
Finally, operating margin was 24% in the quarter, roughly flat sequentially and year over year.
Pricing, up 3%, combined with factory and cost actions drove strong margins in line with prior year despite lower revenue.
Moving to Slide 6.
For Q4, the effective tax rate was approximately 14%.
The company took a non-cash charge of approximately $15 million to record a valuation allowance against its remaining deferred tax assets in Germany.
This non-cash charge is acquired under GAAP accounting rules.
This charge does not impact our non-GAAP after tax results for the quarter and is not expected to have an impact on our future non-GAAP after tax results.
Looking at special items and restructuring charges, we recorded a total pre-tax charge of $13.4 million in the quarter.
The acquisition-related amortization and depreciation was a charge of $12 million with the remaining charges associated with restructuring activities in the quarter.
Interest expense for the quarter was $8.5 million, down $2.3 million compared to last year as a result of lower debt balances.
Other income was approximately $1 million, primarily driven by pension income.
Finally, corporate costs were $7.8 million in the quarter.
Turning to Slide 7.
As Scott mentioned previously, our free cash flow was $20 million in the fourth quarter, up 11% compared to 2019.
Free cash flow was positively impacted by improved operating income and lower working capital, particularly inventory.
Reducing working capital remains one of our top priorities, and we expect further improvement in 2021.
We used the proceeds from the sale of our instrumentation and sampling business to reduce our net debt to $443 million, a reduction of $126 million or 22% year over year.
Free cash flow generated in 2021 will be used to further pay down debt and we continue to target leverage ratio of two to two and a half tiems net debt to adjusted EBITDA.
Now, I will hand it back over to Scott to provide some color on our end markets.
Let's start with our industrial outlook on Slide 8.
As Abhi mentioned, signs of order recovery were evident in the fourth quarter across most major industrial end markets after hitting the bottom in Q3.
Geographically, we continue to see growth in China and India, and we started to see signs of recovery in Europe and North America in the quarter.
Downstream orders were up sequentially, driven by an increase in aftermarket orders, but down significantly versus last year due to a difficult compare.
We're expecting Q1 industrial revenue to come in between down 1% and up 4% year over year.
We expect to see a normal seasonal dip in revenue sequentially in Q1 versus Q4.
We're starting to see improvement in our short-cycle end markets, including machinery manufacturing, chemical processing and wastewater as consumer demand starts to improve.
We're also expecting a mid-single-digit increase in aftermarket as global economies open up and consumption increases.
Downstream oil and gas revenue is expected to be down as refiners continue to manage capex.
We're seeing a similar customer capex dynamic across midstream oil and gas, power generation and building construction, but to a lesser degree.
We expect these end markets to improve further as the year unfolds.
Pricing is expected to be a benefit of roughly 1%, consistent with prior quarters.
Moving to aerospace and defense.
aerospace and defense orders in Q4 were down sequentially and versus prior year.
Both declines were primarily driven by the timing of large defense program orders and the ongoing impact of COVID-19 on our commercial businesses.
We expect order strength across our defense programs to continue through 2021, driven largely by the joint strike fighter and multiple missile and drone programs.
We expect a modest improvement in commercial orders as aircraft utilization improves and OEM production rates increased through the year.
We remain confident in this segment's growth outlook in 2021.
Revenue in the first quarter is expected to be down 7% to 12% versus prior year.
defense revenue is expected to be down 1% to 5% due to the timing of large defense shipments and lower U.S. defense spares orders leading into the quarter.
We anticipate growth of 5% to 10% from our other OEM group, which includes products for drones, missiles and helicopters.
in the Rafal fighter and jet in Europe.
Commercial revenue is expected to be down between 35% and 40%, in line with the broader commercial aerospace market.
Our market position on both Boeing and Airbus aircraft is strong, and we expect revenue to improve throughout the year in line with aircraft utilization and production rates.
Pricing is expected to be a benefit of 1% in the quarter, but in line with 2020 for the full year.
Now, I'll hand it over to Abhi to discuss our guidance.
Before jumping into full-year guidance, I'd like to share a few more expectations for the first quarter.
In addition to the revenue guidance that Scott provided, we're expecting incremental margins of 30% to 35% in industrial and decremental margins of 30% to 35% in aerospace and defense.
Decremental margins in aerospace and defense are slightly higher than our full-year 2020 decrementals due to the expected mix of OEM and aftermarket revenue.
We're also planning for corporate cost of $8.5 million, higher than our expected full-year run rate, due to the timing of certain expenses, such as RFPs.
Interest expense is expected to be roughly $8.5 million in Q1.
Finally, free cash flow for Q1 will be negative due to seasonality of annual disbursements.
Now, moving to full-year 2021 guidance.
We are expecting organic revenue growth of 0% to 4%, and with aerospace and defense expected to grow at low to mid-single digits and industrial at low single digits.
We are planning for a continued slow recovery in commercial Aerospace, where we expect to be better than 2020, but remain significantly lower than pre pandemic levels.
Our defense business remains healthy as we continue to win new business and deliver on growing U.S. defense programs.
In our industrial end markets, we expect to see modest recovery with downstream activity improving in the back half of 2021.
We're expecting adjusted earnings per share of $2 to $2.20, a 40% to 54% increase versus 2020.
This improvement is driven by top-line growth and improved margins from price increases, structural cost out in 2020 and ongoing productivity.
Finally, we're planning to deliver free cash flow as a percent of adjusted net income of 85% to 95%.
We feel that this guidance reflects what we are seeing in our end markets and the operational improvements that we can control within the four walls of CIRCOR.
We're confident in our ability to deliver these results, not only for our shareholders but for our customers, suppliers and employees.
Now I'll hand back to Scott to wrap up.
To summarize, we remain focused on delivering our strategic priorities.
In 2021, we're taking actions to further improve our customers' experience and our operational and financial performance.
We remain focused on attracting, developing and retaining the best talent while fostering a diverse and inclusive culture.
We continue to invest in growth through innovative new products, aftermarket support technology to enhance our customers' experience and regional expansion.
Value-based pricing continues to be a top priority, leveraging our differentiated technology and our strong market positions in the niches where we compete.
The CIRCOR operating system will continue to drive operational improvement and margin expansion.
And by enhancing free cash flow through efficient working capital management, we'll continue to delever the balance sheet. | q3 revenue $187 million versus refinitiv ibes estimate of $186.9 million.
remain on track to achieve $45 million 2020 cost reduction plan. | 0 |
A copy of which is available on our website at www.
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.
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.
And I think Steve is muted.
It wouldn't be a COVID event if somebody wasn't muted.
So I'm glad to get that out of the way.
As we're saying all the time during COVID, I hope you and your loved ones continue to be safe.
But at least now, I'm hoping as well that you and they are beginning to see the light at the end of this tunnel and at the end of the scourge of COVID is within sight.
Ajay, of course, is going to give you the details of this quarter.
Now Ajay will be careful.
And he will stress that some of these earnings strength this quarter reflect one-time benefits, stuff you can't count on recurring, things like FX, some revenue deferrals being recognized, a lower tax rate, etc.
But even normalizing for all that, as far as I can tell, it is a great quarter.
And more important to me and I hope you, it's another in a large number of great quarters, which to me is not a confirmation of onetime things or transient things but of the fundamental strength of this company, what our people are doing every day to build this business in ways that allow us to help our clients navigate, not only their greatest challenges, but in many cases, their greatest opportunities.
It's a fabulous quarter.
I want to be clear, however, it is not that we've turned all of our businesses into businesses that go up in a straight line.
As we have talked about many times, each of our businesses and the company as a whole can have huge zigs and zags due to market conditions or the winning or losing of a big job.
We're jumping on an opportunity to invest, jumping on an opportunity to invest in a way that can hurt the P&L in the short term but supports future growth.
And even in this great quarter, we saw some of that.
If you look at our restructuring business, it continues to face widespread market slowdown around most of the world.
And although we benefited from some legacy cases during the quarter, that business is certainly off in a big way, in a big way from a year or so earlier.
Now I don't believe anybody thinks this restructuring market has gone away permanently.
So we're continuing to invest in that business, but that's the zag.
Similarly, in Tech, some of the fuel that ignited the incredible performance in the first half of the year, notably second request activity weakened this quarter.
We have enormous confidence in the multiyear trajectory of that business and more important, the people of that team that is driving that multiyear trajectory.
So we have, in the face of that slowdown, continued to hire.
We increased our head count in that business 12.4% year over year.
So even though the revenue went up, the adjusted EBITDA declined.
That's just an example of investing to support the business over the medium term, something that we have committed to do and we will continue to do.
And even in FLC, where we have great strength compared to last year, we've had pockets of weakness.
For example, Asia because borders remain closed and travel restrictions have been extended, which affected our ability to both deliver certain services and reach clients in the market.
Even if we do the right things, our business has zigs and zags, and some of them can be pretty bad zags.
But what I think we've said many times and what I now believe the data fully support is if we do the right things, although there are zigs and zags, over any extended period of time, each of our businesses are growth engines, not only growth engines, but vital and powerful growth engines.
They allow us to deliver on major assignments that make at least me proud and I think many of us proud.
They allow us to attract great people to build their brand.
And therefore, though there are zigs and zags, they become zigs and zags around an upward sloping line.
It doesn't mean you can't have all the zags come in the same quarter or even the same year, but it does mean that over any extended period of time, the zig zags are around an incredibly powerful upward sloping line.
Now that line, I assume, is important to you, our shareholders.
I believe it's equally important for the engine of the firm, our people.
It's that upward sloping line that gives us, and I hope to you, the confidence to invest in great people regardless of whether it's a good quarter or not a good quarter for a particular business.
It allows us to not do layoffs just because some businesses temporarily slow in a quarter.
The strength of conviction we drew on obviously last year and supported our people and is giving us real benefits this year.
It allows us to promote people when they're ready to get promoted versus when, oh, the numbers happen to be good.
It allows us to hire aggressively when the great talent is available versus when it feels convenient according to the P&L.
It allows us to invest in our people's development when they're eager to grow.
My experience is when you do that, you build a firm, you build -- take a powerful firm and you make it ever more powerful.
And you create businesses that are global and diverse and effective and vibrant for your clients and for your people.
My experience is also when you have great people doing great work who feel supported, you end up with fabulous individuals.
Fabulous individuals who are in an environment where they can develop even further.
And you end up with great people outside your firm who want to join you.
And through that, we create businesses.
Through the zigs and zags become sustainable, powerful, resilient, and exciting businesses, and exciting growth engines.
That's the journey we have been on.
It has been a lot of work.
It always is a lot of work.
There's always daily things to struggle with.
A lot of work.
It's also been incredibly rewarding.
That is a journey we look, this great team that I have the privilege of leading to stay on.
Beginning with our third quarter results.
Revenue grew 12.9% with every segment reporting growth.
And we continued making investments in headcount, adding 346 total billable professionals year over year, including 36 senior managing directors.
Earnings per share were also boosted by FX remeasurement gains and lower weighted average shares outstanding, or WASO, resulting in a 45% increase in GAAP earnings per share and a 31% increase in adjusted earnings per share compared to the prior-year quarter.
Overall, we are delighted with these results, which exceeded our expectations.
Revenues of $702.2 million increased $80 million, compared to revenues of $622.2 million in the prior-year quarter.
GAAP earnings per share of $1.96 in 3Q '21 compared to $1.35 in 3Q '20.
Adjusted earnings per share for the quarter were $2.02, which compared to $1.54 in the prior-year quarter.
The difference between our GAAP and adjusted earnings per share in 3Q '21 reflects $2.4 million of noncash interest expense related to our convertible notes, which reduced GAAP earnings per share by $0.06 per share.
In 3Q of '20, we had a special charge of $7.1 million as well as noncash interest expense of $2.3 million, which reduced GAAP earnings per share by $0.14 per share and $0.05 per share, respectively.
Net income of $69.5 million, compared to $50.2 million in the prior-year quarter.
The increase in net income was primarily due to higher revenues, which was partially offset by an increase in compensation, including the impact of a 6.9% increase in billable headcount and higher SG&A expenses.
FX remeasurement gains this quarter versus losses in the same quarter last year also boosted net income.
SG&A of $138.6 million or 19.7% of revenues.
This compares to SG&A of $122 million or 19.6% of revenues in the third quarter of 2020.
The increase in SG&A included higher compensation, outside services expenses, bad debt, software costs, and travel and entertainment expenses.
Third quarter 2021 adjusted EBITDA of $100.3 million or 14.3% of revenues, compared to $90.9 million or 14.6% of revenues in the prior-year quarter.
Our third quarter effective tax rate of 21.6% compared to 22.3% in the prior-year quarter.
Our tax rate for the quarter benefited from discrete tax adjustments related to the release of a valuation allowance on our Australian deferred tax assets because of sustained profitability.
Fully diluted WASO of 35.4 million shares in 3Q '21 compared to 37.1 million shares in 3Q '20.
Our convertible notes had a dilutive impact on earnings per share of approximately 842,000 shares, included in WASO, as our average share price of $138.83 this past quarter was above the $101.38 conversion threshold price.
As I mentioned, billable headcount increased by 346 professionals or 6.9% compared to the prior-year quarter.
Now I will share some insights at the segment level.
In Corporate Finance & Restructuring, revenues of $250.3 million increased 5.8% compared to the prior-year quarter.
The increase in revenues was due to higher demand and realization for our transactions and business transformation services, as well as the recognition of deferred revenue, which were partially offset by lower demand for restructuring services.
Adjusted segment EBITDA of $55.6 million or 22.2% of segment revenues compared to $56.2 million or 28 -- or 23.8% of segment revenues in the prior-year quarter.
The year-over-year decrease in adjusted segment EBITDA was due to increased compensation, including the impact of a 6% increase in billable headcount and higher SG&A expenses.
In the third quarter, we continued to grow our transactions and business transformation practices globally.
Not only are we growing these practices, but also we are able especially at junior levels to leverage professionals across practices.
This quarter, once again, a number of our junior professionals, who typically would support restructuring assignments, worked on transactions-related engagements.
On a sequential basis, revenues increased $19.4 million or 8.4% as the segment benefited from continued growth in our business transformation and transactions businesses and recognition of prior deferred revenue.
Adjusted segment EBITDA for the third quarter increased $15.5 million.
Revenues of $145.3 million increased 22% relative to a weak quarter in the prior year.
The increase in revenues was primarily due to higher demand for our investigations, disputes, and health solutions services.
Adjusted segment EBITDA of $16.6 million or 11.4% of segment revenues compared to $13.6 million or 11.4% of segment revenues in the prior-year quarter.
The increase in adjusted segment EBITDA was due to higher revenues, which was partially offset by higher compensation, which includes 7.7% growth in billable headcount as well as higher SG&A expenses compared to the prior-year quarter.
Sequentially, revenues decreased $5.5 million, primarily due to lower demand for investigations and health solutions services.
Adjusted segment EBITDA decreased $1.4 million.
Our Economic Consulting segment's revenues of $172.5 million increased 11.3% compared to the prior-year quarter.
The increase was primarily due to higher demand for non-M&A-related antitrust and financial economic services, which was partially offset by lower demand for our M&A-related antitrust services compared to the prior-year quarter.
Adjusted segment EBITDA of $29.9 million or 17.3% of segment revenues compared to $25.7 million or 16.6% of segment revenues in the prior-year quarter.
The increase in adjusted segment EBITDA was due to higher revenues, which was partially offset by higher compensation, which includes the impact of 5.1% growth in billable headcount.
Sequentially, revenues decreased $10.8 million or 5.9%, which was driven by decreased demand for M&A-related antitrust services, primarily due to the conclusion of a large matter in the quarter.
In Technology, revenues of $64.7 million increased 10.4% compared to the prior-year quarter.
The increase in revenues was primarily due to higher demand for litigation, investigation and information governance services, which was partially offset by lower demand for M&A-related second request services compared to the prior-year quarter.
Adjusted segment EBITDA of $7.8 million or 12.1% of segment revenues compared to $11.9 million or 20.4% of segment revenues in the prior-year quarter.
The decrease in adjusted segment EBITDA was due to higher compensation, which includes the impact of a 12.4% increase in billable headcount, as our Technology segment continues to make investments in talent, particularly at the senior levels to bolster our capacity and expertise globally across data risk, compliance, privacy and information governance, as well as higher SG&A expenses.
Sequentially, revenues decreased $14 million or 17.8%, primarily due to decreased demand for M&A-related second request services.
Adjusted segment EBITDA declined $10.7 million sequentially.
Record revenues in the Strategic Communications segment of $69.4 million increased 31.1% compared to the prior-year quarter.
The increase in revenues was primarily due to higher demand for corporate reputation and public affairs services.
Adjusted segment EBITDA of $15.5 million or 22.3% of segment revenues compared to $8.4 million or 15.9% of segment revenues in the prior-year quarter.
The increase in adjusted segment EBITDA was due to higher revenues.
Sequentially, revenues increased $1.6 million, primarily due to higher demand for financial communications and corporate reputation services.
Adjusted segment EBITDA increased $2 million sequentially.
Let me now discuss key cash flow and balance sheet items.
We generated net cash from operating activities of $196.9 million, which increased by $85.3 million compared to $111.6 million in the third quarter of 2020.
The year-over-year increase was largely due to an increase in cash collected resulting from higher revenues, which was partially offset by an increase in compensation-related costs and other operating expenses.
We generated free cash flow of $172.2 million in the quarter.
Total debt net of cash decreased $160.7 million sequentially from $159.4 million on June 30, 2021 to a negative net debt position of $1.3 million on September 30, 2021.
The sequential decrease was primarily due to an increase in cash and cash equivalents and repayment of borrowings under our senior secured bank revolving credit facility.
Turning to our guidance.
In light of our record financial performance during the first nine months of 2021, we are raising the low end of our previous full year 2021 guidance range for revenues of between $2.7 billion and $2.8 billion to expected revenues of between $2.75 billion and $2.8 billion.
We are raising our full year 2021 guidance ranges for GAAP earnings per share of between $5.89 and $6.39 and adjusted earnings per share of between $6 and $6.50 to GAAP earnings per share of between $6.39 and $6.64 and adjusted earnings per share of between $6.50 and $6.75.
The $0.11 per share variance between earnings per share and adjusted earnings per share guidance for full year 2021 includes the estimated impact of noncash interest expense of $0.20 per share related to our 2023 convertible notes and the second quarter 2021 $0.09 per share gain related to the fair value remeasurement of acquisition-related contingent consideration, which are not included in adjusted EPS.
Our updated guidance after our record year-to-date performance is shaped by four key considerations.
First, restructuring activity remains subdued.
As credit markets remain in an accommodative mode and the number of stressed and distressed issuances remains low, Standard & Poor's is now forecasting that the trailing 12-month U.S. speculative rate -- default rate -- corporate default rate will fall further in the first half of 2022, reaching 2.5% by June 2022, which compares to 3.8% in June 2021 and 6.6% in January 2021.
Second, global M&A activity, which drives demand in our Economic Consulting and Technology segments as well as our transactions business in Corporate Finance & Restructuring, has been at record levels year to date.
There is no certainty that M&A activity will continue at this pace.
Third, we are a large jobs firm.
And when large engagements end, they may not be immediately replaced.
As Steve and I have both mentioned today, we saw several large jobs end or significantly wind down in the last two quarters across our Economic Consulting, Technology, and Corporate Finance & Restructuring businesses.
Fourth, the fourth quarter is typically a weaker quarter for us because of a seasonal business slowdown at the end of the year.
Before I close, I want to reiterate four key themes that underscore the strength of our company.
First, our results show that while continuing to dominate our traditional areas of strength, we have demonstrably grown our adjacencies and footprint, which also have the added benefit of making us less susceptible to the business cycle.
Business transformation and transaction services, which represented 36% of total segment revenues in Corporate Finance in Q3 of last year, contributed 59% this quarter.
Non-M&A-related antitrust services have steadily grown to represent 32% of our Economic Consulting revenues this quarter, which compares to 23% in Q3 of last year.
Our Australian business has grown to 31 senior managing directors from 19 two years back.
And our Middle East business has grown to 16 senior managing directors from five two years back.
And EMEA represented 30% of revenues this quarter with us only recently ramping up in Germany and Spain.
Second, we count among our staff, arguably, some of the leading experts in the world in areas such as antitrust, financial arbitration and economic analysis, restructuring, technology and data analytics-based investigations, and corporate reputation and communications.
Third, in many industries around the world, the pace of change is accelerating.
And we have the surge capacity to help our clients when they face their greatest challenges and opportunities.
And finally, our strong balance sheet continues to give us the flexibility to make sustained investments toward growing our business globally. | compname reports q3 earnings per share $1.35.
sees fy 2020 adjusted earnings per share $5.25 to $5.75.
sees fy 2020 earnings per share $4.93 to $5.43.
q3 earnings per share $1.35.
sees fy 2020 revenue $2.42 billion to $2.47 billion.
q3 revenue $622.2 million versus refinitiv ibes estimate of $623 million.
q3 adjusted earnings per share $1.54 excluding items. | 0 |
I'm Mark Kowlzan, Chairman and CEO of PCA, and with me on the call today is Tom Hassfurther, Executive Vice President, who runs our Packaging business; and Bob Mundy, our Chief Financial Officer.
I'll then wrap things up and then we'll be glad to take questions.
Yesterday, we reported first quarter net income of $167 million or $1.75 per share.
First quarter net income included special items expenses of $0.02 per share related to closure costs for certain corrugated products facilities and specific costs related to discontinuing paper operations associated with the previously announced conversion of the No.
3 machine at our Jackson, Alabama mill to linerboard.
Excluding the special items, first quarter 2021 net income was $169 million or $1.77 per share compared to the first quarter 2020 net income of $143 million or $1.50 per share.
First quarter net sales were $1.8 billion in 2021 and $1.7 billion in 2020.
Total company EBITDA for the first quarter, excluding special items was $342 million in 2021 and $311 million in 2020.
Excluding the special items, the $0.27 per share increase in first quarter 2021 earnings compared to the first quarter of 2020 was driven primarily by higher volumes for $0.45 and prices and mix $0.31 in the Packaging segment and lower annual outage expenses for $0.12.
The items were partially offset by lower volumes, $0.28, and prices and mix of $0.03 in the Paper segment.
Operating costs were $0.15 per share higher, primarily due to inflation-related increases, particularly in the areas of labor and benefits expenses, and fiber costs and energy.
We also had inflation-related increases in our converting costs, which were $0.02 per share higher.
For the last three quarters, freight and logistics costs have risen and were $0.12 per share higher in the first quarter compared to last year.
Significant increases in fuel costs, high truck supply and a higher mix of spot pricing to keep up with box demand are the primary drivers.
And in the first quarter, we had the issues brought on by the winter storms as well.
We also had other expenses of $0.01 per share.
Looking at the packaging business.
EBITDA excluding special items in the first quarter of 2021 of $352 million with sales of $1.6 billion resulted in a margin of 22% versus last year's EBITDA of $290 million and sales of $1.5 billion or a 20% margin.
Demand in the Packaging segment remained very strong as sales volume in both our containerboard mills and our corrugated products plants set or matched all-time quarterly records.
Although we were able to replenish some inventory during the quarter by utilizing the Jackson, Alabama mill for additional containerboard production, we again ended the period with inventory levels lower than planned and at record lows from a weeks-of-supply standpoint due to stronger-than-expected demand.
Our mills and box plants displayed outstanding management of their operations to meet customer commitments in spite of several weather-related events that impacted their operations, created raw material availability issues and presented both inbound and outbound freight and logistics challenges.
In addition, our facilities continued to deliver on numerous cost reduction initiatives, efficiency improvements in capital projects and bringing the benefits of those efforts to the bottom line.
We also recently completed two high return strategic projects that we've mentioned to you before, the OCC project at our Wallula Mill and the boiler project at our Filer mill.
The tremendous effort our employees put into these initiatives and projects helps us minimize some of the cost inflation we see every year and especially now with what we're seeing in the areas I mentioned previously.
As Mark mentioned, corrugated products and containerboard demand were very strong during the quarter, total volume in our corrugated products plants was up 6.6% versus last year and equal the all-time record for total box shipments that we just set in the fourth quarter of 2020.
Shipments per day were up 8.3% over last year, which set a new first quarter record for us.
Strong domestic demand drove outside sales volume of containerboard 13% above last year's first quarter.
Domestic containerboard and corrugated products prices and mix together were $0.26 per share above the first quarter of 2020 and up $0.52 per share compared to the fourth quarter of 2020 as we continued to implement our November 2020 announced price increases during the quarter and we began the implementation of our announced March increase.
Export containerboard prices were up $0.05 per share versus last year's first quarter and up $0.04 per share compared to the fourth quarter of 2020.
Looking at our Paper segment, EBITDA excluding special items in the first quarter was $16 million with sales of $165 million or a 10% margin compared to the first quarter of 2020's EBITDA of $42 million and sales of $217 million or a 19% margin.
As expected, sales volume was about 22% below last year as we ran only one machine at the Jackson, Alabama mill this quarter versus both machines running in the first quarter of 2020.
First quarter paper prices and mix were almost 3% below last year, however, prices began to move higher in the latter part of the quarter, resulting from the announced paper price increases and averaged 1% higher than fourth quarter 2020 average prices.
Industry conditions in the uncoated freesheet market continue to be challenged due to the nationwide responses to help control the spread of the pandemic, however, with the actions we've taken in our Paper segment to match supply with our customers' demand and moving production on the No.
3 machine at our Jackson, Alabama mill from paper to linerboard, we have not only avoided the significant cost issues associated with extended paper market downtime, but we've also enhanced our capabilities, as well as the profitability in our Packaging segment.
Going forward, we will continue to assess our outlook for paper demand and the optimal inventory levels and will run our paper system accordingly.
For the first quarter, we generated cash from operations of $192 million and free cash flow of $107 million.
The primary uses of cash during the quarter included capital expenditures of $85 million and common stock dividends of $95 million.
We ended the quarter with $983 million of cash on hand or $1.1 billion, including marketable securities.
Our liquidity at March 31st was $1.5 billion.
I want to update you on our full year guidance for a couple of items that we provided on last quarter's call.
Current plans and scope of work for the scheduled maintenance outages at our containerboard mills has changed and the new total company estimated cost impact for the year is $0.97 per share.
The actual impact in the first quarter was $0.10 per share and the revised estimated impact by quarter for the remainder of the year is now $0.30 per share in the second quarter, $0.16 in the third and $0.41 per share in the fourth quarter.
Also, our capital spending estimate for the year has changed to a range of $650 million to $675 million as we have now announced our plans for the conversion of the No.
3 paper machine at our Jackson Mill to linerboard.
Regarding the conversion of the No.
3 machine at Jackson, Alabama, our current plans are to continue running the machine on linerboard as demand wards in a manner similar as to how we ran in the first quarter until the scheduled first phase outage is taken in the second quarter of 2022.
The converted machine is expected to operate at an initial production rate of approximately 75% of its new capacity.
The second phase outage work is planned for mid-2023 with the machine reaching its run rate capacity of 2,000 tons per day by the end of 2023.
This phased conversion over the next few years will provide much needed internal linerboard supply.
This gives us a runway for maintaining an optimal integration level and enables us to further optimize and enhance our current mill capacity and box plant operations.
We're committed to being fully integrated and we have a track record of ramping up production from machine conversions according to our customers' demand requirements.
We will continue to serve our paper customers with the No.
1 paper machine at Jackson, Alabama and both machines at our International Falls, Minnesota Mill, which is capable of producing all of Jackson's paper grades.
Looking ahead, as we move from the first and into the second quarter, in our Packaging segment, we expect demand to remain strong and we will continue implementing our previously announced paper price increases.
We also expect export prices to move higher.
In the Paper segment, we expect volumes to be fairly flat with higher average prices and mix as we continue the rollout of our recently announced paper price increase.
The second quarter will be our busiest of the year for planned annual outages in the Packaging segment with work scheduled at four of the mills.
Outage expenses are estimated to be approximately $0.20 per share higher compared in the -- to the first quarter.
We also anticipate continued inflation with freight and logistics expenses as well as most of our operating and conversion costs.
However, energy costs should improve as we move into seasonally milder weather.
With that, we'd be happy to entertain any questions.
The statements were based on current estimates, expectations and projections of the Company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our annual report on Form 10-K on file with the SEC.
And with that, Regina, I would like to open up the call to questions, please. | q1 earnings per share $1.77 excluding items.
q1 sales $1.8 billion.
q1 earnings per share $1.75.
in q2 packaging segment we expect demand to remain strong.
in q2 packaging segment, expect export prices to move higher.
in q2 paper segment, we expect volumes to be fairly flat with higher average prices and mix.
q2 will be our busiest of year for planned annual outages in our packaging segment. | 1 |
Please keep in mind that our actual results could differ materially from these expectations.
All these documents are available on our website at brunswick.com.
Our businesses had a fantastic start to 2021 with a very healthy marine market, strong boating participation and outstanding operating performance, driving historic financial results.
Robust retail demand for our products continues to drive low field inventory levels, with increased production across all our facilities necessary to satisfy orders from our OEM partners and dealer network.
Our teams have performed exceptionally well in the face of supply and transportation headwinds, tighter labor conditions, and continued impact from the COVID-19 pandemic.
And we are excited about our ability to further harness the positive momentum we've generated to propel our growth and industry leadership.
Our Propulsion business continues to deliver outstanding top-line, earnings and margin growth, outperforming the market by leveraging and expanding the strongest product lineup in the industry.
Our parts and accessories businesses delivered strong top-line growth and robust operating margins as a result of increased boating participation, which drove strong aftermarket sales, together with high demand for our full range of OEM systems and services, as boat manufacturers attempt to satisfy retail demand.
Our boat business performed well, as anticipated, in the quarter, reaching double-digit adjusted operating margins for the first time in over 20 years.
Despite elevated production levels consistent with our plans for the year, the continued surge in retail demand is still driving historically low pipeline inventory levels, with 41% fewer boats in dealer inventory at the end of the first quarter, versus the same time last year.
Finally Freedom Boat Club has had an extremely busy start to the year, which I will discuss further in a couple of slides.
We have exceptional momentum as we enter the prime retail season in most markets, and as you can see from our significant guidance increase, we are confident in our ability to perform for the rest of the year and well beyond.
Before we discuss the results for the quarter, I wanted to share with you some updated insights from 2020 concerning our boat buyers and Freedom Boat Club members that reflect very favorable trends for the future of our business.
We continue to outperform the industry in attracting new, younger and more diverse boaters, positioning us for very strong growth in the years to come.
Last year, Brunswick's average boat buyer age was two years younger than the industry average and reached its lowest level in over a decade.
Additionally, Brunswick's first-time boat buyers averaged five years younger than our overall boat buyer demographic, and three years younger than the industry.
Equally encouraging was the fact that the percentage of Brunswick female boat buyers in 2020, while still a minority, equaled the highest percentage on record and first-time female boat buyers entered at double that rate, which was a notable 700 basis points higher than the industry.
In Freedom Boat Club, we saw even more promising trends with the average Freedom member being almost three years younger than our typical boat buying customer, and female Freedom members making up 35% of our member base in 2020 and 2021.
These trends are an extremely important validation of our strategy to secure a healthy future for Brunswick and are also favorable for the entire marine industry.
I also wanted to briefly update you on some very important awards and milestones for Brunswick during the first quarter, which are important in positioning Brunswick for investors and employees, and our ability to secure top new talent.
I am pleased to announce that for the second consecutive year, Brunswick has been recognized by Forbes as one of the Best Employers for Diversity.
Those recognized were chosen based on an independent survey of over 50,000 employees working for companies employing at least 1,000 people in their U.S. operations.
Diversity and inclusion are cornerstones of our culture and a source of innovation and inspiration for our Company.
We also published our 2020 Sustainability Report at the end of March which reviews the exceptional progress we have achieved against our sustainability goals, including our prioritization of the health and safety of our employees.
In 2020, we reported the lowest recordable incident rate in Company history, in the face of immense challenges resulting from the COVID-19 pandemic.
And I also wanted to share with you a snapshot of what the return to in-person boat shows looks like.
The Palm Beach International Boat Show was recently held for the first time since the Spring of 2019.
This was the first major in-person saltwater show of the 2021 season and the outcomes were very positive.
Attendance was up and our brands outperformed the broader marine industry.
Over the course of the four-day show, Sea Ray and Boston Whaler more than doubled the number of boats sold this year vs.
2019 and revenues more than tripled, driven by increased demand for the recently launched models.
Consumers were also able to see Mercury's V-12 600 horsepower Verado in person for the first time, with many eager to repower their boats with this new, game changing engine.
I'll now provide some first quarter highlights on our segments and the overall marine market.
Our Propulsion business continues to gain significant retail market share in outboard engines, especially in higher horsepower categories where we have focused higher levels of investment in recent years.
Mercury gained share in each horsepower category over 50 horsepower in the first quarter, with outsized gains in nodes in excess of 200 horsepower.
As I mentioned earlier, Mercury launched its new 600 horsepower, V-12 Verado engine in February at Lake X in Florida to much fanfare.
Many OEM partners, including Fountain, Scout, Viking and Tiara, and our own Boston Whaler and Sea Ray brands, have already designed boats with this engine in mind and are taking orders.
Many models are already sold out for 2021, with twin-, triple- or even quad-configurations being very popular with both OEMs and customers.
New or enhanced OEM relationships, along with significant investments in new technology, have also helped fuel the continued growth in Mercury's industry-leading controls, rigging and propeller businesses.
As Mercury's growth continues to accelerate, we regularly review our capacity requirements to ensure we are able to meet projected demand and fully capitalize on future growth opportunities.
In this regard, we anticipate having to pull ahead some additional capacity actions.
Our Parts and Accessories businesses also experienced significant top-line and earnings growth in the quarter as aftermarket sales remain elevated due to strong participation trends and service needs, with increased OEM orders to keep up with production resulting from the accelerating retail demand.
Our dealer network reports that their service centers are busier than ever, with the strong participation trends from 2020 continuing into 2021.
In addition, favorable weather conditions in many parts of the U.S. are enabling consumers to return to the water early and in force.
This demand drives the need for aftermarket service parts and a healthy distribution network to get dealers the products they need on a same-day or next-day basis.
The Advanced Systems Group, which has a larger OEM component to its business and also serves some non-marine segments demonstrated significant growth across all its product categories and delivered strong operating margins that were accretive to the overall segment.
Our boat segment had an outstanding quarter, with successful execution of its product plan, resulting in strong revenue and earnings growth, together with double-digit operating margins.
Given the continued retail demand surge, 95% of our production slots are now sold for the calendar year, with many Whaler, Sea Ray and other models now sold out at wholesale well into 2022.
Pipeline inventory, which Ryan will discuss in more detail in a few slides, remains at historically low levels, and we continue to hire additional workers at most facilities to ramp up production consistent with our stated plan.
We remain on track with our plans to reopen and staff the Palm Coast facility and expand our operations at Reynosa and Portugal.
However, it remains very unlikely that pipelines will be significantly rebuilt until 2023 at the earliest.
Freedom Boat Club also continues to exceed our growth expectations, now with over 40,000 memberships and 280 locations, which is more than 100 new locations since we acquired Freedom in 2019.
Freedom has been expanding both through acquisition and organic growth in 2021.
We acquired franchise operations in major boating markets including Chicago and New York, and opened our first location in the U.K. As a reminder, having company operated locations allows us to gain the full economic benefits of the territories, and allows us to increase investment to enable faster growth.
In addition, company operated locations provide the opportunity to get close to the end boating consumer and allow us to enhance our other offerings including Boateka and our F and I businesses.
The outstanding operational and financial performance I have been discussing has not been without some external challenges that our businesses continue to manage and mitigate, sometimes on a daily basis.
Our supply chain teams in particular performed exceptionally well.
Winter storms and resulting power outages in the Central and Southern United States affected oil-based product production and supply, including our third-party producers of resin and foam, while tight semiconductor supply, raw material shortages, and transportation disruption, and resulting cost increases, continue to present challenges to our businesses to varying degrees.
However, the global reach of our supply network and our unique scale in the marine industry, together with our purposeful vertical integration, have so far enabled us to mitigate these challenges and keep our production plans on track for 2021.
Finally, labor conditions remain tight in many locations in which we manufacture product, but our talent acquisition teams have been working hard and successfully to add manufacturing and other talent to our teams as we increase production.
Next, I would like to review the sales performance of our business by region on a constant currency basis.
First quarter sales increased in each region, with international sales up 42% and sales in the U.S. up 47%.
International growth was very strong across all regions, with continued strength in Europe and Asia-Pacific contributing to growth in propulsion and P&A sales.
Canada continued its trend from the back half of 2020 with significant sales growth in all three segments.
This table provides more color on the recent performance of the US marine retail market.
All boat categories reported retail gains in the first quarter, continuing the momentum from 2020.
The main powerboat segments were up 34% in the quarter, with Brunswick's unit retail performance ahead of market growth rates, especially in outboard boat categories.
Outboard engine unit registrations were up 21% in the first quarter, with Mercury significantly outperforming the market and taking market share as I discussed earlier.
As we enter the primary selling season in the U.S., lead generation, finance applications, dealer sentiment and other leading indicators all remain very positive.
In addition, similar to our comments on previous calls, at the end of March, our percentage of dealer orders received with a customer name already attached is approximately three times the percentage from the same time last year.
All these factors give us high confidence in the continuing strength of the retail market as we move through 2021.
Our first quarter results were outstanding.
Year-over-year comparisons are not particularly helpful given the significant COVID impact starting in March of last year, but our performance in the quarter stands on its own against any quarter from the last two decades.
First quarter net sales were up 48%, while operating earnings on an as adjusted basis increased by 116%.
Adjusted operating margins were 17% and adjusted earnings per share was $2.24, each being the highest mark for any quarter for which we have available records.
Sales in each segment benefited from strong global demand for marine products, with earnings positively impacted by the increased sales, favorable factory absorption from increased production, and favorable changes in foreign currency exchange rates, partially offset by higher variable compensation costs.
Finally, we had free cash flow usage of $23 million in the first quarter as we built inventory ahead of the prime retail selling season, which is very favorable versus free cash flow usages of $144 million in the first quarter of 2020 and $159 million in Q1 of 2019.
Revenue in the Propulsion business increased 47% as each product category experienced strong demand and market share gains.
All customer channels showed growth in the quarter as boat manufacturers continued to ramp up production, and increased capacity enabled continued elevated sales to the independent OEM, dealer and international channels.
Operating margins and operating earnings were up significantly in the quarter, benefiting from positive customer mix in addition to the factors positively affecting all our businesses.
In our Parts and Accessories segment, revenues increased 52% and adjusted operating earnings were up 83% versus first quarter 2020 due to strong sales growth across all product categories.
Adjusted operating margins of 21.3% were 350 basis points better than the prior year quarter, with strong sales increases, together with favorable sales mix, driving the robust increase in adjusted operating earnings.
Continuing the theme from 2020, this aftermarket-driven, annuity-based business is benefiting from more boaters on the water, which is being augmented by flexible work schedules allowing for more leisure time, with the OEM component of the business leveraging investments in technology to take advantage of strong demand from boat builders as they increase production.
In our boat segment, sales were up 44%, with 31% adjusted operating leverage resulting in 10.9% margins for the quarter.
Each brand had strong operational performances and contributed to the successful results, with Lund and Boston Whaler leading the gains in the premium brands, and Bayliner having another strong quarter as a mid-tier value brand.
Although it's only one quarter above our stated goal of double-digit margins, this is the third consecutive quarter of margins above 9%, and we believe that we can continue this trend throughout the year and beyond.
Operating earnings were also positively impacted by the increased sales and the lower retail discount levels versus 2020.
Freedom Boat Club, which Dave discussed earlier, contributed approximately two percent of the segment's revenue, at a margin profile that continues to be accretive to the segment.
Our boat production continues to ramp consistent with our plans to produce in excess of 38,000 units during the year.
Despite producing approximately 9,400 units in the quarter, which is up 16% from the 4th quarter of 2020, we only added a few hundred units to dealer inventories given the continued robust retail market.
Our boat brands ended March with just under 19 weeks of boats on hand, measured on a trailing twelve-month basis, with units in the field lower by 41% versus same time last year.
We continue to believe that our current manufacturing footprint will support the production necessary to satisfy the anticipated 2021 retail demand, but we continue to work with our brands to unlock additional near-term capacity through automation, labor and select capital initiatives, including the capacity actions announced earlier in the year related to our Palm Coast, Reynosa and Portugal facilities, which will begin providing benefits by the end of the year.
As a result of historically low product pipelines and continued very strong boating participation, including in many northern regions in recent weeks due to the early Spring, production levels remain elevated across all our businesses to both satisfy retail demand and to rebuild product pipelines.
These factors, together with our strong pipeline of new products and outstanding operational performance, continue to provide enhanced clarity on our ability to drive growth in upcoming periods, resulting in the following guidance for full-year 2021.
We anticipate U.S. Marine industry retail unit demand to grow mid-to-high single-digit percent versus 2020; net sales between $5.4 billion and $5.6 billion, adjusted operating margin growth between 130 and 170 basis points, operating expenses as a percent of sales to remain lower than 2020, free cash flow in excess of $425 million; and adjusted diluted earnings per share in the range of $7.30 to $7.60.
We're also providing directional guidance regarding the second quarter, where we anticipate revenue growth of approximately 50% over the second quarter of 2020, with adjusted operating leverage in the low-20s percent.
As we look to the second half of the year, despite extremely challenging comparisons to 2020, we still believe that we will deliver top-line and earnings growth over the second half of last year.
I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of 2021.
The only significant update relates to the working capital usage for the year.
Projected increases in accrued expenses and accounts payable are exceeding anticipated increases in accounts receivable, resulting in a lower working capital build throughout the year.
We now estimate a working capital increase of $80 million to $100 million for 2021, which together with the higher anticipated earnings, results in a stronger free cash flow projection of $425 million.
Our capital strategy assumptions, however, have been augmented in places to take advantage of our stronger, early year cash position.
We still plan to retire approximately $100 million of our long-term debt obligations, as we repaid $9 million in the first quarter and $60 million already in April.
We repurchased $16 million of shares in the quarter, and plan to continue our systematic approach throughout the year.
We anticipate spending $250 million to $270 million on capital expenditures in the year to support, and in some cases accelerate, growth initiatives throughout our organization.
This slightly increased spending will be directed to new product investments in all of our businesses, cost reduction and automation projects, and select additional capacity initiatives to support demand and future growth, primarily in the Propulsion business.
We are also raising our dividend, for the ninth straight year, to $0.335 cents a share, or a 24% increase, as our strong cash position enables us to raise our dividend earlier in the year than usual, and keep our payout ratio close to our target 20% to 25% range, and continue to provide strong returns to our shareholders.
Finally, we've had a busy start to the year with M&A activity, primarily in expanding Freedom Boat Club as Dave discussed earlier.
Completed deals to date will have an immaterial impact on 2021 results, but we remain active in several areas including P&A, Freedom and ACES and intend to close additional deals throughout the year.
As we discussed on our January call, we felt that 2021 was setting up to be an outstanding year for all of our businesses and the first quarter did not disappoint.
The combination of robust consumer demand during the quarter and solid operational execution by our businesses has us squarely on track to deliver against our operating and strategic priorities.
Our top priority for the Propulsion segment continues to be satisfying outboard engine demand from new and existing OEM customers and expanding market share, especially in the dealer, saltwater, repower and international channels.
We are continuing to invest heavily in new product introductions and industry-leading propulsion solutions that we project will enable top-line and earnings growth far into the future.
Our Parts and Accessories segment remains focused on optimizing its global operating model to leverage its distribution and position of product strength in the areas of advanced battery technology, digital systems, and connected products in support of our ACES strategy.
We will continue to focus our M&A activity in this area as we look for opportunities to further build out our technology and systems portfolio.
The Boat segment will build on its first quarter successes by continuing to focus on operational excellence, improving operating margins, launching new products, executing capacity expansion plans, and refilling pipelines in a very robust retail environment.
Lastly, we remain keenly focused on accelerating the Company's ACES strategy, building on our connectivity and shared access initiatives, but also in the areas of autonomy, where we recently announced a new partnership with Carnegie Robotics, and in marine electrification, where we plan a portfolio of new products.
We will also continue to advance our ESG and DEI strategies across the company.
As we have done with past investor days, we have gathered our business leaders to provide you with an update to our 2022 strategy that was originally presented in February of 2020 in Miami, as well as to discuss certain longer-term initiatives that will grow and differentiate Brunswick through the next decade.
We will also hold a Q&A session for investors to ask questions of our management team on Monday, May 17th at noon Central Daylight Time.
Just a reminder that while we will not be providing a full financial update during this event, Ryan will be providing an abbreviated update on our 2022 financial targets, which will include further details regarding the substantial increase of our 2022 earnings per share target to between $8.25 and $8.75 per share as announced today.
Your hard work has enabled us to seamlessly execute our strategic plan and significantly outpace our initial growth and profit expectations. | brunswick corp releases first quarter 2021 earnings.
oration releases first quarter 2021 earnings.
first quarter gaap diluted earnings per share of $2.15 and as adjusted diluted earnings per share of $2.24.
increasing 2021 guidance, adjusted diluted earnings per share range of $7.30 - $7.60; free cash flow in excess of $425m.
anticipate 2021 net sales between $5.4 billion and $5.6 billion.
for the q2, we anticipate revenue growth of approximately 50 percent.
believe that h2 2021 comparisons will be more challenging due to potential inflationary pressures.
brunswick - believe h2 2021 comparisons will be challenging due to less favorable factory absorption comparisons, smaller benefits from forex rate changes.
brunswick - guidance assumes revenue and earnings growth in the second-half of the year versus second-half 2020.
brunswick - increase of 2022 earnings per share target to $8.25 to $8.75 per share. | 1 |
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.
We closed on the transaction in late October, and since then have been working tirelessly to complete the integration and implement KRG's culture and operating philosophy across the combined organization.
The timing of the merger was impeccable and KRG was positioned perfectly to take advantage of the opportunity.
It's now become clear that the merger is even better than we anticipated.
Today, I'm going to speak about three horizons of opportunity for KRG.
Those opportunities that are immediately in front of us, those that will cultivate over the next 18 to 24 months, and those that will materialize over the long term.
The most immediate benefit of the merger, of course, is the significant earnings accretion.
Heath will give additional color as to the underlying assumptions.
While we've only owned the legacy RPA assets since October 22, we quickly jumped headfirst into attacking operational efficiencies with an intense focus, as always, on our leasing efforts.
Against the backdrop of strong demand from a deep and diverse set of retailers, KRG is experiencing significant leasing momentum across all of our open-air product types.
In fact, we're noticing that national retailers are now looking more intently for space across the open-air spectrum, which dovetails nicely with our high-quality and well-located properties.
These positive trends are readily evidenced in our fourth quarter and full year leasing results.
During the fourth quarter, KRG leased over 900,000 square feet at a very strong 12.9% blended cash spread on comparable new and renewal leases.
The blended spread on our fourth quarter comparable non-option renewals was 10.2%.
This is a strong indicator of where market rents are headed for the KRG portfolio.
For the full year, KRG leased over 2.6 million square feet at blended cash spreads on a comparable deals of 10.7%.
As a reminder, those leasing statistics including the leasing activity from the legacy RPAI portfolio are since October 22nd.
If we include the active -- the activity from the legacy RPAI assets for all of 2021, we leased over 5.1 million square feet for the combined portfolio.
Based on this progress, our retail lease percentage stands at 93.4%, up 220 basis points over last year, and yet, we still have significant upside.
The portfolio has signed not-open NOI of approximately $33 million, which will primarily come online during the back half of 2022 and the first half of 2023.
This bodes extremely well for our growth trajectory going into 2023, as the rents from all these leases will be fully annualized.
The good news is that the $33 million of signed not-open NOI represents about half of the near-term leasing-related NOI opportunity.
Our increased scale and improved balance sheet represent a host of immediate opportunities, including the potential for lower debt costs, increased liquidity in our stock, and enhanced relevance with our tenants and vendors.
We are marching toward completing the active development projects detailed in our supplemental.
Based on KRG's underwritten incremental NOI related to the active developments, we are anticipating very solid returns.
We're meticulously reviewing the land bank, also disclosed in our investor deck, in addition to a multitude of other opportunities embedded within the KRG portfolio.
We have learned over the years that each project is unique and requires a customized approach in order to achieve the best risk-adjusted returns.
Sometimes that means bringing in an experienced JV partner or monetizing the land.
For example, during the quarter, we entered into an agreement with Republic Airways to develop a new $200 million corporate campus on an outdated retail location owned by KRG in Carmel, Indiana.
We knew the highest and best use of the land was no longer retail.
Therefore, we sold a portion of the land to Republic for approximately $7 million and will serve as the master developer of their campus.
KRG will not only receive a sizable development fee but also a profit component, all the while putting 0 KRG capital at risk.
The cash from this development will be recycled into an income-producing investment.
A big win for KRG on a site that was not generating any NOI.
I'm very optimistic about the long-term outlook.
It should come as no surprise that in the near term, we will be spending a significant amount of capital on leasing.
Looking beyond the next few years, we begin to generate substantial additional free cash flow, while also naturally deleveraging.
We are setting up to be in a very liquid and favorable position with a net debt to EBITDA in the low to mid-five times.
While I can't predict the macro environment, I'm confident we will be ready to respond aggressively regardless.
We did this deal because we love the real estate and saw significant upside potential period.
Having been in this business for over 30 years, having visited nearly every legacy RPAI asset, I can unequivocally tell you that the quality of our portfolio improved by virtue of the merger.
When I see what's happened in the private market valuations over the past six months, I couldn't be happier with respect to the timing of our transaction.
We doubled down on the amount of GLA that we have in our warmer cheaper markets.
These markets continue to benefit from household and employer migration, which is a trend we don't see changing anytime soon.
We have a sector-leading presence with over 60% of our ABR in these markets, 40% alone being in Texas and Florida.
The merger also provided KRG with a new or enhanced scale in key gateway markets such as Washington, D.C., New York, and Seattle.
These world-class cultural, educational, health, and lifestyle hubs have endured the test of time and are home to many of the opportunities that we discussed.
In summary, there's nothing better than owning high-quality assets in high-quality places.
As the world opens back up, I encourage each one of you to join us on a property tour and see the quality firsthand.
KRG is nothing without our tremendous people.
I can't emphasize enough how excited I am about what we've accomplished as a team, but more importantly, what we'll accomplish together in the future.
I want to echo John's excitement and confidence in the path that lies ahead.
The opportunity in front of us is absolutely energizing.
On the integration front, our substantial efforts to date have enabled the combined organization to operate at a high level, and truly embrace our internal model of one team, one focus.
Before I discuss KRG's fourth quarter results, please keep in mind that they're a bit clunky by virtue of the fact that we closed the merger on October 22.
While the results are from the combined portfolios, we only have two months and nine days of contribution from the legacy RPAI assets.
For the fourth quarter, KRG generated $0.43 of FFO per share.
As compared to NAREIT, our as adjusted FFO results add back in the $76 million of merger-related costs and deduct the $400,000 of net prior period activity.
For the full year, KRG generated $1.50 of FFO per share, as compared to NAREIT, or as adjusted FFO adds back in the $87 million of merger-related costs and deducts the $3.7 million of prior period activities.
Our same-property growth for the fourth quarter and full year is 7.2% and 6.1%, respectively.
These results were primarily driven by a reduction in bad debt as compared to the prior-year periods.
Absent the net contribution from prior-period activities, the fourth quarter and the full year same-property NOI growth is 6.8% and 4.3%, respectively.
These metrics and a host of others are set forth on the news summary page in a revised supplemental.
We hope you like the changes.
Our balance sheet and liquidity profile not only remains solid but continue to improve.
Our net debt to EBITDA was 6x, down from 6.1 times last quarter.
Adding in $33 million of signed, but not-open, NOI from the combined portfolio, our net debt to EBITDA would be 5.6 times.
We are in a great position to not only weather any storm but to also take advantage of any opportunities that present themselves.
As John alluded to earlier, we are providing FFO as adjusted guidance of $1.69 to $1.75 per share.
The variance from NAREIT FFO is approximately $0.02, which represents our estimate of $4 million of nonrecurring merger-related costs.
Furthermore, the accounting adjustments related to the legacy RPAI below-market leases and above-market debt, contribute an incremental $0.06 of FFO per share to our 2022 guidance.
This is a good indicator of our future ability to drive rents and reduce borrowing costs.
Additional assumptions at the midpoint include neutral impact from any transactional activity and bad debt of 1.5% of total revenues.
As you all know, providing same-property NOI growth is a SKU proposition for the sector, given all the noise over the past few years.
It is especially tricky right after a merger of two companies that approach the potential pandemic credit loss from different perspectives.
In order to avoid any confusion, we are assuming same-property NOI growth of 2% at the midpoint, excluding the net impact of prior period adjustments.
This estimated 2% same-property growth is primarily driven by occupancy gains and contractual rent bumps.
Last week, KRG declared a dividend of $0.20 per share for the first quarter.
This represents a 5% sequential increase and an 18% year-over-year increase.
The dividend will be paid on or about April 15th to shareholders of record as of April 8.
One last thought before turning the call over for Q&A.
I think another compelling comparison is to look at our original 2020 FFO guidance of $1.50 per share at the midpoint.
Like our peers, we gave this guidance before the pandemic set in and reflected KRG's run rate after selling over $0.5 billion of assets in connection with Project Focus.
Our 2022 per share guidance represents a 15% increase over our original 2020 per share guidance at the midpoint.
During the course of 2021, many of you asked, when will your earnings return to pre-pandemic levels.
On a per-share basis, not only we return to pre-pandemic levels, but we tacked on another 15%.
Just another testament to the compelling accretion and synergies associated with our well-timed merger. | q3 ffo per share $0.25.
due to timing of merger, which closed in q4, krg is withdrawing 2021 guidance.
qtrly funds from operations, as adjusted, of operating partnership (ffo) $0.33 per share. | 0 |
Overall, the third quarter reflected a continuation of our strategy of investing in our North American assets to further reposition the company with lower cost, sustainable free cash flow and solid returns over longer mine lives.
As you can see, it was a quarter with several significant developments and decisions.
Results were in line with our internal forecast and we're set up to deliver a strong finish to the year and achieve our original production guidance.
Mick will go through the operations in more detail shortly, but I'll quickly touch on a few main points.
Wharf led the pack and achieved its second highest operating cash flow and free cash flow since we acquired the operations 6.5 years ago.
Palmarejo and Kensington were largely on plan and are on track to deliver strong fourth quarters and Rochester's results reflect steady progress despite devoting 38.5 days, or about 45% of the quarter, to crushing and hauling over-liner material to the new Stage VI leach pad before winter.
It's worth pointing out that Rochester's year-to-date results reflect 2.5 months of essentially no stacking on the legacy Stage IV pad as they prioritize activities to support the POA 11 expansion.
On the exploration front, results continue to validate our ongoing commitment to these higher levels of investment.
We invested $20 million in exploration during the quarter alone.
This commitment to drilling has led to double-digit reserve and resource growth over the past few years and we look forward to hopefully delivering further growth again at the end of this year.
We anticipate investing $70 million in exploration in 2021, which is nearly 40% higher than the record we set last year and is one of the largest programs in our sector.
We remain on track to achieve our full year drill footage targets, yet investing slightly less than originally anticipated, which reflects efficiencies we are realizing from these larger programs.
We will plan to provide another exploration update before the end of the year that will focus on exciting new results at our assets in Nevada, both at Rochester and from the Crown district in Southern Nevada where there continues to be a lot of activity.
Switching over to our expansion projects, I want to walk through some updates starting with the Rochester POA 11 expansion.
This project remains our top priority and is a transformative well-funded source of production and cash flow growth for the company.
Things are moving right along.
Overall progress stood at 42% complete at the end of the third quarter.
In addition to completing the crushing of over-liner for the new Stage VI leach pad, the team also kicked off foundation work for the Merrill Crowe plant and the crusher corridor during the quarter.
As we mentioned on our last conference call, we're experiencing the impact of inflation on remaining unawarded work, like most companies are reporting.
Overall, we're fortunate to have had the vast majority of our contracts locked in prior to the current spike in costs and supply and labor disruptions.
We're trying to mitigate some of these impacts by rescoping and rebidding unawarded contracts, but we currently estimate that we're likely to see a 10% to 15% overall increase to the POA 11 construction costs.
We have kicked off detailed engineering and we'll be evaluating the merits of implementing this process improvement over the coming months.
Assuming we elect to pursue this opportunity, it could potentially extend the timetable for completion and commissioning of the crusher by three to six months.
In the meantime, we plan to install pre-screens on the existing crusher during the first half of next year to give us some full scale run time and experience that we can potentially incorporate into the new crusher configuration.
Now switching over to Silvertip.
Given the current inflationary environment and pandemic-driven supply and labor disruptions, it's not an ideal time to be kicking off a new capital project on an accelerated timetable despite multi-year high zinc and lead prices.
Fortunately, Silvertip expansion and restart is still in the early innings, which gives us a lot of flexibility.
Despite the uncertain macro-environment, which contributed to higher-than-expected capital estimates for an accelerated expansion in restart, one thing we are certain of is the quality and prospectivity of the Silvertip deposit.
The exploration results, along with the knowledge and new discoveries the team is generating, have led us in the direction of evaluating a larger Silvertip expansion and restart on a potentially slower timetable.
To take advantage of such a high-grade and significant resource, a 1,750 ton per day processing facility isn't likely large enough to maximize Silvertip's value.
We're going to take some additional time to evaluate what a larger design and footprint could represent in terms of economics and overall flexibility.
This approach will give us time to continue drilling and hopefully keep growing the resource, allow for the dust to settle on many of these current macroeconomic factors and allow us to focus on delivering POA 11 while not straining the balance sheet.
Finishing out the highlights.
We're pleased to announce that we entered into an agreement with Avino Silver & Gold to sell them the La Preciosa project in Durango, Mexico.
This transaction offers some real potential synergies to unlock value from that asset with their nearby Avino mine.
Strategically, the transaction checks a lot of boxes for us with respect to further enhancing our geopolitical risk profile, our metals mix and the timing of our development pipeline.
We can deploy some of the fixed cash consideration into the Rochester expansion and into our highly prospective exploration programs.
The transaction provides a lot of upside to the asset through the equity ownership we will have, along with contingent payments and two royalties we will retain.
Shifting gears, I want to quickly bring your attention to a set of slides starting on Slide 17 that highlight the great culture and diversity efforts we have at Coeur.
To be a high performing organization, a company's culture, strategy and capabilities need to be aligned, something that I believe we've achieved over the past few years.
To that end, I want to recognize our Head of Human Resources, Emilie Schouten, for her efforts on DE&I and for recently winning the industry's Rising Star Award from S&P Global Platts.
We continue to integrate our ESG efforts into our strategy and overall decision making.
Before having Mick provide an overview of our operations, I'd like Hans to follow-up on my Silvertip comment by providing a brief overview of the Silvertip exploration results and why we are so positive about its potential.
We bought Silvertip in late 2017 with the recognition that the asset has excellent growth potential.
We now have almost 3.5 kilometer of potential growth defined based on step-out drill holes or more than triple what we knew in 2017, as highlighted on Slide 8.
This year, we are completing the largest exploration program in the history of the project.
Impressively, Silvertip accounts for roughly 25% of our $70 million overall budget at Coeur.
The site team led by Ross Easterbrook has done an outstanding job managing the 1,000-meter drill program.
Drilling from underground has given us the ability to conduct exploration year-round and test different parts of the ore body from different angles, which has been a crucial part of the Silvertip growth story.
Underground drilling in early 2021 has led to the discovery of the Southern Silver Zone vertical feeder structures and thick manto ore zones and, more recently, vertical feeder structures under the Discovery South Zone.
These structures represent significant resource tonnage potential and demonstrate excellent upside.
We now have two rigs active underground with plans to add a third rig early next year.
We also expect to continue with three surface rigs testing resource growth to the south in the 1.5-kilometer gap between Southern Silver and Tour Ridge zones.
With the larger drill budget this year, we expect to continue significant growth at Silvertip, which will give our development team confidence to right-size the future operation to fit the potentially increased scale of the ore body.
The team reported last week they've cut the best hole ever with 11 mineralized manto horizons.
The hole is located under Silvertip Mountain about 500 meters or 1,500 feet south of the Southern Silver and Camp Creek zones in an area with no resource shapes at this time.
This new step-out hole is the significant indicator of the growth potential we expect for 2022 and beyond.
I'll now pass the call over to Mick.
Before diving into operational results, I want to recognize the team for continuing to prioritize health and safety and driving continuous improvement in this area.
Flipping to Slide 24, I'm proud to report that we recently received the NIOSH Mine Safety and Health Technology Innovation Award for our cross-functional COVID-19 response efforts.
I'm truly honored to be part of such a great team that is relentless in its efforts to work together and look after the well-being of our people.
Now turning to Slide 5 to cover the operations and starting off with Palmarejo.
The team did an excellent job maintaining higher throughput levels and maximizing recoveries to offset some of the lower grades that we've been experiencing with our resequenced mine plant.
We've also continued advancing development while focusing on increasing rehabilitation rates across the mine, which helps ensure that we've appropriately prioritized the health and safety of our workforce.
Quarterly operating costs remain within guidance helping to counterbalance lower realized prices and generate $15 million of free cash flow.
We expect a strong finish to the year at Palmarejo and we're excited to see how much production growth we can achieve here in this fourth quarter.
Switching over to Rochester.
We crushed just under 1.3 million tons of over-liner for the new Stage VI leach pad during the quarter, completing the necessary requirements for POA 11.
It's important to note, when we are generating over-liner, we were not crushing materials stacked on the legacy Stage IV leach pad, which had a knock-on effect for production during the third quarter.
Despite the near-term production impact, all-time energy and resources used to finish crushing overlay now was an important step toward completing this highly anticipated expansion project.
Now turning to Kensington.
Production was slightly higher during the quarter as better agreed [Phonetic] help to offset lower mill throughput caused by stope sequencing and drill parts availability.
The good news is that we anticipate more high grade Jualin material over the coming months and have already received the necessary spare parts for stope drills, leaving us very well positioned for strong production growth in the fourth quarter.
The Kensington team did an excellent job balancing multiple priorities and maintaining solid cost controls throughout the quarter, which helped generate nearly $15 million of free cash flow.
Finishing with Wharf, I want to start by acknowledging the tremendous achievement.
On October 3, the team at Wharf celebrated one year without a recordable safety incident, truly an amazing accomplishment.
From a results standpoint, Wharf put together yet another great quarter, which marks back to back periods of strong performance.
Gold production was up 17% and cash flow figures was the second highest since Coeur's acquisition back in 2015.
With that, I'll pass the call over to Tom.
First, I wanted to add a bit of color on the non-cash adjustments that impacted our third quarter earnings.
We wrote off $26 million of Mexican VAT refunds, to which we strongly believe we are entitled, but like many other multinational companies doing business in Mexico, we have experienced significant challenges from SAT in the Mexican courts in obtaining these payments.
We also had a mark-to-market adjustment on our equity investments, primarily related to Victoria Gold.
However, the carrying value of the investment remains above our original cost.
Turning over to Slide 4, I'll quickly run through our quarterly consolidated financial results.
Revenue of $208 million was driven by relatively stable metal sales and a lower average realized silver price versus the second quarter.
Operating cash flow totaled $22 million, which was lower than last quarter but also negatively impacted by changes in working capital.
Removing working capital, operating cash flow improved by more than 10% quarter-over-quarter.
Like most companies, we've seen cost pressures related to consumables and labor across all of our operations.
With stronger expected Q4 production, we anticipate operating cash flow levels to continue climbing as we finish out the year.
Turning over to Slide 12 and looking at the balance sheet, we ended the quarter with approximately $330 million of liquidity, including $85 million of cash and $245 million of availability under our revolving credit facility.
Also, it's worth highlighting that these numbers do not include the $140 million of equity investments on our balance sheet.
We did draw down modestly on the revolver.
We ended the period with a net debt to EBITDA leverage ratio of 1.4 times.
We will continue adhering to our disciplined capital allocation framework and remain focused on our goal of keeping net leverage below 2 times and maintaining liquidity of at least $100 million throughout the entire Rochester construction period.
However, we expect the revised timeline for Silvertip, along with the current robust metals price environment, will leave us well positioned to maintain a strong and flexible balance sheet.
I'll now pass the call back to Mitch.
Before moving to the Q&A, I want to quickly highlight Slide 13 that outlines our near-term priorities as we approach the end of the year.
With production guidance reaffirmed and a strong expected fourth quarter underway, we're feeling confident about our 2021 results and in our ability to carry this momentum into next year.
We'll continue pursuing a higher standard and execute at a high level to deliver consistent results and industry-leading organic growth from our balanced portfolio of North American-based precious metals assets. | for q1 of 2021, we expect americas segment revenue to be down high 20 percentage points.
for q1 of 2021, we expect europe segment revenue to be down mid 30 percentage points.
both our americas and europe segments are experiencing customer advertising buying decisions later in buying cycle.
latin america bookings continue to be severely constrained.
will consider expanding or implementing further cost savings initiatives throughout 2021 as circumstances warrant.
qtrly consolidated revenue $541.4 million, down 27.4%. | 0 |
After careful consideration, including engagement with many of our shareholders, the TreeHouse Board has approved a plan to explore strategic alternatives.
As we undertake this exploration of alternatives, which may include the sale of the company of the transaction to allow us to focus on our higher growth snacking and beverage businesses by divesting a significant portion of the meal prep business, we will remain focused on supporting our customers and on the actions that we are taking to gain share, optimize our portfolio and grow our top line.
Our Board and management team are steadfast in our belief that the secular headwinds we are facing are episodic and they will pass.
The long-term consumer demand trends and fundamentals of the underlying business remains strong.
We are not speculating on potential outcomes or timing of the review and we do not intend to comment further unless and until the Board has approved a specific course of action or has determined that further disclosure is appropriate.
So, let me put all of this in the context.
At Treehouse, we are essentially the supply chain for our customers private label products, placing us squarely in the middle of the macro disruptions across our industry today.
As you have heard me say many times, private label plays a vital role for our customers.
And given our size and scale, we have an obligation to do all we can to provide food and beverages, both for our customers and for their consumers.
We are making a conscious decision to support the customer during this difficult time.
The changes we have made to our business over the last several years have enhanced our ability to deliver on our customers' critical needs by providing better service.
As a result, we have strengthened our customer relationships, which have been a critical factor in implementing multiple price increases this year to recover inflation.
We've made important progress.
In fact, this has been one of the most collaborative pricing environments that I've ever seen.
Our teams are rising to the challenge in a historically difficult operating environment and I'm confident that our pricing will catch up over the cycle.
Bill will talk about pricing more in a few minutes, but I'm proud of how our teams are working closely in partnership with our customers to navigate these unprecedented headwinds.
Our strong relationship and improved ability to serve the customers is reflected in our third quarter performance, in seven of our 10 largest categories we outperformed private label, a trend that we've seen over the last year.
We are also seeing demand strengthened in the second half of the year.
As we navigate the pandemic, we have invested significantly to support our customers, bearing the rising costs to secure ingredients and transportation and to maintain labor in our plants.
While that has enabled us to maintain strong customer relationships and to expand our topline as you saw in the revised outlook for the fourth quarter, it comes a significant near-term impact on our profitability.
We believe these costs are temporary and will impact our performance in the near term, but are the right thing to do for the long-term success of our customers and TreeHouse.
As the Board embarks on a strategic review, we as a management team are committed to maintaining our focus on the things that we can control, including the pricing actions we have underway and supporting our customers.
With that as our framework, let's turn to the specifics of the quarter on Slide 4.
Third quarter revenue of $1.1 billion grew 5.3% versus last year.
On an organic basis, revenue grew 1.7% and was driven by pricing of 3%.
Demand for private label products has strengthened in recent months, to the point that today we have more demand than the supply chain challenges allow us to fulfill.
Third quarter adjusted EBITDA was $109 million.
Adjusted EBITDA margin of 9.9% declined 320 basis points, driven by inflation, labor and supply chain disruption.
We delivered adjusted diluted earnings per share in the third quarter of $0.46, within the range of our guidance that we communicated in August.
Slide 5 outlines the impact of inflation, labor and supply chain disruptions we've seen across the manufacturing landscape.
I want to talk for a moment about how these factors are impacting our business.
Inflation across the entire complex continues.
Our commercial organization is working diligently on pricing recovery efforts.
While the escalation and duration continue to be unprecedented, I'll say it again, I'm very encouraged by the level of collaboration that we are experiencing with our customers.
Labor across all manufacturing has not only become more costly, but today's shrinking labor participation and the numerous opportunities for all types of manufacturing labor require a more progressive strategy to staff our plants effectively.
To address this, our HR organization is working with our teams to pivot our labor strategy, being creative and looking holistically at the issues.
Although very early in, we are deploying new strategies and are just beginning to see some of the positive effect as a result.
This was compounded by the supply chain disruption, materials either not showing up on time or not enough of the necessary inputs arriving at our facilities.
Our service levels overall are still in the '90s, but certain categories have been under more pressure and the inherent complexity of private label will continue to pressure our service levels.
Nearly all of our meal prep categories are currently on allocation, a clear sign that orders are outpacing our disrupted capacity.
Demand has strengthened since we last spoke and that's very encouraging.
As certain federal stimulus programs expire, we are seeing signs of private label recovery.
While at the same time, we are winning new business with existing customers.
Turning to Slide 6, you may have seen similar data from us before.
The top green line represents the change in private label dollar sales as compared to two years ago among those states that opted out of enhanced unemployment benefits early in June and July.
The orange line represents the same data, but among those states where these benefits expired in the fall.
As you can see, dollar sales increased meaningfully among those states where the benefits recently expired, approaching the growth rate levels of the states that expired in the summer.
This aligns with our expectations that as things normalize, consumers will return to purchasing private label and share will continue to recover.
Bill will get into this more, but we estimate that in the third quarter we had roughly $40 million in unmet demand due to constraints across the network, either not being able to run lines to the lack of labor or because we didn't have the appropriate supplies.
Looking forward, our near-term priorities are very clear.
First, labor, we are addressing how to best improve staffing and attendance across our plants.
More broadly, we are creating an environment that not only empowers our employees to be efficient and productive, but also was fulfilling for them individually and professionally.
Second, we must continue pricing to offset inflation.
Our pricing is in the market.
And while there is a lag, we will need to continue pricing to cover higher commodity costs.
We'll also focus on cost control and lean across the organization and we'll work with our customers to identify inefficiencies and opportunities for value engineering across the product mix.
And third, we will continue to focus on the customer.
Our teams will continue to work diligently to mitigate disruptions and manage through this uncertainty to fill every order that we can, supplying our customers with food and beverage for their consumers.
As we continue to take actions to support our customers in the current environment, our results will be affected in the near term.
Slide 7 shows our guidance revisions and updates for our outlook for the balance of the year, including the impact of the investments we are making to support our customers.
While we expect demand for our products to continue to strengthen, there will certainly be some limits on how much of that demand we will be able to service given that we now expect our top line to finish the year in the lower half of our current guidance range.
We are looking across the supply chain to address today's disruptions.
It will be costly in the near-term as we invest to serve the customer.
However, as I noted earlier, we will continue to price proactively to offset inflation.
We are a complex supply chain business with 29 categories and 40 plants as we are organized today.
We've done a lot over the last several years to focus on continuous improvement and lean to make ourselves more efficient.
In this environment of supply chain disruption, however, we are making a conscious decision to invest in the customer, bearing significant cost to ensure that our products reach our retailer shelves for their consumers.
It is our belief that investing to serve the customer is the right decision and will serve to strengthen our relationship and the business for the long term.
This also provides the best backdrop for the strategic alternatives that we will consider.
On Slide 8, you see that third quarter revenue was $1.1 billion, up 5.3% versus last year, of which 3 points was pricing related and we've been able to service a $40 million of revenue as Steve mentioned earlier, we would have delivered the top end of our revenue guidance in the quarter.
We are taking creative and dramatic steps to address our service challenges in these very difficult times.
On Slides 9 and 10, we have provided revenue by division and by channel.
Meal prep net sales grew 7.4%, elevated by 5.2 points from the past the pasta acquisition.
Organic sales were nearly 2%, of which 4.6 points was pricing.
As noted on our prior calls, the rapid escalation of soybean oil, a meaningful input for our dressings business was one of the first commodities for which we price earlier this year.
Volume and mix declined 2.8 points, driven by supply chain constraints and partially offset by the continued improvement in the food-away-from-home channel.
Food-away-from-home is expected to return to 2019 levels in early '22.
Snacking & beverage revenue grew 2%, of which 1.1% was driven by volume and mix and in particular, new product introductions.
The balance of the growth was split between pricing and FX.
Sild 10 details our topline by channel.
The unmeasured retail channel, which includes key retailers in the value club and online space continue to drive growth of 6% this quarter.
This compares to a decline of 2% in the measured channels, a sequential improvement over the second quarter.
Looking forward, we expect unmeasured channel growth continue to outpace measured channels.
Slide 11 provides our earnings drivers.
Volume and mix, including absorption were a negative $0.26 of impact.
Moving to the right, I want to spend some time on PNOC, pricing net of commodities and give you a sense for both our pricing progress as well as the cost impact of rising inputs.
I want to be sure to recognize our commercial teams and a very fine job they've done coordinating and communicating with our customers and implementing multiple price increases this year.
As Steve noted and I'll reiterate, we would describe the pricing environment as very constructive.
Our intense focus on service and strong communication with the customer is enabling us to have a very good dialog around pricing.
This gives me confident that we will be able to continue to price and recover the continued input cost escalation over the cycle.
The pricing actions we took early in the year and now being reflected in our P&L as expected.
In the third quarter, pricing contributed $0.43, partially offsetting inflation we incurred in the first half of the year.
The continued cost escalation in commodities, packaging, freight and labor is outpacing our pricing recovery.
In the third quarter, the higher input cost was a negative $0.88.
Total PNOC or the net of these two is negative $0.45.
Also in the third quarter operations contributed $0.22 in total versus last year.
While the comparison to the prior year is positive, the COVID related disruption impacting labor and the supply chain cost the company by about $0.07 in the quarter.
Across our 29 categories and 40 plants, we have been working hard to mitigate the impact.
The balance of the operations largely represents the higher cost inventory produced in the third quarter that will impact us negatively in the fourth quarter as we sell that product.
SG&A was a benefit of $0.16.
This was due to the reversal of variable compensation plan accruals and continued cost management of discretionary spending.
Finally, interest expense favorability contributed $0.08 in the quarter versus last year.
Turning to Slide 12, I'd like to make a few points on our balance sheet.
In the last 12 months, we paid down more than $300 million in debt, reducing total debt from $2.2 billion dollars to $1.9 billion.
This is our lowest debt level since 2015.
We've also reduced our weighted average cost of debt by 100 basis points with the refinancing completed earlier this year.
This action lowered our annual interest cost by approximately $20 million.
Our revolver is largely undrawn.
So between cash on hand and the revolver, we have strong liquidity of nearly $800 million.
As anticipated, we generated cash in the third quarter and will do so again in the fourth quarter.
Financial leverage in the third quarter was 3.9 times as we build inventory to prepare and anticipate continued supply chain interruption.
Turning now to slide 13.
Our revised guidance for the remainder of the year takes into account the following.
Similar to Q3, we anticipate we'll have some limitations on our ability to meet all demand indicated by our customer orders and we think revenue in 2021 will be in the $4.20 [Phonetic] to $4.325 billion.
We do not see signs of inflation subsiding, although we are on track to affect our next sort of pricing actions, we will now fully recover all of this year's inflation in the calendar year due to the timing lag.
While we are exploring many avenues to mitigate the lack of labor availability and supply chain dynamics, in the near-term our cost of service to customer will be significantly higher as a result of these factors, we are reducing our EBIT guidance $155 million to $175 million, which compares to $230 million to $260 million previously.
We anticipate that most of our investments to serve the customer will impact us on the COGS line, resulting in a sequential and year-over-year erosion in gross margin in the fourth quarter.
This translates into full year adjusted earnings per share of $1.08 to $1.28, down from our revised August guidance of $2 and $2.50 per share.
We are disappointed to be sharing a second guidance revision, but I'll echo Steve's earlier comment.
We believe these near-term investments to support our customers will serve to strengthen our relationships and the business for the long-term.
We are reducing our 2021 free cash flow guidance to at least $100 million.
I'll point out here that as we manage our working capital and focus on serving our customers, we are making conscious decisions to build inventory, which due to inflation is more costly.
As a result, the working capital contribution from inventory this year will be lower.
Our debt repayment and liquidity is largely unaffected.
Slide 14 covers our fourth quarter guidance and our expectation for adjusted earnings per share between $0.00 and $0.20.
Before turning it back over, I think it's important to give you a way to think about normalized profitability and the large moving parts of disruption this year, specifically in three areas.
First, private label demand and changing consumption patterns.
Second, inflation and pricing.
And third, labor at supply chain disruption.
We do not believe these factors represent structural changes to the business, so I want to try and quantify their impact on '21, and our underlying profitability in broad strokes.
On Slide 15, we started with our February EBIT guidance of approximately $300 million because we believe that this is a much closer and normalized annual level of profitability for the company.
As you move from left to right, we have layered on our estimates for the full year impact of the macro disruptions.
First, on demand and private label consumption.
Recall that in the first half of the year, we signed a software private label consumption trend due to the macro environment, such as branded promotional activity in certain categories and government stimulus supporting consumers trading up to brands.
We've talked in August about this impacting revenue in both the quarter and the year and we estimate this to be a $40 million impact to EBIT this year.
Our original guidance contemplated input cost headwinds of approximately $100 million to $110 million.
The additional inflationary headwind is another $125 million, more than double our original estimate.
Our pricing actions to recover this inflation are in the market and confirmed by customers.
I showed you earlier how pricing is starting to be reflected in our third quarter results.
Our realized Q3 price increase of 3% is expected to accelerate to 4% to 5% in Q4, building to low-double digits in 2022.
We estimate that the timing lag in calendar '21 is approximately $75 million.
It is important to understand that over the course of the cycle, we are confident we have the initiatives in place we cover the entirety of the inflation headwinds.
Finally, because trends related to labor and supply chain disruption is affecting our ability to meet strengthening demand.
these challenges are especially acute across our 40 plant network.
Despite the near-term costs, we believe the right thing to do for our business over the long-term is to continue to serve the customer to the best of our ability.
We estimate that the incremental cost this year is approximately $60 million.
We've also captured the benefit of the reversal of the variable compensation accrual of $35 million.
The net of these factors represent the near-term impact that has driven our 2020 EBIT guidance to $165 million at the midpoint.
While the magnitude and the velocity of change across the landscape continues to be unprecedented, we strongly believe that these disruptions will at some point normalize.
It will take some time, it could be a few quarters or more.
What I do know where I do have confidence is around our teams and the initiatives we have put in place to mitigate the disruption.
Private label demand is strengthening.
Our pricing is confirmed and we are mobilized to effectively address further inflation with additional pricing.
We're getting creative around how we staff and schedule our plants, thinking holistically about how we extend [Phonetic] our people, so that we can improve attendance.
We're getting opportunities across the entire supply chain spectrum.
On the production side, this includes ensuring we have backup suppliers to prioritizing our customers most important SKUs.
On the transportation side, we completed additional freight RFPs and in some cases we'll utilize the spot market to ensure that we can get inputs and finish product to the right place at the right time, and we will further leverage lean and continuous improvement learnings throughout the network.
When we come back to you in February on our year end earnings call, we will give you more specific direction on 2022.
I'll keep my closing remarks short today and leave you with three thoughts.
First, we're encouraged by the strengthening demand.
Today, we have more orders than we can fill.
As our customers focus on surety of supply, we are winning business and outperforming an environment where we've been taking a great deal of pricing.
We have pricing that's in effect in the month of December, which is unprecedented for as long as I've been in the food business.
This is a difficult environment for everyone, but customers have been appreciative of the level of detail, transparency, and communication we are providing.
This cements my belief that we're making the right decision to invest in the customer.
We are making a clear choice to bear in the near-term cost of servicing our customers to help keep their shelf stock.
As a result, we are outperforming in our largest categories.
When things normalize and they will, we will be a stronger business and benefit from having served the customer during this time of unprecedented disruption.
The alternative would have been to spend less and choose not to service as much demand.
While that might have been a near-term solution for our earnings, I don't believe it's the right long-term decision for the business.
And finally, we'll stay focused on running the business as the Board conducts its review.
As I mentioned earlier, we won't be speculating on potential outcomes or timing of the review.
When we have something definitive to report, we will do so in a timely manner. | compname says q1 sales fell 2.5% to $1.057 billion.
q1 adjusted earnings per share $0.36 from continuing operations.
sees fy sales $4.4 billion to $4.6 billion.
q1 sales fell 2.5 percent to $1.057 billion.
reaffirmed fy guidance of $2.80 - $3.20 for adjusted earnings per share from continuing operations and $4.40 to $4.60 billion of reported net sales.
sees q2 sales $1.02 billion to $1.07 billion.
sees q2 adjusted earnings per share from continuing operations of $0.20 to $0.30. | 0 |
I'm excited to be speaking with you on my first earnings call as CEO of Hanes Brands.
I'm honored and excited to be leading such a passionate team as we embark on a growth-oriented journey.
The global pandemic has clearly created significant challenges and uncertainty.
It's impacted everything from our business visibility to our manufacturing, to consumer traffic in our stores and on our website.
And it continues with this week's European announcements regarding new lockdowns and curfews.
In this unpredictable environment, I'm encouraged by the progress we're making on a number of fronts.
I've been impressed with the team, the way they've been able to adapt and respond to the challenges of 2020.
We're seeing revenue momentum in our business, and I feel good about our strategic assessment and the progress we've already made toward defining the ambition and strategic goals for the organization.
For today's call, I'll begin by sharing some insights about myself and why I was attracted to this opportunity.
I'll then speak to the strategic assessment that we began on my first day.
I'll offer some thoughts on the process, what we are looking at as well as share some initial observations.
And I'll end with a few comments on our current business performance before handing off to Scott for a more detailed review of the results and our fourth quarter guidance.
Hanesbrands is a great company.
We have iconic brands.
We have global breadth and supply chain scale.
We have a solid balance sheet.
There's a long-standing commitment to sustainability, and we have a dedicated, passionate team with a genuine appetite and readiness for change.
With this strong foundation, I see significant opportunities and potential to drive growth and shareholder value.
With respect to my background, at heart, I'm a brand and product person.
I believe in providing great products borne directly from consumer insights.
I believe in the power of brands to differentiate, tell stories and build lasting loyalty.
I like to change and transform things.
And I like to think big.
To that end, I want Hanesbrands to be one of the most admired global apparel companies, one that is growth oriented and consistently delivers strong shareholder value.
I'm also a big believer in communication, being unvarnished, honest and transparent, both internally and with all of you.
With that backdrop, I'd like to give you a sense of how I spent my first three months as CEO.
The global pandemic has certainly altered my approach.
My preference would be to spend the first several weeks traveling, meeting with customers, visiting our stores, touring our manufacturing facilities in Asia, Central America and the Caribbean and sitting with our teams around the globe.
While it's frustrating not to be able to get out and meet face-to-face, I've had plenty of interactions with our global team and our customers via video meetings and virtual plant tours.
I've done a lot of listening, I've been asking a ton of questions and I've immersed myself in learning about our various businesses.
As I mentioned on my first day, we began a detailed, objective assessment of the business.
This is what I call the unvarnished truth.
It will define our opportunities as well as the challenges we must address to be successful and reach our full potential.
The strategic assessment is the foundation on which we will set our ambition for Hanesbrands.
From there, we will build our short- and long-term operating plans to achieve our goals.
With respect to the scope of the strategic assessment, we are evaluating our entire global portfolio.
We're looking at historical performance, category trends, channel dynamics and competitive landscape across geographies and business segments.
We're analyzing our cost structure across spend categories.
We're analyzing the current level and mix of our inventory, and we're looking at how we're organized.
We're also studying our supply chain, our technology infrastructure and our concept to consumer processes.
We're evaluating our online and direct-to-consumer capabilities.
We're analyzing our consumer mix, our brand equity measures and our product quality.
We're even looking at how we are perceived by retailers.
So let me share some initial observations from our work today.
This is a great company with a strong foundation that we can leverage.
However, in an environment where the pace of change is accelerating, for us to be successful and reach our full potential, we must become a more agile, consumer-centric, growth-oriented company.
So what does this mean?
It means that we're going to align Hanesbrands to become a company that embraces change, acts decisively, moves quickly and shares a common ambition.
We'll have a consumer-centric mindset.
The consumer is going to be at the center of everything that we do.
We'll become faster and more flexible by simplifying our organizational structure as well as streamlining processes and decision-making, particularly around concept to consumer.
We'll commit to growth.
For example, we'll support the momentum in the Champion brand globally as well as the growth in Bonds and Bras N Things in Australia, particularly online.
And not surprisingly, we need to return U.S. Innerwear to consistent year-over-year growth by applying a more consumer-centric approach to our brands, evolving our supply chain capabilities and capturing new opportunities.
Lastly, it means we're going to build certain capabilities that improve efficiency and speed, enable growth and position the company for long-term success.
We are looking for opportunities to modernize our technology.
We're looking at segmenting our supply chain to accelerate our time to market and meet the unique needs of our diverse brands and businesses.
We must expand our digital focus and capabilities to be able to capture our share of online growth.
And we'll invest in talent, filling current gaps while also developing the next generation of leaders.
Our investments will be deliberate and targeted.
We've already started a comprehensive review of our current cost structure to identify near-term savings opportunities that can be used to fuel some of our investments.
I feel very good about the progress we've made.
The global team is highly engaged, and there's a lot of energy, excitement and a genuine desire for change.
We're working with purpose, and we're moving fast.
This will be a multiyear journey that I believe will be rewarding for both our people and our shareholders.
You'll begin to see parts of our strategy unfold this quarter, and we look forward to updating you on our progress over the coming months.
Turning to our results.
Overall, Hanes brand had a solid third quarter, with revenue, operating profit, earnings per share and operating cash flow coming in above our expectations.
Scott will provide a more detailed review of our results, so I'll focus my comments on four key takeaways from the quarter.
First, we saw good momentum across the business as apparel revenue trends improved sequentially in each of our business segments.
We're encouraged by the trends in U.S. Innerwear.
Sales, excluding PPE, increased 11.5% over prior year driven by continued point-of-sale strength and broad-based inventory restocking by retailers.
Despite shipments exceeding point-of-sale in the quarter, inventory at retail remains below last year's levels.
Therefore, we expect some level of retailer restocking to continue in the fourth quarter.
We're pleased with the global improvement in Champion as sales increased nearly 130% from the second quarter.
Compared to last year, sales declined 9% due primarily to our sports apparel business where COVID-related headwinds have essentially shut down sporting events and college bookstores.
Excluding this, sales would have been down 2%.
We were also impacted by COVID-driven supply challenges in the quarter.
Absent these two items, Champion sales increased over prior year.
We expect the supply challenges to improve in the fourth quarter.
And with global spring/summer 2021 bookings up over 2019 levels, we expect Champion's momentum to carry into next year.
Looking forward, I'm excited and confident in the global potential of Champion.
There's a lot of opportunity for growth over the next several years.
The second takeaway is that we're facing second half profitability headwinds, which were mentioned on last quarter's call.
The timing of negative manufacturing variances and higher SG&A expense are expected to pressure both gross and operating margins in the fourth quarter.
We're also facing additional uncertainty from the latest COVID trends.
Third, we delivered another strong cash flow quarter, generating nearly $250 million of operating cash flow.
While we now expect to end the year with higher-than-anticipated PPE inventory, we continue to expect to generate positive operating cash flow in the second half and for the full year.
And the fourth takeaway for the quarter, we further strengthened our liquidity, ending the quarter with $2 billion of liquidity, which we believe provides us with plenty of operating flexibility in this uncertain environment.
So in closing, we're making progress in an increasingly unpredictable environment.
We're seeing good revenue momentum in our business.
We're moving quickly with our strategic and cost assessment.
We're defining our ambition, identifying our opportunities and building our plans to become a more agile, consumer-centric, growth-oriented company.
I'm excited to begin this multiyear journey, one that I believe will be rewarding to both our people and our shareholders.
Overall, Hanesbrands had a strong quarter, with the results across all of our key metrics coming in above our expectations.
Revenue momentum continued across the business driven by continued strength in point-of-sale trends and broad-based inventory restocking.
As expected, margins declined over prior year but less than we were anticipating, and we generated $249 million of operating cash flow, further strengthening our liquidity position.
Turning to the details of the results.
Third quarter sales increased 3% over prior year to $1.81 billion, with foreign exchange rates accounting for 80 basis points of the quarter's growth.
Apparel revenue performed better than our expectation for the quarter.
Excluding $179 million of PPE sales, apparel revenue declined 7% compared to prior year.
This represents a significant improvement from last quarter's 40% decline as each segment experienced a sequential improvement in year-over-year revenue trends.
Adjusted gross margin of 36.7% decreased approximately 275 basis points over last year due to increased inventory reserves as well as negative manufacturing variances, which were incurred earlier in the year, rolling off the balance sheet and onto the P&L.
Adjusted operating margin declined approximately 170 basis points over prior year to 12.6% as the gross margin pressure and higher operating costs from COVID were partially offset by ongoing SG&A controls as well as benefits from our temporary cost savings initiatives.
Restructuring and other related charges were $53 million in the quarter.
Approximately $49 million are nonrecurring costs from restarting portions of our manufacturing network that closed for approximately 10 weeks beginning in March due to the COVID pandemic.
We experienced a stronger-than-expected recovery in point-of-sale.
In an effort to meet demand and best serve our customers, we chose to expedite shipments via airfreight as well as temporarily leverage third-party manufacturing capacity.
This resulted in short-term incremental cost in the form of freight and sourcing premiums relative to our normal manufacturing cost.
We believe this was the right long-term business decision.
And in fact, we are already seeing the benefits in the form of newly captured retail shelf space.
The remaining $4 million of these costs relates to our previously disclosed supply chain restructuring actions and program exit costs.
These actions and their associated costs are on track and remain unchanged from previous disclosures.
Our tax rate for the quarter was 17.3%, which was in line with our expectations.
And adjusted and GAAP earnings per share decreased 11% and 43% over prior year to $0.42 and $0.29, respectively.
Now let me take you through our segment performance.
For the quarter, U.S. Innerwear sales increased 41% over prior year driven by a 15% increase in basics, a 7% increase in intimates and the inclusion of $166 million of PPE revenue.
Excluding PPE, U.S. Innerwear sales increased 11.5% over prior year due to the continued positive point-of-sale trends and inventory restocking by retailers.
In our basics business, we experienced growth in each product category, which drove approximately 170 basis points of market share gains in the quarter.
Within intimates, bra sales increased at a double-digit rate.
This more than offset the decline in shapewear sales, which is a category that continues to be negatively impacted by the coronavirus pandemic.
Looking forward, we have seen positive point-of-sale and order trends continue through October.
With these trends, as well as retail inventory that remains below last year, we expect some level of restocking to continue in the fourth quarter.
For the quarter, Innerwear's operating margin expanded approximately 80 basis points over prior year to 21.7% driven by fixed cost leverage from higher unit volumes as well as favorable product mix.
Turning to U.S. Activewear.
Revenue declined 27% compared to last year, which is an improvement from the second quarter's 52% decline.
The vast majority of the year-over-year decline was from our sports apparel business, which continues to be significantly impacted by COVID-related headwinds.
Activewear's operating margin was 9.1% for the third quarter.
As expected, Activewear's margin declined compared to prior year due to the timing of negative manufacturing variances, inventory reserves for some of our non-Champion brands as well as SG&A deleverage from lower sales volumes.
However, I will note that the segment margin improved significantly from last quarter's operating loss.
Touching briefly on Champion, sales of the Champion brand within our Activewear segment increased approximately 85% from the second quarter.
Compared to last year, sales declined 27%, with the vast majority of the decline due to the COVID-challenged sports apparel business.
Despite the challenges in sports apparel, we continue to expect sequential improvement in Champion's revenue trends in the fourth quarter driven by continued point-of-sale growth in key channels and online as well as improved product availability.
Switching to our International segment.
Revenue declined 5% compared to last year on a reported basis and 7% on a constant currency basis.
Adjusting for PPE sales, core International revenue declined 7% as compared to prior year, which is a significant improvement from a 44% decline in the second quarter.
For the quarter, International Champion sales increased 5% over prior year.
Excluding the impact from foreign exchange rates, we experienced growth in our Americas and Champion Europe businesses.
This was more than offset by declines in our European Innerwear, Asia and Australia businesses where COVID-related challenges have slowed the retail recovery.
International segment's operating margin declined approximately 100 basis points over prior year to 15.2% driven by deleverage from lower sales volumes, which was partially offset by continued tight SG&A cost management.
Turning to cash flow.
We generated $249 million of operating cash flows in the quarter.
Looking at our balance sheet, inventory increased 4% over prior year which was in line with sales growth and includes approximately $400 million of PPE inventory.
Excluding PPE, inventory declined 15% compared to prior year.
Leverage at the end of the quarter was 3.3 times on a net debt to adjusted EBITDA basis, which was comparable to last year.
While liquidity remains our short-term focus in a post-COVID environment, our focus would be to return our leverage ratio to below three times.
We further strengthened our liquidity position in the quarter even while reducing debt by approximately $130 million and paying our regular quarterly dividend.
We ended the quarter with $2 billion of liquidity above the $1.8 billion at the end of the second quarter.
We continue to believe we have significant capital cushion in this uncertain environment.
And now turning to guidance.
Outlook reflects the continued uncertainty due to the COVID-19 pandemic.
Our outlook is based on the current business environment, which, among other items, reflects the lockdowns and curfews put in place over the past week in Europe.
Outlook does not reflect any potential impact to the consumer or operating environments should governments or businesses institute additional lockdowns and store closings.
I want to remind everyone that all year-over-year comparisons reference our rebased 2019 results.
For the fourth quarter, we expect total sales of $1.60 billion to $1.66 billion, which, at the midpoint, implies a 2% decline over prior year.
Prior to this week's European lockdowns, our revenue outlook assumed a low single-digit growth.
Included in our sales outlook is approximately $50 million of PPE sales, approximately $10 million of foreign exchange benefit and contributions from a 53rd week.
We expect adjusted operating profit of $160 million to $180 million, which, at the midpoint, implies an operating margin of 10.4%.
Expected year-over-year margin pressure is due to the timing of negative manufacturing variances and higher SG&A expense.
We expect interest and other expense of approximately $50 million and a tax rate of approximately 17.5%.
Our guidance for adjusted and GAAP earnings per share range from $0.25 to $0.30 and $0.24 to $0.29, respectively.
And our guidance for full year 2020 operating cash flow is $300 million to $400 million, which includes the impact from the higher-than-anticipated PPE inventory.
Based on our year-to-date cash flow, this implies fourth quarter operating cash flow of approximately $70 million to $170 million.
So in closing, I'm encouraged by how we're managing through the increasingly unpredictable environment.
We're seeing good revenue momentum in our business.
I'm excited about our strategic assessment we're doing to define our strategy, and I look forward to the journey ahead. | compname reports q3 gaap earnings per share $0.29.
sees q4 2020 adjusted earnings per share $0.25 to $0.30.
sees q4 2020 gaap earnings per share $0.24 to $0.29.
q3 sales $1.81 billion versus refinitiv ibes estimate of $1.67 billion.
q3 gaap earnings per share $0.29.
sees q4 2020 sales about $1.6 billion to $1.66 billion.
full-year 2020 net cash from operations is expected to be $300 million to $400 million.
continues to expect to generate positive operating cash flow in second half and for full year.
qtrly adjusted earnings per share $0.42. | 1 |
I hope you, your colleagues, and loved ones are healthy and staying safe.
The pandemic continues to impact business throughout the world, but Skechers has seen meaningful improvements from the second quarter including a return to growth in many markets.
Third quarter sales were $1.3 billion, which was a 3.9% decrease from the prior year but a 78.3% increase over the second quarter, a significant accomplishment and an encouraging sign of the health of our brand.
Growth came from each of our segments as the retail environment steadily improved with our wholesale channel stabilizing and in several instances growing.
We believe our third quarter results speak to the relevance of our product, resilience of our company's distribution model and our plan to emerge from the pandemic even stronger than before.
In these uncertain times when people are predominantly working from home and more focused on their well-being, consumers desire comfort and we have the product they want and need.
Athletic and casual footwear and apparel with a focus on comfort is precisely in our wheelhouse.
In our domestic wholesale business, growth came primarily from our adult athletic, casual and sandal footwear, along with single-digit improvements in our men's and women's collections.
We experienced double-digit improvement in our kids' footwear, which is particularly notable given the absence of a traditional back-to-school selling season and many children still learning remotely.
Our domestic wholesale business returned to growth in the quarter, rising 6.3% a result of pent-up demand and the relevance of our product.
We saw similar sales trends for our comfortable footwear and our other business channels with a return to growth in many markets and quarterly improvements in our own direct-to-consumer business.
The more than 3,770 Skechers stores e-commerce sites and availability in many of the leading retailers worldwide gave us the opportunity to fulfill demand and satisfy customers as the markets reopen.
The pace of recovery has differed across geographies but where markets are stable and open, Skechers experienced solid growth in sales.
Our joint venture business was up 14% led by an increase of 23.9% in China where our e-commerce business was particularly strong.
Our European subsidiaries were up 18.1% overall led by fantastic growth in Germany as well as in France and Central Eastern Europe.
Our distributor business was down double digits due to ongoing store closures in several markets including our largest distributor, which covers the Middle East.
However several markets recorded positive sales including Australia New Zealand and Scandinavia among others.
By the end of the third quarter all but a few Skechers retail locations were open although many were operating with limited hours.
In the quarter we also opened 24 pre-COVID planned stores including flagship locations on Rue de Rivoli, the premier shopping street in France Oxford Circus in London and Shinjuku in Tokyo.
And two stores in Colombia and another 19 domestic and international locations.
One store closed in the quarter.
We plan to open several key locations in the fourth quarter including our first in Munich and Berlin.
In the third quarter, our direct-to-consumer business decreased 16.9%, as consumer traffic remained challenged mostly in tourist and destination concept stores as well as continued store closures in some markets.
However, our domestic e-commerce business continued to grow significantly, even as our retail locations reopened increasing 172.1% in the quarter.
That said we showed sequential improvement in our brick-and-mortar stores particularly in our big box locations throughout the third quarter and from the fourth -- from the second quarter.
We continue to invest in our direct-to-consumer experience.
During the quarter we began a full-scale update to our point-of-sale system.
And are now connected with our e-commerce channel, allowing consumers to shop our product online and pick up in one of our more than 500 U.S. locations, either in-store or curbside.
We believe these investments to fully integrate our physical and digital ecosystems, into one omnichannel experience will drive sales as shopping online has become a preference and a growing necessity for many consumers.
In addition to the 24 company-owned stores, 189 new third-party Skechers stores opened around the world and 48 closed bringing our total company-owned third-party store count to 3,770 worldwide, at quarter end.
To support the reopening of our business in markets around the world, we strategically heightened our advertising efforts, continuing with the digital focus, while adding in-store, outdoor and new television campaigns for our comfort footwear, including one with baseball great and World Series Champion Clayton Kershaw, who played this week in custom Skechers cleats.
We believe the steps we have taken to protect and improve our business, to reopen stronger than ever, is evident in the growth we have achieved in many markets, including most notably our domestic wholesale channel.
As we strive to continue this positive trend worldwide, we are further enhancing our infrastructure as well as our digital business.
Our new 1.5 million square foot China distribution center remains on track.
And we are working diligently on the expansion of our North American distribution center, which we expect to be completed in the second half of 2021 bringing our facility to 2.6 million square feet.
We also completed the expansion of our European distribution center, bringing it to 2.1 million square feet and expect to open our first U.K.-based distribution center by the end of this year.
Also we have opened new distribution centers in Panama and Colombia, all to pave the way for growth as well as increased e-commerce business.
We are on track to upgrade our e-commerce platforms in Canada, Europe, South America, Japan and India.
Further, as we continue to build our logistics centers for growth.
And as we experience the pent-up demand for our product, we are ramping up our supply chain with increased factory production capacity, to be in line with our future product needs.
Their unwavering dedication has positioned Skechers for the recovery we are beginning to see in our business.
This quarter was a stark improvement over last quarter, as sales improved in each of our segments and total sales grew 78.3%.
Where conditions returned to a degree of normalcy, our business responded, with growth reminiscent of prior years.
Where pandemic restrictions persisted our businesses weathered the situation and improved steadily.
Our sales were down only 3.9% year-over-year, which we view as a major accomplishment.
As conditions normalize further worldwide, we are confident that Skechers will return to growth because our distinctive value proposition continues to resonate with consumers.
And our core, casual, athletic, styles are on trend.
Despite the current environment, we continue to invest for growth, with a focus on our direct-to-consumer capabilities and global distribution infrastructure.
We are confident these investments will continue to propel our brand, by allowing us to scale quicker and meet growing worldwide demand.
Now let's turn to our third quarter results.
Sales in the quarter totaled $1.3 billion, a decrease of $53.1 million or 3.9% from the prior year quarter.
On a constant currency basis, sales decreased $65.6 million or 4.8%.
Domestic wholesale sales increased 6.3% or $18.8 million, fueled by consumer demand for multiple categories, across men's, women's and kids.
International wholesale sales decreased 0.5% in the quarter.
Our distributor business decreased 43.7% in the quarter, reflecting continuing challenges, in distributor-led markets.
But our subsidiaries were up 1.5%.
And our joint ventures grew 14%.
China sales grew 23.9% for the quarter, as demand rebounded, especially in e-commerce channels.
Direct-to-consumer sales decreased 16.9%, the result of a 15.3% decrease domestically and a 19.6% decrease internationally, reflecting both challenged consumer traffic trends and the impact of temporary store closures.
However, these results were partially offset by another robust increase in our domestic e-commerce business of 172.1%.
Gross profit was $625.1 million, down $28 million compared to the prior year on lower sales volumes.
Gross margin was relatively flat compared with the prior year, as increased promotional activity in our joint ventures was nearly offset by a favorable mix shift in our online and international sales.
Total operating expenses increased by $24.3 million or 4.7%, to $536.2 million in the quarter.
Selling expenses decreased by $11.6 million, or 11.9%, to $85.9 million, primarily due to lower global advertising and trade show expenditures.
General and administrative expenses increased by $35.9 million, or 8.7%, to $450.3 million, which was primarily the result of an $18.2 million one-time non-cash compensation charge related to the cancellation of restricted share grants associated with the recent legal settlement, as well as volume-driven increases in warehouse and distribution expenses for both our international and domestic businesses.
Earnings from operations was $92.1 million versus prior year earnings of $147.4 million.
Net income was $64.3 million, or $0.41 per diluted share, on 155 million diluted shares outstanding.
However, adjusting for the one-time non-cash compensation charge previously mentioned, net income was $82.6 million, or $0.53 per diluted share.
These compare to prior year net income of $103.1 million, or $0.67 per diluted share, on 154 million diluted shares outstanding.
Our effective income tax rate for the quarter decreased to 15.4% from 15.8% in the prior year.
And now turning to our balance sheet.
We ended the quarter with $1.5 billion in cash, cash equivalents and investments, which was an increase of $468.2 million or 45.4% from December 31, 2019, primarily reflecting the drawdown of our senior unsecured credit facility in the first quarter.
Trade accounts receivable at quarter end were $709 million, an increase of 9.9%, or $63.6 million from December 31, 2019, and an increase of 7% or $46.6 million from December 30, 2019.
The increase in accounts receivable was primarily due to higher wholesale sales, both domestically and in international markets.
Total inventory was $1.05 billion, a decrease of 1.5% or $16.5 million from December 31, 2019, but an increase of 18.3% or $163 million from the September, 30, 2019.
The increase in year-over-year inventory levels is largely attributable to increases in our international markets, especially in preparation for Singles' Day in China.
Domestic inventory levels declined year-over-year.
Overall, we feel confident in our inventory levels and continue to actively manage supply and demand, aiming to position the business constructively for next year.
Total debt, including both current and long-term portions, was $812 million compared to $121.2 million at December 31, 2019.
The increase primarily reflects the drawdown of our senior unsecured credit facility in the first quarter.
Capital expenditures for the third quarter were $63.6 million, of which $24.6 million related to the expansion of our domestic distribution center, $19.2 million related to new store openings and remodels worldwide, as well as a new point-of-sale system and $11.4 million related to our new corporate offices in the United States.
Our capital investments remain focused on our strategic priorities, enhancing our direct-to-consumer relationships and augmenting our global distribution infrastructure.
This quarter we launched several digital solutions, including our new website and two mobile applications, BOPIS and BOPAC capabilities in the majority of our domestic stores and a refresh of our in-store point-of-sale systems.
We also continued to make progress, despite the pandemic, on our new distribution center in China and expansions to our North American, South American and European facilities.
We have also begun the process of opening a new logistics center in the United Kingdom in anticipation of a post-Brexit environment.
We now expect total capital expenditures for the remainder of the year to be between $100 million and $125 million, inclusive of the aforementioned projects.
Overall, we are pleased with our third quarter performance and remain confident that Skechers will continue to successfully navigate this dynamic environment.
However, we will not be providing revenue and earnings guidance this quarter, as the environment remains too unpredictable to forecast reliably.
We experienced meaningful improvements from the second quarter in all channels of our business, especially in our domestic wholesale, which grew mid-single digits.
Additionally, our wholesale business in many other markets was up single and double digits.
Our direct-to-consumer sales improved since the second quarter and backlogs are up in many key countries including the United States.
We remain very aware of the global health crisis, yet we remain confident in our actions and the strength of our brand and business as countries reopen and consumer confidence grows.
The diversity of our distribution channels broad-based consumer demographics and our exceptionally strong balance sheet and ample liquidity have been especially beneficial to our success during this challenging year.
We believe consumers will continue to gravitate toward comfort in their lives and our athletic casual product at a reasonable price will continue to have worldwide appeal.
We see many opportunities for near and long-term growth and believe, we will be in an even stronger position in the future. | compname announces record second quarter 2021 sales of $1.66 billion and diluted earnings per share of $0.88.
q2 earnings per share $0.88.
q2 sales $1.66 billion versus refinitiv ibes estimate of $1.49 billion.
sees fy earnings per share $2.55 to $2.65.
sees q3 earnings per share $0.70 to $0.75.
sees q3 sales $1.6 billion to $1.65 billion.
sees fy sales $6.15 billion to $6.25 billion. | 0 |
I am joined today by Kroger Chairman and Chief Executive Officer Rodney McMullen and Chief Financial Officer Gary Millerchip.
A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.
We are excited to see that many of you will also be attending, either virtually or in person, our 2022 Business Update tomorrow in Florida when we will share additional details and answer questions about our long-term strategy and growth initiatives.
More information about virtual registration for this event can be found at ir.
[Operator instructions] Additionally, we would ask that you focus today's questions on our fourth quarter and full year 2021 results, as well as our 2022 guidance.
Our strategy of Leading With Fresh and Accelerating With Digital propelled Kroger to record performance in 2021 on top of record results in 2020.
We are incredibly proud of our associates who continued to deliver for our customers through the pandemic.
During 2021, our team delivered for all stakeholders by, first of all, achieving positive year-over-year identicals, without fuel, against very strong identicals last year and a two-year stack of 14.3%.
Also by connecting with customers through expanding our seamless ecosystem and remarkable, consistent delivery of full fresh and friendly customer experience for everyone, plus investing more than ever before in our associates to raise our average hourly rate to $17 and our average hourly rate to over $22 when you include compensation and benefits as well.
We balance all of these investments by achieving cost savings of greater than $1 billion for the fourth consecutive year, and alternative profits contributed an incremental $150 million of operating profit as well.
As we look to 2022, we expect the momentum in our business to continue, and we have confidence in our ability to navigate a rapidly changing operating environment.
We are leveraging technology, innovation, and our competitive moats to build lasting competitive advantages.
Our balanced model is allowing us to deliver for shareholders, invest in our associates, continue to provide fresh, affordable food for our customers, and support for our communities.
We remain confident in our growth model and our ability to deliver total shareholder return of 8% to 11% over time.
Kroger is leading with fresh.
Our fresh departments outpaced total company identical sales, excluding fuel, during the fourth quarter.
Kroger remains the No.
1 retailer in many exciting areas, such as specialty cheese, sushi, and floral.
As the world's largest florist, we sold over 76 million floral stems for Valentine's Day alone.
And the smiles that came along with that for our customers and associates were free.
We advanced our fresh strategy and strengthened our fresh offerings in 2021 by launching our Go Fresh & Local Supplier Accelerator, supporting our commitment to small businesses.
As a result of the launch, we have brought a number of new products to customers, and the initial results have exceeded our expectations.
We are still early in the program, and we will continue to partner with small businesses to expand our pipeline of new products.
We also remain a leader in innovation through exciting partnerships with companies like Kitchen United and Kipster.
We've completed the initial test phase of our End-to-End Fresh initiatives focused on bringing more days of freshness to our customers and are confident in its scalability and with plans to expand to targeted stores across the country.
Our brands continue to resonate strongly with customers and maintains a culture of innovation, launching over 660 new items during the year.
More than half of those new items were within our Simple Truth and Private Selection portfolios.
We accelerated Home Chef's incredible milestone of becoming a billion-dollar brand, our fourth greater-than-$1 billion brand, which is pretty special.
As a reminder for everyone, we merged with Home Chef in 2018.
At the time, we knew our customers were looking for ways to make mealtime easier without compromising on taste or freshness.
While Home Chef originated as a pure-play e-commerce offering, we saw immense potential to integrate and leverage it across our seamless ecosystem, scaling it within our stores and continuing to grow online.
The success of this integration demonstrates our ability to integrate and scale solutions that provide value to our customers and grow our competitive moats.
Kroger is focused on delivering a seamless experience that requires 0 compromise by customers, and I think that's a really important point, 0 compromise required by customers.
And what that means is the freshest products at competitive prices and flexible lead times.
Yael will go into a lot more detail tomorrow on what 0 compromise means for our customers at our business update.
The strength in our top-line sales in 2021 demonstrates our ability to meet our customers no matter how they choose to engage with us, whether it's in-store or online.
At the same time, we are actively encouraging customers to engage with us on our digital platforms, even when shopping in store.
That's because when a customer engages with us digitally, they spend more with Kroger within all modalities.
We continue to attract new customers to our digital platforms.
During the quarter, we saw new seamless pickup and delivery to household acquisitions increased 25% compared to the third quarter.
We remain committed to doubling digital sales and profitability by 2023, which was announced in 2021.
We look forward to sharing our glide path to this goal with you tomorrow.
We do not expect digital growth will be linear, especially as we cycle the sales spike in 2020 and customers become more comfortable shopping in store again.
We are incredibly proud of the new digital modalities we launched during 2021, including Kroger Delivery Now, our Boost membership program, and the rollout of new customer fulfillment centers, all of which we expect to contribute meaningfully to our long-term goals.
Yesterday, we announced a new customer fulfillment center for the Cleveland region, following on heels of our announcement of a cross-dock spoke facility that will serve Oklahoma City.
And just a few weeks ago, we opened our third customer fulfillment center in Forest Park, Georgia, and are leveraging learnings from Monroe and Groveland to drive efficiencies and scale in the new facility.
Customers are loving this new offering, and we continue to be pleased with the initial rollout of our facilities in Groveland and Monroe, and we look forward to sharing additional insights tomorrow.
Now turning to the supply chain.
Our teams across our stores, warehouses, plants, and offices have been incredible in working together to supply fresh food and necessities for our customers while addressing the rapidly changing environment.
During the quarter, industry challenges continued within the supply chain, and we remain confident in our ability to navigate these challenges.
Within our supply chain, we continue to deploy a wide array of tools, including our owned and operated fleet.
We are also partnering with our suppliers to improve product availability using the strength of our data science teams to provide insights that shorten lead times and optimize inventory flow across the extended supply chain.
We continue to focus on expanding our transportation contracts and attracting carriers from outside our industry, which has kept product flowing predictably across our network.
The teams are doing a great job managing the increased costs, and the trends within our costs are improving sequentially.
We are using our data and supplier data plus leveraging technology to support future growth.
We expect the supply chain to continue to improve throughout the year as a result of our actions.
When I visit our stores, I often hear from our associates that what they love most about their job is that they can positively impact the lives of our customers, communities, and each other every day.
And it's also what I love about our business too.
And it's what makes our purpose, to Feed the Human Spirit, so vital for our people.
One way we live our purpose is through progress toward our ESG goals and our commitments.
As part of our Zero Hunger | Zero Waste social and environmental impact plan, last year, Kroger donated 499 million meals, that's right, 499 million meals, to feed hungry families across America.
And we continue to make progress toward our goal of 0 waste.
As part of our commitments to helping people live healthier lives, we've administrated almost 11 million doses of the COVID-19 vaccine through Kroger Health.
For our more than 450,000 associates, we strive to create a culture of opportunity, and we take seriously our role as a leading employer in the United States.
Kroger has provided an incredible number of people with their first jobs, new beginnings, and lifelong careers.
As we continue to operate in a challenging labor market, we are dedicated to attracting and retaining the right talent across the organization to be able to continue delivering for our customers.
We are investing more than ever before in our associates by expanding our industry-leading benefits, including continuing education and tuition reimbursement, training and development, health and wellness, as well as the continued investment in wages that I mentioned earlier.
This is enabling us to navigate current labor conditions while continuing to provide America with the freshest food at affordable prices across our seamless ecosystem.
We are cultivating an environment where all associates are able to thrive.
For the fourth year in a row, Kroger earned top score in the Human Rights Campaign Foundation's 2022 Corporate Equality Index, the nation's benchmark in measuring corporate policies and practices related to LGBTQ+ workplace equality.
Last year alone, we provided more than $5 million to support associates through unexpected hardships through our Helping Hands Fund.
This includes providing critical funds for disaster relief for nearly 1,300 associates.
2021 was an incredible year for Kroger, and we are committed to continued growth.
One of Kroger's greatest strengths is our relentless focus on learning and improving every day.
I believe this has been a key on navigating our business successfully in every operating environment.
We remain customer-obsessed and focused on operational excellence to deliver for our customers, associates, communities, and shareholders.
Kroger continues to execute at a high level and is delivering exceptional results while navigating a rapidly changing environment.
Before I get into our results in more detail, I would like to start by echoing Rodney's appreciation to our fantastic associates.
Their dedication to serve our customers and support each other throughout the pandemic has been nothing short of incredible.
Our performance last year clearly highlights the strength of Kroger's go-to-market strategy as we achieved positive identical sales without fuel and adjusted earnings per share growth on top of record results in 2020.
We also continued to invest in our customers and associates to ensure Kroger is well-positioned for future success.
These investments were balanced with over $1 billion in cost savings and $150 million of incremental operating profit from alternative profit streams.
I will now provide additional color on our full year results.
We delivered adjusted earnings per share of $3.68 per diluted share, up 6% compared to last year.
Identical sales, excluding fuel, were positive 0.2% and digital sales on a two-year stacked basis grew by 113%.
Our adjusted FIFO operating profit was $4.3 billion, up 6% over 2020.
Gross margin was 22% of sales for 2021.
The FIFO gross margin rate, excluding fuel, decreased 43 basis points compared to the same period last year.
This decrease primarily related to higher supply chain costs and strategic price investments, partially offset by sourcing benefits and growth in alternative profits.
The OG&A rate decreased 61 basis points, excluding fuel and adjustment items, reflecting a reduction in COVID-related costs and cost-saving initiatives, partially offset by significant investments in our associates.
Turning now to our fourth quarter results.
Adjusted earnings per share was $0.91 for the quarter, up 12% compared to the same quarter last year.
Kroger reported identical sales without fuel of 4%, our strongest quarter of the year, with fresh departments leading the way.
Kroger's FIFO gross margin rate, excluding fuel, increased 3 basis points compared to the same period last year.
The stability in our gross margin rate reflects effective management of cost inflation and sourcing benefits, offset by strategic price investments and higher supply chain costs.
The OG&A rate, excluding fuel and adjustment items, increased 7 basis points.
The LIFO charge for the fourth quarter was $20 million, compared to an $84 million credit in the same period last year, and represented an $0.11 headwind to earnings per share in the quarter.
The year-over-year increase was attributable to higher inflation in most categories, with grocery and meat being the largest contributors.
One of Kroger's greatest strengths is our ability to successfully navigate many different operating environments, and our team is doing an excellent job managing the current higher inflationary environment.
We continue to leverage our data and work closely with our suppliers to minimize the effect on our customers and our financial model.
We are investing where it matters most to our customers using our proprietary data to be strategic in our pricing and personalization.
Our brands is also an important differentiator for Kroger in this environment, offering customers an unmatched combination of great quality and great value.
Our strategic approach is helping our customers manage their grocery budgets more effectively and is allowing Kroger to maintain a strong price position relative to our key competitors.
Fuel also remains an important part of our overall value proposition for our customers, and we continue to invest in our fuel program in 2021.
Customers that redeem fuel points spend, on average, four times more at Kroger and visit four times more frequently.
Our investment in fuel rewards, which is reflected in our supermarket gross margin, also helps customers stretch their dollars further and allowed us to achieve gallon growth of 5% in the fourth quarter, outpacing market growth.
The average retail price of fuel was $3.30 this quarter versus $2.20 in the same quarter last year.
Our cents per gallon fuel margin was $0.44, compared to $0.33 in the same quarter in 2020.
Turning now to cash flow and liquidity.
Our operating results generated exceptional free cash flow in 2021, which resulted in a further strengthening of our balance sheet and liquidity.
Kroger's net total debt-to-adjusted EBITDA ratio is now 1.63, compared to our target range of 2.3 to 2.5.
We were also disciplined in accelerating the return of cash to shareholders in 2021.
In total, Kroger returned $2.2 billion to investors via a combination of share repurchases and dividends.
I'd now like to take a few minutes to discuss our continued commitment to investing in our associates and our deep experience with collective bargaining.
Wages at Kroger grew before and during the pandemic.
As you know, we committed to significant associate wage investments when we launched our Restock Kroger program at the end of 2017.
Kroger has invested an incremental $1.2 billion in associate wages and training over the last four years.
In addition, we have committed to invest over $1.8 billion during the same time period to help address underfunding and better secure pensions for tens of thousands of associates.
Wage, healthcare, and pensions are included in all of the more than 350 collective bargaining agreements that cover approximately 66% of our associates.
These contracts are regularly negotiated by our professional labor relations team.
Our objective is to negotiate contracts that balance competitive wage increases and affordable healthcare for associates with keeping groceries affordable for the communities that we serve.
Our obligation is to do this in a way that maintains a financially sustainable business.
If negotiations do become contentious, we have contingency plans in place to continue to support our communities.
During the fourth quarter, we ratified new labor agreements with the UFCW for associates in Fred Meyer, King Soopers, and our Michigan division, covering more than 20,500 associates.
For 2022, we have contract negotiations with the UFCW for store associates in Las Vegas, Southern California, Seattle, Indianapolis, Portland, Columbus, Fort Wayne, Chicago, and Toledo, in addition to continued negotiations with the UFCW for store associates in Houston, Little Rock and Memphis.
We are actively proposing generous wage increases over the life of the various contracts we are negotiating, and these increases are included in our financial model and our guidance for 2022.
We are also communicating to local unions that coming to the table with unrealistic proposals, proposals that do not balance associate investments with keeping groceries affordable for our customers is untenable and undermines our shared goal of growing the company to create more jobs and advancement opportunities for more associates.
While we recognize there remain a number of uncertainties in the economic and geopolitical outlook, we believe the strength of Kroger's go-to-market strategy and our ability to manage multiple levers within our financial model will allow us to continue to build momentum within our business in 2022.
We have shared previously that we expect to emerge from the pandemic stronger, and our guidance for 2022 creates a new baseline for FIFO net operating profit that is some $900 million higher than the midpoint of our TSR model would have projected when we announced it in 2019.
Our plans contemplate meaningful investments in associate hourly rates, as well as investments, in delivering greater value for our customers and enhancing our digital capabilities.
We expect these investments and the impact of cycling COVID-19 vaccine revenue will be fully offset by tailwinds in our model and allow us to grow adjusted net earnings per diluted share to between $3.75 and $3.85.
The tailwinds in our 2022 plan includes sales leverage from growing identical sales without fuel between 2% and 3%.
We also expect to deliver cost savings of $1 billion, incremental alternative profit growth largely in line with 2021, and underlying improvement in Kroger Health profitability, excluding vaccine income.
Fuel profitability is expected to be relatively flat year over year as gallon growth is offset by slightly lower fuel margins.
In terms of quarterly cadence for identical sales of our fuel and earnings per share growth, we expect identical sales without fuel in quarter 1 and quarter 2 will be above the midpoint of our 2% to 3% range as we expect heightened inflation will continue in the first half of the year.
We would expect our second-half identical sales, without fuel, to be below the midpoint of our range as we expect the inflation to moderate later in the year as we cycle higher inflation from the second half of 2021.
Regarding adjusted EPS, we would expect quarter 1 to be above the annual growth rate range of 2% to 5%, quarter 2 to be below the range and the second half of the year to be within the range.
Turning briefly to our capital priorities.
We will continue to be disciplined with capital allocation.
This reflects some catch-up from the last two years, where spend was below original guidance due to COVID-related constraints, as well as an acceleration of our strategic initiatives, that will drive longer-term earnings growth.
At the same time, we expect to generate free cash flow of between $2 billion and $2.2 billion.
And consistent with our TSR model, we will continue to return excess cash to shareholders as evidenced by the acceleration in share buybacks over the last six months.
And finally, we are looking forward to spending more time with you at our business update tomorrow when you will hear from key members of our leadership team about our strategic priorities and our path to deliver total shareholder returns of 8% to 11% over time.
Kroger is operating from a position of strength, and we have a variety of levers and growth opportunities to continue to build on this strength.
As we reflect on 2021, we are incredibly proud of our ability to navigate both a rapidly changing operating environment and evolving customer behaviors.
We are obviously in an inflationary environment.
Our teams are managing it well.
And as Gary talked about, we are doing everything we can to keep prices low for customers, including our award-winning customer rewards program, which includes fuel rewards, our amazing and high-quality Our Brands products, and personalized offers and savings for each customer individualized.
As we look to 2022, we are confident in our ability to continue to differentiate ourselves, serve our customers in new and exciting ways and continue to change the definition of what it means to be a grocery retailer while never losing sight of what's most important to our customers.
And when we do this, we have a clear path to delivering on our commitment of 8% to 11% total shareholder returns over time for our shareholders.
As Rob shared at the top of the call, we would like to focus all questions on our quarter 4 and full year 2021 results, as well as 2022 guidance.
We look forward to sharing additional details about our long-term strategy tomorrow at our 2022 Business Update. | qtrly earnings per share of $0.75; adjusted earnings per share of $0.91.
sees 2022 adjusted earnings per share of $3.75 to $3.85. | 1 |
It was a year ago this week that we reported our 31st consecutive year of sales growth.
In 2019, we achieved record levels of sales, earnings per share and cash flow.
As you may recall 2020 got off to a good start for us with mid-single-digit growth in sales through February 2020 was forecasted to be another good year of sales and earnings growth.
By mid-March a global pandemic and national emergency had been declared and the lives of people throughout the world were disrupted.
In the months that followed we worked to keep our employees and our store customers safe from the virus.
We reduced spending, negotiated lower product costs and improved liquidity.
We significantly reduced our exposure to excess inventories caused by temporary store closures.
And by curtailing inventory commitments, we were able to improved price realization and margins last year.
When the pandemic hit, we accelerated the execution of new capabilities to support the same-day pickup of eCommerce orders in our stores, curbside pickup and the direct shipment of eCommerce orders from our stores.
We engaged remotely with our wholesale customers, leveraged our investments in digital product imagery and secured higher bookings for our product offerings this year.
We also engaged more deeply and effectively with consumers through social media, building a virtual community of families with young children.
During the pandemic, we added over 2 million new eCommerce customers and with the support of our wholesale customers, the online sales of our brands exceeded $1 billion last year.
The pandemic was a challenging experience for all of us, but it also enabled us to find new ways to improve our business.
We believe the foundation of our company is now stronger because of the pandemic and we are better positioned to weather future storms that may occur.
It was the strongest quarter of the year in terms of sales and earnings contribution and the performance was in line with what we had planned.
We reporting a record gross profit margin in the fourth quarter enabled by a stronger product offering, leaner inventories and more effective marketing.
As planned, spending grew in the quarter, driven by investments in eCommerce, better staffing and retention in our distribution centers and the partial restoration of compensation for all of our employees.
Compensation was curtailed for several months earlier in the year.
With respect to sales trends, the fourth quarter got off to a strong start with October sales at 95% of prior year sales, consistent with the very strong demand we saw in September.
On a comparable basis, normalizing a holiday calendar shift and excluding the 53rd week.
November and December sales were 84% of prior year sales.
Our best analysis of the deceleration in demand relative to September and October reflects lower store traffic due to the resurgence of the virus heading into the final months of the year.
And we're lean on inventories heading into the holidays and less promotional than last year.
Sales trends improved meaningfully at the end of December and continued into January.
We saw growth in January sales and are expecting first quarter sales to be comparable to last year.
March is expected to be the largest month of sales and earnings contribution in the first half this year.
March sales have historically been driven by Easter holiday shopping and the arrival of spring like weather in more parts of the country.
We're expecting very good growth in the first half of this year as we comp up against temporary store closures last year.
And for the year, we're also expecting good growth in sales and profitability despite the lingering effects of the pandemic.
Our Retail segment was the largest contributor to our fourth quarter sales and profitability.
All of our U.S. stores remained open for the quarter though we did curtail hours 13% based on lower traffic.
COVID continues to have a material impact on store traffic.
Our border and tourist stores have been most affected by the pandemic.
Our border and tourist stores represent 10% of our U.S. stores that contributed over 20% of the decline in comparable sales.
This past year, we saw a fewer international guests in our stores and fewer shopping with us online.
In part, we attribute the decline in online demand from international customers to a significant reduction in our promotions this past year.
Those who came into our stores in the fourth quarter came to buy.
Our store conversion rate grew 5% in the quarter.
The average transaction value grew 9%, driven by higher units per transaction and better price realization.
We ran much leaner in store inventories in the fourth quarter, recall that we curtailed fall and winter inventory commitments when the risks of the pandemic became clear to us in March.
With leaner inventories, we focused our marketing less on promotions and more on the beauty of our product offerings.
In the fourth quarter 94% of our comparable stores were cash flow positive.
Our mall stores saw the largest decrease in comparable sales.
90% of our stores are in open-air shopping centers and these stores outperformed the chain.
As we shared with you last year, we plan to close about 25% of our 2019 store portfolio upon lease expiration.
About 60% of those closures are planned this year, 80% of the closures are planned by the end of next year.
These stores collectively contributed over $140 million in sales in 2020 with an EBITDA margin of less than 3%.
By comparison, the balance of our stores had an EBITDA margin of nearly 18%.
Our focus is on fewer better higher margin stores located in more densely populated areas to provide a higher level of convenience to in-store and online customers.
Our store closure plan is expected to be accretive to earnings in 2021 and provide a $10 million cumulative earnings benefit by 2025.
ECommerce continues to be our fastest growing and highest margin business.
ECommerce penetration grew to 45% of our retail sales, up from 38% in the third quarter.
Increasingly, we are seeing customers enjoy the convenience of picking up their online purchases at our stores located closer to their homes.
Omni-channel sales grew to 24% of our eCommerce orders in the fourth quarter, up from 12% last year.
Last year, we leveraged our stores from Maine to Hawaii to ship online purchases from over 600 stores.
As a result, we improve the speed of delivering online purchases and improve the profitability of our eCommerce business.
We expect the mix of omni-channel sales to grow to nearly 40% of online orders by 2025.
Our Wholesale segment was the second largest contributor to our fourth quarter sales and profitability.
Collectively, we continue to see double-digit growth with our exclusive brands which were margin accretive in the quarter.
ECommerce sales of our brands through our wholesale customers grew over 30% in the fourth quarter and up over 50% for the year.
Sales of our flagship Carter's brand were lower in the fourth quarter, reflecting our decision to curtail fall and winter inventory commitments.
Off-price sales were also lower in the quarter.
The excess inventories created by temporary store closures and related cancellations due to the pandemic were largely sold through our own stores at higher margins.
Going forward, we will continue to use our own stores to move through a higher percentage of excess inventories rather than selling to the off-price channel.
Spring selling is off to a good start with our wholesale customers.
They too are leaner on inventory, have a lower mix of prior season goods and are seeing better price realization and margins.
We're projecting very good growth in wholesale this year, especially in the first half, assuming all stores remain open.
Our International segment contributed over 11% of our fourth quarter sales.
Canada and Mexico contributed nearly 90% of our international sales.
Our eCommerce sales in those markets grew over 60% in the fourth quarter and grew to 30% of our international retail sales from 18% last year.
Both businesses performed remarkably well despite COVID-related store closures in the fourth quarter.
In Canada and Mexico, many of our stores were closed in the weeks leading up to Christmas.
Some of those closures continued through February.
The strength in our international wholesale sales was our Simple Joys brand sold exclusively through Amazon.
That business nearly doubled in the fourth quarter with Amazon's expansion of our brand into Europe and Japan.
Most challenging component of our International segment is with smaller retailers, representing our brands in over 90 countries.
Though individually small, collectively they contributed about 15% of our international sales in 2019 and were margin accretive.
Wholesale sales to these retailers were down over 50% in the fourth quarter.
Based on bookings from these wholesale customers, we're projecting a good recovery in this component of our business this year.
Our supply chains did an excellent job, supporting the continued acceleration in eCommerce demand in the fourth quarter.
The speed of delivering online purchases was meaningfully better than last year and we saw a related improvement in our customer satisfaction ratings.
In 2020, we invested to ensure the safety of our distribution center employees, raised their wages to improve staffing and retention, and invested in technology to improve the speed of delivery.
Our supply chain team also negotiated lower product costs for 2021, which may enable us to further improve our gross profit margin this year.
In the fourth quarter, we began to see delays in the receipt of products from Asia.
Our suppliers were running on average 10 days late due to COVID-related challenges and precautions and transportation delays.
Since the reopening of stores last summer, there's been a surge of imports into the United States.
As a result, there is an unusual shortage of cargo containers in Asia, further delaying the shipment of our products to the United States.
Given the imbalance in the supply and demand for cargo containers, the cost per container has risen significantly in recent months.
This is a macro issue.
Our best information suggests we'll see delays and higher transportation rates for most of the first half.
The surge in imports has also caused congestion at the West Coast ports in California, adding additional time to the receipt of goods.
Our wholesale customers are challenged by the same delays.
The late arrivals of our warm weather products and there is plenty of warm weather ahead of us.
To date, we have not experienced any meaningful order cancellations, but that's a higher risk than usual given the abnormal delays in deliveries from Asia.
Since our last call with you, we have revisited the longer term potential of our brands.
By 2025, we expect sales to grow to nearly $3.7 billion with an expansion of our operating margin to 13%.
Our growth strategies are focused on leading in eCommerce, winning in baby, aging up our brands and expanding globally.
Our Carter's brands have the largest share of the eCommerce children's apparel market in the United States.
In the fourth quarter, Carter's online experience was rated as one of the top user experiences among the largest U.S. and European eCommerce websites.
We also have unparalleled relationships with the leading retailers of young children's apparel, including Amazon, Target, Walmart, Kohl's and Macy's.
Carter's is the number one brand in baby apparel with over 4 times this year of our nearest competitor.
It's been the best-selling brand in young children's apparel for generations of consumers.
It's possible that we may see fewer births near-term due to the pandemic.
We've seen births decline almost every year since the Great Recession began in 2007.
And since 2007, our sales and earnings have more than doubled.
With the promise of vaccines more broadly available this year, government stimulus helping families with young children, historically low interest rates, strong housing market and an improving economy, we view the risk of fewer births as a potential short-term challenge, but not a longer term obstacle to our growth.
We have the number one market share in the baby and toddler apparel markets.
The largest growth in our sales before the pandemic, both in percentage and absolute dollars, was driven by our product offerings focused on 10 -- 5 to 10-year-old children.
With the continued success of our age-up initiative and the reopening of schools this year, we expect that our age-up strategy will be a good source of growth for us in the years ahead.
We plan to extend the reach of our brands globally and profitably.
International sales contributed about 12% of our consolidated sales in 2020 and are expected to grow to 15% of sales by 2025.
Over the next five years, over 60% of our international sales growth is forecasted to be driven by our multichannel operations in Canada and Mexico.
Our brands are also sold through Amazon, Walmart and Costco on a global basis.
We expect good growth from these multinational retailers and other retailers who are extending the reach of our brands to families with young children throughout the world.
In summary, we strengthened our business this past year and we're expecting a good multi-year recovery from the pandemic.
We have built a unique multi-brand multi-channel model, which we believe is well positioned to grow and gain market share.
We're committed to strengthen our business and provide good returns to our shareholders in the years ahead.
I'll begin on Page 2 with our GAAP income statement for the fourth quarter.
Net sales in the quarter were $990 million, down 10% from the prior year.
This year's fiscal year included a 53rd week, so the fourth quarter consisted of 14 weeks versus 13 weeks last year.
This extra week represented $32 million in additional net sales in 2020 and contributed roughly $1 million of operating income.
Reported operating income was $134 million, a decrease of 18% and reported earnings per share for the fourth quarter was $2.26, down 20% compared to $2.82 a year ago.
On Page 3 is our GAAP income statement for the full year.
Obviously, sales and earnings this past year were meaningfully affected by the global pandemic.
Net sales for the year were just over $3 billion, a decline of 14%.
Reported operating income was $190 million, down nearly 50% and reported earnings per share for the year was $2.50, down 57% from $5.85 in 2019.
Our fourth quarter and full year results for both 2020 and 2019 contained unusual items which are summarized on Page 4.
We've treated these items as non-GAAP adjustments to our reported results to enable greater comparability and to provide what we believe is a clear view into the underlying performance of the business.
My remarks today will speak to our results on an adjusted basis which excludes these unusual items.
On Page 5, we've summarized some highlights of the fourth quarter.
It was a strong finish to what's obviously been an eventful and challenging year.
We met our expectations overall for our financial performance in the quarter.
We saw good continued momentum in several important parts of our business.
ECommerce comparable sales were strong, up 16% in the U.S. and up 47% in Canada.
Our store sales in the U.S. were stronger than we had forecasted in part due to a slight improvement in the store traffic trend in December.
A real headline and driver of our fourth quarter performance was gross margin, which expanded significantly over last year; this was an acceleration over the gross margin expansion which we achieved in the third quarter.
Despite lower earnings, our cash flow was very strong in the year, reflecting our working capital initiatives implemented in response to the pandemic.
And our balance sheet and liquidity both were in great shape at the end of the year.
Turning to Page 6 for a summary of net sales for the fourth quarter; reported net sales declined 10% to $990 million.
On a comparable 13-week basis, net sales declined 13% year-over-year.
I'll cover our business segment results in some more detail in a moment.
But as we had expected, sales were lower year-over-year across the business.
Sales were negatively affected certainly by the ongoing disruptions of the pandemic, but also in part due to some of our decisions earlier in 2020 to curtail our fall and inventory commitments.
In recent weeks, we have also been further challenged by delays in the planned receipt of inventory.
This is an industrywide issue with many companies experiencing delays in the scheduled arrival of product from Asia.
We've estimated that the impact of late arriving product negatively affected sales by about $30 million in the fourth quarter.
Turning to Page 7 and our adjusted P&L for the fourth quarter; while sales were down versus last year, as I mentioned, the profitability of our sales increased significantly with our gross margin increasing by 460 basis points to 47.1%.
This represented record quarterly gross margin performance.
So despite sales decreasing over $100 million, gross profit dollars were roughly comparable with a year ago.
This increased gross margin rate was driven by the strength of our product offering, improved price realization, which was a result of more effective marketing and promotion, and our focus on inventory management, including good progress in reducing excess inventory.
Royalty income declined about $1 million versus last year, largely due to the timing of shipments of spring seasonal goods which shifted from the fourth quarter last year into first quarter 2021 and late arriving product.
Adjusted SG&A increased 5% to $327 million.
We partially restored certain compensation provisions, which had been suspended earlier in the year.
So the fourth quarter reflected some element of catch up for these expenses.
Our employees did great work this past year managing through very difficult circumstances.
As we rationalized our promotional activity in Q4, we reinvested some of those savings into marketing, specifically digital media, which delivered good returns.
We also made several investments to strengthen our eCommerce and omni-channel capabilities, including the launch of a new mobile app, enhancing our websites and continued investment in improving the speed and efficiency of our distribution center which supports eCommerce.
We believe these investments will strengthen our capabilities long-term and help us as the business recovers from the pandemic.
Adjusted operating income was $145 million compared to $162 million in the fourth quarter of 2019 and adjusted operating margin was 14.7%, comparable to last year.
Below the line, net interest expense was $15 million, up from $9 million in the prior period due to the $500 million in new senior notes we issued in the second quarter.
We had a $2 million foreign currency gain in the fourth quarter and our effective tax rate was approximately 18%, down from about 19% last year.
On the bottom line, adjusted earnings per share was $2.46, down 12% compared to $2.81 in 2019.
Moving to Page 8 with some balance sheet and cash flow highlights.
Our balance sheet and liquidity remained very strong.
Total liquidity at the end of the fourth quarter was approximately $1.8 billion with $1.1 billion of cash on hand and virtually all of the borrowing capacity under our $750 million credit facility available to us.
Quarter-end net inventories were up 1% to $599 million.
While largely comparable to last year in total of the composition of our inventory was very different because of our decisions to proactively curtail inventory earlier in the year, our inventory levels in our stores and for the core Carter's brand at wholesale were meaningfully lower than a year ago.
Our exclusive brand inventories were generally higher at year-end.
Total year-end inventories were down year-over-year when considering the inventory from summer 2020, which we pack and hold earlier in the year as the pandemic unfolded.
We made good progress selling through this pack and hold inventory during the year and expect to sell the remaining balance as we move through the first half of 2021.
We also made good progress reducing our overall level of excess inventory during the fourth quarter.
Our Q4 accounts receivable balance declined 26% compared to the prior year, principally due to lower wholesale sales.
Accounts payable increased by $290 million to $472 million, which reflects the extension of payment terms and rent deferrals.
Long-term debt was nearly $1 billion, up from roughly $600 million at the end of last year.
This increase reflects our successful senior notes issuance this past May and full repayment of outstanding revolver borrowings in the third quarter.
Operating cash flow in 2020 increased by about $200 million to $590 million.
Our strong focus on working capital and management of spending enabled us to achieve this record performance despite lower earnings in 2020.
Note that while we're planning higher earnings in 2021, operating cash flow is expected to be lower this year due to the repayment of deferred rent and adjustments to some vendor payment terms.
Moving to Page 9 with a summary of our adjusted full year performance; while 2020 sales and earnings were of course meaningfully affected by the pandemic, the combination of our strong product offering, marketing, inventory management and productivity initiatives enabled us to minimize the overall profit impact of lower sales.
With demand so uncertain we made the choice early on in 2020 to focus more on profitability than on sales.
The effectiveness of our initiatives is most evident and looking at the difference in our performance between the first and second halves of the year, which we've summarized on Page 10.
First half sales were significantly affected when our retail stores were closed for much of the second quarter and shipments to many of our wholesale customers were suspended, while their own stores were closed.
Gross margin performance was starkly different between the first and second half.
In the first half our gross margin declined by 350 basis points in part due to taking higher provisions for excess inventory.
In the second half, we achieved record gross margin as a result of improving our realized pricing and making good progress on clearing through that excess inventory.
Profitability followed this gross margin performance with a much smaller decline in adjusted operating income in the second half with an expansion of our adjusted operating margin versus a decline in the first half.
Turning to Page 12 with a summary of our business segment performance in the fourth quarter.
In the largest part of our business, U.S. retail, we improved profitability significantly despite the decline in total sales driven by improved product margin and good growth in our high margin eCommerce business.
Profitability in U.S. wholesale and International declined with sales lower it was more difficult to leverage costs in these businesses.
The increase in corporate expenses was largely due to the additional provisions for compensation and to a lesser extent some spending on external consulting in the quarter.
Now, turning to Page 13 with some detail on U.S. retail performance in the fourth quarter.
Total segment sales declined 6% compared to last year.
Total comparable sales declined 9%, reflecting strong eCommerce growth and lower store sales.
Q4 traffic while down meaningfully versus a year ago came in ahead of our expectations and was better than the apparel industry benchmark which we follow.
The adjusted operating margin of our U.S. Retail segment improved by 280 basis points to 19.1%, driven by higher product margins as a result of improved price realization, lower product costs and lower inventory provisions.
These gains were partially offset by investments to strengthen our eCommerce business and the timing of compensation provisions.
Moving to Page 14 with an update on our omni-channel initiatives; our investments in recent years to build our omni-channel capabilities are clearly paying off.
The ability to pair our leading eCommerce website with our nationwide network of stores is a strong competitive advantage.
As shown in the chart here, we saw strong year-over-year growth in omni-channel demand in the fourth quarter.
We believe these capabilities provide a better experience for our customers in terms of convenience, flexibility and shorter click to consumer times.
Our store-based fulfillment options also generally provide better economics compared to traditional fulfillment from our distribution center.
Lastly, our ship-to-store and pickup in-store options have driven significant traffic to our stores accounting for 1.7 million store visits in 2020.
About 25% of the time customers picking up their online orders made incremental purchases while in the store.
Moving to Page 15 to some of our recent marketing; fourth quarter marked the arrival of the first babies conceived during COVID.
While 2020 certainly provided its share of stress and negative news, there is no happier occasion than the arrival of a new baby.
Campaign featured real families and their babies born in 2020.
Campaign has generated an overwhelmingly positive response, which drove gains in brand awareness, brand favorability and future purchase intent with customers, while introducing Carter's the number one most trusted baby brand to a new audience of parents.
On Page 16 we continued to innovate in our marketing in the fourth quarter and lean into emotionally driven digital experiences for families such as our virtual visits with Santa and virtual PJ parties with Leslie Odom Jr., the star of Hamilton.
These millennial parents have responded well to these digital offers.
As Mike said, we added 1 million new online customers in 2020.
These brand's storytelling and customer engagement efforts resulted in a record 8 billion media impressions across the year, a significant increase over 2019.
Overall, Carter's continues to enjoy the highest level of engagement on social media among all the other major players in the young children's apparel market.
Turning to Page 17; we continue our efforts to expand the reach of our brands to more diverse consumers, which reflects our company's broader focus on diversity and inclusion.
To celebrate the wonderful legacies of historically black colleges and universities and to inspire the next generation, we recently launched an HBCU apparel collection partnering with a series of HBCU alumni influencers.
We also partnered with Sisters Uptown Bookstore in New York City on a Black History Month reading series, highlighting historical black figures and their notable contributions to our country and society.
Moving to Page 18 and with a recap of the U.S. wholesale results for the fourth quarter; net sales were $290 million compared to $349 million a year ago.
Despite late arriving product, we've largely achieved our sales forecast in wholesale for the quarter.
Sales of the Carter's brand and sales in the off-price channel were each down about 40%, tracking with our reduced inventory positions in these parts of the business.
We are planning for good growth of sales in the core Carter's brand in 2021.
With regard to the off-price channel sales, we made much greater use of our own retail stores in the past year to clear excess inventory at higher recovery rates than we've historically achieved in the off-price channel.
Online demand for our brands through our wholesale customers was strong in the fourth quarter with growth of 36% over the prior year.
U.S. wholesale adjusted segment income was $54 million in the fourth quarter compared to $67 million a year ago.
Adjusted segment margin declined 60 basis points, reflecting higher compensation and marketing expenses that were offset in part by lower inventory-related charges and lower bad debt expense.
On Page 19, we've included a photo from Kohl's, which is one of our largest and longest tenured wholesale customers.
Our Carter's baby shops at Kohl's continue to provide a competitive advantage, which elevates the presence of our brand and the customer shopping experience.
Our Little Baby Basics assortment drove strong sales increases all season as customers stocked up on these must-have basics.
This product is shown here in the front isle of this Carter's shop.
On Pages 20 through 22, we've included a few slides that highlight our exclusive brands which are available at Target, Walmart and on Amazon.
These brands had a terrific 2020 and that momentum continued into the fourth quarter where collectively sales of the exclusive brands increased 13% over 2019.
On Page 21, we've depicted some of the beautiful Child of Mine product carried at Walmart.
We've seen a significant -- we've seen significant growth of the Child of Mine brand online with Walmart over the past year.
On the next page, Simple Joys on Amazon continues to be a good source of growth for us.
In 2020, we expanded our product offering in key categories and added incremental categories such as outerwear, robes and sleep bags.
Pictured here is our latest brand store featuring a range of products, including our 2-Way Zip Sleep & Play swimwear and play wear for newborns to toddlers.
Moving to Page 23 and our fourth quarter results for our International segment; international net sales declined 13% to $114 million.
We saw significant disruption in our Canadian and Mexico stores in the fourth quarter as many stores were closed due to the pandemic in these markets.
Online demand in Canada was very strong with eCommerce comps up nearly 50%.
As Mike mentioned, the disruption in our international partners business continued in the fourth quarter, but we're planning for a rebound in this part of our business in 2021.
International adjusted operating margin was 13.3% compared to 16.2% a year ago.
This decline reflects deleverage of store expenses due to lower store sales, eCommerce investments, and the catch-up compensation provisions, offset by lower inventory costs.
On the next few pages, beginning on Page 25, we've summarized some of our thoughts on our strategic positioning in the industry and the growth we're targeting over the next few years.
We believe the company has a number of strategic advantages in the marketplace.
You've heard us speak about many of these over the years.
Our brand portfolio contains the most established and trusted brands in which multiple generations have clothed their children.
We are unique in our multi-channel business model that broadly distributes our brands, including through a growing and vibrant direct-to-consumer business.
We've had a long record of strong operating performance and returns, including significant cash generation.
On Page 26, we've summarized our mission and vision.
Clearly, our objective is to continue to lead the marketplace with special emphasis on the strategic pillars listed here, leading in eCommerce, continuing to win in baby, aging-up and expanding globally.
We've recently refreshed our multi-year financial forecast.
It is difficult to predict the future right now with a lot of precision, but we believe good growth is possible over the next several years.
We believe we can generate mid-single-digit growth overall in net sales comprised of low single-digit growth in U.S. retail, mid-single-digit growth in U.S. wholesale and high single-digit growth in our International segment.
We believe profitability can grow faster than sales as we continue to pursue our transformation and productivity agenda.
So our target for operating income is in the low double-digit growth range.
We believe our anticipated significant cash generation provides us an opportunity to augment operating income growth through debt pay down and the resumption of share repurchases and thereby target earnings per share growth in the mid-teens.
Our forecasts indicates we will generate substantial cash in the coming years, which provides us significant flexibility to reinvest in the business and pursue alternatives, which includes evaluating M&A opportunities where appropriate, paying down debt and returning capital to shareholders.
On Page 27, there are a number of elements which we believe will contribute to our planned growth in sales and earnings over the coming years.
We've summarized some of these here for you.
I won't read this list, but the good news is the number of factors listed.
We have multiple meaningful ways to drive growth in our business.
Turning to Page 29 and our outlook for 2021; while there remains significant uncertainty regarding the ongoing impact of COVID-19, we believe we will have good growth in both sales and earnings in 2021.
We're expecting all of our business segments will deliver growth in net sales with our consolidated net sales growing about 5%.
We're planning for good growth in operating income and operating margin expansion in 2021.
Adjusted earnings per share is expected to grow about 10%, a bit less than what we are planning for operating income growth because of the higher interest costs from the senior notes we issued last year and an assumption of a higher tax rate with more of our income expected to be generated in the United States this year versus overseas.
We expect the first half of the year will be the more meaningful period of sales and earnings growth for a number of reasons, including the comparison to the first half of last year with the initial pandemic disruptions as well as various timing differences between the years and wholesale shipments and spending.
We won't match 2020's record year of cash generation as we repay deferred rent and have other changes in working capital.
We'd expect 2022 to be a more normal year of significant operating and free cash flow generation.
We're cautious and conservative in our planning assumptions given the continued uncertainty which exists, this posture has served us well overtime.
In terms of the first quarter, we expect sales will be comparable to last year.
We do expect first quarter profitability will increase significantly with operating income in the neighborhood of $30 million and adjusted earnings per share of approximately $0.25 compared to losses a year ago.
In terms of key risks, we continue to monitor the status of later arriving product across our various channels and the potential impact these delays may have on the sales of spring product.
Also, we're seeing an ongoing escalation of transportation costs in the marketplace, which may result in additional expense above what we have planned in this year. | q4 adjusted non-gaap earnings per share $2.46.
q4 earnings per share $2.26.
sees fy 2021 sales up about 5 percent.
qtrly u.s. ecommerce comparable sales increased 16%.
sees 2021 adjusted diluted earnings per share growth of approximately 10%.
carter's - for q1 2021, projects net sales to be comparable to q1 2020 & adjusted diluted earnings per share will be about $0.25. | 1 |
In this year's first quarter, we achieved consolidated earnings of $0.52 per share versus $0.38 per share during the first quarter of 2020.
That's a 37% increase or a 21% increase on an adjusted basis.
You can see from this slide that each of our three operating segments contributed to the year-over-year earnings-per-share growth.
The results of our regulated utilities were driven by CPUC-approved rate increases, while our contracted services segment performed a higher level of construction work during the quarter compared to last year.
Steve will discuss this slide in more detail.
We continue to execute on our business strategies in the quarter, provide high-quality water, wastewater and electric services to over 1 million people and make timely investment in our systems, all while keeping our unwavering commitment to reliability and safety.
Our capital investments allow us to replace and upgrade critical infrastructure as well as ensure we can meet our customers' needs for generations to come.
We also remain committed to conservation, environmental stewardship, employee safety and well-being, diversity and inclusion and sound governance practices.
While these issues have always been at the core of our company, we created an environmental, social responsibility and governance section, also known as ESG, on our website, to more clearly make our disclosures available in these areas.
The website includes our corporate social responsibility report, TCFD and SASB disclosures and other relevant documents.
We will continue to focus on our ESG commitments, which benefit our customers, suppliers, employees, broader communities and ultimately, our shareholders.
In addition to producing strong first quarter results in all of our business segments, we filed the cost of capital application for the Water segment yesterday and saw new water and electric rates go into effect starting in January, which generate additional gross margin.
And on a longer-term scale, we continue to invest in infrastructure at our regulated utilities and contracted services business to provide quality services to our customers, perform more work on the military bases we serve, compete for new military based contracts and deliver consistent dividend growth to our shareholders.
I'll touch on these in greater detail later on in the call.
Let me start with our first quarter financial results on Slide 8.
I'm pleased to report that the company had a great quarter with consolidated earnings of $0.52 per share as compared to $0.38 per share last year.
Excluding the $0.05 per share loss on an investment item from the first quarter of last year, earnings for the first quarter of 2021 increased by $0.09 per share or 20.9% as compared to last year.
For our water utility subsidiaries, Golden State Water Company, earnings were $0.33 per share as compared to $0.29 per share, as adjusted to exclude the $0.05 per share loss on investments incurred in the first quarter of last year.
The increase in earnings were due to a higher water gross margin generated from new rates authorized by the California Public Utilities Commission, partially offset by an increase in depreciation expense and property taxes.
Our Electric segment's earnings for the first quarter of 2021 were $0.07 per share as compared to $0.06 per share for the first quarter of 2020 due to an increase in electric rate and a decrease in interest expense.
Earnings from our Contracted Services segment increased $0.04 per share for the quarter.
This was due largely to an increase in construction activity as a result of timing differences of when work was performed as compared to the first quarter of last year, as well as lower expenses for legal and other outside services.
The timing differences were expected to reverse over the remainder of 2021.
We still expect the Contracted Services segment to contribute $0.45 to $0.49 per share for this year.
Our consolidated revenues for the first quarter increased by $8 million as compared to the same period in 2020.
Water revenues increased $3.6 million during the quarter, due to third year step increases for 2021 as a result of passing earnings tax.
The increase in Electric revenues was largely due to CPUC-approved rate increases effective January 1 this year, as well as an increase in usage as compared to the first quarter of 2020.
Contracted Services revenues for the quarter increased $3.8 million, largely due to an increase in construction activity, resulting from timing differences of when construction activity was performed as compared to the first quarter of last year.
In addition, there were increases in management fees due to the successful resolution of various economic price adjustments.
Turning to Slide 10.
Our water and electric supply costs were $22.6 million for the quarter, an increase of $1.3 million from the same period last year.
Any changes in supply costs for both the Water and Electric segments as compared to the adopted supply costs are tracked in balanced income.
Looking at total operating expenses other than supply costs.
Consolidated expenses increased $1.7 million as compared to the first quarter of 2020.
This was primarily due to an increase in construction costs at ASUS resulting from increased construction activity, partially offset by lower unplanned maintenance costs and the Water segment and an increasing administrative and general expense because of lower legal outside service costs.
Interest expense, net of interest income and other decreased by $2.5 million due primarily to gains on investments held for retirement benefit plan compared to losses incurred during the first quarter of last year as previously discussed.
Slide 11 shows the earnings per share bridge comparing the first quarter of 2021 with last year's first quarter.
Turning to liquidity on Slide 12.
Net cash provided by operating activity was $24.7 million as compared to $15.7 million in 2020.
This was largely due to recent improvement in cash flow from accounts receivable from utility customers, which were negatively impacted by the COVID-19 pandemic throughout 2020.
The timing of cash receipts and disbursements related to other working capital items also affected the change in net cash provided by operating activities.
Our regulated utility invested $35.8 million in company-funded capital projects during the quarter, and we estimate our full year 2021 company-funded capital expenditures to be $120 million to $135 million.
In addition, we intended to prepay the entire $28 million of Golden State Water's 9.56% notes issued in 1991 and due in 2021 later this month.
The early redemption will include a premium of 3% of par value or $840,000 if redeemed before May 15, 2022.
Golden State Water recovery redemption premiums in its embedded cost of capital was filed in the cost of capital proceedings, where the cost savings from redeeming high interest rate debt are passed down to customers.
At this time, we do not expect American States Water to issue additional equity.
I'd like to provide an update on our recent regulatory activity.
As you may know, the Water segment has an earnings test that must meet before implementing the second and third year step increases in the three-year rate cycle.
As we reported in our last call, we have timely invested in our capital projects and achieved capital spending consistent with the amount authorized by the CPUC.
As a result, rate increases are expected to generate an additional $11.1 million in the adopted water gross margin for 2021 as compared to the adopted water gross margin for 2020.
We continue to make prudent and timely capital investments.
Golden State Water filed its cost of capital application yesterday.
We requested a capital structure of 57% equity and 43% debt, which is our currently adopted capital structure, a return on equity of 10.5% and a return on rate base of 8.18%.
A final decision on this proceeding is scheduled for the fourth quarter of 2021 with an effective date of January 1, 2022.
As we discussed in our prior calls, Golden State Water filed a general rate case application for all its water regions and the general office last July.
This general rate case will determine new water rates for the years 2022 through 2024.
Among other things, Golden State Water requested capital budgets of approximately $450.6 million for the three-year rate cycle and another $11.4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed.
We are pleased that the administrative law judge assigned to this rate case has clarified that Golden State Water can continue using the water revenue adjustment mechanism or WRAM, and the modified cost balancing account, also known as the MCBA, until our next general rate case application covering the years 2025 through 2027.
In February 2021, the CPUC adopted a resolution that extended the existing emergency customer protections previously established by the CPUC through June 30, 2021, including the suspension of service disconnections for nonpayment of electric utility customers in response to the ongoing COVID-19 pandemic.
For water utilities, the moratorium on service disconnections was implemented in response to an order by the Governor of California, which we believe would require another action by the governor to cease the moratorium on service disconnections for our water customers.
It is expected that the CPUC will work with the governor's office to coordinate the lifting of the moratorium for water utility customers, consistent with the electric customers.
The CPUC's February resolution did extend the COVID-19-related memorandum accounts established by Golden State Water and by Bear Valley Electric Service to track incremental costs associated with complying with the resolution.
In addition, the resolution required utilities in California to file transition plans to address the eventual discontinuance of the emergency customer protections.
Golden State Water's memorandum account is being addressed in its pending water general rate case while Bear Valley Electric Service intends to include the memorandum account in its next general rate case application expected to be filed in 2022.
Golden State Water and Bear Valley Electric filed their transition plans with the PUC on April 1 this year.
Turning our attention to Slide 16.
This slide presents the growth in Golden State Water's rate base as authorized by the CPUC for 2018 through 2021.
The weighted average water rate base has grown from $752.2 million in 2018 to $980.4 million in 2021, compound annual growth rate of 9.2%.
The rate base amounts for 2021 do not include any rate recovery for advice letter projects.
Let's move on to ASUS on Slide 17.
ASUS' earnings contribution increased by $0.04 per share versus last year's first quarter to $0.12 per share, due to an overall increase in construction activity resulting from timing differences of when work was performed as compared to the first quarter of last year and lower legal fees and outside services expenses.
We reaffirm our projection that ASUS will contribute $0.45 to $0.49 per share for 2021.
Thus far, the COVID-19 pandemic has not had a material impact on ASUS' operations.
We continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work for improvement of the water and wastewater infrastructure at the military bases we serve.
In addition, completion of filings for economic price adjustments, requests for equitable adjustment, asset transfers, and contract modifications awarded for new projects provide ASUS with additional revenues and dollar margin.
The U.S. government is expected to release additional bases for bidding over the next several years.
We're actively involved in various stages of the proposal process at a number of bases currently considering privatization.
We continue to have a good relationship with the U.S. government as well as a strong history and experience in managing water and wastewater systems at bases, and believe we're well positioned to compete for these new contracts.
I'd like to turn our attention to dividends.
Each quarter, I'd like to remind everyone of our long and consistent history of dividend payments, dating back to 1931, in addition to our unbroken 66 year history of annual dividend increases, which places us in an exclusive group of companies on the New York Stock Exchange.
In the past decade, our Board of Directors has raised the dividend at a compound annual growth rate of 9.4%, in line with our dividend policy, providing a compound annual growth rate of more than 7% over the long term. | compname reports q1 earnings per share $0.52.
q1 earnings per share $0.52. | 1 |
Following our remarks, we will open the call for analyst questions.
Please limit yourself to one question with one follow up.
We describe these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics.
I hope everyone is staying safe and healthy.
We performed exceptionally well in the second quarter, and demand for our products was strong.
This resulted in our fourth consecutive quarter of double digit sales growth and sixth consecutive quarter of both margin expansion and double digit earnings-per-share growth.
I'm extremely proud of our entire team as we successfully navigated numerous supply chain challenges to enable this growth.
For the quarter, sales increased 24%.
Excluding acquisitions, divestitures and currency, sales increased 18%.
Operating profit increased 27% and margins expanded 60 basis points to 20.1%, principally due to strong volume leverage.
Earnings per share increased an outstanding 34%.
Our overall performance demonstrates the strength of our portfolio of lower ticket, repair and remodel products that are diversified across geographies and channels, serving both the consumer and the professional.
Turning to our plumbing segment, sales increased 48%, excluding currency, led by exceptional growth from our North American and international faucet and shower businesses and our spa business.
International plumbing grew 50% in the quarter, excluding currency, as Hansgrohe sales rebounded sharply in nearly all of its markets.
Strong operational execution and new products such as Hansgrohe's Rainfinity shower systems led to share gains in many of these markets.
New product introductions will continue as we launched the award-winning AXOR One collection in the second half of the year.
This collection was designed by Barber Osgerby, an award-winning internationally acclaimed London-based industrial design studio.
This continues Hansgrohe's legacy of combining leading contemporary design with innovative functionality.
North American plumbing posted strong growth of 47%, excluding currency, in the second quarter, led by approximately 75% growth at Watkins Wellness and robust double digit growth at Delta.
Delta faucet delivered another record quarter with growth across all channels, and particularly strength in the professionally oriented trade channel.
We continue to invest in new products in North American plumbing as well.
And two days ago, we introduced a Frank Lloyd Wright collection by Brizo that furthers the brand's commitment to distinctive design and innovative products.
Lastly, in plumbing, at the beginning of July, we acquired Steamist, another bolt-on acquisition for Delta.
Steamist is a leading manufacturer of residential steam bath products that will complement our strong trade and e-commerce product offering and is consistent with our bolt-on acquisition strategy.
In our decorative architectural segment, sales declined 5% against the healthy 8% comp for the second quarter of 2020.
While bath and cabinet hardware, lighting and propane grew in the quarter, demand moderated for DIY paint.
Material availability and other supply chain issues also impacted our overall coatings business, as nearly all of our resin suppliers were operating under a force majeure declaration during the second quarter.
Because of these issues, sell-through on our coatings products was better than sell-in and inventories in the channel were reduced during the quarter.
Due to lower than expected second quarter sales and our expectation that material availability issues will persist but slowly improve, we are lowering our DIY sales expectation from flat to down low-single digits for the full year.
However, with the acceleration we saw in our propane business in the quarter, we are incrementally more optimistic and are raising our expectations to low-double digit growth from high-single digit for the full year for our propane business.
For the decorative segment overall, we now expect growth to be in the range of 2% to 5% for the full year.
With respect to innovation in the decorative segment, we continue to invest in new products and are excited to launch a new high end line of paint in the third quarter at the Home Depot called Behr Dynasty for both DIY and pro painters.
Dynasty is our most durable, stain-resistant, scuff resistant, one-coat hide paint ever.
It's low VOC, Greenguard and LEED certified, fast drying and has an anti-microbial mildew-resistant paint finish.
This is yet another example of how our innovation teams continue to focus on the voice of the customer to deliver leading innovation and value for both the consumer and the professional.
Moving on to capital allocation.
We continued our aggressive share buyback during the quarter by repurchasing 6.6 million shares for $447 million.
As part of the accelerated share repurchase agreement that we executed during the quarter, we will additionally receive approximately 900,000 shares in July to complete that agreement, bringing our total shares repurchased year-to-date to 13.1 million shares for $750 million.
This is approximately 5% of our outstanding share account at the beginning of the year.
Underscoring our strong financial position and confidence in the future, we now anticipate deploying another $250 million in the second half of the year for share repurchases and acquisitions for a full year total of approximately $1 billion.
Finally, like I did last quarter, let me give you an update on what we are experiencing with inflation and supply chain tightness.
We continue to see escalating inflation across most of our cost basket, including freight, resins, TiO2 and packaging.
Inbound freight container costs nearly tripled during the quarter.
We now expect our all-in cost inflation to be in the high-single digit range for the full year for both our plumbing and decorative segments, with low-double digit inflation in the second half of the year.
Inflation in coatings will likely be in the mid-teens later in the fourth quarter.
To mitigate this inflation, we have secured price increases across both segments, and are taking further pricing action across our business to address these continued cost escalations.
We're also working with our suppliers, customers and internal teams to implement further productivity measures to help offset these costs.
Despite the increased inflation, we still expect to achieve price/cost neutrality by year-end.
While cost inflation has clearly been an issue, material availability has also impacted our business.
Our teams have done a tremendous job of qualifying new suppliers, developing material substitutions, and shifting production to adapt to this dynamic environment and to serve our customers.
However, these raw material constraints have limited our ability to build inventory of many of our products and the channels that we serve.
We anticipate material availability to slowly improve in the second half of the year, and we expect to replenish inventory to the appropriate levels over time.
The demand for our products remains strong.
And with an improved outlook for plumbing based on the continued strength of both our North American and international operations, we are increasing our full year expectations of earnings per share to be in the range of $3.65 to $3.75 per share, up from our previous expectations of $3.50 to $3.70.
As Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other one-time items.
Turning to Slide 7.
We delivered another exceptional quarter as we capitalized on strong consumer demand, resulting in continued growth and increased backlogs.
As a result, sales increased 24% with currency and net acquisitions, each contributing 3% to growth.
In local currency, North American sales increased 15% or 12%, excluding acquisitions.
Strong volume growth in North American faucets, showers and spas led this outstanding performance.
In local currency, international sales increased a robust 50% or 49%, excluding acquisitions and divestitures.
Gross margin was 36.3% in the quarter, up 50 basis points as we leverage the strong volume growth.
Our SG&A as a percentage of sales improved 10 basis points to 16.2% due to our operating leverage.
During the quarter, certain expenses such as headcount, marketing, and travel and entertainment increased as planned.
We expect SG&A as a percent of sales to increase in the third and fourth quarters, as these costs normalize.
We delivered strong second quarter operating profit of $438 million, up $94 million or 27% from last year, with operating margins expanding 60 basis points to 20.1%.
Our earnings per share was $1.14 in the quarter, a 34% increase compared to the second quarter of 2020, due to volume leverage, lower interest expense and lower share count.
Turning to Slide 8.
Plumbing growth accelerated in the quarter with sales up 53%.
Currency contributed 5% to this growth and acquisitions, net of divestitures, contributed another 4%.
North American sales increased 47% in local currency or 41%, excluding acquisitions.
Delta led this outstanding performance, delivering another quarter of robust double digit growth.
With a strong brand recognition and market leadership, Delta continues to drive strong consumer demand across all its product categories and channels.
Watkins Wellness also significantly contributed to growth in the quarter with both demand and our backlog remained strong.
International plumbing sales increased 50% in local currency or 49%, excluding acquisitions and divestitures.
Hansgrohe delivered robust growth as demand continues to improve across Europe and numerous other countries.
Hansgrohe's key markets of Germany, China, UK and France, all grew strong double digits in the quarter.
Segment operating margins expanded 230 basis points to 20.6% in the quarter, with operating profit of $274 million, up $115 million or 72%.
The strong performance was driven by incremental volume, favorable mix and cost productivity initiatives, partially offset by an unfavorable price/cost relationship and higher spend on items such as travel and entertainment, marketing and growth initiatives.
During the quarter, we also completed the divestiture of HUPPE, a small shower enclosure business based in Germany.
HUPPE sales were approximately EUR70 million in 2020.
This transaction closed on May 31, and net proceeds were not material.
Given our second quarter results and current demand trends, we now expect plumbing segment's sales growth for 2021 to be in the 22% to 24% range, up from our previous guidance of 15% to 18%.
Finally, due to our improved sales outlook, we are increasing our full year margin expectations to approximately 18.5%, up from our previous guide of approximately 18%.
Turning to Slide 9.
Decorative architectural declined 5% for the second quarter and was 6%, excluding the benefit from acquisitions.
DIY paint business declined double digits in the quarter against the healthy high-teens comp due to moderating demand and raw material supply tightness as resin plants affected by storms in the Texas Gulf Coast region in the first quarter continued to face production challenges.
We expect these raw material headwinds to persist in the third quarter and now anticipate our DIY paint business to be down low-single digits for the full year.
To help mitigate these challenges, we are working with our existing suppliers and qualifying new sources for materials to meet the demand of our customers which remains strong.
Our PRO paint business delivered strong double digits growth in the quarter, as consumers are increasingly willing to allow professional paint contractors in their homes.
We expect demand in this channel to remain strong and now anticipate low-double digit growth for the PRO paint business for the full year, up from our previous expectation of high-single digits as PRO paint contractors' order books continue to grow.
Our builders' hardware and lighting businesses each delivered growth in the quarter, as they continue to capitalize on increased consumer demand.
Segment operating margins were 22.1% and operating profit in the quarter was $188 million due to lower volume, partially offset by cost productivity initiatives.
For full year 2021, we now expect decorative architectural segment's sales growth will be in the range of 2% to 5%, down from 4% to 9% due to lower than expected second quarter sales and persistent raw material constraints.
We continue to expect segment operating margins of approximately 19% as productivity initiatives in pricing help offset higher input costs.
Turning to Side 10.
Our balance sheet is strong with net debt to EBITDA at 1.3x.
We ended the quarter with approximately $1.8 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver.
Working capital as a percent of sales, including our recent acquisitions, was 16.9%, an improvement of 120 basis points over prior year.
As we discussed last quarter, we terminated and annuitized our U.S. qualified defined benefit plans in the second quarter and had an approximate $100 million final cash contribution to the plans to complete this activity.
This removes approximately $140 million of pension liabilities from our balance sheet, and it will benefit our free cash flow by approximately $50 million through reduced cash contributions, starting in 2022.
Also, we received approximately $166 million from the redemption of our preferred stock related to the recent sale of our former cabinet business.
Finally, as Keith mentioned earlier, as of today, we repurchased 13.1 million shares in 2021 for $750 million.
We expect to deploy an additional $250 million for share repurchases or acquisitions for the remainder of this year.
Collectively, these actions demonstrate our confidence in our business and our commitment and ability to further strengthen our balance sheet, while aggressively returning capital to our shareholders.
Turning to our full year guidance, we have summarized our updated expectations for 2021 on Slide 11.
Based on our second quarter performance and continued robust demand, we now anticipate overall sales growth of 14% to 16%, up from 10% to 14% with operating margins of approximately 17.5%, up from 17%.
Lastly, as Keith mentioned earlier, our updated 2021 earnings per share estimate range of $3.65 to $3.75 represents 19% earnings per share growth at the midpoint of the range.
This assumes the 252 million average diluted share count for the full year.
Additional modeling assumptions for 2021 can be found on Slide 14 in earnings deck.
We had an outstanding second quarter driven by our strong brands, our innovation pipelines and most of all, our people, as demonstrated by outstanding execution by our supply chain teams.
Our strong performance demonstrates the strength of Masco's balanced and diversified business.
Masco is a broad portfolio of lower ticket, repair and remodel-oriented home improvement products.
Our products are broadly distributed across geographies and channels for both consumers and professionals.
Additionally, our markets remain strong, and we expect home remodeling expenditures to drive growth in 2022.
The fundamentals of our repair and remodel business are strong, with year-over-year home price appreciation of over 15% in May and existing home sales up over 23%.
Both metrics have a strong correlation with our sales on a lag basis.
And the consumer is strong, with nearly $2 trillion in savings and an increased desire to invest in their homes.
Lastly, we continue to invest in our business and are well positioned for long-term growth.
We are bringing new, innovative products to market, fueling our growth and expanding our leading market share.
And with our leading margins and strong free cash flow, we will continue to deploy capital to reinvesting in our business, acquiring complementary bolt-on companies and returning cash to shareholders in the form of dividends and share repurchases all to drive long-term shareholder value.
With that, I'll now open up the call to questions. | q1 adjusted earnings per share $0.89 from continuing operations.
anticipate 2021 earnings per share in range of $1.52 - $1.72, and on an adjusted basis, in range of $3.50 - $3.70. | 0 |
slides for today's call are posted on our website, and we invite you to follow along.
Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, February 24, 2021.
Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings.
The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in today's call other than through filings made concerning this reporting period.
In addition, today's discussion will include references to non-GAAP measures.
Clean Harbors beliefs that such information provides an additional measurement and consistent historical comparison of its performance.
Starting on slide three.
We concluded 2020 with a strong fourth quarter.
Our Environmental Services segment outperformed our expectations, driven by a combination of factors, including the level of high-value waste in our disposal network, greater-than-expected COVID decontamination work and ongoing cost controls.
Total fourth quarter revenues were in line with expectations as our Safety-Kleen business remained constrained by the effects of the pandemic.
Adjusted EBITDA in Q4 increased to $136.1 million, which included $5.6 million in benefits from government programs, primarily from Canada.
For the full year, adjusted EBITDA grew by 3% to $555.3 million, with annual margins growing to 17.7%.
We generated record adjusted free cash flow of $265 million, a noteworthy accomplishment considering the economic disruption caused by the pandemic.
Without question, the success we achieved in 2020 is a direct result of the dedication, flexibility and perseverance of our exceptional team.
2020 was a challenging year on many levels.
Turning to our segment results, beginning with Environmental Services on slide four.
Revenue, while down year-over-year due to a market -- due to market conditions, was up on a sequential basis.
Typically, Q4 is a seasonally weaker quarter for us, but the $18 million increase from Q3 is evidence that many of our markets are on the road to recovery.
We also saw strong disposal and recycling volumes to close out the year.
Adjusted EBITDA grew by 13% from a year ago, with margins up nearly 400 basis points.
This was driven by a combination of business mix, cost savings and $3.9 million in benefits from government assistance programs in Q4.
Revenue from our COVID-19 decon work totaled $31 million in Q4.
For the full year, our team completed nearly 14,000 responses and was an essential resourcing and protecting our customers' people and facilities.
In Q4, we benefited from a record level of drums collected as well as some high-value complex waste streams we received into our network.
This resulted in an average price per pound increase of 16% from the year earlier period when we saw more bulk streams.
Incineration utilization in the quarter was 84% due to a higher-than-expected number of maintenance days.
Landfill volumes were down 37% in the quarter as the lack of remediation and waste projects opportunities intensified with the resurgence of the pandemic.
However, our strong base landfill business largely offset that decline with a 42% increase in our average price per ton.
Moving to slide five.
Safety-Kleen revenue was down 15% from a year ago, but was flat sequentially as the ongoing recovery offset normal year-end seasonality.
Vehicles miles driven had been on a nice upward trajectory throughout the summer, but plateaued a bit in Q4, with the COVID-19 surge resulting in some new local restrictions in areas such as California, and all across Canada.
Most of our core services in the SK branch business were down year-over-year as a result, but flat from Q3.
Safety-Kleen's adjusted EBITDA declined 21%, mostly due to the lower revenue and business mix.
This decline was partly offset by our cost reductions initiatives as well as the government assistance programs that provided $1.4 million of benefits in Q4.
Waste oil collections were 49 -- no, excuse me, were 49 million gallons in Q4 with a healthy average charge for oil, given the lack of available outlets for generators.
On the SK oil side, we saw typical seasonal softening of the demand for base oil and lube products.
However, due to lower production levels in the traditional refinery space, available base oil and lubricant supply shrank in the quarter, resulting in a rising price environment that should benefit us here in 2021.
Percentages of blended products and direct volumes came as expected and consistent with prior year.
Turning to slide six.
Looking back at 2020 from a capital allocation standpoint, our strategy due to the pandemic was focused on capital preservation, which served us well.
capex in Q4 was slightly higher than the prior year, but our full year spend was down from 2019.
Moving forward, we expect to focus on internal growth capital on our plants and other assets that we believe generate the best returns.
From an M&A standpoint, our opportunity pipeline is healthy, as businesses emerge from the pandemic, and we gain a clear light -- line of sight on our end markets.
We prudently increased our level of share repurchases in Q4 and had an active repurchase program for the year, and Mike will provide the detail on our buyback shortly.
Looking ahead, we're beginning 2021 in excellent shape, both operationally and financially.
The markets we serve are on an upward trajectory.
For our lines of business that have been held back by the pandemic, such as waste projects and remediation, we expect a measurable recovery this year.
In 2021, we expect to pursue growth opportunities through our core suite of offerings and by capitalizing on market conditions.
And Mike is going to talk about our new sustainability report in a moment.
But let me say that we expect to take full advantage of the growing market acceptance of our sustainable offerings in 2021 and beyond.
We provide a broad array of green solutions that go well beyond our role as the largest collector and recycler of waste oil.
Within Environmental Services, we entered the year with higher deferred revenue and given the availability of waste in the marketplace, expect strong incineration performance in 2021.
We anticipate our offerings within Industrial Services and Tech services to grow from last year.
We expect Field Services to generate $25 million to $35 million of COVID-related revenues in 2021.
Within Safety-Kleen, we remain below normal demand levels as we kick off 2021.
However, later this year, we anticipate a steady recovery in the SK branch business.
For Safety-Kleen Oil, our rerefineries are producing well.
And as I mentioned, pricing for both base oil and blended products is favorable to start the year.
We will continue to actively manage our charge for oil rates, while focusing on growing collection volumes to supply our rerefinery network and take advantage of market conditions for recycled fuel oil.
As I look at 2021, the underlying dynamics in both our operating segments remain positive, and we expect a strong sales growth year with healthy free cash flow as a result.
I anticipate another great year for the company in 2021.
Before I take you through the financials, let me comment briefly on our first ever sustainability report, which is available on the IR section of our website.
We're proud of this document, which we created based on the Sustainability Accounting Standards Board framework.
The document highlights the integral role that sustainability plays in our business decisions as well as our environmental, social and government goals and benchmarks for 2030.
The At a Glance page of the report shown on slide eight is an overview of some of the -- of our ESG benchmarks.
I want to reiterate the point that Alan made about ESG and sustainability as foundational to our business.
For many customers, we are their sustainability solution.
When companies generate potentially harmful byproducts, they call Clean Harbors to safely remove and dispose of them.
When they accidentally release chemicals into the environment, they call Clean Harbors to help clean it up.
When they have waste oil, solvents, precious metals or paint, they call Clean Harbors to recycle.
The new report also highlights the vital role our employees play in our performance.
We strive to create a diverse and inclusive culture, one that values the unique backgrounds, perspectives and experiences of our people.
We are committed to building a sustainable culture through training programs that enable our employees to have -- to enjoy long and successful careers at Clean Harbors.
I encourage everyone to take a look through the report.
It provides the detailed picture of how closely intertwined sustainability is with our entire organization, culture and business model.
We ended 2020 on a high note with another strong financial performance.
If you asked me back in April, when the pandemic began, what level of revenue, adjusted EBITDA and adjusted free cash flow we would have delivered this year, these would have not been the numbers.
Our Q4 adjusted EBITDA results exceeded the guidance we provided in November.
Revenue declined 9% year-over-year, but was up in the third quarter despite Q4 typically being a sequentially lower quarter due to seasonality.
Our efforts to control costs and grow our highest margin businesses, combined with some further government program assistance, resulted in 180 basis point improvement in gross margin.
Adjusted EBITDA grew 3% to $136.1 million.
Our Q4 adjusted EBITDA margin rising 190 basis points from last year speaks to the effectiveness of the actions we have taken this year.
We have improved our adjusted EBITDA margins on a year-over-year basis for 12 consecutive quarters.
For the full year, our adjusted EBITDA margins grew 17.7% -- grew to 17.7%.
If you excluded the $42.3 million of government assistance, those margins would have been 16.3% or a 50 basis point improvement from 2019.
SG&A total costs were down in the quarter based on our lower revenue and cost controls.
But on a margin basis, we're essentially flat.
For the full year, SG&A as a percentage of revenue was 14.3%, which beat our target of 14.5%.
For 2021, using the midpoint of our guidance range, we would expect SG&A to be up in absolute dollars from the prior year and essentially flat on a percentage basis.
Depreciation and amortization in Q4 was down to $71.4 million.
For the full year, our depreciation and amortization was $292.9 million, which was within our expected range.
For 2021, we expect depreciation and amortization in the range of $280 million to $290 million.
Income from operations in Q4 increased by 18%, reflecting a higher gross profit, cost controls and mix of revenue.
For the full year, our income from operations rose 10% to $251.3 million.
Turning to slide 10.
We conclude the year with our balance sheet in terrific shape.
Cash and short-term marketable securities at December 31 were $571 million, up nearly $40 million from the end of Q3.
Our debt was at $1.56 billion at year-end, with leverage on a net debt basis at 1.8 times, our lowest level in a decade.
Our weighted average cost of debt is 4.2%, with a healthy mix -- healthy blend of fixed and variable debt.
With the recent revolver we put in place, we have no debt maturities until 2024.
Turning to cash flows on slide 11.
Cash from operations in Q4 was $113.2 million.
capex, net of disposals, was up slightly to $43.6 million.
That combination resulted in adjusted free cash flow in Q4 of $69.6 million.
For the year, we hit our net capex target, excluding the purchase of our headquarters, with $165.6 million of spend.
That helped us deliver record annual adjusted free cash flow of $265 million, which is toward the high end of our guidance range.
For 2021, we expect net capex in the range of $185 million to $205 million, which is higher than prior year.
Our net capex as a percentage of revenue ranks as one of the lowest among our specialty waste peers.
During the quarter, we increased the level of our share repurchases as we bought back 500,000 shares at an average price just under $71 for a total buyback of $35 million.
In 2020, we repurchased slightly over 1.2 million shares of our authorized $600 million share repurchase program, we have just under $210 million remaining.
Moving to guidance on slide 12.
Based on our 2020 results and current market conditions, we expect 2021 adjusted EBITDA in the range of $545 million to $585 million.
That amount in 2021 should be about $16 million to $18 million compared with $18.5 million in 2020.
Looking at our guidance from a quarterly perspective, we expect Q1 adjusted EBITDA using our revised definition to be 5% to 10% below prior year levels given the record Q1 results we posted in 2020 prior to the pandemic taking hold and the deep freeze we are experiencing in the Midwest and the Gulf here in February.
Here is how our full year 2021 guidance translates from a segment perspective.
In Environmental Services, we expect adjusted EBITDA to decline in the mid-single digits on a percentage basis from 2020.
We expect to benefit from growth and profitability within incineration, a rebound in the majority of our service businesses, along with our comprehensive cost measures, but not enough to fully offset the decline in high-margin decontamination work as well as the large contribution from government assistance programs in 2020 that totaled $27.1 million in this segment.
For Safety-Kleen, we anticipate adjusted EBITDA to increase in the mid- to high single digits on a percentage basis from 2020.
Despite the fact this segment received $12.2 million in government assistance last year.
We expect a mild rebound in the branch business weighted toward the second half of the year post vaccination.
At the same time, we expect SK Oil to deliver a vastly improved performance in 2020, given the current base oil industry supply dynamics as well as our ability to aggressively manage our rerefining spread and collect more gallons of waste oil.
In our Corporate segment, we expect negative adjusted EBITDA to be flat with 2020, which includes $3 million of governance assistance.
For 2021, our EBITDA guidance assumes receiving $2 million to $3 million of Canadian government assistance.
We are not assuming any additional CARES money in 2021 at this time, but we are reviewing the new program.
Based on our EBITDA guidance and working capital assumptions, we now expect 2021 adjusted free cash flow in the range of $215 million to $255 million.
We believe this puts us in a great position to execute on our capital allocation strategy.
In summary, although the pandemic is still with us, we entered the new year with strong momentum in multiple service businesses and most importantly, across our facilities network.
Industrial production in the U.S. is back on the rise by all indications, particularly in the chemical space.
The Chemical Activity Barometer, published by the American Chemistry Council, show that industry levels have been climbing sequentially from May to January, and January was the first time in 10 months that the activity levels were above the prior year, which is a great sign for us.
In addition, our rerefinery business is off to a great start, given the current market conditions.
We expect some of the project and turnaround work that was pushed out in 2020 to benefit us this year and the overall sales pipeline remains strong.
While we are seeing COVID cases decline sharply in recent weeks, we anticipate continued opportunities for near-term decontamination work and disposal of vaccination waste volumes.
Overall, the number of favorable industry and regulatory trends should support our business moving forward.
And while we don't give specific revenue guidance, we certainly expect aline growth in 2021. | q3 adjusted earnings per share $0.90.
q3 earnings per share $0.99. | 0 |
I'm Rubun Dey, Head of Investor Relations.
And with me to talk about our business and financial results are Horacio Rozanski, our President and Chief Executive Officer; and Lloyd Howell, Executive Vice President, Chief Financial Officer and Treasurer.
During todays call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for our investors.
We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our first quarter fiscal year 2022 slides.
We are now on slide four.
As always, Lloyd and I are pleased to share our latest financial results and to represent the great work of the more than 28,000 people of Booz Allen.
Our industry, in fact, the entire economy is transitioning to more in-person work as we recover from the COVID-19 pandemic.
And at Booz Allen, we are excited about the opportunities this presents to our people and clients.
After my remarks, I will give Lloyd the floor to cover the financials in more depth.
Let me start with an overview of the quarter.
On our last call in late May, we talked about our near and midterm priorities and our fiscal year 2022 outlook.
We said we expect another year of significant revenue growth with strong earnings growth, continued cash generation and strategic deployment of capital.
At the same time, we noted that the pattern for the year would likely look different from recent years with lower revenue growth in the first half and significant acceleration in the second half.
This pattern is due to several factors, including the recovery from the pandemic, the implementation of a new financial system and our acquisition of Liberty IT Solutions.
As such, we are pleased to reaffirm our guidance for the full fiscal year.
Operationally, we continue to move back to pre-pandemic business rhythms.
In our Defense and Civil businesses, we are aligned to our governments top priorities, have a robust pipeline and several great wins in the quarter.
These two parts of our portfolio represent three quarters of our revenue, and they continue to deliver solid growth.
In our intelligence business, hiring is going well, and the portfolio reshaping we have done has yielded some important wins.
The first quarter decline in revenue was largely due to low billable expenses, and we continue to expect a growth year in this business.
Global Commercial represents 2% of our revenue.
Continued declines are tied to our portfolio reshaping and the impact of the pandemic.
We do expect to see year-over-year growth in the second half of the fiscal year.
Taken together, our entire portfolio of business produced low single-digit revenue growth year-over-year, as we expected.
The relatively slow growth was driven primarily by a return to more normal staff utilization and PTO trends compared to the first quarter of first quarter of last fiscal year, when the country was largely in lockdown.
At the bottom line, adjusted EBITDA, adjusted EBITDA margin and adjusted diluted earnings per share were ahead of our expectations.
Book-to-bill for the quarter was also strong.
And we are excited about the quality mission center work we are winning.
Cash from operations came in light, primarily driven by one-time costs related to the Liberty transaction.
Lloyd will discuss all the numbers in detail in a few minutes.
As you may remember, on our last call, we spoke about a set of near and midterm priorities that are critical to our success.
The main reason for our optimism about the year is the great progress we have made to-date.
Let me go through them briefly.
Our top priority is recruiting.
And in the first quarter, we began to see results from our laser focus in this area.
We are seeing sequential month-over-month growth and believe momentum will build over the remainder of the year.
Second, the reshaping of our intelligence and global commercial portfolios continues.
We believe the tactical and strategic moves we are making will yield year-over-year growth.
Third, we are very pleased to have completed the Liberty acquisition in mid-June.
Our teams are working side-by-side and everything we have seen since the closing confirms that this was a great deal for Booz Allen and for Liberty.
We are very excited about the strategic opportunities we have to augment each others strengths.
Fourth, the NextGen financial system successfully launched on April 1st and is running very well to the great credit of the team.
After more than three years of preparation, launching the system and executing the first quarter closed without any major disruptions were critical milestones.
And fifth, we continue to invest in our people and capabilities as we carefully manage the transition to a post-COVID environment.
Consistent with that creating the best possible experience for our talent is a constant area of focus for us.
In that vein, I would like to take a few minutes today to share with you how Booz Allen is thinking about the future of work.
We are cautiously optimistic that the worst of the pandemic is behind us in the United States and most places that Booz Allen operates.
As such, we are preparing to fully reopen our offices the day after Labor Day, provided that health and safety allow it.
As we move toward that reopening, we intend to take the best of what we have learned over the past 16-months and create ways of working that better serve our talent, our clients and the critical missions we are part of.
Going forward, our workforce will have three operating models.
First, we have always had a small group of employees who are purely remote, and we expect that to continue and for that group to remain relatively small.
Second, we have a group of people who work full time at government and our facilities.
And that too will continue, although we expect it to proportionately decline from historical levels.
Our clients have shown a great deal of creativity over the course of the pandemic.
And based on this experience, many are interested in flexible models that better serve their missions while reducing the number of people who are 100% on-site.
The third workforce model is a hybrid.
And we expect overtime for this to be a majority of our people.
Employees in this group will spend less time in Booz Allen and client offices than previously and instead have a mix of telework and in-person collaboration.
This gives people much more flexibility in their personal and family lives while at the same time preserving our culture and the close connection to clients, our firm and each other.
What is most exciting about the future of work conversations we have been having internally and externally is the opportunity everyone sees for greater flexibility.
In fact, there is an expectation that we need to work in new ways because the technology allows it and the competition for talent simply requires it.
To succeed, today and in the future, employers, whether they are in the government or the private sector must foster a workforce that is more distributed, more digital and certainly more diverse.
Booz Allen is a leader in this area, working with our government clients to help them rethink and reshape the way they accomplish critical missions.
Many clients believe that the reality of todays world and the needs of the next decade demand fundamental change in how federal agencies execute their business on behalf of all of us.
And consistent with who we are we will lean into those change opportunities proactively.
And so as we look toward the fall and beyond, our firm has a lot to be optimistic and excited about.
We are working very hard to take care of our people, build our business, serve clients and position Booz Allen for the future.
As always, our overriding goal is to continue to create near and long-term value for our investors and all our stakeholders.
And with that Lloyd, over to you.
Before I jump into the financials, I want to note that this has been a truly busy quarter for us.
A few of the major highlights included closing our acquisition of Liberty and launching the integration process, replenishing our balance sheet through the bond market.
Investing in latent II, a highly strategic, rapidly growing company in the AI ML space.
Doubling down on our recruiting and hiring efforts with promising results.
Implementing our NextGen financial system.
And, of course, engaging across the firm on our strategic review and our next investment thesis.
We are energized by the pace of activity and look forward to sharing more in the months to come.
Now on to first quarter performance.
As we noted in May, we expected some early year choppiness in our top-line results as we move into a post-pandemic operating rhythm.
However, we were able to maintain strong performance at the adjusted EBITDA and ADEPS line through disciplined cost management.
Additionally, we are encouraged by our solid bookings performance as well as our pace of recruiting.
Operating cash flow was light of our initial forecast, but we view most of the moving pieces as either one-time or transitory.
Altogether, today s results are in line with the expectations we laid out last quarter, and we remain confident in our plan for the full fiscal year.
At the top-line, in the first quarter, revenue increased 1.7% year-over-year to $2 billion.
Liberty contributed approximately $16 million to revenue growth.
Revenue excluding billable expenses grew 1.9% to $1.4 billion.
Revenue growth was driven by solid operational performance, primarily offset by higher-than-normal staff utilization in the comparable prior year period.
Top-line performance for the quarter was in line with our expectations.
As a reminder, we forecast constrained low single-digit top-line growth in the first half of the year, driven by four dynamics: First, the need to ramp up on contracts and hiring; second, a more normalized utilization rate in the first half of this fiscal year compared to the high staff utilization in the first half of fiscal year 2021, which we believe to be worth roughly 300 basis points of growth.
Third, high PTO balances coming into the fiscal year with an expectation that our employees will take more time off; and fourth, minor timing differences in our costing of labor, resulting from implementation of our new financial system.
As we noted before, we expect growth to accelerate throughout the year.
Now let me step through performance at the market level.
In defense, revenue grew 4.4%, with strong growth in revenue ex billable expenses, partially offset by significant materials purchases in the prior year period.
In Civil, revenue grew 6%, led by strong performance in our health business and the addition of Liberty.
We expect momentum to build throughout the year.
As more administration priorities ramp up and we continue to capture opportunities, building on our strong win rates.
Revenue from our intelligence business declined 6.4% this quarter.
Revenue ex-billable expenses grew in line with our expectations, but were more than offset at the top-line by lower billable expenses.
We are excited by a number of critical recent wins in the portfolio.
And we believe we have the right leadership and strategic direction in place to execute a growth year.
Lastly, revenue in Global Commercial declined 27.4% compared to the prior year quarter.
We anticipate year-over-year growth in the second half, an outcome that is largely dependent on hiring additional talent to capitalize on growing demand as well as moving past challenging prior year comparables in international.
Our book-to-bill for the quarter was 1.3 times, while our last 12-months book-to-bill was 1.2 times.
Total backlog grew 16.5% year-over-year, including Liberty, resulting in backlog of $26.8 billion, a new record.
Funded backlog grew 1.6% to $3.5 billion.
Unfunded backlog grew 91% to $9 billion and price options declined 3.7% and to $14.3 billion.
We are proud of our bookings performance in the first quarter, coming off a seasonally strong fourth quarter results.
We believe that the stability of our longer-term book-to-bill demonstrates continued strong demand for our services as well as the high value placed on our understanding of client missions.
Pivoting to headcount as of June 30th, we had 28,558 employees, up by 1,177 year-over-year or 4.3%.
Accelerating headcount growth to meet robust demand for our services is our top priority for the year.
We are encouraged by how we closed the first quarter, and we expect to see progress throughout the year.
Moving to the bottom line, adjusted EBITDA for the quarter was $238 million, up 11.8% from the prior year period.
This increase was driven primarily by our ability to again build for fee within our intelligence business as well as the timing of unallowable expenses within the fiscal year.
Those items, along with continued low billable expenses as a percentage of revenue pushed our adjusted EBITDA margin to 12%.
We expect billable expenses and unallowable spend to pick up as we move throughout the year.
First quarter net income decreased 29% year-over-year to $92 million, primarily impacted by Liberty transaction-related expenses of approximately $67 million.
Adjusted net income was $146 million, up 12.3% from the prior year period, primarily driven by the same factors driving higher adjusted EBITDA.
Diluted earnings per share declined 27% to $0.67 from $0.92 in the prior year period.
And adjusted diluted earnings per share increased 15% to $1.07 from $0.93.
These increases to our non-GAAP metrics which exclude the impact of the transaction-related costs noted were primarily driven by operating performance and a lower share count in this quarter due to our share repurchase program.
Turning to cash, cash flow from operations was negative $11 million in the first quarter.
This decline was driven primarily by lower collections largely attributable to timing around receivables associated with the integration of our new enterprise financial system.
As our employees and clients adapt to the new invoicing system, we expect to return to a more typical collections cadence over the coming months.
Operating cash flow was negatively impacted by approximately $67 million of transaction costs paid in the first quarter, which includes approximately $56 million of cash payment at closing of the Liberty acquisition.
These cash payments represent a reallocation of a portion of the overall $725 million purchase price prior to adjustments from investing cash flows into operating cash flows.
Capital expenditures for the quarter were $9 million, down $11 million from the prior year period, driven primarily by lower facility expenses.
We still expect capital expenditures to land within our forecast range for the year.
During the quarter, we issued $500 million of 4% senior notes due 2029.
Additionally, we extended the maturity of our Term Loan A and revolving credit facility to 2026 and increased the size of our revolver by $500 million to $1 billion of total capacity.
Those moves are in support of our disciplined capital deployment strategy.
We will continue to use our balance sheet as a strategic asset.
During the quarter, we paid out $52 million for our quarterly dividend and repurchased $111 million worth of shares at an average price of $83.91 per share.
In total, including the close of the Liberty acquisition, we deployed $889 million.
Today, we are announcing that our Board has approved a regular dividend of $0.37 per share, payable on August 31st to stockholders of record on August 16th.
As our actions this quarter demonstrate, we remain committed to preserving and maximizing shareholder value through a disciplined balanced capital allocation posture.
Please move to slide seven.
Today, we are reaffirming our fiscal year 2022 guidance.
As we discussed last quarter, the first half, second half dynamics we laid out are still the guiding framework for our full-year growth expectations.
We expect total revenue growth to be between 7% and 10%, inclusive of Liberty.
Our contract and hiring ramp will determine where we land within that range.
We continue to expect revenue growth to accelerate throughout the year.
We expect adjusted EBITDA margin in the mid-10% range.
We expect adjusted diluted earnings per share to be between $4.10 and $4.30 based on an effective tax rate of 22% to 24% and 134 million to 137 million weighted average shares outstanding.
ADEPS guidance is inclusive of both Liberty and incremental interest expense from our $500 million bond offering.
We expect operating cash flow to grow to $800 million to $850 million, inclusive of the aforementioned $56 million of cash payments related to the Liberty transaction.
Due to these one-time payments, we expect to end the year at the lower end of our range, with partial offset through a combination of working capital management and operational performance.
And finally, we expect capex in the $80 million to $100 million range.
In summary, we are starting off the year just as we expected and look forward to a great year.
We were ambitious in trying to execute both a major acquisition and a companywide rollover of our financial systems in the same quarter.
With that, Rubun, let s open the line to questions.
Operator, please open the line. | booz allen hamilton qtrly earnings per share $0.67.
qtrly earnings per share $0.67.
qtrly adjusted earnings per share $1.07.
reaffirms fiscal 2022 guidance. | 1 |
There are risks, uncertainties and other factors that may cause the company's actual future performance to be materially different from that stated or implied by any comment that we may make during today's conference call.
This document is available on our website or through the SEC at sec.gov.
Also during the call, we'll present both GAAP and non-GAAP financial measures.
Allow me to start off by making a few remarks on the ongoing pandemics impact on the shipping industry.
I'll then discuss how we are doing on executing the plan we outlined on the first quarter call and provide some updates to our outlook for the remainder of 2020.
On our two most recent earnings calls, I mentioned the critical role the international travel infrastructure plays and moving our mariners around the world as they embark and disembark our vessels.
There are over 50,000 ships around the world of all different types and today an estimated 200,000 plus mariners are stranded on vessels and in need of repatriation.
Shipping moves 80% of the global commerce and as an essential part of keeping the global economic recovery going.
So my call to action is this, please join us in supporting the formal recognition of these individuals as key workers.
This would exempt mariners from travel restrictions and enable them to travel to and from ships.
Groups like the International Chamber of Shipping, the International Maritime Organization, the International Labor Organization and the International Transport Workers Federation are all championing this issue.
To the extent that you can help us cause, I urge you to do so.
When we last spoke, I outlined our revised outlook for 2020 and our performance in the second quarter was consistent with that revised outlook.
We stated last quarter that our revised estimated revenue for 2020 was $395 million and the estimated cash operating margin would be 35%.
We now anticipate full year revenue to be approximately $390 million, which is down $5 million from what we estimated as the full-year revenue on the last call.
We still anticipate cash operating margins of 35%, which would result in cash from core operations of $136 million for the year.
Further, we budgeted $20 million for frictional costs associated with the pandemic, and we still see this as the annual impact of the crisis.
This is the increased cost of travel and salaries, cost of quarantine mariners, the cost of fuel to transit vessels coming off hire to their layup locations, and the incremental cost of those vessels being in a layup.
This $20 million of cost gets us down to cash flow of $117 million.
General and administrative expense is now anticipated to be $77 million for the year, a $4 million improvement from $81 million we forecasted on the earlier call and that gets us to $40 million of cash flow.
Vessel disposals of $40 million less dry-dock expenditures of $36 million gets us another positive $4 million.
We are still anticipating a liquidation of working capital, net of taxes and other costs of $21 million for the year.
So our current 2020 outlook compared to the outlook on the last call has cash operating margin down approximately $2 million, dry-dock expenditures are up $3 million, and general and administrative expenses are down $4 million, down $1 million overall to $64 million of free cash flow for the year and consistent with what we laid out on the first quarter call.
In light of the decrease in offshore vessel activity in our revised forecast of the slope of the recovery in the industry, we reassessed the fleet and certain receivables to us from our joint ventures in Africa.
This reassessment resulted in impairments and other charges that totaled $111.5 million for the quarter.
The vessel impairments of $55.5 million reflects two components.
The first relates to moving into the asset held for sale category 22 additional vessels were the revised forecasted day rates and utilization, resulted in a present value from continuing to operate those vessels that was lower than their current disposal value.
So we move them into the asset held for sale category and mark them to their anticipated net realizable value.
Further, in addition to the adjustment in book value for those 22 vessels, the second component is a similar mark-to-market adjustment on the 24 vessels that were already classified as assets held for sale.
So we currently have a total of 46 vessels in this category, valued at $29 million and our intention is to dispose of these vessels over the next 12 months.
Although all the regions of the world have been impacted by the downturn in the oil market in the pandemic, the onshore oil and gas industry of Africa has been impacted disproportionately.
Our activity levels in West Africa are down over 80% and our operations in East Africa for the time being, have been completely shut down.
Other areas of the continent were negatively impacted although more in line with the roughly 25% global average decline, we noted on the first quarter call.
Since 2014, we have had a significant receivable due from our joint venture in Angola.
The balance was in excess of $400 million in 2014 and 2015 and although the balance has been substantially reduced during the intervening years, the current pullback in activity has resulted in us reassessing the collectability of the remaining balance.
As a result of that assessment we recognized an impairment of $42 million.
Related but separate, as a result of the decrease in immediate opportunities to expand our Angolan joint venture with our existing partner, we and our partner mutually agreed to dividend out, substantially all of the cash held by the joint venture.
That resulted in the receipt by Tidewater of $17.1 million of cash in the quarter and dividend income of the same amount.
Also on the continent of Africa, as a result of the steep decline in the business and the outlook in Nigeria, we recognized an impairment on the $12 million owed to Tidewater by our joint venture there and we established a liability for a $2 million loan guarantee, Tidewater provided to the joint venture, back in 2013.
Delivering on our free cash flow objective for 2020 will require similar quarterly results in the third quarter and the fourth quarter as we achieved in the second quarter.
And the formula is the same.
We must continue to minimize dry-dock expense.
We must quickly layup and de-crew idle vessels.
We must timely collect what is due from us from large multinationals and national oil companies and importantly, we have to dispose of older lower specification vessels.
All executed well in the second quarter and all achievable in the second half of 2020 as well.
Right now we have $40 million forecasted for proceeds from vessel disposals and we remain on track with 25 vessels sold for $21 million in the first half of 2020.
The generation of free cash flow remains our key focus and is the key determinant of our cash incentive compensation.
In the second quarter, we generated revenue of $102.3 million, which is a decrease of 19% from the same quarter in the prior year.
This was principally driven by decreases in vessel activity in our West Africa segment, which had a fewer active vessels in the second quarter and our Europe Mediterranean segment, which had 14 fewer active vessels.
Both segments were significantly affected by the decrease in demand caused by the pandemic and the general oversupply of oil.
Overall, we had 26 fewer average active vessels in the second quarter of 2020 then in the second quarter of 2019.
In addition, active utilization decreased from 79% in the same period in 2019 compared to 75% in the second quarter of 2020, which is result of vessels going off hire and into layup.
Consolidated vessel operating costs for the quarters ended June 30, 2020 and 2019 were $64.8 million and $80.4 million respectively.
The decrease year-over-year is driven by the decrease in the number of active vessels, but also a 5% decrease in operating cost per active day.
Our general and administrative expense for the quarters ended June 30, 2020 and 2019 were $17.6 million and $23.7 million respectively, which is down 23% year-over-year.
The significant restructuring of our executive management and corporate administrative functions in 2019 and ongoing cost measures resulted in this 12% decrease in G&A expense per active day, down from $1,587 million in the prior year to $1,401 million in the second quarter of this year.
Depreciation expense for the quarter ended June 30, 2020 and 2019 were $28.1 million and $25 million respectively.
The decrease in depreciation is due to the sale in 2019 of over 40 vessels and the reclassification of the aforementioned 46 vessels to assets held for sale.
Looking at our results of the segment level, despite the industry downturn our average day rates across the company improved to approximately $10,800 for the quarter, up approximately 3% from the same quarter last year.
This was driven by a tailwind of increasing day rates from contracts entered into before the crisis began and complemented by a mix shift as lower day rate vessels were retired through our disposal program or went off hire early in the downturn.
Naturally, the contract protections you get for lower specification, lower day rate vessels are less, and as a result, they tend to come off hire first in the pull back.
Our Americas segment saw revenue decreases of 3% or $1.2 million during the quarter ended June 30, 2020, compared to the quarter ended June 30, 2019.
The decrease is primarily the result of five fewer active vessels operating in the region year-over-year driven by lower demand.
Vessel operating profit for the Americas segment for the second quarter was $5.4 million, excuse me, $4.5 million, $1.6 million higher than the prior year quarter.
The higher operating profit was due to a $3.5 million decrease in operating expenses, resulting from fewer dry-docks and better vessel uptime in the second quarter of this year.
Our Middle East Asia-Pacific region had been impacted as negatively as a major operators in the area did not cut back production like they do in other areas of the world and consequently, planned vessel activity increases commenced in this region, whereas in other regions there was a sharp pullback.
Vessel revenues increased 17% or $3.5 million during the quarter ended June 30, 2020 as compared to the quarter ended June 30, 2019.
Activity utilization for the quarter increased to 76% from 75% average, day rate increased almost 10% and average active vessels in the segment increased by 2%.
The Middle East Asia Pacific segment reported an operating profit of $600,000 for the quarter compared to an operating loss of $2.1 million for the same quarter of the prior year.
For our Europe and Mediterranean region our vessel revenues decreased 41% or $14.4 million compared to the year ago quarter.
The lower revenue was driven by 14 fewer active vessels and lower average day rates, which were down 2%.
However, active utilization increased 2 percentage points during the quarter.
The segment reported an operating loss of $1.8 million for the quarter ended June 30, 2020 compared to an operating profit of $2.8 million for the prior year quarter due to decreased revenue, partially offset by $7.9 million of decreased operating cost, which was primarily due to lower personnel and lower repair and maintenance costs associated with the drop in active vessels.
Finally to West Africa where vessel revenues in the segment decreased 32% or $10.6 million during the quarter compared to the same quarter of the prior year.
The active vessel count was lower by -- inactive utilization decreased from 76% during the second quarter of 2019 to 55% during the second quarter of this year.
Average day rates increased 13% due to the vessel mix of remaining contract, similar to what I mentioned earlier.
The decrease in revenue was almost entirely the result of lower demand caused by the downturn as the significant number of vessels in Nigeria went off hire during the quarter.
Vessel operating profit for the segment decreased from $3.1 million for the quarter ended June 30, 2019 to an operating loss of $4 million in the current quarter due to the decrease in active utilization.
Although the magnitude of the business is shrinking, free cash flow generation is increasing.
Each of our four regions had higher average day rates than the previous quarter.
Operating cost per active day are down 10% from the previous quarter and down 4% from the year ago quarter.
Of course, because of those facts on a consolidated basis, we had higher operating margin percentages, as compared to the previous quarter and the year-ago quarter.
G&A cost per active vessel day is down on sequential quarterly and year-over-year basis and down substantially on an absolute dollar basis.
We're generating more cash by operating fewer vessels at higher day rates of lower operating cost per vessels and at a lower G&A cost per vessel.
We're doing this while carefully minding the capital expenditure and working capital investments.
The company is free cash flow positive and our objectives and compensation are all geared to keeping it go in that way. | qtrly total revenues $102.3 million versus $125.9 million. | 1 |
Joining in the Q&A after Bob and Mike's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group.
You will find the most directly comparable GAAP financial metrics and reconciliations on our website.
Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months.
Before I get into the detail -- into the quarterly details, I want to start by recognize our Agilent India team.
Despite the challenging COVID-19 situation, our India team is working closely with our cause of do while we can to help in this time of extreme need.
In addition our Agilent India customer support, finance and IT teams have worked tiredlessly to help us close out the second quarter and keep us moving forward.
I could not be more proud of how the team has worked together in true one Agilent fashion.
Our thoughts go out the entire Agilent India team and their families during this difficult time.
In Q2 the strong momentum in our business continues against the backdrop of a recovering market.
The Agilent team delivered another outstanding quarter exceeding our expectations, both revenue and earnings are up sharply versus a solid Q2 last year when revenue and earnings per share were relatively flat.
Our growth is broad-based across all business groups, markets and geographies.
We are also expanding margins driving faster earnings-per-share growth.
Revenues for the quarter are $1.525 billion.
This is up 23% on a reported basis and up 19% core.
COVID-19 related revenues accounted for roughly 2% of overall revenues as expected and contributes about 1 point to our overall growth.
Our revenue growth is not a one quarter or easy compare story, but one that sustained above market growth.
For example, our Q2 revenues are up more than 17% core from two years ago.
Q2 operating margin of 23.9%.
This is up 150 basis points.
EPS of $0.97 is up 37% year-over-year.
Like our recent acquisitions in Cell Analysis, Resolution Bioscience an example of our build and buy growth strategy in action.
The Agilent story remains the same.
It is a story of one team outpacing the market to deliver strong broad-based growth in an environment of continuing market recovery.
Moving onto our end market highlights, we do strongly in all markets.
Our growth is led by 29% growth in pharma and 22% in food.
We are seeing improving growth in the chemical and energy market with 14% growth.
We also posted low-teens growth in diagnostics and over 20% growth in academia and government.
Lastly, environmental forensics grew 8%.
Bob will provide end market detail later in his comments.
Geographically, the Americas led the way with 27% growth.
Strength in China, Europe and the Rest of Asia continues with all growing in the mid-teens.
The 30% growth in China is on top of 4% growth last year when the business started to recover from the pandemic.
As we look at our performance by business group, the Life Sciences Applied Markets Group generated revenues of $674 million during the quarter.
LSAG is up 28% on reported basis and up 25% core off a 7% decline last year.
LSAG's growth is broad-based across all end markets and geographies.
Our focus in investments in fast growing end markets continues to pay off.
The LSAG Pharma business is very strong, growing 41% with strength in both biopharma and small molecule.
From a product perspective, we saw strength in liquid chromatography and LCMS along with continued growth in Cell Analysis.
During the quarter, Cell Analysis grew 34% with our BioTek business growing close to 40%.
During the quarter the LSAG team also contribute to our long-term companywide focus on sustainability in advance and important ESG initiatives.
LSAG announced several new products that have earned the highly respected accountability, consistency and transparency, ACT label from My Green Lab.
My Green Lab is a non-profit organization dedicated to improve the sustainability of the scientific research.
LSAG products will also receive two Scientist Choice Awards and now for the Select Science Virtual Analytical Summit.
Our Cell Analysis business during the quarter -- in our Cell Analysis business during the quarter, excuse me, we launched our Cytation C10 Confocal Imaging Reader, a multi-functional automated system focused on research labs and core facilities looking for increased productivity.
This product builds on the BioTek cell imaging leadership with the Cytation multimode leader and expands our reach in the strategic business.
While still early, customer feedback has been extremely positive.
We are also very pleased with the progress and trajectory of our Cell Analysis business overall and see a very positive future for this space.
The Agilent Cross Lab Group posted revenues of $536 million.
This is up a reported 19% and up 15% on the core basis versus a 1% increase last year.
ACG's growth is driven by demand for consumables and services across the portfolio as lab actively continues to increase for our customers.
This is leading to more on-demand services and parts consumption.
Revenues from our contract business continues to drive strong growth due to the high level of contract renewals seen in the previous quarter.
Our strong instrument placements and the increase in installed base will benefit the ACG business going forward.
At the same time our digital investments continue to pay off with continued strong customer uptake and consumables and our digitally enabled services offerings.
Our LSAG and ACG businesses come together in the iLab.
This is where we believe we are well positioned to continue driving above market growth as we build on our market leading portfolio, strong service organization and outstanding customer service.
For the Diagnostics Genomics Group revenues were $315 million, up 20% reported and up 16% core versus the 5% increase last year.
Growth is broad-based, led by our NASD oligo and genomics businesses.
Demand for our NASD offerings remains strong and our capacity expansion plans for a high-growth NASD business remain on track.
We're very pleased with the acquisition of Resolution Bioscience during the quarter with our liquid biopsy technology, Resolution Bioscience is the key player in a very exciting area of cancer diagnostics.
We are very glad to have them on the Agilent team.
I'm confident as time goes on.
, You'll be hearing more and more from us on this business and its contributions.
I would now like to recap the second quarter and take a look forward.
The strong momentum in our business continues.
This is being driven by our relentless customer focus, the strength of our portfolio and the execution capabilities of the one Agilent team.
Our build and buy growth strategy is delivering as intended of above market growth.
Over the last year, I've often said, that Agilent's focused on coming out of the pandemic even stronger as a company.
I believe you're seeing the impact of this approach in our current results.
As we look ahead we do so with a sense about optimism and confidence.
We are optimistic, because of the continued market recovery and the strength of our portfolio.
We are confident, because we have the right team, customer focused, operationally excellent and driven to win.
As a result we are once again raising our full-year revenue and earnings guidance.
Bob will share more details, but we expect that a continuation of excellent top line growth.
We also expect to compare this strong top line into excellent earnings growth and cash generation.
During our Investor Event in December, we discussed our shareholder value creation model and our goals for increasing long-term growth and expanding margins.
Six months into fiscal 2021 we are well on our way to achieving those objectives.
Our build and buy growth strategy is delivering.
The one-Agilent team continues to demonstrate its execution prowess and strong drive to win.
We raised the bar on customer service and continue to exceed customer expectations in providing industry-leading products and services.
While we are yet to fully emerge from the global pandemic, we are looking forward to the future with both optimism and confidence.
I will now hand the call off to Bob.
In my remarks today, I'll provide some additional details on Q2 revenue and take you through the income statement and some other key financial metrics.
I'll then finish up with our updated outlook for the year and the third quarter.
Revenue for the second quarter was $1.525 billion, reflecting reported growth of 23%.
Core revenue growth was 19%, while currency contributed just under 4 points of growth.
We are very pleased with our second quarter results as we saw strong broad-based growth with all three business groups posting mid-teens growth or higher and all end markets growing strongly.
From an end market perspective, our focus on fast growing markets is paying off.
Pharma, our largest market, again led the way delivering 29% growth.
This is on top of growing 5% last year.
Growth was led by Cell Analysis LC and mass spec.
These tools are delivering critical capabilities to our biopharma customers as they continue to make investments to develop new therapies and vaccines.
Our Biopharma business grew roughly 40% and represented over 35% of our Pharma business in the quarter.
Our Small Molecule segment also has momentum, growing in the mid 20s in the quarter.
Overall, we are well positioned within Pharma and expect the Pharma market to continue to be the strongest end-market as we enter the second half of the year.
The food market continued its strong performance, growing 22%.
We experienced strong growth across all regions and segments as we continue to see global investments across the entire food supply chain.
And we were very pleased to see the non-COVID diagnostics businesses continue to improve throughout the quarter, growing 13% as routine doctor visits return closer to pre-pandemic levels.
We posted a very strong month in the diagnostics and clinical market as we came to anniversary, the weak April we experienced in our large markets at the onset of the pandemic last year.
And we exited the quarter with testing volumes at a run rate slightly higher than pre-pandemic level.
The chemical and energy market continues to recover as we grew 14% of a decline of 10% last year.
Our results were primarily driven by continued strength in the chemicals and materials markets and in a positive sign, our order growth rates were ahead of revenues and finished the quarter strong leading us to believe this trend will continue.
We also saw a nice recovery in the academia and government market as non-COVID related labs resume operations in a strong funding environment.
With the increase in activity, our business grew 21% against the weakest comparison of the year.
We would expect the academia and government market to continue to recover throughout the rest of the year.
And lastly, the environmental and forensics market saw high single-digit growth driven by the Americas, services and consumables at Atomic Spectroscopy.
On a geographic basis, all regions grew led by the Americas at 27%, the pharma and academia and government markets in Americas grew in the low 30% range and all markets grew at least 20%.
Europe experienced 16% growth led by food, academia and government and C&E.
Those three markets all grew more than 20%.
And as Mike noted, China grew 13% after growing 4% last year.
This was driven by pharma growth in the high 30s.
Our growth in orders outpaced revenue growth by mid single-digits during the quarter.
Now turning to the rest of the P&L.
Second quarter gross margin was 55.4% flat year-on-year, despite a headwind of more than 30 basis points from currency.
Our operating margin for the second quarter came in at 23.9%, driven by volume, this is up a solid 150 basis points from last year, even as we saw increased spending as activity ramped and we invest in the future.
Strong top line growth coupled with our operating leverage helped deliver earnings per share of $0.97, up 37% versus last year.
Our tax rate was 14.75% and our share count was 307 million shares.
Now on to cash flow and the balance sheet.
Our performance translated into very strong cash flows.
We delivered $472 million in operating cash flow during the quarter, up more than 50% from last year.
The strong cash flow has continued to help drive our balanced capital deployment strategy.
During the quarter we returned $254 million to our shareholders, paying out $59 million in dividends and repurchasing 1.55 million shares for $195 million.
And as Mike mentioned, we also continue to strategically invest in the business, We spent a net of $547 million to purchase Resolution Bioscience and invested $31 million in capital expenditures.
Year-to-date, we returned $657 million to shareholders in the form of dividends and share repurchases, while reinvesting in the business by spending $619 million on M&A and capital expenditures.
And we ended the quarter with a strong balance sheet, which enables us to enjoy financial flexibility going forward.
During the quarter, we raised $850 million in long-term debt at very favorable terms, redeemed $300 million that was maturing next year and reduced our ongoing interest expense.
We ended the quarter with $1.4 billion in cash, $2.9 billion in outstanding debt and a net leverage ratio of 1 time.
Now turning to the outlook for the full year and the third quarter.
We see a great opportunity to build on our strong first half results.
Looking forward, while the pandemic is still with us, we continue to see recovery in our end markets and have solid momentum in all of our businesses.
As a result, we are again increasing our full year projections for both revenue and earnings per share.
This reflects our strong Q2 results an increasing expectations for the second half of the year.
We are also incorporating the Resolution Bioscience into our guidance.
For revenue, we are increasing our full-year range to a range of $6.15 billion to $6.21 billion, up nearly $320 million at the midpoint and representing reported growth of 15% to 16% and core growth of 12% to 13%.
Included is roughly 3 points of currency and 0.5 point attributable to M&A.
This increased outlook also reflects continued growth in our end markets.
We see sustained momentum in the second half of the year in pharma, food and environmental and forensic markets.
End markets that we expect to continue to recover in the second half include the Diagnostics and Clinical, academia and government and C&E.
As Mike mentioned during our Investor Event in December, we provided a long-range plan of annual margin expansion in the range of 50 to 100 basis points.
Our updated guidance for the year exceeds the top end of that range.
And in addition, we are increasing our fiscal 2021 non-GAAP earnings per share to a range of $4.09 to $4.14 per share.
This is growth of 25% to 26% for the year.
Now for the third fiscal quarter, we're expecting revenue to range from $1.51 billion to $1.54 billion, representing reported growth of 20% to 22% and core growth of 15% to 17.5%.
And we expect third quarter non-GAAP earnings per share to be in the range of $0.97 to $0.99 per share with growth of 24% to 27%.
We believe our strategies and our execution of driving the strong results we've achieved and put us in a great position to continue to drive strong results for the remainder of the year.
With that Ruben back to you for Q&A.
Gabriel, if you could please provide instructions for the Q&A. | q2 non-gaap earnings per share $0.97.
sees q3 revenue $1.51 billion to $1.54 billion.
sees fy revenue $6.15 billion to $6.21 billion.
q2 revenue $1.525 billion versus refinitiv ibes estimate of $1.4 billion.
agilent technologies - fy 2021 non-gaap earnings guidance has increased to range of $4.09 to $4.14 per share. | 1 |
In today's remarks by management, we will be discussing non-GAAP financial metrics.
I'm, of course, pleased with our results for the quarter, which were ahead of what we could have foreseen when we talked to you in February.
Our patient volume strengthened through the quarter, ramping up to March and into April.
I'm sure most of you saw the statistics published this week by the CDC, which indicated a sharp downturn in nationwide births in the fourth quarter of 2020.
As you know, we experienced the same trajectory at the end of last year, but to a significantly lesser degree.
We believe this reflects the typical profile of the hospitals where we provide neonatology services, which tend to be larger and bigger markets and with extensive labor and delivery services, including robust neonatal ICUs.
It may also reflect our geographic footprint, which has a heavier weighting in faster-growing states and markets.
Now through into the first quarter and the roughly 400 hospitals that make up our own births statistics, this downward trajectory on price did not continue.
Adjusting for the leap year, total births at the hospitals where we provide NICU services were essentially unchanged in Q1, which is better than what we reported in late 2020.
Lastly, while it's too early to make a final call, the improvement in our payer mix so far suggests that the volatility we experienced in November and December could have been more of an anomaly.
To give me one quick insight into how this rebound in trends impacted our results, our revenue for the quarter, excluding the CARES money we recorded, was over $30 million ahead of our internal expectations, which translated into meaningful year-over-year growth in adjusted EBITDA versus the expectation we shared with you in February that it could easily be down versus 2020.
Looking ahead to our full year 2021 expectations, we expect that our 2021 adjusted EBITDA will be at or above $220 million.
I said last quarter that we'll listen closely at our 2019 adjusted EBITDA of $265 million before the pandemic as the best available benchmark for how our business is recovering as well as backing out our estimate that the 2020 impact of the pandemic was roughly $40 million to $50 million.
If you look at the first quarter of 2021, our adjusted EBITDA of $45 million was still below the first quarter of 2019.
And when we reported -- and that's when we also reported $50 million in adjusted EBITDA.
And when you exclude the roughly $4 million in contribution from the CARES fund we recorded this quarter, we were roughly 18% below Q1 2019.
So while I'm certainly pleased with our results, it's still clear that we're not back to normal and, in fact, that our first quarter results reflect a similar run rate of COVID impact to what we experienced last year.
I don't think this should be surprising, given the unique nature of the services we provide and the time led of this COVID impact and since much of our patient volume is based on pregnancies and trial birth timing.
Lastly, I'll add that our operating results for the past two quarters have been unusually volatile.
So we're also mindful of the still uncertain nature of how fast or consistently we'll see things recover.
Now I've talked for a couple of quarters about my confidence that we can achieve a run rate of $270 million in adjusted EBITDA once we move past the impact of COVID-19 pandemic.
Our results bolster our confidence that we will reach and exceed that run rate.
But I'm not confident just because we saw better trends over the past couple of months.
I'm confident because we continue to push our operating plans and because we are reshaping how we do things here.
Our singular focus at MEDNAX is to reinforce our position as the formal provider of women's and children's healthcare in the markets we serve and to do so efficiently and as the best partner we can be to the patients we serve as well as to the payers and health systems we work with.
So let me talk about what we've been focused on and speak to you about our core Pediatrix and Obstetrix.
It's all about the patient.
Since MEDNAX first began caring for mothers and babies in their most challenging times about 40 years ago, the only absolute imperative that our founder and Board member, Dr. Medel, prescribed has been take great care of the patient.
Much of my time is spent with our clinicians, hospital partners, prospective partners, and of course, with my team.
And I can attest to this unwavering commitment.
There's an unshakable conviction at MEDNAX that we always take great care of the patients, everything else will follow.
Now that's easier said than done.
To take the best care of the patients, the mothers, babies and children required a lot of work and investment.
First, we have to recruit and retain the finest physicians and clinicians.
Second, to do this, we try to provide more support for our affiliated clinicians than anyone else in our field.
Third, we have a foremost independent research organization in our field of medicine, including complex newborn screenings.
one in four babies in the U.S. are patients of ours.
We have more knowledge and data in these areas than anyone else.
And since our care is provided, of course, at a very local level, we have to provide more support for our affiliated clinicians in each market where we are than anyone else.
Finally, we must always lead in our field.
For example, one of the most critical and active parts of our organization is our clinical support group.
This grew along with our full support team, make sure that we can continue to advance our skill and knowledge for the sake of our patients.
In two weeks, as we did even during the depth of the pandemic last year, we will be holding our Annual Medical Directors Meeting, where over 2,000 clinicians will actively participate and will learn from research, quality and clinical experts.
On top of these areas, we provide system support, recruiting support and every other kind of health to allow our clinicians to, again, take great care of the patients.
This long-winded tour of what we do is what I believe makes a de-choice among our nation's hospitals.
This is what makes us a lead employee, a partner to great medical brands.
This is what makes us the leading referral choice of physicians who want their patients to be in our care during their most difficult minutes, days and weeks.
I've spoken about our drive to employ our practice data and dashboards to improve patient access.
This has and continues to be a paramount importance to us.
It's a steady drumbeat.
We want to be certain that a patient who needs care from one of our affiliated physicians gets that care as soon as possible.
And we know as business leaders and owners the effect that this can have on volume.
So we're working with all of our practices to help them make scheduling as driven and efficient as we can, making sure their appointments are kept and immediately rescheduling no-shows, backfilling cancellations, using our scheduling tools to open additional slots staggering staff, outreach and referral management.
They're all part of this necessary equation.
We've already seen improvements in many practices, particularly in terms of higher percentages of kept appointments and reductions in no-shows.
This focus is also helping us to share best practices and create benchmarking capabilities so we can measure how effective our data has on practice scheduling in every measurable factor beyond just the post COVID recoveries we've recently seen.
We all know that a physical visit is not always needed or possible.
And we will make our telehealth process fluid to help our patients and attract new patients.
This efficiency and effectiveness also applied to our growth plans.
Our sales and business development team has reengineered a focused market-by-market approach that's driven by local intelligence and relationships.
We've also added resources to this team to make sure that we're highly integrated, not just in intensifying and winning new business but providing services quickly and seamlessly to the partners who put their trust in us and in pediatrics affiliated physicians.
In my view, we've lapped until now two other major ingredients to propel us forward.
First, our patient relationships have not extended path to our subspecialty practices.
We need to make sure as well as we can that when a patient needs to see a physician in our network, they can do so as quickly as easily as possible.
We're moving forward in pediatric urgent care to develop plans for expansion of their business in markets where we have a significant presence, and we will expand with our brand name pediatrics.
We believe that providing pediatric primary and urgent care and patient-friendly dedicated clinics will allow us to give patients easier access to the exceptional specialists across our organization when they need it and will also help strengthen our relationships with the communities where we provide services and with our hospital partners.
And maybe most significantly, we believe nobody knows how to care for babies, children and mothers like we do.
And we want to fully extend the types of relationships we currently have.
When a mother on trial want to find the best primary and urgent care practice, our answer should be and will be right here with us at Pediatrix.
Second, our brands, Pediatrix and Obstetrix, are not widely known.
We do believe our hospital partners know our name very well.
And more importantly, they know that they can rely on us for what we can do for their patients.
But patients learn about us and count on us at their most challenging times, and then they move on.
Our prospective practices and clinicians do not always think of who we are and what we provide as they cross their career paths.
To address this, and all of our work, we've launched a marketing campaign and its obvious key theme is trust.
Our ads are going to be widespread, and they're completely authentic.
They feature only our own doctors who speak about why people should trust them and trust us.
We will continue to reach out to reinforce the very unique importance of Pediatrix and Obstetrix.
In hospitals, Pediatrix and Obstetrix mean trust, life saving, world-class clinicians.
Our brand will be known to that.
We're working to ensure that MEDNAX can be the best possible partner to the patients we serve and to the physicians, payers and health systems we work with, all driven by our mission to take great care of the patient while, at the same time, taking great care of the business.
This isn't always easy, but we have a long track record of working hard to the best solution when we need to.
I'll add some detail for our first quarter results, including some of the bench making versus 2019 that Mark mentioned and touch on some of our G&A expectations as we move through the second quarter.
Lastly, I'll touch on our financial position as it stands today.
Turning to the quarter.
At the top line, our net revenue grew by $5.5 million or just over 1% year-over-year.
We recorded about $8 million in revenue from the provided relief fund established by the CARES Act during the quarter.
Overall, same unit revenue increased by 2.5% year-over-year, or 3.6% after excluding the additional calendar day in February 2020 for the 2020 leap year.
Same unit volumes declined 2.5% year-over-year or 1.4% adjusted for the leap year, compared to a 6.6% year-over-year decline in the 2020 fourth quarter.
First, as Mark mentioned, patient volumes improved throughout the quarter, such that we saw same unit growth in March across all of our service lines with the exception of PICU and pediatric hospitalist services.
Second, our NICU days for the quarter as a whole were down slightly more than total births at the hospitals where we provide NICU coverage.
This reflects a modest year-over-year decline in average length of stay, partially offset by a year-over-year increase in the rate of admission.
I know that the rate of admission was an area of interest for many of you following our fourth quarter release.
So I'll point out that in Q1, our admit rate reverted to its historical level after being modestly lower through the latter part of 2020.
Lastly, I'd like to address our 2021 volume relative to 2019.
Our first quarter same unit volume was down approximately 3% as compared to the same period in 2019, with hospital-based volume down to a greater degree than office-based volume.
We'll continue to look at this two year comparison throughout this year since it's likely that comparisons to 2020 will not be relevant based on the pandemic-related disruptions we experienced last year.
On the pricing side, we had a couple of favorable items in addition to our usual rate growth, which has been typically in the 1% to 2% range based on managed care and administrative fee revenues.
First, the cares revenue we recorded added little under 2% to our pricing growth.
On the expense side, our practice level, salary, wage and benefit expense was up by $2.7 million or about 85 basis points year-over-year.
This increase mostly reflects variable incentive compensation tied to practice level revenues, partially offset by a decrease in malpractice expense, which was higher in 2020.
Our G&A expense was down nearly $1 million year-over-year, despite incurring approximately $5 million of costs related to transitional services we provided to the buyers of our anesthesia and radiology medical groups.
The reimbursement for those expenses is reflected in our investment and other income line item.
So there's minimal impact to our adjusted EBITDA, but those costs do inflate our reported G&A expense.
In the near term, I'll note that while the radiology PSA arrangement has concluded, we do anticipate that we'll continue providing services under our anesthesiology PSA, at least through the second quarter of this year.
So you should expect a similar expense and reimbursement dynamic in the second quarter.
We expect to wind down the Anesthesiology PSA services sometime after the second quarter, at which point we'll also be able to begin winding down the expenses we're incurring and move toward that future state expectation for G&A.
Again, there may be some period of time when we're still incurring some of those expenses but not being reimbursed for them.
Lastly, our balance sheet reflects our reduced leverage profile and strong liquidity position.
We ended the quarter with $270 million in cash and net debt of $730 million, implying leverage just north of three times.
And I think we are ready to take questions. | mdu resources adjusts guidance.
sees fy earnings per share $1.90 to $2.05.
q3 earnings per share $0.68. | 0 |
I'm joined today by our CEO, Steve Hasker, and our CFO, Mike Eastwood.
We believe this provides the best basis to measure the underlying performance of the business.
Actual results may differ materially due to a number of risks and uncertainties related to the COVID pandemic and other risks discussed in reports and filings that we provide from time to time to regulatory agencies.
You may access these documents on our website or by contacting our investor relations department.
I'm pleased to report the momentum we saw in the first half of the year continued in the third quarter.
Our revenue and sales performance was strong, exceeded our expectations and position us well for Q4 and 2022.
We expect to close out the year on a strong footing and appreciate the efforts of our sales and our go-to-market teams.
This strong performance demonstrates our markets remain healthy and growing.
And our products across legal, tax, corporates and risk, fraud, and compliance fit the needs of our customers.
Our products enable them to effectively equip their professionals to better serve their clients.
We're also seeing improving customer engagement, including 8,000 registrations for our annual Legal, Tax and Corporates SYNERGY conferences around the world.
These conferences are our premier events for professionals who want to understand the future of their professions, learn the latest trends, and experience how tools and data-driven technology can transform their firms, organizations, agencies, and roles.
Our leadership team, including the president of our Corporates business, Sunil Pandita; and the president of our Tax & Accounting Professionals business, Elizabeth Beastrom, will be joining nearly 2,000 of our customers for the upcoming SYNERGY conferences in November in Nashville.
And as I mentioned last quarter, our customers continue to exhibit confidence in both an improving economic environment and in their own prospects.
This potent ecosystem plays to our advantage, and we will continue to capitalize on the opportunities we are seeing to drive growth and expand our positions.
Now to the results.
Our third quarter results reflected a standout performance.
Four of our five business segments recorded organic revenue growth of 6%.
That performance resulted in total company organic revenue growth of 5%, putting us well above the 3.5% to 4% third quarter guidance provided in August.
Our healthy markets are providing us with a tailwind.
That tailwind, coupled with our nine-month results, give us confidence in our prospects for the fourth quarter.
As a result, we've once again raised our full year revenue and free cash flow guidance.
Full year total company organic revenue growth is now forecast to be between 4.5% and 5% and approximately 6% for the Big 3 businesses.
Free cash flow for the year is now forecast to be approximately $1.2 billion.
Turning to our Change Program.
We're making consistent progress as we work through -- as we work toward becoming an integrated operating company.
As of September 30, we recorded run rate savings of about $130 million, putting us on a path to achieve $200 million by year end.
I'll remind you, our aggregate savings target is $600 million by the end of 2023, $200 million of which we plan to reinvest in the business.
Finally, we were active during the quarter executing on the $1.2 billion share buyback program we announced in August.
We've already bought back $1.1 billion of stock, and we expect to complete the program before year end.
So given the progress we're making, we also reaffirmed our guidance for 2022 and 2023.
Now to the results for the quarter.
Contributing to this performance was strong organic growth of more than 20% from our Latin American businesses and nearly 10% growth from our Asia and emerging markets businesses.
Adjusted EBITDA declined 7% to $458 million due to costs related to the Change Program, resulting in a margin of 30%.
Excluding Change Program costs, adjusted EBITDA margin was 33.5%.
Adjusted earnings per share for the quarter was $0.46, compared to $0.39 per share in the prior-year period.
Turning to the results by segment.
The Big 3 businesses achieved organic revenue growth of 6% for the quarter.
Legal's third quarter performance was again strong with organic revenue growth of 6%.
This was Legal's second consecutive quarter of 6% growth, its highest quarterly growth rate in over a decade.
The U.S. legal market continues to be very healthy across the board for small, mid, and large-sized firms, as well as for government and across geographies.
For example, Westlaw Edge continues to achieve strong sales growth and ended the quarter with an annual contract value or ACV penetration of 60%, achieving our full year ACV penetration guidance.
Second, Practical Law, as reported in the Legal segment, continues its strong performance, again growing double digits.
We forecast similar growth in 2022 and continue to invest in this key legal workflow initiative.
Third, our Government business, which is managed within our Legal segment, continues to perform and grew 10% organically.
And fourth, FindLaw grew over 10%, and our Legal businesses in Canada, Europe and Asia all grew mid-single-digit in the quarter.
Legal again achieved strong sales for both the quarter and nine-month periods, recording double-digit recurring sales growth, reflecting customers' willingness and ability to invest in productivity-enhancing products.
Turning to the Corporates business.
Organic revenue growth increased to 6% from 4% in the first half of the year.
This improvement came from increasing demand from customers for our legal, tax, and risk products.
Reuters News organic revenues also increased 6%, the second consecutive quarter of 6% growth.
This was driven by the Professional business, which includes Reuters Events, which grew over 60% and continues to recover from the negative impact of COVID-19 in 2020.
Finally, Global Print organic revenues declined 5%, less than expected, due to a continued gradual return to office by our customers and higher third-party print revenues.
In summary, it was another strong quarter, but we're taking nothing for granted.
We continue to invest in the businesses to enable us to further support our customers and properly position us for 2022 and beyond.
We still have much work to do in executing our Change Program, and we've assembled a talented team over the past 18 months who are working well together and clearly understand our goals and our timelines.
I'm very pleased with our progress to date.
One additional comment regarding growth.
As you can see on this slide, momentum has been building for our Big 3 businesses over the past 11 quarters, which we believe will continue in the fourth quarter and into next year.
I know many investors have historically viewed our markets as slower growing and have perceived our Legal and Tax businesses in particular as low single-digit growers.
We firmly believe that's not the case and, in fact, think that with successful execution of the Change Program, combined with appropriate investments, we can improve growth on a sustainable basis.
Our markets are broad and dynamic and we have strong positions in the right subsegments.
Also, we have numerous levers to pull across our businesses.
And we're investing in our strategic seven initiatives, which are performing well, and we expect they will continue to do so.
This confluence of factors places us in a position where we believe we can grow mid-single digit on a consistent basis over the cycle.
These factors position us well to achieve the upper end of the range of our 2022 revenue guidance of 4% to 5%.
We'll discuss our 2022 guidance further when we report our fourth quarter and full year results in February.
Let me share an example of products that we believe will contribute to sustainable mid-single-digit revenue growth that I just referred to.
First, you'll recall at our investor day, I discussed our goal of becoming a content-driven technology company, which includes excelling at product innovation and successfully integrating our products to provide customers with a seamless offering while delivering an excellent customer experience.
We expect this will further improve the customer loyalty and increase retention as we continually enhance our products, adding to organic growth.
And at investor day, I highlighted seven strategic priorities reflected on this slide.
Those include several of our legal workflow solutions: HighQ, Practical Law and Contract Express.
Last month, we released the latest version of HighQ.
This release features key integrations with Practical Law, Contract Express, Elite 3E and Microsoft Teams and includes more than 50 enhancements and upgrades.
It's an example of an integrated workflow solution that customers are asking for.
It helps legal professionals and other corporate professionals working with the legal team to identify their work and improve client satisfaction.
This leverages Contract Express to automate and improve documents.
It enables lawyers to structure matters with Practical Law.
And it integrates Elite 3E data with HighQ visualization tools to provide greater transparency around client spend and work in progress.
This is truly an integrated legal workflow solution and an example of content-driven technology.
Today, these four legal products are growing double digit, comprising over 10% of total company revenue and are contributing to the improving growth in both our Legal and Corporates segments.
HighQ is just one example of how we're building holistic solutions for our customers through greater product innovation and integration.
I expect to share more such examples of product innovation with you in the coming quarters.
Two weeks ago, we announced the establishment of a $100 million corporate venture capital fund focused on the future of professionals.
Thomson Reuters Ventures will continue -- will concentrate on investments and portfolio support for companies building breakthrough innovations that will allow professionals to operate more productively and with greater insights.
It will focus across the legal, tax and accounting, risk, fraud, and compliance, and news and media markets to identify and support innovative companies to help our customers deliver more to their clients.
The fund will be overseen by our chief strategy officer, Pat Wilburn.
It's an example of how we're thinking about driving more innovation across the company and seeking new opportunities to further strengthen our businesses.
As a reminder, I will talk to revenue growth before currency and on an organic basis.
Let me start by discussing the third quarter revenue performance of our Big 3 segments.
Organic revenues and revenues at constant currency were both up 6% for the quarter.
This marks the fifth consecutive quarter our Big 3 segments have grown at least 5%.
Legal Professionals total and organic revenues increased 6% in the third quarter.
Recurring organic revenue grew 6%.
And transaction revenues increased 10% related to our Elite, FindLaw and Government businesses.
Westlaw Edge added about 100 basis points to Legal's organic growth rate, is maintaining a healthy premium and is expected to continue to contribute at a similar level going forward.
Our Government business, which is reported within Legal and includes much of our risk, fraud, and compliance businesses, had a strong quarter, with total revenue growth of 11% and organic growth of 10%.
In our Corporates segment, total and organic revenues increased 6% due to recurring organic revenue growth of 7% and transactions organic revenue growth of 2%.
Recurring revenue was driven by Practical Law, Indirect Tax and CLEAR, as well as our businesses in Latin America and Asia and emerging markets.
And finally, Tax & Accounting's total and organic revenues grew 6%, driven by 10% recurring organic revenue growth.
Growth was driven by the Latin America businesses and audit solutions, which includes Confirmation.
Transactions organic revenue declined 9%, resulting from the year-over-year timing of individual tax filing deadlines.
I will remind you, last year, paper return revenue shifted from the second quarter to the third quarter.
Normalizing for this timing, organic revenues for Tax & Accounting were up 11% in Q3.
Moving to Reuters News.
Third quarter performance was strong, achieving total and organic revenue growth of 6%, primarily due to the Agency business and Professional business, which includes Reuters Events.
In Global Print, total and organic revenues declined 5%, at the lower end of the range we had forecast of minus 5% to minus 8%.
We expect full year Global Print revenue to decline between 4% and 6%.
On a consolidated basis, third quarter total and organic revenues each increased 5%.
Before turning to profitability, let's look closer at recurring and transaction revenue results for the third quarter.
Starting on the left side, total company organic revenue for the third quarter of 2021 was up 5% compared to 2% in the third quarter of 2020 due to the impact of COVID.
If we look at Q3 2021 performance for the Big 3, you will see organic revenues increased 6% compared to 5% in the same period last year.
Total company recurring organic revenues grew 6% in Q3, 230 basis points above Q3 2020.
And the Big 3 recurring organic revenues grew 7%, which was above last year's third quarter growth of 5%.
Turning to the graph in the bottom right of the slide.
Transaction revenues were up 8%, as the third quarter of 2020 was impacted by COVID, which affected our implementation services and the Reuters Events business.
We continue to remain encouraged by our momentum in 2021, especially for recurring revenues.
This gives us confidence in the trajectory of the business and sustainability beyond 2021.
As previously stated by Steve, we have increased our full year revenue guidance.
Starting with the total TR chart on the top left, we now estimate full year total and organic revenues will grow between 4.5% and 5%.
This is an increase from the previous guidance of 4% to 4.5%.
The Big 3 total and organic revenues are now forecast to grow approximately 6% for the full year, up from the previous guidance of 5.5% to 6%.
Moving to Reuters News.
We forecast full year total and organic revenues to grow between 3% and 5%, driven mainly by our Reuters Professional business.
This is an increase from the previous guidance of 2% to 3%.
Finally, Global Print full year revenues are expected to decline between 4% and 6%, an improvement from our previous guidance of a 4% to 7% decline.
Turning to our profitability performance in the third quarter.
Adjusted EBITDA for the Big 3 segments was $468 million, up 7% from the prior-year period.
The strong EBITDA growth for each of the three businesses was driven by higher revenue growth and a benefit from 2020 cost-savings initiatives, offset by incremental business-as-usual investments in advance of 2022.
As discussed in the second quarter, we are investing more in go-to-market initiatives, enterprise technology, and data and analytics capabilities in the second half of 2021, with a greater concentration of spend in Q4.
I will remind you, the Change Program operating costs are recorded at the corporate level.
Moving to Reuters News.
Adjusted EBITDA was $25 million, $2 million more than the prior-year period, driven by revenue growth.
Global Print adjusted EBITDA was $52 million with a margin of 35%, a decline of about 600 basis points due to the decrease in revenues and the dilutive impact of lower margin third-party print revenue.
So in aggregate, total company adjusted EBITDA was $458 million, a 7% decrease versus Q3 2020.
Excluding costs related to the Change Program, adjusted EBITDA increased 4%.
The third quarter's adjusted EBITDA margin was 30% and was 33.5% on an underlying basis, excluding costs related to the Change Program.
Now let me turn to our earnings per share, free cash flow performance, and Change Program cost.
Starting with earnings per share, adjusted earnings per share was $0.46 per share versus $0.39 per share in the prior-year period, an 18% increase.
The increase was primarily driven by a decrease in depreciation and amortization and lower income taxes, partially offset by lower adjusted EBITDA.
For the full year, we have decreased our tax rate guidance to between 14% and 16% due to favorable results from the settlement of prior tax years in various jurisdictions.
Currency had a $0.01 positive impact on adjusted earnings per share in the quarter.
Let me now turn to our free cash flow performance for the first nine months.
Our reported free cash flow was $1 billion versus $881 million in the prior-year period, an improvement of $120 million.
Consistent with previous quarters, this slide removes the distorting factors impacting free cash flow performance.
Working from the bottom of the slide upwards, the cash outflows from the discontinued operations component of our free cash flow was $59 million more than the prior-year period.
tax authority related to our former Refinitiv business.
In the first nine months, we made $94 million of Change Program payments as compared to Refinitiv-related separation cost of $87 million in the prior-year period.
So if you adjust for these items, comparable free cash flow from continuing operations was just shy of $1.2 billion, $327 million better than the prior-year period.
This increase was primarily due to higher EBITDA, favorable working capital movements, and dividends from our interest in LSEG.
Now an update on our Change Program run rate savings.
In the third quarter, we achieved $42 million of annual run rate operating expense savings.
This brings the cumulative annual run rate operating expense savings up to $132 million for the Change Program.
We are forecasting to achieve $200 million of cumulative annual run rate operating expense savings by the end of this year.
As a reminder, we anticipate operating expense savings of $600 million by 2023 while reinvesting $200 million back into the business or net savings of $400 million.
Achieving $200 million of operating expense savings by the end of 2021 would put us a third of the way toward our goal of $600 million of gross savings by 2023.
We will continue to provide quarterly updates on run rate Change Program savings.
Now an update on our Change Program cost for the third quarter and the rest of 2021.
Spend during the third quarter was $79 million, which included $53 million of opex and $26 million of capex.
Total spend in the first nine months of the year was $170 million.
We now anticipate opex and capex spending between $120 million and $150 million in the fourth quarter.
Spend is forecast to step up related to cloud migration, streamlining internal systems, third-party contractors to support the Change Program and higher capital expenditures.
For the full year, we now expect Change Program opex and capex spend to be between $290 million and $320 million.
This is slightly lower than the previous guidance range of $300 million to $350 million.
We expect the lower spend in 2021 to carry over into 2022 as we are still expecting to incur approximately $600 million over the course of the program.
We will provide formal guidance on Change Program spend for 2022 when we report our fourth quarter results in February.
There is no change in the anticipated split of about 60% opex and 40% capex.
We will continue to provide quarterly updates on our Change Program spend.
And as Steve outlined, today, we increased our full year outlook for total TR and Big 3 revenue growth.
We also increased our full year free cash flow guidance to approximately $1.2 billion.
Additionally, we have slightly lowered our guidance on Change Program spend for both opex and capex for 2021 and carry that underspend over to 2022.
We have also decreased our effective tax rate outlook, both of which are reflected on this slide.
Lastly, we reaffirm the balance of our full year 2021 guidance as well as our 2022 and 2023 guidance previously provided.
And we remain confident in achieving the targets for all metrics.
That concludes our formal remarks on our third quarter results.
So if we could have the first question, operator, please? | compname reports q2 adjusted earnings $0.48/share.
new $1.2 billion buyback program announced.
quarterly adjusted earnings per share $0.48.
raised full-year 2021 total company and big 3 guidance for revenue growth, adjusted ebitda margin and free cash flow.
reaffirmed its outlook for 2022 and 2023.
change program on track, achieved $90 million of run-rate operating expense savings through june 30.
quarterly legal professionals revenues increased 7% (6% organic) to $673 million at constant currency.
quarterly corporates revenues increased 4% (all organic) to $348 million at constant currency.
quarterly tax & accounting professionals revenues increased 15% (all organic) to $197 million at constant currency.
quarterly reuters news revenues of $168 million increased 6%, all organic at constant currency.
quarterly global print revenues increased 6% to $147 million at constant currency.
reuters events continues to hold all events virtually and continues to assess when in-person events can resume.
global print's full-year 2021 revenues are forecast to decline between 4% and 7%.
quarterly corporate costs at adjusted ebitda level were $76 million, including $41 million of change program costs. | 0 |
Joining me on the call today are Nish Vartanian, Chairman, President and CEO; and Ken Krause, Senior Vice President, CFO and Treasurer.
These risks, uncertainties and other factors are detailed in our Form 10-K filings with the SEC.
As you've seen, we've accomplished a lot in the second quarter.
Most importantly, we closed the acquisition of Bacharach on July 1, which I'll discuss after a brief overview of the quarter.
We had a pretty good quarter.
Our revenue returned to growth, up 5% from a year ago.
Core product revenue was up 12%.
Margins are on track as we effectively manage through inflation we see in our supply chain.
I mentioned on the April call that we were optimistic that the worst was behind us from a demand perspective.
I'm glad to reiterate that sentiment today.
Not only did revenue come in a bit higher than our expectations, our order book continued to strengthen throughout the quarter and drove significant increase in backlog.
Our fire service business remains strong, and we're seeing improved demand for gas detection and industrial products.
Overall, our U.S. business continues to lead the recovery.
Europe is starting to recover as the vaccine situation improves.
Like everyone, we continue to manage through supply chain issues, which is a dynamic situation that requires daily attention.
Our most challenging areas are electronic components used in our SCBA and gas detection products.
Our level of revenue indicates we've done a good job of managing through these issues.
Still, we did have pockets of production starts and stops and extended lead times that contributed to our backlog bill.
But even with those challenges, I remain very confident in our ability to enhance our market positions as business conditions improve.
Ken will provide more color on the quarter.
I'd like to now provide more insight into three areas that support my confidence in the long-term future of MSA as the leader in advanced safety technology.
First, we continue to launch safety technologies that solve our customers' toughest safety challenges, and I'll talk about those in a moment.
Second, our continuous improvement culture is driving efficiencies for our organization.
The strong execution of our international margin expansion road map is one example.
And third, we're using our balance sheet to make strategic acquisitions and investments that strengthen our leadership positions in key markets.
We recently closed the acquisition of Bacharach and the integration of our two organizations is off to a strong start.
Starting with the first area, our innovation engine and R&D pipeline.
We're bringing innovation to the fire service market in the form of connected technologies.
We officially launched LUNAR this spring, and our Q2 results include about $1 million of revenue related to product sales.
LUNAR, for those of you who haven't seen or read about it, is a handheld device that uses cloud technology to deliver fire scene management capabilities for incident commanders.
The feedback we're getting from early adopters provides encouragement that we've hit the mark with this new technology.
We're also using our strong balance sheet to invest in other forward-thinking organizations who share similar mission to protect firefighters.
We established this partnership to improve firefighter safety and enhance their capabilities when it comes to fire seeing situational awareness and decision making.
Fotokite is the brand name for a tethered drone system that gives incident commanders a bird's eye perspective of a fire scene without requiring a pilot.
This collaboration is an exciting venture for us because it represents a new avenue to advance the MSA mission through revolutionary technology for firefighters.
The second area I want to highlight is our culture of continuous improvement and our margin expansion progress in the international business segment.
Our entire international team continues to execute a playbook focused on three areas; driving growth in select markets, optimizing our channels approach and delivering operational efficiencies.
We've been executing this playbook for three years now, and it's encouraging to see the margin improvement as revenue starts to recover from the pandemic.
In the second quarter, the International segment operating margin rose 70 basis points to 16.5%.
And looking back to Q2 of 2019, segment margin is up more than 350 basis points.
With the pipeline of programs we have in place, we remain confident in our ability to continue driving margin expansion in international.
The third area I want to highlight is how we use our balance sheet to make acquisitions that strengthen our leadership position in key markets.
On July 1, we closed the acquisition of Bacharach.
Bacharach is a leader in gas detection technologies, which is used in the HVAC refrigeration markets.
With annual revenue of about $70 million, it's headquartered here in Pittsburgh, not far from our gas detection center of excellence, where we've recently made significant investments.
Bacharach aligns well with our product and manufacturing expertise.
Moreover, it provides a strong brand and access to attractive end markets that build further diversification in our gas detection business.
From an integration perspective, we'll be focused broadly on growing the business and reducing complexity.
I'm very confident in our team's ability to capture value from the acquisition while strengthening the brands at both Bacharach and MSA.
From a balance sheet perspective, our leverage remains healthy.
If we add Bacharach into our quarter end net leverage, the pro forma would be about 1.7 times net.
So we're well positioned to continue investing in our business.
One additional topic I'd like to mention is our approach to ESG.
Social responsibility is not new to MSA.
For 17 years, we've been dedicated to helping protect the world's workers.
So we help our customers achieve their own ESG goals by enhancing workplace safety.
But we also focus internally on ESG objectives that help us to build greater resiliency and adaptability into our overall business model to safeguard the value that we've created.
It's become clear to me that our investments in worker safety, talent, environmental sustainability, supply chain resiliency and various risk mitigation programs all help to create a better business model.
And I believe that companies who do these things effectively will be the ones to prosper and be fit for the future.
We're prioritizing areas specific to our strategy.
For example, we know that attracting and retaining a quality workforce through broad talent pipelines is not just the top business challenge for any organization today, but particularly for manufacturing companies.
For that reason, we invest a lot of time and resources into talent development and retention.
And for the first time, MSA was recently recognized by Forbes as one of the best employers for diversity in 2021.
This recognition was based on a survey of more than 50,000 employees around the country.
We were also ranked number 16 on the Forbes Best Midsize Employers list, and we were number one for engineering and manufacturing industry category.
So it's encouraging to see further recognition of our efforts to create a top workplace.
So to summarize, there are three areas that give me confidence in MSA's future.
Our innovation engine is very strong, and it continues to power new and exciting developments in safety technology.
Our continuous improvement culture across all areas of our business is yielding strong results, especially in the International segment and we're effectively using our balance sheet to grow and strengthen our business.
I'll start the discussion with financial highlights centered on revenue, profitability and cash flow.
We returned to revenue growth in the second quarter with total sales up 5% in constant currency.
I'm pleased that our Q2 order pace tracked well above 2020 and increased high single digits from 2019.
Both fire service and industrial-related products are contributing to the stronger order book.
That momentum provides confidence around demand for our products as we look at the coming quarters.
Second, our operating margin of 17.2% showed a nice sequential uptick from Q1 despite $4 million of higher stock compensation expense related to our recently announced acquisition and its expected revenue and profitability contributions over the coming years.
The expenses, noncash and negatively impacted operating margin by approximately 130 basis points in the quarter.
And third, our cash flow performance was healthy.
Receivable performance was excellent on the increase in revenue, and our inventory levels position us to deliver a stronger second half compared to the first half.
We completed the Bacharach acquisition earlier this month for $337 million with an after-tax cost of debt of less than 2%.
And as Nish had indicated, our balance sheet is strong, and we are positioned very well to invest in our business.
Now let's take a closer look at the financial results in the second quarter.
I'll start with a focus on revenue.
Quarterly revenue was up 9%, reaching $341 million.
Revenue was up 5% on a constant currency basis.
While we saw about a 2.5% benefit associated with the addition of Bristol, our APR business presented a 5% headwind on a year-over-year basis.
In constant currency, revenue in the Americas was up 6%, while international revenues were up 3%.
The international performance reflects a lag in vaccine deployment and economic recovery, which is tracking a few months behind the U.S. Core product revenue was up 12% on growth across fire service and industrial PPE, partially offsetting a lower FGFD business.
The strong core recovery was partially offset by a difficult comparison in air purifying respirators.
Looking at industrial PPE, it's great to see the strong growth rates in these areas, upwards of 20% or 30% compared to 2020.
It was also good to see head protection sales back at 2019 levels in the second quarter.
Touching on fire service, backlog remains very healthy, and we're excited about the recent product launches for LUNAR and connected firefighter.
The mission-critical nature of our products and our strategic investments provide a healthy outlook for the global fire service business.
I should note that the SCBA revenues came in ahead of 2019 levels.
Our FGFD business declined 4% compared to last year on challenging comps in the Middle East.
However, we continue to see incoming business strengthen through the second quarter.
In June, we booked one of the largest FGFD orders in our history.
Our FGFD backlog is back to pre-pandemic levels heading into the second half.
For MSA overall, quarterly incoming orders surpassed 2019 levels.
At the same time, supply chain constraints with electronic components are presenting challenges to our ability to deliver in certain areas.
This has resulted in backlog increasing 15% from the end of Q1, particularly in gas detection products.
While it's difficult to predict how long the supply chain challenges will last, we expect the constraints around electronic components will persist into the second half.
Gross profit was relatively consistent compared to last year.
Pricing and stronger throughput in our factories offset higher material costs.
Despite a number of headwinds in margins associated with input costs, gross margins were roughly in line with prior year levels.
We have implemented an off-cycle price increase to respond to the inflation that we are seeing in the U.S. across electronic components, resins and other inputs.
We will continue to evaluate additional pricing opportunities through the second half as we navigate these inflationary pressures.
SG&A expenses was -- were $83 million or 24.4% of sales and was up $12 million from a year ago in constant currency.
As I had indicated on the April call, we expected a difficult SG&A comp in the second quarter because of the variable comp resets at the onset of the pandemic.
This trend played out as expected and impacted the quarterly comparison in SG&A by about $3 million.
Quarterly SG&A also includes about $8 million of costs related to Bacharach and and Bristol acquisitions, including the stock compensation of about $4 million adjustment that I spoke about previously.
Bacharach transaction costs of about $2 million and the remainder being the Bristol base SG&A.
Our cost savings from restructuring programs effectively offset discretionary costs coming back into the business.
We continue to control the controllables and bring costs back into the business at a slower pace than revenue improvements.
We expect SG&A to approximate 23.5% of sales for the second half of 2021.
We invested $7 million in restructuring programs in the quarter, primarily in our International segment as we continue to execute on our margin expansion road map.
Our restructuring actions have produced excellent results to date and position us well for the economic recovery.
Together with the programs we had discussed in 2020, we continue to expect to deliver approximately $15 million of savings across the income statement in 2021 and annual savings of $25 million thereafter.
Our quarterly adjusted operating margin was down 150 basis points from a year ago.
The decline reflects the impact of the Bristol noncash stock compensation adjustment I mentioned earlier, which is booked in our corporate segment.
Looking at our segment performance.
International margins were up 70 basis points to 16.5% of sales.
Our cost reductions and pricing programs remain very much on track.
It's great to see the return to margin expansion for the segment as the volume starts to improve.
America margins were down 140 basis points to 22.6% of sales.
Variable compensation resets associated with the improved revenue performance drove 140 basis point decline in the quarter.
And we continue to navigate the inflationary pressures and are assessing additional levers that will help mitigate these pressures in future quarters.
Our quarterly tax rate was 27.8% on a GAAP basis or 27.4% on an adjusted basis.
There were two discrete items that drove the quarterly rate up.
First, the statutory tax rate increase in the U.K. from 19% to 25% drove a onetime adjustment to our deferred taxes.
Second, we incurred higher nondeductible expenses associated with the acquisition of Bacharach.
From a cash flow and capital allocation perspective, quarterly free cash flow conversion was more than 100% of net income.
While overall working capital performance was strong on improvements in receivables, we did build some inventory in the quarter, which aligns with our backlog build as well as managing supply chain risks.
Our strong balance sheet positions us well to gain share as the market rebounds.
We continue to execute on a balanced capital allocation strategy.
In the second quarter, we paid down $25 million of debt, funded $17 million of dividends to shareholders and invested $11 million in capex programs.
Since we completed the Bacharach acquisition on July 1, its impact is not yet reflected on our balance sheet.
On a pro forma basis, following the acquisition, net debt-to-EBITDA would be 1.7 times compared to 0.6 times at June 30.
We continue to expect Bacharach to provide $0.10 to $0.15 of adjusted earnings per share in the second half of 2021.
In line with our existing methodology, adjusted earnings will exclude purchase accounting amortization.
In connection with the acquisition, we funded $200 million of 15-year senior notes with a fixed interest rate of 2.69%.
The remainder of the transaction was funded with our revolving credit facility, which we amended and extended in May to provide greater borrowing capacity and flexibility.
We also included a sustainability-linked pricing structure on our revolver.
Our borrowing cost flexes up or down based on our performance on certain ESG metrics.
With the pro forma debt for Bacharach, we'd expect interest expense to be in the range of $3.5 million to $4 million in Q3 and Q4 of this year.
We also completed a buyout of our minority partner in our China business for about $19 million in July.
China is a key market for us, and it's an important part of our growth strategy moving forward.
China has consistently been accretive to MSA's growth over time.
As a result, we continue to invest in this business, and this buyout represents a key strategic milestone for us.
We funded the investment with local cash balances.
And as part of this deal, we expect to repatriate between $10 million to $15 million of cash back to the U.S. in the third quarter.
The transaction provides full ownership of our business in a highly strategic market as well as helping us optimize foreign cash balances.
Before we move on, let's touch on the adjustment to the product liability reserve, which drove $12 million of expense in the quarter.
We increased our product liability reserve as a result of an increase in the number of asserted cumulative trauma claims pending against our subsidiary, MSA LLC
We continue to monitor development and filing rates.
We plan to conduct our annual review process later this year, where we will evaluate many factors, including the potential developments in filing trends.
As we look ahead, we're operating in a very dynamic environment.
While the strong rebound in order pace in the second quarter and elevated backlog provide a sense of optimism heading into the second half, the supply chain challenges we are facing are having an impact.
From where we operate today, the supply chain constraints are the largest variable for us.
Raw material availability as well as the cost of those inputs can be difficult to predict.
We're closely monitoring the situation, and we're laser-focused on executing initiatives to mitigate the impact of this on our business, both on the top line and our margin profile.
Our market positions have never been stronger, and we continue to invest in growth programs and acquisitions that support our position as the safety technology leader.
We've taken a number of steps through this recession to position ourselves for strong performance upon the recovery.
The Bristol and Bacharach acquisitions, significant cost takeout programs, midyear pricing actions and expanding our borrowing capacity at historically low rates are just a few examples.
I remain very confident that these actions will benefit our shareholders and stakeholders as conditions continue to improve.
The return to revenue growth and improving order book positions us well for the future in the second half of 2021.
My level of optimism about demand is higher today and has been since the onset of the pandemic.
In the coming months, we'll remain focused on acquisition integration, evaluating additional pricing opportunities, navigating supply chain constraints and improving our leadership positions across core markets and geographies.
At this time, Ken and I will be glad to take any questions you may have.
Please remember, MSA does not give guidance. | q2 revenue $341 million versus refinitiv ibes estimate of $329.2 million. | 1 |
Sherwin-Williams delivered terrific results in the first quarter.
The momentum with which we exited the fourth quarter continued in the first quarter.
We entered the quarter with strong expectations and we finished stronger.
We capitalized on extremely robust demand across both architectural and industrial markets, leading to sales in two of our segments that exceeded the guidance we provided at the beginning of the quarter.
We generated double-digit growth once again in residential repaint as well as in new residential in DIY.
We also generated double-digit growth in our industrial business, with improvement in every region.
Before getting into some of the specific numbers.
I'll remind you that in February, our Board of Directors approved and declared a three-for-one stock split in the form of a stock dividend to make the stock more accessible to employees and a broader base of investors.
Trading of our shares on a stock split-adjusted basis began on April 1, 2021.
So starting with the top line, first quarter 2021 consolidated sales increased 12.3% to $4.66 billion.
Consolidated gross margin decreased 20 basis points to 45.4% due to greater than anticipated raw material cost inflation.
SG&A expense as a percent of sales decreased 300 basis points to 28.5%.
Consolidated profit before tax increased $116.7 million or 29.8% to $509 million.
The first quarter of 2021 included $75.6 million of acquisition related depreciation and amortization expense and one-time costs of $111.9 million related to the divestiture of the Wattyl Australian business.
The first quarter of 2020 included $75.6 million of acquisition-related depreciation and amortization expense.
Excluding these items, consolidated profit before tax increased 48.8% to $696.5 million with flow-through of 44.9%.
Diluted net income per share in the quarter increased to $1.51 per share from $1.15 per share a year ago.
The first quarter of 2021 included acquisition-related depreciation and amortization expense of $0.21 per share and one-time costs related to the Wattyl divestiture of $0.34 per share.
The first quarter of 2020 included acquisition-related depreciation and amortization expense of $0.21 per share.
Excluding these items first quarter adjusted diluted earnings per share increased 51.5% to $2.06 per share from $1.36 per share.
Adjusted EBITDA grew to $848.7 million in the quarter or 18.2% of sales.
Net operating cash grew to a $195.7 million in the quarter.
All three of our operating segments delivered excellent top line growth, margin expansion and strong flow through in the quarter.
Segment margin in the Americas Group improved 240 basis points to 19.2% of sales resulting primarily from operating leverage on the high single-digit top line growth.
Adjusted segment margin in Consumer Brands Group improved 440 basis points to 21.4% of sales resulting primarily from operating leverage on the double-digit top line growth.
Flow-through was 38.9% and adjusted segment margin in Performance Coatings Group improved 60 basis points to 14.3% of sales driven by operating leverage on the double-digit sales growth, which was partially offset by higher raw material costs.
We're off to a tremendous start in 2021.
Credit goes to all of 61,000 members of our team who are serving our customers at a high level, aggressively pursuing and capturing new business and managing through transitory disruptions in the supply chain.
There is no better team in the industry.
Demand was robust across both architectural and industrial businesses in the quarter, particularly in March, where sales were well above our forecast.
We're seeing very positive trends as economies continue to reopen.
As we've often said, volume is the strongest driver of our results and we leverage the strong growth to deliver improved profitability in every segment in the quarter.
In The Americas Group, first quarter sales increased by 8.6% over the same period a year ago including about 1.7 percentage points of price.
The impact of unfavorable currency translation was not material.
Same-store sales in the U.S. and Canada were up 8.2% against a high single-digit comparison.
In residential repaint, our largest segment, we delivered strong double-digit growth in the quarter against a double-digit comparison.
We have grown this business by double-digits for five consecutive years.
We expect this momentum to continue.
Contractors are reporting solid backlogs and interior and exterior work were both very strong.
Demand remained unprecedented in our DIY business where sales were up by a double-digit percentage for the fifth consecutive quarter.
New residential also remained an area of strength for us with low double-digit growth in the quarter against a high single-digit comparison.
New housing permits and starts have been trending very well since last summer and customers are reporting solid order rates.
Momentum is gradually building in our commercial business where sales in the quarter were up low-single digits against a solid quarter a year ago.
Projects continue to resume at varying paces and comparisons are favorable over the remainder of the year.
Property maintenance was down slightly in the quarter though turnover in multifamily properties is improving.
The month of March was positive and we expect to see meaningful improvement as the year progresses.
Protective & Marine was down by a mid-single digit percentage in the quarter, but improved sequentially and delivered strong growth in the month of March.
Growth in smaller customer segments such as flooring, bridge and highway and pharmaceutical was more than offset by softness in the oil and gas segment.
We continue to aggressively pursue opportunities in all these end markets and we expect continued improvement as maintenance projects cannot be delayed indefinitely.
From a product perspective, sales in both interior and exterior paint were up by double-digit percentages with interior being the larger part of the mix, as is normal for our first quarter.
Additionally, this is the third consecutive quarter, spray equipment sales increased by double digits in the quarter.
Contractors typically invest in this type of equipment in anticipation of solid demand.
Our previously announced 3% to 4% price increase to U.S. and Canadian customers became effective February 1st prior to the supply chain disruption the industry began experiencing later in the quarter.
We realized approximately 1.7% from price in the first quarter, and would expect 2% or better in the following quarters.
We will continue to evaluate additional pricing actions as needed.
We opened 11 new stores in the quarter in the U.S. and Canada.
Along with these new stores, we continue to make investments in sales reps, management trainees, innovative new products, e-commerce and productivity enhancing services to drive additional growth.
Moving onto our Consumer Brands Group, sales increased 25% in the quarter, including 2.7 percentage points of positive impact related to currency translation as DIY demand remained robust.
Sales in all regions were above our mid-teen segment growth guidance led by Asia and followed by Europe, North America and Australia respectively.
We exited the Australia business in this segment at the close of the quarter.
As you know, our global supply chain organization is managed within this segment.
We are working collaboratively across all businesses to keep our customers in paint and on the job.
Last, let me comment on first quarter trends in Performance Coatings Group.
The momentum we saw in the third and fourth quarters of last year continued and accelerated in our first quarter.
Group sales increased by a double-digit percentage.
Currency translation was a tailwind of 2% in the quarter.
Price was positive in all regions and all divisions generated growth.
Regionally, sales in Asia grew fastest in the quarter followed by Europe both of which were up by strong double-digit percentages.
Latin America grew by a high single-digit percentage.
North America, the largest region in the Performance Coatings Group continues to gain momentum where sales were up by a low single-digit percentage.
From a divisional perspective, I'll start with the industrial wood division, which has the highest growth in the group.
Sales were up by a strong double-digit percentage in the quarter and we're positive in every region.
Strength in new residential construction continues to drive robust demand for our products in kitchen cabinetry, flooring and furniture applications.
General Industrial, the largest division of the Group, sales were up by a high-teens percentage.
We were positive in every region.
Sales were strong within heavy equipment, building products, containers and general finishing.
While there is likely an element of inventory restocking by our customers in these numbers, we believe growing end market demand is the larger driver given recent PMI and industrial production reports.
Our packaging team also continues to deliver great results.
Sales were up high single-digits against a nearly double-digit quarter a year ago, and were positive in every region.
Demand for food and beverage cans remains robust and our non-BPA coatings continue to gain traction.
This team has been remarkably consistent and has delivered solid growth in every quarter since Sherwin-Williams acquired the business as part of the Valspar acquisition in 2017.
We and our customers continue to invest in this terrific business.
Our Coil Coatings business has also been a remarkably consistent pro forma, sales grew by high single-digit percentage in the quarter against a double-digit comparison a year ago.
This team continues to do an excellent job at winning new accounts in all regions.
We're also seeing a gradual resumption of selected commercial construction projects.
Last automotive refinish sales were up by a mid-single-digit percentage in the quarter.
This level of growth is very encouraging given that miles driven inclusion shop volume remains below pre-pandemic levels, particularly in North America.
We're also pleased with new installations of our products and systems in North America, which were very strong.
This is a good indicator of future momentum in our business.
Before moving on to our outlook, let me speak to capital allocation in the quarter.
We returned approximately $930 million to our shareholders in the quarter in the form of dividends and share buybacks.
We invested $735 million to purchase 3.3 million shares at an average price of $234.96.
We distributed $151.8 million in dividends, an increase of 23.5%.
We also invested $64.3 million in our business through capital expenditures.
We ended the quarter with a debt-to-EBITDA ratio of 2.5 times.
Turning to our outlook, we continue to see robust demand in North America residential repaint and new residential and continued recovery in commercial and property maintenance.
Comparisons in DIY will be challenging over the remainder of the year.
So we are excited by opportunities to work with our retail partners to grow sales in the pros who paint segment.
We expect industrial demand will continue to improve as the year progresses.
We'll continue to leverage our strengths in innovation, value-added services and differentiated distribution as we expect to grow at a rate that outpaces the market.
On the cost side of the equation, we now expect raw material inflation for the year to be in the high single-digit to low double-digit range, a significant increase from the low to mid single-digit range, we communicated in January.
In an already challenged supply chain due to COVID-19, the February natural disaster in Texas, further impacted the complex petrochemical network causing significant disruptions.
These production disruptions coupled with surging architectural and industrial demand.
That pressured supply and rapidly driven commodity prices upwards.
Recovery has been significant in recent weeks and is improving, but it's still far from complete.
At this time, we anticipate some moderation of costs in the back half of the year, though they will still be elevated year-over-year.
As we previously described, there is a lag of about a quarter from the time we see inflation in commodities to the time we see the impact in our results.
Given this timing, we expect to see significant raw material inflation in our second quarter, which will be the highest of the year.
The pace at which capacity comes back online and supply becomes more robust remains uncertain.
We have been highly proactive in managing the supply chain disruptions to minimize the impact on our customers.
We expect to be in a similar mode throughout the summer months as reduced raw material availability resulted in lower than anticipated inventory build during our first quarter.
Our close working relationships with customers and the strength of our global supply chain give us great confidence in managing through any challenges that may occur.
We've also been highly proactive in our pricing actions to offset the raw material inflation we are seeing.
We've issued price increases in both the consumer brands and Performance Coatings Group in addition to the previously announced price increase in The Americas Group.
We likely will need to take further pricing actions if raw material costs remain at these elevated levels.
While we are fully committed to combating rising raw material costs, we also recognize that the timing of price realization will likely result in some near term margin pressure.
Against this backdrop, we anticipate second quarter 2021 consolidated net sales will increase by a mid- to high-teens percentage compared to the second quarter of 2020.
We expect the Americas Group to be up by a mid- to high-teens percentage.
We expect Consumer Brands to be down by a low double-digit to mid-teens percentage including a negative impact of approximately 4 percentage points related to the Wattyl divestiture and we expect Performance Coatings to be up by a high 20's percentage.
We expect to have greater clarity of raw material availability and cost inflation trends at that time as well as further confirmation of the strong demand trends, we are currently seeing.
Our current sales and adjusted earnings per share guidance remains unchanged at this time.
We expect consolidated net sales to increase by a mid to high single-digit percentage.
We expect the Americas Group to be up by a mid to high single-digit percentage, Consumer Brands Group to be up or down by a low single-digit percentage including a negative impact of approximately 5 percentage points related to the Wattyl divestiture and Performance Coatings Group to be up by a mid single-digit percentage.
We expect diluted net income per share for 2021 to be in the range of $7.66 to $7.93 per share compared to $7.36 per share earned in 2020.
Full year 2021 earnings per share guidance includes acquisition-related amortization expense of $0.80 per share and a loss on the Wattyl divestiture of $0.34 per share.
On an adjusted basis, we expect full-year 2021 earnings per share of $8.80 to $9.07, an increase of 9% at the midpoint over the $8.19 we delivered in 2020.
Let me close with some additional data points that may be helpful for your modeling purposes.
We expect to see some contraction in full-year gross margin given the lag between price realization and the rapid and greater than expected increase in raw material costs.
As we capture price and inflation abates, we expect to see gross margin recover and then expand over time just as it has in the previous cycles.
We expect to see expansion of full year adjusted pre-tax margin as we leverage strong sales growth while controlling SG&A.
We will continue making investments across the enterprise that will enhance our ability to provide differentiated solutions to our customers.
We expect to return to our normal cadence with around 80 new store openings in the U.S. and Canada in 2021.
We'll also be focused on sales reps, capacity and productivity improvements, systems and product innovation.
We also plan additional incremental investments in our digital platform and the home center channel.
These investments are embedded in our full year guidance.
We expect foreign currency exchange will not have a material impact on sales for the full year.
We expect our 2021 effective tax rate to be in the low 20% range.
We expect full-year depreciation to be approximately $280 million and amortization to be approximately 300 million.
The capex and interest expense guidance we provided last quarter remains unchanged.
We have $25 million of long-term debt due in 2021.
We expect to increase the dividend by 23.5% for the full year.
We expect to continue making opportunistic share repurchases.
We will also continue to evaluate acquisitions that fit our strategy.
We're off to a great start in 2021 with our excellent first quarter performance.
Our team is operating with momentum and energized by the many opportunities in front of us as the recovery gains strength.
We see demand remaining strong over the remainder of the year and nobody is better equipped to provide differentiated customer solutions than Sherwin-Williams.
We're confident in our ability to manage through transitory raw material availability and cost inflation issues and we expect to deliver another year of excellent results. | compname reports q3 adjusted ffo per share $0.10.
q3 adjusted ffo per share $0.10. | 0 |
Our disclosures about comparable sales include sales from our full-price stores and e-commerce sites, and excludes sales associated with outlet stores and e-commerce flash clearance sales.
Just two weeks ago, I would have wanted to spend a good amount of time on our fiscal 2019 results and share with you the details of our exciting plans for 2020.
With the recent events associated with the COVID-19 outbreak that no longer seems as relevant.
First and foremost, our thoughts are with the people who have been affected by the COVID-19 virus as well as everyone who is working to protect and serve impacted communities.
During these unprecedented times, our priority is and will continue to be the health and well-being of our employees, our customers and the communities in which we live and work.
To the extent it provides a framework for our current environment, I'm going to spend just a moment on our fiscal 2019 results and then spend the rest of our time on how we are responding to the current environment.
Our consolidated financial results for fiscal 2019 were fairly consistent with fiscal 2018.
However, looking at our performance in more detail shows that big strides were made in the right place.
Our direct businesses which are 70% of our sales were strong with positive comps in all quarters of the year by brand and on a consolidated basis.
Importantly, our e-commerce business led the charge with 10% year-over-year growth and 11% comp and now represents 23% of sales.
At the same time, our wholesale sales declined in 2019 as many of those retailers continued to face strategic challenges with sales to department stores representing only 11% of our consolidated revenue.
We would love to continue to partner with these retailers, but in some cases their business model is becoming more challenging and our strategy reflects that.
Our adjusted earnings of $4.32 per share, which were flat with fiscal 2018 included the negative impact of increased tariffs as well as an increase and our effective tax rate, importantly as we ended the fiscal year with very strong liquidity, including $53 million of cash and no borrowings under our $325 million asset-based credit facility which leads us to the topic of the day.
In our 78-year history, Oxford has weathered many crises and we are highly confident in our ability to weather the impact that COVID-19 outbreak is having on our business and the retail marketplace.
We are approaching our businesses with three top priorities; our people, our brands and our liquidity.
First, we have been and will continue to make the health and well-being of our employees, guests and communities in which we live and work our priority.
All of our North American stores and restaurants have been temporarily closed since March 17th and our Australian stores closed earlier this week.
All of our distribution centers are operational and we've implemented a comprehensive program of prudent measures in all of our distribution centers to keep our people safe.
Most of our associates in our corporate and brand offices are working remotely.
As we come out of this crisis, it is critical that any actions we take preserve our ability to have the team we need in place for the future.
Second, our lifeblood is the strength of our compelling brands and we will zealously protect them.
We have a tremendous portfolio led by Tommy Bahama, Lilly Pulitzer, Southern Tide as well as our collection of smaller brands like the Beaufort Bonnet Company and Duck Head.
We will not take actions to try to prop up our top line in the short run that could harm our brands over the long term.
Each of our brands engages their customers with exciting websites and memorable digital marketing programs.
Our technological capabilities will serve us well as we stay connected with our customers during this period of self-isolation.
Our third priority is liquidity.
Importantly, we entered fiscal 2020 with the inventory levels in very good shape.
We had a strong start through the middle of March.
However, as concerns about COVID-19 virus began to impact our business, sales have substantially deteriorated.
We are taking steps to mitigate the risk of the inventory increases by working with our suppliers to cancel delay or reduce our forward purchases.
We are also taking advantage of our strength in digital to remerchandise and remarket our seasonal offerings for this channel.
Finally, preserving our liquidity will be paramount over the near term and we are extremely well positioned on this front.
As I mentioned earlier, we entered 2020 with over $50 million in cash and an undrawn $325 million credit facility.
To further bolster our cash concession and maintain our high level of liquidity, we have drawn down $200 million from the facility.
On the expense side, we are pulling levers across most spending categories.
One of the largest is employment costs which were approximately $260 million in fiscal 2019.
As store and restaurant closures persist, we are using furloughs and layoffs as needed and warranted.
Where possible our plans will include preserving employee benefits at least for a period of time.
At all times, our priorities will be protecting the health of our employees and ensuring Oxford remains well-positioned for the future.
Today Tommy Bahama announced a furlough of most of its retail and restaurant team to begin on March 31st.
Through March 30th these employees will have received full pay and benefits.
During the month of April, Tommy Bahama will continue to cover the cost and benefits for furlough employees.
We are also focusing efforts, including partnering with our landlords as appropriate on mitigating our occupancy costs which were over $100 million last year.
Marketing expense, which was over $50 million last year is being addressed in phases.
Our reliance on digital marketing affords us opportunities to quickly modify our messaging and our spend as needed while continuing to stay engaged with our customers and generate traffic for our e-commerce websites.
Meanwhile reductions are being taken in other areas such as catalogs and photo shoots.
Also other variable costs such as credit card transaction fees, royalties on licensed brands, sales commissions, packaging in the supplies were approximately $50 million in fiscal 2019.
All capital expenditures are being reevaluated with many, including new store openings and remodels, as well as certain IT projects being deferred in this uncertain environment and our Board of Directors reduced our quarterly dividend from $0.37 a share to $0.25 per share.
We believe these measures, among others, position us well to successfully navigate through these unprecedented times.
Ultimately, it's the character and the quality of our people that will help us navigate these troubled times.
By focusing on our people, our brands and our liquidity, we are confident in our ability to continue our history of delivering long-term shareholder value. | compname posts q2 adj. loss per share of $0.38.
q2 adjusted loss per share $0.38.
declares dividend of $0.25 per share.
oxford industries - consumer traffic in brick and mortar locations remained very challenging in quarter.
oxford industries -in q3 expecting year-over-year decline in bricks and mortar traffic to be slightly less pronounced than it was in q2.
expect q3 revenue to decline year over year at a rate similar to q2.
for q4, don't anticipate a significant rebound in brick and mortar traffic.
for q4 believe we will move closer to break-even and expect to return to profitability in fiscal 2021.
oxford industries - believes it has ample liquidity to satisfy ongoing cash requirements in fiscal 2020 & for foreseeable future.
not providing a financial outlook for fiscal 2020. | 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.
Spring's here and we're feeling particularly optimistic and it really doesn't have anything to do with the improving weather.
For the first time in over a year, the news regarding COVID is predominantly positive.
As we sit here today, over 50% of adults in the U.S. have at least one vaccine shot and at the current pace there is potential for 90% of adults in the U.S. to be vaccinated by summer.
We realize that the global progress against the pandemic is uneven, but I am very encouraged on what we're experiencing here on the home front, especially in our target markets.
Our tenants are open and operating, our collections continue to be sector leading, up to 97% this quarter and the velocity of demand for our well-located centers is accelerating.
We had another very strong quarter of leasing, signing over 426,000 square feet of space at blended lease spreads of 12.2% and 6.4% on a GAAP basis and cash basis respectively.
Excluding a single strategic anchor renewal, we realized blended leasing spreads of 16.7% and 10.5% on a GAAP and cash basis respectively.
As we mentioned on our last call, the strong leasing will cause the spread between our leased and occupied rates to widen.
Our current signed, not open NOI is approximately $10 million, which will come online in late 2021 and early 2022.
Another impressive aspect of the new leases is the quality of tenants we are signing.
This quarter our portfolio gained another Total Wine & More at Cool Creek Commons in Indianapolis and another Aldi at our newly acquired Eastgate Crossing Community Center in Chapel Hill.
The latter addition makes Eastgate Crossing a very unique dual grocery anchored center, with all of these joining the existing Trader Joe's.
As we told you last quarter, we've got great expectations for Eastgate Crossing and all of our assets in Raleigh.
Speaking of Raleigh, as I'm sure you've all heard earlier in the week, Apple announced the creation of a $1 billion East Coast campus in the Research Triangle Park located in the Raleigh, Durham MSA.
KRG will be a direct beneficiary of this announcement as we own Parkside Town Commons, a 350,000 square foot Target in Harris Teeter anchored center that is adjacent to the future campus.
Assuming an average salary of $187,000, the 3,000 new employees will generate over $550 million of annual spending power.
Not only is this great news for Parkside Town Commons, it reinforces the migration to warmer and cheaper markets such as Texas, Florida and North Carolina.
We're even seeing this play out in the reallocation of congressional representatives with those same three states adding seats.
With the announcement of the Weingarten/Kimco merger, KRG is now the most compelling way to directly invest in Sun Belt open-air retail real estate.
78% of our ABR is located in the South and West.
Our next closest peer has less than 50% of their ABR in those same markets.
We're proud that our strategy is paying dividends, and we continue to prudently look to expand our exposure to these markets.
As we discussed on our fourth quarter call, we partially match funded our Eastgate acquisition by selling 17 ground leases for a combined $41.8 million.
One outparcel is awaiting final subdivision approval and should close next quarter.
This trade demonstrates our commitment to maintaining our low leverage while at the same time acquiring accretive opportunities.
In terms of our portfolio lease rates, we believe we're at or near the low watermark.
On the anchor front, we've already executed four leases and are negotiating multiple leases on the remaining 23 vacant boxes.
Anchor acceleration is off to a very strong start.
As we discussed last quarter, assuming the current ABR for our in-place anchors, there is a potential mark to market of nearly 20%.
To increase transparency, we've added Page 22 in the sup so you can track our progress as we lease up boxes.
The four leases signed to date have achieved a 12% lease spread and over a 40% return on capital.
These metrics also provide confirmation.
The KRG remains focused on return on capital, not buying up lease spreads.
As we've said before and I'll say again, we're very focused on maximizing total return to our stakeholders.
We believe the market does not fully appreciate the potential upside in our NOI given the robust current leasing environment.
Please keep in mind the while KRG has some of the highest occupancy dislocation in our sector, our revenue decline was one of the lowest.
This means that low paying often dying tenants have finally left our centers.
Not only should this enable us to outperform when it comes to NOI growth, but it allows us to create value by upgrading tenancy, which often results in cap rate compression for the property.
As shown on Page 4, we have the potential to increase our NOI by roughly 14% simply by leasing up vacant space to pre-COVID levels at current portfolio ABR.
Please note we aren't saying that's a guaranteed outcome or providing any sort of forward guidance.
We're simply doing the math using information from our supplement to show investors what's possible.
The strength of our operations is impossible without them.
There are very good times ahead for KRG and I cannot wait to see what the future holds for us.
I want to echo John's enthusiasm for the momentum we are seeing in our industry especially as it relates to leasing.
I'm equally enthusiastic about some of the structural changes we see coming out of COVID.
Many retailers have a renewed appreciation for the value of brick and mortar locations, realizing the importance of these distribution channels as they reimagine their supply chains.
Another pleasant surprise we are experiencing as we emerge from the pandemic is a change in the national narrative.
Over the course of the decade, we have steadfastly maintained that the relentless reports regarding the depth of retail were greatly exaggerated.
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, last quarter, we guided to 2021 FFO on an as-adjusted basis, so as to reduce the noise associated with 2020 receivables and 2020 bad debt.
By way of example, to the extent we are unable to collect any of the 2020 accounts receivable, it will become a bad debt expense in 2021, but it will be excluded from our FFO as adjusted.
The same holds true in the reverse.
As we continue to collect 2020 bad debt, we will recognize that as revenue, but it will also be excluded from our FFO as adjusted.
As set forth on Page 17 of our supplemental, the net 2020 collection impact in the first quarter was de minimis with the collection of $2.2 million of prior bad debt, offset by $1.9 million of accounts receivable we've now deemed to be on the collectables.
There are other several notable items on Page 17 of the supplemental that demonstrate our improving fundamentals on a sequential basis.
Total bad debt to this quarter was $1.6 million as compared to $2.6 million for the fourth quarter of 2020.
Our first quarter recurring revenue has ticked up compared to fourth quarter of 2020.
As for accounts receivable, we collected $5.8 million that was outstanding at year end, including deferred rents.
Today, total outstanding deferred rent stands at $3.5 million, down from $6.1 million at year end, with only $30,000 delinquent to date.
With respect to our small business loan program, the total balance is down to $1.4 million and not a single tenant is delinquent.
Needless to say, these are all encouraging signs regarding the health of our tenants.
Last quarter, we did not give same property NOI guidance as we don't feel like this is a meaningful metric in light of the pandemic impacted 2020 results.
Our same-store NOI growth this quarter is negative 2.9% as a result of COVID-related vacancies.
This includes the benefit of approximately $800,000 of previously written-off debt that we collected in the first quarter.
Excluding those amounts, our same-store NOI would be negative 4.5%.
At 160 basis point difference, it's just noise from 2020 and is precisely why we didn't provide guidance on this metric.
While we are committed to reporting this number, it is best taken with a grain of salt.
Our balance sheet and liquidity profile remains solid.
Our net debt to EBITDA, pro forma for the ground lease dispositions, was 6.6 times, down from 6.8 times last quarter.
During the first quarter, we issued $175 million of exchangeable notes due in 2027.
These notes have an interest coupon of 0.75%.
In conjunction with these notes offerings, we entered into a capped call transaction to increase the conversion price of the notes to $30.26.
The proceeds of this transaction will remain in the balance sheet to retire the 2022 mortgages as they become due next year.
Excluding future lease-up costs, we have only $15 million of outstanding capital commitments and have roughly $420 million of liquidity.
We are extremely pleased with the execution and the added flexibility this delivers to our balance sheet.
We are raising our 2021 guidance of FFO as adjusted to be between $1.26 and $1.34 per share.
This guidance assumes full year bad debt of approximately $7.6 million and no additional material transactional activity.
We are in the early stages of the recovery and while we have put some points on the board, we still have room to run.
We have an envious balance sheet, a best-in-class platform, a strong portfolio of assets and a market strategy that continues to pay dividends. | 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. | 1 |
During today's call, we will also reference non-GAAP metrics.
I greatly appreciate the work they do every day to keep us moving forward.
As always, we remain focused on those things under our control.
Despite a significant shift in the economic environment during fiscal '20, there were several things that went as planned including: sales of replacement parts performed better than new equipment and first-fit products, gross margin increased from the prior year, we reduced our discretionary expenses while investing in growth businesses, and we maintained a strong financial position while returning cash to shareholders through dividends and share repurchase.
We are entering fiscal '21 with clear priorities and engaged employees.
We do not anticipate strong market conditions overall this year but our diverse business model and robust operational capabilities give me confidence that we can make progress on our strategic initiatives in any economic environment.
We will talk more about our longer term opportunities later in the call.
So I'll now turn to a brief overview of fourth quarter sales.
Total sales were $617 million in the quarter with sequential increases in June and July.
Compared with the prior year, sales were down 15%, which is consistent with the forecast we provided in early August.
Both segments experienced a similar decline.
However, there was quite a bit of variability within the results.
In the Engine segment our first-fit businesses remain under the most pressure.
Fourth quarter On-Road sales were down 44% from the prior year.
The U.S. is the largest portion of On-Road and it accounted for much of the decline as the cyclical slowdown in Class 8 truck production was magnified by the pandemic.
As a reminder, On-Road first-fit in the U.S. is only about 3% of total Donaldson sales so our aggregate exposure to that market is limited.
Sales in Off-Road were down 24% in the quarter.
More than half the decline was due to Exhaust and Emissions.
There were pre-buys in Europe last year related to an oncoming regulatory change and new programs for our Exhaust and Emissions products are not yet at meaningful volumes.
In the U.S. production on heavy duty Off-Road equipment remains depressed, particularly for the construction and mining industries.
On the other hand, Off-Road sales in China were up nearly 50% in the fourth quarter.
The Chinese government is investing to stimulate activity which is benefiting our Off-Road business.
Additionally, we continue to win new programs with local manufacturers and some of those programs were won with PowerCore.
These are new customer relationships in the country that produces more heavy duty equipment than anywhere in the world.
We are learning how to best support these local manufacturers and we know that will come with order volatility, but our team in China is motivated as we see the opportunity for significant long-term growth.
Sales trends for Engine aftermarket were predictably better than our first-fit businesses.
Fourth quarter aftermarket sales were down 11% reflecting a decline in the mid-teens for sales through our independent channel.
The headlines in our independent channel are fairly consistent with third quarter.
Sales in the U.S. fell with the collapse of the oil and gas market combined with slowing transportation activity.
In Latin America, utilization is slowing across the region as the spread of the virus is compounding the impact from geopolitical uncertainty.
And fourth quarter sales in Eastern Europe remain strong as we continue gaining share.
Sales through the OEM channel of aftermarket experienced a more modest, low-single-digit decline.
In the U.S., large customers pulled down inventory to match demand, which was partially offset by strong growth in China as we continue gaining share with local customers.
In fact, aftermarket sales in China were at a record level last quarter and we see a long runway as we expect to continue winning new programs with innovative technology.
Our portfolio of innovative products performed well in the fourth quarter.
This portfolio makes up nearly a quarter of the total aftermarket revenue and fourth quarter sales were up in the low-single digits.
For nearly two decades, we have been improving, expanding and reinventing our offering related to these razor-to-sell razor-blade products.
After all that time we still have very strong retention rates.
These products create a significant opportunity for growth and relative stability in our Engine business.
So, we will continue to invest in new technologies for a long time to come.
Sales of Aerospace and Defense were down 3% in fourth quarter driven by soft sales of products for commercial helicopters.
The decline was partially offset by a strong increase in sales for ground defense vehicles but some of the growth is timing-related as key distributors build inventory in the quarter.
I also want to update you on a change to our strategic portfolio classification.
Beginning in fiscal '21, we are recategorizing the defense business to critical core from mature.
Our mature businesses are committed to generating cash that allows for investment elsewhere while critical core businesses are geared toward driving share gains in existing markets with new technology, services and relationships.
The Defense business has won new programs with our robust engineering capabilities and we expect these wins will deliver solid returns over a long time horizon.
Turning to our Industrial segment, fourth quarter sales were down 15% driven in large part by the Dust Collection business within Industrial Filtration Solutions or IFS.
Sales of new dust collectors and replacement parts were down as customers continue to defer investment and reduce output.
The quote-to-order cycle remains elongated with large projects being put on hold while smaller must-do projects tend to move forward.
At the same time, our value proposition still resonates.
Fourth quarter sales of our Downflo Evolution dust collection systems were up in the low teens and the sales of those replacement parts grew more than 30%.
The Downflo family of products is only about 15% of total dust collection sales today, but it has grown rapidly as customers appreciate the space and energy savings it offers and we value the ability to retain the aftermarket.
We are also building the dust collection business through our e-commerce platform shop.
We turned on the ability to take guest orders earlier this year and we are encouraged by the results.
While incremental dollars are still small, we have seen a significant number of new dust collection customers.
With our robust sales and delivery model, we believe the simplicity of our e-commerce platform gives customers another reason to choose Donaldson.
Fourth quarter sales of Process Filtration were down in the low-single digits after an increase of more than 10% last year.
The decline was driven by new equipment while replacement parts were about flat with the prior year.
We continue to make progress penetrating the highly valuable food and beverage industry.
We position ourselves as an engaged partner and we market our ability to quickly fulfill orders with a product that can help improve efficiency in our customer's processes.
The pandemic gave us the opportunity to prove this value proposition to our customers in the food and beverage industry and our Process Filtration team delivered.
We remain very excited about this market, so we will continue to invest in growing the sales force and adding new tools to drive this profitable business.
Sales of Special Applications were down 10% in fourth quarter.
Disk Drive was down from the prior year after having a significant increase in third quarter while the slowdown in the automotive market resulted in lower sales of Venting Solutions.
Fourth quarter sales in Gas Turbine Systems or GTS were up 6% due primarily to strength in small turbines.
Once again the GTS team delivered another profit increase in terms of both dollars and rates.
As you know, we shifted the GTS go-to-market strategy four years ago.
We determined that the best path forward was to focus on replacement parts and small turbines while being highly selective in deciding which large turbine projects we pursue.
The GTS team has done an incredible job executing their strategy and we see it in the results.
In the past quarter we also chose to consolidate our joint venture in Saudi Arabia into our company.
Once again, we are focused on rightsizing and streamlining GTS to enhance our profitability.
Based on what the GTS team has delivered and the opportunities in front of us, we are reclassifying GTS as a mature business in our portfolio.
The GTS team has transitioned from fixing the business to driving profitability and we are on solid footing today.
The success in GTS is not an isolated incident.
Our company is filled with great people working together to deliver results and create value for all our stakeholders.
That's why I'm comfortable and confident in our future.
Before turning the call to Scott, I want to briefly touch on fiscal 2021.
We're not sure how long the pandemic will last nor are we sure about its ultimate impact on our business.
Given those uncertainties, we will remain focused on what we control, prioritizing the health and safety of our employees, fulfilling our customer commitments, pursuing market share and growth opportunities around the world, executing margin enhancement initiatives and maintaining a balanced approach to expense management, which includes making targeted investments to advance our strategic priorities.
Scott will share some more fiscal '21 details.
Like most companies, we had to quickly adjust to a new way of working over the past six months, and our employees did an excellent job at that period.
We increased our level of collaboration, we deepened our relationships with customers and suppliers, and we performed in critical businesses around the world with minimal disruption.
Overall, I'm very impressed by what our team accomplished.
As we turn to fiscal '21, we have a solid foundation.
But the markets are not yet on firm footing.
Given the wide range of possible outcomes, including the timing and shape of the inevitable recovery, we are not issuing detailed guidance at this time.
We do however want to provide some of our 2021 planning assumptions.
I'll cover those later in the call, but first I'll share some thoughts on fiscal '20 results.
Decremental margin was a notable highlight for us.
We delivered 20% in the fourth quarter and 18% for the full year.
Those results are stronger than our historic averages.
So let me walk through some of the details.
I'll start with operating expenses, which declined 10% to $125 million in the fourth quarter, that's flat sequentially, and it's our lowest fourth quarter level in four years.
Discretionary expenses were down significantly, due in part to pandemic-related travel restrictions, and we maintained our investments in strategic growth businesses like Process Filtration, Dust Collection and Connected Solutions.
We will continue to focus on balancing expense [Indecipherable] investments, and we are pleased with the performance in the fourth quarter.
We are also pleased with our gross margin performance.
Fourth quarter gross margin was up 20 basis points in the prior year, and our full year rate was up 50 basis points despite headwinds in lower sales and higher depreciation related to our capacity expansion projects.
As a side note, many of these projects are now completed.
That's why our capital expenditures in fiscal '21 are planned well below the $122 million we invested last year.
Our focus has now shifted to the optimization opportunities enabled by these investments.
We plan to lower our cost structure while maintaining or improving service levels.
While benefits from these initiatives will ramp up over time our list of optimization projects give me confidence that we can deliver strong returns with these new assets.
Lower raw material costs are helping us offset the loss of leverage, impact on gross margin.
We have seen favorability in market prices for steel, media and petroleum-based products and our procurement team is driving incremental savings as they strengthen our supplier network while improving terms.
I also want to touch on pricing, while it has been a major contributor to the year-over-year gross margin increase it hasn't been a headwind.
We have more latitude to drive pricing in many of our replacement parts businesses and teams like those in the independent channel of Engine Aftermarket have done an excellent job consistently executing our pricing strategy.
It makes a big difference especially in this economic environment.
A favorable mix of sales is also making a difference to gross margin.
In the fourth quarter and for most of the year we have realized mixed benefits as replacement parts make up a greater share of total sales.
To a certain extent these mixed benefits are by design.
We invest in technology to win first-fit programs that drive aftermarket retention.
As we move through an economic cycle, our strong base of recurring revenue creates some relative stability and provide some gross margin inflation [Phonetic].
Replacement parts now account for 64% of total sales giving us confidence in the durability of our business model.
Before moving further down the P&L, I want to quickly talk about segment profit margins.
The story is Engine is consistent with the consolidated results.
Mix benefits and lower raw material costs after the loss of leverage results in a year-over-year margin increase of 20 basis points in the fourth quarter.
Within the Industrial segment, the loss of leverage was magnified by continued investments in our strategic growth businesses.
We expect Industrial margins will bounce back helping us deliver our goal of mixing the company's margins up over time.
Moving back to the P&L, Other income was $2.7 million in the fourth quarter compared with an expense of $0.5 million in the prior year, and improved performance in our joint ventures was a benefit in fiscal '20 and the fourth quarter expense in the prior year reflects a charge related to our global cash optimization initiatives.
These initiatives, which allowed us to streamline our legal and fee structure were enabled by tax reform.
We excluded the charge of last year's calculation of adjusted earnings per share and we also excluded a non-recurring charge related to tax reform legislation.
With that in mind, it's best to compare the reported fourth quarter tax rate of 21.1% with the prior year's adjusted tax rate of 21.4%.
While the delta between rates is not significant, I'll point out that current and prior year rates were well below what we would typically expect.
The fourth quarter 2020 rate benefit from a favorable mix of earnings across jurisdictions while the 2019 adjusted rate included a non-recurring benefit related to the favorable settlement of an audit.
As we think about fiscal '21, we see our full year tax rate going up in 2020 to be more in line with our long-term estimate of 24% to 27%.
In terms of our financial position, we feel good about where we ended the year.
Our leverage ratio was 0.9 times net-debt-to-EBITDA and in the fourth quarter we paid off a term loan for $50 million and we reduced borrowings in our revolver by $110 million.
We proactively reduce from our revolver in the early days of the pandemic as a way to bolster our liquidity out of an abundance of caution.
While markets still are uncertain, we are confident in our strong position and no longer feel the need for that extra layer of security.
Receivables were down meaningfully from the prior year, which is what we expect in this environment.
Inventory was also down.
So we plan further improvements this year as we focus on leveling with demand.
Our fourth quarter and full year 2020 cash conversion rates increased meaningfully to 165% and 103% respectively and we plan to exceed 100% again this year.
Our fiscal '21 assumptions for sales are directionally consistent with recent trends.
Sales are expected to vary widely by geography and market and sales of our replacement parts and products for new markets should continue to outperform the company average.
Additionally, we expect sales during the first half of '21 will be down versus the prior year due to the timing of when the pandemic began.
We are seeing these sales trends play out in August, which we expect will be down about 10% from the prior year.
Total sales for the month will also be down from July, but that's typical seasonality.
Regional trends in August match what we saw in the fourth quarter.
Sales in the APAC region are performing the best versus the prior led by growth in China.
Europe is faring better due in part to currency while the U.S. and Latin America remain under the most pressure.
And as expected we have pockets of relative strength from some of our more stable businesses including Engine Aftermarket and Process Filtration, which are both up in Europe while new equipment remains under more pressure.
In terms of fiscal '21 gross margin, benefits from product mix and lower raw material costs would lessen as we compare against strong tailwinds in the prior year.
At the same time, we will execute our optimization projects to position ourselves for long-term increases in gross margin.
Our fiscal '21 operating expenses will also have some puts and takes.
Resetting our annual incentive compensation plan generates a headwind of about $13 million and we are planning to make further investments in our strategic growth businesses and technology development.
We plan to substantially offset these increases by controlling expenses, which will likely see some benefits from pandemic-related restrictions and comparing against a higher level spend in the first half of the prior year.
Should we see an opportunity that makes sense, we will also explore additional optimization initiatives.
Finally, we plan to repurchase at least 1% of outstanding shares in fiscal '21, which would offset any dilution from stock-based compensation.
Any repurchases beyond that level would be governed by macroeconomic conditions, our investment opportunities and our balance sheet metrics.
Should conditions improve, it is not unreasonable to assume this goal above the 1% in fiscal '21.
At a high level, our objectives for the New Year are consistent with our long-term strategic agenda.
We will pursue growth and market share opportunities in our Advance & Accelerate portfolio of businesses, drive optimization initiatives that will strengthen gross margins, control discretionary expenses while making targeted investments and protect our strong financial position to discipline capital deployment and working capital management.
These are the actions we can control and I am confident in our ability to deliver in 2021.
Before turning the call back to Tod, I want to share some news.
After five years as our Investor Relations Director, Brad is going to be moving to Belgium to take over as Finance Director of our Europe-Middle East region.
COVID makes the timing a little uncertain, but I know he's committed to facilitate a smooth transition when we find his replacement.
You have done an excellent job and congratulations on the exciting new adventure with Donaldson.
You'll clearly be missed in this role, but we all know it's a great opportunity, so we're very excited for you.
I'm confident in our ability to navigate the complexities of the current environment and I'm equally confident in our ability to create long-term value by meeting the evolving needs of our customers.
We have strong relationships with our customers and they range from some of the world's biggest brands to small business owners.
Our goal is to solve our customers' complicated filtration challenges in a way that allows them to deliver great products efficiently and I think we're doing well against that objective.
Let me share some examples of what I mean.
In the Engine segment, our Filter Minder team released a wireless monitoring system that helps fleet managers optimize their maintenance schedules for On-Road and Off-Road equipment.
Our system integrates into the existing telematics and fleet management infrastructure making it easy for our customers to adopt this valuable technology.
We're also expanding connecting solutions into the dust collection market with our IQ offering.
This service provides customers with real-time monitoring of their equipment performance helping them save energy costs and reduce unplanned downtime.
Once again, we made it easy to adopt, our IQ set up can be used on any brand of dust collector and the retrofit process is very simple.
Our e-commerce platform is another tool for helping customers operate more efficiently.
donaldson.com has a global reach and offers features like real-time availability and personalization functionality making it easy for customers to find what they need and place new or repeat orders.
As always, new technology is a critical part of our success formula and we continue to expand our technologies and solutions to drive growth.
Many of our Engine customers are looking to improve fuel economy and reduce emissions and our products can help them achieve their goals.
We have shown that consistent use of our PowerCore products can help end-users improve fuel economy and it provides value to our OEM customers as they can retain more of their parts business.
We still see many opportunities with diesel engines and we also see a growing opportunity with alternative powertrains like hybrid solutions and hydrogen fuel cells.
Hybrid platforms leverage the portfolio of air and liquid solutions we have today so we have good opportunity with that equipment.
The needs are different for fuel cells and we have a specialized air filtration system that is specifically designed to meet those needs.
In addition to our air systems, we also have venting products and specialized membranes for fuel cells.
With our technical capabilities, we are well-positioned to participate in this growing market.
We are also pursuing non-Engine markets like food and beverage.
Sales of process filtration were about $15 million in fiscal '20, that's an increase of more than 60% over the past three years.
We have continued investing in new technologies and we are building capabilities that will facilitate our future expansion into life sciences.
Our long-term success is dependent on our team, so we're committed to making our company a great place to work.
We have a strong culture and we place a high value on integrity, commitment, respect and innovation.
We also have a continuous improvement mindset, so we've recently created a diversity, equity and inclusion council that will help identify and implement practices to make us a stronger company.
We are also on a journey with our sustainability practices.
We began developing our global sustainability strategy last year.
We have engaged our stakeholders and we have identified a long list of projects while reducing greenhouse gas emission, energy consumption and wastewater.
Implementing and maintaining sustainable practices is one more way we drive toward our purpose of advancing filtration for a cleaner world.
I'm proud of what we accomplished as One Donaldson and I look forward to another successful new year. | sees fy sales up 9 to 11 percent.
expects to repurchase 1.5% to 2.0% of its outstanding shares during fiscal 2021.
challenges in supply chain are expected to continue through q4 2021.
expects fiscal 2021 capital expenditures between $55 million and $60 million. | 0 |
Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer.
Whether working on-site performing essential maintenance or concierge duties, whether you're engaging remotely with prospects using our new touchless leasing process, or whether you are working from home in the many corporate roles that make Equity Residential hum, you are keeping our company rolling.
Now turning to our business.
The best way I can describe it in the last seven weeks is resilient.
In April, we collected in our residential business about 97% of the cash that we would usually collect.
While no part of our country's economy will be immune from the coming recession, we feel that our portfolio of properties, populated with residents having average annual household incomes of $164,000 and often employed in technology and other knowledge industries, will fare relatively well.
Our operations team has also shown resiliency.
When the pandemic hit in full force in mid-March, Michael Manelis and his team quickly pivoted, and over a few week period, adjusted our leasing and service operations dramatically.
On the leasing side, Michael and his team were able to quickly create a touchless process that made our customers comfortable to lease.
And on the service side, we focused on essential maintenance tasks and cleanliness, which helped our existing residents feel safe and comfortable living with us through this pandemic.
Michael will give you more details about all of this in a minute.
When the lockdowns were initially announced, we saw our leasing activity decline significantly, but demand has since picked up, as we noted in the release.
We see our recent pickup in demand as a further indication that our properties and markets will remain attractive places to live for our target demographic.
All in all, we think our people and our properties have been resilient, with the capital R going through this crisis.
We have further fortified our already strong balance sheet, as Bob Garechana will describe in a moment.
We are also preparing in earnest for our properties to operate with fuller staffing as lockdowns across the country are relaxed.
We will keep in mind the safety of our employees and residents as we reengineer our business.
Equity Residential has historically performed well in these downturns, and we would expect this to be no exception.
We are optimistic that we will perform well operationally given these circumstances and that we will find opportunities to add high-quality assets for our platform as the economy works its way through this recession.
Finally, we did withdraw guidance in the release.
We are unable to estimate with precision the continuing impact of the pandemic and the timing and character of the reopening process on our business.
It makes it impossible for us to give you the high-quality estimates of where our business might go in the near-term that you're used to receiving.
We did provide a significant amount of information on April's preliminary results and hope that is helpful.
So today, I'm going to provide a quick recap of operations over the past 45 days.
Prior to the COVID-19 pandemic, we were off to a very good start for the year.
Our occupancy was ahead of expectations, and we were well positioned for the primary leasing season.
And then COVID-19 hit, causing us to adjust our operations to this new unprecedented challenge.
Let me start by acknowledging the dedication and hard work of our employees during these unprecedented times.
They inspire me with their ability to quickly adjust operations while keeping an intense focus on our customers, properties, themselves and their families.
Shelter-in-place was mandated by governors in our markets in early to mid-March.
For us, this means that our more than 150,000 residents began staying at home 24 hours a day, seven days a week.
In response to shelter-in-place, we made some key changes to our operations.
We closed our common area amenities, we increased cleaning frequency, we quickly modified our website and our artificial intelligent E-Lead responses to pivot the entire sales process to virtual leasing.
Capturing video content and conducting the sales process via video conversations allowed the business to continue uninterrupted.
This process would have normally taken us several months to accomplish.
We also locked the office doors to encourage social distancing but kept the business running as we implemented shift rotations of the staff to reduce the number of employees coming to the property.
When we look back to March 15, we saw our traffic and applications drop 50% compared to the same period in 2019.
That being said, we continued to receive over 375 new applications each week through the end of March, which we see as a validation of the new leasing process.
With reduced traffic coming through the front door, our focus has been on keeping current residents in place.
We are currently offering residents the option to renew without increase.
Overall, retention in April and May has improved as we are now renewing in the mid- to upper 60% range, which is a 300 basis point improvement from last April and an almost 800 basis point improvement from last May.
New York is having the strongest renewal percents of nearly 70% for March, April and May.
Despite this good retention, our overall occupancy since March 31 has declined by 130 basis points.
We expect the occupancy impact to be the most pronounced in the second quarter, setting a new base from which we hope it will improve as shelter-in-place orders are lifted.
Let me share some color on the performance in April.
At the beginning of April, we began to notice an improvement in demand, with both traffic and leasing activity rebounding by almost 30% and actually now trending on par with last year.
In fact, we had over 900 applications last week, which is a significant improvement compared to the 375 that we were averaging in late March and very encouraging for us.
Given the activity in the last 45 days, we would like to see that volume grow even more to help offset the lower demand that we experienced in March and to match the increased volume of applications that we usually get in May.
What is clear is that our high-quality, well-located portfolio continues to attract future residents.
While the pandemic is certainly a deterrent, people have life reasons that require them to move like changes in jobs or partners.
On Page 13, we reported the first quarter and included April monthly pricing statistic by market.
I would remind everybody this is only one month of data, and that longer periods of time are usually required to show definitive trends.
Mark mentioned the strength and quality of our resident base.
This is evident by the fact that we received a very strong 97% of the cash collections in April relative to our March collections.
This resilience delivered 5.4% delinquency, which is quite good given these unprecedented circumstances.
Notably, Seattle and Denver were our markets with the lowest delinquency at below 3% and Los Angeles was the laggard close to 8%.
The rest of our markets were centered around the average.
We have also taken a cut at looking at property type.
And in most of our markets, our garden-style or more suburban assets have experienced higher delinquency than our mid-rise, high-rise more urban locations.
As we move through the continued disruptions created by COVID-19, we remain strategic in our pricing efforts.
Sitting here today, our base rents are down 4% compared to the same week last year.
Let me give you some color on notable markets.
Overall, our strongest market is Seattle, which has shown great resilience, with limited delinquency and the best overall revenue growth performance in the portfolio.
New York is a bit of a mixed story.
On one hand, it has the strongest retention of any market, but it has also not shown the signs of recovery that other markets have with traffic and applications.
Long term, we expect the New York market to benefit from low new supply and technology firms expanding their presence in the city.
We are hoping leasing activity will improve as the hard-hit New York area gets through the worst of the pandemic.
Finally, we started 2020 anticipating that Los Angeles would have a very challenging year given the new supply pressure.
COVID will definitely add to this.
Despite recent improvements in applications, we expect this market to remain challenged with meaningful pricing pressure that will continue as supply is delivered.
So where do we go from here?
Well, we're now in the early stages of preparing our properties for the new normal.
We expect things to shift over time.
Right now, the new normal is going to be focused on increased deep cleaning standards at the properties; adjustments to the layout of common areas, including fitness and lounges to accommodate social distancing; balancing the capabilities of virtual leasing with the need to engage with our customers; and ultimately, staggering work shifts to ensure that we limit the number of employees on-site at any given time.
These are challenging times, but our business is resilient, and our teams are positioned to deliver.
Starting with our new disclosures.
We've modified our disclosures to help better present our business and where it stands today.
We do so by providing April operational and collection statistics, by breaking out our same-store performance between residential and nonresidential, a practice that we would expect to continue as the performance from our main residential business, which makes up approximately 96% of total revenues, is likely to diverge meaningfully in the upcoming quarters for our much smaller nonresidential business.
This includes modifying the schedules on Pages 10 through 12 of the release.
And finally, by providing an update on liquidity and balance sheet information.
In order to accomplish this, we've defined a number of key terms in the back of the release.
We hope that these definitions will provide specificity and clarity to our disclosure.
Part of the new disclosure includes a breakout of nonresidential operations for our same-store portfolio.
This is a modest component of our business at 4% of total revenues and consists mostly of ground floor retail and public nonresident parking at our well-located apartment communities.
Ground floor retail makes up about 2/3 of this 4%, with public nonresident parking making up the rest.
As you would suspect, a good portion of the retail tenants that rent our space have been significantly impacted by shelter-in-place orders.
This is evidenced by the 58% April collection rate for all retail that we disclosed, which, while certainly below what we would have hoped, may be higher than many other retail landlords.
The drugstores, bank branches and national chains that occupy a good portion of these spaces have, for the most part, continued to pay rent, while local small business owners have struggled.
With nonresident parking, we've seen an approximately 30% decline in parking volume for April, given the lack of public events and increased work-from-home arrangements.
We suspect that this may recover as shelter-at-home orders are eventually lifted.
Finally, a few highlights on our balance sheet.
We ended the first quarter with an incredibly strong net debt to normalized EBITDA of 4.9 times and nearly $1.8 billion in liquidity under our revolving credit facility.
Subsequent to quarter end, we improved this already strong position by closing on a very attractively priced 2.6% or $195 million 10-year GSE loan and by closing on the sale of an asset in the San Francisco Bay Area.
With these steps, we sit here today with over 84% of our total NOI unencumbered, about $150 million in commercial paper outstanding and readily available liquidity of over $2.2 billion under our revolving credit facility, which does not mature until 2024.
This liquidity is more than sufficient to address our modest level of anticipated development spend, minimal debt maturities in 2020 and to address our next significant debt maturity, which isn't until December of 2021.
Our balance sheet is in excellent condition to weather the storm and take advantage of opportunities should they present themselves. | equity residential withdraws full year 2020 earnings guidance. | 1 |
And from TDS Telecom, Jim Butman, President and Chief Executive Officer; and Vicki Villacrez, Senior Vice President and Chief Financial Officer.
We provide guidance for both adjusted operating income before depreciation and amortization or OIBDA, and adjusted earnings before interests, taxes, depreciation and amortization or EBITDA to highlight the contributions of US Cellular's wireless partnership.
In terms of our upcoming IR schedule on slide 3, we'll be attending the Raymond James Institutional Investors Conference on March 2 in Orlando, and the Morgan Stanley Technology, Media and Telecom Conference on March 5 in San Francisco.
I will be doing a Non Deal Roadshow with Strategas Securities in Portland on March 6.
And as you know we have an open door policy.
So if you're coming to Chicago and would like to meet with members of management or the IR team, please let us know and we will try to accommodate you, calendars permitting.
Also, I did want to highlight that we have yet again announced an increase in our dividend rate for 2020, this being the 46th consecutive year that we've raised our dividend.
And before turning the call over, I want to remind everyone that even though the auction -- FCC Auction 103 has ended, we are still in the assignment phase and we are unable to respond to any questions related to any FCC auctions.
I'll start on slide 5.
And before talking about 2019 and 2020, I first want to take a step back and look at some of our multi-year investments that have positioned us to better serve our customers into the future.
Let's start with Spectrum.
While I cannot comment on Auction 103, I do want to point to the success we've had in Auctions 101 and 102 where we secured an important spectrum for our 5G plans.
In terms of the customer experience, the introduction of unlimited plans has been a game changer for this entire industry.
And as much as I still worry about the long-term economics of unlimited plans, customers do love them.
They have improved overall satisfaction levels and the migration to these higher-priced plans has helped drive increases in average revenue per user.
To support the increased data usage, we have continued to invest in our network capacity.
Other investments we've made include a brand refresh turnaround Bringing Fairness to Wireless and designed to broaden our appeal in the marketplace.
We have also enhanced our websites so the customers have a better and faster online experience, giving us a platform for future growth in this channel.
Also there are very positive developments in our roaming economics.
Voice over LTE technology has broken down the old CDMA, GSM only roaming patterns and today we have roaming agreements with all of the big four carriers.
As a result, we have seen roaming traffic and roaming revenues growing and roaming expenses declining, a very nice combination.
We've also invested in our culture.
We know it's our frontline associates that delivers the outstanding customer experience US Cellular is known for in the marketplace.
We have numerous programs to ensure our exceptionally high levels of engagement remain and our culture continues to thrive.
Our associates are our secret sauce and I greatly appreciate all of their efforts.
As mentioned earlier, we continue to invest in the network to meet capacity and the ongoing growth in demand and to improve speeds too.
We are completing the final stages of our Voice over LTE rollout and beginning our multi-year rollout of 5G.
Our initial 5G rollout in 2020 will use 600-megahertz spectrum.
We're planning to augment it with millimeter wave spectrum to increase speeds and support future use cases.
These charts on this page show how while meeting our customers' ever-increasing demands for data, we have at the same time managed the businesses to drive annual increases and adjusted earnings before taxes, depreciation -- and depreciation and amortization.
We'll continue to make investments for the long term, including Voice over LTE, network modernization, Spectrum and 5G.
Turning to 2019, slide 6, we worked hard in 2019 to protect our customer base and smartphone connections grew by 71,000 during the year.
For the full year, handset churn increased slightly from the previous year, but still low indicating strong levels of customer satisfaction, especially in this ultra-competitive market.
Another priority was growing revenues.
We reported a 2% increase in service revenues for the year driven by a 2% increase in postpaid average revenue per customer, and a 6% increase in prepaid average revenue per customers.
Factors that drove this growth include a shift in mix in connected devices to smartphones, customers migrating to higher priced service plans and increases in the penetration of device protection plan.
Also contributing to the growth in service revenues was a 13% increase in roaming revenue.
For the third year in a row, we tightly managed costs throughout the company.
In fact, for the year, cash operating expenses rose just four-tenths of 1%.
Key to this was a company wide initiative that has provided $500 million of cumulative cost savings over the last three years, and we believe we have more opportunities in 2020.
One highlight was our ability to manage network costs, given the impact from increased data usage.
To put this in perspective for the full-year, data usage grew 39% while systems operation expenses were essentially flat, quite an accomplishment.
The combined result of all these actions as we grew adjusted EBITDA 5% in 2019.
Network quality remains core to our customer satisfaction strategy.
In 2019, we continue to invest in the network to accommodate increased data usage and to enhance the customer experience.
We ended the year with VoLTE technology available to nearly 70% of our customers and deployment to the final markets is expected to be largely completed in 2020.
And we'd aim to deploy 5G technology in Wisconsin, our first 5G markets with commercial launches planned in the next couple of months.
I want to talk first about postpaid handset connections shown on slide 7.
Postpaid handset gross additions for the fourth quarter were 130,000, down from 136,000 a year ago due to aggressive industry wide competition on both service plans and devices.
Postpaid handset net additions for the fourth quarter were positive 2,000.
This was down from 20,000 last year, driven by the decline in gross additions and higher churn.
I'll touch more on churn in a moment.
On a sequential basis, both gross and net additions improved due primarily to the normal seasonal trend.
In addition to smartphone gross additions, we continue to have existing handset customers upgrading from feature phones to smartphones.
As you can see on the graph on the right side of this slide, including the upgrades, total smartphone connections increased by 27,000 during the quarter and by 71,000 over the course of the past year that helps to drive more service revenue given that ARPU for a smartphone is about $22 more than ARPU for a feature phone.
Next I want to comment on the postpaid churn rate shown on slide 8.
Postpaid handset churn depicted by the blue bars was 1.11% for the fourth quarter of 2019, higher than last year, driven primarily by aggressive industry wide competition.
Total postpaid churn by handsets and connected devices was 1.38% for the fourth quarter of 2019 higher than a year ago and flat sequentially.
Now let's turn to the financial results.
Total operating revenues for the fourth quarter were $1 billion, essentially flat year-over-year, while service revenues increased $9 million.
Retail service revenues increased by $3 million to $666 million.
The increase was due largely to higher average revenue per user, which I'll cover on the next slide.
Inbound roaming revenue was $42 million that was an increase of 11% or $4 million year-over-year, driven by higher data volume.
Finally, equipment sales revenues decreased by $8 million or about 3% year-over-year.
This was primarily driven by a decrease in the number of devices sold.
As I mentioned earlier, there was a decrease in gross additions activity year-over-year that impacted device sales.
In addition, we are continuing to see that existing customers are holding onto their devices for increasingly longer periods, resulting in a slight decrease in upgrade transactions.
Now a few more comments about postpaid revenue shown on slide 10.
Average revenue per user or connection was $46.57 for the fourth quarter, up $0.99, or approximately 2% year-over-year.
The increase was driven by several factors, including a higher mix of smartphones relative to connected devices, a shift in service plan mix to higher priced plans and increased device protection revenue.
43% of our postpaid connections are now on unlimited plans versus 27% a year ago.
Partially offsetting these increases were higher promotional sales costs.
Also there was a decrease in universal service fund revenues resulting from the FCC's December 2018 ruling that revenues from text and multimedia messaging services are no longer assessable under the universal service fund.
As a result this year US Cellular stopped charging customers and will no longer pay the FCC USF fees on these revenue streams.
Because this change also affected general and administrative expense by a light amount, it is neutral to earnings.
Looking through this change, ARPU on a comparable basis increased by a $1.39 year-over-year versus the reported increase of $0.99, a pretty strong result.
On a per account basis, average revenue grew by $1.39 year-over-year.
Excluding the USF impact that I just discussed, ARPU increased by $2.42, or 2%.
Let's move next to our profitability measures.
First, I want to comment on adjusted operating income before depreciation, amortization and accretion and gains and losses.
To keep things simple, I'll refer to this measure as adjusted operating income.
As shown at the bottom of the slide, adjusted operating income was $181 million, up 6% from a year ago.
Correspondingly, the margin as a percent of total operating revenues was up 1 percentage point to 17%.
For those watching service revenue margins, the current quarter result was 24%, an increase of 1 percentage point year-over-year.
As I commented earlier total operating revenues of over $1 billion were essentially flat year-over-year.
Total cash expenses were $871 million, decreasing $10 million or 1% year-over-year.
Total system operations expense decreased year-over-year.
Excluding roaming expense, system operations expense decreased by 2% despite a 47% growth in total data usage on our network.
Roaming expense decreased 4% year-over-year primarily due to lower rates, partially offset by a 50% increase in off-net data usage.
Cost of equipment sold decreased due to a decrease in the number of devices sold and a higher mix of used device sales, which primarily represent the resale devices returned or traded in by customers through our device service program vendors.
SG&A expenses increased 1% year-over-year due to higher selling and marketing costs.
Shown next is adjusted EBITDA, which starts with adjusted operating income and incorporates the earnings from our equity method investments along with interest and dividend income.
Adjusted EBITDA for the fourth quarter was $222 million, up 4% from a year ago.
The improvement is due to the increase in adjusted operating income.
This was partially offset by slight decreases in equity and earnings of unconsolidated entities as well as interest and dividend income.
Adjusted operating income and adjusted EBITDA, do not include depreciation, amortization and accretion expense.
In connection with the network modernization and 5G initiatives, we are upgrading several of the network equipment elements.
This results in the recognition of accelerated depreciation and certain of the assets being replaced.
As a result, depreciation, amortization and accretion expense was up 10% from a year ago.
Total operating revenues were $4 billion, an increase of $55 million or 1% year-over-year.
This was driven by an increase in retail service revenues due to higher average revenue per user.
Also contributing to the increase was higher inbound roaming and tower rental revenues.
Total cash expenses were $3.2 billion, an increase of $13 million year-over-year.
This was due primarily to an increase in selling, general and administrative expenses driven by information system initiatives as well as increase in bad debt expense.
System operations expense was essentially flat despite a 39% increase in data usage on our network, and a 33% increase in off-network data usage.
Adjusted operating income and adjusted EBITDA grew 5%.
This is primarily driven by the increase in operating revenues.
Slide 14, our plans for the year 2020.
In order to strengthen our base, we'll build on a number of initiatives already in the works.
For example, earlier this month, we initiated service in Sioux City, Iowa in Northern Wisconsin expanding our addressable market.
We will continue to build on the branding work we introduced last year, and we'll continue to evolve our plans and pricing but in a economically responsible manner.
In terms of revenue growth, unlimited plans are still only 43% of our base.
So we expect customers to continue to migrate to these plans.
We also expect customers to purchase additional services like device protection and we still have 396,000 future phones on our network, which provides us the opportunity to migrate these customers to smartphones also.
5G should help to address customers' growing demand for more data and faster speeds, as well as create opportunities for new services.
I'm also optimistic about the opportunities in the B2B marketplace, what you call Smart City Internet of Things interest is growing, and fixed wireless broadband continues to be a complementary product for those customers who do not have access to adequate broadband service today.
Customer expectations are always changing and we are rolling out new programs and new tools to ensure that we better understand and engage with our customers that are using data and analytics.
We continue to utilize to life cycle management programs and we are embarking on a number of initiatives like personalization that can be both predictive and proactive.
Continuous evaluation of the format and location of our retail stores is even more important as customers continue to change their shopping preferences.
Turning to slide 15, in 2020, we will continue to foster associate engagement, especially since our associates who are US Cellular's competitive advantage.
And lastly, we will continue to invest in the network to meet ever increasing data demand, finish the last of VoLTE launches, and start down the road to 5G.
Doug will provide greater detail on our capital spending plans in just a minute or so.
In closing, I'm very proud of this organization.
We have built a great foundation.
And we have the best associates in the industry.
That team and the opportunities in front of us have me excited about 2020.
Our guidance for 2020 is shown on slide 16.
For comparison, we're also showing our 2019 actual results.
First, I want to comment on the change in our revenue guidance approach.
Rather than providing guidance on total operating revenues, which includes both service and equipment revenues, we are providing guidance on service revenues only.
Variations in equipment revenues typically have a corresponding impact on cost of equipment sold and as a result are less impactful to our profitability measures and therefore we believe that service revenues are the more meaningful revenue measure for guidance purposes.
For total service revenues, we expect a range of approximately $3.0 billion to $3.1 billion.
This reflects our expectation of a continued highly competitive environment.
We expect adjusted operating income to be within a range of $775 million to $900 million and adjusted EBITDA within a range of $950 million to $1.075 billion.
This guidance reflects our estimates for low-single digit growth in revenue and the increased network costs related to our 5G deployment and ongoing network modernization programs, partially offset by the impact of cost savings initiatives.
For capital expenditures, the estimate is in the range of $850 million to $950 million.
This year in order to provide more transparency on actual 2019 and estimated 2020 capital expenditures, we have provided a breakdown by major category.
There is a lot going on in the network space in 2020.
We will be completing our organizational VoLTE rollout, continuing our low band 5G rollout and hopefully beginning our targeted millimeter wave 5G deployment.
Admittedly, this is a large increase that we could be affected by potential constraints on the availability of network equipment and services.
As a result, we may not be able to complete all of our plans this year.
In that case, we would be at or even below the low end of our guidance.
I am pleased to be able to share with you that our transformation is well under way and our future at TDS Telecom is bright.
As Ken did, I want to spend a few minutes providing a little longer-term perspective on the progress we have made and how our investments are paving the way for the future.
We are in a strong position today due to a number of growth focused initiatives that we have been executing on for over five years.
These initiatives include our fiber strategy both in and out of our existing footprint and our acquisition strategy.
Our investments in fiber-to-the-home are not new.
In fact, we made a strategic shift away from upgrading copper in our most attractive ILEC markets to deploying fiber, augmented with superior products and hyper localized marketing and sales.
The success we saw with this transformational change was the catalyst for us to develop, then test our out-of-territory fiber deployment strategy.
During 2019, we scaled up and now our out-of-territory strategy, fiber strategy is in full swing.
We now have approximately 230 fiber service addresses in the hopper.
Vicki will go into further detail of where these are in the process.
To address the broadband needs of our most rural markets, we advocated relentlessly and then secured over $1 billion in A-CAM funds over the program period.
This is allowing us to bring higher broadband speeds to our most rural customers which helps drive fiber much deeper into our network.
We also secured over $30 million in State Broadband Grants over the past five years.
We bought our first cable company in 2013 and have continued to add to that part portfolio with smart cable acquisitions and tuck-ins.
These acquisitions are a natural extension of our broadband strategy and we have been able to leverage expertise and resources across our business to drive strong financial results.
Over the past five years, our cable segment generated $1 billion in revenue and $289 million in adjusted EBITDA, helping to drive growth and offset secular declines in our legacy business.
During that period, we improved our cable adjusted EBITDA margin from 24% to 33%.
These charts show our investment thesis in position is very different from our peers.
Turning to the specifics for 2019 for our wireline segment, it was really all about fiber construction in launching new markets both within and outside of our current footprint.
However, there was so much foundational work that was done that you cannot see in our reported results.
Identifying additional markets and scaling up our organization to be able to execute on this program, today, and for years to come.
We are successfully redeploying cost savings from our legacy businesses to investing in our broadband growth initiatives.
Our cable segment continues to perform well, showcasing the success of our broadband strategy.
We purchased cable properties in attractive markets, which continue to provide a nice tailwind to our growth and we are very pleased with our cable acquisitions.
The latest one, Continuum closed on December 31 of last year.
The Continuum markets located just north of Charlotte, North Carolina represent just the type of demographics and household formation growth we find attractive.
Let me briefly highlight our financial results for the full year shown on slide 21.
Revenues, cash expenses and adjusted EBITDA are relatively flat.
However, as Jim mentioned, this result masks the significant transformations taking place across our business.
Consolidated revenues increased slightly from the prior year, as revenues from our investments in both fiber expansions and cable have exceeded the declines we've had in our legacy business.
Cash expenses increased 1%, as we redeployed spending from our legacy businesses to our growth initiatives.
Adjusted EBITDA was effectively the same as last year at $313 million.
On slide 22, for the fourth quarter, we see repetition of these trends.
TDS Telecom grew consolidated revenues 1% due to $4 million of growth in cable revenues, which was partially offset by the decline in wireline revenues.
Cash expenses increased 2%, mostly in the cable operations, which incurred closing costs related to the Continuum acquisition.
As a result, adjusted EBITDA in the fourth quarter decreased 3% to $75 million from a year ago.
Capital expenditures increased 35% to $124 million as we continued to invest in our fiber deployment.
This quarter, we launched three new out-of-territory fiber markets.
One, in our Southern Wisconsin cluster and two in our Coeur d'Alene, Idaho cluster.
And so far, we are very pleased with how these markets are performing.
More to come on our total fiber program in a minute.
But for now, let's turn to our segments, beginning with wireline on slide 23.
From a broadband perspective, residential connections grew 3%, driven by significant growth in our out-of-territory markets.
We are offering up to 1 gig broadband speeds in our fiber market.
Across our wireline residential base, 30% of all broadband customers are now taking 100 megabit speeds or greater compared to 24% a year ago, helping to drive a 4% increase in average residential revenue per connection in the quarter.
Wireline residential video connections grew 8% compared to the prior year.
Video is important to our customers.
Approximately 40% of our broadband customers in our IPTV markets take video, which, for us, is a profitable product.
We expect to see increasing trends in this metric as we are seeing higher results in our out-of-territory markets.
TDS Telecom continues to grow its overall IPTV customer base by targeting markets and segments that find value in bundling services.
Slide 24 summarizes the status of our multi-year fiber program.
As a result of our fiber deployment strategy, over the last several years, 30% of our wireline service addresses are now served by fiber.
This is driving revenue growth while expanding the total wireline footprint.
Our current fiber plans include roughly 230,000 service addresses, of which about 50,000 were turned up in 2019.
Plans for our current footprint are aimed at household growth and expansion in our current fiber market as well as overbuilding existing copper market.
Plans for our out-of-territory markets currently include our Wisconsin and Idaho clusters, which we have recently expanded to include the Meridian, Idaho area.
We are planning for additional markets in the Pacific Northwest and are evaluating expansion in our major clusters.
Now looking at the wireline financial results on slide 25.
Total revenues decreased 1% to $171 million.
Residential revenues increased 3%, due to growth from video and broadband connections as well as growth from within the broadband product mix, partially offset by a 4% decrease in residential voice connections.
Commercial revenues decreased 10%, primarily driven by lower CLEC connections, and wholesale revenues were flat compared to 2018.
Wireline cash expenses were flat.
We continue to see reduced cost of legacy services, partially offset by higher video programming fees.
Employee expenses were held flat as we staffed up to launch new markets, which were offset by a continued focus on cost discipline.
Maintenance expense increased as we incurred storm damage during the year.
Wireline adjusted EBITDA decreased 6% to $54 million, due primarily to the reduction in commercial revenues.
Now moving to cable on slide 26.
Cable total revenues increased as customers continue to value our broadband services.
As Jim mentioned, we acquired Continuum at December 31.
So while we've included connections in our results, we did not have any income statement impact for 2019 other than closing cost.
Total cable connections grew 10% to 371,000, which included 31,000 from the acquisition and a 6% organic increase in total broadband connections.
Organic broadband penetration continued to increase, up 100 basis points to 44%.
On slide 27, total cable revenues increased 7% to $64 million, driven primarily by growth in broadband connections for both residential and commercial customers.
Our focus on broadband connection growth and fast reliable service has generated a 17% increase in total residential broadband revenue.
Also driving this growth is an 8% increase in average residential revenue per connection, driven in part by customers rolling off promotions, higher product mix and price increases.
Cash expenses increased 8%, due primarily to additional costs related to the acquisition and plant maintenance.
As a result, cable adjusted EBITDA increased 4% to $21 million in the quarter.
I think of our investment priorities in three buckets; network, products and people.
Broadband is our primary product and our investments are focused on fiber deployments, strengthening our cable operations and meeting our first milestone of the A-CAM program.
We also will continue to innovate what we sell and how we sell it.
TDS TV+, our next-gen cloud-based TV service was launched this week in our first market, and we will roll it out throughout 2020 in our cable and wireline operations.
TDS TV+ plus is a far superior product that makes it simple to find great programming with a recommendation engine and voice search that integrates traditional TV content with Netflix, YouTube and other over-the-top apps.
This service is available on our new set-top box, along with Apple and Android phones and tablets.
We are also helping our customers lower their bill, with a road map that will allow them to use the service on streaming devices in lieu of purchasing extra set-top boxes.
Continuing on slide 29, a critical component of our success this year and into the future is our ability to identify markets where our formula wins.
We have built a robust model, whereby we screen for criteria listed here and prioritize the most attractive market.
Extensive analysis goes into this along with detailed financial modeling for each potential market.
Our models are adjusted in real-time with actual results and key learnings.
Finally, I want to call out a significant strength of our organization, and that is how lean we operate.
While we have wonderful growth opportunities ahead of us, we can't lose sight of the need to continuously take cost out of the legacy business so we can redeploy those savings into our growth initiatives.
This is a team that has demonstrated time and again, they can execute.
2019 was an incredibly busy year, full of lots of successes as well as key learnings.
Energy, confidence and enthusiasm everyone comes to work with each day has positioned TDS Telecom to achieve great things for many years to come.
Back to you, Vicki.
On Slide 30, we've provided our 2020 guidance.
We are forecasting total telecom revenues of $950 million to $1 billion compared to $930 million in 2019.
For wireline, new fiber market growth will be strongly additive to continued growth in residential broadband and video connections and revenues.
Commercial revenues and residential voice revenues will continue to decrease as well, wholesale revenues.
We expect organic cable revenue growth in the mid-single-digits, reflecting continued strong growth in broadband.
Our recently completed acquisition will add an excess of $20 million to revenue.
Adjusted EBITDA is forecast to be within a range of $290 million to $320 million compared to $313 million in 2019.
Contributions from wireline broadband and video growth, combined with growth from Cable as well as cost reductions, will continue to help offset pressures in the legacy wireline business and expected its fiber expansion costs in our new markets.
Capital expenditures are expected to be between $300 million and $350 million in 2020 compared to $316 million in 2019.
Wireline capex guidance includes $150 million dedicated to in and out-of-territory fiber deployments, a 50% increase over 2019 spending as well as $60 million in success-based spending for both wireline and cable and approximately $30 million allocated to the A-CAM program.
And just a quick update on OneNeck IT solutions.
OneNeck IT solutions continues to make very good progress, driving revenues in strategic solutions, including multi-cloud hosting, managed services and professional services.
The OneNeck team had a strong finish to the year, showing improvements in revenues while driving operational improvements in its cost structure.
OneNeck is well positioned going into 2020 as they continue to leverage a multi-cloud strategy with plans to roll out their next-generation ReliaCloud platform and plans to expand upon their public cloud strategy by offering additional platform-based services via both ReliaCloud and Azure.
Offering customers solutions architected around a highly secured framework will continue to be the cornerstone of OneNeck's offering. | increases to 2020 guidance. | 0 |
During the call, we will discuss some items that do not conform to generally accepted accounting principles.
These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP.
We hope everyone listening is staying safe and in good health.
We appreciate you joining our conference call and for your interest in Thermon.
Jay Peterson, our CFO, is with me and will provide additional information on our Q2 financial performance following my remarks.
Since our Q1 call, the Thermon team has remained focused on the safety and security of our employees, customers, suppliers and the communities in which we live.
As a supplier to critical infrastructure, we remain open for business and have focused on supporting our customers around the globe.
As we look across the world, our teams and our customers are adapting to the new normal.
In many locations, we continue to suspend business travel, work-from-home where possible, and follow the applicable local health protocols.
Our employees are incredibly resilient and have quickly adapted to this new way of working.
Their commitment to our core values of care, commitment and collaboration as well as our industry-leading safety performance is both admirable and appreciated.
With the uncertainties surrounding this pandemic, our team has remained focused on value preservation and cash management.
In Q1, the team took decisive action to reduce SG&A by $16 million in the fiscal year and just over $17 million on an annualized basis.
During the second quarter, the team has further reduced expected SG&A spending by an additional $9 million in the fiscal year.
And we expect this reduction to continue on an annualized basis going forward.
In addition, we have reduced manufacturing overhead by an additional $6 million, including a rooftop consolidation that will improve absorption on lower volume in Q4 and beyond.
Many of these savings are the result of the work this team has done over the last four years to improve the systems, processes and tools to generate efficiencies and unlock scale from engineering to back office processes.
We also believe we are well on track to deliver the $3.9 million in continuous improvement cost savings through our manufacturing operations.
We believe these changes have fundamentally repositioned the business to be more profitable during the downturn and generate meaningful operating leverage during the recovery.
It is important to note that these cost reductions were made while preserving investments in key areas that will help drive future growth, such as front line sales, resources to drive globalization of the process and environmental heating product lines, and new product development.
I'd like to turn now to our Q2 results.
Overall, we were pleased with the improvements we're seeing in the business during Q2.
We believe our Q1 represented a quarterly bottom in terms of both revenue and EBITDA.
Our second quarter showed sequential improvement in many areas with revenue of $66.4 million.
While down 35% from a record prior-year quarter, revenue grew 17% sequentially.
We did see shipment delays due to logistics and supply chain shortages in some key electrical components that negatively impacted the top line during the quarter.
Adjusted EBITDA of $10.5 million was down 50% from prior year, but up 661% or $9.1 million from Q1 on improved volume and cost reduction actions.
Gross margins for the quarter were 43.6%, down 57 basis points from prior year, but up 120 basis points sequentially.
We continue to benefit from the receipt of the Canadian Emergency Wage subsidies, which have been excluded from the adjusted numbers.
GAAP and adjusted earnings per share were $0.06 a share and $0.12 a share, respectively, during the quarter, showing positive momentum on the sequential volume growth and cost reduction efforts.
We were pleased with bookings for the quarter at $75.7 million, which were down 18% from prior year, but up 25% sequentially relative to the Q1 27% shortfall to prior year.
This represented a sequential double-digit improvement even when adjusted for seasonality.
Our book-to-bill of 1.14 was positive for the third consecutive quarter with backlog growing by 8% sequentially and 16% year-over-year.
In addition, margins in backlog improved by 420 basis points during the quarter on a positive mix of business.
We continue to see weakness in our MRO business due to safety measures our customers have implemented in an effort to prevent the spread of the virus.
Many have suspended project-based maintenance activities to limit the number of contractors on site and manage cash.
We did see sequential improvement in our Q2 quick turn business of 14% when compared to Q1 on a relative basis to prior year quarters.
While we do expect to see further sequential improvement in Q3, we believe the deferral of maintenance is building pent-up demand that will create incremental opportunities for MRO/UE as COVID-19 restrictions ease.
We anticipate capital spending to be weaker in the second half of the year, particularly in the US and Latin America, representing a headwind in the near term.
We continue to generate positive cash flows from our operations of $9.3 million during the second quarter, which enabled $4.4 million in debt repayment.
We see further opportunities to free up an additional $10 million in cash from the balance sheet by year-end.
Turning now to a discussion of our end markets.
The oversupply of oil resulting from the Saudi-Russia dispute combined with the unprecedented decline in demand due to COVID-19 lockdowns has had a profound impact on our customer and end markets.
However, we are seeing that some customers are better positioned to weather the storm.
Upstream, which represents approximately 14% of our revenues and integrated oil companies have been the hardest hit.
Chemical companies and customers with more exposure to natural gas has seen much less decline in demand, and commodity pricing has been more resilient.
We also see strength in agro-chemicals as well with capital investments in nitrogen and ammonia processing plants for fertilizers.
As we look forward, there are a number of fundamental shifts under way.
Thermon is well positioned to capitalize on the transition to natural gas as a bridge fuel with LNG projects moving forward.
The shift to renewables also creates opportunities for our business in bio gas and biofuels.
We are currently executing a sizable biodiesel project in the US with many more projects in various stages of planning in the US and across Europe.
We also see numerous oil to chemical projects creating future opportunities where producers and refiners are seeking growth markets for their capacity as demand for transportation fuels stagnates.
Growing demand for power across Asia and other emerging markets will also create additional opportunities for our business going forward.
Finally, tightening environmental regulations that require lower sulfur fuels and higher CAFE standards drives demand for a wide range of Thermon solutions as well.
Turning now to transportation.
Transportation represents around 3% of our revenues in fiscal year 2020 and is a growing segment of our business that offers an opportunity to diversify our end markets.
After securing two large orders in light rail in the last two quarters, we continue to see large transit opportunities that will expand the installed base in the US and Canada to generate stable recurring revenues.
We also see additional opportunities to grow our presence in less cyclical end markets, such as food and beverage, to further diversify our revenue streams going forward.
Turning now to our investments in research and development.
We continue to invest in new product development that creates value for our customers and differentiates Thermon solutions in the marketplace.
Key areas of investment include connected and smart control solutions, advanced heating technologies and material science.
We were excited to recently announce the new Genesis Network, which extends our leadership position in smart connected control solutions.
This introduction builds upon the technology platform of our Genesis Controller by creating a plantwide ecosystem, employing a self-healing mesh network with an IIoT gateway and browser-based supervisory software.
The combined system, which is backwards compatible, enable operators to have real-time operational awareness to improve the safety, reliability and efficiency of their processes.
The mesh network also lowers total installed cost while enabling brownfield locations to be cost effectively upgraded to the newest technology.
The Genesis server represents Thermon first subscription-based operational software platform that will create opportunities for future product and service revenue streams from the installed base.
While visibility is improving, we continue to experience near-term uncertainty due to the number of variables influencing our end markets.
As a result, we remain focused on managing the five key priorities communicated last quarter.
They are: First, the safety of our employees and customers; second, aligning cost structure to the level of incoming business; third, driving continuous improvement programs to achieve the targeted $3.9 million in savings during the fiscal year; fourth, cash management; and fifth, investing for future growth.
Executing on these five priorities will position the business to perform during this downturn and more importantly, profitably grow as our end markets recover.
Looking forward, given the current level of uncertainty, we do not intend to provide formal guidance for fiscal 2021 at this time.
We do believe that Q1 represented the quarterly bottom in terms of revenue and earnings due to COVID-19 restrictions that were in place combined with the normal seasonality of our business.
With Q2 revenues down 35% from prior year and bookings down 18%, we expect the revenue shortfall to prior year to begin to moderate in Q3 and Q4.
We also expect the cost reductions to begin to have a meaningful impact to bottom line performance in the back half of the year with decremental margins in the 25% to 30% range.
As a result, we anticipate a small step down in trailing 12-month EBITDA in Q3, representing a bottom with trailing 12-month EBITDA expansion in Q4 on lower volume.
The actions we have taken this year have positioned the business to deliver 100 basis points or more of EBITDA margin expansion during a downturn, and the team is hard at work to build a path to deliver similar or greater margin expansion in the subsequent year.
We continue to actively manage the business while remaining focused on executing on our strategic, operational and financial plans.
As we look ahead, I want to emphasize the strength and resilience of our business model and our ability to drive EBITDA and generate cash through the cycle.
We have a talented team that remains committed to serving our customers and creating value for our shareholders.
By focusing on the priorities outlined, Thermon is well positioned to emerge a stronger, more profitable business as our customers and end markets adapt to the next normal.
With that, I'd like to pause here and hand it over to Jay for more detailed review of the financials.
In light of the protracted depressed capital spend environment, our focus continues to be on value preservation in addition to funding specific strategic investments.
During the quarter, we recorded $2 million of restructuring cost related to the Q2 cost out actions.
And we expect these cost out actions, including the Q1 reduction in force, to reduce SG&A to approximately $34 million to $35 million for the second half of this fiscal year.
And we believe approximately 80% of these reductions are structural in nature and will provide incremental operating leverage when growth returns.
And since May of this year, we have reduced our SG&A by approximately 24% from $100 million down to $76 million to $77 million.
Also during Q2, our Canadian subsidiaries qualified for and received a $1.4 million benefit from the Canadian Emergency Wage Subsidy program.
And $400,000 of this benefit was recorded under cost of sales, while the remainder impacted SG&A.
And While we have faced significant challenges in our P&L-related to COVID-19 and the sustained decline in oil prices, our balance sheet remained strong and our cash and investments balance at the end of September improved by $51.4 million.
And we also paid down $4.4 million in debt and generated $7.2 million in free cash flow.
And that marks our ninth consecutive quarter of positive free cash flow.
Our capex spend for the second quarter totaled $2 million, and that's inclusive of both growth and maintenance capital.
And we expect fiscal '21 capex to be approximately $4.6 million and that's a year-on-year reduction of 54%.
Our net debt to EBITDA ratio was 2.9 times at the end of Q2.
And lastly, our capital allocation priority is to continue to reduce our debt through continued optional debt repayment.
And we remain confident in our current liquidity and ability to generate cash during this fiscal year and we plan to pay down additional debt in the second half of this year.
And regarding M&A, our pipeline remained strong.
However, due to our current leverage position, we do not anticipate any acquisitions in the near term.
Now turning to revenue and orders.
Our revenue this past quarter totaled $66.4 million and that's up sequentially by 17% and down by 35% against the prior year quarter, and was in line with our expectations for Q2.
Our legacy revenue mix between MRO/UE and Greenfield was 64% and 36%, respectively, versus a 53% and 47% in Q2 of fiscal year '20.
And FX decreased total revenue by $1.1 million in the quarter.
And in constant currency, our revenue declined by 34%.
Orders for the quarter totaled $75.7 million, up sequentially by 25%.
And relative to the prior year quarter, our orders declined by 18%, and that's an improvement from the Q1 decrease of 27%.
And our backlog of orders ended September at $118.7 million, and that's the highest level in the last 18 months, albeit under depressed revenues.
And due to cost out actions and higher margin projects, we have seen our backlog margins improved to 33.4%, and that's a 420 basis point improvement on a sequential basis.
Our book-to-bill for the quarter was positive at 1.14, and that marks the third consecutive quarter of a positive book-to-bill.
In terms of gross margins, margins were 43.6%.
And although they were down by 57 basis points versus the prior-year comp period, they were up sequentially by 114 basis points.
And gross margins were positively impacted by 63 bps due to the Canadian Emergency Wage Subsidy program.
Gross profit in the quarter declined by $16.5 million and that's attributable to the volume and revenue decline of 35%.
And looking forward to the second half of this fiscal year, we expect gross margins to improve by 100 basis points or more due to the benefits of cost reductions, even in light of the anticipated reduction in year-on-year volumes and an increase in the mix of our high margin on both a gross and net construct maintenance business.
Moving on to OpEx.
Operating expenses for the quarter, that is SG&A and this excludes depreciation and amortization of intangibles, totaled $21 million versus $25.4 million in the prior year.
And SG&A expenses included $2 million of restructuring cost.
Normalized for the Canadian Wage Subsidy program and the restructuring charge, our SG&A on a pro forma basis totaled $19.9 million.
And as mentioned earlier, we expect our second half SG&A to be in the $34 million to $35 million range, inclusive of the recent spending reduction actions.
And going forward, we would anticipate incremental spending in travel and other expenses to grow as volume returns.
GAAP earnings per share for the quarter totaled $0.06 a share compared to the prior year quarter of $0.21, and that's a decline of $0.15 a share.
Adjusted EPS, as defined by GAAP earnings per share less amortization expenses and any one-time charges, totaled $0.12 a share relative to $0.29 a share in the prior year quarter.
And versus the prior year comparison period, adjusted EBITDA declined by 50% and adjusted EBITDA as a percent of revenue improved to 16%, and that's an increase of 1,300 basis points versus the prior sequential quarter.
And adjusted EBITDA totaled $10.5 million this past quarter.
Free cash flow was positive for the quarter by $7.2 million.
And as I said before, our ninth consecutive quarter of positive free cash flow.
And we remain confident in our ability to generate cash and service debt going forward.
For Q2 of '21, we generated pre-tax income of $1.2 million and recorded a tax benefit of $627,000.
And this benefit was due to U.S. Treasury regulations that provided updated guidance to the tax reform law of 2017 and the associated GILTI tax rules.
And as a result, we reversed $1.4 million of previously recorded GILTI tax.
And for the remainder of fiscal year '21 and the out years, we expect our tax rate to be 26% on a consolidated basis.
In the quarter, cash grew by $3.1 million to $51.4 million, and we generated $9.2 million from working capital.
And over the last 12 months, we have paid down $30.3 million in debt.
And finally, given the continued impact of COVID-19 to our end markets, we will not be providing formal topline guidance at this time.
And I would like to reiterate that we will continue to manage what we have control over, including our operating expenses, cost reduction efforts, continuous improvement initiatives and the continued management of our working capital. | compname reports q4 earnings per share $4.43.
compname reports fourth quarter net income and operating income of $4.43 and $3.02 per diluted share, respectively.
full year net income and operating income of $9.42 and $9.32 per diluted share, respectively.
full year combined ratio of 94.4%.
q4 operating earnings per share $3.02.
q4 earnings per share $4.43. | 0 |
It is now my pleasure to turn the floor over to your host, Bill Rhodes, Chairman, President and CEO.
Sir, the floor is yours.
autozone.com under the Investor Relations link.
Please click on Quarterly Earnings Conference Calls to see them.
As we begin, we want to continue to stress that our highest priority remains the safety and well being of our customers and AutoZoners.
Everyone across the organization takes this responsibility very, very seriously, and I am very proud of how our team has responded.
Since the start of the pandemic, we have reiterated consistently that we could not deliver the kind of results we have without the exceptional efforts of our entire team, especially our store and supply chain AutoZoners.
As our sales volumes have remained at historic all time highs, our AutoZoners continue to go the extra mile and surprise and delight our customers by providing WOW Customer Service, regardless of the myriad of challenges that are thrown their way.
The Assistance Fund is an independent non-profit whose primary mission is to provide assistance to AutoZoners who find themselves in a very difficult place.
We are very fortunate to be able to help our AutoZoners in this way.
To me it's yet another example of our organization living consistent with our values.
We'll also share how inflation is affecting our cost and retails and how we think they will impact our business for the remainder of the fiscal year.
On to our sales results.
Our domestic same-store sales were an impressive 13.6% this quarter on top of last year's very strong 12.3%.
Our team once again executed at an extraordinarily high level and delivered amazing results.
Congratulations again to AutoZoners everywhere.
Our growth rates for retail and commercial were both strong with domestic commercial growth impressively north of 29%.
Commercial set a first quarter record with $900 million in sales.
And now we've delivered $900 million in sales in one quarter, an incredible accomplishment.
On a trailing four quarter basis, we had over $3.5 billion in annual commercial sales versus $2.8 billion a year ago, up 27%.
We also set a record in average weekly sales per store for any quarter, reaching over $14,400 versus $11,500 just last year.
On a two year basis, our sales accelerated from last quarter, exceeding 40%.
Many people want to understand what is driving our tremendous sales growth in commercial.
In short, it is not one thing, and I want to repeat that.
It is not one thing.
It's a host, a whole host of key initiatives we've been working on for several years.
Those initiatives include improved satellite store availability, massive improvements in hub and mega hub coverage and access, the continuing strength of the Duralast brand, leveraging technology to make us easier to do business with and amplifying our execution strength to improve delivery times, enhancing our sales force effectiveness and engaging our store operations team deeper in the business and ensuring that we live consistent with our pledge by being priced right for the value proposition that we deliver.
We continue to execute very well in commercial, and we are extremely proud of our team and their performance.
We're also very proud of our organization's performance in domestic DIY.
We ran a 9% comp this quarter on top of last year's 12.7%.
While our DIY two year stack comp decelerated slightly from our fourth quarter, it's remarkable to reflect on a more than 20% two year comp in this sector of our business.
From the data we have available to us, we continue to not only retain the enormous 10% share gains we built during the initial stages of the pandemic, but modestly build on those gains.
Our performance, considering the amount of time from the last stimulus and the ending of the enhanced unemployment benefits, has substantially exceeded our expectations and raises our expectations on how sustainable these sales gains may be long-term.
Now let's focus on our sales cadence.
Same-store sales increased sequentially from September through November.
However, this acceleration could be deceiving as last year's comp weakened as the quarter progressed.
Given the dynamics of the past 20 months, we like others who benefited from the pandemic, believe it is more instructive to look at two year stacked comps.
On this basis, the monthly results were almost identical and very, very stable.
For Q1, our two year comp was 25.8% and the four week periods of the quarter increased by 26.3%, 26% and 25.3% respectively.
Regarding weather, we experienced warmer than usual weather in the Northeastern United States, while the remainder of the country experienced normal trends.
Overall, we feel weather did not play a material role in our sales results for the quarter.
As we look forward to the winter months, we are encouraged to see forecast estimating a slightly colder than usual winter.
Historically, extreme weather, be that hot or cold, helps drive parts failure.
Regarding this quarter's traffic versus ticket growth in retail, our traffic was up 1%, while our ticket was up 7.5%.
This low-single-digit transaction count growth continues to be a meaningful acceleration from pre-pandemic levels, although it decelerated versus last year as expected due to the elimination of stimulus, the reduce -- the elimination of enhanced unemployment, stay at home orders and the closure of some big box retail automotive service departments last year.
In our commercial business, we saw most of the sales growth come from transaction growth from new and existing customers.
It was encouraging for us to see sales trends remain strong.
And we continue to be pleased with the momentum we are seeing in both domestic businesses heading into the winter months.
During the quarter, there were some geographic regions that did better than others, as there always are.
While last quarter we saw roughly 400 basis point gap in comp performance between the Northeast and Midwestern markets versus the remainder of the country, we did not see that gap this quarter.
In fact, the Northeastern Midwestern markets slightly outperformed.
The market share data suggests that we continue to gain share in most markets across the country.
Now let's move into more specifics on performance for the quarter.
Our same-store sales were up 13.6% versus last year's first quarter.
Our net income was $555 million.
And our earnings per share was $25.69 a share, increasing an impressive 38.1%.
Regarding our merchandise categories in the retail business, our sales floor and hard parts categories grew at a similar rate this quarter.
As Americans get back to driving more, we've seen maintenance and failure-related categories perform well.
We've been especially pleased with our growth rates in select failure-related businesses, like batteries, that have successfully lapped very strong performance last year.
We believe our hard parts business will continue to strengthen as our customers drive more.
Let me also address what we are seeing from inflation and pricing.
This quarter, we saw our sales impacted positively by about 4% year-over-year from inflation, while our cost of goods was up about 2% on a like-for-like basis.
We believe both numbers will be higher in the second quarter as cost increases in many key merchandise categories continue to work their way through the system.
We could see mid-single-digit inflation in retails as rising raw material pricing, labor and transportation costs are all impacting us and our suppliers.
We have no way to say how long this will last, but our industry has been disciplined about pricing for decades, and we expect that to continue.
While we continue to be encouraged with the current sales environment, it remains difficult to forecast near to mid-term sales.
What I will say is that the past three quarter sales have all been consistent on a two year stack comp basis and both our DIY and commercial businesses have been remarkably resilient.
While it's difficult to predict absolute sales levels, we are excited about our growth initiatives, our execution and the tremendous share gains we have achieved in both sectors and are maintaining and/or continuing to grow those gains.
Currently, the macro environment, while more uncertain than normal, is certainly favorable for our industry.
And if these near-term trends fade, we believe that we are in an industry that is positioned for solid growth over the long-term.
For FY '22, our sales performance will be led by the continued strength in our commercial business as we continue executing on our differentiating initiatives.
As we progress through the year, we will as always be transparent about what we are seeing and provide color on our markets and outlooks as trends emerge.
As Bill mentioned, we had a strong second quarter.
Our growth initiatives continue to deliver strong results.
And the efforts of our AutoZoners in our stores and distribution centers have enabled us to take advantage of robust market conditions.
For the quarter, total auto part sales, which includes our domestic, Mexico and Brazil stores, were $3.6 billion, up 16.2%.
Let me give a little more color on sales and our growth initiatives.
Starting with our commercial business, for the first quarter, our domestic DIFM sales increased 29.4% to $900 million and were up 41% on a two year stack basis.
Sales to our DIFM customers represented 25% of our total sales.
And our weekly sales per program were $14,400, up 25% as we averaged $75 million in total weekly commercial sales.
Once again, our growth was broad-based as national and local accounts both grew over 25% in the quarter.
Our execution of our commercial acceleration initiatives is delivering exceptional results as we focus on building a faster growing business.
The disciplined investments we are making are helping us grow share.
And we're making tremendous progress in growing our business in this highly fragmented portion of the market.
We now have our commercial program in approximately 86% of our domestic stores, and we're focused on building our business with national, regional and local accounts.
This quarter, we opened 32 net new programs, finishing with 5,211 total programs.
We continue to leverage our DIY infrastructure and increase our share of wallet with existing customers.
As I said on last quarter's call, in fiscal year '22, commercial growth will lead the way, and our first quarter results reflect this dynamics.
Our growth strategies continue to work as we continue to grow share.
We are confident in our strategies and execution and believe we will continue gaining share.
Delivering quality parts, particularly with our Duralast brand, improved assortments, competitive pricing and providing exceptional service has enabled us to drive double-digit sales growth for the past six quarters.
Our core initiatives are accelerating our growth and position us well in the marketplace.
And notably, our mega hub strategy is driving strong performance and position us for an even brighter future in our commercial and retail businesses.
Let me add a little more color on our progress.
As I mentioned last quarter, our mega hub strategy is giving us tremendous momentum, and we're doubling down.
We now have 62 mega hub locations and we expect to open approximately 16 more over the remainder of the fiscal year.
As a reminder, our mega hubs typically carry roughly 100,000 SKUs and drive tremendous sales lift inside the store box as well as serve as a fulfillment source for other stores.
The expansion of coverage and parts availability continues to deliver meaningful sales lift to both our commercial and DIY businesses, and we are testing greater density of mega hubs to drive even stronger sales results.
By leveraging sophisticated predictive analytics and machine learning, we are expanding our market reach driving closer proximity to our customers and improving our product availability and delivery times.
These assets continue to outperform our expectation, and we would expect to open significantly more than 110 locations we have previously targeted.
In commercial, we are building a meaningful competitive advantage and we continue to have confidence in our ability to create a faster growing business.
On the retail side of our business, our domestic retail business was up 9% and up 21.4% on a two year stack.
The business has been remarkably resilient as we have gained and maintained over three points of market share since the start of the pandemic.
As Bill mentioned, we saw an increase in traffic versus the prior year as our initiatives are continuing to drive tremendous sales and share growth along with a relentless focus on execution by our AutoZoners in our stores and distribution centers.
These initiatives include improving the customer shopping experience, expanding assortment, leveraging our hub and mega hub network and maintaining competitive pricing.
These dynamics along with favorable macro trends and miles driven, a growing car park and a challenging new and used car sales market for our customers have continue to fuel sales momentum in DIY.
And the execution of our AutoZoners who are taking care of our customers gives us a key competitive advantage.
I'm also very pleased with the competitive position of our DIY business and our outlook going forward.
Our in-stock positions, while still below where we would like for them to be, are continuing to improve as our supply chain and merchandising teams have made great progress in a challenging supply chain environment.
We've been able to navigate supply and logistics constraints and have product available to meet our customers' needs.
DIY has been a strong contributor to the growth of our company.
And while comps are difficult because of our strong past performance, the fundamentals of our business remained strong.
Now I'll say a few words regarding our international business.
We continue to be pleased with the progress we're making in Mexico and Brazil.
During the quarter, we opened two new stores in Mexico to finish with 666 stores and one new store in Brazil to finish with 53.
On a constant currency basis, we saw accelerated sales growth in both countries.
We remain committed to our store opening schedules in both markets and expect both to be significant contributors to sales and earnings growth in the future.
With approximately 10% of our store base now outside the U.S. and our commitment to continue expansion in a disciplined way, international growth will be an attractive and meaningful contributor to AutoZone's future growth.
Now let me spend a few minutes on the P&L and gross margins.
For the quarter, our gross margin was down 65 basis points, driven primarily by the accelerated growth in our commercial business where the shift in mix coupled with the investments in our initiatives drove margin pressure, but increased our gross profit dollars by 14.9%.
I mentioned on last quarter's call that we expected to have our gross margin down in a similar range this quarter as we saw in the fourth quarter of last fiscal year where we were down 82 basis points.
However, the team has been focused on driving margin improvements, primarily through pricing actions that offset inflation to drive a better than expected outcome.
As Bill mentioned earlier in the call, we are continuing to see cost inflation in certain product categories along with rising transportation and distribution center costs.
We continue to take pricing actions to offset inflation, and consistent with prior inflationary cycles, the industry pricing remains rational.
We would expect our margins in the second quarter to be down in a similar range as the first quarter.
All of the actions we are taking have resulted in us growing our DIY and DIFM businesses at a significantly faster rate than the overall market, and we're committed to capturing our fair share while improving our competitive positioning in a disciplined way.
We are laser focused on taking care of our existing customers, driving new customers to AutoZone and over time growing absolute gross profit dollars at a faster than historic rate.
Moving to operating expenses.
Our expenses were up 10.4% versus last year's Q1 as SG&A as a percentage of sales leverage of 171 basis points.
The leverage was driven primarily by our strong sales results.
While our SG&A dollar growth rate has been higher than historical averages, we've been focused on maintaining high levels of customer service during a period of accelerated growth and taking care of our AutoZoners during these extraordinary high sales growth times.
We're also investing in IT to underpin our growth initiatives.
And these investments will pay dividends and user experience, speed and productivity.
We will continue to be disciplined on SG&A growth as we move forward and manage expenses in line with sales growth over time.
Moving to the rest of the P&L.
EBIT for the quarter was $754 million, up 22.6% versus the prior year's quarter, driven by strong top-line growth.
Interest expense for the quarter was $43.3 million, down 6.3% from Q1 a year ago as our debt outstanding at the end of the quarter was just under $5.3 billion versus just over $5.5 billion last year.
We're planning interest in the $45 million range for the second quarter of fiscal 2022 versus $46 million in last year's second quarter.
For the quarter, our tax rate was 21.9% versus 22.2% in last year's first quarter.
This quarter's rate benefited 159 basis points from stock options exercised, while last year it benefited 134 basis points.
For the second quarter of fiscal 2022, we suggest investors model us at approximately 23.6% before any assumption on credits due to stock option exercises.
Moving to net income and EPS.
Net income for the quarter was $555 million, up 25.5% versus last year's first quarter.
Our diluted share count of 21.6 million was lower by 9.1% from last year's first quarter.
The combination of higher earnings and lower share count drove earnings per share for the quarter to $25.69, up 38.1% over the prior year's first quarter.
Now let me talk about our cash flow.
For the first quarter, we generated approximately $800 million of operating cash flow.
Our operating cash flow results continue to benefit from the strong sales and earnings previously discussed.
You should expect us to be an incredibly strong cash flow generator going forward.
And we remain committed to returning meaningful amounts of cash to our shareholders.
Regarding our balance sheet, we now have nearly $1 billion in cash on the balance sheet and our liquidity position remains strong.
We're also managing our inventory well, as our inventory per store was up 10% versus Q1 last year.
Total inventory increased 3% over the same period last year, driven by new stores.
Net inventory, defined as merchandise inventories less accounts payable on a per store basis, was a negative $207,000 versus negative $99,000 last year and negative $203,000 last quarter.
As a result, accounts payable as a percent of gross inventory finished the quarter at 129.4% versus last year's Q1 of 114.1%.
Lastly, I'll spend a moment on capital allocation and our share repurchase program.
We repurchased $900 million of AutoZone's stock in the quarter.
As of the end of the fiscal quarter, we had approximately 20.7 million shares outstanding.
At quarter end, we had just over $1 billion remaining under our share buyback authorization and just under $700 million of excess cash.
The powerful free cash we've generated this quarter allowed us to buy back approximately 2.5% of the shares outstanding at the beginning of the quarter.
We bought back over 90% of the shares outstanding of our stock since our buy back inception in 1998, while investing in our existing assets and growing our business.
We remain committed to this disciplined capital allocation approach.
We expect to maintain our long-term leverage target in the 2.5 times area and generate powerful free cash flows that will enable us to invest in the business and return meaningful amounts of cash to shareholders.
To wrap up, we had another very strong quarter, highlighted by strong comp sales, which drove a 25.5% increase in net income and a 38.1% increase in EPS.
We are driving long-term shareholder value by investing in our growth initiatives, driving robust earnings in cash and returning excess cash to our shareholders.
Our strategy is working.
And I have tremendous confidence in our ability to drive significant and ongoing value for our shareholders.
Fiscal 2022 is off to a stellar start, and we continue to be focused on superior customer service and flawless execution.
That and our culture is what defines us.
From July 4, 1979 when our first store opened in Forest City, Arkansas, customer service has been paramount to our success.
At the end of the day, it is why customers come back to us.
Whether they are a seasoned professional or a new DIYer, they trust us.
They trust us to help them with their needs.
We continue to be bullish on our industry, and in particular, on our own opportunities for the new year.
We believe the macro backdrop is in our favor for the foreseeable future.
Our customers across the Americas want to get out, get out and drive,.
and we'll be there when they need helpful advice.
Our team has worked diligently and collaboratively with our suppliers, and together they have done a very good job dealing with the enormous supply chain challenges that exist for all retailers.
While we are not where we'd like to be on our store in-stock levels, we believe we are better than most retailers, and I think our results support that belief.
For the remainder of fiscal 2022, we are launching some very exciting initiatives.
We are focused on further growing share, but as always, doing so on a very profitable basis.
We will be announcing significant expansions to our supply chain to fuel the growth of our domestic and Mexico businesses.
We are also targeting to open 16 more new domestic mega hubs in the U.S. that will enhance our availability and support growth in our retail and commercial businesses.
We will also be leveraging our hub and mega hub strategy further in Mexico.
For the fiscal year, we will open more than 200 new stores throughout the Americas with notable acceleration in our Brazil business.
These capacity expansion investments reflect our bullishness on our industry and our growth prospects.
We are being disciplined yet aggressive.
Our company, our customers, our leadership team, and in particular, our AutoZoners have greatly benefited from Mark's 19 years of remarkable service.
Mark spent the majority of his years with AutoZone leading our merchandising team and has played a critical role leading our supply chain and marketing teams in recent years.
He leaves our organization much, much better than he founded and leaves us well positioned for accelerated growth.
I also want to reiterate how proud I am of our team across the board for their commitment to servicing our customers, and doing so in a very safe manner.
First and foremost, our focus will be on keeping our AutoZoners and customers safe, while providing our customers with their automotive needs.
And secondly, we must continuously challenge ourselves during these extraordinary times to position our company for even greater future success.
We know that investors will ultimately measure us by what our future cash flows look like three to five years from now.
I continue to be bullish on our industry, and in particular, on AutoZone. | q4 adjusted earnings per share $3.27.
q4 earnings per share $2.72. | 0 |
I appreciate you joining us today to discuss our first quarter fiscal year 2021 results.
Before reviewing the quarter, I would like to express my continued gratitude to AAR's employees.
The majority of our people have continued to come to work every day throughout the pandemic to ensure AAR's uninterrupted support of its customers, and I'm grateful for their dedication and commitment, and proud of our team's ability to continue to navigate a truly unprecedented decline in commercial passenger flying.
Turning to the results.
Our sales for the quarter decreased 26% from $542 million to $401 million and our adjusted diluted earnings per share from continuing operations decreased 70% from $0.57 per share to $0.17 per share.
Our total sales to commercial customers decreased 48% from the prior year, while sales to government and defense customers increased 10%, reflecting new contract awards and significant shipments out of our Mobility business against the previously announced $125 million Cargo Pallets contract.
For the quarter, sales to government and defense customers were 56% of the total.
In response to the current environment, we have taken a number of actions to align our costs with the lower levels of demand.
But we've also gone further to position the company for improved margins as demand recovers.
Over the last three years, we have consolidated -- three quarters, we have consolidated three facilities, a permanent reduction to our fixed and variable costs, and exited or restructured several underperforming contracts.
We have also taken steps to focus on our core aviation services offering by completing the divestitures of our Airlift and Composites businesses.
All of these actions have simplified our portfolio, improved efficiency in our operations and set us up to drive higher returns on capital.
In addition to this progress, we continue to win new business during the quarter.
We announced a three-year contract with the Royal Netherlands Air Force to repair F-16 jet fuel starters.
We also announced two new contracts won by our Airinmar subsidiary, which provides component repair cycle management and aircraft warranty solutions.
We were selected by both Frontier Airlines and Air Methods, the world's largest civilian helicopter operator to provide a full suite of warranty and value engineering services.
In addition to the wins this quarter, we saw stabilization in certain of our businesses.
Our order volume in trading and distribution were consistent throughout the quarter at a level above what we saw in April and May, but well below pre-COVID levels.
In our MRO business, as we head into the fall, we incurred -- we are encouraged by the loading we expect to see in our hangars.
While our customers continue to operate in an uncertain environment and their maintenance schedules could change, the early indications are positive relative to our earlier expectations.
We are in a constant contact with our commercial customers globally and are continuing to look for ways to support them during this difficult time.
In our Government business, where we saw growth during the quarter, we continue to pursue new opportunities and the pipeline remains full.
As John mentioned, we continue to take action to reduce our costs and exit underperforming activities in the quarter.
These actions and other items resulted in predominantly non-cash pre-tax charges of $37.3 million.
Also, as previously disclosed, we received financial aid under the CARES Act in the quarter.
The total amount received was $57.2 million, of which $48.5 million was a grant and $8.7 million was a low interest pre-payable loan.
In the quarter, we utilized $8 million of the CARES Act grant and $3 million of other non-U.S. government labor subsidies for a total of $11 million.
This amount is included in the GAAP income statement but excluded from adjusted earnings.
As of the quarter-end, the unutilized portion of the grant was $40.8 million, which was recorded as a current liability.
This amount will flow through the P&L, as it is utilized, which we expect to be complete by mid-Q4.
Turning to some additional financial detail in the quarter.
SG&A expense was $45.3 million for the quarter.
On an adjusted basis, SG&A was $39.7 million, down $10.5 million from the prior year quarter, which reflects the reduction of our overhead cost structure.
In the quarter, adjusted SG&A as a percentage of sales was 9.9%.
Net interest expense for the quarter was $1.6 million compared to $2.1 million last year, which reflects the lower interest rate in the period.
During the quarter, we generated $39.8 million of cash in our operating activities from continuing operations.
This includes the $48.5 million grant portion of the CARES Act funding and a net use of cash of $18.6 million, as we reduce the level of our accounts receivable financing program.
Excluding the CARES Act and accounts receivable financing program impacts, cash flow provided by operating activities from continuing operations was $9.9 million.
Additionally, as we are focused on lowering our working capital, we were able to reduce inventory by $19 million during the quarter.
Also, we repaid $355 million of our revolving credit facility during the quarter.
We had previously drawn the full balance as a precautionary measure.
Our net debt at quarter-end was $149.3 million and unrestricted cash was $107.7 million.
Our balance sheet remains strong with net leverage of 1.1 times and availability under our revolver of approximately $355 million and we have no near-term maturities.
In light of the current macro environment, we are pleased with our Q1 performance.
Our Government business continues to be healthy, our cargo end markets continue to generate demand and our balance sheet remains strong.
As discussed on the Q4 call, given the uncertainty in the market, at this stage, we are not providing guidance for the rest of the year.
Having said that, looking forward more generally, although, the trajectory of the recovery remains uncertain, we expect the aftermarket to recover faster than the OEM market.
Within the aftermarket, we expect used serviceable material, in which AAR is the global leader, to be prioritized by operators over higher cost alternatives.
We also expect to see more material become available to support this demand as aircrafts are permanently retired and parted out.
This, along with the maintenance deferrals occurring for both airframe and engine, should drive an increased need for services out of our Trading, Distribution and MRO businesses as the commercial market recovers.
While the timing of the recovery is unknown, we believe that the actions we have taken and are continuing to take to adjust our cost structure and reposition our portfolio, combined with the strength of our team, the airlines' need for lower cost solutions and our balance sheet, uniquely position us to benefit from an eventual return of demand and to emerge an even stronger and more profitable company. | q4 earnings per share $0.85.
q4 sales fell 12 percent to $226.9 million.
q4 adjusted earnings per share $0.89.
sees fy 2021 revenue $850 million to $890 million.
sees 2021 gaap and adjusted earnings per share of between $2.40 and $2.80.
sees 2021 capital expenditures in range of $50 million to $60 million. | 0 |
We appreciate you're joining us today for Gartner's first quarter 2021 earnings call, and hope you are well.
With me on the call today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer.
All growth rates in Gene's comments are FX-neutral unless stated otherwise.
Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website.
Finally, all contract values and associated growth rates we discuss are based on 2021 foreign exchange rates unless stated otherwise.
I encourage all of you to review the risk factors listed in these documents.
Gartner performance accelerated in the first quarter of 2021.
We delivered strong results across contract value, revenue, EBITDA and free cash flow.
Total revenues were up 6%, with each of our business segments, research, conferences, and consulting, exceeding our expectations.
Research is our largest and most profitable segment.
Our Research segment serves executives and their teams across all major enterprise functions in every industry around the world.
Research has a vast market opportunity across all sectors, sizes and geographies.
Global Technology Sales, or GTS, source leaders and their teams within IT.
For Q1, GTS contract value grew 5%.
First quarter new business was up 21% as a result of new logos and upsell with existing clients.
Client engagement continue to be strong, with content and analyst interaction volumes up to 26% compared to Q 2020.
We saw strong performances across several regions and industries, including tech and midsized enterprises.
We expect GTS contract value growth to continue to accelerate in 2021 and return to double-digit growth in the future.
Global Business Sales, or GBS, serves leaders and their teams beyond IT.
This includes HR, supply chain, finance, marketing, sales, legal and more.
GBS achieved contract value growth of 12%, its first quarter of double-digit growth.
New business growth was a very strong 87% in the quarter.
All practices, with the exception of marketing, ended Q1 with double-digit contract value growth rates, and all practices delivered positive quarterly NCVI.
Across our entire research business, we practiced relentless execution of proven practices, and we're seeing the results of our efforts.
Our Research business is well positioned to return to sustained double-digit growth over the medium term.
Turning to Conferences, as many of you know, during 2020, our Conferences business pivoted from in-person destination conferences to virtual.
Our value proposition for virtual conferences remains the same as for in-person conferences.
We deliver extraordinarily valuable insights to an engaged and qualified audience.
While Q1 is a small quarter for conferences, the business exceeded our expectations.
Beyond virtual conferences, we continue to prepare to return to in-person conferences in the second half of 2021.
Gartner Consulting is an extension of Gartner Research, and helps clients execute their most strategic initiatives through deeper extended project-based work.
Our Consulting segment also exceeded our expectations, with bookings up 26% during Q1.
Our Consulting business will continue to serve as an important complement to our IT Research business.
One of our objectives is to generate strong cash flow.
Free cash flow for the quarter was $145 million, up significantly versus the prior year.
In addition, we used that cash flow plus cash balances to purchase more than $600 million in stock through April of this year.
With these repurchases, our Board increased our share repurchase authorization by another $500 million.
We recently launched our 2020 Corporate Responsibility Report.
The report details the progress we made in accelerating positive social change and contributing to a more sustainable world.
We want our associates, communities and clients to continue to thrive today and in the future.
The report can be found on gartner.com, and I encourage you to take a look.
Summarizing, Q1 was a strong quarter with all three business segments exceeding our expectations.
Looking ahead, we are well positioned for sustained success.
We have a vast addressable market which will allow us to achieve double-digit contract value and revenue growth over the next five years and beyond.
We expect to deliver modest EBITDA margin expansion going forward from a normalized 2021.
We generate significant free cash flow in excess of net income, which we'll continue to deploy through share repurchases and strategic tuck-in acquisitions.
And with that, I'll hand the call over to Craig.
I hope everyone remains safe and well.
First quarter results were outstanding with very good momentum across the business.
Revenue was well above our expectations.
Despite the lower-than-planned expenses, we are well positioned to take advantage of the strong demand environment.
We will continue to restore spending to support and drive long-term sustained double-digit growth.
With stronger-than-expected results in contract value, nonsubscription research and consulting, we are increasing our revenue growth and normalized margin outlook, which results in a meaningful increase to our 2021 guidance.
The improved outlook reflects the increased visibility we have following the stronger-than-expected first quarter.
First quarter revenue was $1.1 billion, up 8% year-over-year as reported and 6% FX-neutral.
In addition, total contribution margin was 70%, up more than 320 basis points versus the prior year.
EBITDA was $320 million, up 50% year-over-year and up 44% FX-neutral.
Adjusted earnings per share was $2, and free cash flow in the quarter was $145 million.
Research revenue in the first quarter grew 8% year-over-year as reported and 6% on an FX-neutral basis, and we saw strong retention and new business throughout the quarter.
First quarter research contribution margin was 74%, up about 200 basis points versus 2020.
Higher contribution margins reflect both improved operational effectiveness and the avoidance of travel expenses.
Some of the margin improvement compared to historical levels is temporary and will reverse as the world reopens, and we increase spending to support growth.
We are seeing a benefit from increased scale and a mix shift to higher-margin products, including from the discontinuation of certain lower-margin marketing products.
Total contract value grew 6% FX-neutral to $3.7 billion at March 31.
Quarterly net contract value increase, or NCVI, was $59 million, significantly better than the pandemic affected first quarter last year.
Quarterly NCVI is a helpful way to measure contract value performance in the quarter, even though there is notable seasonality in this metric.
Global Technology Sales contract value at the end of the first quarter was $3 billion, up 5% versus the prior year.
GTS CV increased $34 million from the fourth quarter.
The selling environment continued to improve in the first quarter but while retention isn't yet fully back to normal.
Moving forward, we expect win backs and a return to more expansion with existing clients to contribute to growth in 2021, consistent with our experience coming out of the last downturn.
By industry, CV growth was led by technology, healthcare and services, while retention for GTS was 98% for the quarter, down about 560 basis points year-over-year.
Sequentially, a majority of our industry groups saw retention improve from the fourth quarter.
GTS new business was up 21% versus last year with strength in new logos and an improvement in upsell with existing clients.
Our regular full set of metrics can be found in our earnings supplement.
Global Business Sales contract value was $731 million at the end of the first quarter, up 12% year-over-year.
GBS CV increased $25 million from the fourth quarter.
This was the strongest first quarter performance we've seen from GBS.
CV growth was led by the healthcare and technology industries.
All practices recorded double-digit CV growth with the exception of marketing, which was impacted by discontinued products.
However, our marketing practice saw improving retention rates and a return to year-over-year new business growth in the quarter.
All of our practices, including marketing, showed sequential increases in CV from the fourth quarter.
While retention for GBS was 104% for the quarter, up more than 330 basis points year-over-year, GBS new business was up 87% over last year, led by very strong growth across the full portfolio.
As with GTS, our regular full set of GBS metrics can be found in our earnings supplement.
Conferences revenue for the quarter was $25 million.
We had about $10 million of onetime revenue in the quarter.
This reflected contract entitlements, which we extended beyond the end of 2020 as a result of the pandemic.
Contribution margin in the quarter was 56%.
We held five virtual conferences in the quarter.
We also held a number of virtual Avanta meetings.
First quarter consulting revenues increased by 4% year-over-year to $100 million.
On an FX-neutral basis, revenues were flat.
Consulting contribution margin was 39% in the first quarter, up 860 basis points versus the prior year quarter.
Labor-based revenues were $84 million, up 4% versus Q1 of last year and down 1% on an FX-neutral basis.
Labor-based billable headcount of 744 was down 8% due to headcount actions taken in Q2 and Q3 of last year.
Utilization was 68%, up about 550 basis points year-over-year.
Backlog at March 31 was $116 million, up 3% year-over-year on an FX-neutral basis after a strong bookings quarter.
Our backlog provides us with about four months of forward revenue coverage.
Our Contract Optimization business was up 6% on a reported basis versus the prior year quarter and 3% FX-neutral.
As we have detailed in the past, this part of the consulting segment is highly variable.
Consolidated cost of services decreased 2% year-over-year and 4% FX-neutral in the first quarter.
Cost of services declined due to lower travel and entertainment costs during the quarter, as well as the continuation of various cost avoidance initiatives.
SG&A decreased 2% year-over-year and 4% FX-neutral in the first quarter as well.
SG&A declined due to lower facilities, travel, entertainment, and conference-related expenses, as well as the continuation of various cost avoidance initiatives.
As CV rebounds this year, our traditional sales productivity metrics will also improve.
For 2021, we have ample sales capacity to drive increasing CV growth, a more tenured-than-usual sales force, several consecutive quarters of strong client engagement which should drive improving retention, and the insights to help our clients address their most critical priorities.
Going forward, in addition to the initiatives to improve sales force productivity and cost effectiveness we've been discussing the past few years, this year, we are investing to upgrade many of our sales technology tools.
We will be ramping up our sales force hiring later in the year to ensure we have the team in place to drive strong CV growth next year.
We still anticipate high single-digit growth in both GTS and GBS headcount by the end of 2021.
EBITDA for the first quarter was $320 million, up 50% year-over-year on a reported basis and up 44% FX-neutral.
First quarter EBITDA reflected revenue above the high end and costs toward the low end of our expectations for the first quarter.
Depreciation in the quarter was up about $3 million versus 2020, including real estate and software, which went into service since the first quarter of last year.
Net interest expense, excluding deferred financing costs in the quarter, was $25 million, flat versus the first quarter of 2020.
The Q1 adjusted tax rate, which we used for the calculation of adjusted net income, was 23.5% for the quarter.
The tax rate for the items used to adjust net income was 22.4% in the quarter.
Adjusted earnings per share in Q1 was $2.
Recall that about $6 million of equity compensation expense, which we normally would have incurred in the fourth quarter of 2020, shifted into the first quarter of 2021.
The weighted average fully diluted share count for the first quarter was 89.1 million shares.
The ending fully diluted share count at March 31st was 87.7 million shares.
Operating cash flow for the quarter was $157 million compared to $56 million last year.
The increase in operating cash flow was primarily driven by EBITDA growth, improved collections and cost avoidance initiatives.
capex for the quarter was $13 million, down 49% year-over-year.
Lower capex is largely a function of lower real estate investments.
Free cash flow for the quarter was $145 million, which was up about 360% versus the prior year.
Free cash flow growth continues to be an important part of our business model, with modest capital expenditure needs and upfront client payments.
Free cash flow as a percent of revenue or free cash flow margin was 22% on a rolling 4-quarter basis, continuing the improvement we've been making over the past few years.
Free cash flow is well in excess of both GAAP and adjusted net income.
At the end of the first quarter, we had $446 million of cash.
Our March 31st debt balance was $2 billion.
At the end of the first quarter, we had about $1 billion of revolver capacity.
Our reported gross debt to trailing 12-month EBITDA was about 2.2 times.
We remain very comfortable with our current gross debt level and the corresponding lower leverage multiple.
The multiple has reduced predominantly from increased EBITDA.
Our expected free cash flow generation and excess cash remaining on the balance sheet provide ample liquidity and cash to deliver on our capital allocation strategy of share repurchases and strategic tuck-in M&A.
During the first quarter, we repurchased $398 million in stock at an average price of about $180 per share.
In the month of April, we repurchased more than $200 million of our stock.
At the end of April, the Board increased our share repurchase authorization for the second time this year, adding another $500 million.
As of April 30, we have around $790 million available for open market repurchases.
We expect the Board will continue to refresh the repurchased authorization as needed going forward.
As we continue to repurchase shares, we expect our capital base to shrink going forward.
This is accretive to earnings per share and combined with growing profits, also delivers increasing returns on invested capital over time as well.
We are updating our full year guidance to reflect Q1 performance and an improved and increased outlook for the remainder of the year.
For Research, the strong start to the year in CV performance and improvements to nonsubscription revenue are contributing to higher-than-previously expected research revenue.
For Conferences, our guidance is still based on being virtual for the full year.
Operationally, we are planning to relaunch in-person Avanta meetings in the third quarter and in-person destination conferences starting in September.
Our guidance includes fixed costs, primarily people and marketing related to both a full year of virtual and a partial year of in-person conferences.
We've excluded the variable costs, primarily venue-related associated with in-person conferences from our guidance.
If we are able to run in-person conferences, we expect incremental upside to both our revenue and profitability for 2021.
For Consulting revenues, demand started the year better than we expected and the backlog improved during the first quarter.
For expenses, we have reinstated benefits, which were either canceled or deferred in 2020.
This includes our annual merit increase, which took effect April 1.
We also plan to increase quota-bearing head count in the high single digits for both GTS and GBS by the end of 2021.
Additionally, we continue to invest in several other programs.
The impact of most of these expense restorations or investments impact our P&L starting in the second quarter.
As you know, travel expenses were close to 0 from April 2020 through March 2021.
Our current plans continue to assume a modest ramp-up in travel-related expenses over the course of 2021.
Most of this ramp is built into the second half of the year.
If travel restrictions remain in place for longer than we've assumed, we'd see expense savings.
For our revenue guidance, we now expect Research revenue of at least $3.935 billion, which is growth of at least 9.2%.
We expect Conferences revenue of at least $170 million which is growth of at least 42%.
We now expect consulting revenue of at least $400 million, which is growth of at least 6.4%.
The result is an outlook for consolidated revenue of at least $4.5 billion, which is growth of 9.9%.
Based on current foreign exchange rates and business mix, the consolidated growth includes an FX benefit of about 200 basis points.
The year-over-year FX benefit is more pronounced in the first half of the year.
With the ongoing business momentum we are seeing, we are planning to restore growth spending as we move through the year.
We now expect full year adjusted EBITDA of at least $1 billion, which is an increase of about 22.3% versus 2020 and reported margins of at least 22%.
This is based on conferences running virtual only.
The 18% to 19% expected margins in the back half of the year should provide a reasonable run rate for thinking about the margins going forward as we will have more fully restored costs and resumed growth hiring.
We expect our full year 2021 adjusted net interest expense to be $102 million.
We expect an adjusted tax rate of around 22% for 2021.
We now expect 2021 adjusted earnings per share of at least $6.25.
For 2021, we now expect free cash flow of at least $850 million.
This is before any insurance proceeds related to 2020 conference cancellations.
All the details of our full year guidance are included on our Investor Relations site.
Finally, we expect to deliver at least $270 million of EBITDA in Q2 of 2021.
We expect the second quarter tax rate in the high 20s.
Looking out over the medium term, our financial model and expectations are unchanged.
With 12% to 16% research CV growth, we will deliver double-digit revenue growth.
With gross margin expansion, sales cost growing in line with CV growth over time and G&A leverage, we can modestly expand margins from a normalized 2021 level of around 18% to 19%.
We can grow free cash flow at least as fast as EBITDA because of our modest capex needs and the benefits of our clients paying us upfront.
We will repurchase shares over time, which will lower the share count as well.
We had a strong start to the year with momentum across the business.
We have meaningfully updated our outlook for 2021 to reflect the stronger demand environment and our enhanced visibility.
We are restoring certain expenses and investing to ensure we are well positioned to rebound as the economy recovers.
We repurchased more than $600 million worth of stock this year through the end of April and remain committed to returning excess capital to our shareholders. | q1 revenue rose 8.4 percent to $1.1 billion.
board of directors increased share repurchase authorization by $500 million in april 2021. | 1 |
Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC.
The resiliency of Barnes Group was apparent once again this quarter as we grew sequential revenues for the second consecutive quarter and delivered adjusted earnings per share above the high end of our October outlook.
Given the historic challenges resulting from the global pandemic for most of 2020, I'm very proud of the many contributions of our 5,000 employees across the globe who stepped up to the challenge by going above and beyond to meet the needs of our customers and support our communities.
And while I am happy with our performance, given the significance of the disruption, we at Barnes Group, remain mindful and respectful of the personal and social hardships caused by the pandemic across the world.
From the onset, our response to the pandemic was structured around four phases.
First and foremost, the health and safety of our employees.
Second, adjusting the business for the stark realities of lower demand.
Third, anticipating and adapting to structural shifts in some of our end markets.
And fourth, making key strategic investments to position Barnes Group for an economic recovery.
While we moved our current -- while we have moved our current focus to Phase 4, we have not lost sight of the first three phases as they continue to be important.
Through 2020, one thing that has remained unchanged is our vision to be a leading global provider of highly engineered products, differentiated industrial technologies and innovative solutions serving our diversified end markets.
For the fourth quarter, organic sales were down 21%, primarily as a result of lower volumes given the pandemics' continuing impact on our end markets, especially at Aerospace.
The fourth quarter saw a 7% increase over the third quarter with both segments generating sequential sales improvement.
Adjusted earnings per share were $0.36, down 58% from last year.
Though, as mentioned, just above the high end of our October outlook.
Looking at the full-year, organic sales were down 22%, while adjusted earnings per share were $1.64, down nearly 50% from a year ago.
As difficult as those numbers are, early cost actions and a focus on cash generation, allowed us to maintain double-digit margins, positive earnings and strong cash flow throughout the year.
As we turn the page on 2020, our mindset is shifting and our focus has returned to driving growth, both organically and through acquisitions.
With a keen focus on our strategic filters, we continue to explore enabling technologies and market-leading businesses that would complement our current portfolio with several potential targets in the pipeline being analyzed.
We remain enthusiastic in our pursuit of value adding transactions, that strategically advance our transformation.
More immediately, an emphasis on organic investments will target growth-orientated capital expenditures, research and development efforts and further build out of our newly established innovation hub capabilities.
While these investments will influence margins in the short-term, they are instrumental to position the Company more favorably for the long run.
It's my expectation that we'll be talking frequently about our innovation and digital initiatives as we progress through 2021.
Moving now to a discussion of end market dynamics, beginning with Industrial.
At Industrial, we see the continuation of favorable trends discussed on our last call.
Manufacturing PMIs in our major geographic markets remain strong and correspondingly, we've seen fourth quarter organic orders at Industrial grow 10% over a year ago.
Sequential Industrial orders were up 9% over the third quarter and segment book-to-bill was slightly better than 1 times.
So, as we think about our Industrial expectations for the upcoming year, we feel bullish about the prospects for this part of our business.
Molding Solutions generated very strong orders in medical end markets, both year-over-year and sequentially, each with well over 50% growth.
Medical sales lagged a bit in the quarter given a very challenging comparable and the timing of deliveries.
We see that is normal given the nature of this business and expect sales to bounce back by the second quarter.
Packaging orders were very strong on both a year-over-year and sequential basis.
Sales were up over 20% from a year ago.
Meanwhile, personal care orders took a dip in the quarter and sales were slightly down versus a year ago.
However, sequential sales were strong increasing over 20%.
Our Synventive business, which is predominantly automotive hot runners, saw a modest increase in orders, both year-over-year and sequentially.
Although sales were relatively flat to a year ago, they were up 20% sequentially.
All-in, our expectations for 2021 is organic sales growth to be up in the low-double digits for Molding Solutions.
Sheet metal forming markets also continue to see a rebound, as Force & Motion Control orders were up high-single digits over last year and up high-teens over the third quarter.
While sales were down modestly from a year ago, sequential sales were up in the high-single digits.
We forecast Force & Motion Control to generate organic sales growth in the low-double digits for 2021.
At Engineered Components, organic orders were up nearly 20% on a year-over-year basis, with organic sales up mid-single digits versus a year ago.
Total sales were up high-single digits sequentially, continuing a rebound that we've seen over the last couple of quarters.
With General Industrial Markets on the upswing and global automotive production forecasted to be up meaningfully in 2021, we anticipate Engineered Components to grow high-single digits organically.
That said, we are very mindful about the current impact semiconductor shortages are having on automotive production and we will monitor that situation carefully as it unfolds.
Looking next at our Automation business.
It continues to demonstrate signs of a positive rebound as mid-single-digit orders growth over a year ago and third quarter were achieved.
Total sales growth was strong with both year-over-year and sequential growth of 20%.
Like last quarter, demand for our end-of-arm tooling solutions in automotive, and medical and pharma applications remain solid.
We expect 2021 to deliver low-double-digit organic growth as these markets remain healthy and as we launch new innovative products.
Speaking of new products, as I mentioned earlier, our investments in innovation and R&D are aimed at providing a solid foundation for organic growth.
As an example, we recently launched our comprehensive vacuum solutions product line with complete gripping solutions, advanced control systems and high-quality components.
The vacuum product range consists of about 1,100 items, including high-performance suction cups, vacuum pumps, sensors and related accessories that allow our customers to handle different objects in various industrial sectors with low energy consumption and reduce downtime.
Overall, for the Industrial segment, we see 2021 organic growth in the low-double-digit range with adjusted operating margins of 12% to 14%.
Moving now to our Aerospace business.
For the fourth quarter, Barnes Aerospace sales were down nearly 40% at OEM and nearly 50% in the aftermarket from the prior year.
Not surprising as commercial aviation remains significantly disrupted by the global pandemic, our outlook for Aerospace is certainly not as bullish as for our Industrial businesses.
That being said, we continue to believe the trough quarter of sales is behind us.
With OEM, production levels of narrow-body aircraft are expected to improve from here modestly, although wide-bodies will remain pressured.
The journey back to pre-COVID levels will most likely take a few years.
The OEM silver lining for the fourth quarter was book-to-bill of 1.6 times relative -- reflective of the strongest orders quarter since the third quarter of 2019.
One last point on our Aerospace business, OEM business, in particular, our estimates of OEM sales per aircraft for our major programs are unchanged from our prior view except for the 737 MAX.
With the award of the long-term agreement with GE Aviation on the LEAP program, mentioned on last quarter's call, we now forecast approximately $100,000 of sales per aircraft, up from our previous estimate of $50,000.
For the aftermarket, many of the factors discussed last quarter, lower aircraft utilization, weakened airline profitability and government imposed travel restrictions are still affecting the industry.
Recovery will require more widespread vaccine distribution, allowing people to feel more comfortable about flying, combined with the lifting of the various travel restrictions that currently exist.
Only then will we see commercial flights return in earnest, likely led by domestic travel, while international flights are expected to take a little longer to resume.
Until then, we anticipate aftermarket volume to remain pressured.
However, we do expect aftermarket activity to gradually improve beginning in the second half of 2021.
With that as the backdrop, for 2021, we see OEM sales up mid-single digits over 2020, with MRO down mid-single digits and spare parts down in the mid-teens.
We anticipate 2021 segment operating margin to be in the range of 13% to 14%, surely compressed by the lower aftermarket expectation.
In line with our continued focus on addressing the various topics of interest to our stakeholders, you may recall that last quarter on the topic of ESG, I took a few moments to address our commitment to make Barnes Group a more sustainable, socially responsible and diverse and inclusive Company.
While we've made great progress, there's definitely more work to be done.
Related to our ESG efforts, I'm proud to highlight that Barnes Group was recently named as one of America's Most Responsible Companies by Newsweek.
This acknowledgment is a testament to our employees across the globe who embrace our Barnes Group values each and every day.
So, to conclude, the extraordinary disruption in 2020 required many businesses to play defense, including Barnes Group, securing employee safety, keeping our essential operations running, adjusting to the lower demand -- levels of demand, focusing on costs and preserving liquidity were of paramount importance.
Given the circumstances, the financial results achieved are indicative of the quick and decisive actions taken by the strong leadership team and talented workforce at Burns.
With the arrival of 2021, we now turn to a more offense minded view, increasing our investments in innovation, research and development and growth programs across the enterprise.
While the high level of economic uncertainty still exists, we are squarely focused on controlling our own destiny, seeking out new opportunities and setting the Company up for long-term profitable growth.
Let me begin with highlights of our fourth quarter results on Slide 4 of our supplement.
Fourth quarter sales were $289 million, down 22% from the prior year period, with organic sales declining 21% as continuing impacts from the pandemic affect our end markets.
The diversified Seeger business had a negative impact of 3% on our net sales for the fourth quarter, while FX positively impacted sales by 3%.
Operating income was $32.7 million versus $61.3 million a year ago.
Adjusted operating income was $32.9 million this year, down 48% from $63.5 million last year.
Adjusted operating margin of 11.4% decreased 580 bps.
Net income was $17.7 million, or $0.35 per diluted share, compared to $41 million, or $0.80 per diluted share a year ago.
On an adjusted basis, net income per share of $0.36 was down 58% from an $0.86 a year ago.
Adjusted net income per share in the fourth quarter of 2020 excludes $0.01 of residual restructuring charges from previously announced actions with most of the impact reflected in other expense not operating profit.
For the fourth quarter of 2019, adjusted net income excludes a favorable $0.05 adjustment related to the finalization of Gimatic short-term purchase accounting and an $0.11 non-cash impairment charge related to the divestiture of Seeger, both in our Industrial segment.
Moving to 2020 full-year highlights on Slide 5 of our supplement.
Sales were $1.1 billion, down 25% from the prior year.
Organic sales were down 22% for the year.
The Seeger divestiture negatively impacted sales by 3%, while FX had a minimal positive impact.
Operating income was $123.4 million versus $236.4 million a year ago.
On an adjusted basis, operating income was $144 million this year versus $244.1 million last year, a decrease of 41%.
Adjusted operating margin decreased 360 bps to 12.8%.
For the year 2020, interest expense was approximately $15.9 million, a decrease of $4.7 million as a result of lower average borrowings and lower average interest rates.
Other expense was $5.9 million, a decrease of $3 million, primarily as a result of lower FX losses this year as compared to last year, partially offset by higher pension expense.
The Company's effective tax rate in 2020 was 37.6% compared with 23.4% last year, with the increase largely due to a decline in earnings in jurisdictions with lower rates, the recognition of tax expense related to the completed sale of the Seeger business during the first quarter of 2020, the impact of the global intangible low-taxed income or guilty tax on foreign earnings in the US and tax charges related to prior year's stock awards.
For 2020, net income was $63.4 million, or $1.24 per diluted share, compared to $158.4 million, or $3.07 per diluted share a year ago.
On an adjusted basis, 2020 net income per share was $1.64, down 49% from $3.21 in 2019.
Adjusted earnings per share for 2020 excludes $0.27 of restructuring costs and $0.13 of Seeger divestiture adjustments.
While 2019 adjusted earnings per share excludes $0.03 of Gimatic short-term purchase accounting adjustments and an $0.11 non-cash impairment charge related to the disposition of the Seeger business.
Turning to our segment performance, beginning with Industrial.
Fourth quarter sales were $209 million, down 9% from a year ago.
Organic sales decreased 8%.
Seeger divested revenues had a negative impact of 5%, while favorable FX increased sales by 4%.
Sequential sales were up 6% from the third quarter.
Industrial's operating profit for the fourth quarter was $24.5 million versus $30.2 million last year.
As has been the consistent theme since the second quarter, the primary driver is lower sales volume, offset in part by our cost mitigation efforts.
On an adjusted basis, which excludes a small amount of restructuring charges and Seeger divestiture adjustments, fourth quarter operating income was down 24% to $24.7 million and adjusted operating margin was down 230 bps to 11.8%.
For the year, Industrial sales were $770 million, down 18% from $939 million a year ago, with organic sales down 14%.
The Seeger divestiture had an unfavorable sales impact of 5%, while favorable foreign exchange had a positive impact of 1%.
Operating profit of $66.6 million was down 42% from the prior year.
On an adjusted basis, operating profit was $85 million, a decrease of 30% from last year.
Adjusted operating margin was 11%, down 200 bps.
Sales were $80 million for the quarter, down 43% from last year and operating profit was $8.2 million, down 74%, primarily driven by the lower sales volume.
Operating margin was 10.2% as compared to 22.3% a year ago.
All-in, especially considering the meaningful decline in the high-margin aftermarket, the Aerospace team continues to respond well in a challenged environment.
For the full-year, Aerospace sales were $354 million, down 36% from a record $553 million a year ago.
Operating profit was $56.8 million, down 54% from last year's record $122.5 million.
On an adjusted basis, which excludes $2.3 million in 2020 restructure charges, operating profit was $59 million and adjusted operating margin was 16.7%.
Aerospace OEM backlog ended the quarter at $572 million, up 7% from the third quarter and we expect to ship approximately 45% of this backlog in 2021.
2020 cash provided by operating activities was $215 million, a decrease of approximately $33 million versus last year.
Nonetheless, solid performance in the current environment, given our focus on driving working capital improvement.
Free cash flow was $175 million versus $195 million last year and capital expenditures of $41 million were down approximately $13 million from a year ago.
Regarding the balance sheet, our debt-to-EBITDA ratio, as defined by our credit agreement, was approximately 3 times at quarter end.
The Company is in full compliance with all covenants of our credit agreements and maintained adequate liquidity to fund operations.
As a reminder, the Company amended on a temporary basis, the debt limits allowed under our credit agreement.
Through the third quarter of 2021, our senior debt covenant maximum, our most restrictive covenant, has increased from 3.25 times EBITDA, as defined, to 3.75 times.
We anticipate leverage to peak with our first quarter 2021 results, though, well below the amended covenant level.
Our fourth quarter average diluted shares outstanding was 51 million shares and our share repurchase activity remains suspended.
Turning to Slide 6 of our supplement, let's now discuss our initial outlook for 2021.
We expect organic sales to be up 6% to 8% for the year.
FX is not expected to have a meaningful impact.
Adjusted operating margin is forecasted to be between 12% and 14%.
We expect a couple of pennies worth of residual restructuring charges to come through, likely split evenly in the first and second quarters.
Adjusted earnings per share is expected to be in the range of $1.65 to $1.90, approximately flat to up 16% from 2020's adjusted earnings of $1.64 per share.
We do see a higher weighting of adjusted earnings per share in the second half with a 40% first half, 60% second half split.
In particular, we see the first quarter of 2021 being the low quarterly point, given delivery schedules in our longer cycle business in the range of $0.27 to $0.32, significantly lower than last year's strong first quarter.
A few other outlook items.
Interest expense is anticipated to be between $16.5 million and $17 million.
Other expense approximately $8.5 million driven by pension, and effective tax rate of approximately 30%.
Capex of $55 million.
Average diluted shares of approximately 51 million shares and cash conversion of over 100%.
To close, 2020 certainly was historic in terms of business disruption.
The Barnes Group team rose to the occasion to rapidly adapt to the realities of the economic environment with a focus on cost management and cash generation.
As Patrick mentioned, it's now time to shift our mindset to growth with necessary investments in key initiatives like innovation and digital that are targeted to help us accelerate through the anticipated recovery.
Our balance sheet is supportive of such investments and our sales volume and, as our sales volume returns, we expect further margin expansion as well. | barnes group q4 gaap earnings per share $0.35.
q4 adjusted earnings per share $0.36.
q4 gaap earnings per share $0.35.
q4 sales $289 million versus refinitiv ibes estimate of $282.8 million.
sees 2021 organic sales growth of +6% to +8%.
sees 2021 adjusted earnings per share of $1.65 to $1.90; approximately flat to up 16% from 2020 adjusted eps.
barnes group - as 2021 unfolds, anticipate organic revenue growth to return for industrial business, while aerospace is expected to remain pressured. | 1 |
chubb.com for more information on factors that could affect these matters.
First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Peter Enns, our Chief Financial Officer.
As you saw from the numbers, Chubb had an outstanding quarter, highlighted by record operating earnings and underwriting results, expanded margins and double-digit premium revenue growth globally, the best in over 15 years, powered by commercial P&C and supported by continued robust commercial P&C rate movement.
Chubb was built for these conditions.
We have averaged double-digit commercial P&C growth over the past 10 quarters.
The breadth of our product and reach, combined with our execution-oriented underwriting culture and our reputation for service and consistency enable us to fully capitalize on opportunity globally.
And conditions such as these size and scale are our friend.
Core operating income in the quarter was $1.62 billion or $3.62 per share, again, both records.
On both the reported and current accident year ex-cat basis, underwriting results in the quarter were simply world-class.
The published P&C combined ratio was 85.5% and current accident year was 85.4% compared to 87.4% prior year.
The two percentage points of margin improvement were almost entirely loss ratio related.
Current accident year underwriting income of $1.2 billion was up 27%.
While on the other side of the balance sheet, adjusted net investment income of $945 million, also a record, was up nearly 9.5% from prior year.
Peter will have more to say about cats and prior period development, investment income and book value.
Turning to growth and the rate environment.
P&C premiums were up 15.5% globally, with commercial premiums, excluding agriculture, up nearly 21%.
The 15.5% growth for the quarter and 12.6% for the first six months were the strongest growth we have seen since 2004.
Growth in the quarter was extremely broad-based, with contributions from virtually all commercial P&C businesses globally, from those serving large companies, to midsized and small and most regions of the world and distribution channels.
We continue to experience a needed and robust commercial P&C pricing environment in most all important regions of the world, with continued year-on-year improvement in rate to exposure on the business we wrote, both new and renewal.
Based on what we see today, I'm confident these conditions will continue.
In North America, Commercial P&C net premiums grew over 16%.
New business was up 24%, and renewal retention remained strong at 96.5% on a premium basis.
In our North America major accounts and specialty commercial business, net premiums grew over 13%, with each division, major accounts, Westchester and Bermuda having its largest quarter in history in terms of written business.
And the standout was our middle market and small commercial division, which had the biggest quarter in about 20 years, driven by record new business growth and strong retentions.
Overall rates increased in North America commercial by a strong 13.5%, which is on top of a 14.7% rate increase last year for the same business, making the two-year cumulative increase over 30%.
And remember, in North America, rates have been rising for almost four years.
However, they have exceeded loss costs for only about two years now.
Loss costs are currently trending about 5.5% and vary up or down depending upon line of business.
General commercial lines loss costs for short-tail classes are trending around 4%, while long-tail loss costs, excluding comp, are trending about 6%.
Let me give you a better sense of the rate increase movement by division and line in North America.
In major accounts, rates increased in the quarter by about 16% on top of almost 18% prior year for the same business, making the two-year cumulative increase over 36%.
Risk management-related primary casualty rates were up almost 9%.
General casualty rates were up 21% and varied by category of casualty.
Property rates were up nearly 12% and financial lines rates were up almost 20%.
In our E&S wholesale business, the cumulative two-year rate increase was 39%, comprised of an increase of circa 18% this quarter on top of 18% prior year second quarter.
Property rates were up about 16.5%.
Casualty was up about 21%, and financial lines rates were up over 21%.
In our middle market business, rates increased in the quarter over 9.5% on top of over 9% last year, making the two-year cumulative increase 20%.
Rates for property were up over 10.5%.
Casualty rates were up 11%, excluding workers' comp, and comp rates were down at about 0.5%.
Financial Lines rates were up over 17.5% in our middle market business.
Turning to our international general insurance operations.
Commercial P&C premiums grew an astonishing 33% on a published basis or 24% in constant dollars.
International retail commercial grew 27% and our London wholesale business grew 60%.
Retail commercial P&C growth varied by region, with premiums up 36.5% in our European division, with equally strong growth in both the U.K. and on the continent.
Asia Pacific was up over 29%, while our Latin America commercial lines business grew over 14.5%.
Internationally, like in the U.S., in those markets where we grew, we continued to achieve improved rate to exposure across our commercial portfolio.
In our international retail commercial P&C business, the two-year cumulative rate increase was 35% comprised of increases this quarter and prior year of 16% each.
Two territories in particular, the U.K. and Australia, stand out in terms of rate achievement.
In our U.K. business, rates increased in the quarter by 18%, on top of a 26% rate increase prior year for the same business, making the two-year cumulative increase 48%.
In Australia, the two-year cumulative rate was 42%, comprised of an increase of 23% this quarter, on top of 16% prior year.
In our London wholesale business, rates increased in the quarter by 13%, on top of a 20% rate increase prior year, so making the two-year cumulative 36%.
International markets began firming later than the U.S. And again, like with the U.S., rates has exceeded loss costs for about two years now.
Outside the U.S., loss costs are currently trending 3%, so that varies by class of business and country.
Consumer lines growth globally in the quarter continued to recover from the pandemic's effects on consumer-related activities.
Our international consumer business grew 13% in the quarter, and that's on a published basis.
It grew 5% in constant dollars.
Breaking that down for you, international personal lines grew 20% on a published basis, while our international A&H grew 6.5%, but it was essentially flat in constant dollar.
Within our A&H book, a nascent recovery in our leisure travel business outside of Asia is beginning to result in growth, although passenger travel activity is still well below pre-pandemic levels.
In both our group A&H business, with its employer-based benefits and our consumer-focused direct marketing business, premiums were up mid-single digits, still impacted by the pandemic but beginning to improve.
Net premiums in our North America high net worth personal lines business were up over 2.5%.
Nonrenewals in California and COVID auto-related renewal credits had almost one point of negative impact on growth in the quarter.
Our network client segment, the heart of our business, grew almost 8% in the quarter.
Overall retention remains strong at over 94%.
And we achieved positive pricing, which includes rate and exposure of 13% in our homeowners portfolio.
Loss cost inflation in homeowners is currently running about 11%.
Lastly, in our Asia-focused international life insurance business, net premiums plus deposits, were up 55% in the quarter, while net premiums in our Global Re business grew up -- grew over 32%.
In sum, we continue to capitalize on a hard or firming market for commercial P&C in most areas of the world.
Both growth and margin expansion are two trends that I am confident will continue.
Our organization is firing on all cylinders.
We're growing our business and our exposures, and we continue to expand our margins.
Our leadership employees are energized and driven to win.
I am confident in our ability to outperform and deliver strong, sustainable shareholder value.
I'm excited to be in my new position and build upon all that he has achieved -- all he has achieved under his leadership, and I'm honored to be leading the very strong team he has built going forward.
Turning to our results.
We completed the quarter in an excellent financial position and continue to build upon our balance sheet strength.
We have over $75 billion in capital and a AA-rated portfolio of cash and invested assets that now exceeds $123 billion.
Our record underwriting and investment performance produced strong positive operating cash flow of $3.1 billion for the quarter.
Among the capital-related actions in the quarter, we returned $2.3 billion to shareholders, including $1.9 billion in share repurchases and $352 million in dividends.
Through the six months ended June 30, we returned $3.1 billion, including $2.4 billion in share repurchases and dividends of $704 million.
We recently announced a onetime incremental share repurchase program of up to $5 billion through June 2022.
As Evan said, adjusted pre-tax net investment income for the quarter was a record $945 million, higher than our estimated range, benefiting from increased corporate bond call activity and higher private equity distributions.
We increased the size of our investment portfolio by $2.4 billion in the quarter after buybacks due to strong operating cash flow and high portfolio returns, including $694 million in pre-tax unrealized gains from falling interest rates.
At June 30, our investment portfolio remained in an unrealized gain position of $3.3 billion after tax.
During this challenging investment return environment, we will remain consistent and conservative in our investment strategy and do not expect to materially adjust the portfolio asset allocation over the near term.
We will be selective but active, and we'll continue to focus on risk-adjusted returns and we will not reach for yields.
There are a number of factors that impact the variability in investment income, including the amount of operating cash flow available to invest, the reinvestment rate environment and the assumed prepayment speeds on our corporate bond calls and variability around private equity distributions.
Based on the current interest rate environment and a normalization of bond calls and private equity distributions, we continue to expect our quarterly run rate to be approximately $900 million.
Our annualized core operating ROE and core operating return on tangible equity were 11.5% and 17.7%, respectively, for the quarter.
And as a reminder, we continue to present the fair value mark on our private equity funds outside of core operating income as realized gains and losses instead of net investment income as other companies do.
The gain from the fair value mark this quarter of $712 million after tax, we have increased core operating ROE by five percentage points to 16.5% and core operating income by $1.59 per share to $5.21.
Book and tangible book value per share increased by 4.2% and 5%, respectively, from the first quarter due to record core operating income and realized and unrealized gains of $1.4 billion after tax in our investment portfolio, which again primarily came from declining rates and mark-to-market gains on private equities.
The increase in book value per share also reflects the impact of returning over $2 billion to shareholders in the quarter.
Our pre-tax P&C net catastrophe losses for the quarter were $280 million, principally from severe U.S. weather-related events.
There was no overall change to our aggregate COVID-19 loss estimate.
We had favorable prior period development in the quarter of $268 million.
This included a charge from molestation claims of $68 million pre-tax compared with $259 million in the prior year.
Excluding this charge, we had favorable prior period development in the quarter of $336 million pre-tax, split approximately 30% in long-tail lines, principally from accident years 2017 and prior and 70% short-tail lines.
For the quarter, our net loss reserves increased $1.1 billion in constant dollars and our paid-to-incurred ratio was 80%.
Our core operating effective tax rate was 15.8% for the quarter, which is within our expected range of 15% to 17% for the year. | sees 2021 total revenue up 5% to 8%.
sees 2021 earnings per share from continuing operations up 8% to 12%. | 0 |
In the third quarter, Cullen/Frost earned $106.3 million or $1.65 per share compared with earnings of $95.1 million or $1.50 per share reported in the same quarter of last year.
And this compared with $116.4 million or $1.80 per share in the second quarter.
We continue to focus on our organic strategy while the economy works to move past supply chain issues and other lingering effects of the pandemic.
Average deposits continued their strong increase in the third quarter and were $39.1 billion, an increase of 19% compared with $32.9 billion in the third quarter of last year.
Overall, average loans in the third quarter were $16.2 billion compared with $18.1 billion in the third quarter of 2020, but this included the impact of PPP loans.
Excluding PPP loans, third quarter average loans of $14.8 billion were essentially flat from a year ago but up an annualized 6% on a linked quarter basis.
And looking forward, we're very encouraged about the outlook for loan growth.
New loan commitments booked through the third quarter excluding PPP loans were up by 11% compared to the first nine months of last year.
For the quarter, new loan commitments were up by 6% on a linked quarter basis.
We were especially pleased that the linked quarter increase was due primarily to C&I commitments, which were up 30%.
Our current weighted pipeline is 41% higher than one year ago and 22% higher than last quarter.
The increases are in both C&I, up 22%; and CRE, up 28%.
The market continues to be very competitive.
In the third quarter, 69% of the deals we lost were due to structure compared to 50% in the quarter before.
We also continue to add to our commercial customer base, and we recorded 619 new commercial relationships during the quarter.
And while this was down from the same quarter a year ago when we were experiencing incredible PPP success, it is 2/3 higher than the quarter immediately before the PPP program.
As with the second quarter, we did not report a credit loss expense in the third quarter.
Our asset quality outlook is stable and in general, problem assets are declining in number.
New problems have dropped to pre-pandemic levels.
Net charge-offs for the third quarter totaled $2.1 million compared with $1.6 million in the second quarter.
Annualized net charge-offs for the third quarter were five basis points of average loans.
Nonaccrual loans were $57.1 million at the end of the third quarter, a slight decrease from the $57.3 million at the end of the second quarter.
Overall, delinquencies for accruing loans at the end of the third quarter were $95.3 million or 60 basis points of period-end loans, and these are manageable pre-pandemic levels.
What started out as $2.2 billion in 90-day deferrals granted to borrowers early in the pandemic were completely gone as of the end of the third quarter.
Total problem loans, which we define as risk grade 10 and higher, were down slightly to $635 million at the end of the third quarter compared with $666 million at the end of the second quarter.
In the third quarter, we continued making progress toward our goal of mid-single-digit concentration level in the energy portfolio over time, with energy loans falling to 6.5% of our non-PPP portfolio at the end of the quarter.
Our teams continue to analyze the nonenergy portfolio segments that we considered the most at risk from pandemic impacts.
As of the third quarter, those segments are represented by restaurants, hotels and entertainment and sports.
The total of these portfolio segments excluding PPP loans represented $695 million at the end of the third quarter, and our loan loss reserve for these segments was 8.8%.
The credit quality of individual credits in these segments is currently most stable -- mostly stable or better compared to the end of the second quarter.
We reported in the second quarter that we had completed our 25-branch Houston expansion initiative, and we're very pleased with the results.
We've identified eight more locations to open in the coming months, and that process is underway.
Let me update you where we stand through the third quarter with the Houston expansion excluding PPP loans.
Our numbers of new households were 134% of target and represented more than 12,200 new individuals and businesses.
Our loan volumes were 177% of target and represented $371.4 million in outstandings, and about 80% of this represents commercial credits with about 20% consumer.
Deposits surpassed $0.5 billion and were 111% of target.
Commercial deposits accounted for 2/3 of the total.
In the meantime, we're also preparing for our upcoming 28-branch expansion project in the Dallas region, which will kick off with the first new financial center opening early next year and continuing into 2024.
The Dallas expansion will follow our Houston model, and we will employ the lessons learned during our team's successful rollout.
I'll continue to emphasize that the business we are generating through our expansion strategy is consistent with the overall company.
Its profitability is weighted toward small and midsized businesses, but it also has complemented wealth management, insurance, and of course, consumer banking, which continues to see tremendous growth.
For example, through the first six months of this year, we had already surpassed consumer banking's all time annual growth for new customer relationships, which was 12,700 in 2019.
At the end of the third quarter this year, this had risen to 19,974 net new checking customers.
That's already more than 150% of our previous annual record.
We've worked hard to lower barriers to entry for potential customers with improved product offerings and physical distribution.
For example, besides overdraft grace which we introduced in April and Early Pay Day which we announced in July, we also recently established an ATM branding partnership with Cardtronics that resulting -- resulted in us having by far the largest ATM network in the state.
In addition, after over two years of study, we've begun the process of putting in place the infrastructure to add residential mortgages to our suite of consumer real estate products in late 2022.
HELOC, home improvement and purchase money second loans, which has steadily grown to in excess of $1.3 billion.
Utilizing best-in-class technology will allow us to provide Frost level of world-class customer service as we build this portfolio over time in response to customer demand.
Finally, I want to commend our team working on PPP loans.
Nearly 90% of the 32,500 loans or $4.7 billion have already been helped with the loan forgiveness process.
That includes upwards of 97% of the first-round loans from 2020.
Our team continues to put in outstanding work to execute our strategies, whether it's PPP, our expansion projects, or the enhancements we've made to our customer experience.
I believe we've got the best team in the financial services industry.
They are why I continue to be optimistic about our company and our prospects for success.
Looking first at our net interest margin.
Our net interest margin percentage for the third quarter was 2.47%, down 18 basis points from 2.65% reported last quarter.
The decrease was primarily the result of a higher proportion of earning assets being invested in lower-yielding balances at the Fed in the third quarter as compared to the second quarter, and to a lesser extent, the impact of a lower PPP loan volumes and their related yields compared to the prior quarter.
Interest-bearing deposits at the Fed averaged $15.3 billion or about 35% of our average earning assets in the third quarter, up from $13.3 billion or 31% of average earning assets in the prior quarter.
Excluding the impact of PPP loans, our net interest margin percentage would have been 2.27% in the third quarter, down from an adjusted 2.37% for the second quarter, with all of the decrease resulting from the higher level of balances at the Fed in the third quarter.
The taxable equivalent loan yield for the third quarter was 4.16%, down 12 basis points from the previous quarter.
Excluding the impact of PPP loans, the taxable equivalent loan yield would have been 3.74%, down six basis points from the prior quarter.
To add some additional color on our PPP loans, total PPP loans at the end of September were $828 million, down from $1.9 billion at the end of June.
Forgiveness payments received during the third quarter were higher than we had projected, resulting in an acceleration in the recognition of the net deferred fees during the quarter.
At the end of the third quarter, we had only about $11.5 million in net deferred fees remaining to be recognized, and we currently expect about 75% of that to be recognized in the fourth quarter.
Looking at our investment portfolio.
The total investment portfolio averaged $12.5 billion during the third quarter, up about $209 million from the second quarter.
The taxable equivalent yield on the investment portfolio was 3.35% in the third quarter, down one basis point from the second quarter.
The yield on the taxable portfolio which averaged $4.1 billion was 2.03%, up two basis points from the second quarter.
Our municipal portfolio averaged about $8.4 billion during the third quarter, up $230 million from the second quarter, with a taxable equivalent yield of 4.04%, down five basis points from the prior quarter.
At the end of the third quarter, 78% of the municipal portfolio was pre-refunded or PSF-insured.
The duration of the investment portfolio at the end of the third quarter was 4.5 years, up slightly from 4.4 years in the second quarter.
We made investment purchases toward the end of September of approximately $1.5 billion, consisting of about $900 million in MBS agency securities with a yield of about 2%, about $500 million in treasuries yielding 1.07% with the remainder in municipal securities.
Regarding noninterest expense, looking at the full year 2021, we currently expect an annual expense growth rate of around 3% over our 2020 total reported noninterest expenses, which is consistent with our previous guidance.
Regarding the estimates for full year 2021 earnings, given our third quarter results and the recognition of lower PPP fee accretion for the fourth quarter, we currently believe that the current mean of analyst estimates of $6.48 is reasonable. | q2 earnings per share $1.80. | 0 |
I'm Steven Sintros, UniFirst President and Chief Executive Officer.
Actual future results may differ materially from those anticipated depending on a variety of risk factors.
As we look back over our fiscal year 2021, we are pleased with what we have accomplished as a team in the face of what continues to be a unique and challenging operating environment.
During the year, our Company and the communities that we operate and then serve continue to deal with the impact of the COVID-19 pandemic.
Progress was certainly made at the introduction of vaccines has allowed for improvements in the overall public health situation as well as the reopening of many businesses.
As you are all keenly aware however, the challenges related to COVID-19 continue to evolve and are not fully behind us just yet.
I also want to continue to highlight that for over a year now, our team partners have continued to put forth tremendous efforts in the face of the many obstacles created by the pandemic.
They've worked extremely hard to take care of each other and our customers during these extraordinarily challenging times.
For our full year fiscal 2021, the Company reported revenues of $1.826 billion exceeding fiscal 2020's total of $1.804 billion.
When we provided guidance at the beginning of the fiscal year, we had articulated that showing any growth during fiscal 2021 would be a challenge.
Therefore, overall, we were pleased with this outcome.
Our Core Laundry Operations revenue over the second half of the year were positively impacted by a modest level of customer reopenings as well as increases in the sale of PPE.
In addition, our Specialty Garments segment was also a strong contributor to our overall results, producing a record year from a top and bottom line perspective.
From a profit perspective, full year diluted earnings per share was $7.94 compared to $7.13 in fiscal 2020.
The improved earnings comparison for the full year was primarily due to our depressed results in the second half of fiscal 2020 when the impact of the COVID-19 pandemic was greatest on our business, primarily in the form of customer closures.
Shane will provide the details of our fourth quarter results shortly.
As we've talked about over the last year or two, we continue to be focused on making good investments in our people, our infrastructure and our technologies.
All of our investments designed to deliver solid long-term returns to our UniFirst stakeholders and are integral components to our primary long-term objective to be universally recognized as the best service provider in the industry.
As we look ahead to fiscal 2022, there are number of key initiatives, we are excited about progressing as we continue to transform the Company in terms of our overall capabilities and competitive positioning.
The first being the rollout of our new CRM system which we have spoken quite a bit about previously.
We continue to make solid progress on this key initiative, which we will continue -- which will continue through fiscal 2022 and well into fiscal 2023.
The second is an investment in the UniFirst brand.
Our brand is an area that has not been significantly invested in over the years and we are excited for this revitalization which will not only evolve the look and feel of who UniFirst is, but will solidify our message internally and externally around what we stand for as a company and why we are a great choice for existing and prospective customers and employees.
Finally, during fiscal 2022, we will be embarking on a multi-year project to implement a corporate wide ERP system with a strong focus on supply chain and procurement automation and technology.
This phase initiative will become the core of UniFirst technology footprint and will integrate and complement the capabilities of the CRM system, we are currently deploying.
From an operating standpoint, heading into fiscal 2022, we carry solid momentum from a top line perspective into the year.
Despite the external challenges that the team has hindered, our sales performance has been very solid selling both new business as well as internally to our existing customers.
In addition, our customer retention for fiscal 2021 was much improved compared to recent years.
We also will clearly be looking to work with our customers to sharing the cost increases that we are experiencing in various aspects of the business.
As a result of these top line drivers, we expect organic growth for fiscal 2022 to exceed what we've been experiencing in recent years.
Shane will provide the details of our outlook shortly.
From a bottom line perspective, there are two categories of costs.
We expect to present challenges from a margin perspective in fiscal 2022.
The first group consists of costs that are bouncing back from depressed levels during the pandemic, and costs that are being impacted by the increasingly inflationary environment.
Last quarter, I highlighted some of these items including merchandise amortization, costs related to raw materials and the overall supply chain disruption, the cost to hire and retain labor, energy and travel.
The second group consists of investments we are making in the future of our company.
A subset of these costs relate to building stronger overall capabilities as a company that we feel are necessary to enhance our competitors -- competitiveness, accelerate growth and ultimately improve efficiency and profitability.
These investments are being made in several areas including human resources, supply chain, central services and marketing among others.
In addition, significant costs are expected to be invested in fiscal 2022 and upcoming years related to the three discrete initiatives I discussed earlier.
Going forward we'll be carving out the portion of costs related to these initiatives that we view are transitionary, and excluding them from a measure of adjusted profitability and we will continue to report until these key initiatives are completed.
You can expect we'll be providing regular communication during our quarterly earnings calls regarding cost that we are expanding during these large initiatives, so investors can have a better sense of what our results look like excluding some of these costs.
Even excluding these transitory costs related to these large initiatives, our margins will be pressured in fiscal '22 by investments we continue to make in our overall capabilities.
However, we feel strongly about the need to invest in these areas and believe in the future benefits they will provide.
We also firmly believe, on the other side of these initiatives, there will be opportunities not only to rationalize the direct costs related to these initiatives, but to improve the overall efficiency of our cost structure that currently is working to support multiple systems through this technology transformation.
Our solid balance sheet positions us well to meet our ongoing challenges while continuing to make these investments in growth and strengthen our business.
We also continue to routinely evaluate our strategy around capital allocation.
As part of that review, we announced earlier today, we will be increasing our quarterly dividend by 20% to $0.30 per share of the Company's common stock and $0.24 per share on the Company's Class B common stock.
At this time, we believe that a continued annual increase to our dividend was over time expands, commensurate with our free cash flow generation will be a foundational piece to our capital allocation strategy.
In addition, we have reloaded our share purchase authorization program to allow for the Company to purchase up to $100 million of its outstanding shares.
And finally, as always we continue to focus on providing our valuable products and services to existing customers and selling new customers on the value UniFirst can bring to their business.
As we have discussed, the pandemic has clearly highlighted the essential nature of our products and services.
We believe the need and demand for hygienically clean garments and work environments positions our Company well to support the evolving economic landscape.
Consolidated revenues in our fourth quarter of 2021 were $465.3 million, an increase of 8.5% from $428.6 million a year ago.
Consolidated operating income increased to $44.9 million from $40.8 million or 10.1%.
Net income for the quarter increased to $34.6 million or $1.82 per diluted share from $31.6 million or $1.66 per diluted share.
Our effective tax rate in the quarter was 22% compared to 26.6% in the prior year.
As a reminder, our tax rate can move from period to period based on discrete events including excess tax benefits and efficiencies associated with employee share based payments.
Our Core Laundry operations revenues for the quarter were $415.1 million and increased 7.9% from the fourth quarter of 2020.
Core Laundry organic growth which adjusts for the estimated effective acquisitions as well as fluctuations in the Canadian dollar was 7.2%.
This increase was primarily driven by the COVID-19 pandemic, significantly impacting our customer operations and wearer [Phonetic] levels in prior year as well as solid sales performance and improved customer retention in 2021.
Core Laundry operating income was $41.8 million for the quarter, up from $38.1 million in prior year.
And the segment's operating margin increased to 10.1% compared to 9.9% in 2020.
The increase in 2021's operating margin was primarily due to lower merchandise amortization as a percentage of revenues, partially offset by higher energy, healthcare claims cost and travel.
In addition, production payroll cost increased as a percentage of revenues, but were offset by costs we incurred responding to the pandemic in prior year providing a favorable comparison.
Company's G&A costs also trended higher during the quarter as we prepared for and advanced the key initiatives that Steve discussed earlier.
Energy costs increased to 4.2% of revenues in the fourth quarter of 2021, up from 3.5% a year ago.
Revenues from our Specialty Garments segment which deliver specialized nuclear decontamination and cleanroom products and services were $33.9 million for the fourth quarter of fiscal 2021, an increase of 22.5% over 2020.
The segment's strong top line growth was driven by improved performance in both its cleanroom as well as its US and European nuclear operations.
The segment's operating income increased to $4.1 million or 12.1% of revenues from $2 million or 7.1% of revenues in the year-ago period.
This increase was primarily due to the improved revenue performance resulting in strong operating leverage as well as lower casualty claims expense as a percentage of revenues.
These benefits were partially offset by higher merchandise cost as a percentage of revenues.
As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality as well as the timing and profitability of nuclear reactor outages and projects.
Our First Aid segment's revenues in the fourth quarter of 2021 decreased to $16.3 million from $16.4 million primarily due to elevated PPE sales in the prior year, partially offset by growth in the First Aid van business.
In addition, the segment had an operating loss in the quarter of $1 million compared to operating income of $0.7 million in 2020.
The current quarter's operating results reflect continued investment in the Company's initiative to expand its First Aid van business into new geographies.
We continue to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents and short-term investments totaling $512.9 million at the end of fiscal 2021.
Cash provided by operating activities for the year was $212.3 million, a decrease of $74.4 million from the prior year.
This decrease was primarily due to sizable working capital needs of the business as some of our asset positions which were abnormally depressed during the pandemic have returned to pre-pandemic balances.
Capital expenditures for fiscal 2021 totaled $133.6 million as we continue to invest in our future with new facility additions, expansions, updates and automation systems that will help us meet our long-term strategic objectives.
During the quarter, we capitalized $2.3 million related to our ongoing CRM project which consisted of both third-party consulting costs and capitalized internal labor costs.
As of August 28, 2021, we had capitalized $34.2 million related to the CRM project.
As a reminder, we started deploying this system to our locations earlier in the fiscal year and anticipate, this will continue through fiscal 2022 and well into 2023.
We are depreciating this system over a 10 year life, including the additional hardware we installed to support our new capabilities like mobile handheld devices for our route drivers, we incurred approximately $2 million in depreciation and amortization in fiscal 2021 [Phonetic].
In 2022, we expect that the amortization of the system and depreciation of the related hardware will approximate $5 million in total and eventually ramp to an estimated $6 million to $7 million per year.
Although, our acquisition activity in fiscal 2021 was relatively nominal, we continue to look for and aggressively pursue additional targets as acquisitions remain an integral part of our overall growth strategy.
I'd like to take this opportunity to provide our outlook for fiscal 2022.
At this time, we anticipate our full year revenues for fiscal 2022 will be between $1.92 billion and $1.945 billion.
This top line guidance assumes a Core Laundry organic growth rate of approximately 6.1% at the midpoint of the range.
As Steve mentioned, this strong expected organic growth rate is primarily a result of customer reopenings, solid sales performance and improved customer retention in fiscal 2021 as well as anticipated efforts to share with our customers, the cost increases that we are seeing in our business.
For fiscal 2022, we further expect that our fully diluted earnings per share will be between $5.70 and $6.10.
This guidance includes $38 million of costs that we expect to incur in the fiscal year directly attributable to the three key initiatives that Steve discussed, our CRM and ERP system initiatives and our branding efforts.
Excluding these transitionary investment costs, our Core Laundry operations adjusted operating margin assumption at the midpoint of the range is 9.5%.
This adjusted operating margin reflects certain costs that are normalizing from depressed levels during the pandemic like merchandise amortization and travel costs, costs we are incurring to hire and retain labor in this challenging employment environment, elevated input costs related to the current inflationary environment and global supply chain challenges as well as additional investments we are making in strengthening our overall capabilities.
Based on the current energy prices, we are modeling the energy costs in our Core Laundry operations will increase to 4.6% of revenues in fiscal 2022, up from the previously discussed 4.2% in 2021.
Next year's effective tax rate is assumed to be 24% compared to 22% in fiscal 2021.
Our Specialty Garments' segment revenues are forecast to be relatively flat compared to 2021.
However, the segment's operating income is expected to be down approximately 11%.
As a reminder, fiscal 2021 was a record year for this segment from both a top and bottom line perspective and the anticipated decline in operating margin is due to the timing and relative profitability of its planned outages and project work.
Our First Aid segment's revenues are expected to be up approximately 10% compared to 2021.
However, this segment's profitability will be relatively marginal in 2022 as a result of the investments, we continue to make in building out the geographic footprint of our van operation.
We expect that our capital expenditures in 2022 will approximate $125 million.
Our guidance for fiscal '22 also assumes our current level of outstanding common shares.
No impact related to potential tax reform and no deterioration in the current economic environment.
In addition, as I'm sure that you are aware, last month President Biden issued broad sweeping vaccine and or testing requirements for all companies with more than 100 employees.
These rules have not yet been finalized nor has an effective date been communicated.
As such, we have not included any costs in our forecast that we do expect would be incurred to comply with these requirements. | q3 earnings per share $1.12.
q3 revenue $445.5 million versus refinitiv ibes estimate of $382.5 million.
continue to believe that ability to assess financial impact on business remains limited.
not providing guidance for remainder of our fiscal 2020. | 0 |
Actual results may vary materially from the assumptions presented today.
All such statements should be evaluated together with the Safe Harbor disclosures and the other risks and uncertainties that affects our business, including those discussed in our Form 10-K and other SEC filings.
These results exclude certain non-operating and non-recurring items including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.
All adjustments in the quarter and for the full year 2020 are detailed in the reconciliations in the appendix.
Before we begin, I'd like to provide a brief overview of our fourth quarter GAAP results compared to prior year.
Q4 revenue decreased 1.5% to $709 million.
Segment operating income increased 11.6% to $120 million.
And reported earnings per share was a net loss of $0.16.
This is principally driven by a $137 million charge related to the successful termination of our U.S. pension plan and other items, including tax charges totaling $17 million, partially offset by $52 million asbestos insurance settlement benefit.
I truly hope that everyone is healthy and safe.
I'm humbled by the way this team continues to respond to the crisis and want to express my sincere gratitude for all you have done.
Your efforts to serve our customers and drive exceptional performance in a safe, fast and productive manner are a testament to the commitment, perseverance and your hard work.
Mark joined ITT in January of this year after a successful 13-year career at Honeywell and has hit the ground running.
I'm happy and excited to have Mark on the ITT team to drive our global investor Relations strategy.
As a result of our focus on the health of our people and our efforts, we delivered another strong performance in the fourth quarter.
Early last year, we took some difficult and swift actions to respond to the pandemic.
These actions ensured that ITT continued to outperform in 2020 and will emerge stronger in 2021 as the economic environment recovers.
Let me now highlight some key financial achievements for the quarter.
We generated adjusted segment operating income growth of 8% with margin expansion of 150 basis points on a 4% organic sales decline.
And we improved our decremental margin every quarter in 2020.
For the full year, our decremental margin was 22% at the low end of our range.
As a result, we delivered adjusted earnings per share of $1.01, a sequential and as well as a year-over-year increase.
We generated free cash flow of $102 million for Q4 and $372 million for full year.
Throughout the year, we drove cash collections and optimized inventory, while applying strict control over capital investments.
These drove a free cash flow margin of 15% at the high end of our guidance that we increased just last quarter.
On capital deployment, in 2020, we increased our dividend by 15%.
We repurchased ITT shares totaling 73 million and we increased our majority stake in our Wolverine China joint venture as we continued to expand our market share in Asia.
Despite the restrictions posed by COVID, I was fortunate to safely visit many of our facilities around the globe, including in China, Europe, the Middle East and across the U.S. As you know, I consider this fundamental to identifying and executing the many operational and commercial opportunities we at ITT have around the globe.
In 2020, we reduced the number of recordable incidents by 25% and implemented safer workplace protocols globally.
This is an important element in ensuring the health of our people.
And it also contributed to a significant reduction in workers' compensation expense in the U.S. Safety is foundational for our operational excellence and all of us should expect a continued reduction in incidents in the future.
From a commercial perspective, sales in Friction outpaced global auto production rates by more than 600 basis points for the full year.
We increased market share by almost 400 basis points in North America, more than 200 basis points in China and almost 100 basis points in Europe.
And when it comes to EVs, we secured position on 42 new electric vehicle platforms during the year.
In Industrial Process, we continue to execute on our footprint rationalization projects.
We finalized our first consolidation in Europe this quarter and are progressing according to plan on our second project; this one in North America.
We are making progress in sourcing efficiencies through aggressive negotiations and supplier rationalization.
As I noted before, I believe there are still many opportunities to improve our purchasing performance, as well as further lean out our operations.
Industrial Process delivered 15.1% adjusted segment operating margins this quarter.
This is a milestone still in IP.
At the end of last year, I visited our industrial valve site in Amory, Mississippi.
I was impressed with the order management process implemented by Angie and her team that has resulted in best-in-class on-time delivery performance and unparalleled service for our customers.
This is also true from a project management performance standpoint where IP continue to drive near-perfect execution and on-time delivery, while driving margin expansion for many of our large projects.
While CCT's end markets remain challenged, we are deploying the same operational excellence playbook that we successfully executed in MT and IP.
We expect to reach pre-COVID margin levels at CCT in the next two to three years.
Today, I'm also pleased to provide our outlook for 2021 that reflects all that we have done to strengthen our operations, our people and our potential.
We anticipate full year organic sales growth of 2% to 4% driven by continued share gains in Motion Technologies, as well as the broader auto market recovery.
We expect the rest of our markets to be flat to slightly down.
We plan to expand adjusted segment margins by 130 to 180 basis points.
The increased sales volume and the carryover impact of our 2020 cost actions, coupled with the strong productivity from 2021 initiatives, we'll generate adjusted earnings per share in the range of $3.45 to $3.75%, which equates to 8% to 17% growth versus prior year.
Because of our strong free cash flow performance in 2020, we're well-positioned to deploy capital in 2021.
First, we would invest in our businesses with approximately $100 million of capital expenditures, up over 55% versus 2020.
Second, we will aggressively and diligently pursue acquisitions in our core markets to effectively put our cash to work and build on our strong businesses.
This is our ninth consecutive dividend increase.
And finally, we are planning to repurchase ITT shares totaling $50 million to $100 million reducing the full year weighted average share count by approximately 1%.
From a top-line perspective, Motion Technologies delivered a strong performance, growing over 10% organically, driven by continued share gains and double-digit growth in auto in North America and China.
This was offset by lower short-cycle demand in Industrial Process as we anticipated and the impact of commercial aerospace dynamics in CCT.
Our focus on operational excellence is producing strong results.
Motion Technologies expanded margins over 400 basis points to 19.5%.
Industrial Process grew margin 90 basis points to 15.1% despite a 10% organic sales decline.
The MT and IP performances more than offset Connect and Control Technologies' margin decline.
For the full year, I'd like to point out a few highlights in addition to those that we have already discussed.
First, working capital as a percentage of sales continues to decline and we saw 70 basis points of improvement in 2020, excluding the impact of FX.
Second, free cash flow increased 40% versus prior year despite the challenges posed by the global pandemic.
We hit the high end of our full year target for free cash flow margin, while also investing in the business through growth capex of more than $35 million for the year.
Third, we continue to effectively manage our legacy liability profile.
As I mentioned in our last earnings call, early in Q4, we successfully transferred our U.S. pension liability to a third party.
This will reduce our administrative costs and end all future funding requirements for the plan.
We also continue to successfully negotiate asbestos-related insurance settlements with our carriers.
And we drove an increase in our insurance assets of $52 million in the fourth quarter and $100 million for the full year.
As a result, our net asbestos liability that we have recently brought to a full-horizon valuation is now $487 million.
Years back, our Friction team developed a strategy to penetrate the growing EV segment, while continuing to gain share on conventional vehicle platforms.
We focused our technical expertise in addressing tighter noise and vibration requirements, while continuing to deliver a frictionless customer experience.
In China, our EV Brake-Pad Development Center continues to effectively partner with our customers in the largest EV market in the world.
And in 2020, we continued to see the results of our strategy by winning content on new electric vehicle platforms, including several platforms wins with The EV manufacturer.
We also won both the front and rear axle for a new U.S. performance crossover vehicle.
The strength of our Friction technology continues to be on display as we assist automakers in significantly reducing braking distance of heavier vehicles.
All of these is a testament to the innovation and the engineering prowess behind our brake-pad technology.
In Industrial Process, our redesigned between-bearing API pump has seen new orders increase over 50% this year.
Our customers are benefiting from improved hydraulic efficiency and performance with reduced lead times at a competitive price point.
In Q3, we further expanded and improved our hydraulic pump offering and have an active funnel of potential orders already.
Our new i-Alert remote monitoring offers diagnostic capabilities and tailored solution that predict customer equipment failure and improve asset up-time.
Finally, in Connect and Control Technologies our Enidine business is teaming with Bell Textron to produce passive vibration control technology for the 360 Invictus.
The Invictus is Bell's competitive prototype to the U.S. Future Attack Reconnaissance Aircraft or the FARA program.
Together with Bell, the Enidine team is developing technology for use in a mission-critical defense application suitable for the FARA program.
As we embarked on 2021, we remain laser focused on operational excellence and customer centricity.
These has been the ITT playbook for the last four years.
We continue to make significant progress and we, again, saw the benefits of this commitment in the results we delivered in Q4.
We will continue to be good stewards of ITT, driving performance for our customers, while searching for organic and inorganic opportunities to deploy capital and grow the business.
Our effective and comprehensive capital deployment strategy with clear priorities on organic investments, first and foremost, followed by close-to-core acquisitions and then return to shareholders will ensure that our cash is efficiently put to work.
Let me begin with Motion Technologies.
Our Q4 organic growth of 10% was primarily driven by strong performance in our Friction OE business.
We delivered 640 basis points of outperformance in 2020 on a global basis; further evidence that the MT machine continues to win in the marketplace.
For the quarter, Friction sales in North America were up 43% and sales in China, up 19%, while growth in our Wolverine business was over 12% with strength in Europe and Asia-Pacific as we gained market share in both brake shims and sealings.
Segment margins were incredibly strong again expanding 410 basis points on incremental margins of 46%.
This was mainly driven by higher volume and productivity that allowed us to continue to fund growth investments.
We are very pleased with the pace and the strength of the recovery in MT as we head into 2021.
For Industrial Process, sales were down, as we anticipated, with declines in short-cycle due to pandemic-related impacts that affected our previous two quarters' bookings.
Our project business, which encompasses most of our oil and gas exposure in IP, saw declines in pump bookings as large projects continued to shift to the right.
However, our short-cycle orders in the quarter were up 1%, driven by aftermarket demand.
IP margins expanded 90 basis points on 7% decremental margins.
The impact of the sales decline was almost entirely offset by productivity benefits, restructuring savings and price.
Furthermore, IP's working capital as a percent of sales improved 590 basis points versus prior year and we still see further opportunities to optimize inventory as we consolidate footprint and enhance materials planning.
IP finished the quarter with less than 20% working capital as a percent of sales.
Lastly, in Connect and Control Technologies, we continued to see weak demand across all major end markets.
Sales in aerospace and defense were down over 30%, driven by lower passenger traffic and lower build rates from airframers.
The de-bookings we saw in aerospace in the second and third quarters declined sequentially in the fourth quarter to minimal levels.
We expect that the sales weakness we saw this quarter in commercial aerospace will likely persist into the first half of 2021.
Connected sales were down over 10%, mainly due to North America aerospace and defense.
On a positive note, we are encouraged by the recovery in orders in defense and industrial connectors.
These contributed to a book-to-bill of more than 1 in Q4.
CCT margins were impacted mostly by lower volumes, partially offset by an aggressive cost reduction plan.
While this year was challenging for CCT, we are encouraged by the productivity, which was over 400 basis points this quarter and the full year.
I am now on Slide 7 to present a deeper look at the margin performance this quarter.
I want to highlight two main points.
First, we generated productivity of 230 basis points.
For the full year, that number was over 300 basis points.
This is the result of a multi-year approach to reduce ITT's cost structure by driving operational excellence across the enterprise and moving toward a leaner ITT in all three segments and at corporate.
We have successfully executed this playbook at Motion Technologies and we are in the early stages of the journey with Industrial Process.
At CCT, we're still laying the foundation and over time we expect results similar to what we experienced in Motion Technologies.
The second key takeaway is on strategic investments.
While we made necessary cuts to discretionary expense this year to manage through the pandemic, these did not come at the expense of growth investments.
We continued to selectively fund the most promising growth initiatives in key markets, including in EVs globally, to ensure we continue to win in the marketplace as we did with our successful launch of copper-free brake pads several years back.
For the full year, we achieved cost reduction savings in excess of $100 million, including $40 million in the fourth quarter.
This came from a combination of headcount reductions, reduced Executive and Board compensation and discretionary cost actions.
We delivered approximately $65 million of structural reduction in fixed costs for the full year, with the remainder comprising temporary savings, which will partially reverse in 2021.
We are continuing to drive footprint optimization at both IP and CCT, while remaining diligent with strong cost control and accelerated sourcing performance.
We expect that the carryover impact of actions in 2020 will generate approximately $10 million to $15 million of additional savings in 2021.
We also expect to fund and execute new footprint rationalization and cost reduction plans in addition to the normal productivity we will generate.
As a result of these measures, our decremental margins improved every quarter since Q2 and we finished the year at 22% at the lower end of our target, given the strong performance in Q4.
In 2021, we expect incremental margins north of 35% as volumes recover and we leverage our optimized cost structure.
Keep in mind, this will vary from quarter to quarter based on our quarterly performance in 2020 and the mix among our businesses.
Our end markets are showing signs of recovery.
Still, the full year economic outlook remains somewhat uncertain at this time.
We intend to remain flexible and manage our costs to coincide with the expected gradual recovery.
Despite the ongoing disruption from the COVID pandemic, we see general economic conditions continuing to improve throughout 2021, particularly in the second half of the year.
We expect total revenue will be up 5% to 7% versus 2020 and up 2% to 4% on an organic basis.
The strong organic growth we see in Friction, stemming from continued share gains and the resurgence in auto, will likely be offset by declines in industrial pumps as customer opex continues to be constrained and project activity remains weak.
Notably, we expect sales in Motion Technologies in 2021 to get back to 2019 levels.
In commercial aerospace, activity will slowly recover, starting in the second half of 2021 as inventory levels normalize and passenger air traffic begins to recover.
Defense should be relatively stable as the large order we won in the fourth quarter of last year will convert into revenue toward the end of 2021.
Finally, in oil and gas, we expect modest growth from downstream activity improvement.
However, the growth rate will be impacted by lower project bookings in 2020 as a result of the market downturn.
We expect to see stronger growth in the Middle East and Asia-Pacific in particular.
We expect adjusted segment margins to expand by a 150 basis points at the midpoint, driven by higher volumes, continued productivity and the incremental benefits from structural reductions to our cost structure in 2020.
All segments should deliver triple-digit margin expansion.
We're guiding to adjusted earnings-per-share growth of 8% to 17%.
This assumes an approximate 1% reduction in our full year weighted average share count from repurchases and an effective tax rate of 21.5%.
Free cash flow will be in a range of $270 million to $300 million and we expect free cash flow margin to be 10% to 12%.
This is lower than the 15% delivered in 2020 as we expect to increase capex spending, including $5 million to $10 million of investments into green projects and increase working capital dollars to support top-line growth.
However, we expect working capital to continuously decline as a percent of sales over the long term.
At these levels, adjusted free cash flow conversion will approximately be a 100% aided in part by working capital optimization.
On Slide 10 we show the walk to our 2021 adjusted earnings per share guidance.
The majority of our earnings growth will be generated by stronger volume and net productivity, partially offset by the reversal of temporary cost savings and the incremental investments for growth.
The reversal of temporary cost savings is due to a combination of higher compensation costs, travel expense and CARES Act benefits that will become a headwind to earnings in 2021.
Foreign exchange is expected to contribute positively to earnings and tax rate is expected to be slightly higher than 2020 at 21% -- 21.5% with a variance of 20 basis points around the mean, depending on the jurisdictional mix of our income.
Our planning rate currently implies a $0.02 earnings per share headwind.
Lastly, as Luca highlighted, we expect to repurchase $50 million to a $100 million in ITT shares, which will generate a $0.01 to $0.03 tailwind.
Before we wrap up, I also want to share some additional details on what we are seeing thus far in 2021 and what we expect in the first quarter.
Year-to-date, we are on track.
Our first quarter outlook assumes continued double-digit organic sales growth in Motion Technologies, offset by mid-to-high-teens declines in both Industrial Process and Connect and Control.
In Industrial Process, soft 2020 bookings will continue to weigh on revenue near-term, particularly in the chemical and oil and gas segments.
Our short-cycle business will decline due to customers maintaining tight operating expense controls and lower ending backlog.
However, we expect that IP short-cycle will improve sequentially in the second quarter and then grow in the second half of 2021.
In CCT, the declines will be driven by weak commercial aero demand.
This will be partially offset by growth in connectors, given the strong beginning backlog after over 30% sequential order growth in Q4.
The margin expansion will be driven by MT and IP, given the higher order volumes and the cost actions executed in 2020.
Despite progress, CCT's margin will be lower than last Q1, which was still largely unaffected by the pandemic.
While there remains a fair amount of uncertainty in some of our end markets, we're confident in ITT's ability to continue to execute and outperform the competition, which will likely generate Q1 adjusted earnings-per-share growth of mid-to-high-single-digits versus prior year.
Let me pass it back to Luca for closing remarks.
I'm proud of the results we delivered in 2020.
We focused on what we could control, acted quickly and continued to invest in our businesses.
Our Motion Technologies business is our springboard for growth.
Friction continues to win in the marketplace with a focus on capturing share in the fast growing EV segment.
We are progressing in our transformation at both Industrial Process and Connect and Control technologies with a lot of runway.
And finally, our financial health is strong entering 2021 with ample capacity to deploy capital.
We intend to fund high-return growth initiatives, aggressively and diligently pursue strategic acquisitions, pay a competitive dividend and systematically reduce our share count, while continuing to wind out our legacy liability exposure.
We have clear priorities, we are aligned and purposely committed and accountable and we are seeing the benefits of our rigor in our results.
With that, Maria, could you please open the line for Q&A? | itt q4 loss per share $0.16.
q4 adjusted earnings per share $1.01 excluding items.
q4 loss per share $0.16.
compname announces a 30% increase in quarterly dividend to $0.22 per share.
initiates 2021 earnings per share guidance of $3.12 to $3.48, adjusted earnings per share guidance of $3.45 to $3.75.
qtrly organic revenue decreased 4%.
qtrly revenue $708.6 million, down 1.5%.
expect revenue growth of 5% to 7%, or up 2% to 4% on an organic basis in 2021.
sees free cash flow of $270 million to $300 million in 2021. | 1 |
I am pleased to share our fourth quarter results and our full-year performance in what was clearly an unprecedented year.
Importantly, our industry rose to meet the challenges and effectively deliver on our commitments.
I'm very proud of our CNA employees who effectively served the needs of our agents and brokers, as well as our insurers, and have positioned us well to continue to take advantage of the hardening market conditions.
Before I provide detail on the quarter, here are a few highlights for the full-year.
Core income was $735 million, or $2.70 per share, and net income for the year was $690 million, or $2.53 per share.
This compares to $979 million and $1 billion in 2019, respectively.
The shortfall from the prior year primarily attributed to the impact of the elevated pre-tax catastrophe losses of $550 million, which included our reserve charge for the pandemic of $195 million that we announced in the second quarter of 2020 as compared to $179 million of catastrophe losses in 2019.
On the other hand, our P&C underlying underwriting profit for the full-year increased 38% to $498 million as the underlying combined ratio improved 1.7 points to 93.1%.
It is the fourth consecutive year of improvement in the underlying combined ratio.
The improvement in the underlying combined ratio came from both the loss ratio and the expense ratio.
Our underlying loss ratio improved 0.8 points from 2019.
A half a point of the improvement reflected the favorable claim frequency from the shelter-in-place directives.
The frequency benefit was relatively muted for us because, as I said on the second quarter call, a substantial portion of our insureds are in essential industries, such as healthcare, construction and manufacturing, which were not subject to shelter-in-place restrictions.
The expense ratio improved 0.9 points from 2019 to 32.6%, which reflected our disciplined approach to managing expenses as we grow the business and continue to make meaningful investments in talent, technology and analytics.
The all-in combined ratio was 100.9% with 7.7 points of catastrophe losses and flat prior period development.
Gross written premium growth ex-captives grew 9% in 2020 despite the impacts of the economic downturn, which reduced our exposure almost 3 points from the prior year.
Net written premium increased 6% for the full-year.
We successfully achieved rate increases of 11% for the full-year, more than double our 2019 rate increases, and new business was up 6% for the year.
We continue to leverage this hardening market to build margin, all else equal, as rates continue to earn-out above our long run loss cost trends.
The 11% of written rate we achieved in 2020 was 8 points on an earned basis for the full-year, while our long run loss cost trends were about 4 points.
However, as I have said before, we are going to continue to be prudent on how we act on any margin due to the global pandemic's disruptive impact obfuscating claim trends [Phonetic], in particular social inflation.
Moreover, the economy has not recovered nor have court dockets reverted to pre-pandemic activity, therefore, we are staying the course.
Turning to the fourth quarter.
Our results in the quarter evidenced our strong execution in every aspect of our business, including significant growth driven by double-digit rate, strong new business growth, and improved retention, as well as an improved underlying loss ratio and expense ratio.
We also benefited from a low catastrophe quarter and strong investment performance.
Core income for the quarter was a record $335 million, $1.23 per share, an increase of $70 million over the prior year fourth quarter.
The increase was largely driven by improved underlying underwriting profits.
Net income for the quarter was $387 million, or $1.42 per share, and was an increase of $114 million over 2019's fourth quarter.
The P&C underlying combined ratio was 92.7%, a significant improvement over last year's fourth quarter results and in line with Q3 results, both of which are the best two underlying combined ratios CNA has had in over 10 years.
The all-in combined ratio was 93.5%, slightly more than 2 points of improvement compared to the fourth quarter a year ago, driven by commercial, which improved 4.4 points to 96.2% and international, which improved 3.4 points to 96.9%.
Although specialty had less favorable prior period development in the fourth quarter a year ago, they had a very strong combined ratio of 89.4%.
Pre-tax catastrophe losses were benign at $14 million, or 0.8 points of the combined ratio.
Our estimated ultimate losses from COVID-19 are unchanged at $195 million as claim activity continues to unfold slowly, as we expected.
Prior period development had no impact on the combined ratio in the quarter.
The underlying loss ratio was 60.5% for the quarter, a 0.4 point year-over-year improvement and consistent with Q3.
Specialty was 60%, commercial was 61.1%, and international was 60.1%.
In the fourth quarter, the expense ratio was 32%, 1.7 points better than the prior year quarter as we maintained a disciplined approach to managing expenses as we continue to grow the business.
We are pleased with the improvement and as our growth continues to earn out through 2021, we expect that to drive additional improvement.
Gross written premium ex our captive business grew 15% in the quarter with significant contributions across all operating segments, with specialty at plus 17% and commercial at plus 13%.
International was also strong at plus 14%, fueled by strong rate in the quarter in our London operation and strong rate and new business growth in our Canadian operations.
Net written premium for total P&C increased 12% in the quarter.
In the quarter, the hardening market persisted as evidenced by our continued double-digit rate achievement of plus 12%, while increasing our retention by 3 points to 85% from the third quarter.
We achieved strong rate across the board with specialty at plus 13%, commercial at plus 12%, and international at plus 18%.
In addition to double-digit rate achievement for the quarter, we continued to implement tighter terms and conditions across our portfolio.
These improved terms and conditions, as I have mentioned before, are equally important to strong pricing as they improve attritional loss ratios, help prevent unintended coverage, and are typically slower to be relaxed once market conditions start to soften.
New business growth was strong in the quarter, 17% higher compared to last year's fourth quarter.
Specialty grew 23% and commercial 22%, while international remained slightly negative.
We are writing high-quality accounts within our target market segments.
Examples, we continue to grow our profitable specialty affinity portfolio, we grew our very profitable construction segment within commercial, and we are building our management liability portfolio at a time when we can get excellent terms and conditions.
We carefully monitor pricing on new business relative to renewal policies, and the new to renewal relativities have been stable all year across the portfolio, indicating rate on new business has increased commensurately and obviously contributed to the overall growth in new business.
We are well positioned to grow in these hardening market conditions and indeed, we believe it is the best time to grow.
In addition to restoring pricing to these levels and improving terms and conditions, the disruption from insured dislocation in a hardening market causes broad remarketing by agents and brokers that also ferrets out tremendous high-quality new business opportunities, and we have been able to secure more of these opportunities as we are leveraging all the investments we have made in the last few years to deepen our specialized underwriting expertise and provide improved solutions to our customers.
Finally, we completed our annual asbestos and pollution reserve review, which resulted in a non-economic after-tax charge of $39 million, which compares to last year's after-tax charge of $48 million, and we also had positive core income of $26 million from our life and group operations.
Al will provide more detail on this, as well as our asbestos and pollution review.
As Dino mentioned, I will provide more detail on the Life & Group results, as well as our corporate segment, including the asbestos, environmental reserve review.
Before I do that, let me just highlight a few items related to our overall results, as well as our P&C operations.
Core income for the quarter was a record at $335 million, 26% higher than the prior year quarter results.
With a core ROE of 11.4% for the period, we are certainly pleased with the close to 2020 and the significant progress made to build upon our underlying underwriting profitability.
Dino spoke about this progress with regards to our combined ratio improvement.
A meaningful contributor was the expense ratio.
I would like to highlight the advancements made during 2020.
Our fourth quarter expense ratio of 32% reflects significant progress on a year-over-year basis, as well as on a sequential quarter basis during 2020.
The expense ratio improvement was reflected in all three of our P&C business segments, especially in international notably recording improvements of 2 and 3 points, respectively, versus the prior year quarter.
We are particularly pleased with the international results as the efforts to reduce acquisition costs as part of our reunderwriting strategy is paying dividends.
Likewise, with respect to specialty and commercial, the significant progress we have made on our expense ratio reflects our ability to grow while being disciplined about our expense spend and also making investments back into the business.
Considering the trajectory of our net written premium, we would expect that our earned premium growth will further aid our progress on the expense ratio in 2021.
Turning to net prior period development and reserves, for the fourth quarter overall P&C net prior period development was flat compared to 2.2 points of favorable development in Q4 2019.
Favorable development in specialty during the quarter driven by professional and management liability was offset by adverse premium development on general liability within commercial.
For the full-year 2020, overall development was essentially flat versus 0.7 points of favorable development in 2019.
In terms of our COVID reserves, we have made no changes to our catastrophe loss estimates during the quarter.
We continually review our COVID reserves and our previously established estimate of ultimate loss remains appropriate, and our loss estimate is still virtually all in IBNR.
Finally, with regards to the P&C operations, on January 1 several of our reinsurance treaties were renewed, the main ones being for management liability and casualty lines of business.
These treaties renewed with more favorable terms and conditions relative to expectations given current market conditions.
Now, turning to Life & Group.
This segment produced core income of $26 million in the quarter and $9 million for the full-year.
This compares with Q4 2019 loss of $4 million and a full-year 2019 loss of $109 million.
Favorable long-term care results for full-year 2020 relative to 2019 reflects the lower reserve charge in the current year relative to the prior year, as well as better-than-expected morbidity experienced in 2020 amid the effects of COVID-19.
Specifically, since the onset of COVID, we've experienced lower-than-usual new claim frequency, higher claim termination, and more favorable claim severity as policyholders favor home healthcare versus the use of long-term care facilities.
The higher level of claim terminations is largely being driven by an elevated level of mortality and claimant recoveries.
As referenced in the previous quarters, given the uncertainty of these trends, we've been taking a cautious approach from an income recognition perspective, and accordingly, we've been holding a higher level of IBNR reserves.
As well, in our annual gross premium valuation review completed in third quarter of 2020, we did not build any of this favorable experience into our ongoing reserving assumptions.
With all of this in mind, we are closely evaluating these favorable claim trends to assess the extent to which they may persist beyond the pandemic.
Our Corporate segment produced a core loss of $60 million in the fourth quarter and $108 million for the full-year.
This compares to a $68 million loss in Q4 2019 and $102 million loss for the full-year 2019.
The loss for Q4 2020 was driven by our annual asbestos, environmental reserve review concluded during the quarter.
The results of the review included a non-economic after-tax charge of $39 million driven by the strengthening of reserves associated with higher defense and indemnity costs on existing claims, and this compares to last year's non-economic charge of $48 million.
Following this review, we have incurred cumulative losses of $3.3 billion, well within the $4 billion limit of our loss portfolio transfer cover that we purchased in 2010, and paid losses are now at $2.1 billion.
You will recall from previous years' reviews that while we continue to be covered under this OPT limit, there is a timing difference with respect to recognizing the benefit of the cover relative to incurred losses as we can only do so in proportion to the paid losses recovered under the treaty.
As such, the loss recognized today will be recaptured over time through the amortization of the deferred accounting gain as paid losses ultimately catch up with incurred losses.
As previously announced, we've entered into a loss portfolio transfer transaction with a subsidiary of Enstar Corporation and related to legacy excess worker comp reserves.
This non-core portfolio has been in runoff for over 10 years and the transaction enables us to strengthen our focus on going forward operations while reducing potential future reserve volatility.
The transaction closed on February 5.
Going forward, we'll report the impacts associated with this line of business and the associated loss portfolio transfer through the Corporate segment.
Turning now to investments.
Pre-tax net investment income was $555 million in the fourth quarter, compared with $545 million in the prior year quarter.
The results reflected more favorable returns from our limited partnership and common equity portfolios relative to the prior year, more than offsetting the decline in net investment income from our fixed income portfolio and attributable to lower reinvestment yields.
As a point of reference, pre-tax effective yield on our fixed income holdings was 4.4% at Q4 2020 compared to 4.7% as of Q4 2019.
Pre-tax net investment income for the full-year was $1.9 billion, compared with $2.1 billion in the prior year.
While lower interest rates have certainly been a headwind for our net investment income, it's also driven the increase of our unrealized gain position on our fixed income portfolio, which stood at $5.7 billion at year end, up from $5 billion at the end of the third quarter and $4.1 billion at the end of 2019.
The change in unrealized during the quarter was driven by the tightening of credit spreads across the market, our risk-free rates have remained low.
Fixed income invested assets that support our P&C liabilities had an effective duration of 4.5 years at quarter end.
The effective duration of the fixed income assets that support our Life & Group liabilities was 9.2 years at quarter end.
Our balance sheet continues to be very solid.
At quarter end, shareholders' equity was $12.7 billion, or $46.82 per share, reflective of the increase in our unrealized gain position during the quarter.
Shareholders' equity excluding accumulated other comprehensive income was $11.9 billion, or $43.86 per share.
Book value per share ex-AOCI and excluding the impact of dividends paid has grown by 6% over the last year.
We have a conservative capital structure with a leverage ratio below 18% and continue to maintain capital above target levels in support of our ratings.
In the fourth quarter, operating cash flow was strong at $367 million, compared to $160 million during Q4 2019.
On a full-year basis, operating cash flow was $1.8 billion versus $1.1 billion for 2019, a significant increase substantially driven by the improvement in our current accident year underwriting profitability and a lower level of paid losses.
In addition to our strong operating cash flow, we continue to maintain liquidity in the form of cash and short-term investments and have sufficient liquidity to meet obligations and withstand significant business variability.
Finally, we are pleased to announce an increase in our regular quarterly dividend to $0.38.
This increase reflects our confidence that we can continue to grow our underwriting profits and build upon our financial strength.
In addition, notwithstanding an extraordinary year in 2020, including the elevated impact of catastrophe on our results, we were pleased to declare a special dividend of $0.75 per share.
In summary, we had a great quarter generating record core income as we effectively leveraged the opportunities from the hardening market, as we did throughout the year, and we are confident in our ability to continue to do so as these market conditions persist in 2021. | compname announces third quarter 2021 net income of $0.94 per share and core income of $0.87 per share.
q3 core earnings per share $0.87.
q3 earnings per share $0.94.
qtrly book value per share of $46.67.
qtrly book value per share excluding aoci of $45.39. | 0 |
This is Jim Koch, Founder and Chairman, and I'm pleased to kick off the 2020 fourth quarter earnings call for the Boston Beer Company.
Joining the call from Boston Beer are Dave Burwick, our CEO; and Frank Smalla, our CFO.
As the COVID-19 panic slowly winds down, our primary focus continues to be on operating our breweries and our business safely and working hard to meet consumer demand.
I'm very proud of the passion, creativity, and commitment to community that our company has demonstrated during this pandemic.
We achieved depletions growth of 26% in the fourth quarter and 37% for the full year.
We remain positive about the future growth of our diversified brand portfolio and we believe that our depletions growth is attributable to our key innovations, the quality of our products, and our strong brands.
We see significant distribution and volume growth opportunities in 2021 for our Truly, Twisted Tea, and Dogfish Head brands, which remain our top priorities for 2021.
Early in 2021, we launched Truly Iced Tea Hard Seltzer, which combines refreshing hard seltzer with the real brewed tea and fruit flavor.
The launch has been well received by distributors, retailers and drinkers, but it is too early to tell if it will be successful.
We are working hard to further develop our brand support and messaging for our Samuel Adams and Angry Orchard brands to position them for long-term sustainable growth, in the face of the difficult on-premise environment.
We are excited about the response to the introduction in early 2021 of several new beers, Samuel Adams Wicked Hazy, Samuel Adams Wicked Easy and Samuel Adams Just the Haze, our first non-alcoholic beer, as well as the positive reaction to our Samuel Adams Your Cousin from Boston advertising campaign.
We are confident in our ability to innovate and build strong brands that complement our current portfolio and help support our mission of long-term profitable growth.
I will now pass over to Dave for a more detailed overview of our business.
Before I review our business results, I'll start with the usual disclaimer.
Now, let me share a deeper look at our business performance.
Our depletions growth in the fourth quarter was the result of increases in our Truly Hard Seltzer and Twisted Tea brands, partly offset by decreases in our Samuel Adams, Angry Orchard and Dogfish Head brands.
The growth of the Truly brand, led by Truly Lemonade Hard Seltzer, continues to be very strong and well ahead of hard seltzer category growth.
Truly Lemonade was the most incremental new product in the entire beer industry in measured off-premise channels in 2020.
The Truly brand overall generated triple-digit volume growth in 2020 and grew its velocity and its market share sequentially despite other national, regional and local hard seltzer brands entering the category.
In 2020, Truly increased its market share in measured off-premise channels from 22 points to 26 points and was the only national hard seltzer, not introduced in 2020, to grow share.
There remain many opportunities to expand package, channel and geographic distribution and we expect the Truly brand to continue to lead the growth of the business as it has come to stand for a great-tasting, refreshing, pure-play hard seltzer brand.
In early 2021, we launched Truly Iced Tea Hard Seltzer and, while it's still in the early stages, we're encouraged by the support our wholesalers have provided, the trial we are generating as a result of the brand's established equity, and the social media response from consumers.
We will continue to invest heavily in the broader Truly brand and work to improve our position in the hard seltzer category, as competition continues to increase.
Our Twisted Tea brand has benefited greatly from increased at-home consumption and continues to generate accelerating double-digit volume growth, even as new entrants have been introduced and competition has increased.
Our Samuel Adams, Angry Orchard and Dogfish Head brands have been most negatively impacted by COVID-19 and the related on-premise closures.
For 2021, we plan to build upon our success and work to drive our brands to their full potential, with a particular focus on our Truly and Twisted Tea brands.
We are expecting all of our brands to grow in 2021 and for the growth rate of our operating expenses to be below our top line growth rate, delivering leverage to our operating income.
During the fourth quarter, as we increased our brand spend, we also made investments in our supply chain to ensure we are prepared for increased competitive activity in the hard seltzer category.
We have invested to increase our can and automated variety pack capacity, but these capacity increases keep on getting eclipsed by our depletions growth, resulting in higher than expected usage of third-party breweries.
We will continue to take advantage of the fast-growing hard seltzer category and deliver against the increased demand through this combination of internal capacity increases and higher usage of third-party breweries, although meeting these higher volumes through increased usage of third-party breweries has a negative impact on our gross margins.
We have begun a comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes, and allow us to scale up more efficiently.
We expect to complete this transformation over the next two to three years.
While we anticipate the program to start delivering margin improvements in 2021, our gross margins and gross margin expectations will continue to be impacted negatively until the volume growth stabilizes.
While we are in a very competitive business, we are optimistic for continued growth of our current brand portfolio and innovations and we remain prepared to forsake short-term earnings as we invest to sustain long-term profitable growth, in line with the opportunities that we see.
Based on information in hand, year-to-date depletions reported to the company through the 6 weeks ended February 6, 2021 are estimated to increase approximately 53% from the comparable weeks in 2020.
Now, Frank will provide the financial details.
For the fourth quarter, the reported net income of $32.8 million or $2.64 per diluted share, an increase of $1.52 per diluted share or 136% from the fourth quarter of last year.
This increase was primarily due to increased net revenue, partially offset by lower gross margins and higher operating expenses.
Shipment volume was approximately 1.94 million barrels, a 54% increase from the fourth quarter of 2019.
Shipments for the quarter increased at a higher rate than depletions and resulted in higher distributor inventory as of December 26, 2020, when compared to December 28, 2019.
The Company believes distributor inventory as of December 26, 2020 averaged approximately 5 weeks on hand and was at an appropriate level, based on supply chain capacity constraints and inventory requirements to support the forecasted growth.
Our fourth quarter 2020 gross margin of 46.9% decreased from the 47.4% margin realized in the fourth quarter of last year, primarily as a result of higher processing costs due to increased production at third party breweries, partially offset by cost saving initiatives at Company-owned breweries and price increases.
Fourth quarter advertising, promotional and selling expenses increased $48.1 million from the fourth quarter of 2019, primarily due to increased investments in media and production, increased salaries and benefits costs and increased freight to distributors because of higher volumes.
General and administrative expenses were flat from the fourth quarter of 2019, primarily due to non-recurring Dogfish Head transaction-related expenses of $2.1 million incurred in the comparable 13-week period of 2019, partially offset by increases in salaries and benefits costs.
Our full-year net income per diluted share of $15.53 increased $6.37 or 70% compared to the prior year.
This increase was primarily due to increased revenue, partially offset by lower gross margins and increases in advertising, promotional and selling expenses.
Our full-year 2020 shipment volume was approximately 7.37 million barrels, a 38.8% increase from the prior year.
Looking forward to 2021.
Based on information of which we are currently aware, we are targeting 2021 earnings per diluted share of between $20 and $24, but actual results could vary significantly from this target.
This projection excludes the impact of ASU 2016-09.
We are currently planning increases in shipments and depletions of between 35% and 45%.
We're targeting national price increases per barrel of between 1% and 2%.
Full year 2021 gross margins are currently expected to be between 45% and 47%, a decrease from the previously communicated estimate of between 46% and 48%.
We plan increased investments in advertising promotional and selling expenses of between $120 million and $140 million for the full year 2021, a decrease from the previously communicated estimate of between $130 million and $150 million, not including any increases in freight costs for the shipment of products to our distributors.
We estimate our full-year 2021 effective tax rate to be approximately 26.5%, excluding the impact of ASU 2016-09.
This effective tax rate also excludes any potential future changes to current federal income tax rates and regulations.
We are not able to provide forward guidance on the impact of ASU 2016-09 will have on our 2021 financial statements and full-year effective tax rate, as this will mainly depend upon unpredictable future events including the timing and value realized upon exercise of stock options versus the fair value of those options were granted.
We are continuing to evaluate 2021 capital expenditures and currently estimate investments of between $300 million and $400 million.
The capital will be mostly spent on continued investments in capacity and efficiency improvements at our breweries.
Similar to the last couple of calls, Dave will be the MC on our side and coordinate the answers when needed since we are in different locations. | compname posts q3 earnings per share of $6.51.
q3 earnings per share $6.51.
began seeing impact of covid-19 pandemic on its business in early march.
full-year 2020 shipments and depletions growth is now estimated to be between 37% and 42%.
boston beer company -targeting overall volume growth rates in 2021 to be between 35% and 45%.
sees 2021 depletions and shipments percentage increase between 35% and 45%. | 0 |
I'm Hallie Miller, Evercore's Head of Investor Relations.
These factors include, but are not limited to, those discussed in Evercore's filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
We continue to believe that it is important to evaluate Evercore's performance on an annual basis.
As we have noted previously, our results for any particular quarter are influenced by the timing of transaction closings.
It's hard to believe that when we reported our 2019 earnings at this time last year, everything was "normal".
The past 12 months, however, have been anything but normal.
So, please indulge me a brief review of the year.
When faced in mid-March with two simultaneous crises, a global pandemic and the sharpest economic downturn in decades, our entire business and way of life was disrupted.
Our clients' needs changed rapidly and many of their strategic initiatives, particularly their M&A plans, were placed on hold.
Corporate leaders and financial sponsors became focused almost exclusively on cost control, reducing capital spending, increasing liquidity, amending debt covenants and strengthening their balance sheets.
And while most previously committed M&A transactions were complete, this strategic M&A activity essentially stopped.
Later in the second quarter, as fiscal and monetary stimulus stabilized the debt and equity markets, we helped client capitalize on the opportunity to build liquidity and in certain cases to initiate large restructuring and recapitalization transactions.
These balance sheet and liquidity focused assignments, which drove demand for capital raising advice and execution in both the equity and debt markets, dominated our advisory services in the second quarter and into the beginning of the third quarter.
As the third quarter evolved, strategic and M&A discussions began to resume.
Despite the sharp decline in M&A activity, which lasted several months starting the beginning of March, our revenues were essentially flat year-over-year through the first nine months.
So, how did this happen?
First, over the last few years, we have made significant investments that have materially broadened the services that we can provide to our clients.
We acquired ISI, which materially enhanced our research, underwriting and distribution capabilities.
We greatly strengthened our restructuring team by adding five new SMDs globally, dramatically enhanced our equity underwriting team, we enhanced our private capital raising capabilities for both sponsors and public and private companies, we strengthened our debt advisory capabilities, we added the best activist defense and shareholder engagement team in our entire industry and we added best-in-class capabilities in corporate restructuring, split offs, spins, Morris Trust, reverse Morris Trust, etc.
, and best-in-class capabilities in SPAC capital raising and SPAC merger advice.
So, first, first nine months of 2020, we demonstrated that we have in place best-in-class capabilities to advise our clients in widely varied environments.
And second, we demonstrated that our team has the talent and the entrepreneurial spirit to deploy these capabilities rapidly in support of our clients.
In the latter half of 2020, the M&A market began to recover meaningfully.
Local and US M&A volume increased 92% and 163% respectively compared to the first half and the number of global and US deals increased 18% and 16% respectively.
Still, for the year, M&A volume was down [Technical Issues].
And in the US, the largest M&A market for all firms, and for Evercore particularly, M&A volume was down 21%.
The recovery in M&A, coupled with continued momentum in the broader advisory capabilities that I just described, led to a spectacular fourth quarter by any measure and fueled the many records that we achieved as a firm in 2020.
The point of this review is simple.
In 2020, we proved that while M&A is still our largest source of revenue, our capabilities to advise our clients and to be paid for that advice is much broader than many of our shareholders and many of our analysts -- and perhaps even we -- would have anticipated.
So, while there clearly is some cyclicality in various parts of our business, we truly are very much an all-weather firm that can advise clients on their most important strategic, financial and capital needs in widely varied environments and a firm that can generate significant revenues by providing that advice to our clients in widely varied environments, all the while sticking religiously to our fee-only, no capital risk business model.
As we begin 2021, M&A dialogs and strategic activity discussions are strong.
Growth companies continued to access the public markets for capital.
Financial sponsors and other private businesses are seeking capital and acquisitions in the private and public markets and institutional investors continue to value high quality research, investment analysis and advice.
So, as we enter 2021, our momentum continues to be significant in all of our businesses.
The level of activity of our teams is high and our backlogs remains very strong.
While there certainly still are challenges related to the pandemic and the economy and all of us at Evercore most certainly have enormous empathy for those in our society who have not been as fortunate as we have been, we begin 2021 in a very strong position.
As we look forward, we continue to focus on long-term and trusted relationships with both current and prospective clients determined to advise them on their most important strategic, financial and capital decisions.
We are planning for our eventual return to our offices globally, with the health and safety of our team paramount as we develop these plans.
We are focused on maintaining our strong culture that is grounded in our core values and in collaboration, both of which are hugely important contributors to our many accomplishments in 2020.
We, of course, are actively pursuing opportunities to add talent strategically throughout the firm and we are optimistic about our ability to recruit this talent.
We see significant opportunities to continue to grow our business, both by expanding our coverage of key sectors and geographies and by deepening our product capabilities.
And we are committed to continuing to operate with financial discipline, delivering strong returns to our shareholders, while maintaining a strong and liquid balance sheet and resuming our historical approach of returning any excess capital to our shareholders through dividends and share repurchases.
Let me now turn to our financial results.
We achieved record fourth quarter and full-year adjusted revenues, adjusted operating income, adjusted net income and adjusted EPS, driven by extremely strong revenue growth and good operating leverage.
Fourth quarter adjusted net revenues of $969.9 million grew 45% year-over-year and full-year adjusted net revenues of $2.33 billion grew 14% compared to 2019, the highest annual revenues in our history.
Fourth quarter advisory fees of $790 million grew 40% year-over-year and full year advisory fees of $1.76 billion grew 6% compared to 2019 and also were the highest in our history.
Based on current consensus estimates and actual results, we expect to maintain our number 4 ranking on advisory fees among all publicly traded investment banking firms and we also expect to grow our market share among these firms.
Importantly, our growth in 2020, combined with declining advisory revenues at the three top bulge bracket firms, resulted in a nearly 50% reduction in the gap between us and the number 3 ranked firm and we narrowed the gap between Evercore and the number 1 and number 2 firms as well.
Fourth quarter underwriting fees of $95 million and full-year underwriting fees of $276.2 million each more than tripled year-over-year.
This business experienced the true step up in 2020, in large part due to the expansion of our capabilities that allowed us to work on a variety of assignments for our clients, including IPOs, follow-ons, convertibles, SPACs and caps, as well as the more prominent role we play in virtually all transactions with which we were involved.
Fourth quarter commissions and related fees of $52.4 million increased 1% year-over-year and full year commissions and related fees of $205.8 million increased 9% compared to 2019.
Fourth quarter asset administration fees of $20.1 million increased 20% year-over-year and full-year asset management and administration fees of $67.2 million increased 11% compared to 2019.
Turning to expenses, our adjusted compensation rate for the fourth quarter is 52.3% and for the full year is 58.9%.
Fourth quarter non-compensation costs of $85.8 million declined 12% year-over-year.
And full-year non-compensation costs of $316.7 million declined 10% versus [Technical Issues].
Fourth quarter adjusted operating income and adjusted net income of $376.4 million and $277.4 million increased 110% and 113% respectively and adjusted earnings per share of $5.67 increased 108% versus the fourth quarter of 2019.
Full-year operating income and adjusted net income of $639.3 million and $459.6 million increased 28% and 23% respectively and adjusted earnings per share of $9.62 increased 25% versus 2019.
We produced a full-year adjusted operating margin of 27.5%, roughly 300 basis points of margin expansion compared to 2019.
Finally, we remain committed to returning excess capital to our shareholders.
Our Board declared a dividend of $0.61 and we will resume our normal annual reassessment of that dividend in April.
We remain committed to offsetting the dilution of our upcoming bonus RSU grants and RSU grants to new hires through share buybacks.
And we will resume our historical policy of returning excess earnings not reinvested in the business to our shareholders through dividends and share repurchases.
Bob will comment later on our GAAP results and provide additional detail on our balance sheet.
Our results demonstrate clearly that we are a leader in virtually every business in which we participate and our strength in the fourth quarter in particular contributed significantly to the many records we set for the full year as a firm.
We sustained our number one League Table ranking for volume of announced M&A transactions both globally and in the US among independent firms in 2020 and are advising on 4 of the 10 largest US M&A transactions in 2020.
In the fourth quarter, we realized revenues from many assignments that we started earlier in the year.
And we participated in a number of announced transactions that will close in the future.
This includes advising AstraZeneca on its acquisition of Alexion which was announced in the fourth quarter and is the largest healthcare deal and the largest cross-border deal since the onset of the pandemic.
Our restructuring team ranked number 2 in the League Tables for number of announced US transactions in 2020.
We believe that our restructuring franchise is even stronger than the League Table indicates due to our diversified business base of working with both debtor and creditor clients, as well as working on both in-court and out-of-court restructurings.
Our restructuring business can deliver service and advice far beyond the traditional Chapter 11 bankruptcy advice and many companies called on us in 2020 for our liability management and financing capabilities.
We believe activity levels will remain elevated as certain sectors and companies continue the slow and taxing recovery from the pandemic induced downturn.
Our equity capital markets business performed exceptionally well in 2020 and we expect to continue to benefit from the sustained strong market for equity issuance.
We continue to see strong results from our ongoing investment in this business, which has diversified our capabilities and has led to both fee-paying events and larger transactions.
In 2020, we participated in more than 100 equity and equity-linked transactions that raised nearly $70 billion in total proceeds.
Additionally, both sponsor and corporate clients increasingly have looked at Evercore to play a significant role in their capital raising.
We increased both the number of active book run and book run assignments in 2020 with our growth in active book run assignments outpacing our growth in book run assignments.
Our investments in SPAC capabilities have positioned us well to serve many new clients as they navigate this active market.
We are also encouraged by early results from our investment in convertible debt underwriting and sales and trading, including our first ever sole book run convertible transaction that took place just last week.
Our capital advisory group had a phenomenal year.
Our team advised on more than $30 billion of deals in GP and LP-led transactions, increased significantly in the second half of the year, and we continue to raise primary capital successfully for these clients.
In fact, the team has an impressive virtual fundraising track record, closing more funds virtually than anyone else in the industry.
We continue to see broad growth opportunities in these areas.
In defense and shareholder advisory where campaigns were down in 2020, we continued to experience very strong demand for our market-leading activism advisory practice.
We advised on the defense of the largest US hostile takeover attempt and successfully advised on the defense of two of the largest proxy fights.
Activist activity continues to build as activists increase their positions in companies.
In equities, our team of top institutional investor ranked macroeconomic and fundamental analysts provided valuable insights to our clients throughout this volatile year.
We also continue to make investments in our platform to support our ECM franchise, which enables us to execute at a very high level on a significant number of transactions, with increasingly important roles.
Finally, our wealth management business grew AUM past the $10 billion mark for the first time in 2020 and provided important investment advice to clients in a challenging environment.
We are pleased with these many accomplishments.
Yet, we remain focused on continuing this momentum in 2021 and beyond.
Let me now turn to discuss our opportunities for future growth.
Our expanded advisory and underwriting capabilities provide the foundation for our growth in the future and plenty of opportunity to grow remains.
We believe that there are two main elements to our future growth.
First, further expanding our coverage model, and second, deepening and broadening our capabilities.
Our continued efforts with the Evercore 100, our program to expand service to targeted large cap nationals and multinationals, our dedicated coverage of financial sponsors and investing in talent to grow in areas of whitespace with the addition of A plus talent will all facilitate our expanded coverage model.
There are many areas of untapped geographic and sector potential and we are actively seeking to add talent in those areas where we believe we can deepen our coverage, including TMT, FinTech, pharma, consumer, financial sponsors, large cap multinationals and Europe.
We continue to have many conversations with talented professionals to strengthen these important areas of coverage.
These additions enhance our advisory capabilities on complex, large cap corporate realignments and our capital markets [Indecipherable] business.
We look forward to additional talent announcements in 2021 as we resume a more normalized recruiting process.
Equally important to recruiting externally is our focus on long-term commitment to attracting recruiting and mentoring talented junior individuals and promoting from within.
These individuals contribute to our ability to be a self-sustaining from.
We are pleased to announce that we promoted three managing directors to senior managing director in January, strengthening our advisory coverage of healthcare and restructuring and our equities coverage of healthcare services and technology.
Deepening and broadening our capabilities, the second element of our growth plan further enables our bankers to collaborate with others across the firm to meet the strategic, financial and capital needs of our clients.
Evercore acted as a lead financial advisor and the sole debt advisor to this transaction.
In addition, people from M&A and advisory as well as equity capital markets and hedging all contributed to the advice.
We continue to focus on broadening and diversifying our capabilities, so that we can deepen client relationships, participate in a broader range of activities and earn a greater share of fees that clients pay to their advisor on any given transaction.
We've built a truly world-class ECM, underwriting and advisory business and we are excited to have Kristie join us to lead this business through its next stage of growth.
Our 2020 results demonstrate that the breadth and diversity of our capabilities drives deeper relationships with clients and helps with building new client relationships.
Our investments in both the SPAC and convertible markets are just two recent examples of investments that have enabled new opportunities to advise clients.
We believe that the significant opportunities remain to provide additional services to our current client base and to attract new clients.
Our broader capabilities have supported our industry-leading advisory SMD productivity.
We anticipate that, as these capabilities become more broadly utilized by our clients and our fee share increases, our market-leading productivity will be sustained or even enhanced.
The results and achievements that Ralph and I have summarized could not have happened without the dedication, teamwork, collaboration and commitment that our people demonstrated throughout one of the most uniquely challenging years many of us have ever experienced.
We are deeply grateful for their extraordinary effort.
Now, let me pass the call over to Bob.
Let's kick off with our GAAP results.
For the fourth quarter of 2020, net revenues, net income and earnings per share on a GAAP basis were $927 million, $220 million and $5.02 respectively.
For the full year, net revenues, net income and earnings per share on a GAAP basis were $2.3 billion, $351 million and $8.22 respectively.
As has been the case historically, our adjusted results exclude certain items related to the realignment strategy that began in the fourth quarter of 2019 and which was completed in the fourth quarter of 2020.
In total, we incurred separation and transition benefits and related costs of approximately $45 million, which reflect a modest increase in the costs from our prior estimate of $43 million.
During the fourth quarter of 2020, we recorded approximately $4 million of special charges, which are excluded from our adjusted results.
In the fourth quarter, we completed the sale of our broker-dealer business in Mexico to its management team and we completed the transition of our advisory business in Mexico to a strategic alliance with TACTIV, a newly performed strategic advisory firm founded by the former leaders of our advisory business.
There, there is a loss of approximately $31 million for the year included in other revenue that is related to our transition in Mexico.
Our adjusted results for the fourth quarter and full-year 2020 also exclude special charges of $1.3 million and $3.3 million respectively related to accelerated depreciation expense and $1.7 million related to the impairment of assets resulting from the wind down of our Mexico business.
Turning to taxes, our GAAP tax rate for the fourth quarter was 23.2% compared to 21.7% in the prior-year period.
Our GAAP tax rate for the full year was 23.7% compared to 21.2% in the prior period.
And on a GAAP basis, the share count was 43.9 million for the fourth quarter and 42.6 million for the full year.
Our share count for adjusted earnings per share was 48.9 million for the fourth quarter and 47.8 million for the full year.
Firmwide non-compensation costs per employee were approximately $47,000 for the fourth quarter and $172,000 for the full year, each down 9% and 11% on a year-over-year basis respectively.
The decrease in non-compensation costs per employee versus last year primarily reflects lower travel and related expenses.
As we continue to evolve toward more normal operations, costs associated with travel, recruiting and other expenses will begin to increase.
Finally, focusing on our balance sheet.
Our strong year-end balance sheet reflects the strength and momentum of the recovery in the latter part of the year.
As of December 31, we held approximately $830 million in cash and cash equivalents and $1.1 billion in investment in securities.
As is always the case at this time of year, a meaningful portion of our liquidity will be used to fund upcoming cash bonus payments, payments related to prior-year deferred compensation awards that are vesting currently, tax obligations related to compensation awards including relating to the net settlement of restricted stock units that vest in the first quarter.
Longer term, we are holding investment securities to fund payment obligations relating to deferred compensation awards that will vest in the future and to meet liquidity and regulatory capital requirements.
As of December 31, we have made commitments to pay more than $450 million related to future cash payment obligations under our long-term deferred compensation programs and these payment obligations exist at various dates through 2024.
These payments are, of course, subject to satisfaction of established investing requirements.
This number will change in the first quarter as prior awards will vest and be paid out and new awards relating to 2020 compensation will be granted.
The actions taken in 2020 strengthen our balance sheet significantly.
And as Ralph and John have noted, put us in a position to return free cash earnings generated from operations to investors, consistent with past practice. | compname reports quarterly adj earnings per share of $5.67.
compname reports full year 2020 results; record fourth quarter and full year revenues; quarterly dividend of $0.61 per share.
evercore inc - q4 u.s. gaap and adjusted net revenues of $927.3 million and $969.9 million, respectively.
evercore inc - qtrly earnings per share $5.02.
evercore inc - qtrly adjusted earnings per share $5.67. | 1 |
Yesterday, after the market close, we issued our quarterly release.
The pass code you will need for both numbers is 5371939.
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 August 31, 2021.
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.
This resulted in annualized return on average common equity of 27.6% and annualized operating return on average common equity of 16.8%.
Now that many of our locations are tentatively reopening, we are excited to begin reestablishing our normal cadence of business.
In many ways, last year was a trying one, but it was also a year of great opportunity.
I'm especially proud of our team's ability to continue to thrive and execute in a time of great uncertainty.
While for many, 2020 was a year of challenges; for us, it was also a time of opportunity and growth.
I am pleased with all that we accomplished and we'd like to take a few minutes to talk about the journey we have been on and how that affects who we are and what we do.
Back in 2013, the market was evolving rapidly.
We anticipated that investors would increasingly seek yield, which would result in capital becoming more interested in reinsurance risk.
At that time, we made the strategic decision to focus on our vision, which is to be the best underwriter.
For us, this meant leveraging our skills into remaining the leading reinsurer, while diversifying both geographically and into traditional casualty lines.
It meant remaining focused on reinsurance business and not pursuing an insurance strategy.
It also meant committing to grow our hybrid business model by expanding our Capital Partners franchise.
We knew that achieving this strategic imperative would require us to become more efficient.
We set specific goals to increase our capital leverage, investment leverage and operating leverage with particular focus on managing expenses.
This was because we expected the market to become more efficient and we wanted to insulate our investors as best we could from the effects of the soft market.
Lowering our expense ratio help to mitigate the effect of the falling rates and offset its impact on our ROE.
In short, we transformed the profile of the company to ensure we continue to benefit our shareholders over the long-term.
We knowingly began building our casualty business during a challenging phase of the market with the intent that by doing so we could construct a portfolio with embedded options for growth when pricing improved.
This is not a strategy for the faint of heart.
You must believe that you understand the risk you are taking because there is little room for error.
You need conviction in your beliefs on how, when and why the market will change.
And you must be positioned as a respected market participant so you can grow quickly when opportunity arises.
I am pleased to report that we have succeeded in executing this strategy in our casualty book.
Of course, we continue to monitor the impact of social inflation and other trends.
What I am confident of, however, is that the successful execution of our strategy to grow casualty in a clearly improving market will serve us well and the favorable balance of profitable business will ultimately benefit our shareholders.
As we have said many times, we evaluate our casualty business over rolling 10-year periods.
For the last few years, we've been writing well-rated risk that we believe will serve as the foundation for a strong portfolio with superior returns.
While we believe that we are already beginning to see this profitability, we are in no rush to make changes today.
Our long-term shareholders support us and they will be rewarded.
Shifting gears briefly to capital management, which Bob will address in greater detail.
We have always been thoughtful and careful stewards of our capital and have methodically grown our capital base at a pace consistent with scaling our business while maintaining strong ratings.
Since the second quarter -- we have -- of 2020, we have raised $1.1 billion in equity capital, raised over $1 billion of partner capital, grown gross written premiums in our in-force portfolio by $1.8 billion, earned $1 billion in net income and returned over $700 million to our shareholders through share repurchases and dividends.
As a result, we now find ourselves in the enviable position of having what we believe to be the most -- to be more than ample financial flexibility to support our existing risk, take advantage of potential opportunities and continue repurchasing our shares on what we believe are attractive valuations.
I cannot emphasize too strongly, however, that last year's common equity raise was the cornerstone of all these capital management and underwriting successes.
Having the right capital at the right time provided us the fortress balance sheet necessary to accomplish all that we have.
That concludes my opening comments.
I'll provide more detailed update on our segments performance at the end of the call.
My comments today will focus on our accomplishments during the quarter and items that drove our results, including our three drivers of profit.
Starting with our consolidated results where we reported net income of $457 million and operating income of $278 million for the quarter.
These results were driven by strong performances in each of our three drivers of profit: excellent underwriting results, increased fee income and high-quality net investment income, as well as robust mark-to-market gains in our strategic investment and fixed income portfolios.
This produced annualized return on average common equity of 27.6% and annualized operating return on average common equity of 16.8%.
I'll now shift to our three drivers of profit starting with underwriting income.
Our top-line grew significantly in the quarter.
Gross premiums written were up $392 million or 23% with the Property segment growing $141 million and the Casualty segment growing $251 million.
Year-to-date, we have grown net premiums written by $886 million or 36% and remain on track to grow well over $1 billion.
We reported underwriting profit of $329 million in the quarter and a combined ratio of 72%.
For our Property segment specifically, gross premiums written grew $141 million over the comparable quarter or 14% and we reported a combined ratio of 44%, driven by a lack of cat losses and strong performance in our other property business and $51 million in prior year favorable loss development.
Growth in gross premiums written was $50 million or 7% in property cat and $91 million or 28% in other property.
Most of the growth in our property catastrophe business took place in our joint ventures.
As a result, we currently only retain about 28% of the gross premiums written in our property catastrophe business.
Attritional losses in other property book ran at about 46%.
This is somewhat favorable to our expectations for this business.
As a reminder, in addition to attritional risk, we also take catastrophe risk in our other property business.
Moving on to our Casualty results.
Our Casualty segment reported gross premiums written of $911 million, growing $251 million or 38% versus the comparable quarter.
Kevin will elaborate on the drivers of this growth in his discussion of underwriting performance.
We experienced a small amount of favorable development and the combined ratio was 97.8%.
Underlying this was a 67% current accident year loss ratio, which is a 1.4 percentage point improvement from the same quarter last year and consistent with our expectations.
This quarter, there were no significant changes to our COVID-19 loss estimates.
That said, this is a developing situation and we will continue to receive information over time.
We continue to monitor COVID-19 development across both segments and our current reserves represent our best estimate of potential losses.
Now moving on to our second driver of profit, fee income.
Total fee income was $46 million, which is up from the second quarter of last year.
Management fees increased and we expect that they will continue to serve as a strong, stable source of recurring revenues going forward.
Overall, we shared $114 million of income with the partners in our joint ventures as reflected in our redeemable non-controlling interest, driven by profitable performance and a low cat quarter and prior year favorable loss development.
Our Medici and Epsilon funds raised in aggregate over $200 million in new quarter capital this year, which we deployed it to June 1 renewal.
We made a small addition to our financial supplement this quarter.
You will see that on the bottom of Page 11, we have broken out our fee income to show its contribution to underwriting results.
The goal was to provide additional disclosure on the geography of our fee income in the income statement.
Turning now to our third driver of profit, investment income.
We recorded strong investment returns this quarter due to falling interest rates as well as gains in our equity portfolio.
Net investment income was $81 million and we had $191 million of mark-to-market gain.
This resulted in total investment returns of $272 million.
The decrease in interest rates has lowered the yield on our retained fixed maturity and short-term investment portfolio to 1.3%.
The duration on a retained portfolio remained roughly flat at 3.8 years.
You'll note that we reduced our exposure to corporate credit this quarter, shifting the portfolio to US Treasuries.
We did this as credit spreads approach multi-year lows.
And turning now to our expenses and starting with the acquisition expense ratio, which was up slightly to 24%.
This was driven by casualty acquisition ratio, which increased by 1 percentage point to 28%.
The current expected run rate of our casualty acquisition expense ratio is in the upper-20%s.
So this quarter is consistent with expectations.
Meanwhile, the property acquisition ratio -- expense ratio -- acquisition expense ratio was flat.
Our direct expense ratio, which is the sum of our operational and corporate expenses divided by net premiums earned, was flat from the prior quarter at 6%.
On an absolute basis, operational expenses were up in the quarter but remain below 5% as the ratio to net premiums earned.
Going forward, as we grow our top-line, we will also continue to invest in the business to support our growth.
We expect our direct expense ratio to remain generally consistent with this quarter, absent one-time items.
I'd like to now shift to our discussion on our capital management during the quarter.
Earlier this month, we issued $500 million of our Series G Perpetual Preference Shares with a fixed for life dividend of 4.20%.
We plan to use $275 million of the proceeds to refinance our 5.375% Series E preference shares, which we have already been called and the remainder of the proceeds for general corporate purposes.
As a reminder, last year, we redeemed the outstanding $125 million of our 6.08% Series C Preference Shares and retired $250 million of our 5.75% senior debt.
So in total, we have replaced $650 million of capital at an average cost of 5.67% with $500 million of capital at a cost of 4.20% [Phonetic].
This is part of our long-term strategy to minimize the cost of capital.
Even with the incremental $225 million raised this month, we are comfortable with our various capital ratios which are stronger than two years ago.
Also in the quarter, we participated in the issuance of additional $250 million tranche of our Mona Lisa cat bond.
Consistent with our strategy, this adds additional efficient underwriting capital to our fortress balance sheet.
As Kevin noted, since June -- since last June, we have earned $1 billion.
In the second quarter of 2021, we continued returning these earnings to shareholders repurchasing 1.9 million common shares for $309 million.
This works out to an average price per share of about $159 and an average price to book value of 1.1 times our current book value.
Subsequent to the quarter-end, we continued to repurchase shares and, as of July 19, had repurchased an additional 920,000 shares for $138 million at an average price of just over $149 a share.
In total this year, we have purchased 3.9 million shares for $618 million at an average price of $157 per share.
This has reduced our share count by about 7.8% from the year-end 2020 total.
Despite substantial quarterly share repurchases, we ended the quarter with more capital than we began, which reflects our excess earnings, net of share buybacks and dividend.
Our common equity now stands at $6.7 billion.
To be clear about the use of the $1.1 billion of common equity we raised last year, that money has been fully downstreamed into our operating entities to support the attractive opportunities we took advantage of to substantially grow our book this year and position us well for the future.
Now before turning the call back over to Kevin, I'd like to finish with a brief discussion on tax.
We have been closely following recent G7 and G20 announcements on setting a global minimum corporate tax, the OECDs work on Pillar 1 and 2 and President Biden's proposals for US tax changes.
When it comes to tax reform, the details matter and they are not yet clear.
Over the years, however, the flexibility of our global operating platform has proven resilient and we anticipate this resilience will persist.
That said, we will continue to monitor this issue closely.
So, in closing, we are pleased with our solid financial performance this quarter across our three drivers of profit and believe we have demonstrated proactive capital management, which should continue to contribute to shareholder value.
As usual, I'll divide my comments between our Property and Casualty segments.
Starting with Property, while we always maintain our leadership and property cat underwriting, to be clear we are increasingly doing it differently.
We currently take more of our cat exposed risk through our other property portfolio because that is where we are seeing better returns for taking cat risk.
Our existing other property book has access to some of the most dislocated property lines in the US E&S market.
We have the platforms, capital and expertise to focus across classes to target and obtain the best risk due to the long-term relationship that we've cultivated with customers for over 25 years.
This is evident in the 28% year-on-year growth, which our other property book has delivered and we now have an in-force portfolio of over $1 billion.
We also grew our property cat portfolio this quarter but by a smaller percentage.
The June 1 renewals proceeded as anticipated and, overall, we believe that we have constructed one of our best cat books in years.
The Florida renewal saw rate increases averaging 5% to 20% with abundant capacity for upper layers, while many lower layers struggled to get placed, especially if they were loss impacted.
As we anticipated on last quarter's call, we reduced the number of Florida programs that we wrote from 18 to 13, which is a continuation of last year's trend when we reduced from 25 programs.
Since 2019, we have reduced our bottom line exposure to Florida domestic companies by almost half.
The Florida market remains highly challenged due to social inflation and, as anticipated, proposed reforms do not appear likely to materially change the landscape.
I reiterate that the Florida domestic market now represents less than 3% of our gross written premiums.
That said, decreased exposure to Florida domestics is not the same thing as decreased exposure to Florida hurricanes.
Southeast wind remains the peak risk in our portfolio.
What has changed is that we have moved away from Florida domestic companies to more regional and nationwide programs and over the last year have increasingly taken southeast wind risk through our other property portfolio.
I should note that as we have grown, so has our tail risk on an absolute basis.
On a percentage of equity basis, however, it is similar to where we were prior to last year's capital raise.
It is easy to grow in this business by simply going risk on, but we created a larger and more efficient portfolio than we had prior to the capital raise and we did this while holding our relative risk levels consistent with prior years.
Inflation has been in the news recently with headline CPA in May exceeding 5%.
Most relevant to our property book, however, is inflation in the commodity and labor markets as that is more likely to impact rebuilding cost after an event.
Lumber and other commodity prices have been elevated this year although recently they appear to be moderating.
We price for inflation in our models.
Given the elevated risk in the current environment, we have stress tested our portfolio and remain comfortable with its exposure to inflation.
From our perspective as a reinsurer, it was a quiet quarter for tax.
Claudette made landfall in Louisiana as a disorganized weak tropical storm.
In the beginning of July, Elsa made landfall in Florida as a strong tropical storm and was the earliest east storm on record.
While these storms may result in some losses, we currently do not anticipate these to be material.
We are closely monitoring meteorological conditions as we head into the third and fourth quarters.
You've probably read news reports about wildfires and record droughts already in the US, particularly in California.
We are expecting an active hurricane season having already having three US landfalling storms.
Europe recently experienced a significant flooding event, which we are closely evaluating although it's too early to estimate potential losses.
As always, RenaissanceRe Risk Sciences is proving invaluable in helping us understand the climate dynamics likely to influence the remainder of the year.
I am often asked if we vary the amount of business that we write based on weather forecasts.
I strongly believe that due to our superior tools and better understanding of climate change, we play a critical role in managing our customers' natural catastrophe risk.
Behaving like a partner by providing long-term stable capacity is part of our value proposition for which I expect we will be rewarded.
Moving now to our Casualty and Specialty segment.
Our Casualty portfolio is performing well.
Original insurance rates continuing to increase although the magnitude appears to be moderating in those classes which have experienced the greatest uplift such as D&O.
We have grown our Casualty business by more than 300% since 2015 on an in-force basis.
This includes adding over $1 billion of new business in the last 12 months, also on an in-force basis, which should position as well as the market has clearly improved.
Reflecting over my career, I believe that many underwriters do not go large enough when opportunity knocks or small enough when it recedes.
I am proud of how our team has performed and believe that we have executed into this market opportunity with great skill and dexterity.
Our competitive advantages, including our long-term relationships and first mover status, have served us well this year.
We anticipated this market well in advance and adopted a strategy of confident provision of consistent capacity.
While other reinsurers haggled over terms and conditions, we were discussing new structures and coverages.
We believe that this was the appropriate approach and it explains our ability to grow proactively into an improving market, which should benefit from building our largest and what we believe to be our best Casualty and Specialty portfolio as the market hits a multi-year high.
Cyber insurance has been getting a lot of attention lately.
Rate changes have been greater than 40% year-on-year and the market has been growing by about 25% each year for the previous five years.
Recently, this is being driven by multiple large cyberattacks and increasing instances of ransomware.
As a result, the cyber market is currently experiencing increasing demand and limited supply.
We have been reinsuring cyber liability for almost a decade and believe there are good opportunities to grow this book.
Casualty and Specialty losses, including those related to COVID-19, continue to develop within our expectations.
In our credit book, mortgage forbearance rates also continue to improve and the US housing market continues to be very healthy.
As I mentioned on our previous calls, in the Casualty business, our actuaries are being patient in recognizing positive rate movements.
We are optimistic that over time we will benefit from the improved underwriting terms and pricing that we believe we are enjoying.
Closing now with our Capital Partners business.
The big news for this quarter was that our Medici capital and fund surpassed $1 billion in capital under management.
This quarter experienced near-record cat bond issuances.
And we continue to see strong demand for our Medici fund.
Our strategic approach to asset management is not as an asset accumulator, but rather as an underwriter looking to match the most efficient capital with desirable risk.
To achieve this and provide the best solutions to our customers, we need multiple capital structures and capital sources.
It is for this reason that we manage several vehicles both rated and unrated to provide additional capacity to our customers from third-party capital.
Since 2015, we have grown our Capital Partners business from four vehicles and $6 billion in capital to six vehicles with more than $11 billion in capital.
This is a critical component of our strategy, provides our customers efficient capital with our owned rated balance sheets are less efficient.
It allows our third-party investors to partner with the best underwriter and benefit from our unparalleled understanding and modeling of the catastrophe risk that they desire.
And it is good for our shareholders that it results in a stable growing source of fee income.
In conclusion, we delivered a solid quarter with strong premium growth, improving profitability and proactive capital management.
We maintained a fortressed balance sheet while heading into the winter season, continuing to build the foundations for long-term shareholder value. | net claims and claim expenses incurred associated with covid-19 pandemic were not significant in q2 of 2021. | 1 |
Our discussion today will be led by Andres Lopez, our Chief Executive Officer; and John Haudrich, our Chief Financial Officer.
Today, we will discuss key business developments and review our financial results.
Please review the safe harbor comments and disclosure of our use of non-GAAP financial measures included in those materials.
We appreciate your interest in O-I Glass.
We're very pleased with our performance during the second quarter.
We reported adjusted earnings of $0.54 per share.
Results exceeded our guidance range and reflected a stronger-than-expected shipment levels as well as favorable ongoing operating performance.
We continue to see favorable performance across key business levers.
Shipments improved 18% and production rebounded 27% compared to the prior year, which was impacted by the onset of the pandemic.
The strong demand also reflected consumer preference for healthy, premium and sustainable glass packaging as markets reopen.
Furthermore, the benefit of higher selling prices substantially offset the rated cost inflation and continued favorable operating performance was driven by the positive contribution of our margin expansion initiatives.
Second quarter cash flow was also very strong as a result of solid operating performance.
As I noted last quarter, O-I has reached an inflection point.
We have seen a step change improvement in our ability to consistently perform and deliver on our commitments, which is underpinned by advanced capabilities across many disciplines developed over the last few years.
I believe current quarter results underscore this view.
As I will discuss shortly, we continue to advance our bold plan to change O-I's business fundamentals.
In addition to better-than-expected earnings and cash flow, I'm very pleased with the progress we made advancing our strategy.
Our margin expansion initiatives are exceeding our expectations, and we achieved a major milestone with MAGMA this past quarter.
Likewise, we continue to rebalance our business portfolio and advance our efforts to resolve our legacy asbestos liabilities.
As we look to the future, we remain optimistic about our business outlook.
We expect third quarter adjusted earnings will approximate $0.47 to $0.52, which is a significant improvement from the prior year.
Our full year earnings and cash flow guidance has improved.
We now anticipate full year earnings of between $1.65 and $1.75 per share and $260 million of cash flow.
Let's move ahead to slide four to discuss recent volume trends.
As you can see on the chart, second quarter shipments were up significantly over the prior year, which was impacted by the onset of the pandemic.
Total shipments increased 18% this year compared to a 15% decline last year.
In the Americas, second quarter shipments were up 17%, with all geographies improving from the prior year.
The rebound was most pronounced in Mexico and the Andeans, which were significantly disrupted in 2020.
In Europe, shipments were up 22% and all geographies improved double digits from last year.
While the pandemic was very disruptive, underlying trends point to a stable or modestly improving demand.
For example, second quarter shipments were in line with 2019 levels, reflecting a return to pre-pandemic levels.
Glass has proven to be very resilient despite significant market volatility.
This includes supply chain disruptions, transportation challenges and major channel shifts between retail and on-premise consumption patterns.
The chart on the right illustrates how food and beverage consumption patterns should evolve across channels over the next 18 to 24 months.
As you can see, on-premise consumption is expected to rebound after the depths of the pandemic, while retail purchases should remain elevated compared to pre-pandemic levels.
While we first shared these analysis last quarter, the evolution of packaging demand over the past couple of quarters, supports these trends and continues to reinforce the projected consumption patterns in this chart.
As we look to the future, we expect continued volume growth.
While markets had already rebounded well in the third quarter of last year, we expect our shipments to be flat to up 1% in the third quarter of this year.
Reflecting solid demand year-to-date, we have increased our full year 2021 growth outlook.
While our prior guidance called for 3% to 4% growth, we now expect growth of between 4% and 5% in 2021.
In addition to a strong operating performance, we also achieved a number of key milestones during the first half of the year as we continue to advance our strategy.
On this page, we released our 2021 priorities as well as some highlights on our progress.
I'll touch base on each of our three platforms.
First, we aim to expand margins.
We have targeted $50 million of initiative benefits as well as continued performance improvement in North America.
We have made good initial progress with our margin expansion initiatives.
Benefits totaled $40 million during the first half, and we now expect to exceed our original $50 million target for the full year.
North America in turn has demonstrated a strong resilience responding to severe weather, high freight inflation and a tight supply chain situation, and sales volumes are comparable to 2019 levels.
Next, we seek to revolutionize glass.
To support this, we successfully validated several technology milestones for MAGMA Generation one line in Germany as well as continue to advance our Glass Advocacy campaign and reposition ESG.
Similarly, we remain on track to pilot the Generation two MAGMA line in the Streator, Illinois, in the second half of the year and continue to make solid progress developing Generation three.
Additionally, we're actively working on a R&D lightweighting program we call Ultra, targeting significant container weight reductions to improve even further the convenience and sustainability profile of glass.
O-I's Glass Advocacy campaign aims to rebalance the dialogue about glass.
Our digital marketing campaign is well underway with over 660 million impressions program to date and the campaign has reached over 80 million people across the U.S.
We are building a community of glass advocates, who regularly engage with our content, which demonstrates the relevance of our message.
Like in our technology developments, we are very encouraged by the positive response and progress made, and we'll continue to advance these marketing efforts.
I'll touch on ESG momentarily.
Third, we will continue to optimize our structure.
This includes a number of efforts ranging from portfolio adjustments, improving the balance sheet, simplifying the organization and addressing legacy liabilities.
Regarding our divestiture program, we have completed or entered into agreements for $930 million of assets sales to date.
So we are over 80% of our way toward our targeted divestitures by the end of 2022.
As John will expand, on our cash flow during the first half of the year was quite favorable given historic seasonal business trends, reflecting very good working capital management, which support debt reduction.
In March, we entered into a long-term strategic agreement with Accenture to manage our global business services activities, and we completed the first phase of this transition in July.
In addition to reducing G&A cost, we expect to accelerate capability enhancement by leveraging world-class processes and technologies.
As you know, we reached an agreement in principle back in April for a fair and final resolution to our legacy asbestos-related liabilities.
Efforts to complete the reorganization for Paddock are proceeding as expected.
Before I turn over to John, let me add a few comments on sustainability.
At O-I, our ESG and sustainability vision is holistic, grounded in innovation and touches every part of our business.
In our vision, we see a future where the innate circularity of glass meets O-I's disruptive technologies and other innovations to change how glass is made, sold and recycled.
This sustainable future of glass involves the development of significantly lighter glass containers through Ultra, which implies a lower carbon footprint per container.
It also involves the use of cleaner gas oxygen fuels and improved technology in traditional furnaces.
On top of that, O-I's revolutionary MAGMA melting technology will be capable of using biofuels and other carbon neutral renewable sources of energy, like hydrogen, as well as more grades of recycled class.
MAGMA includes a more flexible manufacturing process, including the ability to turn the unit on and off to optimize the use of energy and efficiency.
It also can be co-located at manufacturing and filling facilities.
This will reduce freight and potentially leverage the use and reuse of wastage, water and other resources.
In addition, we're building a future where innovative approaches, such as glass for good, enhance glass recycling while providing a benefit to the community, elevating O-I's ESG profile.
We are looking forward to sharing all of this and more in our coming 2020 sustainability report, which will be available at the end of Q3.
Now over to John.
I plan to cover a few topics today, including a recent performance, progress on our capital structure as well as our most current 2021 business outlook.
I'll start with a review of our second quarter performance on page seven.
O-I reported adjusted earnings of $0.54 per share.
Results exceeded our guidance of $0.45 to $0.50, given stronger-than-anticipated shipments and favorable cost performance.
In particular, sales volume was up more than 18% from last year compared to our expectation of 15% or higher.
Segment profit was $232 million and significantly exceeded prior year results, which were impacted by the onset of the pandemic.
Higher selling prices substantially offset elevated cost inflation linked to higher energy and freight costs.
Naturally, higher sales volume and favorable mix boosted earnings.
Likewise, favorable cost performance was driven by a 27% improvement in production levels as the prior year was impacted by forced curtailment due to lockdown measures.
Keep in mind that maintenance and project activity costs have normalized for the disruption last year.
Cost performance also reflected continued good operating performance and benefits from our margin expansion initiatives.
The slide includes additional details on nonoperating items.
Let me point out that we did record a gain on an indirect tax credit in Brazil after a favorable court ruling, which has been excluded from management earnings.
Overall, we are pleased with favorable performance trends.
Moving to page eight.
We have provided more information by segment.
In the Americas, segment profit was $124 million, which is a significant increase compared to $52 million last year.
Higher earnings reflected 17% higher sales volume as the prior year was impacted by the onset of the pandemic.
Higher prices substantially offset cost inflation, which was elevated due to higher freight costs.
In Europe, segment profit was $108 million compared to $42 million last year.
The significant earnings improvement reflected a 22% increase in sales volume, while the benefit of higher selling prices partially offset cost inflation.
In the case of both regions, very good operating performance, mostly reflected higher production, which increased 28% in each segment, while supply chains remain very tight across the globe.
Likewise, very good operating performance also benefited from our margin expansion initiatives.
Keep in mind that we no longer report in Asia Pacific region following the sale of ANZ last summer.
In addition to comparing results to last year, we have added a comparison to 2019 to better understand our performance with pre-pandemic trends.
As illustrated on page nine, our current underlying performance exceeds pre-pandemic levels.
Adjusted primarily for the divestiture of ANZ, segment profit was up $7 million in the second quarter of 2021 compared to the same period in 2019.
Overall, higher selling prices have nearly offset elevated cost inflation, while sales volume and mix were comparable to 2019 levels.
Favorable results were really driven by improved operating and cost performance reflecting our margin expansion initiatives.
Let's shift to cash flows in the balance sheet.
I'm now on page 10.
We are following a specific set of guiding principles that are aligned with our strategy to increase shareholder value.
As we focus on maximizing free cash flow, we expect significantly higher cash flow this year and key working capital measures should be in line or favorable compared to 2020 levels.
As illustrated on the chart, our second quarter cash flow was $117 million and was comparable to the prior year, which benefited from significant inventory reduction due to forced production curtailment.
Over the past year, we have improved the consistency of our cash flows and now reflect normal seasonality of our business, solid operating results and very good working management.
Second, we preserved our strong liquidity and finished the second quarter with approximately $2.2 billion committed liquidity well above the established floor.
Third, we are reducing debt.
We expect net debt will end the year below $4.4 billion, and our BCA leverage ratio should end the year in the high 3s compared to 4.4 times at the end of 2020.
We expect to receive divestiture proceeds over the next several months, which will further improve our balance sheet position.
Please note, these targets could shift if the Paddock trust funding occurs prior to year-end.
At the end of the second quarter, net debt was down almost $1 billion from the same period last year, reflecting improved free cash flow and proceeds from divestitures.
Furthermore, our bank credit agreement leverage ratio was around 3.8 times as of midyear, which is well below our covenant limit.
Finally, we intend to derisk legacy liabilities as we advance the Paddock Chapter 11 process.
As previously announced, we have an agreement-in-principle for a consensual plan of reorganization, whereby O-I will support Paddock's funding of a 524(g) trust.
Total consideration is $610 million to be funded at the effective date of the plan.
Importantly, the agreement provides a channeling injunction protecting Paddock, O-I and their affiliates from current and future liability.
The Paddock reorganization is proceeding as expected and timing will be a function of the remaining legal and court actions to conclude this matter.
As previously noted, we have ample liquidity to fund the trust in the future.
And for clarity, we are not considering equity as a funding method.
Likewise, we remain highly focused on reducing our total debt obligations over time through free cash flow and proceeds from divestitures.
Let me wrap up with a few comments on our business outlook.
I'm now on page 11.
As Andres mentioned, we anticipate our business performance will improve in 2021 as markets stabilize and recover.
We expect third quarter adjusted earnings will approximate $0.47 to $0.52 per share.
Naturally, this is a meaningful improvement from the third quarter of 2020, which was impacted by ongoing COVID required production curtailments in Mexico and the Andeans.
Overall, we expect shipments will be flat to up 1% from the prior year.
Keep in mind, demand had already rebounded in the third quarter of 2020 from pandemic lows.
Production should be up about 8% to 10% from last year, which was still impacted by lockdown measures in some markets.
At the same time, certain costs like maintenance and depreciation have normalized following the pandemic-induced disruption last year.
Likewise, the current supply chain is fairly stretched across the value chain, reflecting the impact of prior year production curtailments as well as a strained transportation situation in many markets.
Finally, we expect continued solid operating performance and benefits from our margin expansion initiatives.
Our full year 2020 outlook has improved as we've tightened our earnings expectations to the high end of our guidance range and increased our free cash flow estimate.
We now expect adjusted earnings of $1.65 to $1.75 per share and free cash flow of approximately $260 million.
This adjustment reflects higher expected shipment levels, which we now anticipate will increase 4% to 5% compared to 2020.
Likewise, we expect the benefit of our margin expansion initiatives will also exceed our original goal of $50 million.
We anticipate the benefit of higher shipments and improved cost performance will more than offset the impact of winter storm Uri, which, of course, was not included in our original guidance.
During this session, we will update our plans that will include more details on MAGMA.
Likewise, we will share key company targets and milestones.
Subsequent investor events will expand on these key topics.
Let me wrap up with a few comments on slide 12.
Overall, we are very pleased with our second quarter performance, which exceeded our guidance due to stronger sales volumes and improved cost performance.
In fact, our underlying performance was favorable across key business levers.
Selling prices and volumes were up and costs were down.
Our margin expansion initiatives are working well, and our ability to deliver on our commitments has improved, underpinned by advanced capabilities across business functions, rigorously built over the last few years.
I'm very pleased with the progress we are making on our bold plan to change O-I's business fundamentals.
Our business is more stable.
We have well-structured business planning processes, and we are a much more agile and resilient organization.
Likewise, we are removing the constraints of the past, like legacy asbestos liabilities, while successfully advancing breakthrough innovations, such as MAGMA.
Finally, we are encouraged by market trends, which is reflected in our improved earnings and cash flow guidance for 2021.
Over the past several years, we have been hard at work, improving the foundational capabilities of our company as well as staging the company for continued transformation.
We look forward to our Investor Day on September 28.
During this event, we will share our exciting plans to align glass and O-I with the future packaging for decades to come.
We are confident this plan will increase shareholder value and all share a new period of prosperity for life. | q2 adjusted earnings per share $0.54 excluding items.
currently, o-i expects q3 2021 adjusted earnings will approximate $0.47 to $0.52 per share.
now expects 2021 sales volume in tons should increase 4 to 5 percent compared to 2020.2021 adjusted earnings per share should approximate $1.65 to $1.75. | 1 |
You can access this announcement on the Investor Relations page of our website, www.
aam.com, and through the PR newswire services.
You can also find supplemental slides for this conference call on the Investor page of our website as well.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
With that, let me turn things over to AAM's Chairman and CEO, David Dauch.
Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.
To begin my comments today, I'll review the highlights of our third quarter 2021 results.
I'll then touch on some exciting business development news, including electrification announcements with REE and our largest customer, General Motors.
And lastly, we'll discuss the ongoing supply chain challenges and our financial outlook.
After Chris covers the details of our financial results, we will then open up the call for any questions that you may have.
AAM delivered solid operating performance in the third quarter of 2021 despite unprecedented supply chain challenges that impacted industry production in the third quarter.
When we reported second quarter earnings, our expectation was that the worst of the shortage was behind us.
This turned out not to be the case.
Production volatility stemming from the semiconduct -- chip shortage took another leg down, which eventually forced OEMs to idle production at many facilities, including their full-size truck plants that were largely protected previously.
However, the AAM team did a great job in managing these obstacles and factors under our control, resulting in solid financial performance.
AAM sales for the third quarter of 2021 were $1.21 billion, down approximately 14% compared to $1.41 billion in the third quarter of 2020.
The decrease in our revenues on a year-over-year basis primarily reflects the impact of the semiconductor supply chain disruptions of nearly $245 million.
North American industry production was down approximately 25% according to third-party estimates.
Light truck production was down 20% year-over-year and volumes on our core platforms decreased significantly from a year ago.
The industry is at a point where a lack of inventory has begun to impact retail sales.
Days supply on key products that we support were at or below 30 days with certain platforms in single digits and large SUVs closer to 20 days.
Once the supply chain issues are resolved, which will take some time, we foresee an extended recovery to meet customer demand and replenish dealer inventories.
AAM is in a great position to benefit from the strong demand in light trucks, especially pickups and SUVs and the replenishment of crossover vehicles.
AAM's adjusted EBITDA in the third quarter of 2021 was $183 million or 15.1% of sales.
This compares to $297 million last year.
Excluding the impact of metal markets and currency, our EBITDA margins would have approximated 19%.
This is a testament to our optimization efforts and our strong cost control, yielding strong EBITDA conversion.
AAM's adjusted earnings per share in the third quarter of 2021 was $0.15 per share compared to $1.15 in the third quarter of 2020.
As for cash flow, we continue to generate positive free cash flow in the third quarter.
AAM's adjusted free cash flow was approximately $69 million.
Earlier this year, we announced a development agreement with REE.
We are pleased to share that we have secured an initial platform business award with our partner, and AAM plans to supply REE with high-performance electric drive units for its highly modular and disruptive REEcorner technology that enables full flat EV chassis for multiple applications.
This is a great electrification opportunity for AAM and its validation of our innovative industry-leading advanced electric drive technology, and we're excited to build upon this win with REE going forward.
Investors and other interested parties may have an opportunity to see our will and drive units and other EDU portfolio on display at trade shows beginning in January of 2022.
In addition, AAM announced today that we will be supplying track right differentials for the new GMC Hummer EV.
These differential subassemblies distribute power generated by the electric drive motor to the left and right wheels.
This enhances the experience for drivers looking for exceptional vehicle performance, both on and off road.
We are very happy to support GM on this great product, and we look forward to spy GM for their future electric driveline needs.
Our strategy and approach to the market continues to take hold.
Our opportunity to succeed in full electric drive units, subassemblies and components are well displayed with these two announcements.
As we all know, electrification is coming fast, and it's a great growth opportunity for AAM.
We have a strong product portfolio in EDUs and e-beam axles, gearboxes, subassemblies and components.
As such, our technology is guarding interest around the globe from new and established OEMs from small cars to light commercial vehicles.
We are in numerous discussions with manufacturers, and our business prospects look very positive.
Because of our deep driveline experience, we believe we have an edge among the competition, especially when it comes to systems integration and NVH.
Before I transition to Chris, I want to talk about the industry supply chain challenges and our financial guidance.
What the industry has and continues to experience is unprecedented.
A lack of semiconductor availability continues to drive high production volatility with very minimal warning.
Additionally, rising commodity costs, labor shortages, logistical challenges and port delays continue to stress the value chain.
We are hoping to see semiconductor stabilization over the next successive quarters, but it's difficult to ascertain when the industry will return to normal as global demand for chips remain strong and new capacity will take time to come online.
We expect this issue will continue well into 2022 and possibly into 2023.
That said, our priority at AAM is to execute our game plan, which means to produce high-quality products, deliver on time and be cost-efficient to support our customers and protect the continuity of supply regardless of the operating conditions, and we're doing just that.
One of the management's top priority is to diligently optimize the cost structure and improve efficiency, and we are doing that.
Now let's discuss our financial guidance.
Operating uncertainty continues in the fourth quarter, especially with the availability of semiconductors and rising commodity prices.
And as such, we have updated our guidance.
For the full year, we now target revenue in the range of $5.15 to $5.25 billion, adjusted EBITDA in the range of $830 million to $850 million and adjusted free cash flow of approximately $400 million.
In conclusion, we had a good and solid operating quarter.
We did what we do best, that is we delivered operational excellence.
The team delivered positive adjusted earnings and adjusted free cash flow under a very difficult operating environment.
We are confident that our strong operating fundamentals should support solid financial performance, especially as volumes recover over time.
In the meantime, we continue to secure our core truck, SUV and crossover business and generate strong cash flow to fund our electrification future.
In addition, we will continue to invest in advancing our electrification platform technology and our overall EV portfolio to serve multiple vehicle segments.
Our goal is to be the electrification supplier of choice for the broader OEM community, and we are making primary index-related inputs to metal materials that we purchase.
You may recall, we hedged this risk with our customers by passing through the majority, but not all of these index-related changes.
The metal portion of this column reflects these elevated pass-throughs on a year-over-year basis.
For the first three quarters of 2021, metal markets in a foreign currency have increased our revenues by approximately $212 million, and we expect this to be well over $300 million for the full year.
Now let's move on to profitability.
Gross profit was $165.6 million, or 13.7%, of sales in the third quarter of 2021 compared to $249.8 million in the third quarter of 2020.
Adjusted EBITDA was $183.2 million in the third quarter of 2021 or 15.1% of sales.
This compares to $297.1 million in the third quarter of 2020.
You can see a year-over-year walk down of adjusted EBITDA on Slide 8.
The return of COVID volumes added approximately $16 million, but was more than offset by the negative impact from the production volatility stemming from the semiconductor disruptions in the amount of $83 million.
Last year, we also had a $22 million benefit from an ED&D recovery and a customer settlement that did not recur in 2021.
But even through all these disruptions in the quarter, AAM still delivered $17 million of net performance.
As I just mentioned in our sales highlights, we are facing significant year-over-year increases in commodity metal markets.
The retained portion impacting this quarter plus foreign currency was $31 million.
You can see on our EBITDA walk, the dynamic this has on our margin calculations.
If you exclude the impact of this pass-through dynamic, our margins would have been significantly higher, as noted on our walk.
Let me now cover SG&A.
SG&A expense, including R&D, in the third quarter of 2021 was $90.5 million, or 7.5% of sales.
This compares to 4.7% of sales in the third quarter of 2020.
The AAM's R&D spending in the third quarter of 2021 was $34.7 million compared to $18 million in the third quarter of 2020.
Recall, we received significant engineering and development recovery last year of approximately $15 million.
The third quarter of 2021 incurred a sequential quarterly increase in R&D, in line with our expectations.
We will continue to focus on controlling our SG&A costs, while at the same time, investing in technologies and innovations to achieve our pivot to electrification.
We do expect R&D spend to increase in the coming quarters as we launch new programs and continue to pursue meaningful opportunities in the electric vehicle business as we experienced significant customer interest in our new products and technology.
Now let's move on to interest and taxes.
Net interest expense was $47 million in the third quarter of 2021 compared to $50.5 million in the third quarter of 2020.
We expect this favorable trend to continue as we benefit from continued debt reductions.
In the third quarter, we redeemed $100 million of our 6.25% notes due 2025 and refinanced the remaining $600 million balance.
In the third quarter of 2021, we reported an income tax benefit of $13.6 million compared to a benefit of $22.5 million in the third quarter of 2020.
As we near the end of 2021, we expect our effective tax rate to be approximately 10% to 15%.
We would also expect our cash taxes to be in the $25 million to $30 million range.
Taking all these sales and cost drivers into account, our GAAP net loss was $2.4 million, or $0.02 per share, in the third quarter of 2021 compared to an income of $117.2 million, or $0.99 per share, in the third quarter of 2020.
Let's now move on to cash flow and the balance sheet.
Net cash provided by operating activities for the third quarter of 2021 was $89.8 million compared to $249.5 million last year.
Capital expenditures net of proceeds from the sale of property, plant and equipment for the third quarter of 2021 was $33.2 million.
Cash payments for restructuring and acquisition-related activity for the third quarter of 2021 were $9 million.
The net cash outflow related to the recovery from the Malvern fire we experienced in September of 2020 was $3.5 million in the quarter.
However, we anticipate the Malvern fire to have a neutral cash impact for the full year as timing of cash expenditures and cash insurance proceeds aligned over time.
In total, we would expect $55 million to $65 million in cash payments for restructuring and acquisition costs in 2021.
Reflecting the impact of this activity, AAM generated adjusted free cash flow of $69.1 million in the third quarter of 2021.
From a debt leverage perspective, we ended the quarter with net debt of $2.6 billion and LTM adjusted EBITDA of $930.2 million, calculating a net leverage ratio of 2.8 times at September 30.
We are focused on improving the balance sheet and delivering on our goal to improve our leverage this year.
We have made meaningful progress in reducing our gross debt outstanding and reducing our leverage ratio by more than a full turn as of the end of the third quarter.
Before we move on to the Q&A portion of the call, let me close out my comments with some thoughts on our 2021 financial outlook.
We expect adjusted EBITDA to be in the range of $830 million to $850 million.
Just as a reminder, investors need to consider the impact of the metal market pass-throughs as it relates to our margin calculations when comparing from period to period.
In periods and environment such as this, it is meaningful.
We expect to generate approximately $400 million of adjusted free cash flow in 2021, or nearly 50% adjusted free cash flow to adjusted EBITDA conversion.
We expect our capital expenditures at less than 4% of sales as our capital reuse and optimization efforts continue to deliver results.
Our updated outlook is based on the latest and best information we have regarding customer production schedules.
We continue to assume our customers will prioritize building full-size pickup trucks and SUVs through the end of the year with minimal disruptions.
However, the operating environment remains choppy with multiple factors posing a risk to the supply chain.
As volumes begin to normalize, we should be in a great position to leverage that environment to generate profits and cash flow.
This in turn will be used to support our highly advanced research and development initiatives in electrification and solidly position us for future profitable growth aligned with our capital allocation priorities.
We have reserved some time to take questions.
So at this time, please feel free to proceed with any questions you may have. | q3 adjusted earnings per share $0.15.
q3 loss per share $0.02.
q3 sales $1.21 billion.
for fy 2021 targeting sales in range of $5.15 billion - $5.25 billion.
for fy 2021 targeting adjusted ebitda in range of $830 million - $850 million.
adjusted ebitda in q3 unfavorably impacted by lower sales as result of semiconductor shortage by about $83 million.
sales for q3 of 2021 were unfavorably impacted by semiconductor chip shortage by approximately $245 million. | 1 |
A replay for today's call will be available on our website for a seven day period beginning this evening.
Today's call may also contain non-GAAP financial measures.
Since we last reported in July, we have seen a fundamental shift in the natural gas market.
Current world events demonstrate the critical importance that natural gas will play in our energy future.
Natural gas futures for 2022 through 2026 have rallied approximately $0.75, which has translated to a meaningful increase to our near-term free cash flow projections.
World events have underscored the important role that natural gas plays in the world's energy ecosystem, not only in reliability and costs, but in meeting our global climate goals.
What we are witnessing in Europe and Asia is a crisis borne out of an undersupplied traditional energy sources, one that highlights the dislocation between the perceived good intentions of addressing climate change through policies of elimination and how these policies play out in the real world.
We are unfortunately seeing the predictable outcomes of an underinvestment in traditional energy resources with both continents having to ration energy in hopes of maintaining sufficient supply to make it through the winter.
While defenders of these policies may claim that these events are isolated in transitory, we believe they are chronic symptoms due to a structural underinvestment in traditional energy resources.
And unfortunately, but yet predictably, we are seeing the adverse environmental ramifications of this, as just a couple of weeks ago, China has announced that it's rethinking the pace of its energy transition and ramping up coal production.
This is not the way to address climate change.
As one of the largest exporters of natural gas, the United States needs to recognize the role it plays, not only in the solution, but also the problem.
The solution is American shale.
We are fortunate to be one of the few countries in the world that has an abundance of energy resources and more so in abundance of the lowest cost, lowest emissions energy resources that is exportable, namely Appalachian natural gas.
During the shale boom, technological breakthroughs, investor support and the innovation and efforts of American natural gas workers translated American shale into low-cost, reliable, clean power, replacing high emissions coal and laying the foundation for solar and wind to play a supporting role with the results being the U.S. leading industrialized countries in emissions reductions.
This model is replicable on a global stage, but only if the United States takes on a leadership role.
For example, if we were to replace only China's new build coal power plants with natural gas, we would eliminate approximately 370 million tons of CO2 equivalent per year.
That number is roughly equivalent to the emissions reduction impact of the entire U.S. renewable sector, which leads to the problem.
The problem is that the United States and advocates for policies of elimination have failed to understand the key role that American shale plays in the global energy ecosystem.
The United States represents about 1/4 of global natural gas supply.
Appalachia alone represents almost 10%.
What that means is that global demand has looked all around the world and, instead, we need almost 1/10 of our natural gas coming from Appalachia.
Regrettably, we've canceled multiple pipelines in the last several years, LNG facilities have stalled, capital has been pulled out of the system, all the while demand has grown, and now we're seeing the results.
U.S. natural gas and more specifically, Appalachian natural gas has the opportunity to provide affordable, reliable, clean energy to the world.
But to do that, we need support in building more infrastructure.
A failure to support pipeline and export infrastructure would effectively advocate the leadership role that the United States is poised to play in addressing global climate change to countries that likely do not have the resources or political desire to do so.
Now to talk more about the gas macro specifically and how it is impacting our business.
There are a number of bullish trends for the global natural gas market that we believe underpin a long-term structural change of the curve.
First, severe underinvestment in supply across all hydrocarbons and associated infrastructure over the past few years has contributed to a global scarcity of accessible traditional energy sources.
Second, Solar and wind have reached enough scale in global power markets that their intermittency is driving structural volatility, driving demand for reliable energy sources like natural gas to stabilize the grid.
Third, environmental pressures and governmental regulations on infrastructure have limited the ability for energy to go where it is needed most, creating market inefficiencies and restricting investments across the space, limiting the ability of producers to react to supply demand imbalances.
And fourth, a continued focus on low-cost, reliable and clean energy sources has increased the prominence of the role of coal-to-gas switching as one of the most impactful, actionable and speedy opportunities for significant progress in reducing global emissions.
These are the main reasons that global natural gas prices rose over $20 per dekatherm during the quarter, with the back end of the futures curve having also revved nearly $1 in the past six months.
They are also why we see structural change in the curve sticking.
While we have been vocal about our bullish view of natural gas prices for some time, the speed of the current price escalation came sooner than we anticipated.
Our reasons for hedging 2022 production at the levels we did while continuing to keep 2023 exposure open is simple: We believe that regaining our investment-grade rating and reducing absolute debt levels best positions EQT shareholders to fully capture these thematic, long-term tailwinds in the commodity.
As you look across the energy sector, it's clear that traditional energy companies are being valued at a steep discount.
We believe this is principally a result of views on a long-term sustainability of traditional energy sources impacting terminal value.
We believe that markets have overshot in this regard, especially so as it pertains to natural gas.
And that events like the current global energy crisis, in particular, as to how they are contributing to a step backwards in our efforts to address climate change, we will make this readily apparent to policymakers and investors alike.
And we believe that at that time, there will be a rerating within the sector, principally concentrated on companies like ours that are differentiated in their sustainability, both financially and on an ESG basis.
Now I'd like to give an update on our free cash flow projections.
The structural shift in the commodity curve, along with some hedge repositioning in 2021 and 2022, have had a positive and material impact on our free cash flow projections.
In 2021, we are now expecting to deliver approximately $950 million in free cash flow generation.
In 2022, our preliminary estimates are $1.9 billion, with 65% of our gas hedged.
As our hedges roll off in 2023, we see free cash flow generation potential growing even further to approximately $2.6 billion, equating to an approximate 30% free cash flow yield for a company that expects to be investment grade, highlighting how robust the free cash flow generation is from our business.
In addition to the shipping commodity market, we have several other factors driving improved free cash flow generation, including our contracted gathering rate declines, more efficient land capital spending, shallowing base declines and FTE optimization, which we have just announced.
As such, we are updating our 2021 through 2026 cumulative free cash flow projection to over $10 billion, a 40% increase since our July estimate and materially above our current market cap.
This extensive free cash flow generation provides us with the ability to return a substantial capital to shareholders while simultaneously enhancing our balance sheet.
And as previously mentioned, we think there is still running room.
Further, this structural gas price improvement has solidified our execution of shareholder-friendly actions in 2022, which we intend to formally announce before the end of 2021.
While we are acutely aware of the investor appetite for return of capital, one of the key considerations as we finalize our plans is leverage management.
However, we want to be clear that attaining investment grade or a certain leverage target is not a precondition to initiating shareholder returns.
With our hedge position and strong free cash flow, we can accomplish both debt reduction and shareholder returns as we create our debt retirement glide path.
This business is capable of returning tremendous amount of capital to shareholders while maintaining optimal leverage.
Bottom line is we are projected to have approximately $5.6 billion in available cash through 2023.
And if 100% of that cash was allocated to shareholder returns, we would still be left with leverage of sub 1.5 times.
Those are some very compelling stats, and we look forward to executing on this robust capital allocation strategy in the very near term.
I'll briefly cover our third quarter results before moving on to some strategic and financial updates.
Sales volumes for the second quarter were 495 Bcfe, at the high end of our guidance range.
Our adjusted operating revenues for the quarter were $1.16 billion.
And our total per unit operating costs were $1.25 per Mcfe.
During the third quarter of 2021, we incurred several onetime items totaling approximately $116 million, which impacted our financial results and free cash flow generation.
First, we purchased approximately $57 million of winter calls and swaptions to reposition our hedge book to provide upside exposure to rising fourth quarter '21 and all of 2022 prices, which I'll discuss in more detail in a moment.
Second, we incurred transaction-related costs, mostly from Alta of approximately $39 million.
And finally, we incurred approximately $20 million to purchase seismic data covering the area associated with the Alta assets, which hit exploration expense.
Our third quarter capital expenditures were $297 million, in line with guidance.
Adjusted operating cash flow was $396 million.
And free cash flow was $99 million.
Rising commodity prices and actions taken to unwind fourth quarter hedge ceilings have resulted in an increase to our fourth quarter free cash flow expectations of approximately $200 million.
But at the midpoint, we expect fourth quarter sales volumes to be 525 Bcfe, total operating cost of $1.25 per Mcfe, capital expenditures of $325 million and free cash flow generation of $435 million.
Turning to some more strategic items, I'd like to discuss the actions taken during the third quarter to optimize our firm transportation portfolio.
First, we successfully sold down 525 million a day of MVP capacity, which when combined with 125 million a day previously sold down, amounts to approximately 50% of our original capacity.
The terms are governed by an Asset Management Agreement, pursuant to which EQT will deliver and sell certified, responsibly sourced gas to an investment-grade entity for a six year period.
EQT will manage the capacity and retain access to the premium Southeast markets, while the third-party entity will be responsible for all financial obligations related to the capacity.
This transaction meaningfully reduces our firm transportation costs.
Going forward, we believe that retaining our remaining $640 million a day of MVP capacity provides appropriate diversity to our transportation portfolio.
And we do not intend to sell down any additional capacity at this time.
During the quarter, we were also successful in securing 205 million a day of Rockies Express capacity, with access to the premium Midwest and Rockies markets.
As part of the agreement, the parties agreed to significantly discount the reservation rates during the first 3.5 years of the contract, which results in a material uplift to price realization and margins during that period.
In the aggregate, we expect these arrangements to lower our go-forward firm transportation costs by approximately $0.05 per Mcfe, while simultaneously improving realized pricing.
Additionally, we are currently working on several smaller firm transportation optimization deals, which, if executed, are expected to further enhance margins and price realizations.
Furthermore, our RSG program is ramping up.
The six year, 525-million-a-day contract, we believe represents the largest RSG transaction done in the marketplace and highlights the accelerating end market demand for low methane intensive natural gas.
I'll now move on to some hedging activity initiated during the quarter, which effectively unlocked upside exposure to rising prices.
Since the end of the second quarter, we have seen the Henry Hub contract price appreciate, backed by modestly tightening U.S. fundamentals and rising volatility.
Couple that with energy shortages occurring around the world, we believe the U.S. could see extreme price events this winter.
By early August, we have revised our hedge positioning to one that participates in more upside while still locking in the necessary cash flows for progressing back to investment grade.
In essence, we removed approximately 28% and 13% of tax for ceilings for the balance of 2021 and all of 2022 and lowered our floor percentages by 11% and 9%, respectively.
We were able to do this by purchasing a significant number of winter call options at very attractive prices and strike levels that are currently in the money.
These call options maintain our downside protection, capitalize on rising volatility and open our portfolio to increase realizations.
In addition to our winter call options, we also purchased swaps in 2022 by taking advantage of the backwardation in the market to purchase swaps at points on the curve we felt to be undervalued.
This is expected to allow us to capture stronger pricing in 2022 well after we are through the winter.
These actions resulted in a onetime cost of approximately $57 million in the third quarter and approximately $18 million in the fourth quarter, with the current market value sitting at well over three times the execution cost.
For our 2023 hedge book, which sits at under 15%, we expect to hedge with a more balanced and opportunistic approach as we have reduced debt and achieved our investment-grade metrics in 2022.
At a high level, we envision a lower hedge percentage, utilizing structures that enable upside participation to capture our anticipated long-term appreciation of natural gas prices and increased volatility.
Last, we remain relatively unhedged on our liquids volumes for 2022 and 2023 at less than 15%, which represents about 5% of our volumes and 7% of our revenues.
Moving on to a quick update of leverage and liquidity.
Pro forma the full year impact of Alta and the removal of margin postings, our year-end 2021 leverage sits at 1.8 times and is expected to decline to 0.9 times by year-end 2022 and 0 leverage by year-end 2023 without the impact of shareholder returns.
If you add all our free cash flow through 2023, plus the $700 million in current cash margin posting, we are looking at $5.6 billion in cash available for shareholder returns and leverage management.
So we have the ability to retire substantial debt, achieve optimal leverage and provide robust returns to our shareholders.
Stay tune for a more formal framework before year-end.
As of September 30, our liquidity was $1.2 billion, which included approximately $0.7 billion in credit facility borrowings largely related to margin balances tied to our hedge portfolio.
As of October 22, our margin balance sits at approximately $0.4 billion and our liquidity will end October at around $1.5 billion.
With respect to margin postings, we've been able to manage these nicely by working with our hedge counterparties, many of which are also [Indecipherable] revolver.
We continue to make progress on lowering our letters of credit postings under the credit facility, which dropped approximately $0.1 billion during the third quarter to $0.6 billion, and it declined another $0.1 billion through October 22.
From mid-2020, we have effectively cut our letters of credit in half from approximately $0.8 billion to an anticipated $0.4 billion by year-end 2021.
And as a final reminder on liquidity, virtually all margin postings and letters of credit go away when we achieve investment-grade rating.
We are one notch away from IG with all three agencies.
And when combined with the structural gas macro tailwinds and EQT's robust free cash flow profile, we believe it's only a matter of time until we regain our investment-grade rating.
These include: one, the compelling and structural positive momentum driving the gas macro backdrop, setting up robust and sustained free cash flow generation; two, the announcement of a shareholder return framework that is right around the corner; three, an investment-grade rating that is on the horizon, further driving increased free cash flow generation and improved liquidity; and lastly, our modern approach and ESG leadership will continue to drive sustained, long-term value creation for all of our stakeholders in the sustainable shale era. | sees fy 2021 same store noi change down 8.5% to down 7.5%. | 0 |
Erik Gershwind, our chief executive officer; and Kristen Actis-Grande, our chief financial officer, are both on the call with me.
We continue to work remotely at MSC.
So please bear with us if we encounter any technical difficulties.
Like last quarter, when I highlighted our recently created micro site dedicated to corporate social responsibility, I'd like to invite you to visit our completely redesigned investor relations web page.
We have made it much easier to find information and add content we think you will find useful.
These risk factors include our comments on the potential impact of COVID-19.
I hope that everybody remains safe and healthy.
As we close the books on fiscal '21 and we kick off our fiscal '22, our transformation story is gaining steam.
Several years ago, we began repositioning MSC from strictly a spot-buy supplier to a mission-critical partner on the plant floor of Industrial North America.
Along the way, we execute several significant changes.
We reimagined our value proposition, reengineered our supply chain, reshaped our sales force, and updated our technology infrastructure.
The pandemic came, and we used it as a catalyst to accelerate the path we were already on.
We took several bold steps to rethink how we work and to redeploy capital from back office into growth.
At the start of fiscal '21, we rolled out Mission Critical, which was our plan to translate these changes into superior financial performance, and we outlined two, three-year goals.
First, to accelerate market share gains.
Our stated target was to reach at least 400 basis points of growth above the IP index by the end of our fiscal 2023.
Our first base camp would be this past quarter, our fiscal '21 fourth quarter, where we expect it to be at least 200 basis points above IP.
The second goal was to restore return on invested capital, or ROIC, into the high teens by the end of fiscal 2023.
And we would achieve this by leveraging growth, by executing on gross margin initiatives, and by delivering structural cost takeout of 90 to $100 million, helping to reduce opex as a percentage of sales by at least 200 basis points over that time period.
We're now one year into our Mission Critical journey, and I am very encouraged by progress.
With respect to our first goal market share capture, we're gaining momentum.
Our Q4 performance was strong, with ADS growth of roughly 500 basis points above IP.
Our growth continues to be powered by the execution of the five growth levers that we outlined at the start of the fiscal '21.
And those are metalworking, solutions, selling our portfolio, digital, and diversified end markets.
We're also seeing improvement in ROIC.
After adjusting out nonrecurring costs, adjusted ROIC was 15.4% at the end of Q4, an improvement of approximately 60 basis points over the past year.
And there's two important drivers behind this.
We held gross margins flat on higher sales dollars and had strong price realization in a robust inflationary period to offset mix headwinds.
Our structural cost takeout also helped drive profitability, and I'll speak more to that in just a minute.
The second driver of improved ROIC was our balance sheet, as we brought down average working capital versus prior year.
I'd add that our board just approved ROIC as a metric driving long-term incentive compensation.
Back to our Mission Critical program.
We achieved $40 million of cost savings in fiscal '21, exceeding our original target of 25 million.
And we're redeploying a good portion of these savings back into growth investments that will further fuel revenue growth, and hence, improve operating leverage.
We've redeployed field sales headcount from back-office into growth drivers, including metalworking, government, and our business development program.
We're approaching pre-COVID levels on our vending machine signings and our implant program is gaining traction, finishing fiscal '21 at just over 7% of company sales, as compared to 5% a year ago.
We continue to upgrade our web infrastructure, including a new search engine, product information platform, and user experience.
These have started, and it will continue to drive improved performance through e-commerce.
We've executed all of this in the face of very challenging conditions, including severe supply chain disruptions, substantial cost inflation, and extreme labor shortages.
And while we're certainly not immune to these challenges, I've been quite pleased with our team's response to navigating these choppy waters.
We've increased inventory significantly and are leveraging our good, better, best product offering to offer our customers alternatives.
As a result, while our service level is not yet back to pre-COVID levels, it is well above most of the industry and is fueling market share capture.
On the cost side, we are seeing significant inflation in wages, freight, product costs, and more, and our team has worked hard to minimize the impact of these.
Our structural cost and productivity efforts are buffering the effects on our P&L.
Looking ahead to fiscal '22, our outlook is positive.
We intend to build on this momentum despite the near-term challenges with supply chain disruption and inflation.
With respect to revenue growth, we're aiming for at least 300 basis points of growth above IP, on our way to 400 basis points or more for fiscal 2023.
We'll target holding gross margins roughly flat for the third consecutive year by continuing strong price execution.
On the structural cost front, we expect to deliver roughly $25 million in incremental savings on top of the 40 million in fiscal 2021.
As Kristen will describe in just a bit, we expect this to yield incremental margins of 20% in the likely scenarios for the year.
I'll now turn to the details of the quarter and the latest test to what we see on landscape.
The demand environment remained strong during our fiscal fourth quarter.
The majority of our manufacturing end markets remain robust, with some isolated but acute pockets of softness like automotive.
This is reflected in the IP reading that continues to show growth and in sentiment reading such as the MBI index, which remain at high levels.
That said, the supply chain shortages and disruptions that we began to see in our fiscal third quarter have increased.
And while hard to quantify, are certainly constraining growth across the industrial economy in the near term.
Product scarcity, freight delays and extreme labor shortages are also resulting in significant inflationary pressures.
We are well positioned to navigate this environment, particularly when compared to the local and regional distributors who make up 70% of our market.
MSC's broad multi-brand product assortment, our high inventory levels, strong supplier relationships, and next-day delivery capabilities are all strengths that allow us to accelerate market share capture.
Turning to our performance.
You can see our reported numbers on Slide 4 and adjusted numbers on Slide 5.
Sales were up 11.1%, or 12.9% on an average daily sales basis.
Our non-safety and non-janitorial product lines grew 20%, while sales of safety and janitorial products declined roughly 14%.
Looking at our performance by customer type.
Government sales declined nearly 30% due to difficult janitorial and safety comps.
National Accounts improved their growth rate into the mid-teens, while our core customers maintained their growth rates.
DCSG grew in the low double digits.
September continued the trend of a low double-digit growth rate with ADS growth of 11.1%.
Our non-safety and non-janitorial growth was roughly 15% [Inaudible] 11%.
Keep in mind that the difficult safety and janitorial prior-year comparisons continue for the first half of our fiscal '22 and particularly the rest of our fiscal first quarter before easing in the back half of the year.
Kristen will speak more about our fiscal '22 assumptions when she discusses our annual operating margin framework in just a bit.
With regards to the pricing environment, it remains strong as product inflation continues pretty much across the board.
Supplier pricing moves led us to take another increase in August, and solid realization of our June increase allowed us to post the gross margin of 42% for the quarter, down just 30 basis points from our fiscal third quarter, which is less than our typical seasonal drop.
Continued price escalations from suppliers and increasing inbound freight costs will be a headwind in the coming quarters, and we'll look to offset this with further pricing actions.
I'll now turn things over to Kristen, who will cover our financials, Mission Critical progress, and our fiscal '22 annual operating margin framework.
I'll begin with a review of our fiscal fourth quarter and then update you on the progress of our Mission Critical initiative.
Our fourth-quarter sales were 831 million, up 11.1% versus the same quarter last year.
We had one less selling day this year in our fourth quarter.
So on an average daily sales basis, net sales increased 12.9%.
Erik gave some details on our sales growth, but I'll just reiterate that the non-safety and non-janitorial ADS sales grew 20% in the quarter, while our safety and janitorial sales declined 14%.
Our gross margin for fiscal Q4 was 42%.
And as Erik mentioned, was down 30 basis points from our third quarter and up 40 basis points from last year.
Operating expenses in the fourth quarter were 253.3 million or 30.5% of sales, versus 227 million or 30.4% of sales in the prior year.
It's worth noting that our fourth quarter operating expenses include nearly 8 million of expense add-back from prior year COVID cost containment measures.
Opex also increased as inflation challenges began in the fourth quarter.
Excluding approximately $1 million of acquisition-related costs, adjusted opex was 252.1 million or 30.3 as a percent of sales.
As expected, our adjusted operating expenses came down sequentially from Q3 due to volume-based expenses from sequentially lower sales dollars and lower incentive compensation.
We also incurred approximately 4.4 million of restructuring and other related charges in the quarter.
Our operating margin was 11%, compared to 9.8% in the same period last year.
Excluding the acquisition-related costs, as well as the restructuring and other related costs, our adjusted operating margin was 11.7%, versus an adjusted 11.2% in the prior year.
Adjusted incremental margin for our fiscal fourth quarter was 15.3%.
GAAP earnings per share were $1.18, as compared to $0.94 in the same prior-year period.
Adjusted for the acquisition-related costs, as well as restructuring and other charges, adjusted earnings per share were $1.26 as compared to adjusted earnings per share of $1.09 in the prior-year period, an increase of 15.6%.
Turning to the balance sheet and moving ahead to Slide 9.
Our free cash flow was 69 million in the fourth quarter, as compared to 171 million in the prior year.
The largest contributor to the decline were increasing inventory and accounts receivable balances relating to our year-over-year sales lift.
I would also note that we repurchased 20 million of stock during the quarter or about 231,000 shares at an average price of 89.08 per share.
As of the end of the fiscal fourth quarter, we were carrying 624 million of inventory, up 26 million from last quarter.
We're actively managing inventory levels to support our customers as sales continue accelerating and in light of the ongoing supply chain disruptions.
Our capital expenditures were 16 million in the fourth quarter and for the full year, were 54 million, within our expected range of 50 to 60 million.
In addition, our fiscal year 2021 annual cash flow conversion or operating cash flow divided by net income was strong at 103%.
Our total debt at the end of the fiscal fourth quarter was 786 million, reflecting a 27 million increase from our third quarter.
As for the composition of our debt, 234 million was on our revolving credit facility, about 200 million was under our uncommitted facilities, and approximately 350 million was long-term fixed rate borrowings.
Cash and cash equivalents were 40 million, resulting in net debt of 746 million at the end of the quarter.
As of the end of September, our net debt was down to 728 million.
Let me now provide an update on our Mission Critical productivity goals.
Our original program goal was to deliver 90 to 100 million of cost takeout through fiscal 2023, and that is versus fiscal 2019.
As you can see on Slide 10, our cumulative savings for fiscal year 2021 were 40 million against our original goal of 25 million and our revised goal of 40 million.
We also invested roughly 23 million in fiscal 2021, which compares to our revised full-year target of 25 million.
As we have already begun our fiscal '22, I'll give you our expectations for this year.
We expect additional gross savings in fiscal '22 of 25 million and additional investments of 15 million.
These investments will continue to fuel share gains by building out our digital platform and expanding our sales force.
That will result in additional net savings for Mission Critical initiatives of roughly 10 million.
As a result of our strong progress on Mission Critical savings, we are increasing our total savings target to a minimum of 100 million through the end of fiscal '23, as compared to our fiscal '19 baseline.
Now let's turn to the fiscal year 2022 adjusted operating margin framework, which is shown on Slide 11.
Operating margins will naturally vary based on our sales levels.
The punchline is that, on an average daily sales basis, sales are up high single digits.
We would expect adjusted operating margin to be in the range of 12.3%, plus or minus 30 basis points.
And if sales are up mid-single digits, we would expect adjusted operating margin to be in the range of 12%, also plus or minus 30 basis points.
This means we expect to achieve 20% adjusted incremental margins at our likely revenue growth range of mid to high single-digit growth.
Let me cover some of our assumptions behind the framework.
With regard to sales levels, we are assuming an IP index somewhere between low to mid-single-digit growth, and we are targeting market outgrowth of roughly 300 basis points.
That yields company growth on an ADS basis in the mid to high single digits.
We're optimistic about our growth runway as most of our end markets are still in the early stages of recovery.
We aim to hold gross margins roughly flat with fiscal '21.
It's worth noting that in addition to volume-related expenses, we will face several challenging headwinds, such as labor and freight inflation of nearly 25 million, as well as COVID cost add-backs and additional COVID-related costs of more than 13 million.
I would point out that 3 million of those costs are for an incentive and marketing campaign to help us achieve compliance with the federal contractor vaccination mandate.
These costs will likely occur in our first quarter.
Please note that the quarterly progression, whether we're talking about sales growth or profitability levels, will not be a straight line.
For example, we expect our fiscal first-quarter sales to face more difficult comparisons due to safety, janitorial, and government sales.
Likewise, operating expenses will also face difficult comparisons in the first half of fiscal '22 as COVID-related cost-saving measures were still in place in the first half of fiscal 2021.
Finally, keep in mind that our fiscal year '22 includes a 53rd week, and you can find our fiscal calendar on our IR website.
Our Mission Critical transformation is gaining speed.
With our recent Q4 performance as another strong data point, our market share capture rate is growing.
Our efforts around gross margin and productivity improvements are beginning to lift ROIC toward our FY fiscal '23 goal of high teens.
Looking to fiscal '22, we're set up for a strong year, including 20% incremental margins in our likely growth range.
And we're accomplishing all of this in the face of difficult conditions.
Your work is allowing MSC to stand out from competition and delight our customers. | compname posts q4 adjusted earnings per share $1.26.
q4 adjusted earnings per share $1.26.
q4 earnings per share $1.18.
qtrly net sales of $831.0 million, an increase of 11.1%. | 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. | sees q4 non-gaap earnings per share $1.56 to $1.58.
issues q4 revenue and earnings per share guidance.
qtrly revenue of $7.8 billion was flat year-over-year as reported and grew 2% organic.
qtrly cardiovascular revenue of $2.745 billion increased 1% as reported and 3% organic.
qtrly cranial & spinal technologies revenue of $1.102 billion increased 2% as reported and 3% organic.
expects q4 organic revenue growth of approximately 5.5%.
qtrly neuroscience revenue of $2.144 billion increased 1% as reported and 2% organic.
q3 revenue results reflect unfavorable market impact of covid-19 and health system labor shortages on medical device procedure volumes.
qtrly medical surgical revenue of $2.290 billion decreased 1% as reported and increased 1% organic.
impact of covid-19 resurgence on healthcare procedure volumes, particularly in u.s., peaked in final weeks of our quarter in january.
expect healthcare procedures to reaccelerate post-omicron. | 1 |
Joining me on the call today are Tim Gokey, our Chief Executive Officer; and our Chief Financial Officer, Edmund Reese.
A summary of these risks can be found on the second and third page of the slides and a more complete description on our annual report on Form 10-K.
We will also be referring to several non-GAAP measures, which we believe provide investors with a more complete understanding of Broadridge's underlying operating results.
I'll begin with an overview of our key messages and an update on our third quarter results, including our performance against our strategic objectives.
It's an exciting time to be at Broadridge, and we have a lot to cover, so let's get started.
I'm pleased to share that Broadridge delivered strong third quarter results.
Recurring revenues and adjusted operating income both rose 8%.
Our results in both ICS and GTO are being propelled by long-term trends, including increasing digitization, mutualization and the democratization of investing.
These trends are driving strong new business growth, record growth in the number of shareholders and higher trading volumes.
We're also executing well against our strategic growth plan across governance, capital markets and wealth and investment management.
I'll highlight some of those initiatives in a few minutes.
A combination of those strong results and continued execution against our growth plans is giving us the confidence to continue to invest in our business.
We've continued to fund attractive investments in our products, platforms and people, including the pending acquisition of Itiviti.
We're also substantially increasing our guidance for fiscal year 2021 on both the top and bottom line.
We now expect recurring revenue growth of 8% to 10% and adjusted earnings per share growth of 11% to 13%.
While the new guidance reflects the impact of Itiviti, the bulk of this raise is organic, as Edmund will discuss.
The net result of all these points, our strong third quarter results, our continued internal and M&A investment and our outlook for fiscal 2021 is that Broadridge is executing well and is on track to deliver at the higher end of our 3-year financial objectives, including 8% to 12% adjusted earnings per share growth.
We remain focused on delivering long-term growth driven by secular trends and consistent investment across our governance wealth and capital markets businesses and, in turn, generate consistent, sustainable top quartile shareholder returns.
Broadridge's ability to generate those attractive returns is driven by executing on our clear long-term growth plan.
So let me update you on some highlights of our recent progress on Slide five.
I'll start with ICS.
Recurring revenues rose 11% to $586 million driven by revenue from new sales and very strong equity record growth.
The biggest driver of ICS' strong growth was revenue from new sales, and I'm pleased to see the impact of recent investments on our results.
Let me share two examples of our focus on product investment and strong execution are translating directly into increased revenue growth.
The first is the Shareholder Rights Directive II.
Over the past two years, we've created a shareholder communications hub, linking millions of investors across the EU and with hundreds of wealth managers, winning almost 300 new clients along the way.
Now as we enter proxy season, we're starting to see those efforts translate into new revenues helping to drive 80-plus percent growth in our international proxy business.
Virtual shareholder meetings continue to be a great example of product investment translating into new revenues.
Over the past year, we've upgraded our VSM capabilities to include the latest in virtual meeting capabilities, including state-of-the-art video and audio technology, improved Q&A functionality, one-click shareholder authentication and seamless proxy voting.
Those upgrades have helped retain our existing clients and have driven additional growth.
We are now on pace to serve almost 1,900 virtual shareholder meetings this proxy season, up from 1,400 last spring.
The second factor driving ICS was very strong equity record growth, which was 20% for the quarter.
It's clear, the move to reducing trading commissions has triggered a significant expansion in the number of market participants, which contributed to the increase in equity record growth.
That strong growth has been broad-based across our broker clients but has been most pronounced at the online brokers.
It has also been broad-based across issuers with 20% growth across both widely held stocks and those with more medium-sized shareholder bases.
We did see large increases at a handful of names, including so-called meme stocks like GameStop.
But those increases only contributed one point of the overall growth.
Commission-free trading is the latest step in a long-term trend.
It includes the rise of ETFs, lower trading costs across all participants and changes in investor interfaces that helps propel high single-digit equity and fund record growth over the past decade.
Broadridge has invested to scale its capabilities to meet that rise in demand, increase the digitization of critical regulatory communications and ensure that both new and existing investors get the information they need to understand the risks and participate in the governance of their investments.
Looking forward, we expect strong record growth to extend into the fourth quarter with our testing indicating 25% stock record growth for Q4.
To close off on governance.
Let me touch briefly on regulatory.
I want to congratulate Commissioner Gensler on his confirmation as SEC Chairman.
As we have with every chair and administration of both parties over the past 40 years, we look forward to assisting by investing in the next generation of technology, to help the SEC achieve its mandate to better inform and protect investors, all while reducing cost for registers and creating a fair return for our shareholders.
Let's turn now to our capital markets franchise.
Capital markets' recurring revenues slipped by 1% as steady international growth was offset as expected by lower license revenues.
We anticipate this period of flattish revenue to continue through the fourth quarter before picking up again in fiscal '22 as we onboard our very healthy backlog.
On the strategic front, our planned acquisition of activity represent a significant enhancement of our ability to drive value to our clients.
For those who may have missed our call a few weeks ago, let me remind you why we think this transaction is such an exciting step forward for our global capital markets franchise.
As a leading provider of order management and trade execution technology and connectivity solutions for financial institutions, Itiviti gives Broadridge a compelling opportunity to extend our capital market service offering.
The combination of Itiviti's front-office trading solutions, with Broadridge's leading post-trade back-office capabilities, will allow us to serve our client's entire trade life cycle from order to settlement.
With increasing high frequency and algorithm trading, it's increasingly important to serve clients across traditional boundaries.
This combination will bring critical data from the back to the front office to improve trading decisions, and it will enable our clients to simplify and improve their front-to-back technology stack and operating model.
The combination also strengthens our joint capabilities across equities, exchange-traded derivatives and fixed income, and it substantially extends our global reach, creating significant cross-selling opportunities and enhancing our relationships with blue chip clients.
The acquisition virtually doubles our business in APAC and further expands our reach in Europe.
That expanded footprint and scale positions us to take advantage of growing mutualization trends in both EMEA and Asia.
Itiviti adds more than $6 billion to Broadridge's total addressable market and will drive stronger growth, margins and earnings, as Edmund will discuss in his remarks.
Early feedback from our clients has been overwhelmingly positive, giving us added confidence that our front-to-back thesis and our near-term medium growth outlook are sound.
Also of note in our capital markets franchise is the continued development of our LTX fixed income trading platform.
LTX recently completed the first-ever multi-buyer digital block trading.
Enabling a single seller to simultaneously access the aggregated liquidity for multiple buyers is a milestone for the fixed income market, and I hope one of the many steps toward creating a more liquid corporate bond market.
To date, 10 dealers and over 40 asset managers have joined the LTX platform.
And an additional 14 institutions are signed in the onboarding process, including one of the world's largest fixed income managers.
Let's turn next to our wealth and investment management business, where revenues grew by 7%, driven by new client additions and higher equity trading volumes.
A key part of our growth strategy is to expand our sales of component solutions.
So it's terrific to see new client onboardings across a full range of our wealth and investment management products.
We also continue to make progress on building our industry-leading wealth management platform, which will help clients with the digital transformation of their wealth business.
We're already live with our average daily balance billing solution and industry milestone.
We're currently in active testing of our phone office workstation with select advisors, setting the stage for a period of extensive testing of the broader platform before going live.
Our sales and marketing efforts with several new clients to this platform are advancing well.
Clients see that using the Broadridge wealth platform to drive digitization by seamlessly connecting the back office functions we already provide, with additional select front and middle office capabilities, will drive a stronger top and bottom line by bringing new capabilities to advisors and clients while digitizing financial advisor, branch and back office interactions.
Another important part of our wealth strategy is developing a robust partner network to ensure that we can integrate cutting-edge capabilities from innovative partners.
Recent partnerships include Fligoo for predictive analytics and Anchor Bank for securities-based lending; and, a wealth management fintech accelerator.
These partnerships and others represent ongoing steps in building a network that will enable our clients to rapidly adopt new technologies.
When I spoke to you at the close of our fiscal third quarter a year ago, the economic outlook was deeply uncertain and from the New York area and much of the world was locked down.
My remarks at that time were focused on the steps we were taking to keep our associates safe and meet the needs of our clients in an unprecedented time.
Today, after 12 long months, there remains significant challenges and thinking, in particular, of our more than 3,000 associates in India and of their families and friends.
But the global outlook is unquestionably brighter, with increasing economic growth marching, hand-in-hand with rising vaccination rates.
The pandemic has also accelerated many long-term trends, including digitization, mutualization and next-generation resiliency.
And the lower cost and friction for investing is bringing in millions of new investors.
These changes are clearly having a significant impact across wealth management, governance and capital markets.
They're causing financial services leaders to rapidly adopt next-generation technologies.
And Broadridge is building the suite of capabilities that will help them navigate and win this period of change.
We do so from a position of strength.
We started the fiscal year last July expecting 2% to 6% recurring revenue growth and 4% to 10% adjusted earnings per share growth.
Our focus then was on driving enough expense savings to assure that we could continue to fund critical growth investments.
Fast forward nine months, and we are poised to deliver 8% to 10% recurring revenue growth, driven by a combination of strong new sales and healthy financial markets.
After achieving our expense targets, we're now investing heavily in new product capabilities, enhancing our global post-trade platform and building next-generation capabilities across digital communications, wealth management and fixed income trading, among other investments.
We're also adding talent and investing in our people to make Broadridge the best place for the most talented associates in our industry.
Last but not least, we're on the brink of closing our $2.5 billion acquisition of Itiviti, expanding our capital markets franchise and further strengthening our global footprint.
And yet even after those investments and the near-term dilution from Itiviti, we're positioned to deliver 11% to 13% adjusted earnings per share growth.
Broadridge is at its front foot and leaning into the opportunities we see ahead.
It has been a remarkable year.
Looking further ahead, we're on track to achieve the higher end of our 3-year growth objectives, driving strong recurring revenue and double-digit adjusted earnings per share growth.
We see long-term trends continuing to drive demand for our services.
And our investments are creating new avenues for growth long beyond our current 2-year objectives.
The future of Broadridge is brighter than ever.
We've asked a lot of our team over the past 12 months, and they're delivering.
They stayed focused on clients, and through them are helping to build better financial lives for millions.
As you can see from the Q3 financial summary on Slide seven, Broadridge delivered another strong quarter.
Recurring revenue grew 8% to $900 million.
Adjusted operating income also grew 8% to $284 million.
Margins declined 60 basis points to 20.4% as we successfully made the investments that we discussed last quarter in our technology platforms, in our products, our people.
Our operating income was partially offset by a higher tax rate in Q3 '21 as we grew over discrete tax benefits in Q3 '20.
So our adjusted earnings per share grew to $1.76 in the quarter, up 5% over Q3 '20.
Now let's turn the slide and get into the details of the quarter, starting with recurring revenue growth.
As I said, recurring revenue grew 8% in the quarter, powered by 7% organic growth, and comfortably within our historic mid- to high single-digit growth performance.
demonstrating the strength of our sustainable recurring revenue growth model.
As a result of that strong organic growth and an increase in our outlook for the fourth quarter, we're raising our guidance for recurring revenue growth to 8% to 10% for the full year, up from our prior guidance of growth at the higher end of 3% to 6%.
Now let's look at this quarter's recurring revenue growth by business on Slide nine.
I'll start with our ICS segment, where revenues grew by 11% to $586 million.
Regulatory revenues rose 20% to $290 million driven by the 20% equity record growth, higher mutual fund and ETF communications volumes and net new sales, including from our Shareholder Rights Directive II solution that Tim highlighted earlier.
We expect strong regulatory revenue growth to continue in the fourth quarter with, our current testing indicating 25% equity record growth.
After a strong 12 months, we now have significant penetration of our VSM solution across the S&P 500, and we expect issuer revenue growth to ease going forward as we start to lap the increase of VSM activity that began in Q4 '20.
Fund solutions revenue was flat as double-digit growth in data and analytics was offset by lower interest income from custodied accounts in our funds processing business.
Customer communications revenues were also flat with double-digit growth in our high-margin digital products, offset by lower print volumes due in part to the pandemic-depressed activity levels.
We expect growth in both our data-driven solutions and customer communications business to pick up in the fourth quarter as these headwinds ease.
Wealth and investment management revenues rose 7%, driven by the onboarding of new component sales and higher retail trading.
Capital markets revenues fell 1% of strong growth from international sales, was offset by $6 million in lower license revenues, which declined as expected.
As we said last quarter, this flat revenue growth will continue in the Q4 '21 before picking up in fiscal year '22.
Let's turn to Page 10, where we show more detail on volume trends.
Broadridge's recurring revenue growth benefits from underlying volume growth trends, including stock record growth.
Over the past decade, record growth across equity, mutual funds and ETF has grown 6% to 8%.
Recently, equity record growth has accelerated to 11% in Q4 '20 and continued to increase through the year to 20% in Q3 '21, surpassing the estimates from our January testing.
As I said, we expect these growth trends to continue and reach 25% in Q4 '21.
Mutual fund and ETF record growth picked up as well to 7%, more in line with our historical growth rates.
We are modeling a return to more moderate mid-single-digit growth across both equity, mutual fund ETF records for fiscal year '22, with stronger growth in the seasonally smaller first half and more moderate growth in the second half.
Touching briefly on trade volumes, which you'll see on the bottom of this slide.
This is the fifth consecutive quarter of aggregate double-digit volume growth.
This growth reflects the increase in volatility in retail investor engagement over the past year, which continued to be quite strong well into the third quarter.
More recently, trading volatility subsided during the second half of March, and we expect tougher trading volume comps in Q4.
Let's move to Slide 11 for a closer look at the drivers of our recurring revenue.
Organic growth at a very healthy 7% continues to be the largest component of our recurring revenue growth, and new sales remains the biggest driver with strong growth contribution from both ICS and GTO.
We also continued our long track record of revenue retention above 97%.
Internal growth contributed another three points as growth in ICS regulatory volumes more than offset the decline in GTO license revenue.
We've now fully lapped all of our fiscal year 2020 acquisitions.
Looking ahead to the fourth quarter, we expect Itiviti to add three points to fourth quarter recurring revenue growth.
Total revenue growth this quarter was stronger than usual, reaching 11%, with distribution revenue contributing three points due to the increased mailings that correspond with the high record growth and the increased event-driven activity this quarter.
Moving forward, we continue to expect the low to no-margin distribution revenue to decline over time as we focus on increasing higher-margin digital revenue across our governance business.
Event-driven communications remain an integral part of our client offering.
Event-driven revenues have climbed over the past four quarters to be more in line with our historical norms of about $50 million a quarter and reached $74 million in the third quarter, well above last year's unusually low $39 million.
Broadridge benefited from an increase in mutual fund proxy activity as well as a rebound in proxy contest volumes and capital markets transactions.
We expect fiscal '21 event-driven revenue to be more in line with the average that we've seen over the past seven years.
For modeling purposes, we're assuming $50 million to $60 million of event-driven revenues in the fourth quarter.
Turning to Slide 13.
Adjusted operating income grew by 8%.
Our adjusted operating income margin declined by 60 basis points, reflecting the continued investments that we're making in our technology platforms and product capabilities that we highlighted on our last quarterly call.
These investments, which support our long-term growth, have a short-term impact on margin expansion, but we remain on track to deliver approximately 50 basis points of margin expansion for the full year, right in line with our fiscal year '21 guidance and 3-year growth objectives.
This formula, forgoing near-term margin expansion and consistently investing in our technology platforms and products to drive long-term sustainable recurring revenue growth, will continue to be an important part of how we manage our business.
As a Chief Financial Officer focused on long-term growth, it's encouraging to see us making these types of investments across all of our product lines, giving us momentum toward future growth.
Our $124 million closed sales year-to-date are in line with our performance over the same period last year.
We continue to see strong demand for our ICS solutions, including regulatory and issuer communications and data solutions.
We remain on track to achieve our full year guidance of $190 million to $235 million for closed sales, which implies a fourth quarter range of $66 million to $111 million.
Historically, the closed sales performance in the last quarter of the year has been impacted by the timing of larger deals.
A handful of larger signings could propel us to the top end of our guidance range, and conversely, delays could put us at the lower end.
And I'll also note that we continue to feel good about our recurring revenue backlog, which was 12% of our fiscal '20 recurring revenues as of Q4 '20 and gives us great visibility into our top line growth.
Moving to capital allocation on the following slide.
We generated $136 million of free cash flow year-to-date, up $54 million over the first nine months of fiscal year '20 driven by higher earnings and strong working capital management.
During the first nine months of the fiscal year, we invested $205 million in building out our industry platforms and another $71 million in capex and software spending.
Our M&A investment through the first nine months of the year was 0, but that will change with our announced $2.5 billion acquisition of Itiviti, which I'll touch on in a moment.
Even after completing the Itiviti acquisition, Broadridge will remain committed to a balanced capital allocation policy, which prioritizes internal investment, growing our dividend, M&A and returning excess capital to shareholders.
Importantly, we are also committed to maintaining an investment-grade credit rating, which means we'll prioritize debt paydown over share repurchases and expect to limit ourselves to smaller tuck-in M&A opportunities over the next several quarters.
Given our strong free cash flow, we believe that we can comfortably achieve our new 2.5 times leverage target by the end of fiscal year '23.
Turning to capital returns on the right-hand side of the slide, our dividend has grown and remains in line with our historical 45% payout ratio.
On Slide 16, we are on track to close the Itiviti acquisition in the coming weeks.
So let me take a moment to give you some additional clarity about the expected impact that Itiviti will have on our financial performance.
I'll start with fiscal year '21.
We expect Itiviti to add $25 billion to $30 billion or one point to our full year recurring revenue growth, which equates to three points to our fourth quarter growth.
And the acquisition is expected to be modestly dilutive to our adjusted earnings per share growth.
In fiscal year '22, we expect Itiviti to add approximately $250 million or about eight points to our recurring revenue growth.
And we expect the acquisition to be accretive by approximately two to three points or roughly $0.10 to $0.15 to adjusted earnings per share growth.
Please note that Itiviti's results in both fiscal year '21 and fiscal year '22 will be negatively impacted by the accounting treatment of acquired revenue, which will reduce revenue recognition by approximately $30 million in total with 2/3 of that impact in fiscal '22.
This revenue haircut is incorporated in the numbers that I just shared with you.
Finally, I want to reiterate the commentary that I gave you when we announced the deal, about the impact on our 3-year growth objectives.
We expect Itiviti to add 2.5 to three points to our 3-year recurring revenue growth CAGR and, after interest, more than two points to our 3-year adjusted earnings per share CAGR.
Now turning to guidance on Slide 17.
We are raising our outlook for fiscal '21 recurring revenue growth to 8% to 10% from the higher end of 3% to 6%, and that includes one point of growth from Itiviti.
We are raising our guidance for total revenue growth to 8% to 10% from the higher end of 1% to 4%.
We continue to expect our adjusted operating income margin to expand to approximately 18%, up from 17.5% in fiscal year '20 as we balance near-term returns with continued investments to sustain long-term growth.
We expect adjusted earnings per share growth of 11% to 13%, up from the higher end of 6% to 10%, and that includes a 1-point drag from Itiviti.
Finally, as I noted earlier, we continue to expect closed sales in the range of $190 million to $235 million.
The Broadridge Financial model is working.
We are on track to deliver strong 8% to 10% recurring revenue growth.
That growth is fueling our ability to both invest and expand margins.
At the same time, our strong free cash flow business model enables us to pursue balanced capital allocation, commit to a rising dividend, fund investments in our platform and products and step up and make a significant M&A investment to grow our capital markets franchise.
The end result is that we're on track to deliver at the higher end of our 3-year financial objectives of 7% to 9% recurring revenue growth and 8% to 12% adjusted earnings per share growth.
It's a great example of how we manage our business to drive sustainable revenue growth, steady and consistent adjusted earnings per share growth and historically top quartile TSR. | q3 adjusted earnings per share $1.76.
sees 2021 total revenue growth of 8% - 10%.
sees 2021 non-gaap adjusted earnings per share growth 11% - 13%. | 1 |
I know many of you have had the opportunity to speak with Amber, our new Director of Investor Relations.
Ken has a proven track record of leading high-performing teams and delivering results at several diverse global organizations.
We are excited to have Ken on our team.
Ken will then provide additional financial details on the third quarter and then I'll come back to discuss our outlook for the fourth quarter.
Our global team continues to demonstrate tremendous resiliency, adapting the changing market conditions and working hard to service the demands of our customers.
I'm incredibly proud of how our teams have worked together during these challenging times to achieve such strong financial results, delivering record quarterly EBIT, double-digit EBIT margins in all three businesses and record free cash flow.
All of this was accomplished while maintaining our focus on keeping each other as well as our customers and suppliers healthy and safe, ramping up manufacturing operations throughout the quarter to service increasing customer demand and supporting our communities as we continue to operate through this global health crisis.
Before discussing our markets and financial results in more detail, I'll start with safety.
As you know, safety is a top priority for our company.
Year-to-date 57% of our global facilities remain injury free.
In the third quarter, while we continue to perform at a high level with a recordable incident rate of 0.73, this result was above our third quarter 2019 performance and reminds us of the daily focus we must have on safety in order to achieve an injury free workplace.
Turning to financial results, our performance this quarter was better than what we outlined during our last earnings call as we saw customer demand continue to improve throughout the quarter in most of our end markets.
Revenues were $1.9 billion, up 1% compared with the same period last year and adjusted EBIT was $289 million, up 4%.
These results continue to demonstrate the strength of our company's market leading position, broad product offering and improved operating efficiencies to generate substantial free cash flow and deliver sustainable shareholder value.
On our last two calls, I've discussed four key areas, we have focused on this year to ensure the strength and continuity of our business.
First, keeping our employees and other key stakeholders healthy and safe, second, staying closely connected to our customers, our suppliers and our markets, third, rapidly adapting our businesses to near-term changes in market conditions, while remaining focused on positioning us for long-term success, and fourth, ensuring a strong balance sheet with access to capital as needed.
We have managed these four priorities well through the pandemic and expect to finish the year strong, while we position ourselves for 2021.
Overall, we continue to see our end markets recover during the quarter, but at different rate.
Our residential markets, especially, in the United States are being fueled by robust demand for new single-family housing as well as increased repair and remodeling investments as owners upgrade their homes and expand their living spaces.
Our commercial and industrial markets are also seeing improvements, but we continue to expect these to recover at a slower pace as we finished 2020.
In the third quarter, our Roofing business delivered revenue and earnings growth.
Increased storm activity and continued remodeling growth drove significantly higher market demand in the quarter.
While our manufacturing and supply chain teams worked hard to service the higher demand, our volumes trail the overall market growth due to limited inventory levels entering the quarter.
We remain focused on improving our service cycles and plan to continue running our facilities at full capacity to meet near-term demand, while ensuring we are positioned to support our customers and service expected market demand in 2021.
In composites, volumes also continue to improve throughout the quarter with revenues down just 2%.
Our focus on specific end markets, such as building and construction and wind energy combined with our local supply chain model in specific geographic regions, continues to pay dividends as we grow our volumes.
This along with our continued focus to drive operational efficiencies through manufacturing productivity and network optimization led to double-digit EBIT margins in the quarter.
And in insulation, revenues also finished down 2% with EBIT margins of 11% driven primarily by the additional growth we saw in our North American residential fiberglass business.
As I stated earlier, we continue to see the U.S. housing market strengthening with demand around 1.4 million units on a seasonally adjusted basis for the last three consecutive months.
Given the market demand we are currently seeing and that is forecasted for 2021, we have initiated work to restart our batt & roll insulation line at our Kansas City facility.
We would expect to have this line back up and running during the second quarter of next year.
Our focus in this business has been to operate the most efficient and most flexible manufacturing network, which positions us to quickly respond to changing market conditions to service our customers and deliver strong financial performance.
As we continue to adapt our operations to service the changing market environment, we remain focused on generating strong free cash flow and maintaining an investment grade balance sheet.
Last quarter, we discussed our focus on evaluating our liquidity needs, prioritizing deleveraging the balance sheet and maintaining our dividend.
In the third quarter, given our cash flow, we were able to execute on all these areas, finishing the quarter with more than $1.7 billion of liquidity.
Before turning it over to Ken to discuss our third quarter financial results in more detail, there is one other item I would like to cover.
She will become the Senior Vice President of Corporate Affairs and General Counsel at Whirlpool Corporation.
During her five years with Owens Corning, Ava played a key role in shaping the direction of our company and driving our success.
We are currently exploring alternatives to identify her successor, and we'll make an announcement when our evaluation is complete.
First, let me say that I'm honored by the opportunity to join the OC team and to contribute to the future success of this company.
While only on day number 50, I'm already impressed with the resilience of the company and the dedication of our people.
Every day reaffirms for me that OC is truly global in scope and human in scale.
His leadership during this unprecedented time was crucial, and the company's financial strength is a testament to the quick and decisive actions taken by Prith and the leadership team.
Now turning to our results.
On Slide 5, the company's third quarter performance demonstrates the strength of Owens Corning and its ability to generate strong financial results in an improving, but still challenging environment.
The company has reduced its debt position and retains ample liquidity in light of the continued market uncertainty.
For the third quarter, we reported consolidated net sales of $1.9 billion, up approximately 1% over 2019.
In the quarter we saw solid revenue growth in our Roofing business while revenues in our Composites and Insulation businesses declined slightly.
Through the quarter, the residential recovery in the U.S. has continued to accelerate while commercial, industrial and non-U.S. residential markets have recovered at a slower pace as expected.
Adjusted EBIT for the third quarter of 2020 was $289 million, up $12 million compared to the prior year, highlighted by the continued recovery in residential end markets, primarily in the U.S. All three businesses achieved double-digit EBIT margins as a result of the company's market-leading positions and continued focus on our key operating priorities.
Net earnings attributable to Owens Corning for the third quarter of 2020 was $206 million, compared to $150 million in Q3 of 2019.
Adjusted earnings for the third quarter were $186 million or $1.70 per diluted share compared to $176 million or $1.60 per diluted share in Q3 2019.
Depreciation and amortization expense for the quarter was $120 million, up $8 million as compared to last year.
Our capital additions for the third quarter were $68 million, down $114 million versus 2019.
On Slide 6, you see adjusted items reconciling our third quarter 2020 adjusted EBIT of $289 million to our reported EBIT of $296 million.
During the third quarter, we recognized $7 million of gains on the sale of certain precious metals.
We've excluded these gains from our adjusted EBIT.
I would also like to highlight one item related to adjusted EPS.
We've adjusted out a $13 million non-cash income tax benefit related to regulations that were issued during the third quarter associated with U.S. corporate tax reform.
This adjustment is described in more detail in the notes of our 10-Q.
Slide 7 provides a high level overview of the changes in third quarter adjusted EBIT from 2019 to 2020.
Adjusted EBIT of $289 million increased $12 million as compared to the prior year.
Roofing EBIT increased by $53 million, insulation EBIT decreased by $11 million and composites EBIT decreased by $12 million.
General corporate expenses of $35 million were up $18 million versus last year, primarily due to higher incentive compensation expense associated with our improved financial outlook.
In addition, the timing of smaller one-time items more than offset benefits from our ongoing cost control initiatives.
Now I'll provide more details on each of the business results, beginning with Insulation on Slide 8.
Insulation sales for the third quarter were $681million down 2% from Q3 2019.
During the quarter, volume growth in North American residential fiberglass insulation was more than offset by lower selling prices for the overall segment and lower volumes and technical and other building insulation.
Volumes were down in technical and other due to the impacts of COVID-19, however, we saw some sequential improvement within the quarter.
EBIT for the third quarter was $73 million, down $11 million as compared to 2019.
The decline was driven by lower year-over-year selling prices, the negative impact of lower volumes in technical and other, and slightly higher delivery costs.
The benefit of higher sales volumes from the recovery in North American residential and favorable manufacturing performance, partially offset these impacts.
For the Insulation business overall, our sequential operating leverage from Q2 to Q3 was 48%, in line with the outlook provided on the Q2 call.
Sales in composites for the third quarter were $521 million, down 2% as compared to the prior year due to lower selling prices and unfavorable product mix.
Overall, sales volumes were flat year-over-year.
During the third quarter we saw certain regional markets began to recover and continued to see strong performance in our wind and roofing downstream specialty applications.
EBIT for the quarter was $55 million, down $12 million from the same period a year ago but up significantly from EBIT of $6 million reported in Q2 of 2020.
Our results continue to be impacted by COVID-19 demand variability.
The EBIT decline in the quarter was primarily driven by the negative impacts of production curtailments and lower selling prices, partially offset by favorable manufacturing performance.
Unfavorable customer mix and negative foreign currency translation were largely offset by lower selling, general and administrative expenses, input cost deflation and lower delivery costs.
Sequentially, from Q2 to Q3, we generated operating leverage of 40%.
Slide 10 provides an overview of our Roofing business.
Roofing sales for the quarter were $761 million, up 7% compared with Q3 of 2019, driven by 12% volume growth, which was partially offset by lower year-over-year selling prices and lower third-party asphalt sales.
In the third quarter, the U.S. asphalt shingle market grew significantly as compared to the prior year, primarily due to continued strength in repair and remodeling as well as increased storm activity.
EBIT for the quarter was $196 million, up $53 million from the prior year, producing 26% EBIT margins for the quarter.
The EBIT improvement was driven by higher sales volumes, input cost deflation and favorable manufacturing performance, partially offset by lower selling prices.
The current pricing environment has improved sequentially with the realization of our August increase, partially offsetting the year-over-year headwind from the lack of a spring price increase.
In addition, the benefit of asphalt cost deflation and slightly lower delivery cost more than offset the negative impact of lower year-over-year selling prices.
As a result, we maintained a favorable price-cost relationship in the quarter and cash contribution margins were solid, as we exited the quarter.
Turning to Slide 11, I'll discuss significant financial highlights for the third quarter of 2020.
We continue to manage our working capital balances, operating expenses and capital investments.
As a result of disciplined actions taken and the recovery of U.S. residential markets, our third quarter free cash flow reached a record quarterly level and our year-to-date free cash flow of $514 million was $232 million higher than the same period last year.
In the last earnings call, we highlighted the company's focus on strengthening liquidity, deleveraging the balance sheet and maintaining the dividend.
Based on our strong cash flow performance and deleveraging activities, we're operating within our target debt to adjusted EBITDA range of 2 to 3 times with ample liquidity.
I'd like to highlight our progress and evolution in this space.
During the quarter, we repaid the remaining $190 million that was drawn on our revolver at the end of the first quarter.
We also repaid the remaining $150 million balance of the term loan in advance of the February 2021 due date.
We maintained our dividend in the third quarter and have returned $159 million to shareholders so far this year through dividends and share repurchases.
As of September 30th, the company had liquidity of more than $1.7 billion, consisting of $647 million of cash and cash equivalents and nearly $1.1 billion of combined availability on our revolver and receivable securitization facilities.
We continue to focus on maintaining an investment grade balance sheet and are evaluating additional U.S. pension contributions in the range of $50 million to $100 million to further delever the balance sheet and improve our credit metrics.
Through our teamwork and consistent execution, we are positioned well to capitalize on both the near-term market recovery as well as longer-term secular trends.
However, we continue to face uncertainties with the pandemic and potential government responses and expect our financial performance to be impacted by market disruptions caused by COVID-19.
Broadly speaking, we have experienced a much faster recovery in our residential end markets, while commercial and industrial end markets are following at a slower pace.
Given this continued market performance, we would expect the company to deliver revenue and adjusted EBIT in the fourth quarter at or above last year, driven by our innovative product offering and broad market reach.
Based on trends we are seeing in October, I'll provide some additional details by business, starting with Insulation.
Within our North American residential business, we saw continued strengthening in U.S. new residential construction.
While lagged housing starts in Q4 will be higher versus prior year, we expect our volumes will be relatively flat based on current supply constraints and limited inventories.
In our technical and other building Insulation businesses, October volumes are trending down mid-single-digits versus prior year.
We expect year-over-year volumes will continue this trend through the fourth quarter based on a steady but slower recovery in commercial and industrial end markets.
Prices through the third quarter remained relatively stable in both our North American residential and our technical and other Insulation businesses, however, we continued to face a negative year-over-year price carryover.
While we are seeing positive traction from the mid-September residential insulation price increase, we don't expect to come positively yet in the fourth quarter.
As we move into 2021, we recently announced an 8% price increase for our U.S. residential Insulation business effective January 11th.
Overall for our Insulation business in the fourth quarter, we expect results to be slightly better than our EBIT in Q3.
In Roofing, third quarter industry shingle shipments were up about 25% with our volumes tracking below the market due to supply constraints driven by low inventories entering the quarter.
Our October shipments have started the quarter higher than prior year.
Based on current trends we could see year-over-year market volumes for the fourth quarter up a similar percentage to what we saw in the third quarter, depending on the timing of winter weather.
Given our third quarter volumes, we would expect to outperform the market in Q4 to service out-the-door demand and improve distributor inventory positions of our products.
In the fourth quarter, we should continue to see realization from our August price increase, offsetting the year-over-year headwind from the lack of a spring price increase.
However, we expect to see some continued pricing headwinds in the quarter driven by higher rebates versus 2019, due to this year's increased Roofing demand.
Deflation from expected seasonal declines of asphalt costs should result in another quarter of positive price cost mix.
Based on all these factors, roofing EBIT margins in the fourth quarter should remain strong, but could be slightly lower than Q3 due to seasonally lower shipping volumes.
In Composites, Q3 shipments improved throughout the quarter.
Given this trend, we could see volumes in Q4 similar to the first quarter with overall demand continuing to recover.
While transactional pricing remains relatively stable, we continue to expect a similar pricing headwind in Q4 as we realized in Q3.
As we work through our annual contract negotiations with customers, we've announced price increases in most of the regions we serve, which could impact 2021.
We remain committed to tightly managing our inventory levels, which will continue to impact our manufacturing performance in the fourth quarter as we curtail production to meet demand.
Similar to the last several years, we expect to see our overall fourth quarter revenue and EBIT performance similar to what we saw in the first quarter with an additional $5 million headwind related to rebuild costs.
With that view of our businesses, I'll discuss a few key enterprise focus areas.
We continue to closely manage our operating expenses and capital investments.
We expect corporate expenses for the company to be approximately $125 million, primarily due to additional incentive compensation tied to our earnings outlook.
And we expect capital investments to be at the high end of the range we previously provided of $250 million to $300 million.
In terms of our capital allocation, we remain committed to generating strong free cash flow into our target of returning at least 50% to investors over time.
So far this year we have returned $159 million through share repurchases and dividends and we'll pay our third quarter dividend of approximately $26 million next week.
In our last call, we said we would focus on deleveraging the balance sheet and maintaining our dividend, we increased liquidity to over $1.7 billion, paid down the revolver and term loan and paid our dividend in the quarter.
Going forward, we will continue to manage our liquidity needs, remaining focused on supporting the dividend, while evaluating additional pension contributions and potential share repurchases.
As I stated at the beginning of the call, our team continues to execute very well, adapting to changing market conditions while remaining committed to operating safely, servicing our customers and creating value for our shareholders. | quarterly adjusted earnings per share from continuing operations $0.23.
paid digital-only subscriptions totaled about 7,588,000 at quarter end, net increase of 455,000 subscriptions compared with end of q2 2021.
new york times sees q4 subscription revenue up 12%.
total subscription revenue in q4 2021 are expected to increase about 12 percent compared with the fourth quarter of 2020.
total advertising & digital advertising revenue in q4 of 2021 expected to increase in the mid-teens compared with q4 of 2020. | 0 |
I am Jessica Doran, Chief Financial Officer.
If you do not have a copy, it can be obtained in the Investor Relations section on our website at www.
Please note that we do not undertake to update such information to reflect the impact of circumstances or events going forward.
In addition, please be advised that due to prohibitions on selective disclosures we do not as a matter of policy disclose material that is not public information on our conference call.
Last quarter, my remarks centered on the extreme volatility on the market during March that has only happened once before during the Great Depression.
Here we are three months later and volatility has moderated and optimism has returned.
During the second quarter, the S&P 500 continued to rise on the growing dominance of the FANG stocks which now represent almost 13% of the index's market cap and 4.3% of the 500 companies earnings.
Well we have generally outperformed the markets from the bottom, we still lag behind the indices over longer periods of time raising age old questions.
Is value investing broken?
If value was supposed to protect on the downside, why does it appear to be so much more volatile?
Given these questions, we wrote a white paper this quarter with these two hypotheses.
First, while recent extreme volatility has made value investing look bad today, long-term investors should match their investment horizon which -- with the period over which they measure volatility.
It just seems illogical to us to compare long-term returns with monthly volatility, which is what most every investor does.
And the second, value investing looks bad today, because the endpoint is so distorted.
The idea, that's something has changed that makes value investing different than in the past is not defensible.
The practice of value investing is simply to take advantage of undervaluation created by investors emotional overreaction to recent events.
We believe there are opportunities to exploit these valuation anomalies without taking excessive risk.
Our study showed that while value strategies tend to have higher short-term volatility than the market, our long-term returns are actually less volatile than the markets.
Further, while strategies long-term track record is commonly used to measure manager skills, it has notable flawless.
In particular, return data are highly influenced by their starting and ending points.
Once a manager has run a consistent investment process for many years, we can look at the average experience over time periods and remove the vagaries of starting and ending points.
15 months ago our focus value strategy posted the best absolute 10 year performance record in its history.
While our most recent 10 year history is more representative of our long-term average.
Meanwhile, the S&P 500s most recent 10 year record is substantially above it's average and appears to be anomalously high.
When we calculate a sharp ratio using our recent performance record and our higher short-term volatility, our investment skill appears questionable versus the S&P 500.
However, when we do the same calculation using average 10 year returns and the volatility of those 10 year returns, we see a completely different picture which one actually represents our true investment skill after 25 years of deep value investing.
Just a word about our business.
We finished the quarter with approximately $400 million in net outflows.
Those two for us are notoriously bumpy.
For the previous 12 months, we had net positive flows of approximately $300 million.
And for the last three calendar years we had positive net flows.
We attribute this milestone win to our new clients acknowledgment that we will not deviate from our value discipline, and that such commitment is necessary to achieve long-term investment success.
We reported diluted earnings of $0.13 per share for the second quarter compared to zero last quarter and $0.18 per share for the second quarter of last year.
Revenues were $30.1 million for the quarter and operating income was $11 million.
Our operating margin was 36.4% this quarter, increasing from 32.1% last quarter and decreasing from 46.4% in the second quarter of last year.
Taking a closer look at our assets under management.
We ended the quarter at $31.5 billion, up 17.5% from last quarter, which ended at $26.8 billion and down 15.5% from the second quarter of last year which ended at $37.3 billion.
The increase in assets under management from last quarter, was driven by market appreciation including the impact of foreign exchange of $5.1 billion, partially offset by net outflows of $0.4 billion.
The decrease from the second quarter of last year reflects $6.1 billion in market depreciation, including the impact of foreign exchange, partially offset by net inflows of $0.3 billion.
At June 30, 2020, our assets under management consisted of $13 billion in separately managed accounts.
$16.4 billion in sub-advised accounts and $2.1 million in our Pzena Funds.
Compared to last quarter, assets under management across all channels increased with separately managed account assets reflecting $2 billion in market appreciation and foreign exchange impact and $0.2 billion in net inflows.
Sub-advised account assets reflecting $2.8 billion in market appreciation and foreign exchange impact, partially offset by $0.7 billion in net outflows.
And assets in Pzena Funds being $0.3 billion in market appreciation and $0.1 billion in net inflows.
Average assets under management for the second quarter of 2020 were $29.8 billion, a decrease of 15.8% from last quarter and a decrease of 19.7% from the second quarter of last year.
Revenues decreased 13.1% from last quarter and 20.4% from the second quarter of last year.
The decreases from last quarter and the second quarter of last year primarily reflects the decrease in average assets under management.
During the quarter, we did not recognize any performance fees, similar to last quarter and compared to $0.3 million recognized in the second quarter of last year.
Our weighted average fee rate was 40.4 basis points for the quarter, compared to 39.1 basis points last quarter and 40.8 basis points for the second quarter of last year.
Asset mix and the impact of swings in performance fees and fulcrum fees are all contributors to changes in our overall weighted average fee rate.
Our weighted average fee rate for separately managed accounts was 55.2 basis points for the quarter, compared to 52.6 basis points last quarter and 54.5 basis points for the second quarter of last year.
The increase from the first quarter of 2020 reflects the addition of assets to strategies that typically carry higher fee rates.
Our weighted average fee rate for sub-advised accounts was 26 basis points for the quarter, compared to 26.6 basis points for last quarter and 28.7 basis points for the second quarter of last year.
The weighted average fee rate for the quarter reflects the reduction in the base fees of certain accounts related to the fulcrum fee arrangements of one client relationship.
These fee arrangements require a reduction in the base fee if the investment strategy underperforms its relevant benchmark or allows for a performance fee if the strategy outperforms that benchmark.
During each of the second and first quarters of 2020, we recognized $1 million reduction in base fees related to these accounts, compared to a $0.5 million reduction in base fees during the second quarter of last year.
These fees are calculated quarterly and compare relative performance over a three-year measurement period.
To the extent the three-year performance record of this account fluctuates relative to its relevant benchmark, the amount of base fees recognized may vary.
Our weighted average fee rate for Pzena Funds was 65.9 basis points for the quarter, increasing from 62.5 basis points last quarter and decreasing from 69.4 basis points for the second quarter of last year.
The increase from the first quarter of 2020 reflects inflows into funds that generally carry higher fee rates.
The decrease from the second quarter of 2019 reflects an increase in fund expense cap reimbursements which are presented net against revenue.
Looking at operating expenses, our compensation and benefits expense was $15.6 million for the quarter, decreasing from $19.1 million last quarter and from $16 million for the second quarter of last year.
The decrease from the first quarter reflects the absence of the cost of employee departures and expenses associated with tax payments and the company's employee profit sharing and savings plan, which generally do not recur during the year.
The decrease from the second quarter of 2019 reflects the decrease in the bonus accrual.
G&A expenses were $3.6 million for the second quarter of 2020, compared to $4.4 million last quarter and $4.3 million for the second quarter of last year.
The decrease from last quarter and the second quarter of last year primarily reflects the reduction in travel costs and professional fees.
Other income was $3.2 million for the quarter, driven primarily by the performance of our investments.
The effective rate for our unincorporated and other business taxes was 4.1% this quarter compared to 29.9% last quarter and 4.3% in the second quarter of last year.
We expect the effective rate associated with the unincorporated and other business taxes of our operating company to be between 3% and 5% on an ongoing basis.
Our effective tax rate for our corporate income taxes ex-UBT and other business taxes was 26.6% this quarter, compared to our effective tax rate of 100% last quarter and 23.8% for the second quarter of last year.
We expect this rate to be between 23% and 25% on an ongoing basis.
The allocation to the nonpublic members of our operating company was approximately 77.7% of the operating company's net income for the second quarter of 2020, compared to 74.5% both last quarter and in the second quarter of last year.
The variance in these percentages is the result of changes in our ownership interest in the operating company.
During the quarter, through our stock buyback program, we repurchased and retired approximately 266,000 shares of Class A common stock for $1.4 million.
At June 30, there was approximately $11.2 million remaining in the repurchase program.
At quarter end, our financial position remains strong with $33.1 million in cash and cash equivalents as well as $7.3 million in short-term investments.
We declared a $0.03 per share quarterly dividend last night.
We'd now be happy to take any questions. | for 2022, company expects to distribute up to 50% of 2021 free cash flow, after payment of base dividends.
expects its 2021 drilling, completions and facilities capital budget to range between $2.95 billion to $3.25 billion.
during 2021, company plans to operate an average of 22 to 24 horizontal drilling rigs in permian basin. | 0 |
And the 10-Q for the quarter will be filed later today after the call.
David McElroy, CEO of general insurance; and Kevin Hogan, CEO of life and retirement; will be available for Q&A.
These statements are not guarantees of future performance or events and are based on management's current expectations.
Actual performance and events may materially differ.
Factors that could cause results to differ include the factors described in our 2020 annual report on Form 10-K and our other recent filings made with the SEC.
Additionally, some remarks may refer to non-GAAP financial measures.
I will then review results from general insurance and the significant progress we've made with our portfolio, which allowed us to pivot from remediation to grow heading into 2021.
Following that, I will review first-quarter results for life retirement.
I will then provide an update on the work we're doing on the separation of life retirement from AIG.
And lastly, I'll provide an AIG 200 update.
Mark will give you more details on the financial results and then we will take questions.
AIG had an excellent start to the year and we have significant momentum across the entire organization.
In the first quarter, we delivered an outstanding performance in general insurance.
We saw continued solid results in life retirement.
We made meaningful progress on the separation of life retirement from AIG and we significantly advance AIG 200 with the transformation remaining on track to deliver $1 billion in savings by the end of 2022 against the cost to achieve $1.3 billion.
In addition, our balance sheet and financial flexibility remain exceptionally strong allowing us to focus on profitable growth across our portfolio, prudent investments in modern technology and digital capabilities, separating library retirement from AIG in a manner that maximizes value for our stakeholders and positions both companies for long-term success, and returning capital to our shareholders when appropriate.
We ended the first quarter with parent liquidity of $7.9 billion and we repurchased $92 million of common stock in connection with warrant exercises and an additional $207 million against the $500 million buyback plan we mentioned on our last call.
We expect to complete the additional $230 million of that buyback plan by the end of the second quarter.
Turning to general insurance, net premiums written increase approximately $600 million year over year, or approximately 6% on an FX constant basis, driven by nearly $1 billion, or a 22% year-over-year increase in our global commercial businesses.
This 22% increase in global commercial was driven by higher retentions; excellent new business production, particularly in international; strong performance in first-quarter portfolio repositioning; and continued rate momentum.
North America commercial net premiums written grew by approximately 29%, an outstanding result due to a variety of factors including increased 1/1 writings on the balance sheet, continue strong submission flow in Lexington, rate improvement, strong retention and higher new business and segments we have been targeting for growth.
In addition, as a result of the improved quality of our North American commercial portfolio and our improved reinsurance program, which now includes lower attach points in North America, we did not need to purchase as much CAT reinsurance limit in 2021.
The benefits of which will come through in future quarters.
The international commercial had an exceptionally strong first quarter with the year-over-year growth in net premiums written of approximately 13% on an FX constant basis.
Increases were balanced across the portfolio with the strongest growth in international financial lines followed by our specialty business.
Looking ahead, we expect overall growth in net premiums written for the remainder of 2021 to be higher than the 6% we saw in the first quarter of this year with more balance in growth across our global commercial and personal portfolios.
With respect to rate, momentum continued with overall global commercial rate increases of 15%.
North America's commercial rate increases were also 15%, driven by improvements in Lexington casualty with 36% rate increases, excess casualty with 31% rate increases, and financial lines with rate increases over 24%.
International commercial rate increases maintain strong momentum at 14%in the first quarter of 2021, which is typically the largest quarter of the year for our European business.
These increases were driven by energy with 26% rate increases, commercial property with 19% rate increases, and financial lines with 20% rate increases.
Turning to global personal insurance, net premiums written in the first quarter declined 23% on an FX constant basis due to our travel business continuing to be impacted by the pandemic as well as reinsurance sessions to Syndicate 2019.
Our partnership with Lloyd's.
Adjusted for these impacts, global personal insurance, net premiums written were down only 1.6% on an FX constant basis.
We expect to see strong year-over-year growth for the remainder of the year with a rebound in global personal insurance as the effects of COVID subside, the repositioning and reunderwriting this portfolio nears completion, and a full year of reinsurance sessions relating to Syndicate 2019 will be complete.
We are very pleased with the continued improvement in our combined ratios, including and excluding CATs.
I don't need to remind everyone where we were when I outlined our turnaround strategy three years ago.
In the first quarter of this year, the adjusted accident year combined ratio was 92.4%, a 310-basis-point improvement year over year, driven by a 440-basis-point improvement in our adjusted commercial accident year combined ratio.
The adjusted accident year loss ratio improved 160 basis points, to 59.2%, driven by a 330-basis-point improvement in global commercial.
The expense ratio improved 150 basis points reflecting the impact of AIG 200 savings and continued expense discipline.
We expect to continue to improve the expense ratio throughout 2021, particularly as we deliver on our AIG 200 programs.
To provide further color on combined ratio improvements, in North America, the adjusted accident year combined ratio improved to 95.6%, 210-basis-point improvement year over year.
This reflects a 370-basis-point improvement in the North American commercial lines adjusted accident year combined ratio, which came in at 93.9%.
In international, the adjusted accident year combined ratio improved to 90.2%, a 340-basis-point improvement year over year.
This reflects a 490-basis-point improvement in the international commercial lines adjusted accident year combined ratio, which came in at 86.8%, 150-basis-point improvement in the international personal lines adjusted accident year combined ratio which was 94%.
With respect to catastrophes, first quarter 2021 was the worst first quarter for the industry in over a decade in terms of weather-related cap losses largely due to winter storms in Texas.
Net cap losses in general insurance are $422 million primarily driven by the Texas storms and do not include any new COVID-related estimated losses for the first quarter.
Now let me touch on reinsurance assumed.
As I noted, Validus Re saw strong 1/1 renewals across most lines with attractive levels of risk-adjusted rate improvement.
The team focuses on prudent capital deployment and portfolio construction while improving technical ratios and reducing volatility.
With respect to April 1 renewals, within the international property, rate adjustments varied from mid-single-digits to upwards of 30% and loss impacted accounts and our Japanese renewals were very successful with 100% client retention, net limits largely similar year over year, and risk-adjusted rate increases, which were in the high single-digits.
Before moving on, I want to highlight the quality and the strength of our general insurance portfolio.
Of course, optimization work will continue but the magnitude of what was accomplished over the last three years is worth reflecting on because the first quarter of 2021 was an important inflection point for our team.
Our focus pivoted from remediation to driving profitable growth.
These are a couple of concrete examples of how we have repositioned the global portfolio.
Growth limits and global commercial will reduce by over $650 billion.
North America excess casualty removed over $10 billion in mid-limits and increased writings in mid-excess layers in order to achieve a more balanced portfolio.
And in Lexington, we reposition this business to focus on wholesale distribution.
The team grew the top line in 2020 for the first time in over a decade.
The portfolio is now more balanced and the submission flow has increased over 100% over the last couple of years.
The enormity of the turnaround and the complexity of execution that was accomplished cannot be understated.
We now have a disciplined culture that is grounded in underwriting fundamentals, a well-defined and articulated risk appetite, we remain laser-focused on terms and conditions, and obtaining rate above loss cost.
And we have an appropriate reinsurance program in place to manage severity and volatility.
Our global portfolio is poised for improving profitability and more predictable results.
While all this was taking place in general insurance, our colleagues in life retirement did an excellent job maintaining a market-leading position in the protection and retirement savings industry and, together with our investment colleagues, consistently delivered a solid performance against the backdrop of persistent low-interest rates and challenging market conditions.
Turning to life retirements first quarter.
This business also had strong results.
Adjusted pre-tax income in the first quarter was $941 million, an adjusted return on common equity was 14.2% reflecting our diversified businesses and high-quality investment portfolio.
The sensitivities we provided last quarter generally held up with respect to equity markets, 10-year reinvestment rates, and mortality although first-quarter results were toward the higher end of our mortality expectations of reinsurance and other offsets.
We continue to actively manage impacts from the low-interest rate and tighter credit spreads environment and the range we previously provided for expected annual spread compression of 8 to 16 basis points has not changed.
Our high-quality investment portfolios well-positioned to navigate uncertain environments as demonstrated by our steady performance through the macroeconomic stress and high levels of volatility in 2020.
And our variable annuity hedging program has continued to perform as expected, providing offsetting protection during periods of volatile capital markets.
We believe life retirement is positioned to deliver strong, sustainable financial results due to the quality of its balance sheet, diversified product offerings and distribution, effective hedging programs, and disciplined risk management.
With respect to the separation of life retirement from AIG, we continue to work diligently and with a sense of urgency toward an IPO of about 19.9% of the business.
We've made significant progress on several fronts including preparing stand-alone audited financials and having an independent party conduct a thorough actuarial review.
No concerns have been raised about the life retirement portfolio as a result of this work.
As I noted on our last earnings call, we did receive a number of credible increases from parties interested in purchasing a minority stake in life retirement and our investment management group.
We conducted a robust evaluation of those opportunities to determine if they offered a better long-term outcome for our stakeholders than an IPO.
At this time, we believe an IPO remains the optimal path forward to maximize value for our stakeholders and to position the business for additional value creation as a stand-alone company.
In addition, an IPO allows AIG to retain maximum flexibility regarding the operations of the business, as well as the separation process.
Overall, I'm pleased with the progress we've made.
Turning to AIG 200, all 10 operational programs are deep into execution mode.
Our transformation teams continue to perform exceptionally well despite the continued remote-work environment.
Recent progress on IT modernization has enabled us to reach the halfway point or $500 million of our run-rate savings target.
$250 million in cumulative run-rate savings has been realized in APTI through the first quarter of this year with $75 million of incremental savings achieved within the first-quarter income statement.
Key highlights on our progress include the successful transition of our shared services operations and over 6,000 colleagues to Accenture at year-end 2020.
This partnership is going extremely well with KPIs at or better than pre-transition levels.
We also negotiated a multi-year agreement with Amazon Web Services to execute on an accelerated cloud strategy, which is a significant step forward in modernizing our infrastructure.
And with a new highly experienced leader in Japan, we made significant progress during the first quarter on our AIG 200 strategy in Japan and are on track to finalize target outcomes as we modernize this business by developing digital capabilities with agile product innovation.
The last year in particular brought unimaginable stress and tragedy across the world.
And for our colleagues, it came during a time of significant and foundational change.
Yet they never lost sight of our purpose at AIG and continue to be focused and dedicated to the important work we do, each other, and the communities in which we live and work.
I could not be prouder of what we've achieved together.
We are in great businesses, a global scale, loyal clients, exceptional relationships with distribution of reinsurance partners, world-class experts and industry veterans, and we strive to be a responsible corporate citizen with a diverse and inclusive workforce that delivers value to our shareholders and all other stakeholders.
I am confident AIG is on its way to becoming a top-performing company in everything that we do.
Since Peter has already provided a good overview of the quarter, I'll just add that we've posted a 7.4% annualized adjusted return on common equity at the AIG level, an 8.2% adjusted return on tangible common equity at the AIG level, an 8.5% adjusted return on segment common equity for general insurance, and a 14.2% adjusted return on segment common equity for life and retirement.
Now moving to general insurance, first-quarter adjusted pre-tax income was $845 million, up $344 million year over year, primarily reflecting increased underwriting income in international, as well as increased global net investment income driven by alternatives.
Catastrophe losses totaled $422 million pre-tax or 7.3 loss ratio points this quarter, compared to 6.9 loss ratio points in the prior-year quarter.
The CAT losses were mostly comprised of $390 million related to the winter storms, primarily impacting commercial lines including AIG rate.
The net impact of the winter storms reflects the benefit of our commercial reinsurance program and changes to our PCG portfolio as a result of syndicate 2019.
Overall, prior-year development was $56 million favorable this quarter, which included $58 million of net favorable development in North America, driven by $52 million of favorable development from the ADC amortization, and $2 million of net unfavorable development in international.
It's worthwhile to note that general insurance still has $6.6 billion remaining of the 80% quota share ADC cover.
There was also, embedded within these figures, $33 million of unfavorable development related to COVID-19 claims that relate back to 2020 loss occurrences or a movement of less than 3%, emanating primarily from Validus Re and Talbot or Lloyd's syndicate.
Our general insurance business continued to materially improve, driven largely by strong accident year 2021 ex-CAT showings in both North America and international commercial lines.
So, rather than double up on facts that Peter has shared, the main drivers of the attrition with underwriting gain improvements were for North America commercial, Lexington, financial lines, and excess casualty.
And from international commercial, the main drivers of improvement stemmed from property, Talbot, and financial lines.
As Peter, noted on a global-commercial-lines basis, the accident year combined ratio, excluding CAT was 90.4%, which represents a 440-basis-point improvement over the prior year's quarter with 75% of that improvement attributable to a lower loss ratio and 25% of the improvement attributable to a lower expense ratio.
Turning to personal insurance, starting in the second quarter of this year, meaning next quarter, our year-over-year comparisons will begin to improve, given the timing of the initial COVID-19 impacts and the formation of syndicate 2019 in May of 2020.
Although North American personal lines had a 74% drop in net premiums written as Peter highlighted, it's also important to understand that the other units within the segment which represented nearly 50% of the quarter's net written premium is comprised mostly of warranty and personal A&H business had their net premium only fall marginally.
Our international personal lines business, which by size dominates our overall global personal insurance business, continues to perform well with 150-basis-points improvement in the accident year ex-CAT combined ratio, reflecting an improved loss ratio and expense discipline.
Now, to expand on some of Peter's marketplace commentary, various areas continued to accelerate the adequacy of achieved rate beyond that of prior quarters.
For example, the level of excess casualty rate increases continues and in many units, exceeds prior results such as CAT excess coverage out of Bermuda, North America corporate, and national admitted excess, and the Lexington.
The increase achieved in the first quarter of 2020 and compounded in the first quarter of 2021 alone, ignoring prior to 2020 rate increases, exceeded 150% for Bermuda-based capacity business, which makes sense given recent years' price deficiency on these capacity excess layers, and approximately 115% for the other mentioned units.
financial lines on the same compound basis has seen in excess of 80% increases for the staples of D&O and EPLI.
Internationally, the 14% first-quarter overall rate increase saw continued rate expansion in key markets, such as the U.K. at plus 23%, global specialty at plus 15%, Europe and the Middle East at 14%, Latin America at 13%, and Asia Pacific also at 13% when excluding the tempering influence of predominantly Japan at 3%.
Lastly cyber achieved our highest rate increase yet at 41% for the quarter.
These increases are clearly broad-based by region and line of business all around the world.
I'd now like to spend a few minutes on two observations.
One, the impact of net rate change versus gross rate change.
And two, some examples of new business rate adequacy relative to a renewal rate adequacy.
So, first, our achieved North America commercial rate change for the quarter on a net basis is now estimated to be at least 150 basis points stronger than the corresponding growth rate change, largely due to our increased net positions across selected product lines.
Last year much of the achieved growth rate increase was being ceded to reinsurers, where now there is much less so.
The shift to higher net positions resulted directly from our prior-stated strategy of improving the gross book such that we had increased competence to retain the appropriate amount of net, and because we could not take a higher net position previously because of the legacy imbalance of very large limits written.
Now, moving on to relative rate adequacy, we see continuing indications in North America of new business having stronger relative rate adequacy over renewal rate levels in most lines of business.
This likely doesn't reflect different class mixes, but instead an additional margin for a lesser-known exposure.
However, this should be expected and is also historically supported given where we are in the underwriting cycle as new business is less established with an insurer versus an existing client renewal relationship.
A further related item involves renewal retentions.
As general insurance implemented revised underwriting standards, renewal retentions predictably would have been impacted, especially in the target lines.
Now, even with superior risk selection rate and term condition changes that have been achieved, renewal retentions have improved to the mid-80% in the aggregate across all commercial lines in both North America and across internationally.
We also see improvement in the Lexington, where E&S has lower industry retentions based on the nature of the business, and this is very positive for the book.
And we see it across specialty lines and across most admitted retail books.
This is indicative of the reunderwriting actions being successful, having settled down, and now with general insurance being comfortable with the underlying insured exposures that meet our risk appetite.
Based on current market conditions and our view of the foreseeable future, we continue to anticipate earned margin expansion throughout 2021 and into 2022 resulting from AIG's favorable underwriting actions taken, favorable global market conditions, maturely improved terms and conditions, and a more profitable, less volatile business mix.
As a result, I would like to reconfirm our outlook for a sub-90% accident year combined ratio excluding CAT by the end of 2022.
Global commercial lines are very nearly at the sub-90% level now and global personal lines is running at 96% for the first quarter.
Given our portfolio composition, and market conditions, and our strategic repositioning of North America personal, we anticipate greater continued margin expansion within commercial lines than personal lines.
We are highly confident that we will achieve our sub-90% target and have several pass to help us get there.
Some by a mix, some by a reasonable market conditions persisting, and some via expense levers.
Now, I'd also like to unpack some of Peter's high-level net written premium growth comments for 2021 with an emphasis here on next quarter, second quarter.
North America commercial is expecting to see growth of approximately 10% for the second quarter of 2021 relative to the prior-year quarter, driven mostly from Lexington across a host of product lines and admitted casualty both primary and excess.
This growth will be two-pronged as growth on the front end will be coupled with lower reinsurance sessions, especially from those lines subject to the casualty quota share.
North America personal is expected to see significant second-quarter 2021 growth, but it is driven by the syndicate 2019 reinsurance session change that we've been signaling.
You will recall, North American personal had a negative $150 million net written premium in the second quarter of 2020 due to many syndicate 2019 treaties becoming effective, including an unearned premium cover for the PCG high-net-worth book.
That distortive spike in sessions, which is not repeatable in the second quarter of 2021 will give the appearance of considerable growth, but instead will provide a PCG net premium that is more stable on an ongoing basis.
So, overall, for North America, both personal and commercial combined, we anticipate net written premium growth between 35% to 40% for the second quarter over the second quarter of the prior year.
International commercial in the second quarter of 2021 is expected to be roughly plus 7% net written premium growth, driven by global specialty, financial lines, and Talbot, and international purpose -- personal is expected to be approximately flat relative to the prior-year quarter.
Now, turning to life and retirement, adjusted pre-tax income increased by 57% or $340 million compared to the first quarter of 2020 with favorable equity markets driving higher private equity returns, lower deferred acquisition and cost amortization, a rebound in most areas of sales, and higher-fee income.
The increase also reflects favorable short-term impacts from tighter credit spreads driving higher call and tender income and higher fair value option bond returns.
This increase was partially offset by adverse mortality as U.S. COVID-related population death of approximately 205,000 in the first quarter were higher than or earlier anticipated which was also reflected in our own experience.
In terms of premiums and deposits, we continue to see encouraging improvement in retail sales.
Individual retirement premium and deposits grew 8% from the prior-year quarter, which we consider a pre-COVID quarter as the sales pipeline carried through March of last year with index and variable annuities, both exceeding prior-year levels.
In group retirement, group acquisition deposits increased significantly from prior year, although both periodic and nonperiodic deposits declined, leading to a marginal reduction in overall gross group premiums and deposits of 2%.
In life insurance, premiums and deposits grew 6% overall with year-over-year growth in both the U.S. and international.
Finally, while institutional markets did not conclude any significant pension risk transfer transactions in the quarter, the pipeline of direct and reinsurance transactions going into the second quarter is very strong, particularly with many defined benefit plans nearing fully funded status.
Turning to net flows and related activity.
Our portfolio reflects the dynamic environment quarter by quarter of the last year.
Individual retirement net flows improved by approximately $1 billion over the first quarter of 2020 driven by variable annuities and retail mutual fund.
And yet when excluding retail mutual funds, net flows were positive, led by index annuities rebounding to be plus 1 billion for the quarter, which is virtually identical to one year ago, but with steady progress from a low of 439 million in the second quarter of 2020 to the plus 1 billion this quarter.
Surrender rates were up slightly over the last few quarters within individual retirement for fixed and index, whereas variable annuity surrender rates have been more comparable as have for group retirement.
Similarly, the life business has seen consistently lower lapse and surrender rates over the last four quarters than prior.
Life and retirement continue to actively manage the impacts from the low-interest rate and tighter credit spread environment, and the previously provided range for expected annual spread compression has not changed.
New business margins generally remain within our targets at current new money returns due to active product management, disciplined pricing approaches, and our significant asset origination and structuring capabilities.
Moving to other operations.
Adjusted pre-tax loss was 530 million, which was inclusive of 176 million of losses from the consolidation and eliminations line, which principally reflects adjustments, offsetting investment returns in the subsidiaries by being eliminated in other operations.
So it wouldn't be double counting.
Before consolidation and eliminations, adjusted pre-tax loss was $354 million, which was $481 million better than the first quarter of 2020, which included a $317 million adjusted pre-tax loss related to Fortitude and a $30 million one-time cash grant given to employees to help with unanticipated costs when the global pandemic began last March.
The first quarter also reflects lower corporate interest expense and lower corporate general expenses, and we expect this to continue throughout 2021.
However, one might expect some continued volatility within the consolidation and eliminations line, which can fluctuate based on investment returns.
Now, shifting to investments.
Net investment income on an APTI basis was 3.2 billion or 492 million higher than the first quarter of 2020.
Adjusting first-quarter 2020 for Fortitude's investment income to make the comparison apples to apples, this quarter's net investment income on an APTI basis was actually 611 million higher than the prior year, or plus 23%, reflecting strong private equity and real estate returns, as well as bond tender and call premiums, which more than offset the lower income on the AFS fixed income portfolio.
We continue to have a high-quality investment portfolio that is positioned well under any market conditions.
Turning to the balance sheet.
At March 31, book value per common share was $72.37, down 5.3% from year-end, reflecting net unrealized mark-to-market losses on the investment portfolio.
Adjusted book value per share was $58.69, up nearly 3% from December 31.
At quarter-end, AIG parent, as Peter noted, had cash and short-term liquidity assets of $7.9 billion, and we repaid our March debt maturity of $1.5 billion and repurchased the $362 million of shares, as Peter outlined.
Our GAAP debt leverage at March 31 was 28.4%, flat to year-end given downward fixed income market movements negatively impacting AOCI despite the repaid debt maturity mentioned earlier.
Our primary operating subsidiaries remain profitable and well-capitalized.
For general insurance, we estimate the U.S. pool fleet risk-based capital ratio for the first quarter to be between 465% and 475%, and life and retirement fleet is estimated to be between 435% and 445%, both well above our target ranges.
And Jake, I think we're ready to start Q&A. | q4 adjusted non-gaap operating earnings per share $3.88. | 0 |
We hope everyone is well.
I think earnings for the quarter were right in line with our expectations and impacted by the same influences the past several quarters.
Margin continues to be a headwind, but deposit fees, the strength of our financial services businesses, and credit tailwinds and we saw that this quarter.
The bigger story for us in the quarter was loan growth.
We had growth in every one of our portfolios this quarter ex-PPP and our pipelines and market activity continue to be very strong.
We're encouraged by these trends and have really good momentum right now across all of our credit businesses.
We also increased our securities book in the quarter given the market opportunity and that will be additive to future earnings as well.
I think Joe will provide more detail on that.
The recent strength of our financial services businesses continued in the quarter with revenues up 17% and pre-tax earnings up 22% over 2020.
We also closed on the acquisition of Fringe Benefits Design of Minnesota, a provider of retirement plan administration and consulting services with offices in Minneapolis and South Dakota.
Their performance out of the gate has been exceptional.
So we expect that will be a productive addition to our benefits business.
Our benefits wealth and insurance businesses are all performing extremely well right now in what is a very productive growth, pricing, and M&A environment for those businesses.
On the human capital front, as we previously announced, I'm delighted that Maureen Gillan-Myer has joined us as Executive Vice President and Chief Human Resources Officer.
She previously held the same role for HSBC USA and will bring tremendous experience, expertise, and business judgment to Community Bank System and we look forward to her contributions to our continuing human capital efforts.
Lastly, earlier this month, we announced an agreement to acquire a Elmira Savings Bank, a $650 million asset bank with 12 offices across the Southern Tier and Finger Lakes regions of New York State.
It's a very nice franchise with a very good mortgage business that we expect will be $0.15 per share accretive on a full year basis excluding acquisition expenses.
So a very productive low risk transaction.
We have targeted a closing date in Q1 of next year.
Looking ahead, we like our current momentum across the company in all of our businesses.
As Mark noted, the third quarter earnings results were solid with fully diluted GAAP and operating earnings per share of $0.83.
The GAAP earnings results were $0.04 per share or 5.1% higher than the third quarter 2020 GAAP earnings results, but $0.02 per share or 2.4% below the prior year's third quarter on an operating basis.
The decrease in operating earnings per share is driven by decrease in net interest income and higher operating expenses as well as increases in income taxes and fully diluted shares outstanding, offset in part by lower credit-related costs and an increase in non-interest revenues, particularly in the company's non-banking financial services businesses.
Comparatively, the company recorded fully diluted GAAP in operating earnings per share of $0.88 in the linked second quarter of 2021.
The company recorded total revenues of $156.9 million in the third quarter of 2021, an increase of $4.3 million or 2.8% over the prior year's third quarter.
The increase in total revenues between the periods was driven by a $6.9 million or 16.9% increase in financial services revenues, offset in part by a $2.2 million decrease in banking-related non-interest revenues and a $0.4 million or 0.4% decrease in net interest income.
Total revenues were up $5.4 million or 3.5% from the second quarter 2021 results driven by a $0.5 million or 0.5% increase in net interest income, a $1.4 million increase in banking-related non-interest revenues, and a $3.5 million or 8% increase in financial services revenues.
Total non-interest revenues accounted for 41% of the company's total revenues in the third quarter.
Although net interest income was down only slightly from the same quarter last year, the results were achieved in a significantly lower net interest margin outcome.
The company's tax equivalent net interest margin for the third quarter of 2021 was 2.74% as compared to 3.12% one year prior, a 38 basis point decrease between the periods.
Comparatively, the company's tax equivalent net interest margin for the second quarter 2021 was 2.79% or 5 basis points higher than the third quarter.
Net interest margin results continue to be negatively impacted by the low interest rate environment and the abundance of low yield cash equivalents being maintained on the company's balance sheet.
The tax equivalent yield on earning assets was 2.83% in the third quarter of 2021 as compared to 2.89% in the linked second quarter and 3.28% one year prior.
During the third quarter, the company recognized $4.3 million of PPP-related interest income including $3.7 million of net deferred loan fees.
This compares to $3 million of PPP-related interest income recognized in the same quarter last year and $3.9 million in the linked second quarter of 2021.
On a year-to-date basis, the company has recognized $15.1 million of PPP-related net interest income.
The company's total cost of deposits remained low however, averaging 9 basis points during the third quarter of 2021.
Employee benefit services revenues for the third quarter of 2021 were $29.9 million, $4.8 million or 18.9% higher than the third quarter of 2020.
The improvement in revenues was driven by increases in employee benefit trust and custodial fees as well as incremental revenues from the acquisition of Fringe Benefits Design of Minnesota during the quarter.
Wealth management revenues for the third quarter 2021 were$8.3 million, up from $6.9 million in the third quarter of 2020.
The $1.4 million or 20.8% increase in wealth management revenues was primarily driven by increases in investment management and trust services revenues.
Insurance services revenues of $9.2 million were up $0.6 million or 7.6% over the prior year's third quarter driven by organic growth factors and the third quarter, acquisition of a Boston-based specialty lines insurance practice.
Banking non-interest revenues decreased $2.2 million or 11.5% from $19.1 million in the third quarter of 2020 to $16.9 million in the third quarter of 2021.
This was driven by a $3.5 million decrease in mortgage banking income offset in part by $1.3 million or 8.3% increase in deposit service and other banking fees.
On a linked quarter basis, financial services revenues were up $3.5 million or 8%, reflective of the organic and acquisition-related momentum in these businesses and banking non-interest revenues were up $1.4 million or 8.7% [Phonetic].
During the third quarter of 2021, the company recorded a net benefit in the provision for credit losses of $0.9 million.
This compares to a $1.9 million provision for credit losses recorded in the prior year third quarter.
The company's net loan charge-offs were only 7 basis points annualized in both periods.
During the third quarter of 2021, economic forecasts were more favorable than the third quarter 2020 economic forecast driven by the post-vaccine economic recovery, which in combination with elevated real estate and vehicle loan collateral values drove down the expected life of loan losses.
On a September 2021 year-to-date basis, the company recorded net charge-offs of $1.1 million or 2 basis points annualized.
The company recorded $100.4 million in total operating expenses in the third quarter 2021 as compared to $97 million of total operating expenses in the third quarter of 2020, an increase of $3.4 million or 3.6% between the periods.
Operating expenses exclusive of litigation and acquisition-related expenses increased $7.2 million or 7.7% between the comparable quarters, $5.6 million of which was driven by an increase in salaries and employee benefits due to acquisition-related staffing increases, merit and incentive-related employee wage increases, higher payroll taxes, and higher employee benefit-related expenses.
Other expenses were up $0.9 million or 8.7% due to the general increase in the level of business activities.
Data processing and communication expenses were also up $0.9 million or 7.2% due to the company's implementation of new customer-facing digital technologies and back office systems between the comparable periods.
Occupancy and equipment expense decreased slightly due primarily to branch consolidation activities between the periods.
In comparison, the company recorded $93.5 million of total operating expenses in the second quarter of 2021.
The effective tax rate for the third quarter of 2021 was 21.1% up from 20.3% in the third quarter 2020.
The increase in the effective tax rate was primarily attributable to an increase in certain state income taxes that were enacted in the second quarter of 2021.
The balance sheet crested the $15 billion total asset threshold during the third quarter due to the continued inflows of deposits, which increased $384.8 million or 3.1% from the end of the second quarter.
The company's low yielding cash and cash equivalents remained elevated totaling $2.32 billion at the end of the quarter despite the company purchasing $536.9 million of investment securities during the quarter.
Ending loans at September 30, 2021 were $7.28 billion, $38.4 million or 0.5% higher than the second quarter 2021 ending loans of $7.24 billion and $176.1 million or 2.4% lower than one year prior.
Excluding PPP activity, ending loans increased $154.1 million or 2.2% in the third quarter.
This increase was driven by growth in all five loan portfolio segments: consumer mortgages, consumer indirect loans, consumer direct loans, home equity, and business lending excluding PPP.
As of September 30th, 2021, the company's business lending portfolio included 1,386 PPP loans with a total balance of $165.4 million.
This compares to 2,571 PPP loans with a total balance of $284.8 million at June 30th, 2021.
The company expects to recognize its remaining net deferred PPP fees totaling $6.3 million over the next few quarters.
The company's capital ratios remained strong in the second quarter.
The company's net tangible equity [Phonetic] to net tangible assets ratio was 8.59% at September 30th, 2021.
This was down from 9.92% a year earlier and 9.02% at the end of the second quarter.
The company's Tier 1 leverage ratio was 9.22% at September 30th, 2021, which is nearly 2 times the well capitalized regulatory standard of 5%.
The company has an abundance of liquidity.
The combination of the company's cash and cash equivalents, borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available for sale investment securities portfolio provided the company with over $6.18 billion of immediately available sources of liquidity at the end of the third quarter.
At September 30th, 2021, the company's allowance for credit losses totaled $49.5 million or 0.68% of total loans outstanding.
This compares to $51.8 million or 0.71% of total loans outstanding at the end of the second quarter of 2021 and $65 million or 0.87% of total loans outstanding at September 30th, 2020.
The decrease in the allowance for credit losses is reflective of an improving economic outlook, very low levels of net charge-offs, and a decrease in specific reserves on impaired loans.
Non-performing loans decreased in the third quarter to $67.8 million or 0.93% of loans outstanding, down from $70.2 million was 0.97% of loans outstanding at the end of the linked second quarter of 2021, but up from $32.2 million or 0.43% of loans at the end of the third quarter of 2020 due primarily to the reclassification of certain hotel loans under extended forbearance from accrual to non-accrual status between the periods.
Loans 30 to 89 days delinquent totaled 0.35% of loans outstanding at September 30th, 2021.
This compares to 0.36% one year prior and 0.25% at the end of the linked second quarter.
Management believes the low levels of delinquent loans and charge-offs has been supported by extraordinary federal and state government financial assistance provided to consumers throughout the pandemic.
During the third quarter of 2021, the company increased its quarterly cash dividend a $0.01 or 2.4% to $0.43 per share on its common stock.
This increase marked the company's 29th consecutive year of dividend increases.
Looking forward, we remain focused on new loans generation and will continue to monitor market conditions to seek the right opportunities to deploy our excess liquidity.
Our loan pipelines are robust and asset quality remains very strong.
We also expect net interest margin pressures to persist to remain well below our pre-pandemic levels but also believe our abundance of cash equivalents represents a significant future earnings opportunity.
We're also fortunate and pleased to have strong non-banking businesses that have supported and diversified our streams of non-interest revenue.
And lastly, to echo Mark's comments, we are pleased and excited to be partnering with Elmira Savings Bank.
Elmira has been serving its communities for 150 years and will enhance our presence in five counties in New York's Southern Tier and Finger Lakes regions.
At June 30th, 2021, Elmira had total assets of $648.7 million, total deposits of $551.2 million and net loans of $465.3 million.
We expect to complete the acquisition in the first quarter of 2022, subject to customary closing conditions including approval by the shareholders of Elmira Savings Bank and required regulatory approvals. | compname posts q2 2021 net income of $0.88 per fully-diluted share.
q2 revenue $151.6 million versus refinitiv ibes estimate of $151.7 million.
q2 2021 net income of $0.88 per fully-diluted share.
net interest income of $92.1 million in q2 of 2021 versus $92.0 million of net interest income recorded in q2 of 2020. | 0 |
I'm Hallie Miller Evercore's, Head of Investor Relations.
Joining me on the call today are Ralph Schlosstein, and John Weinberg our Co-Chairman and Co-CEOs and Bob Walsh, our CFO.
These factors include, but are not limited to, those discussed in Evercore's filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
We continue to believe that it's important to evaluate Evercore's performance on an annual basis.
As we've noted previously, our results for any particular quarter are influenced by the timing of transaction closings.
It's hard to believe that this is our third earnings call, for which we are not all together in the same conference room.
For today's call, John is in our offices in New York City, it's his week in the office and I am in my office in North Salem, New York and Bob is with our traders in our office in New Jersey.
Our business thrives on in-person collaboration and teamwork, and while we have been quite effective and successful over the last seven-plus months, operating out of 1800 offices around the globe we certainly recognize that our business and our culture operate best when we are physically together.
That certainly is our ultimate goal once the virus is no longer a factor in our lives, but in the interim, we remain committed to serving our clients with distinction and to collaborating with one another, as we implement a gradual return to office around the world.
The first nine months of this year have been volatile, and have had significant challenges and uncertainties, but there also have been many opportunities to advise our clients on their most important, strategic and financial needs.
The strategic investments we have made to broaden and diversify our capabilities over the past several years have enabled us to serve our clients on a wide array of strategic and financial matters and resulted in solid quarterly and year-to-date results demonstrating both to our clients and our shareholders that Evercore very much is in all-weather firm that can produce good results in a wide variety of environments.
There unquestionably are still uncertainties ahead; the upcoming US election, Brexit, the path of the virus and the disparity between the financial market recovery and the real economic recovery with so many of our fellow Americans, Europeans and others around the globe still unemployed or with their small businesses shuttered.
However, as we see the market for merger activity improve, and we continue to see robust activity in capital advisory, restructuring, underwriting and research and trading, we have never been more confident in our ability as a firm to help our clients achieve their most important strategic financial and capital objectives.
Before I comment on our financials, I want to provide a brief update on how Evercore has broadly responded to the events of this year and on what we are focused going forward.
As I mentioned, we are beginning to implement a very deliberate and thoughtful return to our offices around the globe.
Our transition back is occurring at a measured pace and follows all local government guidelines designed to protect communities in which we work.
The health and safety of our employees and their families remains our paramount consideration, and the return of any individual has been of their own choice.
Most of our colleagues, continue to work remotely and we anticipate that this will be the case for a reasonable period of time, probably measured in quarters rather than months.
We remain focused on pivoting to meet the needs of our clients and leveraging our broad and diverse capabilities to advise them, and the changing economic and financial environment.
The result is as follows: new M&A activity is being announced, in addition to the pre-downturn matters that have begun to reengage.
We are seeing continued momentum occurring in our capital advisory business both helping clients raise equity privately and publicly and advising clients on debt opportunities.
Restructuring and refinancing transactions are continuing and we are having constant dialog with our clients about their future financing needs.
And finally, we are experiencing strong engagement with investors looking for Research and our Wealth Management clients seeking strong financial advice.
Non-M&A activity, including underwriting has been a distinct opportunity during the past several months and has become an increasingly important part of our business in the current environment.
We've been able to support clients to enhance their liquidity, raise investment capital and shore up their balance sheets.
We are particularly proud of our CAPS product, which is designed to be an alternative to SPACs which we originated during the quarter and which we are in the early stages of building our convertible securities capability, including enhancing our distribution capabilities and our origination team.
There was a significant increase in M&A announcements in the third quarter and that momentum seems to be continuing in the fourth quarter.
Despite the many potential uncertainties which I outlined earlier as we look forward to the remainder of 2020 and into 2021, our backlogs are strong and we look forward to continuing our momentum in 2021 and in finishing this year strongly, and of course, we remain committed to maintaining our strong and very liquid balance sheet.
Let me now turn to our results.
We are quite pleased with our results for the third quarter and first-nine months of 2020 as the diversity of our capabilities and the entrepreneurial spirit of our team, allowed us to deliver revenues that are essentially flat year-over-year.
Below average M&A transactions in March, April, May, June affected our third quarter advisory results.
However, as you have seen, announced global M&A volumes nearly doubled in the third quarter compared to the second quarter and increased 38% compared to last year's third quarter in the US.
In the US, announced M&A volumes increased more than three-fold versus the second quarter and increased 55% compared to last year's third quarter.
Each of the three months of the third quarter both global and US announced M&A transaction volumes were higher than the monthly average of the last two years and in September, global announced monthly volume surpassed $450 billion for only the second time in the past few years.
Third quarter adjusted net revenues of $408.5 million and year-to-date adjusted net revenues of $1.36 billion were both flat versus the prior year periods.
As revenues from capital advisory, restructuring, underwriting and commissions and related fees largely offset the decline in revenues from lower M&A activity.
Third quarter advisory fees of $271.2 million declined 16% year-over-year and year-to-date advisory fees of $966.8 million declined 11% compared to the prior year period.
Based on the current consensus estimates and actual results, we expect our market share of advisory fees among all publicly reporting firms, on a trailing 12-month basis to be 8.3% compared to 8.1% at the end of June and 8.3% at year-end 2019.
Third quarter underwriting fees of $66.5 million increased more than 275% year-over-year, and the year-to-date underwriting fees of $181.2 million nearly tripled versus the prior year period.
The diversification of our underwriting business has contributed to a real step up in momentum.
Now, we continued to invest in broadening our industry coverage and our product capabilities.
We are working hard to sustain this momentum in the fourth quarter and have a meaningful and diversified pipeline of IPOs follow-ons and convertible securities.
Third quarter commissions and related fees of $43.9 million declined 6% year-over-year as the heightened volume and volatility of the first six months of the year subsided.
Year-to-date commissions and related fees of $153.4 million increased 12% versus the prior year period.
Asset management and administration fees were $16.6 million in the third quarter and $47.1 million for the year.
To date, an increase of 11% for the nine months and 7% -- I'm sorry, 11% for the quarter and 7% for the 9 months.
Turning to expenses, our adjusted comp ratio for the third quarter and the first nine months of 2020 is 63.6%, the 63.6% accrual for the first nine-months reflects, as it has in past years our estimate for the full year compensation ratio, which includes an estimate of 2020 incentive compensation.
This year, however, as we have pointed out on previous earnings calls there is higher level of uncertainty than in prior years about both the full-year revenues and full year market compensation.
Third quarter non-compensation costs of $71 million declined 18% year-over-year and year-to-date non-compensation costs of $230.9 million declined 9% versus the prior period.
Third quarter adjusted operating income and adjusted net income of $77.7 million and $52.6 million declined 8% and 13% respectively and adjusted earnings per share of $1.11 declined 12% versus the third quarter of 2019.
Year-to-date, operating income and adjusted net income of $262.9 million and $182.2 million declined 18% and 25% respectively and adjusted earnings per share of $3.85 declined 23% versus the prior period.
We remain committed to our historical capital return strategy in which we return earnings not needed in our business to shareholders through dividends and share repurchases.
Given our solid results for the first nine months of the year, we have -- which have resulted in good cash flow generation.
We are beginning to turn to that pre-COVID strategy.
Consistent with that view, our Board declared a dividend of $0.61 a $0.03 per quarter increase which is a 5% increase from the prior quarter.
We plan to return to our normal reassessment of the dividend in April of 2021, and to begin to restart our practice of returning our cash earnings that are not required in the business to investors through share repurchases.
Bob will provide additional detail on our cash position in his remarks.
We continue to see opportunities to further build out our capabilities and to expand geographically and we are building a pipeline of senior level A+ talent positions.
We also remain highly focused on developing and promoting our high talent professionals from within the firm.
Finally, we are especially proud of Evercore ISI's most recent showing in Institutional Investors Annual All-America Research Survey where we were recognized as the top ranked independent firm by a wide margin for the seventh year in a row and ranked number two or number three among all firms, large or small, depending upon how you count.
Ed Hyman Evercore ISI's Founder and Chairman was awarded the number one position in economics, a recognition he has earned 40 times.
Furthermore, Evercore ISI claimed a record 39 individual positions and tied its 2019 record of 36 team positions.
After several months of muted merger activity immediately following the onset of the global pandemic I believe that absent a negative event which could certainly happen, we are in the early stages of a recovery as many of the key conditions necessary for a healthy M&A market continue to improve.
The equity markets are strong for many sectors, access to financing and readily available credit remains, CEO confidence continues to improve and there appears to be greater stability in the markets.
As a result of these improving conditions, we are seeing increased opportunities to serve our clients across multiple industry sectors globally.
In financing, we have found multiple opportunities to help advise our clients in both equity and debt capital raises.
Despite the rapid government stimulus at the onset of the pandemic and the swift recovery in the credit markets, we expect restructuring and refinancing activity to stay elevated as leverage remains high across all sectors, especially those that are distressed.
Our restructuring group remains busy and continues to work through assignments and advise clients in sectors most hard hit by the pandemic.
Private Capital transactions for sponsors have increased and active assignments are beginning to reemerge, again as well.
While we are not yet back to pre-COVID levels, we are encouraged by the current pace of activity.
Returning to our investor clients, both institutional and wealth management clients remain focused on the evolving financial markets during the quarter and we continue to provide valuable research insights and wealth management advice.
We expect this focus to continue, particularly as we head into the year end.
Trading activity in the third quarter however has not been as high as the first six months of the year, as volatility has subsided.
I'm optimistic about the trajectory of the merger market overall, and I am pleased with our capital raising performance and our restructuring and debt advisory teams that have stepped up over these months.
Let me now turn to our performance in Investment Banking.
I'm encouraged to see activity levels with both corporate clients and financial sponsors broadly increasing across our platform in many sectors.
As announced, M&A activity increased during the quarter, we sustained our number one league table ranking for volume of announced M&A transactions over the last 12 months, both globally and in the US, among independent firms.
Among all firms we were once again number four, in the US in announced volume over the last 12 months.
As I said, our restructuring and debt advisory teams remain busy.
Our US restructuring group has already completed more transactions year-to-date than in all of 2019 and has been involved in nine of the 15 largest bankruptcies by total liabilities year-to-date.
We believe there will be further opportunities to advise our clients throughout what we expect to be an elongated restructuring cycle.
The team continues to do a great job partnering with and leveraging the expertise of our industry-focused bankers.
In shareholder advisory and activism defense and our Private Capital Advisory businesses, origination activity is beginning to pick up momentum.
There has been a pickup in unsolicited activity and we are pleased to be the financial advisor to CoreLogic, which is the biggest hostile situation at the moment.
Our Private Funds Group has successfully adapted to the virtual environment and has been a leader in this space, successfully completing virtual fund raises for both existing clients and new clients where the relationship has been developed entirely in remote environments.
Our equity capital markets business is performing extremely well.
We continue to gain momentum, and we are maintaining our focus on building our team.
We served as an active book runner or co-manager on six of the 11 largest US IPOs in the first nine months of 2020 and we played a key role in 30 underwriting transactions in the third quarter alone.
We are very proud to have served as the sole book runner -- our first US book run mandate ever on Executive Network Partnering Corporation's $360 million CAPS IPO.
This unique CAPS offering was pioneered, structured and developed here at Evercore and brings innovation to the increasingly popular SPACs market.
Clients continue to look opportunistically to raise capital and we are pleased with the breadth of the conversations and activity we are experiencing across a broad range of sectors including healthcare, financials, technology and energy.
We also continue to invest in broadening the business and building out the convertible origination team with important strategic hires.
Although it is still early days for us in the convertible space, we have served as an active book runner for Helix Energy Solutions Group's $200 million convertible bond offering during the quarter.
In our equities business our Investor and Corporate clients continue to rely on us for valuable macro and fundamental insights and our traders continue to help our clients execute in volatile markets.
As Ralph mentioned earlier, we are very proud of the team's institutional investor results.
I am very much encouraged by the current pace of activity and the momentum we are experiencing in our business.
Let me begin with a few comments on our GAAP results.
For the third quarter of 2020 net revenues, net income and earnings per share on a GAAP basis were $402.5 million, $42.6 million and $1.01 respectively.
For the first nine-months of 2020, net revenues, net income and earnings per share on a GAAP basis were $1.3 billion, $130.2 million and $3.09 respectively.
Our adjusted results exclude certain items related to the realignment strategy that began in the fourth quarter of 2019.
At this juncture, we are finalizing all of the required communications that remain and are associated with the realignment strategy and we are working hard to complete its execution by year-end.
Ultimately, we expect to incur separation and transition benefits and related costs of approximately $43 million which reflect a modest increase in the cost for our prior estimate.
During the third quarter of 2020, we recorded $7.3 million as special charges, which are excluded from our adjusted results.
Year-to-date we have recorded $37.6 million of special charges related to the realignment initiative.
As we mentioned earlier this year, we have entered into an agreement with the leaders of our business in Mexico to purchase our broker-dealer there, which principally provides investment management services.
Completion of this sale is subject to regulatory approval, which was submitted in June and is expected to occur shortly after that approval is received.
In addition, leaders from our advisory business in Mexico announced earlier this month that they are departing Evercore to form a new strategic advisory firm TACTIV, which we will partner with under a new strategic alliance.
We believe this alliance model best positions the team in Mexico to address client needs and build a diverse and growing array of capabilities.
Our adjusted results in the third quarter and first nine months of 2020 also exclude special charges of $0.1 million and $2.1 million respectively related to accelerated depreciation expense.
Turning to other revenues; in the third quarter other revenues increased compared to the prior-year period, primarily as a result of a gain of approximately $8 million on the investment funds portfolio which is used as an economic hedge against a portion of our deferred compensation program.
Other revenues for the first nine months of 2020 decreased versus the prior-year period, primarily reflecting a net gain of $1 million from this portfolio compared to $9.2 million for the first nine months of 2020.
Of course, this amount fluctuates as market values move and the continued strength of the market during the quarter, drove this quarter's gains.
Focusing on non-compensation costs, firmwide non-compensation costs per employee approximated $39,000 for the quarter, down 17% on a year-over-year basis.
The decrease in non-compensation costs per employee versus last year primarily reflects lower travel and related costs and lower professional fees.
As we continue to evolve toward more normal operation, costs associated with travel, professional fees and some other expenses will begin to recur.
Our GAAP tax rate for the third quarter was 23.5% compared to 28% for the prior year period.
On a GAAP basis, our share count was 42.3 million shares for the third quarter, our share count for adjusted earnings per share was 47.4 million shares.
Wrapping up and looking at our financial position, we held $1.1 billion of cash and cash equivalents at approximately $100 million of investment securities or $1.2 million of liquid assets as of September 30, 2020.
By comparison, at September 30, 2019 we held approximately $305 million at cash and cash equivalents and $620 million of investment securities or $920 million of liquid assets.
As we have discussed in the past, we hold cash and investment securities both for operations and to fund our deferred compensation obligations.
At the outset of the downturn, we shifted our holdings to a highly liquid portfolio, reducing expenditures and buybacks to maximize our financial flexibility.
We plan to begin to reestablish our longer-term investment portfolio, so that funds held to satisfy our deferred compensation obligations as well as a portion of our permanent capital base, generate a greater return.
This investment strategy will result in shifting funds to investment securities relative to cash and cash equivalents.
We continue to monitor our cash levels, liquidity, regulatory capital requirements, debt covenants and our other contractual obligations, including deferred compensation regularly, and as Ralph noted, we will begin to return cash earnings not needed to support these needs -- to our investors.
Just a couple of comments before we go to questions.
Second, during our last call, we talked about the importance of diversity and inclusion at Evercore.
We remain committed to pursuing our diversity and inclusion goals and I'm proud to share that during the quarter, we added diversity and inclusion as a stand-alone core value.
We are committed to holding ourselves both as individuals and as a firm, accountable in this important area and we look forward to continuing to make progress.
Finally, as Ralph and I shared with our employees during a recent virtual town hall that we conducted while socially distanced in the office we are all very much focused on finishing the year strongly and preparing for 2021.
While there are still uncertainties ahead, we have never been more optimistic about the strength, breadth and diversity of our platform to help our clients regardless of the environment.
Now, I'd like to invite you to ask questions. | compname posts qtrly diluted earnings per share $3.21.
compname reports record second quarter 2021 results; quarterly dividend of $0.68 per share.
evercore inc - qtrly diluted earnings per share $3.21. | 0 |
On a per share basis, third quarter earnings were $1.52 compared with $2.52 last year and $1.16 for the third quarter of 2019.
During the third quarter of 2021, the Company recorded pre-tax adjustments to earnings, including a $30 million impairment in one of the company's minority investments, $13 million of costs related to the wind down of the Footaction banner, and $14 million of acquisition and integration costs related to WSS.
As a reminder, last year's third quarter included a pre-tax non-cash gain of $190 million related to the higher valuation of GOAT.
On a non-GAAP basis, earnings per share were $1.93 compared to $1.21 for the third quarter of last year, and $1.13 for the third quarter of 2019.
Andy Gray, Executive Vice President and Chief Commercial Officer will then provide color on the key product and customer engagement highlights from the quarter.
Andrew Page, Executive Vice President and Chief Financial Officer will then review our third quarter results and provide guidance for the current fiscal year.
We are pleased to report that the third quarter was another great performance for our company, as we comped a strong back-to-school season from last year, battled supply chain challenges and delivered impressive bottom line results.
We also successfully completed the WSS acquisition during the quarter and subsequent to the quarter end, closed the Atmos transaction as well, bringing both of these great companies into the Foot Locker family of brands.
As we begin the fourth quarter, in the all-important holiday season, we continued to see three macro trends working in our favor.
Number 1 is the democratization of sneaker culture, with more brands and more consumers participating in the ecosystem of sneaker culture.
With our position as a multi-branded retailer through Foot Locker, Kids Foot Locker, Champs Sports x Eastbay and now, WSS and Atmos, we have an incredible connection to the marketplace and consumers.
Second is the growing emphasis on fitness and self-care, as people look to offset stress and work-from-home conditions by getting up and staying active to maintain their physical and mental wellness.
Whether it's home fitness, running, training, hiking or any number of other sport fitness categories, we see consumers are turning to and returning to Foot Locker to meet their fitness needs, and we see this trend increasing.
And third is the overall athleisure trend and further casualization of society.
Some of this is aided by the continued work-from-home environment, some of it by the new return-to-work hybrid model.
But overall, people want to be more comfortable, and that certainly plays into our strengths, especially around footwear, but also in our apparel business, which has been performing extremely well this year.
All of this to say, consumer demand remains strong, driven by mega trends and consumer adoption and demand that favors the brands and the categories we sell.
Spending continues to be fueled by people wanting to look good as they venture out again.
In terms of the global supply chain, we're all aware of the challenges.
It's a fluid situation that we are making every effort to manage, and we do have a few advantages.
First, we are a truly multi-branded retailer, with a diversified product mix serving a broad range of consumer needs across price points.
We like our position in terms of our assortment of brands, and we benefit from the very strong partnerships we have built with them over many decades.
In times like these, our partnerships are mutually beneficial, enabling us to look together as far into the future as possible to plan, collaborate and be solution-oriented.
Second, carrier capacity is something we always keep a close eye on, and we are much better positioned this year than in the past with FedEx, UPS and our pool carriers and with the US Postal Service as another alternative.
We've got better visibility than we've ever had on where their hot spots are, so we can manage customer expectations appropriately.
Third, we feel good about our distribution center staffing and capacity levels.
We are building in some additional flex capacity for the fourth quarter to ensure we are doing everything we can to effectively mitigate any macro pressures.
And fourth, we are focused on leveraging the advantage that having approximately 3,000 stores globally offers us to serve our customers and deliver the types of diversified product offerings, inclusive of apparel, accessories and complementary products that our customers come to us for.
In the third quarter, we successfully launched our controlled brands.
We are especially excited about this offense.
Our teams have been working hard to bring it to life in a big way and we are poised to push these brands meaningfully forward in the coming seasons.
At the same time, we are expanding our range of brand partners using programs like our innovative greenhouse incubator and LEED initiative to invest in up-and-coming designers, new concepts, exclusive collaborations and curated partnerships, all of which will ultimately help us provide a broader range of product offerings to our consumers.
And finally, but perhaps most importantly, we are benefiting from great connectivity with our consumers.
Elevating the customer experience has long been one of our strategic pillars.
We have great brand awareness and consumers continue to come to Foot Locker first.
I believe we have the best team in retail, the best partners in the business and we feel very good about where we're headed for the upcoming holiday season and beyond.
Turning to our recent acquisition of WSS.
It's been a great start with our back-to-school and overall Q3 results.
Some of the early progress includes setting up our team addition offense for WSS, which we believe is a big operational opportunity to get speed-to-market to support their apparel business.
We have also looked at our supply chain, technology and other operating contracts, and we've been able to secure some wins here as well.
All that to say, the early integration work is off to a good start.
We are very bullish on WSS, driven in part by their strong connection to the Hispanic consumer and because it's very complementary to our existing portfolio from a consumer perspective, a merchandise assortment and pricing approach and the geography and real estate standpoint.
We are encouraged to see new WSS stores perform above their budgets, giving us confidence to continue to expand the store base in the coming year.
Texas is our next WSS growth market.
Plans are well underway for Dallas and Houston, and we also see some fill-in market opportunities.
We continue to open stores in Northern California.
Turning now to Atmos.
We are excited to have closed the acquisition earlier this month.
This premium globally recognized, digitally led brand sits at the center of sneaker culture.
We are thrilled to have Hommyo san and his talented team officially onboard.
Similar to WSS, we are bullish on this high-growth business and are well underway with the integration process.
Turning to Champs Sports x Eastbay.
It's been about 18 months since we combined these operating units.
And in late January, we will be opening our first home field store in South Florida, which is the new concept where these two banners come together bringing the best of what they do individually to one singular location.
Our first home field store will be the largest format we have in our global fleet at about 35,000 gross square feet.
We will have several features that drop on the equity and the DNA of Champs Sports and Eastbay, inclusive of the best global brands and sport lifestyle performance.
We'll also have a dedicated zone for Eastbay training and performance footwear and apparel.
It will feature an athlete fuel station for guests with protein shakes and smoothies, nutrition bars and post-recovery workout-type supplements that consumers can enjoy in the space itself or buy products to take home with them.
There will be several digital and interactive parts of the store, including an activation space where we will hold coaching clinics training sessions and skill development or yoga workouts.
We will be live and interactive in bringing sport into the space, and we are excited to be able to connect with the community through those experiences.
We'll also be able to leverage our Eastbay Team Sports division through existing and new relationships with key schools.
In fact, there are 12 high schools within a 10-mile radius of the home field location.
We will look to expand the relationships with those schools, building bridges and opportunities with the athletic directors, coaches and athletes themselves.
We are very excited to see this experience come together as we pilot this new concept.
Our team has done an incredible job executing on the wind down and transitioning some of the locations to other banners.
To date, we've converted 18 locations, and there are another nine under construction, with over half of them rebranding as Foot Locker.
About 40% is Champs Sports and the remaining 10% of Kids Foot Locker.
Without exception, we have seen encouraging productivity gains with these stores performing above expectations and well above their previous results.
We have negotiated or worked with our lease flexibility to close about 85% of the total fleet by year-end.
We are continuing our negotiations with landlords for the approximately 35 stores that will remain open into fiscal '22.
We've had a great partnership with our vendors and are pleased with the vendor community's reception to the Footaction transition.
We've been able to transfer not only inventory, but also access to some brands and concepts that will bode well for some of our go-forward banners, especially Champs Sports and Eastbay.
Yesterday, we announced some exciting organizational enhancements to advance Foot Locker's long-term growth in omnichannel objectives.
Frank Bracken, Executive Vice President and Chief Executive Officer, North America, has been named Chief Operating Officer effective immediately.
In his new role, Frank will oversee the company's global operating divisions, the omni customer experience, inclusive of global technology services and supply chain, and our global franchise JV partnerships.
Susie Kuhn, Senior Vice President, General Manager of Foot Locker Europe, has been named as President of EMEA and General Manager of Foot Locker Europe, also effective immediately.
Andy Gray, Chief Commercial Officer, will expand his responsibility by leading our global commercial unit including product, the powering up of our controlled brands, omni-marketing, membership and commercial development and the LEED initiative.
Together, the announced leadership appointments and organizational enhancements underscore our focus on aligning our commercial, operations and finance functions to drive organizational productivity.
With a more agile operational structure, we will be in an even stronger position to expand our customer base and grow our connectivity with sneaker culture and the communities we serve.
Overall, our financial position remains strong.
Our vendor relationships are very strategic in nature, and we continue to obsess around our customers, whether it's through our digital channels, social media, FLX or an in-store customer experience.
Our solid Q3 performance is why we remain optimistic about the strength of our portfolio, the power of our assortments and the loyalty of our customers.
We are confident that this positive momentum will continue into 2022 and beyond.
It is their dedication and hard work that made these outstanding results possible and will enable us to continue to drive our business forward and fulfill our purpose to inspire in a power youth culture.
Throughout the quarter, we remain laser-focused on continuing to strengthen our relationships with our existing consumers and bringing new ones into our business.
This enabled us to beat our results from last year and continued to outpace 2019.
To give you a breakdown of our performance, our footwear business decreased low single digits, while our apparel and accessory businesses were both up double digits.
All families of business were up relative to 2019.
While our total men's business was down slightly, we saw acceleration in women's and positive momentum in kids' driven by our success at drawing in more consumers and the expansion of our sneaker community.
Again, all areas were positive to 2019.
We often saw a great vendor diversity showcasing the health of our category and the expansion of our consumers' taste preferences as they fill their sneaker and apparel closet.
The majority of our top 20 vendors posted gains driving excitement in their respective categories, all of which helped to offset supply chain disruption that impacted the flow of some of our franchisees and launch products.
Another area of our business that continues to gain momentum is apparel, which was up double digits in men's, women's and kids' versus both LOI and 2019.
Our branded business remains strong across categories, and our own brand business has expanded and accelerated.
In addition to our CSG business, which is our Champs Sports private label offering, we reimagined our Eastbay performance wear in the third quarter with a cross-category launch featuring Jalen Hurts.
And we introduced our Locker brand for the first time to great reception from our customers.
This momentum continues into Q4.
We are launching more own brands, including Cozy, a new apparel brand tailored for our female consumer.
We just launched All City by Just Don, a lifestyle brand created with Don C rooted in basketball and sneaker culture that is inspired by the spirit of community.
Don C has been a part of the cultural vanguard for decades as a music executive, fashion designer, sneaker collaborator and brand storyteller and this launch immediately resonated with the next generation of streetwear enthusiasts.
And we have upcoming exclusive partnerships with more taste makers and celebrity curators like Melody Ehsani as we continue to add dimension to our apparel business.
Store retailing continues to evolve and enable us to connect with our consumers as we work with all of our partners to deliver a strong pipeline of exciting exclusive product concept that set us apart in the marketplace.
We delivered 15 exclusive concepts in the third quarter, which were significant in terms of scale and consumer engagement.
And our powerful consumer concept offense continues throughout the holiday season, including Alter and Reveal with Nike, Adidas and Trey Young, Crocs and AWAKE collaboration, Louis De Guzman and New Balance, and a whole host of excitement from PUMA, including LaMelo Ball, LOL surprise and Staple.
This offense, together with our positioning in the key footwear franchises, continued seasonal expansion with an increased focus on boots and fleece and a very strong pipeline of product and inventory in apparel, leaves us well positioned to delight the consumer in the holiday season.
Local areas of development for the team in the quarter included enhancing our mobile and app experience where we see 90% of our online traffic come from evolving our launch reservation process with new data algorithms to improve fairness and work toward ensuring unique individual winners and enhancing our buy online, pick-up in store experience, leading to greater adoption.
Lastly, the ongoing expansion of our community stores and geo offense is a critical component of our strategy.
During the quarter, Downey in LA and Brixton in London opened their doors to great reaction from our consumers.
We also continued to build community through the rollout and expansion of our FLX membership program.
We now have over 28 million enrolled members with over 3 million joining in this quarter alone.
We remain encouraged by the results and engagement of our members who spend more and shop more often than nonmembers.
And there's still a lot of opportunity ahead of us with the program recently launching in Italy, Germany and Spain.
As we push our consumer-led offense forward, it's a combination of product leadership and diversity, enhanced omni experiences and our focus on community and purpose that continues to drive our leadership in the industry and strengthen our relationship with our consumers.
Let me now pass the call over to Andrew.
As we navigate the ongoing supply chain challenges, our strong third quarter results demonstrate the resilience and flexibility that our diversified product mix and our strong vendor relationships afford us.
During my review of the results, I would like to note that in addition to comparing to last year, I will also reference comparisons to the third quarter of 2019 where it is helpful.
On a year-over-year comparable basis, our third quarter sales were up 2.2% and earnings per share grew almost 60%.
Impressively, this strong result was on top of the robust 7.7% comp gain in last year's third quarter and speaks to the strong connection we have built with our customer base.
This connection was apparent during the back-to-school period where we saw strong customer engagement in our stores, digital and social channels, and growing attachment to our key initiatives like our FLX membership program.
From a cadence perspective, with school openings on a more normal schedule, August led with a low double-digit comp gain, while September comps, which benefited last year from the later school openings, declined high single digits.
We then saw momentum turn meaningfully positive in October with comp sales up low single digits.
Total sales for the quarter rose to $2.2 billion or a 3.9% increase over the prior year and up 13.3% versus the third quarter of 2019.
This includes a $56 million contribution from WSS since the close of the transaction in mid-September.
For the third quarter, our global fleet was open for 97% of possible operating days with temporary closures in Australia, New Zealand, certain markets in Asia and Germany.
Our year-over-year comp sales through our store channel increased 4.2%.
Store traffic increased approximately 30% compared to fiscal 2020 as our customers continued to want an in-store experience with our multi-brand product assortment.
When compared to fiscal 2019, traffic was down high single digits, and conversion was up significantly.
In our digital channels, which continued to be an important connection point with our customers, sales were down 4.6% in the third quarter as we lapped an approximate 50% increase from last year.
Digital sales penetration rate was 19.8%.
While down 160 basis points in 2020, it was well above the 15.3% from 2019.
Our customers continued to overwhelmingly start their shopping journey with us digitally.
And as we continued to create a seamless omni experience, they can easily close their transactions through our apps, our websites or in our physical stores.
Turning now to some highlights of our three geographies.
In North America, our Champs Sports, Foot Locker Canada and Kids Foot Locker banners led the way with low single-digit comp gains, at the top of last year's double-digit increases.
The other North American banners posted comp declines with Foot Locker in the U.S. down low single digits, Eastbay down high single digits and Footaction in wind-down mode closed the quarter down over 20%.
In EMEA, pent-up demand continues to drive growth as stores reopened across all countries with strength across apparel, women's footwear and strategic brands like Converse and New Balance, leading to another double-digit comp gain at Foot Locker Europe and high teens comp gain at Sidestep.
Our EMEA fleet was opened 99% of possible operating days in the quarter compared to 96% in the third quarter of last year.
Our APAC region was down slightly due to ongoing challenges related to COVID.
The fleet was open approximately 55% of possible operating days, down from 82% in Q2 of this year.
Foot Locker Pacific leveraged strong demand through the digital channel to offset the impact of the store closures and finished with a low single-digit comp gain, while Foot Locker Asia was down mid-single digits.
We continued to make progress on our expansion strategy within Asia as we opened two new stores and sold during the third quarter.
And earlier this month, we completed the acquisition of Atmos giving us a strong presence in Japan, one of the key markets in sneaker culture.
Across our markets, regions and channels, the combination of more limited promotional environment, solid demand and a higher penetration in our stores led to a low single-digit increase in average selling prices while units were down slightly.
Moving down the income statement.
Gross margin was 34.7% compared to 30.9% last year and 32.1% in the third quarter of 2019.
The improvement in our gross margin was driven by many of the same trends from the first half of 2021 as the combination of robust demand and fresh and lean inventory drove meaningfully lower levels of promotional activity.
Our merchandise margin rate improved 470 basis points over last year and 80 basis points over 2019, driven primarily by the meaningful reduction in markdowns.
Looking into the holiday season and the fourth quarter, we expect the promotional activity to remain favorable relative to both 2020 and 2019.
As a percent of sales, our occupancy and bias compensation costs delevered 90 basis points over Q3 of 2020.
As a reminder, in last year's third quarter, we benefited from $32 million of COVID-related tenancy relief versus $3 million this year.
When compared to Q3 of 2019, we leveraged our occupancy expense by 180 basis points.
Our SG&A expense came in at 20.9% of sales in the quarter compared to 20.1% in the prior year period.
When compared to 2019, our SG&A rate improved by 40 basis points.
For the quarter, depreciation expense was $49 million, up from $44 million last year.
Interest expense rose to $4 million from $2 million in the prior year due to the incremental expense related to the company's new bond issuance.
Within other income, there was a benefit of $26 million or $0.18 per share from the mark-to-market of our investment in Retailers Limited.
As a reminder, Retailers Limited is our partner in the joint venture that manages our Foot Locker stores in select Eastern and Central European market and is also our franchise partner in Israel.
Our non-GAAP tax rate came in at 27.8% compared to last year's rate of 30.7%.
Turning to the balance sheet.
We ended the quarter with approximately $1.3 billion of cash, down $54 million from a year ago.
At the end of the quarter, inventory was up 9.1% to last year, driven by our supply chain and logistics team efforts to position us well for the upcoming holiday season combined with the inventory that was included in the WSS acquisition.
On a constant currency basis, inventory was up 8.5% and sales increased 3.6%.
In terms of capital expenditures, we invested $50 million in the quarter, bringing the year-to-date total to $137 million.
This funded the opening of 32 new stores, including new Foot Locker community stores in Downey, California and Brixton, UK.
Champs Sports Power stores in the Bronx, New York and Torrance, California; the expansion of Sidestep in Belgium; and the conversion of 18 Footaction stores.
We also relocated or remodeled 29 stores and closed 80 stores in the quarter, including 50 Footaction stores.
With the addition of WSS stores, we finished the quarter with 2,956 company-owned stores.
For the full year, we now expect to open approximately 144 stores, including eight new WSS stores, remodel or relocate 200 stores and close 370 stores, including about 205 Footaction doors.
Looking forward, we now expect to invest approximately $240 million in capital expenditures this year, lower than our prior guidance of $260 million due primarily to supply chain challenges with the balance shifting into 2022.
Turning to capital allocation.
We and our Board are confident in the financial position of the company and continue to believe that returning cash to our shareholders is an important aspect of the company's capital allocation strategy.
First, we returned $30 million to our shareholders through our quarterly dividend program.
Next, we saw opportunity given the value of the company's stock, and we repurchased 2.75 million shares of common stock for $129 million during the quarter.
In total, we have returned $242 million to shareholders through the first nine months of the year through share repurchases and dividends while continuing to make strategic investments to fuel our growth.
We also returned to the capital markets during the quarter, taking advantage of favorable market conditions to create more flexibility by issuing $400 million worth of 4% senior notes due in 2029.
Proceeds from the issuance will be used for general corporate purposes such as repaying $98 million of senior notes due in January 2022 and replenishing our inventory levels.
Of note, following the capital raise, our liquidity position is comparable to pre-pandemic levels.
In summary, we are still on track with our capital allocation program investing in our business first, with a continued focus on returning cash to shareholders through our dividend and opportunistic share repurchase programs.
Finally, turning to our full year outlook, which now includes the benefit from WSS and Atmos.
We believe we are well positioned for the holiday season in terms of both strong customer demand and inventory levels to support that demand.
Like other companies, we expect global supply chain constraints, including factory shutdowns and port congestion to continue to be a headwind through the fourth quarter and into 2022.
As such, we remain appropriately cautious in the near term.
Based on our current visibility, we expect to deliver sales growth in the high teens for the full year, with comp sales in the mid-teens.
We are expecting the gross margin rate to be up 540 basis points to 550 basis points for the full year versus 2020, mostly driven by a more rational promotional environment.
Our SG&A expense rate is expected to leverage between 40 basis points and 50 basis points year-over-year.
Moving down the income statement.
We expect depreciation and amortization expense to be approximately $190 million, interest expense of about $14 million and our year-over-year effective tax rate of around 28%.
We now expect our non-GAAP earnings range to be approximately $7.53 to $7.60 per share.
This guidance reflects our strong performance in the first nine months of the year and our increased visibility in the fourth quarter while recognizing the supply chain challenges that we discussed.
As we look ahead to fiscal 2022, powered by the strength of our portfolio, the breadth of our assortments and the loyalty of our customers, we look forward to providing our fiscal 2022 outlook on our fourth quarter earnings call.
In closing, we believe the combination of our financial strength, strategic relationships with our vendor partners and deep connection with our customers provide us with flexibility to maneuver in this rapidly evolving marketplace through the fourth quarter and beyond, executing toward our long-term strategic imperatives and driving shareholder value.
We remain very confident in our strategy, are pleased with the trajectory we are currently on, and we look forward to updating you on our progress in the coming quarters. | fleetcor q4 earnings per share $2.44.
q4 adjusted earnings per share $3.01.
q4 earnings per share $2.44.
sees q1 adjusted earnings per share $2.60 to $2.80.
sees fy 2021 adjusted earnings per share $11.90 to $12.70.
sees fy 2021 revenue $2.6 billion to $2.7 billion. | 0 |
Joining me on the call today are President and Chief Executive Officer, Lynn Bamford; and Vice President and Chief Financial Officer, Chris Farkas.
These statements are based on management's current expectations and are not guarantees of future performance.
As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtiss-Wright's ongoing operating and financial performance.
Also note that both our adjusted results and full-year guidance exclude our build-to-print actuation product line that supported the 737 MAX program, as well as our German valves business, which was classified as held for sale in the fourth quarter.
I'll begin with the key highlights of our second quarter performance and an overview of our full-year 2021 outlook.
Starting with the second quarter highlights.
Overall, we experienced a strong 14% increase in sales.
Our aerospace and defense markets improved 11%, while sales to our commercial markets increased 21% year-over-year.
Diving deeper within our markets, we experienced double-digit sequential improvements in sales within our commercial aerospace, power and process and general industrial markets.
These markets were among the hardest hit by the pandemic last year and we are encouraged by their improving conditions.
Looking at our profitability.
Adjusted operating income improved 24%, while adjusted operating margins increased 120 basis points to 15.6%.
This performance reflects strong margin improvement in both the Aerospace and Industrial and the Naval and Power segments based upon higher sales, as well as the benefits of our operational excellence initiatives.
It's important to note that this strong performance was achieved while we continue to invest strategically with a $5 million incremental investment in research and development as compared to the prior year.
Based on our solid operational performance, adjusted diluted earnings per share was $1.56 in the second quarter, which was slightly above our expectations.
This reflects a strong 22% year-over-year growth rate, despite higher interest expense and a slightly higher tax rate, which were generally offset by the benefits of our consistent share repurchase activity.
Turning to our second quarter orders.
We achieved 11% growth and generated a strong 1.1 times book-to-bill overall, as orders exceeded one-time sales within each of our three segments.
Of note, our results reflect strong commercial market orders, which serves 50% year-over-year and included a record quarter of order activity for our industrial vehicle products covering both on and off-highway markets.
Within our aerospace and defense markets, book-to-bill was 1.15.
Next, to our full-year 2021 adjusted guidance where we raised our sales, operating income, margin and diluted earnings per share.
Our updated guidance reflects an improved outlook in our industrial markets, some additional planned R&D investments to support our top line growth and an increase to the full-year tax rate.
Chris will take you through the detail in the upcoming slides.
But in summary, we are well positioned to deliver strong results in 2021.
I'll begin with the key drivers of our second quarter results, where we again delivered another strong financial performance.
Starting in the Aerospace and Industrial segment.
Sales improved sharply year-over-year and this was led by a strong increase in demand of approximately 40% for industrial vehicle products to both on and off-highway markets.
The segment's sales growth also benefited from solid demand for surface treatment services to our industrial markets, which is driven by steady improvements in global economic activity.
Within the segment Commercial Aerospace market, we experienced improved demand for our Sensors products on narrow-body platforms.
However, as we expected, those gains were mainly offset by continued slowdowns on several wide-body platforms.
Looking ahead to the second half of 2021, we expect an improved performance within this market, led by increased production of narrow-body aircraft, including the 737 and A320.
Longer term, we see narrow-body aircraft returning to prior production levels by the 2023 timeframe, while wide-body aircraft may not fully recover until 2024 or even 2025.
Turning to the segment's profitability.
Adjusted operating income increased 138%, while adjusted operating margin increased 800 basis points to 15.7%, reflecting favorable absorption on higher sales and a dramatic recovery from last year's second quarter.
Also, our results reflect the benefits of our ongoing operational excellence initiatives in year-over-year restructuring savings.
And although we continue to experience minor influences from supply chain constraints in both container shipments and electronic components, this impact was immaterial to our overall results.
In the Defense Electronics segment, revenues increased 17% overall in the second quarter.
This was led by another strong performance from our PacStar acquisition, which is executing quite well and its integration remains on track.
Aside from PacStar, second quarter sales were lower on an organic basis due to timing on various C5 ISR programs in Aerospace Defense.
If you recall, we experienced an acceleration of organic sales into the first quarter for our higher-margin commercial off-the-shelf products as several customers took action to stabilize their supply chains due to concerns for potential shortage in electronic components.
Segment operating performance included $4 million in incremental R&D investments, unfavorable mix and about $2 million in unfavorable FX.
Absent these impacts, second quarter operating margins would have been nearly in line with the prior-year strong performance.
In the Naval and Power segment, we continue to experience solid revenue growth for our naval nuclear propulsion equipment, principally supporting the CVN-80 and 81 aircraft carrier programs.
Elsewhere, in the commercial Power and Process markets, we experienced higher nuclear aftermarket revenues both in the U.S. and Canada, as well as higher valve sales to process markets.
The segment's adjusted operating income increased 13%, while adjusted operating margin increased 30 basis points to 17.2% due to favorable absorption on higher sales and the savings generated by our prior restructuring actions.
To sum up the second-quarter results, overall, adjusted operating income increased 24%, which drove margin expansion of 120 basis points year-over-year.
Turning to our full-year 2021 guidance.
I'll begin with our end-market sales outlook, where we continue to expect total Curtiss-Wright sales growth of 7% to 9%, of which 2% to 4% is organic.
And as you can see, we've made a few changes highlighted in blue on the slide.
Starting in Naval Defense, where our updated guidance ranges from flat to up 2%, driven by expectations for slightly higher CVN-81 aircraft carrier revenues and less of an offset in the timing of Virginia-class submarine revenues.
Our outlook for overall aerospace and defense market sales growth remains at 7% to 9%, which, as a reminder, positions Curtiss-Wright to once again grow our defense revenues faster than the base DoD budget.
In our commercial markets, our overall sales growth is unchanged at 6% to 8%, though we updated the growth rates in each of our end markets.
First, in Power and Process, we continue to see a solid rebound in MRO activity for our industrial valves businesses.
However, we lowered our 2021 end market guidance due to the push out of a large international oil and gas project into 2022.
And as a result, we are now anticipating 1% to 3% growth in this market.
Next, in the general industrial market, based on the year-to-date performance and strong growth in orders for industrial vehicle products, we've raised our growth outlook to a new range of 15% to 17%.
And I would like to point out that at our recent Investor Day, we stated that we expect our industrial vehicle market to return to 2019 levels in 2022 and we have a strong order book to support that path.
Continuing with our full-year outlook.
I'll begin in the Aerospace and Industrial segment, where improved sales and profitability reflect the continued strong recovery in our general industrial markets.
We now expect the segment sales to grow 3% to 5%, and we've increased this segment's operating income guidance by $3 million to reflect the higher sales volumes.
With these changes, we're now projecting segment operating income to grow 17% to 21%, while operating margin is projected to range from 15.1% to 15.3% of 180 to 200 basis points, keeping us on track to exceed 2019 profitability levels this year.
Next, in the Defense Electronics segment.
While we remain on track to achieve our prior guidance, I wanted to highlight a few moving pieces since our last update.
First, based upon technology pursuits in our pipeline, we now expect to make an additional $2 million of strategic investments in R&D for a total of $8 million year-over-year to fuel future organic growth.
Next, in terms of FX, we saw some weakening in the U.S. dollar during the second quarter, and this will create a small operating margin headwind on the full year for the businesses operating in Canada and the UK.
In addition, we've experienced some modest impacts on our supply chain over the past few months, principally related to the availability of small electronics, which we expected to minimally persist into the third quarter.
And while this remains a watch item, particularly the impact on the timing of revenues, we're holding our full-year segment guidance.
Next, in the Naval and Power segment, our guidance remains unchanged and we continue to expect 20 to 30 basis points of margin expansion on solid sales growth.
So, to summarize our full-year outlook, we expect 2021 adjusted operating income to grow 9% to 12% overall on 7% to 9% increase in total sales.
Operating margin is now expected to improve 40 to 50 basis points to 16.7% to 16.8%, reflecting strong profitability, as well as the benefits of our prior-year restructuring and ongoing companywide operational excellence initiatives.
Continuing with our 2021 financial outlook, where we have again increased our full-year adjusted diluted earnings per share guidance, at this time to a new range of $7.15 to $7.35, which reflects growth of 9% to 12%, in line with our growth in operating income.
Note that our guidance also includes the impacts of higher R&D investments, a higher tax rate, which is now projected to be 24% based upon a recent change in UK tax law and a reduction in our share count, driven by ongoing share repurchase activity.
Over the final six months of 2021, we expect our third quarter diluted earnings per share to be in line with last year's third quarter and the fourth quarter to be our strongest quarter of the year.
Turning to our full-year free cash flow outlook, we've generated $31 million year to date.
And as we've seen historically, we typically generate roughly 90% or greater of our free cash flow in the second half of the year and we remain on track to achieve our full-year guidance of $330 million to $360 million.
I'd like to spend the next few minutes discussing some thoughts and observations since our recent May Investor Day.
I'll start with the President's FY '22 defense budget request, which was issued shortly after our Investor Day event.
The release reflected approximately 2% growth over the FY '21 enacted budget and was reasonably consistent with our expectations and plans.
The budget revealed continued strong support for the most critical U.S. naval platforms, including the CVN-80 and 81 aircraft carriers and the Columbia-class and Virginia-class submarines.
We believe the bipartisan support for the Navy's future provides us a strong base, from which we can grow our nuclear and surface ship revenues and has room for potential upside should they add a third Virginia submarine or another DDG destroyer.
We also expect ongoing support for the funding of the DoD's top strategic priorities, including cyber, encryption, unmanned and autonomous vehicles, all of which were highlighted in the budget release.
This bodes well for our defense electronics product offering, which support all of these areas.
Another bright spot was army modernization.
Despite cuts to the overall army budget, funding to upgrade Battlefield network is up 25% in the services FY '22 budget request to a total of $2.7 billion, which represents the single greatest increase among the Army's modernization priorities.
Further, it provides great confidence behind our decision to acquire PacStar, as they are in a prime position to capitalize on the ongoing modernization of ground forces.
Since then, we have also seen increasing signs of optimism as the budget makes its way through the Congressional markup.
The recent vote by the Senate Armed Service Committee to authorize an additional $25 billion to the Pentagon's budget for FY '22 represents a 3% upside to the President's initial request and an overall increase of 5% above the current fiscal year.
Though not final, this again provides confidence in our long-term organic growth assumptions across our defense markets.
Our pivot-to-growth strategy is led by a renewed focus on top line acceleration, which we expect to achieve through both organic and inorganic sales growth and our expectations to grow operating income faster than sales, which implies continued operating margin expansion.
Additionally, we are targeting a minimum of double-digit earnings per share growth over the three-year period ending in 2023 and continued free -- strong free cash flow generation.
Based on our new long-term guidance assumptions, we're minimally expecting low single-digit organic sales growth in each of our end markets.
We have good line of sight on achieving a 5% base sales growth CAGR, including PacStar, by the end of 2023.
In addition to the organic growth embedded within these expectations, we are focused on maximizing our growth potential in our key end markets based on the contribution from our continued incremental investments in R&D, as well as the benefits of our new operational growth platform.
We are reinvesting in our business at the highest level in Curtiss-Wright's recent history.
And as you know, it's an area that I'm very passionate about.
As you saw in our updated guidance, we increased our 2021 R&D investment by another $2 million, reflecting a total of $12 million in incremental year-over-year spending.
These investments are targeted at critical technologies and the highest growth vectors in our end markets such as MOSA in our defense electronics business.
Additionally, the rollout of the new operational growth platform is providing greater management focus, attention and energy to drive all things critical to growth from reinvigorating innovation and collaboration, to providing new opportunities in commercial excellence and strategic pricing.
As a result, we will have continued opportunities for cost reduction, which could free up money to cover short-term acquisition dilution, be distributed to R&D investments or result in margin expansion.
These will be focused and conscious investment decisions.
Further, I believe it's critical to point out that we will continue to drive our strong processes and dedication to operational excellence, with the same level of commitment and bigger that this team has demonstrated since 2013.
Lastly, I wanted to reiterate that our target for a minimum earnings per share CAGR of 10% over the three-year period is likely to incorporate annual share repurchase activity above our current base level of $50 million annually.
We remain committed to effectively allocating capital to drive the greatest long-term returns to our shareholders.
Therefore, the year-to-year allocation to share repurchases will vary, depending on the size and timing of future acquisitions that we bring into Curtiss-Wright.
Finally, with more management attention on M&A and a very full pipeline of opportunities, I feel very optimistic that we will have the opportunity to exceed 5% and approach the 10% sales targets as we find critical strategic acquisitions to bring into Curtiss-Wright.
In summary, we are well positioned to deliver strong results this year.
We expect to generate a high single-digit growth rate in sales and 9% to 12% growth in both operating income and diluted earnings per share this year.
Our 2021 operating margin guidance now stands at 16.7% to 16.8%, including our incremental investments in R&D.
And we remain on track to continue to expand our margins to reach 17% in 2022.
Our adjusted free cash flow remains strong and we continue to maintain a healthy and balanced capital allocation strategy to support our top and bottom line growth, while ensuring that we are investing our capital for the best possible returns to drive long-term shareholder value. | curtiss-wright raises full-year 2021 financial guidance.
q2 adjusted earnings per share $1.56. | 1 |
I am joined with our Chairman and CEO, Scott Santi and Senior Vice President and CFO, Michael Larsen.
During today's call, we will discuss fourth quarter and full year 2019 financial results and provide guidance for full year 2020.
Finally, I'd like to remind folks, we have our Investor Day coming up six weeks from today on March 13 in Fort Worth, Texas.
The ITW team delivered another quarter of solid operational execution and strong financial performance in Q4.
Despite some broad-based macro challenges, we delivered GAAP earnings per share growth of 9%, operating margin of 23.7% and after-tax return on invested capital of 28.9% in the quarter.
For the full year, against the backdrop of an industrial demand environment that went from decelerating in the first half of the year to contracting in the second half of the year, we're continuing to execute well on the things within our control.
As a result, despite revenues that were down $700 million or 4.5% year-on-year, we delivered record GAAP earnings per share of $7.74, expanded operating margin to 24.4% excluding higher restructuring expenses and group free cash flow by 9%.
In addition, we were able to raise our dividend by 7% and returned $2.8 billion to shareholders in the form of dividends and share repurchases.
Equally important, in 2019, we continued to make solid progress on our path to ITW's full potential performance through the execution of our enterprise strategy.
Last year, we invested more than $600 million to support the execution of our strategy and further enhanced the growth and profitability performance of our core businesses.
In addition, each of our divisions continued to make progress in executing well-defined and focused plans to achieve full potential performance in their respective businesses.
We look forward to providing a full progress update on our enterprise strategy and our progress toward ITW's full potential performance at our Investor Day in March.
Looking ahead, ITW's powerful and proprietary business model, diversified high quality business portfolio and dedicated team of highly skilled ITW colleagues around the world position us well to continue to deliver differentiated performance across a range of economic scenarios in 2020 and beyond.
In the fourth quarter, organic revenue declined 1.6% year-over-year in what remains a pretty challenging demand environment.
The strike at GM reduced our enterprise organic growth rate by approximately 50 basis points and Product Line Simplification was 60 basis points in the quarter.
By geography, North America was down 2% and international was down 1%.
Europe declined 1%, while Asia Pacific was flat.
Organic growth in China was broad-based across our portfolio and up 7% year-over-year.
As expected, our execution on the elements within our control remained strong in the fourth quarter.
Operating margin was 23.7%, including 40 basis points of unfavorable margin impact from higher restructuring expenses year-over-year.
Excluding those higher expenses, operating margin was up 10 basis points to 24.1%.
Enterprise initiatives contributed 130 basis points and price/cost was positive 30 basis points.
GAAP earnings per share was up 9% to $1.99 and included an $0.11 gain from three divestitures and $0.06 headwind from higher restructuring expenses year-over-year and foreign currency translation impact.
The effective tax rate in the quarter was 22.8%.
Free cash flow was 114% of net income.
And as planned, we repurchased $375 million of our own shares during the quarter.
Overall, Q4 was another quarter characterized by strong operational execution and resilient financial performance in a pretty challenging demand environment.
Let's move to Slide 4 and operating margin.
Overall, operating margin of 23.7% was down 30 basis points year-over-year, primarily due to higher restructuring expense.
Excluding those higher restructuring expenses, margin improved 10 basis points despite a 3% decline in revenues.
Enterprise initiatives were once again the highlight and key driver of our margin performance, contributing 130 basis points, the highest levels since the fourth quarter of 2017.
The enterprise initiative impact continues to be broad-based across all seven segments, ranging from 80 basis points to 200 basis points.
And the benefits of the restructuring activities that we initiated earlier in the year are being realized.
The majority of these restructuring projects are supporting enterprise initiative implementation, specifically our 80-20 front-to-back execution.
Price remained solid with price well ahead of raw material costs and price/cost contributed 30 basis points in the quarter.
Volume leverage was negative 30 basis points.
In Q4, as we always do, we updated our inventory standards to reflect current raw material costs.
As raw material cost in the aggregate have declined over the course of the year, the annual mark-to-market adjustments to the value of our inventory that we do every fourth quarter, this year had an unfavorable impact of 30 basis points versus last year.
We also had a favorable item last year that didn't repeat this year for 40 basis points.
And finally, the other category, which includes typical wage and salary inflation was 50 basis points.
So overall, solid margin performance again for the quarter and the year.
Turning to Slide 5 for details on segment performance.
As you know, 2019 was challenging from an industrial demand standpoint.
And you can see that the organic growth rate in every one of our segments -- seven segments was lower in 2019 than in 2018.
At the enterprise level, the organic growth rate swung from positive 2% in 2018 to down 2% in 2019 with the biggest year-on-year swings in our capex-related equipment offerings and automotive.
Speaking of automotive, let's move to the individual segment results starting with Automotive OEM.
Organic revenue was down 5% as the GM strike reduced revenues by approximately two percentage points.
Taking a closer look at regional performance, North America was in line with D3 builds, down 13%, Europe was essentially flat versus builds that were down 6% and China organic growth was 11% compared to builds, up one.
Moving on to Slide 6, Food Equipment had a good quarter with organic growth up 2% year-over-year despite a tough comp of 5% organic growth last year.
The service business was solid, up 4% in the quarter.
Equipment growth of 1% reflects double-digit growth in retail and modest decline in institutional and restaurants, against tough year-over-year comps for both of those.
Operating margin expanded 90 basis points to 27.5% with enterprise initiatives the main contributor.
Test & Measurement and Electronics had a very strong quarter with Test & Measurement up 6% with 13% growth in our Instron business.
This segment also experienced a meaningful pickup in demand from semiconductor customers.
Electronics was up 2%.
Margin was the highlight as the team expanded operating margin 330 basis points to a record 28.1%, the highest in the company this quarter with strong contributions from enterprise initiatives and volume leverage.
Also in the quarter, we divested Electronics business with 2019 revenues of approximately $60 million.
Turning to Slide 7.
Welding organic revenue declined 4% against a tough comparison of 8% growth last year.
North America equipment was down 3% against a tough comparison of up 7% last year.
The lower demand is primarily in the industrial business, while commercial, which includes smaller business and personal users was pretty stable.
Oil and gas was down 2%.
Operating margin was 25.4%, down 150 basis points, primarily due to higher restructuring expenses.
In the quarter, we divested an installation business with 2019 revenues of approximately $60 million, which reduced Welding's organic -- which overall growth rate by 150 basis points in the quarter.
Polymers & Fluids' organic growth was down 2% versus a tough comp of plus 4% last year.
Polymers was flat, Automotive aftermarket was down 1%, Fluids was down 6%.
Operating margin was strong, up 150 basis points, driven primarily by enterprise initiatives.
Moving to Slide 8.
Construction organic revenue was down 1% with continued softness in Australia/New Zealand, which was down 4%.
Europe was down 3% with the U.K. down 14%.
North America was up 2% with residential remodel up 2% and commercial up 5%.
Operating margin was 22.2% down due to the inventory mark-to-market adjustments and higher restructuring expenses.
In Specialty, organic revenue was down 3%, which on a positive note, is an improvement from the past couple of quarters.
As in prior quarters, the main drivers are significant PLS and the relative performance of the businesses we have identified as potential divestitures.
Excluding these potential divestitures, core organic growth was down 1.7%.
By geography, North America was down 4% and international 3%.
We also divested a business in this segment with 2019 revenues of approximately $15 million.
And these divestitures reduced Specialty's growth rate by almost eight percentage points.
Now let's quickly review full year 2019 on Slide 9.
In a challenging industrial demand environment, organic revenue was down 1.9% with total revenues down 4.5% as foreign currency translation impact reduced revenues by 2.3% and divestitures by 30 basis points.
GAAP earnings per share was $7.74 and included $0.09 of divestiture gains, as well as $0.32 of headwinds from foreign currency and higher restructuring expenses year-over-year.
Operating margin was 24.1% -- 24.4% excluding higher year-on-year restructuring expense as enterprise initiatives contributed 120 basis points.
After-tax return on invested capital improved 50 basis points to 28.7%.
Our cash performance was very strong with free cash flow up 9% and a conversion rate of 106% of net income.
We made significant internal investments to grow and support our highly profitable businesses, increased our annual dividend by 7% and utilized our share repurchase program to return surplus capital to our shareholders.
A quick update on our various divestiture processes that overall remained on track.
As a reminder, we're looking to potentially divest certain businesses with revenues totaling up to $1 billion and are targeted to complete the effort by year-end 2020.
The strategic objective with this phase of our portfolio management effort is to improve our overall organic growth rate by 50 basis points and improve margins by approximately 100 basis points.
Not counting potential gains on sales, the plan is to offset any earnings per share dilution with incremental share repurchases.
In the fourth quarter, we completed the sale of three businesses with combined 2019 revenues of approximately $135 million, generating a pre-tax gain on sale of $50 million or $0.11 a share.
In 2019, these businesses were a 20 basis points drag to our organic growth rate and 10 basis points to our margin rate.
On Slide 10, we wanted to give you a quick update on the progress that we're making on our organic growth initiatives.
We estimated the aggregate market growth rate or decline for each one of our segments and compared it to the segments actual organic growth rate in 2019.
We also included Product Line Simplification by segment.
As you know, full potential steady state PLS is expected to be about 30 basis points.
As you can see overall, we've made some good progress, as our segments are all outgrowing their underlying markets, except for Specialty Products.
At the enterprise level, we estimate that we outpaced our aggregate blended market growth rates by approximately one percentage point.
So overall good progress on our organic growth initiatives.
And by completing our Finish the Job agenda over the next several years, we expect to generate one to two percentage points of additional improvement in ITW's organic growth rate.
As Scott mentioned, we look forward to providing a full progress update at our Investor Day in March.
Now let's talk -- let's turn the page and talk about 2020, starting with Slide 11.
First, we expect GAAP earnings per share in the range of $7.65 to $8.05 for 2020.
Using current levels of demand adjusted for seasonality, organic growth at the enterprise level is forecast to be in the range of 0% to 2% for the year.
At current exchange rates, foreign currency translation impact and the revenue associated with our 2019 divestitures are each of -- one percentage point headwind to revenue.
PLS impact is expected to be approximately 50 basis points.
We expect to expand operating margin from 24.1% in 2019 to a range of 24.5% to 25% in 2020 with enterprise initiatives contributing approximately 100 basis points.
After-tax ROIC should improve to a range of 29% to 30%.
And as usual, we expect strong free cash flow with conversion greater than net income.
We have allocated $2 billion to share repurchases with core share repurchases of $1.5 billion, an additional $500 million to offset the earnings per share dilution from the three completed divestitures.
Additional items include an expected tax rate in the range of 23.5% to 24.5%, which represents a 10% -- $0.10 earnings per share headwind and foreign currency at today's rates is also unfavorable $0.10 of EPS.
Just a quick word as it relates to the Coronavirus situation in China and we're obviously in the same position as everyone else.
At this point, we've baked into our guidance a last week of production, assuming that we all return to work in China on February 10.
But obviously it's too early to tell and we'll continue to monitor the situation closely.
Overall, ITW is well positioned for differentiated financial performance across a wide range of scenarios as we continue to execute on the things within our control and make meaningful progress on our path to full potential performance through the implementation of our Finish the Job enterprise strategy agenda.
Finally, we're providing an organic growth outlook by segment for full year 2020 on Slide 12.
And as always, these are based on current run rates adjusted for seasonality and are obviously influenced by year-over-year comparisons as we go through the year.
It's important to note that there is no expectation of demand acceleration embedded in our guidance.
You can see that every segment is forecast to improve the organic growth rate in 2020 relative to 2019.
The same is true for margins, as every segment expects to improve the margin performance in 2020.
Julianne, we're ready to open up the lines for Q&A. | q4 gaap earnings per share $1.99.
sees fy earnings per share $7.65 to $8.05.
illinois tool works inc - plans to repurchase approximately $2 billion of its shares in 2020.
illinois tool works inc qtrly organic revenue down 1.6%.
illinois tool works inc - at current levels of demand, sees 2020 organic growth to be in range of 0% to 2%. | 1 |
Additionally, David Bray, Group President, Poultry; Noelle O'Mara, Group President, Prepared Foods; and Shane Miller, Group President, Fresh Meats will join the live Q&A session.
I'll start by saying that the safety of our team members continue to be our top priority and I'm very pleased that we now have a team in the US that is fully vaccinated.
As we focus on meeting the needs of our customers and consumers, vaccination is the best way that we can protect our team members from the impacts related to COVID-19 and ensure business continuity.
Earlier today, we reported strong fourth quarter and fiscal year 2021 results.
We delivered double-digit sales and earnings growth in a challenging year.
Our performance was supported by continued strength in consumer demand for protein.
Our retail core business lines which include our iconic brands Tyson, Jimmy Dean, Hillshire Farm and Ball Park have driven strong share growth in the retail channel delivering 13 quarters of consecutive growth.
Continued recovery in the foodservice channel led by QSRs also supported our strong results.
Overall, we saw our volume recovery in the second half from the pandemic lows to finish the fiscal year only slightly down.
We are taking several deliberate actions by segment to improve our volumes including investing behind capacities, brand and product innovation and our team members.
Our investments in team members include our successful vaccination mandate as well as automation and technology initiatives that I'll discuss in a moment.
The construction of the 12 new plants that we've mentioned previously are progressing well and once complete will enable Tyson to address capacity constraints and growing global demand for protein.
These new capacities include nine chicken plants, two case-ready beef and pork plants and one new bacon plant.
In parallel to our actions to improve volume, we have also work to recover inflation through pricing, achieving a 13% price improvement for the fiscal year and a 24% increase for the fourth quarter.
In this dynamic environment, we will be aggressive in monitoring inflation and driving price recovery activities.
And the diversity of our portfolio showed its value again this quarter as demonstrated by earnings, performance in our beef segment supported the delivery of a strong fiscal year earnings results.
Our performance has allowed us to build financial strength.
Our balance sheet is strong, resilient and provides Tyson the optionality needed to pursue strategic growth priorities.
And to that point, our investment in future growth across our portfolio continue.
We demonstrated resilience in fiscal year 2021 and we are entering fiscal 2022 with tremendous momentum.
Our results demonstrate the dedication of our global team, the importance of our diverse portfolio strategy and our ability to meet consumer demand across proteins, channels and meal occasions.
Now turning to financial results, let me give you some highlights overall.
I was pleased with both a strong quarter and full year.
Sales improved 20% in the fourth quarter and 11% during the full year.
Our sales gains were largely driven by higher average sales price.
Average sales price trends reflect successful pricing strategies during the ongoing inflationary environment, but we still have opportunities specifically in prepared foods where we delivered softer results than anticipated.
Like many other companies, we were faced with a range of higher levels of inflation notably higher grains, labor, meat and transportation cost.
Our teams have worked together with our customers to pass along that inflation through price increases.
On volume, we saw improvement in the second half relative to the same period last year.
Volumes were up 3% for the second half or nearly 350 million pounds.
Although we are working diligently to achieve optimal throughput across our segments, labor challenges are still impacting our volumes and ability to achieve optimal mix across our processing footprint.
Having said that, we're taking aggressive active actions as a team to address labor constraints and we're seeing improvements.
We delivered solid operating income performance, up 26% during the fourth quarter and 42% for the full year.
This performance was largely due to strength in our beef segment where continued strong consumer demand and ample cattle supply have driven higher earnings.
Overall, our operating income performance translated to earnings per share of $2.30 for the fourth quarter, up 35% and $8.28 for the full year, up 53%.
Looking at our results on volume, we are taking aggressive actions to optimize our existing footprint, add new capacity, adjust our product mix by plant and match our portfolio more closely with customer and consumer needs.
For the fiscal year, our volume was down slightly.
Customer demand during the fiscal '21 outpaced our ability to supply products, but we're working aggressively to fill that void.
We recognize how important service levels are to our customers and we're committed to improving our fill rates and reliability of supply.
With respect to supply, we have focused on ensuring our ability to maintain business continuity and our team has been resilient in the face of numerous supply chain challenges.
As we look toward fiscal '22, improving volumes will be key to delivering against our commitments.
We expect to grow our total Company volumes by 2% to 3% next year, outpacing overall protein consumption growth.
A large percentage of that growth will come from the chicken segment and across our business we're working to optimize our product portfolio, remove complexities, enhance capacities and pursue operational improvement initiatives to deliver against these volume growth objectives.
We fully understand that this starts with an unrelenting focus on safety, every minute, every shift, every day.
The health, safety and wellness of our team members has been and will continue to be our top priority.
So I'd like to take a minute to stop and commend our team members and our leadership team for doing their part to keep themselves, their colleagues, their families and their community safe, which has helped us reach our vaccination goals.
The vaccines and investments in COVID-19 protection measures are certainly not the only actions that we've taken to become the most sought after place to work.
To ensure that every Tyson team member feels as though they can bring their true and complete self to work each day, we've invested behind diversity, equity and inclusion efforts and we also understand the importance of a strong compensation offering and we believe that we hold a leadership position in this space.
We have raised wages and across our business today, we pay an average of $24 per hour, which includes full medical, vision, dental and other benefits like access to retirement plan and sick pay, and we will continue to explore other innovative benefit offerings that remove barriers and make our team members lives easier.
We're also accelerating investments in automation and advanced technologies to make existing roll safer and easier while reducing cost.
We're confident that our actions will increase Tyson staffing levels and position us for volume growth.
Relating to operational excellence and market competitiveness, today we are announcing the launch of the new productivity program designed to drive a better, faster and more agile organization that is supported by culture of continuous improvement and faster decision-making.
The program is targeted to deliver $1 billion in recurring productivity savings by the end of fiscal '24 relative to fiscal '21 cost baseline.
These savings are included in the guidance expectations that Stewart will share in a moment.
Execution of the effort will be supported by our program management office that will ensure delivery of key project milestones and report on savings achievements connected to three imperatives.
The first is operational and functional excellence and is targeted to deliver greater than $300 million in recurring savings.
This includes functional efficiency efforts in finance, HR and procurement that are focused on applying best practices to reduce cost.
The second is digital solutions, which is targeted to deliver more than $250 million in recurring savings.
We'll achieve this goal by leveraging new digital solutions like artificial intelligence and predictive analytics to drive efficiency and operations, supply chain, planning, logistics and warehousing.
For example, we're using technology to ensure that our shipments are optimally loaded to say freight cost and enhance customer service levels.
In many ways the pandemic has already accelerated our push to more digital footing and our commitment in this space will continue that focus.
The third is automation.
We will leverage automation and robotics technologies to automate difficult and higher turnover positions.
For example, we have substantial opportunity to automate the debone process within our poultry harvest facilities using the combination of both third-party and proprietary technologies.
Chicken remains the top priority for me personally and for our Company.
We continue to execute against our roadmap to bring operating income margin to at least the 5% to 7% range on a run rate basis by mid fiscal '22.
Our goal has not changed and we remain committed to restoring top-tier performance.
The first imperative is to be the most sought after place to work.
I've outlined the investments we're making to enhance our team member experience in my earlier comments.
This will ensure that we have the right levels of staffing to fulfill our customer orders on time and in full.
The second imperative is to improve operational performance.
Critical to improving operational performance is maximizing our fixed cost leverage, which means having enough birds in our internal networks to run our plants full.
By reconfiguring and optimizing our existing footprint, we can increase our harvest capacity by more than 10% without building another plant.
In addition, we have clear initiatives to remove complexity from our plant, reduce transportation and handling and minimize waste.
Our operational improvements will unlock significant unused capacity in our network and take advantage of the fixed cost leverage.
Each of these initiatives will support leading operational performance from our chicken business in the future.
Hatch rates have impacted our ability to do this and we've shared the initiatives underway to correct this.
Our new male rollout is progressing as planned and we believe we've hit the inflection point that will lead to sequential improvements through the entirety of fiscal 2022.
The new male rollout at our pellet [Phonetic] farms is nearly complete and we continue to observe improved hatch rates associated with these new males.
We've also mentioned how strengthened spot prices for commodity chicken products throughout the fiscal year has put our buy versus grow program at a relative disadvantage versus history.
From Q3 to Q4, we again reduced our rate of outside purchases this time by nearly 30%.
The final imperative is to service our customers on time and in full.
Tyson's branded value-added product offerings have continue to gain share during both the fourth quarter in the latest 52 weeks and new capacity expansions will help us maintain momentum.
Inflation has clearly had an impact on the business.
Our commercial teams have successfully pursued inflation justified pricing delivering top line growth for the business to offset the cost increases.
As rates of inflation continue, so with our pricing actions with an equivalent level of instances [Phonetic] on disciplined operational execution and volume throughput.
We will staff our plants, service our customers, grow volumes and be the best chicken business.
The plan we have in place is still the right plan and our level of confidence, conviction and excitement as a team continue to grow.
Looking forward to fiscal year 2022, I feel confident in our ability to drive value creation.
We have strong consumer demand, a powerful and diverse portfolio across geographies and channels and the team that is positioned to take advantage of the opportunities in front of us.
Our priorities are clear, winning with customers and consumers, winning with team members and winning with excellence in execution.
With these priorities as our guide, we are taking aggressive actions to accelerate our growth relative to the overall market, improve operating margins and drive strong returns on invested capital.
We are committed to our team members with a focus on ensuring their health, safety and well-being as well as ensuring an inclusive and equitable work environment, every shift, every day, every location with no exceptions.
We have shown that we are willing to take bold actions in support of this commitment.
Second, we are working to enhance our portfolio and capacity to better serve demand.
This includes increasing the contribution of branded and value-added sales by focusing our product portfolio and by adding capacity to meet demand.
We expect our volume to outpace the market in the intermediate term.
Third, we are aggressively restoring competitiveness in our chicken segment.
This starts by returning our operating margin to the 5% to 7% level by the middle of fiscal 2022.
Fourth, we are driving operational and functional excellence and investing in digital and automation initiatives.
This is at the heart of our new productivity program.
We are working diligently to drive out waste, minimize bureaucracy, enhance decision making speed across the organization.
Finally, to address expected demand growth over the next decade, we're using our financial strength to invest in our business through both organic investments and strategic M&A.
On capital loan, we expect to invest $2 billion in fiscal year '22 with a disproportionate share focused on new capacity and automation objectives.
Tyson has the right portfolio, the consumer-driven insight and the scale and the capabilities to win in the marketplace across proteins, channels and meal occasions.
We also have the financial strength to invest behind our business to accelerate growth and to maintain our momentum.
I look forward to sharing with you our progress as we work through the year and I'll be sharing more details with you at our Investor Day in a few weeks.
Let me turn first to a summary of our total Company financial results.
We're pleased to report a strong overall finish to the year.
Sales were up approximately 20% in the fourth quarter largely a function of our successful pricing initiatives that we've pursued to offset inflationary pressures.
Volumes were down 4% during the fourth quarter primarily due to labor challenges hampering our efforts to fully benefit from strong retail demand and recovery in foodservice.
Fourth quarter operating income of nearly $1.2 billion was up 26% due to continued strong performance in our beef business.
For the full year, operating income improved to nearly $4.3 billion up 42%.
Driven by the strength in operating income, fourth quarter earnings per share grew 35% to $2.30 with the full year up 53% to $8.28.
Slide 11 bridges our total Company sales for fiscal year '21.
Sales dollars were up across all segments as you can see the most substantial sales dollars benefit came from the beef segment which saw market conditions that led to a wider than historical cut out margin.
At the same time, we sought price increases across the business to offset the high levels of inflation we faced.
Looking at our channel result, sales of retail drove over $1 billion of top line improvement versus last year even after exceptionally strong volumes in the comparable period.
Improvements in sales through the foodservice channel drove an increase of $1.6 billion and our fiscal year export sales were nearly $1 billion stronger than the prior year as we leveraged our global scale to grow our business.
Slide 12, bridges year-to-date operating income which was about $1.3 billion higher than fiscal 2020.
As I mentioned previously, volumes were down slightly during the year primarily result of a challenging labor environment.
Our pricing actions and strength in the beef segment led to approximately $5.6 billion of sales price mix benefit, which more than offset the higher COGS price-mix of $4.6 billion.
We saw inflation across the business, notable areas where in wages, grain cost, live animal costs and pork, meat cost and prepared foods and freight costs across the enterprise.
Incremental direct COVID-19 costs were favorable by approximately $200 million during the year although our total spending at $335 million was still substantial.
The decrease was driven primarily by cycling one time bonuses that were paid last year and a large portion of that was reinvested in permanent wage increases for our team members this year.
Lower one-time bonus costs were partially offset by higher testing and vaccination cost incurred during fiscal 2021.
While these costs are expected to reduce in fiscal '22, we will continue to spend against initiatives to keep our team members safe.
And finally, SG&A was over $100 million favorable to prior year, which was largely a result of a net benefit associated with the beef supplier fraud [Phonetic].
Now moving to the beef segment.
Segment sales were over $5 billion for the quarter, up 26% versus the same period last year.
Key sales drivers included strong domestic and export demand for beef products.
Offsetting higher sales prices were higher cattle costs, up more than 20% during the fourth quarter.
We had ample livestock available in the quarter driven by strong front-end supplies and we have good visibility into cattle availability through fiscal '22 and currently believe it will also be sufficient to support our customer needs.
Sales volume for the quarter was up year-over-year due to continued strong demand in contrast to a soft comparable period a year ago driven by lower production volumes.
We delivered segment operating income of $1.1 billion or 22.9% for the fourth quarter.
This improvement was driven by strong global demand for beef products and a higher cut-out which were partially offset by higher operating costs.
While our beef segment experienced strong results during the quarter and fiscal year, we are still not at optimal levels of capacity throughput due to labor challenges, which we expect to normalize over the course of fiscal '22.
Now, let's move on to the pork segment on slide 14.
Segment sales were over $1.6 billion for the quarter, up 30% versus the same period last year.
Key sales drivers for the segment included higher average sales price due to strong demand and increased hog costs, partially offset by a challenging labor environment.
Average sales price increased more than 40%, our volumes were down relative to the same period last year.
Segment operating income was $78 million for the quarter down 52% versus the comparable period.
Overall, operating margins for the segment declined to 4.7% for the quarter.
The operating income decline was driven by higher hog costs and increased labor and freight costs.
Moving now to prepared foods.
Sales were $2.3 billion for the quarter, up 7% relative to the same period last year.
Total volume was down 5.7% in the quarter with strength in the retail channel and continued recovery in food service more than offset by labor challenges.
Sales growth outpaced volume growth driven by inflation justified pricing and better sales mix.
During the fourth quarter, retail core business lines experienced their 13th straight quarter of volume share growth driven by consumer demand for our brands and continued strong brand execution by our team.
Operating margins for the segment were 1.7% or $39 million for the fourth quarter.
A slowdown in segment operating margins versus the same quarter last year was driven by significant increases in raw material input costs that we were not able to fully recover through price during the quarter.
For the full year, operating income margin was 7.6% or $672 million.
As we mentioned last quarter, the ongoing inflationary environment created a meaningful headwind for prepared foods during the fourth quarter.
Raw material cost, logistics, ingredients, packaging, labor have increased our cost of production.
We've executed pricing, revenue management and commercial spend optimization initiatives while ensuring the continued development of brand equity through marketing and trade support.
We expect to take continued pricing actions to ensure that any inflationary cost increases that our business incurs are passed along.
Pricing has lagged inflation, but we expect to recover those cost increases during fiscal '22.
Moving into the chicken segment's results.
Sales of $3.9 billion for the fourth quarter, up 21%.
Volumes improved 1.3% in the quarter as strong consumer demand offset both labor challenges and the detrimental impact of a fire at our Hanceville rendering facility.
Our teams have been focused on streamlining our plans to deliver higher volumes and we expect to deliver substantial volume improvements in fiscal '22 as the hatch rate recovers and we operate our plants more efficiently.
Average sales price improved over 20% in the fourth quarter and 11.4% for the fiscal year, compared to the same periods last year.
This increase is due to favorable product mix and price recovery to offset cost inflation.
Our pricing has admittedly lagged our realization of cost inflation, but we made tremendous progress in the last few months to close that gap and are now seeing those benefits.
We have restructured our pricing strategies given our experience in fiscal '21 to ensure that we have the flexibility to better respond to market and inflationary conditions.
Chicken experienced an operating loss of $113 million in the fourth quarter.
The segment earned $24 million representing an operating margin of 0.2% for the fiscal year 2021.
Operating income was negatively impacted by $945 million of higher feed ingredient cost, grow-out expenses and outside meat purchases.
For the fourth quarter, feed ingredients were $325 million higher than the same period last year.
Segment performance also reflects net derivative losses of $75 million during the fourth quarter, which was $120 million worse than the same period last year.
Turning to slide 17.
In pursuit of our priority to build financial strength and flexibility, we have substantially de-levered our business over the past 12 months, reducing leverage to 1.2 times net debt to adjusted EBITDA as we paid down $2 billion of debt while growing our earnings and cash flow.
Investing organically in our business will continue to be an important priority and will help Tyson increase production capacity and market capability.
Each of these levers will support strong return generation for our shareholders.
We will also continue to explore positive -- optimize our portfolio through M&A through the lenses of value creation and shareholder return.
Finally, as our track record has demonstrated, we are committed to returning cash to shareholders through both dividends and share buybacks.
We're pleased to announce that last week our Board approved $0.06 increase to our annual dividend payment now totaling $1.84 per Class A share.
Let's now discuss the fiscal '22 financial outlook.
We currently anticipate total Company sales between $49 billion and $51 billion which translates to sales growth of between 5% and 7%.
We expect 2% to 3% volume growth on a year-over-year basis as we work to optimize our existing footprint and run our plants full.
Our new productivity initiative is expected to deliver $300 million to $400 million of savings during fiscal '22 driven by operational and functional excellence initiatives, the rollout of digital solutions across the enterprise and extensive automation projects that are currently underway.
Now as we look at the organic growth opportunities ahead for our business, we expect a meaningful increase in capex spending to pursue a healthy pipeline of projects with strong return profiles.
We currently anticipate capex spending of approximately $2 billion during fiscal '22, an increase of roughly $800 million.
This investment will support our initiatives to meet global protein demand growth into the future, allow us to gain share and will deliver strong financial returns for our shareholders.
Excluding the impact of changes from potential tax legislation, we currently expect our adjusted tax rate to be around 23%.
We anticipate net interest expense of approximately $380 million because of intentional deleveraging during fiscal '21.
Liquidity is expected to significantly exceed our target, while net leverage is expected to remain well below 2 times net debt to adjusted EBITDA.
It is important to note though that over the last two years, working capital has been a source of cash.
We don't expect this to be the case in fiscal '22.
Moving forward, our business growth will require increased working capital, which combined with deferred tax payments under the CARES Act taxes on the gain of the pet treats divestiture, litigation settlements and other discrete items will lead to a substantial use of cash during fiscal 2022.
Now let's look at how each of our segments will contribute to that total Company performance.
Prepared Foods is expected to deliver margins during fiscal '22 of between 7% and 9%.
We will remain disciplined and agile in our pricing initiatives to ensure that any additional inflationary pressures are passed along to customers, while also working diligently to deliver productivity savings to reduce costs.
We expect the beef segment to continue to show strength due to prolonged industry dynamics leading to segment margins of between 9% and 11%.
We expect the front half of the year to be meaningfully stronger than the back half as industry and labor conditions are expected to normalize part way through the year.
In chicken, our operational turnaround is working and we still expect to achieve run rate profitability of 5% to 7% by the middle of the year.
We expect this will be achieved through sequential quarterly margin improvements during the first half of the year resulting in full year margins that fall between 5% to 7% although expected at the lower end of that range.
In pork, we expect similar performance during fiscal '22 to what we accomplished during fiscal '21 equating to a margin of between 5% and 7%.
In International and other, we expect margins of 2% to 3% as capacity expansions and strong global demand support volume growth and improved profitability.
Our segments individually and in aggregate have clear and compelling role within Tyson's portfolio strategy.
They deliver diverse counter cyclical performance that supports the Company's long-term earnings objectives and delivers strong value for shareholders.
Operator, please provide the Q&A instructions. | compname reports q4 adjusted earnings per share $2.30.
q4 adjusted earnings per share $2.30 .
delivered double digit sales and earnings growth during q4 and fy.
expect sales to approximate $49 billion to $51 billion in fiscal 2022.
targeting $1 billion in productivity savings by end of fiscal 2024 and $300 million to $400 million in fiscal 2022.
expect capital expenditures of approximately $2 billion for fiscal 2022.
expect capital expenditures of about $2 billion for fiscal 2022.
q4 adjusted earnings per share $8.28. | 1 |
Today's call will be led by Chairman and CEO, 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 do appreciate you joining our call.
We've got a lot to cover today.
I want to take you through the highlights of a very strong quarter and discuss our acquisition of Normerica.
Matt will then review our financial results in more detail and our expectations for the third quarter.
Let me start with a recap of the quarter.
Building on the momentum generated over the past few quarters, we delivered a strong second quarter with several financial and operational highlights that I'll take you through.
First and foremost, this was a record quarter for our company with earnings per share of $1.29.
This milestone reflects robust demand across our markets, strong operating performance by our team and continued execution on our growth projects.
For perspective, many of our product lines have now reached or exceeded pre-COVID sales levels, but others still have room to improve.
Let me give you a feel for how the demand trends, our performance and strategic initiatives across each of our segments led to these results.
In Performance Materials, our Metalcasting business continues to perform very well with strong foundry demand globally and our broad portfolio of consumer-focused businesses and household personal care and specialty remained on their steady growth track.
Specifically, sales in our personal care business nearly doubled as we introduced new private label skin care formulations and expanded partnerships with major retail brands.
Another large contributor to the segment sales growth in the quarter was the rebound in project activity in both Environmental Products and Building Materials.
Within our Specialty Minerals segment, we delivered another quarter of sales growth across all product lines.
Paper demand continues to improve in all regions, and we're benefiting from the ramp-up of our new satellites.
Paper mill operating rates in Normerica have reached nearly 95%.
And to underscore the current supply and demand situation, one of our customers in Normerica recently announced plans to restart a mill to meet the increased demand.
In addition, our Specialty PCC, GCC and Talc businesses benefited from a robust activity in consumer, automotive and residential construction markets.
Our refractory segment also had an impressive quarter marked by steel utilization rates, which are now above 80%.
We've also secured several new contracts, which will drive growth in the second half of this year and into next for both our refractory and metallurgical wire product lines.
A combination of these positive trends and business development actions in our segments yielded sales of $456 million, with growth in every segment and geography.
We drove these higher sales into operating income of $64 million, up 53% compared to 2020, and margins expanded to above 14% as we expected.
Our team's disciplined operational execution through pricing actions, productivity improvements and strong cost control enabled MTI to deliver these results.
We also navigated challenges related to increased input and logistics costs that accelerated during the quarter.
Our global teams have done a great job maneuvering through a more dynamic supply chain environment, which includes navigating logistics challenges and energy and raw material inflation.
We're well positioned to offset these costs with pricing actions that we've been effectively implementing across our portfolio, and Matt will discuss this more in his comments.
Generating strong cash flow, further strengthening our balance sheet and maintaining flexibility with how we deploy our capital to the highest return opportunities are priorities for us.
Through the first half of the year, cash from operations and free cash flow were both up 25% over last year.
We've been using our cash flow to pay down debt and bolster our liquidity.
And we finished the quarter with our lowest net leverage ratio in the past six years.
In addition, we've continued with our returns to shareholders through our $75 million buyback program and anticipate fully completing the program under the authorized time frame.
Financial strength also provides us the capability to pursue acquisitions as we have demonstrated with the purchase of Normerica.
We advanced our growth initiatives this quarter, focused on new product development and geographic expansion.
Let me highlight a few specific areas.
On previous calls, we mentioned several positive trials and interest with our FLUORO-SORB product that addresses PFAS contamination in groundwater.
And I'm pleased to share that during the quarter, we were awarded our first major sale for a large-scale project at a North American department of Defense location.
The project has been going very well as FLUORO-SORB efficacy has been demonstrated commercially.
We have several other similar type projects in our sales pipeline as well as for waste municipal wastewater treatment sites, and we have the manufacturing capacity and technical capabilities to pursue them and further grow sales.
On the front, we are ramping up production at our new satellites in Asia, which came online at the end of 2020 and represent 200,000 tons of new capacity on an annualized basis.
We have another approximately 130,000 tons of capacity coming online now through the middle of next year, including our 40,000 ton expansion for a packaging application in Europe, where we will begin realizing the volume benefit in the third quarter.
We are finalizing the construction of our 40,000 ton satellite in India, which will start-up late next quarter, and we have also begun construction on a new 50,000 ton satellite in China, which should be operational in the first half of 2022.
And finally, we announced the acquisition of Normerica this week, which I'll go through in a moment.
To sum up the quarter, it was a very productive one with many positive highlights.
We navigated through challenges over the past 18-plus months and created opportunities for ourselves on all fronts, has put our company in an advantageous position to continue to drive profitable growth going forward.
As I mentioned on the previous slide, the exciting news this week is our acquisition of Normerica, and I wanted to spend time discussing who they are, why we pursued the transaction and how Normerica fits into our global Pet Carebusiness.
Acquisitions are an important component of how we plan to grow and move MTI to a higher return, more balanced portfolio, and we've discussed our pipeline of opportunities that align with our strategic initiatives.
Normerica was one of those opportunities as it continues to shift to a more balanced sales portfolio and aligns extremely well with our overall growth strategy in pet care.
For background on Normerica, the company was founded in 1992, headquartered in Toronto, Canada, and is a leading supplier of branded and private label Pet Care products in North America.
Normerica has a long history as a well-run company with an impressive track record of innovation, customer service and profitable growth.
Product portfolio consists primarily of bentonite based cat litter products, which are manufactured in facilities in Canada and the United States.
Normerica has about 320 employees, and in 2020, generated revenue of approximately $140 million.
Let me give you some more details on the transaction and its rationale.
The combination is highly complementary from a geographic, product portfolio, customer and operating perspective.
Normerica's portfolio of branded and private label bentonite based cat litter products fits well within our North America business.
In addition, Normerica's strategically located footprint throughout the U.S. and Canada, combined with our vertically integrated mine-to-market model, gives us a unique position in the cat litter market.
We are now one of the largest vertically integrated private label pet litter providers globally with a strengthened position in North America.
We see further benefits as we can provide enhanced value in terms of consistency and quality and are positioned to serve a broader customer base more efficiently.
The purchase price for the transaction was $185 million on pre-synergy EBITDA of approximately $20 million.
We will realize synergies from the transaction by leveraging our combined operational footprint and vertically integrated model and through the deployment of our business processes.
On a post-synergy basis, we expect the transaction to be about 7.5 times EBITDA, similar to the Sivomatic transaction and earnings accretion to begin in the fourth quarter of this year.
We expect to fully integrate the business, employees, systems and processes over the next few quarters, and accretion will ramp up to 5% to 7% on a full year basis in 2022.
Let me step back and describe our existing Pet Care business.
We've been profitably growing this business since the acquisition of Amcol in 2014.
Our acquisition of Sivomatic in 2018 gave us a differentiated mine-to-market private label presence in Europe, Normerica is an extension of that private label growth strategy.
Pet Care sector provides stable growth rates and attractive dynamics as domesticated cat ownership continues to rise globally.
We are uniquely positioned to serve this market and have invested in expanding our vertically integrated capabilities and product portfolio globally.
In addition, the strength and resiliency of our Pet Care business was demonstrated during the past year when demand was at an all-time high during a period when our businesses serving industrial markets were impacted.
On the lower left of the page, you can see how our Pet Care sales have grown organically and inorganically since 2017.
And with the addition of Normerica and Sivomatic, our Pet Care business has grown from $78 million to $350 million, and our household and personal care business is now the largest product line at MTI.
This represents a significant shift in our portfolio toward noncyclical, consumer-oriented markets, positioning our company to drive growth rates above our historical averages, and we see opportunities to further balance our portfolio.
In sum, Normerica is a great strategic fit with our company, and this transaction provides many compelling opportunities for growth and value creation.
I'll review our second quarter results, the performance of our segments as well as our outlook for the third quarter.
And now let's begin with the second quarter review.
Sales in the second quarter were 28% higher than the prior year and 1% higher sequentially as demand remained strong across the majority of our end markets, and we started to see higher levels of activity in our project-oriented businesses.
Operating income, excluding special items, was $64.1 million, 53% higher than the prior year and 9% higher sequentially.
Operating margin improved from 13% in the first quarter to 14.1% in the second quarter.
The sequential margin improvement played out largely how we expected as we benefited from the incremental margins of our project-oriented businesses, a more normalized level of corporate expenses and continued pricing actions and productivity, all of which helped to offset higher-than-expected inflationary cost pressures.
As you can see in the operating income bridges on this slide, we saw higher costs in the second quarter.
The higher costs were primarily driven by energy, logistics and certain raw materials such as lime and packaging.
Our teams have done an excellent job managing through these challenges, and we are in the process of implementing additional price adjustments in the third quarter, which will help mitigate the impact on our margins going forward.
In some cases, the price increases are contractual as with the pass-through arrangements in Paper PCC and in other cases, they are negotiated based on the value that our products provide.
Meanwhile, we continue to control overhead expenses with SG&A as a percentage of sales at 11.3% versus 11.7% in the first quarter and 13.1% in the prior year.
Earnings per share, excluding special items, was $1.29, a record quarter for the company and represented 52% growth above the prior year and 10% above the first quarter.
Our effective tax rate for the quarter was 18.9%, excluding special items, and we expect our effective tax rate to be approximately 20% going forward.
And now let's review the segments in more detail, starting with Performance Materials.
Second quarter sales for Performance Materials were $238.4 million, 24% higher than the prior year and 3% higher sequentially.
Metalcasting sales grew 52% versus the prior year as foundry demand remained strong in North America and China.
Sales were relatively flat sequentially, and were only modestly impacted by the global semiconductor shortage, which caused a limited number of foundry customers to take downtime in the quarter.
Household, Personal Care and Specialty Products, our most resilient product line last year, grew 17% versus a relatively strong prior year quarter.
Demand for our consumer-oriented products has remained strong and growing, driven by continued new product development and expansion into new customer channels and geographies.
We also saw higher volumes of our specialty drilling products, which are benefiting from a rebound in construction, infrastructure and oil drilling activity versus the prior year.
Environmental product sales grew 6% versus the prior year and were 53% higher sequentially, driven by improving demand for environmental lining systems, water and soil remediation and wastewater treatment.
As Doug mentioned, we also delivered on the first major commercialization of our FLUORO-SORB technology for PFAS remediation in the second quarter.
Building Materials sales grew 17% versus the prior year and were up 12% sequentially on higher levels of project activity.
In North America, we are seeing more commercial construction and infrastructure projects move forward.
While in Europe, projects have been slower to advance as countries are still in varying stages of reopening.
Operating income for the segment grew 55% from the prior year to $34.7 million and was 16% higher sequentially.
Operating margin was 14.6% of sales versus 11.7% in the prior year and 12.9% in the first quarter as higher volumes and our strong operating performance drove incremental margin improvement.
Now looking ahead to the third quarter.
We see continued strength in household and personal care and foundry demand remained strong for Metalcasting, with lower volume sequentially due to seasonal foundry outages.
Meanwhile, the pipeline for our project-oriented businesses, environmental products and building materials continues to improve in North America, and the current outlook for the third quarter looks strong.
However, we remain cautious on some of our international projects given the potential for a slower reopening outside the U.S. due to COVID.
I'd also like to note that we are seeing higher costs for the plastic and fabric components of our environmental and construction mining systems.
While this presents some near-term margin pressure, we expect to fully offset these higher costs through the ongoing efforts of our supply chain team as well as through pricing adjustments.
Overall, we expect another strong quarter for this segment with organic sales and margins at similar levels to the second quarter.
In addition, Normerica is now part of the Performance Materials segment, and the acquisition will contribute two months of sequential sales growth to the segment in the third quarter.
As Doug stated earlier, we expect modest earnings per share accretion to begin in the fourth quarter this year as we move through the integration period, ramping up to full run rate accretion over the next 12 months.
And now let's move to Specialty Minerals.
Specialty Minerals sales were $142.7 million in the second quarter, 30% higher than the prior year and 3% lower sequentially.
Paper PCC sales grew 31% versus the prior year on recovering paper demand and the continued ramp-up of three new satellites.
Specialty PCC sales grew 24% versus the prior year and higher demand from automotive, construction and consumer end markets.
Overall, PCC sales were 5% lower sequentially, primarily due to temporary paper mill outages in India related to COVID-19 and the typical seasonal paper mill outages we experienced in North America.
Process Mineral sales were 31% versus the prior year and 2% sequentially on continued strength in residential construction and consumer end markets.
Operating income for this segment grew 31% to $20 million and represented 14% of sales.
Inflation impacted this segment the most, primarily driven by lime and energy cost increases.
We have been managing the impact with our supply chain team, and we have been adjusting pricing throughout the first half of the year accordingly.
We expect the inflationary cost environment to continue, and we will also continue with our price adjustments throughout the second half.
As you'll recall, the price adjustments for Paper PCC are contractual, and they follow a predetermined schedule.
Now moving to the third quarter, we expect higher volumes for Paper PCC on higher sales in India and the ramp-up of our packaging expansion in Europe.
We also see continued strength in specialty PCC and processed minerals.
And overall, for the segment, we expect the third quarter to be similar to the second quarter.
Sales should increase modestly on a sequential basis.
However, we do expect margin pressure to persist due to ongoing higher costs and the timing of Paper PCC increases.
And now let's turn to the refractory segment.
Refractory segment sales were $74.5 million in the second quarter, 33% higher than the prior year and 1% higher sequentially, as steel utilization rates continue to strengthen in the second quarter.
Segment operating income was $11.7 million, 98% higher than the prior year and 3% lower sequentially, and operating margin was strong at 15.7% of sales.
Steel utilization rates have improved to 84% in North America and 77% in Europe, up from 78% and 72%, respectively, in the first quarter.
Steel production at these levels, we should continue to generate strong demand for our refractory products and the productivity that they provide for our customers' furnaces.
As Doug mentioned, we see growth ahead for this business as we signed two additional long-term contracts in the second quarter.
We've now signed a total of seven new contracts worth $80 million over the next five years, which will provide $16 million of incremental annual revenue ramping up through 2022.
Looking ahead, strong market conditions are expected to continue in the third quarter.
We should benefit from a few additional laser equipment sales in the third quarter.
However, we expect the bulk of our laser equipment sales to occur toward the end of the year as our teams are able to perform more on-site installations.
And overall, for this segment, we expect a similar performance sequentially.
Now let's take a look at our cash flow and liquidity.
Second quarter cash from operations was $67 million versus $64 million in the prior year, bringing year-to-date cash from operations to $118 million versus $94 million last year.
This was a 25% increase.
We deployed $22 million of capital during the quarter on sustaining our operations, mine development and other high return opportunities.
We continue to expect capital expenditures in the range of $80 million to $85 million for the full year, split evenly between sustaining and growth capital.
Year-to-date, we have used free cash flow to repurchase $37 million of shares.
And in total, we have repurchased $54 million under our current $75 million share repurchase program.
As of the end of the second quarter, total liquidity was over $700 million, and our net leverage ratio was 1.6 times EBITDA.
For the acquisition of Normerica, we used $85 million of cash on hand and $100 million of our revolving credit facility.
This will initially bring our net leverage ratio to approximately 2 times EBITDA on a pro forma basis, and we expect to pay down the incremental borrowing over the next 12 months.
Our balance sheet remains in a very strong position.
And this strength provides us with the flexibility we need to continue to invest in high value, high-return growth opportunities.
We expect strong cash flow generation to continue in the second half of the year, and we see free cash flow in the range of $150 million for the full year.
And now let me summarize our outlook for the third quarter.
Overall, we see similar conditions in the third quarter across our end markets to what we saw in the second quarter.
Our consumer-oriented businesses remain robust and paper demand should continue to improve through the third quarter.
We will have the typical foundry customer maintenance outages, and our project-oriented businesses should continue their recovery.
We continue to watch for potential COVID related shutdowns that may impact some of these projects.
Inflationary cost pressures will continue in the third quarter.
We are keeping pace with higher costs through pricing actions, some of which we have already implemented and other price adjustments, primarily in the paper business, which will be implemented contractually through the second half.
Overall, for the company, we anticipate another strong performance in the third quarter with a similar level of operating income to that of the second quarter as well as continued strong cash flow generation.
I'll note here again that we also see two months of sales from the acquisition of Normerica in the third quarter, along with purchase accounting adjustments and integration costs.
Accretion from the acquisition will begin ramping up in the fourth quarter.
With that, I hand it back over to Doug to give you the highlights of our latest sustainability report.
Before we conclude, I'd like to take a quick moment to highlight the publication of our 13th annual sustainability report.
This year's report is a significant step forward in terms of reporting and outlining the significant progress around our broad range of sustainability goals.
You'll see in the report that we've already exceeded our reduction goals in four of six targets -- or six targets related to emissions, energy and water and are on pace to achieve the other 2.
In addition, we provided more details regarding our safety culture, how we've evolved our product portfolio toward more sustainable solutions and initiatives around employee engagement, diversity and inclusion and community outreach.
I'm very proud of the progress we've made advancing our objectives, which is a direct reflection of our employees' involvement and dedication to sustainability at MTI.
I encourage you to review the report, which is available on our website.
With that, let's open it up 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. | 0 |
Also joining me on the call today are Rick Muncrief, our president and CEO; Clay Gaspar, our chief operating officer; Jeff Ritenour, our chief financial officer and a few other members of our senior management team.
Devon's second quarter can best be defined as one of comprehensive execution across every element of our disciplined strategy that resulted in expanded margins, growth and free cash flow and the return of significant value to our shareholders through higher dividends and the reduction of debt.
Following our transformative merger that closed earlier this year, I'm very pleased with the progress the team has made and our second-quarter results demonstrate the impressive momentum our business has quickly established.
Even today, as we celebrate Devon's 50th anniversary as a company this year, we're only getting started and our talented team is eager, energized and extremely motivated to win.
As investors seek exposure to commodity-oriented names, it is important to recognize that Devon is a premier energy company and a must-own name in this space.
We have the right mix of assets, proven management, financial strength and a shareholder-friendly business model designed to lead the energy industry in capital discipline and dividends.
Now, turning to Slide 4.
The power of Devon's portfolio was showcased by our second-quarter results as we continue to deliver on exactly what we promised to do both operationally and financially.
Efficiencies drove capital spending 9% below guidance.
Strong well productivity resulted in production volumes above our midpoint.
The capture of merger-related synergies drove sharp declines in corporate cost.
These efforts translated into a sixfold increase in free cash flow from just a quarter ago.
And with this excess cash, we increased our dividend payout by 44% and we retired $710 million of low premium debt in the quarter.
Now, Jeff will cover the return of capital to shareholders in more detail later, but investors should take note, this systematic return of value to shareholders is a clear differentiator for Devon.
Now, moving to Slide 5.
While I'm very pleased with the results our team that delivered year-to-date, the setup for the second half of the year is even better with our operations scale that generate increasing amounts of free cash flow.
This improved outlook is summarized in the white box at the top left of this slide.
With the trifecta of an improving production profile, lower capital and reduced corporate cost, Devon is positioned to deliver an annualized free cash flow yield in the second half of the year of approximately 20% at today's pricing.
I believe it is of utmost importance to reiterate that even with this outstanding free cash flow outlook, there is no change to our capital plan this year.
Turning your attention to Slide 7.
Now with this powerful stream of free cash flow, our dividend policy provides us the flexibility to return even more cash to shareholders than any company in the entire S&P 500 Index.
To demonstrate this point, we've included a simple comparison of our annualized dividend yield in the second half of 2021, assuming a 50% variable dividend payout.
Now as you can see, Devon's implied dividend yield is not only best-in-class in the E&P space, but we also possess the top rank yield in the entire S&P 500 Index by a wide margin.
In fact, at today's pricing, our yield is more than seven times higher than the average company that is represented in the S&P 500 Index.
Furthermore, our dividend is comfortably funded within free cash flow and is accompanied by a strong balance sheet that is projected to have a leverage ratio of less than one turn by year-end.
Investors need to take notice, Devon offers a truly unique investment opportunity for the near 0 interest rate world that we live in today.
Now, looking beyond Devon to the broader E&P space, I'm also encouraged this earnings season by the announcement from Pioneer on their variable dividend implementation as well as a growing number of other peers who have elected to prioritize higher dividend payouts.
These disciplined actions will further enhance the investment thesis for our industry, paving the way for higher fund flows as investors rediscover the attractive value proposition of the E&P space.
Now, moving to Slide 10.
While the remainder of 2021 is going to be outstanding for Devon, simply put, the investment thesis only gets stronger as I look ahead to next year.
We should have one of the most advantaged cash flow growth outlooks in the industry as we capture the full benefit of merger-related cost synergies, restructuring expenses roll-off and our hedge book vastly improves.
At today's prices, these structural tailwinds could result in more than $1 billion of incremental cash flow in 2022.
To put it in perspective, this incremental cash flow would represent cash flow per share growth of more than 20% year over year, if you held all other constants -- all other factors constant.
Now while it's still too early to provide formal production and capital targets for next year, there will be no shift to our strategy.
We will continue to execute on our financially driven model that prioritizes free cash flow generation.
Given the transparent framework that underpins our capital allocation, our behavior will be very predictable as we continue to limit reinvestment rates and drive per share growth through margin expansion and cost reductions.
We have no intention of adding incremental barrels into the market until demand side fundamentals sustainably recover and it becomes evident that OPEC+ spare oil capacity is effectively absorbed by the world markets.
The bottom line is we are unwavering in our commitment to lead the industry with disciplined capital allocation and higher dividends.
As Rick touched on from our operations perspective, Devon continues to deliver outstanding results.
Our Q2 results demonstrate the impressive operational momentum we've established in our business, the power of Devon's asset portfolio and the quality of our people delivering these results.
I want to pause and congratulate the entire Devon team for the impressive work of overcoming the challenges of the pandemic and the merger while not only keeping the wheels on but requestioning everything we do and ultimately building better processes along the way.
We've come a long way on building the go-forward strategy, execution plan and culture and I see many more significant wins on the path ahead.
Turning your attention to Slide 12.
My key message here is that we're well on our way to meeting all of our capital objectives for 2021.
At the bottom left of this slide, you can see that my confidence in the '21 program is underpinned by our strong operational accomplishments in the second quarter.
With activity focused on low-risk development, we delivered capital spending results that were 9% below plan, well productivity in the Delaware drove oil volumes above guidance and field level synergies improved operating costs.
While the operating results year-to-date have been great, the remainder of the year looks equally strong, a true test of asset quality, execution and corporate cost structure proves out in sustainably low reinvestment rates, steady production and significant free cash flow.
This is exactly what we're delivering at Devon.
We plan to continue to operate 16 rigs for the balance of the year and deliver approximately 150 new wells to production in the second half of 2021.
During the quarter, our capital program consisted of 13 operated rigs and four dedicated frac crews, resulting in 88 new wells that commenced first production.
This level of capital activity was concentrated around the border of New Mexico and Texas and accounted for roughly 80% of our total companywide capital investment in the quarter.
As a result of this investment, Delaware Basin's high-margin oil production continue to rapidly advance, growing 22% on a year-over-year basis.
While we had great results across our acreage position, a top contributor to the strong volume were several large pads within our Stateline and Cotton Draw areas that accounted for more than 30 new wells in the quarter.
This activity was weighted toward development work in the Upper Wolfcamp, but we also had success co-developing multiple targets in the Bone Spring within our Stateline area.
The initial 30-day rates from activity at Stateline and Cotton Draw average north of 3,300 BOE per day and recoveries are on track to exceed 1.5 million barrels of oil equivalent.
With drilling and completion costs coming in at nearly $1 million below predrill expectations, our rates of return at Cotton Draw and Stateline are projected to approach 200% at today's strip pricing.
While we've all grown weary of quoted well returns, this is the best way that I can provide insight to you on what we're seeing in real time and what will be flowing through the cash flow statements in the coming quarters.
While we lack precision in these early estimates, I can tell you, these are phenomenal investments and will yield significant value to the bottom line of Devon and ultimately, to the shareholders through our cash return model.
And lastly, on this slide, I want to cover the recent Bone Spring appraisal success that we had in the Potato Basin with our three well Yukon Gold project.
Historically, we focused our efforts in the Wolfcamp formation in this region and Yukon was our first operated test of the second Bone Spring interval in this area.
Given the strong results from Yukon plus additional well control from nonoperated activity, this will be a new landing zone that works its way into the Delaware Basin capital allocation mix going forward.
This is another example of how the Delaware Basin continues to give.
This new landing zone required no additional land investment, very little incremental infrastructure and as a result, the well returns have a direct path to the bottom line of Devon.
Moving to Slide 14.
Another highlight associated with the Delaware Basin activity was the improvement in operational efficiencies and the margin expansion we delivered in the quarter.
Beginning on the left-hand side, our D&C costs have improved to $543 per lateral foot in the quarter, a decline of more than 40% from just a few years ago.
To deliver on this positive rate of change, the team achieved record-setting drill times in both Bone Spring and Wolfcamp formations with spud to release times and our best wells improving to less than 12 days.
Our completions work improved to an average of nearly 2,000 feet per day in the quarter.
I want to congratulate the team and I fully expect that these improved cycle times will be a tailwind to our results for the second half of the year.
Shifting to the middle of the slide, we continue to make progress capturing operational cost synergies in the field.
With solid results we delivered in the second quarter, LOE and GP&T costs improved 7% year over year.
To achieve this positive result, we adopted the best and most economic practices from both legacy companies and leveraged our enhanced purchasing power in the Delaware to meaningfully reduce costs associated with several categories, including chemicals, water disposal, compression and contract labor.
Importantly, these results were delivered by doing business in the right way with our strong safety performance in the quarter and combined with company delivered some of the meaningful environmental improvements over a year-over-year basis.
And my final comment on this slide -- on the chart to the far right, the cumulative impact of Devon's strong operational performance resulted in significant margin expansion compared to both last quarter and on a year-over-year basis.
Importantly, our Delaware Basin operations are geared for this trend to continue over the remainder of the year and beyond.
Moving to Slide 15.
While the Delaware Basin is clearly the growth engine of our company, we have several high-quality assets in the oil fairway of the U.S. that generate substantial amounts of free cash flow.
These assets may not capture many headlines but they underpin the success of our sustainable free cash flow-generating strategy.
In the Delaware Basin, cash flow nearly doubled in the quarter on the strength of natural gas and NGLs.
Our Dow joint venture activity is progressing quite well and we're bringing on the first pad of new wells this quarter.
The Williston continues to provide phenomenal returns and at today's pricing, this asset is on track to generate nearly $700 million of free cash flow for the year.
In the Eagle Ford, we have reestablished momentum with 21 wells brought online year-to-date, resulting in second-quarter volumes advancing 20%.
And in the Powder River, we're encouraged with continued industry activity and how -- in evaluating how we create the most value from this asset.
We have a creative and commercially focused team working with this asset, many of which bring fresh set of eyes on how we approach this very substantial oil-rich acreage position.
Overall, another strong quarter of execution and each of these asset teams did a great job delivering within our diversified portfolio.
The team here at Devon takes great personal pride in delivering affordable and reliable energy that powers every other industry out there as well as the incredible quantity and quality of life we appreciate today.
We absolutely believe that in addition to meeting the world's growing energy demand, we must also deliver our products in an environmentally and commercially sustainable way.
As you can see with the goals outlined on this slide, we're committing to taking a leadership role by targeting to reduce greenhouse gas emissions by 50% by 2030 and achieving net zero emissions for Scope 1 and 2 by 2050.
A critically important component of this carbon reduction strategy is to improve our methane emissions intensity by 65% by 2030 from a baseline in 2019.
This emissions reduction target involves a range of innovations, including advanced remote leak detection technologies and breakthrough designs like our latest low-e facilities in the Delaware Basin.
We also plan to constructively engage with upstream and downstream partners to improve our environmental performance across the value chain.
While it's a journey, not a destination, environmental excellence is foundational to Devon.
My comments today will be focused on our financial results for the quarter and the next steps in the execution of our financial strategy.
A great place to start today is with a review of Devon's strong financial performance in the second quarter, where we achieved significant growth in both operating cash flow and free cash flow.
Operating cash flow reached $1.1 billion, an 85% increase compared to the first quarter of this year.
This level of cash flow generation comfortably exceeded our capital spending requirements, resulting in free cash flow of $589 million for the quarter.
As described earlier by Rick and Clay, our improving capital efficiency and cost control drove these outstanding results, along with the improved commodity prices realized in the second quarter.
Overall, it was a great quarter for Devon and these results showcased the power of our financially driven business model.
Turning your attention to Slide 6.
With the free cash flow generated in the quarter, we're proud to deliver on our commitment to higher cash returns through our fixed plus variable dividend framework.
Our dividend framework is foundational to our capital allocation process, providing us the flexibility to return cash to shareholders across a variety of market conditions.
With this differentiated framework, we've returned more than $400 million of cash to our shareholders in the first half of the year, which exceeds the entire payout from all of last year.
The second half of this year is shaping up to be even more impressive.
This is evidenced by the announcement last night that our dividend payable on September 30 was raised for the third consecutive quarter to $0.49 per share.
This dividend represents a 44% increase versus last quarter and is more than a fourfold increase compared to the period a year ago.
On Slide 8, in addition to higher dividends, another way we have returned value to shareholders is through our recent efforts to reduce debt and enhance our investment-grade financial strength.
In the second quarter, we retired $710 million of debt, bringing our total debt retired year-to-date to over $1.2 billion.
With this disciplined management of our balance sheet, we're well on our way to reaching our net debt-to-EBITDA leverage target of one turn or less by year-end.
Our low leverage is also complemented by a liquidity position of $4.5 billion and a debt profile with no near-term maturities.
This balance sheet strength is absolutely a competitive advantage for Devon that lowers our cost of capital and optimizes our financial flexibility through the commodity cycle.
Looking ahead to the second half of the year, with the increasing amounts of free cash flow our business is projected to generate, we'll continue to systematically return value to our shareholders through both higher dividend payouts and by further deleveraging our investment-grade balance sheet.
As always, the first call in our free cash flow is to fully fund our fixed dividend of $0.11 per share.
After funding the fixed dividend, up to 50% of the excess free cash flow in any given quarter will be allocated to our variable dividend.
The other half of our excess free cash flow will be allocated to improving our balance sheet and reducing our net debt.
Once we achieve our leverage target later this year, this tranche of excess free cash flow that was previously reserved for balance sheet improvement has the potential to be reallocated to higher dividend payouts or opportunistic share buybacks should our shares remain undervalued relative to peers in the broader market.
So in summary, our financial strategy is working well.
We have excellent liquidity and our business is generating substantial free cash flow.
The go-forward business will have an ultra-low leverage ratio of a turn or less by year-end and we're positioned to substantially grow our dividend payout over the rest of the year.
I would like to close today by reiterating a few key thoughts.
Devon is a premier energy company and we are proving this with our consistent results.
Our unique business model is designed to reward shareholders with higher dividend payouts.
This is resulting in a dividend yield that's the highest in the entire S&P 500 Index.
Our generous payout is funded entirely from free cash flow and backstopped by an investment-grade balance sheet.
And our financial outlook only improves as I look to the remainder of this year and into 2022.
With the increasing amounts of free cash flow generated, we're committed to doing exactly what we promised and that is to lead the industry in capital discipline and dividends.
We'll now open the call to Q&A.
Please limit yourself to one question and follow up.
With that, operator, we'll take our first question. | davita fourth quarter 2021 results.
4th quarter 2021 results.
sees 2022 adjusted diluted net income from continuing operations per share attributable to davita inc. $7.50 to $ 8.50.
sees 2022 free cash flow from continuing operations $850 million to $1,100 million. | 0 |
I'm Steven Sintros, UniFirst's president and chief executive officer.
Actual future results may differ materially from those anticipated depending on a variety of risk factors.
Overall, we are pleased with our results for the first quarter of fiscal 2022.
Our team continues to focus on providing industry-leading services to our customers as well as selling prospective customers on the value that UniFirst can bring to their businesses.
The results for our first quarter were largely as we anticipated, with consolidated revenues growing 8.8% and an overall adjusted operating margin for our core laundry operations of approximately 10%.
The team continues to execute well, producing solid performances in both new account sales as well as customer retention during the quarter.
In addition, wearer additions versus reductions during the quarter were positive, indicating the continued growth and recovery of our customer base.
This is a favorable comparison to a year ago when many customer wearer levels remained depressed due to the impact of the pandemic.
The strong year-over-year growth in the quarter was also impacted by adjustments to customer pricing as we continue to work with our customers through this inflationary environment.
As a reminder, from a profitability perspective, we discussed during our year-end earnings call that going forward over the next few years, we are going to be reporting adjusted results, which exclude the impact of costs that we are expending on three discrete strategic initiatives that are critical in our efforts to transform the company in terms of our overall capabilities and competitive positioning.
As a reminder, these three initiatives are the rollout of our new CRM system, investments in the UniFirst brand, and a corporatewide ERP system with a strong focus on supply chain and procurement automation and technology.
As we have talked about over the last year or two, we continue to be focused on making good investments in our people, our infrastructure, and our technologies.
All of the investments designed to deliver solid long-term returns for UniFirst stakeholders and are integral components of our primary long-term objective to be universally recognized as the best service provider in our industry.
After excluding our costs in our quarter related to these investments, our adjusted operating margin is showing an anticipated decline compared to a year ago.
The comparison of adjusted margin is being impacted by increases in costs we've been highlighting for a couple of quarters now.
Some are simply bouncing back from depressed levels during the pandemic and others are being impacted by the inflationary environment and some are being impacted by both.
As a reminder, these costs include merchandise amortization, costs related to raw materials and the overall supply chain disruption, the cost to hire and retain labor, energy, and travel.
Our solid balance sheet positions us well to meet these ongoing challenges while continuing to make investments in growth and strengthen our business.
Along those lines, during December, we closed on two small acquisitions, which will improve our footprint in key markets.
As we have highlighted before, acquisitions continue to be part of our overall growth strategy.
Despite the challenges in the overall operating environment, we continue to be confident in our ability to manage and execute through these obstacles.
We maintain a sharp focus on taking care of our employees, our customers, and bringing new customers into the UniFirst family.
As we have discussed previously, the pandemic has clearly highlighted the essential nature of our products and services and we feel the company is positioned well to support the evolving economic landscape.
In our first quarter of 2022, consolidated revenues were $486.2 million, up 8.8% from $446.9 million a year ago, and consolidated operating income decreased to $44.8 million from $56 million in -- or 20.1%.
Net income for the quarter decreased to $33.7 million or $1.77 per diluted share from $41.9 million or $2.20 per diluted share.
Our financial results in the first quarter of fiscal 2022 included $5.9 million of costs directly attributable to the three key initiatives that Steve discussed.
Excluding these initiative costs, adjusted operating income was $50.7 million, adjusted net income was $38.1 million, and adjusted diluted earnings per share was $2.
Although our financial results in the prior year may have included direct costs related to these key initiatives, which in our first quarter of 2021 would have primarily been for our CRM initiative, the company did not specifically track the amounts that were being expensed.
This is because the amount was less significant in value and a large number of the costs were still being capitalized.
As a result, we will not be providing adjusted amounts for the prior year comparable period.
Our core laundry operations revenues for the quarter were $428.8 million, up 9.1% from the first quarter of 2021.
Core laundry organic growth, which adjusts for the estimated effect of acquisitions as well as fluctuations in the Canadian dollar, was 8.6%.
This strong organic growth rate was primarily the result of customer reopenings, solid sales performance, and improved customer retention in fiscal 2021 as well as efforts to share with our customers the cost increases that we are seeing in our business due to the current inflationary environment.
Core laundry operating margin decreased to 8.5% for the quarter or $36.5 million from 12.4% in the prior year or $48.9 million.
Costs we incurred during the quarter related to our key initiatives were recorded to our core laundry operations segment.
And excluding these costs, the segment's adjusted operating margin was 9.9%.
The decrease from prior year's operating margin was primarily due to higher merchandise amortization, which continues to normalize from depressed levels during the pandemic, as well as the effect of large national account installations, which are providing additional merchandise amortization headwinds.
Also, inflationary pressures and the overall supply chain disruption continued to impact our other merchandise costs.
During the quarter, the adjusted operating margin was also impacted by higher travel and energy costs as a percentage of revenues as well as wage inflation we are experiencing, responding to the very challenging employment environment.
Energy costs increased to 4.3% of revenues in the first quarter of 2022, up from 3.6% in prior year.
Revenues from our specialty garments segment, which delivers specialized nuclear decontamination and cleanroom products and services, increased to $39.5 million from $38.1 million in prior year or 3.5%.
This increase was primarily due to growth in our cleanroom and European nuclear operations.
The segment's operating margin increased to 21.9% from 18.8%, primarily due to lower merchandise costs as a percentage of revenues.
As we've mentioned in the past, this segment's results can vary significantly from period to period due to seasonality and the timing of nuclear reactor outages and projects that require our specialized services.
Our first aid segment's revenues increased to $17.8 million from $15.5 million in prior year or 14.8%.
This increase was due to improved top line performance in both our wholesale distribution as well as our first aid van business.
However, the segment had an operating loss of $0.3 million during the quarter primarily due to continued investment in the company's initiative to expand its first aid van business into new geographies.
We continue to maintain a solid balance sheet and financial position with no long-term debt and cash, cash equivalents, and short-term investments totaling $478.1 million at the end of our first quarter of fiscal 2022.
During the quarter, our net cash provided by operating activities was impacted by our reduced profitability as well as heavier than normal working capital needs of the business.
Contributing to these higher working capital needs were elevated supply inventory balances related to the ongoing supply chain disruption as well as increases to rental merchandise and service as our balance sheet position continues to normalize coming out of the pandemic-impacted period.
Capital expenditures for the quarter totaled $31.1 million as we continued to invest in our future with new facility additions, expansions, updates, and automation systems that will help us meet our long-term strategic objectives.
Now that our CRM project has transitioned from a development phase to deployment, the majority of the costs are now being expensed.
As a result, the capitalization of costs related to our CRM project in the quarter totaled only $1.7 million.
During the first quarter of fiscal 2022, we repurchased 22,750 common shares for a total of $4.8 million under our previously announced stock repurchase program.
I'd like to take this opportunity to provide an update on our outlook.
At this time, we now expect our full-year revenues for fiscal 2022 will be between $1.94 billion and $1.955 billion.
This revised top-line guidance includes the anticipated impact of the two small acquisitions we closed in December that Steve discussed.
These acquisitions are expected to add approximately $10 million to our fiscal 2022 revenues.
We further expect that our diluted earnings per share for fiscal 2022 will now be between $5.50 and $5.80.
This earnings per share guidance assumes an effective tax rate of 24% and continues to include an estimate of $38 million worth of costs directly attributable to our key initiatives that will be expensed during the year.
Please also note the following assumptions regarding our guidance.
Core laundry operations adjusted operating margin at the midpoint of the range is now 9.2%, which reflects continued pressure from costs that trended lower during the pandemic and the current inflationary environment.
Our assumed adjusted tax -- our assumed adjusted tax rate for fiscal 2022 is 24.25%.
Adjusted diluted earnings per share is expected to be between $7 and $7.30.
Guidance does not include the impact of any future share buybacks or potential tax reform, and guidance assumes a stable economic environment with no pandemic-related headwinds, including potential expenses related to government COVID-19 mandates. | q1 revenue $486.2 million.
q1 earnings per share $1.77.
now expect revenues for fiscal 2022 to be between $1.940 billion and $1.955 billion.
expect 2022 diluted earnings per share to be between $5.50 and $5.80.
2022 adjusted diluted earnings per share is expected to be between $7.00 and $7.30. | 1 |
They will provide an update on Greenbrier's performance and our near-term priorities.
And with that, I will hand the call over to Bill.
Greenbrier adhered to disciplined management program throughout this year of the pandemic.
Our simple core strategy since March 2020 has been number one, to maintain a strong liquidity base and balance sheet; number two, to safely operate our factories, while generating cash, reducing costs and adjusting to reduce demand for our products and services, that reduction and demand was clearly shown in this quarter's results; number three, to prepare for economic recovery and forward momentum in our markets.
We believe we're now solidly in this recovery phase.
We believe that our Q2 just completed in February will be the most challenging quarter of our fiscal year, particularly affected by very bad weather in North America.
There's good reason to be optimistic as vaccines expanded in the United States.
Vaccinations will bolster already accelerating infection and mortality rates and allow America to turn the corner on the pandemic at last.
Globally, we are prepared for the pandemic to take a longer course toward resolution.
Sadly, we learned last week that Greenbrier lost two more employees, our sixth and seventh loss to COVID-19.
Merala Nisioh [Phonetic], 58 was a assistant to the plant manager at our Severin, Romanian facility where she worked for over 32 years.
We also lost Luis Martinez aged 43.
Luis was maintenance manager in our factory in Tlaxcala, State of Mexico -- in the State of Tlaxcala in Mexico.
He's been with Greenbrier since December 2017.
He was survived by his wife and four children ages, 19, 17, 11 and five.
We mourned the loss of Merala and Luis.
And we're extending support and prayers to their family and to colleagues who worked with them.
Our results in the second quarter reflect the current -- temporary difficulties in the operating environment, particularly in North America, but also in Europe and Brazil, and I emphasize temporary.
In addition to lower production levels related to the market downturn and as earlier mentioned, severe weather conditions impact our second quarter results in North America.
On a much more positive note, revenue, aggregate gross margin and EBITDA, all improved sequentially month-by-month during the quarter, indicating positive momentum.
Our order pipeline of inquiries took a big jump in March.
We completed our GBX joint venture post quarter with Steve Menzies and funded the first $100 million tranche of railcars from a newly established $300 million non-recourse credit line established for this business.
Our financial results were also positively impacted by tax benefits related to the creation of GBX Leasing joint venture and additional capitalization of railcars into the Greenbrier leasing fleet in our second fiscal quarter.
Adrian Downes, our CFO, will touch on this in a few minutes.
Finally, post quarter and almost all in the month of March, we received orders for another 1,700 railcars with an approximate value of $190 million on top of the 3,800 railcars orders received during the quarter worth $440 million in all 5,500 cars worth about $630 million in the space of four months or more.
In recent weeks, North American rail traffic grew in year-over-year comparisons, including double-digit increases in grain and intermodal loadings.
The added traffic has driven year-to-date rail velocity down by nearly 6% compared to the same period in 2020 or about 2 miles an hour.
Slowing rail velocity, as all of you know, impacts cars and storage and demand for new railcars.
Consider that about 148,000 cars have been taken out of storage in North America alone since the peak storage levels of last year, storage statistics have fallen now to 378,000 units, well below what we believe to be the frictional level of storage, 400,000 cars.
At that point, new cars need to be built.
With returns of cars serviced, higher scrap pricing and tax benefits for construction of new, more efficient and environmentally friendly equipment, we expect this trend to continue.
Throughout the course of the pandemic, we've been laser-focused on maintaining our strong liquidity position.
We ended the quarter with over $700 million of liquidity, including nearly $600 million of cash and another $115 million of available borrowing capacity.
We expect to add another $100 million shortly.
Now let's talk for a moment about our plan for recovery.
Vital to our ongoing success is the ability to rapidly align production capacity and execution with our forward view of the market.
We began to reduce capacity prior to the onset of the pandemic as our industry was already entering a weaker period due to PSR.
COVID-19 compelled us to take a series of further actions to protect the enterprise and to ensure Greenbrier attained its strongest possible financial position.
We have maintained long-term profitability over the years by prioritizing our manufacturing flexibility and refusing to allow our unique manufacturing platform to become a mere commodity.
Refinement of our go-to-market strategy, adding GBX Leasing to our successful formula of direct sales, syndications and partnerships with operating lessors will reinforce our recovery.
We reactivated a number of North American production lines in March, and several of our production lines are already booked well into or through fiscal 2022.
The inquiry rate for new manufacturing business has picked up dramatically.
We expect a continued high rate of commercial activity to continue April, May, and beyond.
Consistent with our earlier forecasts that the second half of calendar 2021 would be the time of a V-shaped recovery.
Forecast for rail traffic fundamentals in North America support Greenbrier's outlook that we are entering a period of sustained and expanding railcar [Indecipherable].
FTR Associates projects the total rail traffic will grow by 5.7% year-over-year in 2021 and intermodal traffic will grow by 6.4%.
In North America, that's even more bullish and closer to 7% for 2021.
In February, the Purchasing Managers' Index reached its highest level since February 2018.
At the same time, however, supply chain disruptions that have been evident for months persist with congestion at West Coast ports, and these continue to weigh in the North American traffic flows.
Strong consumer demand, manufacturing growth and Fed policy on lower interest rates, along with low-cost funding available globally will continue to spur economic recovery from the COVID-19 crisis.
Federal stimulus spending in the US is at extraordinary levels.
Also, a federal infrastructure bill will provide additional stimulus for a sustained growth into 2022 and probably beyond.
Other bills in the work -- in the works at past should enhance US job growth and further incent the construction of more efficient, environmentally friendly railcars.
In Europe, the large EU recovery and resiliency facility will begin to impact EU economy, and money remains plentiful and cheap.
A wave of pent-up consumer and investment demand is expected to materialize, although vaccine rollout has been slower than in America.
In the meantime, rail freight has continued to perform well through the latest rounds of lockdowns and restrictions.
Order rates have ticked up dramatically with EU.
EU policy and congestion and the environment is attempting to shift transportation from truck to rail, which is three to four times more fuel efficient and produces less congestion and better air quality in cities.
Rail freight traffic has actually grown over pre-crisis levels in some countries.
In the UK, rail may turn out to be one of the few beneficiaries of Brexit as trade flows are rerouted to accommodate new circumstances.
Longer term, broad scale economic European reforms to address climate change are ushering in an era of mode of shift from freight -- for freight from polluting and congested road travel to efficient higher-speed rail service.
This will drive significant growth in railcar demand in the years to come, above and beyond replacement demand growth.
And the fleets in EU countries are aging.
Many cars are already well past the time for replacement.
Finally, in Brazil, the continued impact of COVID-19 has left the country's health system in a very weak condition.
Greenbrier Maxion continues to operate well in a stressful environment.
Demand for its products is strong.
Earlier, we rightsized this business and it has a strong and profitable backlog.
About 30% of our present backlog is in Europe and Brazil.
We expect tailwinds from both regions.
Our approach globally continues on course to emphasize safe operations of all of our facilities under essential industry status.
We continue to plan for robust liquidity and ongoing cost containment and to execute on the growing number of orders we expect, while maintaining pricing discipline and control of costs, especially on steel and components.
Entering the second half of our fiscal year, Greenbrier enjoys an industry-leading manufacturing leasing and services franchise on three continents, and we've achieved scale.
Our business outlook is significantly improving, which will bring advantages from that scale.
Despite the lingering uncertainty created by COVID-19, the one thing I'm certain about is that our franchise will benefit strongly from all the things I've mentioned in these remarks today.
Meanwhile, we will continue to preserve our strong liquidity position, make prudent business decisions about deployment of capital, grow our market opportunities, manage our manufacturing capacity judiciously.
We will do all this with -- at all times respect for our customers, for our workforce and through diversity and environmentally sound policies.
Our team continues to work hard to accomplish these goals and to maintain focus as better days draw closer as the COVID chill on society melts away.
Now over to you, Lorie.
I too am proud of how Greenbrier employees responded in our second quarter.
We expected it to be a challenging operating quarter, but the extreme winter weather that impacted every location in North America added an additional test.
I was impressed with the creativity and commitment shown to ensure operations continued as seamlessly as possible.
Over the last several quarters, Greenbrier has balanced right-sizing our global footprint and production capacity with maintaining our ability to respond quickly as recovery begins.
The first six months of the fiscal year were painful, but we're seeing improved demand in each of our markets, and we've recently restarted several production lines in North America and are poised to flex our manufacturing footprint as conditions evolve.
As you heard from Bill, we remain focused on executing our COVID-19 protocols by focusing on employee safety and maintaining our liquidity to ensure we're prepared for the emerging economic recovery.
Regarding the second quarter activity, Greenbrier delivered 2,100 units in the quarter, including 400 units in Brazil.
We received orders for 3,800 units in the quarter valued at approximately $440 million.
International order activity accounted for nearly half of the orders in the quarter and the average sales price in backlog increased sequentially reflecting a more favorable mix of railcars.
Our book-to-bill ratio of 1.8 times resulted in a growing backlog to 24,900 units valued at $2.5 billion.
Our global manufacturing performance was not indicative of its true value.
While a positive gross margin was achieved, the team's operational execution was tremendous in a challenging environment.
Now bear with me while I throw some numbers at you.
Compared to Q1, our deliveries in Q2 were down 37% and that followed a 45% decline from Q4 to Q1.
And then, further if you were to do a year-over-year comparison, you guys like all these year-over-year comparisons of Q2, manufacturing revenue was down 59% on 54% lower deliveries.
With such a steep decline in revenue and production, it's effectively impossible to quickly cost cut your way to profitability.
It was more a matter of weathering the short-term pain for the longer-term goal of responding effectively to increasing activity.
Over the next six months, the manufacturing team will be focused on increasing production rates quickly and efficiently, while maintaining employee safety, quality and customer satisfaction.
Volumes in our wheels and parts business improved sequentially, although still well below normal winter level.
The volume and mix of work continue to lag in our repair business, although we are seeing some early signs of increased activity and improved efficiency as we right-size those operations.
We've well-positioned shops that serve our customer base in an efficient and safe manner, and our network is prepared for the return of more normalized activity levels later in the calendar 2021.
Our leasing and services team continues to navigate the downturn well with fleet utilization improving sequentially during a time when approximately 25% of the total North American railcar fleet and storage.
Greenbrier's capital market team had a relatively quiet quarter with 100 units syndicated.
This lower volume is reflected of the lower production rates in the prior two quarters and the types of railcars being produced.
Our Management Services Group added another 38,000 new railcars under management during the quarter, bringing total rail cars under management to 445,000 or about 26% of the North American fleet.
After quarter-end, we finalized the formation of GBX Leasing.
The joint venture is an exciting development for us and an opportunistic deployment of our capital.
The JV achieved several important goals for Greenbrier.
From a commercial standpoint, it's a strong complement to our integrated business model of railcar manufacturing and services that further enhances our distribution strategies to direct customers, operating lessors, industrial shippers and syndication partners.
We expect the joint venture will help Greenbrier continue to grow its diversified customer portfolio with the focus on industrial shipper customers and small batch production to leverage long-standing customer relationships and capabilities gained through the acquisition of the manufacturing unit of ARI.
We've realized significant cost synergies following the US manufacturing acquisition, and we expect that this joint venture will result in meaningful commercial synergies.
Financially, GBX Leasing delivers clear benefits.
Over the long term, it reduces our exposure to the new railcar order and delivery cycle by creating a new annuity stream of tax-advantaged cash flows and sound portfolio practices, including asset diversity, staggered lease terms and debt maturities.
Adrian will discuss the tax benefit shortly.
GBX Leasing will acquire approximately $200 million of railcars per annum from Greenbrier with the initial portfolio identified from leased railcars on our balance sheet or in backlog.
The joint venture will be levered about 3-to-1 debt to equity during the initial $300 million traditional non-recourse warehouse facility, of which we've drawn the first $100 million and those transition to a more traditional asset-backed securities financing as time progresses.
GBX Leasing will be consolidated in our financial statements, and we plan to provide additional supplemental information to illustrate the performance and benefits of this exciting new venture.
Looking ahead, I'm optimistic about a recovery in calendar 2021 that will primarily benefit our fiscal 2022.
And while the first six months of '21 were difficult, we still expect gross margins in the low-double-digit to high-single-digit range, and we'll continue controlling costs to improve financial performance.
Greenbrier remains healthy with strong liquidity and no near-term debt maturities.
We have leadership positions in our core markets in North America, Europe and Brazil, and see early signs of recovery in each geography.
And you can see that, particularly with what Bill mentioned, our recent orders for 1,700 railcar units in just the first month of our Q3.
The decisive actions we've taken over the last 12 months have positioned Greenbrier to exit the pandemic economy a stronger and leaner organization.
And now, Adrian will provide commentary on the quarterly results.
During the quarter, Greenbrier continued managing for near-term stability, while positioning for a strong recovery.
Obviously, the pandemic has had a major impact on our revenue and delivery levels.
Nonetheless, we were able to achieve positive margins in each segment as a result of our flexible manufacturing footprint and aggressive cost reductions.
Reduced deliveries and revenue is a power driver of bottom line performance even in the face of dramatic reductions and payroll, overhead and SG&A.
Performance did improve each month within the quarter, and we exited the quarter with positive momentum increasing production rates to build sequential momentum in Q3 and Q4.
A few quarterly items I'll mention include revenue of $296 million; book-to-bill of 1.8 times made up of deliveries of 2,100 units, including 400 units from Brazil and orders of 3,800 new units; aggregate gross margin of 6%; selling and administrative expense of $43 million, flat sequentially and 20% lower than Q2 of fiscal 2020.
Net loss attributable to Greenbrier was $9.1 million or a loss of $0.28 per share.
EBITDA was negative $1 million.
The effective tax rate in the quarter was a benefit of 62%, due to the net operating losses and tax benefits from accelerated depreciation associated with capital investment in our leasing assets.
These deductions will be carried back to earlier high tax years under the CARES Act, resulting in a $16 million tax benefit in the quarter and cash tax refunds to be received in fiscal 2022.
We also incurred $2.5 million of incremental pre-tax costs specifically related to COVID-19 employee and facility safety.
These costs will continue for the foreseeable future.
Moving to liquidity, we have continued managing for near-term balance sheet strength and are positioned for a recovery.
Including borrowing capacity of $115 million, Greenbrier's liquidity remains healthy at $708 million plus another approximately $100 million of initiatives and process.
Cash in the quarter ended at $593 million, reflecting $48 million of inventory purchasing to support higher production levels beginning in Q3 and the $44 million increase in leased railcars for syndication.
Historically, tax receivables have been included in the accounts receivable line in our balance sheet, but to improve transparency, we separated this activity in the quarter to provide a more accurate picture of operating receivables as well as the future tax refunds I just mentioned.
Capital expenditures, net of equipment sales, in the quarter was $9.2 million.
Leasing and services capital spending is expected to be about $90 million in 2021, with about 42% of that already occurring in the first half of the year.
This capital spending includes GBX Leasing, which began operations in Q3 and approximately $130 million of leased railcar assets were transferred into the JV at that point, including some assets, which were already on our balance sheet at the beginning of the year.
An additional approximately $70 million of assets will be newly built or transferred later this year.
Manufacturing and wheels repair and parts capital expenditures are still expected to be about $35 million for the year with spending focused on safety and required maintenance.
We continue to have healthy cushions in our debt covenants.
And while we have no significant debt maturities until late calendar 2023 and calendar 2024, we are proactively evaluating opportunities to extend maturities and capitalize on the low interest rate environment.
Greenbrier's Board of Directors remains committed to balanced capital deployment.
Authorization of share repurchases remains in effect through January 2023.
And today, we're announcing a dividend of $0.27 per share, our 28th consecutive dividend.
Since the start of our program, the growth of our dividend represents a compound annual rate of 9%. | q2 loss per share $0.28.
q2 revenue $296 million. | 1 |
I'm Larry Mendelson, Chairman and CEO of HEICO Corporation.
As management looks at the company, we really believe that our success and the ability to keep our head well above water, not to get into any financial binds, not to struggle to sell debt at 8% or 10% and so forth and to be fiscally sound is all attributed to the unbelievable talent and brilliance of the team members.
And I can tell you, senior management hold -- and the Board holds these people in the highest regard.
Before reviewing our operating results in detail, I'd like to take a few minutes to discuss the impact on HEICO's operating results from the COVID pandemic.
Results of operations in the first quarter of fiscal '21 continue to reflect adverse impact from COVID-19.
Most notably, demand for commercial aviation products and services continues to be moderated and impacted negatively by ongoing depressed commercial aerospace markets.
We continue to focus on health and safety measures at our facilities in accordance with the CDC guidelines in order to protect the global team members and mitigate the spread of COVID-19 while serving our customers' needs.
Keep in mind that almost all of our facilities were open continually since the start of the COVID pandemic.
And very, very few members of our teams came down with this miserable disease.
That was because of the safety measures and health measures that we employ throughout the company.
Consolidated net sales for businesses that operate within the commercial aerospace industry decreased by about 43% in the first quarter of fiscal '21 as compared to the first quarter of fiscal '20.
As we mentioned in prior calls, we anticipate that as the pandemic vaccine becomes more widely available, consumer interest in commercial air travel should begin to reemerge.
As such, we cautiously anticipate improved demand for our commercial aerospace products to slowly recover toward the second half of fiscal '21.
Summarizing the highlights of our first quarter of fiscal '21 results.
I would tell you that despite continuing difficult operating environment created by the pandemic, HEICO continues to generate excellent cash flow.
And the cash flow provided by operating activities was very strong, increasing 32% to $107.2 million in the first quarter of fiscal '21, and that was up from $81.1 million in the first quarter of fiscal '20.
We are encouraged by the second consecutive quarter of sequential improvement in net sales and operating income at our Flight Support Group.
Operating income and net sales at flight support increased 20% and 3%, respectively, in the first quarter of fiscal '21 as compared to the fourth quarter of fiscal '20, clearly an improvement that's obvious.
Net sales for ETG, space and electronics products grew organically by a very strong 19% and 14%, respectively, in the first quarter of fiscal '21, while the ongoing pandemic's impact resulted in softer demand for its commercial aerospace products.
In January 21, we paid our regular semiannual cash dividend of $0.08 per share, and this represented our 85th consecutive semiannual cash dividend since 1979.
HEICO's strength in the face of ongoing challenging conditions, coupled with our optimism for HEICO's future, gave our Board the confidence to continue paying a cash dividend through the current health pandemic.
Total debt to shareholders' equity improved to 32.2% as of January 31, '21, and that compares to 36.8% as of October 31, '20.
Our net debt, which is total debt less cash and cash equivalents of $270.3 million as of January 31, '21, to shareholders' equity ratio improved to 13% as of January 31, '21.
And that was down from 16.6% as of October 31, '20.
Our net debt-to-EBITDA ratio improved to 0.62 times as of January 31, '21.
And that was down from 0.71 times on October 31, '20.
We have no significant debt maturities until fiscal '24, and we plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes to accelerate the growth and maximize shareholder return.
Last week, we publicly have proudly extended our congratulations to both NASA and Jet Propulsion Laboratories, or known as JPL, on their successful Mars Perseverance Rover Landing.
Our Apex Microtechnology, Sierra Microwave, 3D PLUS and VPT subsidiaries supplied mission-critical hardware for the mission.
Once again, NASA and JPL demonstrated remarkable talent and capabilities despite a year of great challenges for the world's population, and they remain a beacon of optimism for all people.
And we are extremely proud of HEICO companies and team members who contributed to this effort.
I think we want to focus on the extreme technical ability and unbelievable quality that these -- our subsidiaries built into the electronics that they supply for that Mars Perseverance Rover Landing.
The Flight Support Group's net sales were $199.3 million in the first quarter of fiscal '21 as compared to $301.1 million in the first quarter of fiscal '20.
The net sales decrease is principally organic and reflects lower demand for the majority of our commercial aerospace products and services resulting from the significant decline in global commercial air travel attributable to the pandemic.
The Flight Support Group's operating income was $25.8 million in the first quarter of fiscal '21 as compared to $62 million in the first quarter of fiscal '20.
The operating income decrease principally reflects the previously mentioned decrease in net sales as well as a lower gross profit margin and the impact from lost fixed cost efficiencies stemming from the pandemic.
The lower gross profit margin principally reflects the impact from lower net sales of commercial aerospace products and services across all of its product lines.
The Flight Support Group's operating margin was 13% in the first quarter of fiscal '21 as compared to 20.6% in the first quarter of fiscal '20.
The operating margin decrease principally reflects the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned lost fixed cost efficiencies and the effect of higher intangible asset amortization expense.
I would like to point out that the full impact of the pandemic began to affect the FSG operating segment at the beginning of our third quarter of fiscal '20.
Through practical and disciplined cost management, we have delivered sequential quarterly improvements in our FSG operating margin.
The FSG operating margin was just 6.7% in the third quarter of fiscal '20 and has since steadily increased to 11.1% in the fourth quarter of fiscal 2020 and to 13% in the first quarter of fiscal '21.
Our team members and assembled workforce is our most valuable asset.
Our team members engaged primarily in commercial aviation sacrificed greatly during the pandemic through limited layoffs, moderate furloughs and wage reductions for nearly all others not impacted by layoffs or furloughs.
These team members sacrificed a tremendous amount, and we owe our loyalty to them as we held on to a much higher percentage of our workforce than most others.
Thus, we decided to operate with higher overhead, which reduced our gross margins and increased our SG&A.
A lot of companies speak about how their team members are important.
But HEICO demonstrates it through actions, including by maintaining our 401(k) matching contributions and granting our team members their maximum potential 401(k) profit sharing contributions, even though we missed our budgets due to the pandemic.
We could have sacrificed the future in order to have better current period results, but that is not what HEICO is about.
That's the luxury of being part of the HEICO family as we don't feel pressured to make short-term decisions that hurt future performance.
We also treated our customers, suppliers, principles, partners and acquisitions extremely well and truly believe this helps us grow faster than the industry as people prefer dealing with us due to our culture.
We are confident that our motivated and assembled workforce will propel us to new heights as the pandemic passes.
And I would also like to echo my gratitude to all of HEICO's team members, including those at the Electronic Technologies Group, for their remarkable efforts during this difficult time.
About 90% of our people cannot work from home and have to come in.
And our businesses have been operating as essential businesses throughout this pandemic very carefully and very safely and taking care of each other.
And I'm very proud of the job that our people have done throughout this entire difficult period as well as the many years before, and I know that they'll continue to do the excellent work that they've carried out.
As for the Electronic Technologies Group's performance, our net sales increased 7% to $223.6 million in the first quarter of fiscal '21, up from $208.4 million in the first quarter of fiscal '20.
The increase is principally attributable to the favorable impact from our fiscal '20 acquisitions.
The Electronic Technologies Group's operating income increased 5% to $60.1 million in the first quarter of fiscal '21, up from $57.5 million in the first quarter of fiscal '20.
This increase principally reflects the previously mentioned net sales growth.
The Electronic Technologies Group's operating margin was 26.9% in the first quarter of fiscal '21 as compared to 27.6% in the first quarter of fiscal '20.
The lower operating income as a percent of net sales principally reflects a lower gross profit margin, partially offset by a decrease in SG&A expenses as a percentage of net sales, mainly from certain efficiencies gained from the previously mentioned net sales growth.
The lower gross profit margin mainly reflects a decrease in net sales with commercial aerospace products and lower net sales and a less favorable product mix of certain defense products, partially offset by an increase in net sales of certain electronics products.
Moving on to earnings per share.
Consolidated net income per diluted share was $0.51 in the first quarter of fiscal '21 and that compared to $0.89 in the first quarter of fiscal '20.
The decrease principally reflects the previously mentioned lower operating income of the Flight Support Group and higher income tax expense, partially offset by less net income attributable to noncontrolling interest as well as lower interest expense.
Depreciation and amortization expense totaled $23 million in the first quarter of '21.
That was up from $21.6 million in the first quarter of fiscal '20.
The increase in the first quarter of fiscal '21 principally reflects the incremental impact of higher intangible asset amortization expense from our fiscal '20 acquisitions.
Significant new product development efforts are continuing at both ETG and flight support.
R&D expense was $16.2 million in the first quarter of fiscal '21 or about 3.9% of sales, and that compared to $17.1 million in the first quarter of fiscal '20 or 3.4% of sales.
Consolidated SG&A expense decreased by 10% to $78.1 million in the first quarter of fiscal '21 as compared to $87.1 million in the first quarter of fiscal '20.
The decrease in consolidated SG&A expense reflects: a decrease in performance-based compensation expense; a reduction in other selling expenses, including outside sales commission, marketing and travel; and the reduction in other G&A expenses.
Consolidated SG&A expense as a percentage of net sales was 18.7% in the first quarter of fiscal '21, and that compared to 17.2% in the first quarter of fiscal '20.
The increase in the consolidated SG&A expense as a percentage of net sales principally reflects higher other G&A expenses as a percentage of net sales and the impact from higher intangible asset amortization expense.
Interest expense decreased to $2.4 million in the first quarter of fiscal '21, and that was down from $4.3 million in the first quarter of fiscal '20.
The decrease was principally due to lower weighted average interest rates, partially offset by a higher weighted average balance of borrowings under our revolving credit facilities.
Other income in the first quarters of fiscal '21 and '20 was really not significant.
HEICO's income tax expense was $2.3 million in the first quarter of fiscal '21, and that compared to an income tax benefit of $22.9 million in the first quarter of fiscal '20.
HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal '21 and '20 of $13.5 million and $47.6 million, respectively.
The tax benefit from stock option exercises in both periods was the result of the strong appreciation in HEICO's stock price during the option lease holding period, and the $34.1 million larger benefit recognized in the first quarter of fiscal '20 was the result of more stock options which were exercised.
Net income attributable to noncontrolling interest was $5.7 million in the first quarter of fiscal '21, and that compared to $7.9 million in the first quarter of fiscal '20.
The decrease principally reflects a decrease in the operating results of certain subsidiaries of flight support, in which noncontrolling interests are held.
For the full FY '21, we now estimate a combined effective tax rate and noncontrolling interest rate of approximately 24% to 26% of pre-tax income.
Moving over to balance sheet and cash flow.
The financial position of HEICO and forecasted cash flow remains very strong.
As we mentioned earlier, cash flow provided by operating activities was very strong and increased 32% to $107.2 million in the first quarter of fiscal '21, up from $81.1 million in the first quarter of fiscal '20.
Our working capital ratio was strong and consistent at 4.9 times as of January 31, '21, and that compared to 4.8 as of October 31, '20.
Days sales outstanding of receivables, DSOs, improved to 45 days as of January 31, '21, and that compared to 46 days as of January 31, '20.
Of course, we continue to closely monitor all receivable collection efforts in order to limit our credit exposure.
No one customer accounted for more than 10% of net sales.
Our top five customers represented about 24% and 22% of consolidated net sales in the first quarter of fiscal '21 and '20, respectively.
Our inventory turnover rate increased to 164 days for the period ending January 31, '21.
That compared to a pre pandemic 132 days for the period ended January 31, '20.
The increase in the turnover rate principally reflects lower net sales volume, mainly resulting from the pandemic impact on certain -- on demand for certain of our products and services.
And despite the increased turnover rate, our subsidiaries really have done an excellent job controlling inventory levels in the first quarter of fiscal '21, which we believe are appropriate to support expected future net sales.
And in consideration of HEICO's consolidated backlog, which has increased by $62 million since October 31, '20, the backlog was $906 million as of January 31, '21.
As we look ahead to the remainder of fiscal '21, the pandemic will likely continue to negatively impact commercial aerospace and HEICO.
Given this uncertainty, we cannot provide fiscal '21 net sales and earnings guidance at this time.
However, we believe that our ongoing fiscal conservative policies, healthy balance sheet and increased liquidity will permit us to invest in new research and development and gain market share as the industry recovers.
In addition, our time-tested strategy of maintaining low debt and acquiring and operating high cash-generating businesses across a diverse base of industries beyond commercial aviation, such as defense, space and other high-end markets, including electronics and medical, puts us in a good financial position to weather this uncertain economic period.
Furthermore, we are cautiously optimistic that the vaccine progress may generate increased commercial air travel and will result in gradual recovery in demand for our commercial aerospace parts and services businesses.
And we expect that to commence primarily in the second half of fiscal '21, although we do expect it to increase gradually until we get there.
That strength will manifest from our culture of ownership, our mutual respect for each other and the unwavering pursuit of exceeding customers' expectations.
I also would like to point out that in spite of the pandemic and in spite of decreased sales, HEICO wanted to look and reward our team members.
And again, this year, we continue to make the 5% match to team members' 401(k) investments.
As you know, most team members invest 6%, HEICO matches it with 5% of their salary in HEICO shares.
We would never cut that back because we respect and we want to reward our outstanding team. | compname reports strong operating cash flows in the first quarter of fiscal 2021; up 32%.
q1 earnings per share $0.51.
cannot provide fiscal 2021 net sales and earnings guidance at this time. | 1 |
In our financial guaranty business, Assured Guaranty is having our best year for direct new business production in more than a decade based on direct PVP results since 2009 for both the third quarter and first nine months of 2020.
Additionally on a per share basis, Assured Guaranty's adjusted book value, shareholders' equity, and adjusted operating shareholders equity reached new highs.
As part of our capital management strategy, we have purchased more shares in nine months of this year than we did in all of 2019.
And our Board of Directors has authorized additional share repurchases of $250 million.
Also on October 1st, S&P Dow Jones Indices announced that Assured Guaranty would become a component stock of the S&P SmallCap 600 index on October 7th.
Both the price and trading volume of our shares increased on the news.
Presumably, because index funds and ETFs attract the S&P 600, as well as actively managed funds benchmark to the index began accumulating positions in our shares.
KBW estimated that has the funds that track the S&P 600 will need to purchase 8.7 million shares.
I think it's safe to say that certain passive investors and active small cap mutual funds and ETFs now form an additional base of AGO shareholders.
There are more than 2000 funds in the SmallCap investment category.
Turning to U.S. product public finance production, we wrote $93 million of PVP in the third quarter, more than double our third quarter 2019 PVP and an 11 year record.
In terms of insured par sold, we continue to lead the industry guaranteeing 64% of the $11.9 billion of primary market insured par sold in the third quarter, which was the industry's highest quarterly insured par amount since mid-2009 and 82% higher than in last year's third quarter.
Bond insurance penetration reached 8.3%, up from last year's third quarter penetration of 5.7%.
The 7.7% penetration for the first three quarter, municipal bond insurance industry is likely to see its best annual market penetration in the insured par volume in over a decade and this is still in a very low interest rate environment.
We benefited from credit spreads that are wired than at the beginning of the year, but this is still a market where AAA benchmark yields have been below 2% almost all year.
Wall Street Journal has called this increase in penetration, a renaissance in the municipal bond insurance industry.
Driven by the heightened demand for insurance, combined with a 35 [Phonetic] year-over-year increase in quarterly issuance, Assured Guaranty's third quarter originations totaled $7.5 billion of primary market par sold, essentially double the amount during the third quarter of 2019.
One of the new issues sold with our insurance in the third quarter was Assured Guaranty's largest U.S. public finance transactions since 2009, a $726 million of insured par for the Yankee Stadium project.
This transaction closed in October so it's PVP and par exposure will be reflected in the fourth quarter results.
It refunded $335 million of our previous exposure, so our net exposure to this credit increased by $391 million.
This is one of 19 new issues that utilize $100 million or more of our insurance during the third quarter.
For the first nine months, we provided insurance on $100 million or more of par on 32 individuals issued -- individual new issues, more than in any full year over the past decade.
Our significant capital resources and strong trading value on larger transactions are important competitive advantages.
We believe two types of investors have driven our increase in larger transactions.
The first our institutions investing in the traditional tax exempt market, which are attracted by our strong balance sheet and broad proficiency and credit analysis.
The others are non-traditional investors in the growing taxable municipal bond market, including international investors to internal resources to evaluating surveil U.S. municipal credits may be limited.
Actual issuance represented approximately 30% of the muni market's total new issue par volume during the first nine months of 2020 compared with 5% to 10% in recent years.
And 35% of our par insured on new issues sold in the period was taxable.
During those nine months, the par amount we insured on taxable new issues totaled $5.5 billion compared with $1.5 billion in the first nine months of 2019.
In case of credits with underlying S&P or Moody's ratings in the AA category, we insured a total of $806 million of par for the quarter and during the first nine months more than $2 billion of par.
This year-to-date par volume is greater than our par volume of such AA credits in all of 2019.
This reflects the strength of our value proposition and the market's view of our financial strength.
Year-to-date through September, we provided insurance on $15.7 billion municipal new issue par sold, of which $1 billion -- which is $1 billion more than in all of 2019.
Combining primary and secondary market activity for the first nine months, we guaranteed $16.6 billion of municipal par, $6.2 billion more than in the same period last year, a 60% increase.
In international infrastructure finance, we completed the best third quarter origination since 2009's acquisition of AGM, producing $24 million of PVP, 52% more than in last year's third quarter.
Our guaranty is now a mainstream solution and widely accepted option for efficiently financing infrastructure development.
The flow of transaction inquiries is much stronger than it was just a few years ago and little over a year's time we guaranteed four solar power transactions in Spain, including the most recent one in August.
These transactions are good examples of how our guaranty makes the financing of renewable energy projects more cost efficient.
Another significant third quarter transaction was a GBP90 million private placement to finance improvements to students accommodations at Kingston University in the United Kingdom.
The high insured ratings and associated lower investment -- investor capital charges as well as the long tenure of many infrastructure bonds we guaranty makes them an attractive for institutions seeking to optimize long-term asset liability matching.
The impact of COVID-19 has temporary slowed the new issued transaction flow.
It is also creating conditions that we expect to provide significant international opportunities.
We believe downgrades with a potential for them could make our guaranty more valuable for even a broader range of essential investment grade infrastructure financings, such as airports that are crucial for the region's economies.
In the medium term, we expect a massive global policy initiative to invest in infrastructure and renewables.
Additionally, we see opportunities where guaranty has been underutilized.
In Australia for example, we are ramping up our business development and advertising efforts and working with the local origination consultant to help us expand our network of relationships on the ground.
Our international and structure finance groups often collaborate when it comes to bilateral risk transfer transactions that allow large asset portfolios to be managed more efficiently, whether from the perspective of capital efficiency, capital management, or risk mitigation.
Transactions of these types are a strategic focus of our structured finance underwriting group.
These tend to be large transactions requiring significant due diligence and the timing regular.
We have a number of them in progress and expect to close in the fourth quarter or next year.
In other aspects of structured finance, we continue to explore opportunities to add value to a variety of securitizations, including for example, those for whole business revenues, tax credits and consumer debt.
Now, let me provide some insight into the ability of our insured portfolio to weather today's unique economic circumstances.
We have continued to take a deep dive analytically into our highly diversified universe of insured exposures, especially in the sectors we view as the most potentially vulnerable to the consequences of pandemic such as mass transits, stadiums and hospitality among others.
What we found is that the underwriting we did to select the credits we've insured and the structural protections we've required in order to be able to guaranty those transactions and work the way they were intended.
We again model performance of transactions in vulnerable sectors under economic stress test, assuming no Federal assistance beyond what was already authorized before September as well as significant reductions in future revenues.
Having updated that analysis, we remain confident that we do not expect first time claims arising from the pandemic that will lead to material ultimate losses.
On some transactions that were already classified as below investment grade, prior to the pandemic, we did make marginal reserve adjustments.
As of now, we have paid no claims that we believe were due to credit stress arising specifically from COVID-19.
Last week, KBRA wrote that it used the pandemic as primarily a potential liquidity event for Assured Guaranty, it expressed that view in its ratings affirmation and release for our insurance companies last week, which were AA plus for AGM, MAC and our U.K. and French subsidiaries and AA for AGC.
We taken active role in managing risk at the transaction level.
This year, we have worked with some of our insured issuers to take advantage of low interest rates to reduce or to further debt service over the near-term through refinancings.
These transactions also typically benefit us by accelerating our premium earnings and generating new premium on refunding bonds that we insure.
I won't say a lot about Puerto Rico today because a new Commonwealth Administration will be starting soon and the composition of the Oversight Board is in flex.
Sub-Board members have resigned and new Board members joined and others may be reappointed or replaced.
I'll just repeat that achieving a consensual restructuring without further delay is the best thing that could happen for the people of Puerto Rico.
The recently announced release of $13 billion in federal assistance helped to improve the conditions for reaching such an agreement.
The integration of BlueMountain Capital, which we acquired last year is progressing.
In September we rebranded it, Assured Investment Management and rolled out the new branding on a newly launched Investment Management website.
These changes reflect the close alignment of our Investment Management business with our overall corporate strategy.
Assured Investment Management currently manages $1 billion of our insured companies investable assets.
Throughout the company, we are actively developing synergies between our Insurance division credit underwriting and surveillance skills and the Investment Management division's ability to structure and market investment products.
We want our Investment Management business to grow, as we continue to leverage our capital through the strategic business diversification.
I believe that Assured Guaranty is in good position, both in the market and financially.
I expect a strong finish for 2020, our U.S. public finance, international infrastructure and global structured finance businesses are strong pipelines of potential originations.
Assured Guaranty is fortunate to be a company designed from the ground up to be resilient and succeed in difficult times, which we proved during the previous recession.
As the effectiveness of our remote operations and the diligence and commitment of our employees made it possible for us to perform well and operating safely in challenging times, allowing us to continue to working toward protecting investors and securities we insure during uncertain economy, assisting issuers and funding public services and manage their fiscal challenges and building a greater value for Assured Guaranty shareholders.
This quarter we have continued to make progress on our strategic initiatives.
In our Insurance segment, our strong premium production is replenishing our unearned proved reserve, offsetting the amortization of the existing book of business, which will be accretive to future earnings.
In terms of capital management, year-to-date at September 30th, we have already repurchased 11.4 million shares, which is well over our initial plan of approximately 10 million shares.
As for our third quarter 2020 results, adjusted operating income was $48 million or $0.58 per share.
This consists primarily of $81 million of income from our Insurance segment, a $12 million loss from our Asset Management segment and a $18 million loss from our Corporate division which -- where we reflect our holding company interest expense as well as other corporate income and expense items.
Starting with the Insurance segment, adjusted operating income was $81 million compared to $107 million in the third quarter 2019.
This includes net earned premiums and credit derivative revenues of $113 million compared with the $129 million in the third quarter of 2019.
The decrease was primarily due to lower net earned premium accelerations from refundings and terminations, offset in part by an increase in scheduled earned premiums due to higher levels of premiums written in recent periods.
In total, accelerations of net earned premiums were $18 million in the third quarter 2020 compared with $38 million in the third quarter of 2019.
Net investment income for the Insurance segment was $75 million compared with $89 million in the third quarter of 2019, which do not include mark-to-market gains related to our Assured Investment Management funds and other alternative investments.
As we shift to alternative investments and continue our share repurchase program, average balances in the fixed maturity portfolio have declined.
As of September 30, 2020, the insurance companies have authorization to invest up to $500 million in funds managed by Assured Investment Management, of which over $350 million had been deployed.
Income related to our Assured Investment Management funds and other alternative investments are recorded at fair value in a separate line item from net investment income.
The change in fair value of our investments in Assured Investment Management funds was a $13 million gain in the third quarter 2020 across all strategies.
These gains were recorded in equity and earnings of investees, along with an additional $7 million gain on other non-Assured Investment Management alternative investments with a carrying value of almost $100 million.
This compared to only $1 million in fair value gains in the third quarter of 2019.
Going forward, we expect adjusted operating income will be subject to more volatility than in the past.
As we shift assets to alternative investments.
Loss expense in the Insurance segment was $76 million in the third quarter 2020 and was primarily related to economic loss development on certain Puerto Rico exposures.
In the third quarter of 2019, loss expense was $37 million also primarily related to Puerto Rico exposures, but was partially offset by a benefit in the U.S. RMBS transactions.
The net economic development in the third quarter 2020 was $70 million, which mostly consisted of $56 million in loss development for the U.S. public finance sector principally Puerto Rico exposures.
The Asset Management segment adjusted operating income was a loss of $12 million.
The impact of the pandemic continues to challenge the timing of distributions out of our wind-down funds and of new CLO issuance.
Additionally, price volatility and down grades have triggered over-collateralization provisions in CLO transactions that resulted in the third quarter 2020 management fee deferrals of approximately $3 million.
In the third quarter 2020, AUM inflows were mainly attributable to the additional funding of a CLO strategy under the intercompany investment management agreement, which we executed last quarter.
These represent assets in our insurance company subsidiaries' fixed maturity investment portfolios.
Our long-term view of the enhanced returns from the Assured Investment Management funds remains positive.
We believe the ongoing effect of the pandemic on market conditions and increased market volatility may present attractive opportunities for Assured Investment Management and for the alternative asset management industry as a whole.
Adjusted operating loss for the Corporate division was $18 million for the third quarter of 2020 compared with $28 million for the third quarter of 2019.
This mainly consists of interest expense on the U.S. holding company's public long-term debt as well as inter-company debt to the insurance companies that was primarily used to fund the BlueMountain acquisition.
It also includes Board of Directors and other corporate expenses and in the third quarter of 2020, it also include a $12 million benefit in connection with the separation of the former Chief Investment Officer and Head of Asset Management from the company.
From a liquidity standpoint, the holding company currently have cash and investment available for liquidity needs and capital management activities of approximately $82 million, of which $20 million reside AGL.
On a consolidated basis, the effective tax rate may fluctuate from period-to-period, based on the proportion of income in different tax jurisdictions.
In the third quarter 2020, the effective tax rate was a benefit of 32.7% compared with a provision of 16.3% in the third quarter 2019.
The tax benefit in the third quarter of 2020 was primarily due to a $17 million release of reserves for uncertain tax positions upon the closing of the 2016 audit year.
Turning to our capital management strategy, in the third quarter of 2020, we repurchased 1.9 million shares for $40 million for an average price of $20.72 per share.
Since the end of the quarter, we have purchased an additional 1.7 million shares for $46 million, bringing our year-to-date share repurchases as of today to over 13 million shares.
Since January 2013 our successful capital management program has returned $3.6 billion to shareholders, resulting in a 61% reduction in total shares outstanding.
The cumulative effect of these repurchases was a benefit of approximately $25.43 per share in adjusted operating shareholders' equity and approximately $45.48 in adjusted book value per share, which helped drive these important metrics to new record highs of $73.80 in adjusted operating shareholders' equity per share and over $108 million of adjusted book value per share.
Finally, in connection with the capitalization of AGM French subsidiary, AGM's third quarter 2020 investment income increased due to dividends received from its U.K. subsidiary, which increased AGM's 2020 dividend capacity to its holding company parent.
However, as always future share repurchases are contingent on available free cash, our capital position and market conditions. | q3 adjusted operating earnings per share $0.58. | 1 |
Joining me are our Chief Executive Officer, Bob Steers; our President, Joe Harvey; and our Chief Financial Officer, Matt Stadler.
Further, none of our statements constitute an offer to sell or the solicitation of an offer to buy the securities of any fund.
These non-GAAP financial measures should be read in conjunction with our GAAP results.
Yesterday, we reported record earnings of $0.94 per share compared with $0.54 in the prior year's quarter and $0.79 sequentially.
Revenue was a record $144.4 million for the quarter compared with $94 million in the prior year's quarter and $125.8 million sequentially.
The increase in revenue from the first quarter was primarily attributable to higher average assets under management across all three investment vehicles, the recognition of performance fees and one additional day in the quarter.
Our implied effective fee rate was 58 basis points in the second quarter compared with 57.3 basis points in the first quarter.
Excluding performance fees, our second quarter implied effective fee rate would have been 57 basis points.
No performance fees were recorded in the first quarter.
Operating income was a record $62.6 million in the quarter compared with $35.5 million in the prior year's quarter and $53.2 million sequentially.
Our operating margin increased to 43.4% from 42.3% last quarter.
The second quarter included a cumulative adjustment to reduce the compensation to revenue ratio.
Expenses increased 12.6% compared with the first quarter, primarily due to higher compensation and benefits, distribution and service fees and G&A.
The compensation to revenue ratio, which included the just mentioned cumulative adjustments to lower the incentive compensation accrual, was 35.03% for the second quarter and is now 35.25% for the six months ended.
The increase in distribution and service fee expense was primarily due to higher average assets under management in US open-end funds, and the increase in G&A was primarily due to higher professional and recruitment fees as well as an increase in travel and entertainment expenses.
Our effective tax rate, which also included a cumulative adjustment, was 26.51% for the second quarter and is now 26.85% for the six months ended.
The reduction in the effective tax rate from the first quarter was primarily due to the diminished effect of the non-deductible portion of executive compensation on a higher than previously forecasted pre-tax base.
Our firm liquidity totaled $185.6 million at quarter-end compared with $124.3 million last quarter.
Total assets under management was a record $96.2 billion at June 30th, an increase of $9.2 billion or 11% from March 31st.
The increase was due to net inflows of $2.6 billion and market appreciation of $7.4 billion, partially offset by distributions of $769 million.
Advisory accounts, which ended the quarter with a record $23.1 billion of assets under management, had net inflows of $1 billion during the quarter.
We recorded $300 million of inflows from five new mandates and a record $1.2 billion of inflows from existing accounts.
Partially offsetting these inflows were $493 million of outflows resulting from client rebalancing.
Net inflows were evenly a portion between US real estate, Global real estate, Preferred and Global listed infrastructure portfolios.
Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan Subadvisory had net outflows of $272 million during the quarter, compared with net outflows of $204 million during the first quarter.
As mentioned on last quarter's call, in January of 2021, our distribution rate cut was made to one of the funds we subadvised.
Encouragingly the rate of net outflows in this fund decelerated throughout the quarter and we actually recorded net inflows for the month of June.
Subadvisory excluding Japan had net outflows of $375 million primarily from a single client who decided to bring the portfolio management for a portion of the assets we manage for them in-house.
Open-end funds, which ended the quarter with record assets under management of $43.5 billion, had net inflows of $2.1 billion during the quarter.
This marks the 10th straight quarter of net inflows into open-end funds, and the first time we have recorded net inflows into each of our 11 US mutual funds.
Net inflows were primarily into US real estate and preferred funds.
Distributions totaled $312 million, $260 million of which was reinvested.
Let me briefly discuss a few items to consider for the second half of the year.
With respect to our outlook for compensation, the double-digit sequential growth in our assets under management and revenue, driven by our industry-leading organic growth rate and our strong investment performance, is tempered by the fact we still have half a year ago.
As a result, we reduced the compensation to revenue ratio by 25 basis points to 35.25% for the six months ended, and we expect that our compensation to revenue ratio will remain at 35.25%.
As we resume certain business activities that have been restricted during the worst of the pandemic, we expect G&A will increase by about 12% from the $42.6 million we recorded in 2020, but only by about 3% from the $46 million we recorded in 2019.
As was the case last quarter, the increase is primarily attributable to incremental investments in technology and global marketing as well as higher recruitment costs associated with the hiring of certain key investment and distribution personnel.
We expect that our effective tax rate will remain at 26.85%.
And finally, during the second quarter, in response to a client requests, we converted the fee structure on two portfolios from a performance-based fee structure to a base fee-only.
This conversion resulted in the realization of the year-to-date outperformance.
The increase in the base fee for these portfolios is not expected to have a meaningful impact on our overall effective fee rate.
Today, I will review our investment performance and discuss related key themes such as our near record, our perfect record of outperformance, what we are doing to sustain and enhance performance, the impact of accelerating inflation on our asset classes and how our major asset classes are performing versus expectations at the beginning of the year.
As we all know, in the second quarter, the US economy reopened from the pandemic and surged powerfully, driving appreciation and positive returns in virtually all asset classes.
A good portion of our AUM did better than the S&P 500, which was up 8.6%.
And we continued to post stellar outperformance versus our benchmarks.
One surprising development was that, treasury yields declined in the quarter against the backdrop of accelerating economic growth and rising inflation.
In fact, inflation surprised on the upside, something that hasn't happened in a long time.
Looking at our performance scorecard, in the second quarter, eight of nine core strategies outperformed their benchmarks.
For the last 12 months, all nine core strategies outperformed.
99% of our AUM is outperforming benchmarks on a one-year basis compared with 93% last quarter, driven by improvements in global listed infrastructure and certain global real estate portfolios.
On a three-year basis 100% of AUM is outperforming, and for five years 99% is outperforming, essentially the same as last quarter.
US REITs returned 12% in the quarter, lifting the year-to-date return to 21.3%.
We outperformed our benchmark in the quarter and for the last 12 months.
Going into this year, we believe 2021 would be a good, so called vintage year for real estate investing starting first with listed and then followed by private, consistent with a long history of the listed market leading the way, particularly during turning points.
The reopening in the US economy has created greater visibility into the turnarounds and demand for space, leasing activity and tenant credit and assorting out of rent deferrals, all of which restrained REIT share prices last year, while investment sales activity resumed including some major portfolio and Company sales.
While fundamentals and share prices for many property sectors have reached or eclipsed pre-pandemic levels, some of the most impacted sectors such as hotels, office and healthcare have loan recovery runways.
We believe that inflation in prices for building materials, such as steel and copper, labor, housing and land have contributed to rising real estate values and share prices.
This is different than in past periods where the replacement cost dynamic has taken a development cycle to kick in.
Global real estate returned 9.2% in the quarter compared with global stocks at 7.7%, lifting the year-to-date return to 15.5%.
For both the quarter and the last 12 months, we have outperformed in all three of our regional strategies as well as in our global and international strategies.
Global listed infrastructure returned 2.9% in the quarter, lifting the year-to-date return to 7%.
We outperformed for the quarter and for the last 12 months.
Similar to real estate, we believed that 2021 would be a good vintage year for infrastructure investing as infrastructure depreciated last year in part due to the sub-sectors that were uniquely impacted by the pandemic.
This year, the sectors hardest hit by the pandemic such as airports, ports and toll roads are still wrestling with concerns about the spread of coronavirus variance and levels of cross-border travel.
And utilities have been flat for the second year in a row, left back in a strong technology-led bull market.
That infrastructure performance, while positive, has not been stronger likely represents an opportunity in our view.
Preferred returned 2.9% in the quarter, helped by the 10-year treasury yield falling 30 basis points to 1.4%.
The year-to-date return is 2.4%.
We outperformed in the quarter and for the last 12 months in both our core and low duration preferred strategies.
Going into this year, we believe that the flat yield curve with the potential for a transition in the rate environment to higher long-term yields suggested investors should pivot toward our low duration strategy.
Notwithstanding the surprise and inflation this year, concerns about the coronavirus variants and global central bank yield management, have resulted in a very orderly interest rate market.
The risks of higher bond yields are on our watch list.
The inflation surprise has helped some of our strategies performance wise and has stimulated investor demand, particularly in our real estate strategies.
Going into this year we believe that inflation risks arising and that our multi-strategy real assets portfolio would see greater investor interest, while conversations have increased, they have yet to translate into flows.
Our real assets multi-strategy benchmark returned 8.5% in the quarter, lifting the year-to-date return to 14.5%.
We outperformed for both the quarter and the last 12 months, driven by excess returns in every strategy sleeve, real estate, infrastructure, commodities, resource equities, gold and high-grade low duration credit, and through top down asset allocation.
In the quarter commodities returned 13.3%, with 25 of the 27 commodities in the index producing positive spot price returns.
On the topic of whether higher inflation is temporary or not, we believe that many factors, including unprecedented fiscal and monetary stimulus, trade bottlenecks, labor markets, housing prices and consumer psychology have come together to support a phase of higher and longer inflation.
If so, the conversations about inflation solutions should turn into more allocations.
In terms of inflation beta or the sensitivity to surprise inflation, the most sensitive of our strategies in descending order are commodities, resource equities, multi-strategy real assets, infrastructure and real estate.
At the same time, the macro environment for real assets is improving.
Real assets are the cheapest versus equities in nearly 20 years.
While we have a near-perfect record of outperformance, we are by no means complacent.
Our goal is to sustain our current level of outperformance, while continuing to innovate, identify alpha sources, put process in place to harvest that alpha and widen our excess return margins versus benchmarks.
The longer our outperformance persist, the better our ability to realize returns on the investments we've made and new vehicles and distribution.
We continue to devote resources to our investment department.
We've talked previously about our initiatives to integrate quantitative techniques and IT efficiencies into our fundamental processes.
Those initiatives are producing positive results and our investment teams are now asking for more.
We've added analysts and are identifying our next group of emerging leaders through our annual talent review process.
We recently added a Head of ESG, who will help our teams take our current ESG integration framework to the next level, contribute to the development of explicit strategies and help address the increasing demands of clients and consultants.
We see many opportunities for innovation and real estate investing.
There is an acute need for next generation real estate strategies to help investors reorganize and rebalance existing allocations, which are heavy in private, heavy in core property types and are not set up to be nimble to pivot to where the best deal is.
We have developed next generation, new economy property type strategies for the listed market.
In April, as we discussed on the last call, we announced the formation of our Private Real Estate group.
Our imperative is to innovate at the intersection of private and listed real estate investing to tilt to where the best returns are and harvest the alphas at those intersections.
Meantime, the pandemic has created change in demographic and business trends, which we believe creates opportunity by geographic market, property sector and business model.
Our private team is organized, our allocation and research processes between listed and private are established and we are commencing efforts to raise capital in institutional vehicles and in closed-end fund strategies.
In closing, we are in a unique phase of the economic and market cycles from an investor's perspective or what we do.
The setup that I've talked about before is how to achieve in a risk-managed fashion, a return bogey of 7% from a 60-40 blend of stocks and bonds.
For a long while now, the 40% in fixed income on a current basis has not been able to meet the return goal.
Now introduce inflation and the exercise becomes more difficult.
The fixed income dilemma is tougher.
There is higher risk for equities and the need to fit real assets into portfolios is greater.
Our strategies offer attractive total returns, current yield, diversification, inflation protection and for the taxable investor, tax advantages.
We have organized our teams to engage with clients to help solve these portfolio challenges.
We are excited about the opportunity.
First off, it's great to be back at work in my office, and I'm 100% healthy.
Also, I'd like to recognize Joe Harvey and our entire Executive Committee, who stepped up seamlessly in my absence, which underscores the quality and depth of our leadership team.
As I look back on the quarter and the year-to-date, it's apparent that we're in an environment that's very favorable for real assets.
The historically strong cyclical recovery that we've experienced this year has fostered a dramatic rebound in fundamentals for real assets ranging from real estate and infrastructure to resource equities and commodities.
The rebound and prospects for real assets versus 2020 is stark.
As Joe just pointed out, whereas the performance of virtually all real asset strategies badly lagged the broader equity markets last year, the reverse has been the case so far this year, especially for our real estate and diversified real asset strategies.
We believe this is a unique point in time for real assets and CNS, one that will not be transient in nature, and is supported by secular trends.
First, this cyclical recovery is historic and underpinned by unprecedented fiscal and monetary stimuli, which are supportive of real asset fundamentals.
Second, investor psychology is shifting toward real assets.
The forces behind this shift are both fundamentals, including growing demand for hedges against unexpected inflation, and technical also including expectations of massive capital flows into public and private infrastructure.
We believe our strong brand and investment performance have put us in a unique position to capitalize on these trends as evidenced by our $2.6 billion in net inflows and the 12% organic growth in this latest quarter.
That said, we're working hard to expand our breadth and depth of capabilities in the real asset space by developing unique and valuable new space [Phonetic].
In addition, we're continuing our work to enhance and improve the results in all distribution channels, especially our US Advisory segment.
Last quarter's net flows in the wealth channel were a near-record $2.1 billion, and just shy of the first quarter record of $2.2 billion.
The organic growth rate in this, our largest channel was 22%.
Importantly, the strong growth in assets was well diversified by channel and product.
We saw strong flows for each of the broker dealer, RIA and independent channels.
DCIO also delivered a $163 million of net inflows, which marks the 12th consecutive quarter of positive net flows for this vertical.
Flows by strategy were diverse as well.
The preferred securities fund led the way with $665 million of net inflows, and our low duration preferred securities fund also generated $205 million of net inflows.
Consistent with the growing interest in real estate, our global real estate securities fund achieved a record $370 million of net inflows in the quarter, and year-to-date has generated a 62% organic growth rate.
Net flows into our three US real estate funds were strong as well at $390 million.
Our non-US funds experienced $61 million of net inflows, which marks the fourth consecutive quarter of positive inflows.
These flows, which have been accelerating, are the result of our expanding network of platforms and relationships throughout the EMEA region.
We expect these results will continue to improve over time.
The advisory channel delivered a solid $1 billion of net inflows in the quarter, also with strong demand across a range of strategies.
US real estate led the way with $443 million of net inflows, followed by preferred securities at $314 million.
Global real estate and global infrastructure also experienced net inflows of $227 million and $162 million, respectively.
$860 million of the $1.4 billion beginning institutional pipeline was funded during the quarter.
In addition, $479 million of new mandates was both won and funded in the quarter, and thus, never even made it into the pipeline.
Our end of quarter pipeline stands at $925 million.
As you may remember, less than one year ago, the advisory group under the leadership of Jeff Sharon was reorganized into a regional team approach, and we are very encouraged by these early results.
The subadvisory channel had net outflows of $375 million, which was attributable to one client who took $381 million of US and global real estate mandates in-house as a cost-saving measure.
Similarly, Japan subadvisory saw $272 million of net outflows, and $309 million of distributions, which reflect the continuing effects of a distribution cut in a large US REIT fund.
Looking ahead, the economy and equity markets appear to be at a tipping point, either the economic activity slows materially and inflation pressures turn out to be transitory or not.
As Joe alluded, the indicators that we follow strongly suggest that economic activity and inflation will remain higher for longer than expected.
In this environment, real assets will be highly sought after for their return and diversification characteristics.
Current fundamentals and stock market momentum appear to confirm this view.
We believe that this is a time to step-up new product initiatives to capitalize on what we expect will be strong vintage years ahead of us.
The launch of our first private real estate fund will be an important milestone for us.
Related to this, we are also growing our multi-strat asset allocation team.
And this, together with our listed and unlisted capabilities, will position us at the intersection of what is now for us a $16 trillion real estate universe.
The opportunity as we see it is to advise investors on how to tilt their real estate portfolios between listed and unlisted investments continuously to generate alpha and maximize returns.
This will open a range of opportunities for us from open and closed-end funds and separate accounts to non-traded vehicles.
Separately, we expect to recognize improved results from our EMEA, wholesale and US institutional teams, both of which are benefiting from new leadership and additional resources.
Only time will tell, but our excellent track record, strong cyclical tailwinds and proven distribution make us as excited about our growth prospects as ever. | qtrly net inflows of $3.8 billion.
qtrly adjusted earnings per share $0.79. | 0 |
Participating in today's call will be Bruce Schanzer, Chief Executive Officer; Robin Zeigler, Chief Operating Officer; and Philip Mays, Chief Financial Officer.
These statements are subject to numerous risks and uncertainties, including those disclosed in the company's most recent Form 10-K to the year ended 2019, as updated by our subsequently filed quarterly reports on Form 10-Q and other periodic filings with the SEC.
As you all realize, this has been and continues to be a time of incredible stress, with many folks worrying about contracting a frightening virus, and managing all of the personal challenges this pandemic has engendered.
Although, we usually describe our grocery anchored shopping center assets as being resilient, I can proudly say that the members of team Cedar are most valuable assets, have proven themselves to be even more resilient than our shopping centers, as they have performed their jobs with a characteristic focus on everyday excellence, collegiality, and collaboration.
Since the outset of the pandemic, we have focused on a number of pressing matters in order for us to emerge from this period on a strong footing as possible.
First and foremost, we have endeavored to help our tenants survive the economic shutdown, and ideally pay their rents or at a minimum agree to a forbearance arrangement, whereby we have the right to collect the rent in the future.
Second, we have awaited the reopening of the real estate debt capital markets in order to arrange the refinancing of our $75 million term loan maturing in February 2021, as well as addressing our other upcoming debt maturities.
Third, we have advanced our redevelopment projects, while exploring joint venture arrangements for the initial phases, especially the recently announced DGS building.
Fourth, we have used this period to take a rigorous zero based approach to many G&A categories, and have identified substantial savings that we anticipate benefiting from not only in 2020, but more generally in 2021 and beyond when we see the full-year impact of some of these measures.
Before walking through each of these areas of focus during the pandemic, it is worth reflecting on a remarkable revelation afforded by this period.
At Cedar, we have consistently articulated a two pronged long-term business strategy that we have steadfastly pursued for many years through the ups and downs of the market and our stock price performance.
First, we have focused on a core portfolio of grocery anchored shopping centers in the D.C. to Boston corridor, and have therefore systematically divested non-core assets.
Second, we have pursued mixed use urban redevelopment projects in high population density submarkets within our D.C. to Boston footprint, with a particular focus on building affordable and market rate workforce housing at these projects.
Remarkably, the pandemic has highlighted the very trends we have anticipated and been building toward with our two pronged strategic plan.
Specifically, the accelerated secular demise in many bricks and mortar retail categories has led to grocery anchored shopping centers being the strongest performing category within retail real estate.
Notably, our grocer anchors have experienced a growth in sales during this period, and the inline tenants and junior anchors in our centers have benefited from the strong traffic and overall center vitality resulting from the strong grocer performance.
Additionally, the pandemic triggered a wave of de-urbanization from center cities and significant pressure on higher end multifamily, while highlighting the inequality of housing opportunities within our cities, and the growing need for attractive and reasonably priced workforce housing.
Thus, the particular multifamily market opportunity which we are targeting with our mixed use projects has grown deeper during this period.
Now some comments on our four primary focus areas over the last few months.
This appears to be among the better collection rates for all retail REITs in the third quarter.
Cedar's relatively high degree of success is a direct result of the tirelessness with which the team approach the challenges presented by the pandemic, as well as the aforementioned decision made when we arrived at Cedar back in 2011 to hone our portfolio to focus on a core portfolio of grocery anchored shopping centers in the D.C. to Boston corridor.
At the outset of the pandemic, we formed a cross functional committee within Cedar that engaged with all of our tenants in an effort to make sure that they endure and come out of this crisis as favorably positioned as possible.
In addition, this cross functional committee laid the groundwork for a highly detailed and analytical approach that included using legal tools, center and tenant monitoring, as well as repeated tenant outreach.
As they say, the proof is in the pudding.
And apparently our approach has proven effective as measured by our rent collections over the past two quarters.
We felt this was a prudent move since while we are comfortable that the mortgage debt markets are open and attractive, we didn't want to have to worry about the closing dragging a bit nor do we want to have to deal with the possibility of further dislocation in the capital markets, owing to a second wave in the coming winter months.
As Phil will describe, there appear to be interesting and attractive refinancing options for both the term loan, as well as our other near-term financing needs.
Third, as was announced in July, and discussed at our second quarter earnings call, we have finalized a 20-year built-to-suite office deal with DGS at our Northeast Heights project in Washington D.C.
This building will serve as an anchor for the project and also represents the first phase of the project.
We have been actively engaged with various debt and equity financing sources and are optimistic that we will be able to finalize an arrangement later this year or early next that will allow us to break ground and get started with this exciting project.
More generally, much as our strategic decision early on to focus on grocery anchored to the exclusion of other retail asset types has proven to be a good decision.
Our particular redevelopments have proven to be well positioned as we begin to hope we come out of this pandemic period.
Fourth, we have taken a zero based approach to our G&A in evaluating many corporate expenses.
A great example of how this approach has borne fruit is our decision to relocate our headquarters office from a building in Port Washington Long Island, where we rent space on a lease expiring in February of 2021 to the back of a Carman's Plaza Shopping Center in Massapequa Long Island, where we are converting a space that has been essentially unrentable during my tenure into office space, which we will occupy rent free.
Considering that our full-year rent expense is approximately $500,000, this is a terrific G&A savings opportunity.
More generally, we anticipate reducing year-over-year G&A by an excess of $2 million through the zero based cost savings approach.
In sum, we have navigated through this period of unprecedented personal and professional stress remarkably well thus far.
First, we have managed to bounce back from the initial shocks to our business with a collections level this past quarter of 91%, representing among the better performances through the third quarter among retail REITs.
Second, we've addressed our near-term debt maturities and are optimistic about closing on a permanent refinancing later this year or in early 2021.
Third, we are similarly focused on finalizing both the debt and equity financing needs of our redevelopment projects, especially the DGS building, which will position us to commence the project in early 2021.
Last, we have tightened up our overhead in the face of all distress with full-year G&A savings anticipated to be in excess of $2 million in 2021.
Our progress to this point is not an accident.
It begins with my colleagues on team Cedar, who have conducted themselves with exceptional resilience and professionalism during this time of great stress.
They are supported by decisions we have made many years ago to focus strategically on grocery anchored shopping centers in the D.C. to Boston corridor, and on urban mixed use projects with an affordable or market rate workforce housing component.
In the coming months and quarters, we look forward to announcing continued progress on all these endeavors, while we hope that there is no second wave, and that this terrible pandemic recedes into the rearview mirror.
With that, I give you Robin to provide greater detail on many of these topics.
Not only are we living in unprecedented times, but we are operating shopping centers in unprecedented times as well.
While our team has been focused on working with tenants through deferral negotiations and the collections process, we are also laser focused on what happens on the other side of this pandemic.
What do our tenants need from their landlord to maximize their ability to survive this pandemic?
How can we help our tenants pursue omnichannel operating measures to hedge their risk and pivot into a new operating environment?
What cost savings measures can we put into place that help both the tenants and the landlord from a CAM and capital expenditures standpoint.
These are among the topics we are addressing as we deliberately, thoughtfully and strategically advance our operations.
The professionalism of our team has been exemplary as they deal with not only ordinary course business challenges of daily operations, but astutely balancing those with the video conferences, field visits, and the ongoing impact from social unrest in some of our urban markets.
Our centers remained open during the third quarter with 96% of our tenants opened for business.
The users that have not reopened are mainly movie theatres, fitness and buffet style restaurants.
We have had another successful quarter of rent collections reaching our highest yet collection rates since the inception of COVID of 91%.
Moreover, October collections are currently at 91%, which does not reflect one high credit anchor that pays at the end of the month, which will take us to approximately 92.5% for October.
In order to ensure tenant health and occupancy, we have actively engaged with almost all of our over 800 tenants during the pandemic.
We completed 105 deferral and waiver agreements through September 30, 2020, totaling $3 million of deferred rent with a required payback beginning over a period ranging between July 2020 and March 2021.
The number of months differed averages four months for an average payback period of 10 months.
$900,000 of rent was waived as of September 30, 2020, for an average of four months.
These agreements were made with tenants in an effort to not only sustain their viability, but also to achieve some landlord favorable concessions including sales reporting, additional lease term and modification of key lease provisions.
Despite the pandemic our leasing momentum remained strong.
32 leases were signed this quarter, eight new deals totaling 72,800 square feet, and 24 renewals totaling 167,300 square feet.
The new deals executed were at a positive spread of 21.5% and include two anchor deal Shoppers Road at Jordan Lane [Phonetic] at a spread of 44% and America Sprayed at Golden Triangle [Phonetic] at a spread of 23%.
The renewals were done at a negative spread of 3.1% when analyzed in total.
The negative spread is a result of anchor and junior anchor renewals with home goods at New London mall, Goodwill at Groton and Yes!
Organic at Shoppes at Arts District, which were done with the objective of retaining these important anchor and junior anchor occupancies and missed the pandemic.
The spread increases to positive 2.8% excluding these three tenants.
As of September 30, 2020 our current lease same center occupancy is 91.7%, a 0.2% increase from prior quarter.
We continue to have momentum on our redevelopments and value add renovations.
At Fishtown crossing Starbucks had their grand opening in September, GameStop and T-Mobile have relocated, Nifty Fifty was delivered in August, and the original Hot Dog Factory was delivered in September.
We expect the IGA grocery store facade renovation to be completed by the end of the year and the remaining facade renovation for the rest of the center to be completed in 2021.
Also in Philadelphia, we are making progress on site plan amendments to our Revelry project.
Our original site plan was based on a movie theatre anchor.
Since the pandemic shutdowns, United Artists Cinema at Revelry has not yet reopened.
We are in discussions with the potential replacement anchor tenant for this project, and we expect to regain possession of the theatre space effective in November 2020 incident to the termination of their tenancy.
We think that the potential alternate anchor will be a great catalyst for the Revelry redevelopment.
Northeast Heights continues to progress at a steady pace as well.
We contunue last -- I'm sorry, we announced last quarter that our lease was executed with the District of Columbia for a 260,000 square foot office building, including ground floor retail for the Department of General Services.
This government agency comprises more than 700 skilled professional employees with expertise in the areas of construction, building management and maintenance, portfolio management, sustainability and security at district owned properties.
This office building is slated to be built as part of the first phase of Northeast Heights.
The DGS lease structure includes a 20-year 10-month term based on a net rent of $22.52 per square foot and a gross rent of $56.43 per square foot, which includes a TI amortization of $14.09 per square foot.
Plans are under way to commence construction in early 2021.
The DGS building is a central element of Cedar's vision to realize a true metamorphosis for Ward 7 and is emblematic of the type of neighborhood we are endeavoring to create with Northeast Heights.
As always, our team remains focused and motivated to continue to create value even during these unprecedented time.
With that, I will give you Phil.
Today we announced sequential quarterly improvements in both FFO and same property NOI.
FFO increased to $8 million or $0.09 per share, compared to $5.7 million or $0.06 per share reported for the previous quarter.
Same property NOI decreased 9.1% over the comparable period in 2019, and marked improvement from the 14.6% decrease we reported in the previous quarter.
Both of these improvements were driven by our strong cash collections that Bruce and Robin discussed.
Last quarter, I walked through our cash collections and revenue recognition in a fair amount of detail and received comments that was very helpful in understanding our results.
Accordingly, I want to take a minute to once again walk through our revenue recognition in detail.
Our total tenant billings for base rent and recoveries combined for this quarter were $31.6 million.
During the quarter, we collected and recognized as revenue $30.1 million or 91% of these billings.
Additionally, we recognized another $1.1 million or 3% as revenue that we determined to be collectible, the majority of which is covered by signed deferral agreements.
Accordingly for this quarter, we recognize as revenue 94% of our build rent and recoveries for the quarter.
The $1.9 million or 6%, that we did not recognize consists of $1.8 million that was not paid by tenants, and which we have determined at this time should be accounted for on a cash basis, and $100,000 that we agreed to waive.
As reminder, just because we have placed certain tenants on the cash basis it does not mean we will not collect anything from them.
While some cash basis tenants may fail, we expect some will simply make inconsistent payments or partial payments, which we will recognize as revenue if and when received.
Moving to the balance sheet.
On our prior quarter call, we discussed that we were exploring secured debt to refinance our $75 million term loan that was scheduled to mature in February of 2021.
As the secured financing market has opened for pressured anchored shopping centers with high cash collection rates, we have engaged with two financial institutions to assist with placing secured debt.
We are working diligently toward closing secured loans in amount equal to or greater than $75 million in early 2021.
To that end, earlier this week, we utilized our revolving credit facility and retired the $75 million term loan scheduled to mature in February of 2021.
Our revolving credit facility matures in September of 2021 and has a one year extension option.
Accordingly, as Bruce noted, this provides us with flexibility concerning the timing of closing these secured loans.
And they've been a second wave of COVID should again temporarily dislocate the capital markets.
Another note worth the balance sheet matters, receivable we now have for deferral agreements.
As Robin noted, we have signed deferral agreements for $3 million, of which approximately $250,000 was repaid this quarter, and $250,000 relates to the remainder of the year, resulting in us carrying a $2.5 million receivable for deferral agreements at the end of this quarter.
The vast majority of this receivable is scheduled to be repaid in 2021, with approximately $700,000 in each Q1 and Q2 of 2021, and approximately $500,000 in each Q3 and Q4 of 2021.
The collection of these amounts will increase our cash flows from operations in 2021, but will not impact earnings as they've already been recognized.
This reverse split will not only assist with maintaining compliance with the New York Stock Exchange listing requirements, but will also reset our share price above the $5 minimum requirement of some investment funds and do so while keeping more than 10 million shares outstanding to assist with trading liquidity.
With that, I'll open the call to questions. | full-year 2021 capital expenditures, sustaining are expected to be about $80 million - $100 million. | 0 |
Different from the first quarter this year, second quarter ended up being quite unbeatable.
As many of you have asked quite a few times now, will Frontline try and exploit the weakness in this market to grow further?
And I guess, we have answered that now during Q2.
We are in some way a three-legged shipping platform with VLCCs, Suezmax and LR2s.
Our VLCC leg has been a bit shorter than the others.
Now we're amending that somewhat.
Parts of the challenges in the market this quarter has been the continuous flare-ups of COVID infections in various locations around the world.
Vaccination has come far in the Western parts.
But other parts of the globe are not so fortunate.
We remain vigilant toward our seafarers' well-being and are happy to share that our efforts to arrange vaccines for them is going well.
In addition, I'd like to mention we are very grateful certain port states are being extremely generous, offering vaccines to seafarers literally for free.
So let's move on and have a look at the highlights on Slide 3.
Q2 '21 performance reflects the challenges the market faced this quarter.
It is, however, a further proof that our business model, efficient operations, modern fleet, and a very hardworking chartering team manages to outperform the key benchmarks.
To put this in perspective, an average weighted earnings index I checked recently for oil tankers came in just over $6,000 per day in Q2 '21, the lowest print in more than 20 years.
In order to outperform this, the owners, and in particular, the owners' charters, must fight for every cent and know their position well to be able to play their hands best possible.
Regrettably, this is not always the case as far as we can observe.
Anyway, at Frontline, we do the hard work and managed to achieve $15,000 per day on our VLCC fleet; $11,000 per day on our Suezmax fleet; and $10,600 per day on our LR2/Aframax fleet in the second quarter of this year.
So far in Q3, we have booked 70% of our VLCC days at $14,000 per day; 64% of our Suezmax days at $9,800 per day; and 63% of our LR2/Aframax days at $11,800 per day.
All numbers in this table are on a load-to-discharge basis.
Before Inger takes you through the financial highlights, let me quickly comment on the acquisitions in the quarter.
During Q2, we acquired, through resale, six latest-generation ECO-type VLCCs currently under construction at Hyundai in Korea.
In addition, we acquired two modern ECO-type VLCCs built in 2019 at the same shipyard.
We have for a period of time followed the VLCC asset market closely to look for opportunities.
As we didn't expect an imminent recovery in tanker markets, delivery was a key bargaining chip.
The rallying steel prices and high activity around us for non-tanker assets pushing potentially delivery slots way forward added to our conviction in making these investments.
I'll now let Inger take you through the financial highlights.
Following the acquisition of the VLCCs, as Lars mentioned, we have progressed on the loan financing.
And in August this year, we obtained financing commitments, subject to final documentation, for three senior secured term loan facilities.
They are in a total amount of just $247 million.
And they will partially finance the acquisition on the two VLCCs built in 2019 and three of the six VLCC newbuilding contracts.
All facilities will finance 65% of the market value.
They will carry an interest rate of LIBOR plus a margin of 170 basis points.
And they will have an amortization profile of 20 years, starting from delivery date from the yard.
We intend to establish long-term financing for the remaining four resale VLCCs newbuilding contracts closer to delivery of the vessels.
Then I think we should move to Slide 4 and look at the income statement.
Frontline achieved total operating revenues, net of voyage expenses, of $80 million and adjusted EBITDA of $28 million in this quarter.
And we report a net loss of $26.6 million or $0.13 per share and an adjusted net loss of $23.2 million or $0.12 per share.
The adjustments this quarter consist of a $4.7 million loss on derivatives; a $0.8 million gain on marketable securities; and a $1.3 million amortization of acquired time charters; and lastly, a $0.8 million share of losses of associated companies.
The adjusted net loss in the second quarter decreased $32 million compared with the first quarter.
And the decrease was driven by a decrease in our time charter equivalent earnings due to the lower TCE rates, as Lars mentioned; an increase in ship operating expenses of $9.3 million, mainly as a result of higher dry-docking costs; offset by a gain on marketable securities sold in the quarter of $4 million.
Let us then look at balance sheet on Slide 5.
The total balance sheet numbers have increased with $64 million in this quarter.
The balance sheet movements in the quarter are primarily related to taking delivery of the LR2 tanker from Future and the acquisition of 6 VLCC newbuilding contracts in addition to ordinary debt repayments and depreciation.
As of June 30, Frontline has $257 million in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facilities, marketable securities, and minimum cash requirements.
Then let us take a closer look at cash breakeven rates on Slide 6.
We estimate risk cash cost per daily rate for the remainder of 2021 of approximately $21,800 per day for the VLCCs; $7,500 per day for the Suezmax tankers; and $15,400 per day for the LR2 tankers.
And the fleet average estimate is about $18,000 per day.
These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating costs and dry dock, estimated interest expenses, TCE and bareboat hire, installments on loans and G&A expenses.
The highly attractive terms on the updated financing commitments on four of the acquired VLCCs, which I mentioned earlier, decreases the daily cash breakeven rates with approximately $1,400 per vessel per day compared to existing financing terms of similar vessels.
In the quarter, we recorded opex expenses of $7,600 per day for VLCCs; $8,500 per day for Suezmax; and $9,000 per day for LR2.
We dry-docked three Suezmax tankers in this quarter and four LR2 tankers.
And we expect to dry-dock one VLCC and two LR2 tankers in the third quarter and none in the fourth quarter.
The graph on the right-hand side of this slide shows that if we assume $30,000 on top of the daily fleet average cash cost per daily rate of $18,000, Frontline will generate a cash flow per share after the service cost of $3.51 per year.
And the cash generation potential will increase after acquisition of the eight VLCCs.
With this, I leave the word to Lars again.
So let's look at Slide 7 and recap the second quarter tanker market.
So global oil consumption averaged 96.7 million barrels per day in Q2 '21.
That's up 2.1 million barrels per day from Q1 '21.
Production averaged 94.9 million barrels per day.
Hence, the world continued to draw about 1.8 million barrels from inventories.
Just to put that in perspective, when you go from inventories, you're not really using that much transportation.
And as a rule of thumb on tanker utilization, you need about 30 VLCC equivalents in order to transport 1 million barrel of oil per day.
So this kind of draw represents a loss of 30 to 35 VLCC equivalents in demand.
The tanker rate gradually slipped throughout the quarter and volatility faded.
OPEC+ did increase supply by more than 1 million barrels per day during Q2 '21.
The key OPEC producers also went into higher-demand periods, typically in the Middle East, where summer hits and you start to basically burn oil or fuel for electricity generation.
U.S. and Brazil added another 900,000 barrels per day.
Most of the Brazilian additions came out as exports.
Demand rose sharply in North America and Greater Europe while Asia, that led the recovery, saw a far more muted development in the second quarter of the year.
As illustrated in the two charts below, where we basically isolated North America, Europe, and Eurasia, we see that during Q2, demand there rose sharply while the rest of the world, and in particular Asia, and as I mentioned that led the recovery toward 2021, has performed kind of -- performed less first half this year.
So let's move over to Slide 8 and look at the tanker order books.
New ordering has naturally been muted during the second quarter of '21.
We've observed that the delivery window for ordering a significant number of VLCCs or Suezmaxes is now firmly into 2024.
This is obviously due to all the ordering activity for asset classes kind of outside of the tanker space.
The overall tanker order book for VLCCs, Suezmax, and LR2 has shrunk 10% year to date.
The overall order book for tankers above 10,000 deadweight tons stands at 8% of the existing fleet.
And this is, in fact, comparable to levels seen in Q1 1997.
In absolute deadweight terms, we are at a 20 years low.
I'd also like to put this in some perspective.
Twenty years ago, the global oil consumption was around or at 76 million barrels per day.
A normalized market now is closer to 100 million, if not above.
So it means that the oil market is 30% larger now than in early 2000 and the order book is just about the same size.
The VLCC order book is now at 81 units, give or take.
At the same time, 124 VLCCs will be above or past 20 years in the same period.
For Suezmax, we are at 41 units and 123 passing 20 years on the same metrics.
Let's move to Slide 9 and look at oil in transit.
This is a very important indicator to us.
We monitor this basically on a monthly basis to see where we are.
Oil in transit is basically oil being transported, so in essence, excluding whatever is on storage.
And as you can see on -- I've kind of circled in 2020 in a red rectangle here.
And as you can see, 2020 was a very noisy year for oil transportation.
We started off the year with the Saudi-Russian price war, which distorted Q1 and Q2, and we had a massive production increase and transportation increase.
Then the COVID-19 pandemic hit, and we had -- and we saw a demand shock that suddenly kind of took away a lot of production and also then transportation needs.
And Q3 and Q4, the transportation needs diminished almost back to 2017 levels.
Floating storage did save tank utilization at the time.
First half of '21, the tanker markets have -- well, basically, volume has increased and transportation has grown.
But we've been facing increased fleet supply by vessels released from storage and delivery of newbuilds, together with seeing deep inventory draws.
Now -- where we are now, this is obviously, July and August for Q3, we're back to Q4 2019 levels.
OECD commercial inventories are now down to 2019 levels.
And I believe or we believe that's a fair proxy for global inventories.
There is also another thing to note, when inventories are no longer drawn, transported oil will come into play.
As an example of this, EIA are currently estimating us to build 1 million barrels of oil per day for September.
But then come October, we're supposed to draw half a million barrels per day from inventories.
That gives you a delta of 1.5 million barrels, which then needs to be transported.
That's equivalent to the demand for 45 to 48 VLCC equivalents.
And I think this gives you kind of a notion of how quickly this can turn.
Now let's move to Slide 10.
And I call it the VLCC fleet paradox.
This is almost the same for Suezmaxes.
But I decided to point out this for the VLCCs.
We may all speculate in what the older generation of VLCCs are doing.
But it is undisputable that a 20-year-old vessel will struggle as a very limited number of charters accept them.
And this is purely on age.
With the challenging trading environment we've had during first half this year, earnings achieved on non-ECO, high-consuming vessels have been zero or negative.
And mind you, 51 vessels are above 20 years as we speak.
Year to date, eight VLCCs are reported sold for recycling.
The average recycling price in Asia has risen 70% in the same period and is now close to $25.5 million for a VLCC.
Well, one of the typical exits for an older vessel in the tanker world is crude oil storage.
Well, crude oil curves turn into backwardation in Q4 last year and are not at all supporting floating storage.
So far this year, we've seen three VLCC spot fixtures reported on a vessel that's either 20 years or older than that.
And this is out of the 660 VLCC fixtures we recorded.
So again, I want to highlight this because it is important and it's very important looking at the previous slide, where we are in the cycle on oil being transported.
If it is so that the effective tonnage actually hasn't grown over the last couple of years, then we're closer to balance than we might think we are.
So let me sum up on Slide 11.
Demand and supply of oil continues to rise.
But we have to admit the Delta-type infections cloud the outlook, in particular in Asia.
We see asset prices remain firm, steel prices continue to rise.
And the activity is very good on the yards but for non-tanker assets.
At the same time, the tanker fleet continues to age, the overall order book shrinks and the potential delivery window moves further out, should demand for tankers pick up.
OPEC+ plan to add about 400,000 -- no.
400,000 barrels per day each month until the end of the year.
This means in total 2 million barrels per day of increased supply.
And go back to the math for -- we then would need 60 to 65 VLCC equivalents by the end of the year.
Oil in transit continues to rise.
And the big question mark is obviously, when do we reach the inflection points?
I would like to draw your attention to the chart at -- below or at the bottom of the slide.
I showed you this last quarter as well.
And as the orange dot indicates, this is where we were in March this year.
So we're -- basically, we're gradually digging ourselves in from negative year-on-year growth in global oil trade into positive territory.
And since last, Frontline has increased its position significantly.
We have secured attractive financing and are ready to capitalize as we sail on toward the expected recovery. | frontline q1 net income at usd 28.9 mln.
q1 net profit 28.9 million usd.
q1 diluted earnings per share 0.15 usd.
reg-fro - first quarter 2021 results.
net income of $28.9 million, or $0.15 per diluted share for q1 of 2021.
reported spot tces for vlccs, suezmax and lr2 tankers in q1 of 2021 were $19,000, $15,200 and $12,000 per day, respectively.
high number of ballast days at end of quarter will limit amount of additional revenues to be booked on a load-to-discharge basis.
will recognize certain costs during uncontracted days up until end of period.
we expect spot tces for full q2 of 2021 to be lower than tces currently contracted, due to impact of ballast days at end of q2 as well as current freight rates. | 0 |
These statements involve risks and uncertainties, and actual results may differ materially from those discussed or anticipated.
Also, during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements.
We believe these non-GAAP financial numbers assist in comparing period-to-period results in a more consistent manner.
nuskin.com for any required reconciliation of non-GAAP numbers.
And with that, I'll turn the time over to Ritch.
We really do appreciate you joining us today.
As many of you may know, this will be my last earnings call as CEO of Nu Skin before transitioning leadership to Ryan on September 1.
We truly have an amazing Nu Skin team around the globe, and the future continues to get brighter for growth and prosperity of this business.
I'm excited about all that we've accomplished, but I'm even more positive about the future, and these are some of the reasons for my optimism.
First, we've taken deliberate actions to evolve into a more customer-obsessed enterprise that delivers world-class beauty and wellness products through a socially enabled affiliate platform.
We've also positioned our business to leverage powerful macro trends and shifts in consumer behaviors.
For example, we focused our product development on beauty device systems, and we have now been recognized by Euromonitor as the world's number one brand for beauty device systems for four consecutive years.
We formed key partnerships with Amazon Web Services and Alibaba and have revamped our tech strategy by moving our infrastructure to the cloud.
While this transition has greatly expanded our load capabilities and increased our ability to scale, I am most encouraged by the new tools and digital experiences that we plan to introduce, which will delight our customers and empower our affiliates.
We've modified our incentive structure to speed payments and increased flexibility to our affiliates and attract a younger demographic.
We purchased manufacturing assets to increase our speed and agility in bringing beauty and wellness products to market and securing our supply chain.
We established aggressive sustainability goals around people, product and planet with a focus on building a better tomorrow for our world.
This foundation will continue to drive growth and profitability going forward.
In the second quarter, we generated very strong results, which highlight our corporate focus on improving our geographic balance and operating margin.
We reported revenue growth of 15% with the western segment accounting for approximately 40% of our revenue.
We also improved our operating margin by 260 basis points to 12.1%, which contributed to our reported 42% earnings-per-share growth.
Through all my years at Nu Skin, I can truly say that we are better positioned for the future than we have ever been.
The transition of management has been going very well.
Ryan and I have worked hand in hand over the past several years in building the strategy of the company and executing our growth plans, and I am confident that he and our team will accelerate our growth into the future.
Let me now turn the time to Ryan to report on the business and give more detail around our second quarter results.
For the past nearly five years, we've been working together tirelessly to drive Nu Skin's transformation into an even more customer-obsessed global and digital-first company.
And I'm really extremely proud of the progress that we're making.
Before we describe the quarter in more detail, I'd like to discuss how we'll accelerate our vision to becoming the world's leading innovative beauty and wellness company that's powered by our dynamic affiliate opportunity platform.
We're all familiar with the emerging macro trends that are shaping the broader consumer marketplace, including product personalization and every brand's desire to know their customers on a more intimate level; digital, social and mobile connectivity of the direct-to-consumer experience; and the disruption of retail and e-commerce with social media and influencers to what is now being called social commerce.
As we look to the future, we're aligning our vision and strategy to take advantage of these emerging market forces and reposition Nu Skin as a disruptive beauty and wellness leader through three key transformational moves.
First, building on our heritage of developing innovative products and leveraging our leading position in beauty device systems, we will be introducing connected device systems as we personalize our product offerings and deepen our relationships with more than 1.4 million registered customers.
Second, we will continue to transform our business by leveraging the power of social commerce and our unique person-to-person affiliate marketing channel to build brand awareness and acquire customers at greater scale via social media platforms in a deeper and more personal manner than traditional retail or e-commerce.
And third, we will enable all of this through our enhanced digital ecosystem that improves our ability to attract, connect and nurture customers, which currently makes up more than 90% of Nu Skin's revenue.
Together, these three transformational moves will enable us to accelerate our vision to becoming the world's leading innovative beauty and wellness company.
So let me dive a little deeper into our strategy, beginning with our innovative beauty and wellness products.
We continue to focus on expanding our leadership position in beauty device systems with the launch of ageLOC Boost in several markets in the first half and the remainder of our markets in the second half.
These beauty device systems now make up approximately 30% of the company's total revenue.
Additionally, we're pleased with the first half results of Nutricentials Bioadaptives, our customizable skincare line that's targeted toward millennial and Gen Z emerging skincare enthusiasts.
For the remainder of the year, we will introduce two new product innovations.
First, we'll leverage our unique inside/outside R&D capabilities to develop our first beauty-from-within solution, beauty Focus Collagen+, which will be launched in several markets throughout the second half.
This proprietary formula is our entry into the rapidly expanding $40 billion beauty supplement market.
Second, we will be introducing in several of our markets our next significant Pharmanex product innovation, ageLOC Meta, a supplement that supports metabolic health and help shift the body's biochemistry toward a healthier mode.
Looking ahead into 2022, we will expand our device system leadership position by introducing next-generation connected devices, which will further enhance the company's ability to provide consumers with more personalized product experiences to meet their needs.
The second part of our strategy, our dynamic affiliate opportunity platform, is how we take these products to market in order to acquire and serve our customers.
Virtually every consumer brand today is looking to build lasting relationships directly with their customers, though they struggle to do so due to the constraints with their retail partners.
At Nu Skin, we are leveraging our global team of micro influencers in nearly 50 markets who utilize the power of their personal brand and relationships to provide authentic product recommendations and personalized customer engagement via social media.
This form of social commerce is now enabling us to expand our target market and reach new customer segments at greater scale, evidenced by the acceleration of our business over the past year.
Overall, we have a growing number of affiliates adopting social commerce in the West, and we are actively proliferating this model in key markets throughout the East.
Grand View Research is projecting social commerce to grow from an estimated $474 billion in 2020 to $3.3 trillion by 2028 with Asia currently accounting for 68% of the total social commerce revenue.
We believe Nu Skin is ideally positioned to take advantage of this growth opportunity as our social commerce business model evolves in those markets.
We continue to expand our digital ecosystem by incorporating new digital tools to empower our affiliates to make this shift, including Vera, our personal product recommendation app, which is currently in beta form and will be migrated to a new consumer experience app later this year; MySite, our most popular affiliate tool, which will be migrated into a more robust affiliate app with enhanced social commerce functionality; and our WeShop Tencent-powered social commerce tool set that will be introduced in China beginning in the second half.
Our dynamic affiliate opportunity platform is enabling us to accelerate our shift to a social commerce business model through the coming quarters.
So turning to our global markets.
We have been able to sustain growth in the West over the past year.
Despite ongoing COVID-related disruptions in certain markets, our trends are improving in our Eastern markets as we expand our product offering and social commerce business.
Our customers remained relatively flat due to the surge in the prior year while sales leaders grew 15% related to new product introductions and enhanced new leader qualification programs.
In the Americas Pacific region, the successful launch of Nutricentials Bioadaptives has helped sustain the gains we achieved during the past year.
We achieved strong revenue and leader growth due to promotional product cadencing and leadership alignment.
The year-over-year moderate customer decline in the region is primarily due to a slowdown in Argentina related to inflationary challenges.
As I mentioned earlier, we look forward to the Collagen+ and Boost launches in the U.S. in the second half of the year along with the digital tool enhancements that we'll begin to roll out in Q4.
Moving on to EMEA.
ageLOC Boost exceeded our expectations during the product preview in Q2, and we expect the excitement to continue into consumer launches in the second half of the year.
Social commerce continued to propel our business in the first half, though we are seeing some leveling in the summer months as personal travel increases over the prior year.
With new product launches and strong product promotions kicking into gear, we remain optimistic about the future of EMEA and our business there.
This was a busy quarter for us in Mainland China where the launches of Boost and Nutricentials contributed to the ongoing stabilization of this market.
We are strongly focused on growing this region, and we were excited to hold trainings in July with more than 10,000 sales leaders in preparation for social commerce and the rollout of our enhanced digital tool set, including WeShop personal storefronts.
We're also preparing for the introduction of Meta and Collagen+ in the second half.
In Hong Kong and Taiwan, we remained stable with solid sales of Boost and Nutricentials Bioadaptives.
We are focused on advancing social commerce training in these markets as well and expect to benefit from the introduction of ageLOC Meta in Q4.
Turning to Japan, a successful promotion of our ageLOC products, including devices, contributed to the fifth consecutive quarter of local currency growth.
Our business continues to perform well as we focus on engaging and training leaders on social commerce platforms ahead of our Meta previews in the quarters to come.
In Korea, a strong promotion of our TR90 weight management system in the quarter led to solid 6% growth in local currency.
Social commerce trainings continue in the region as well with Meta preview scheduled for the fourth quarter.
And finally, Southeast Asia.
This market has been perhaps most impacted by COVID with deepening lockdowns in various markets.
That said, we saw revenue and sales leader growth in the region, led by Indonesia, offset by continued challenges in Vietnam and Thailand that contributed to our customer decline.
We look forward to the introduction of Meta in the half.
So wrapping up, we continue to transform our business to become the world's leading innovative beauty and wellness company powered by our dynamic affiliate opportunity platform.
Our vision is on point to take advantage of the most significant beauty and wellness trends in the market.
And our social commerce go-to-market strategy is aligned to enable us to reach even more consumers through the power of our micro influencer affiliates.
We will continue to invest in our business to drive growth through innovation while improving our operational efficiencies to generate shareholder value in the near and long term.
I'm excited about what lies ahead for us at Nu Skin as we lean aggressively into this vision.
And with that, I'll turn the time over to Mark.
I'll provide a financial overview and then give Q3 and 2021 guidance.
For additional details, please visit the Investor Relations section on our website.
For the second quarter, revenue increased 15% to $704.1 million.
Quarterly revenue was positively impacted 6% due to favorable foreign currency.
Earnings per share improved 42% to $1.15 and benefited nicely by improved gross margin and overall cost containment.
Gross margin for the quarter improved 80 basis points to 75.6% due to product mix, product cost focus and supply chain efficiencies.
Gross margin for the core Nu Skin business was 78.3% compared to 77.6% in the prior year.
Moving on to selling expense, which, as a percent of revenue, was 39.5% compared to 40.6% in the prior year.
For the Nu Skin business, selling expense was 42.4% compared to 43.3%.
As a reminder, selling expenses often fluctuate quarter-to-quarter, plus or minus 1%.
General and administrative expenses as a percent of revenue were 24% compared to 24.7% year-over-year as we continue to carefully manage expenses and gain leverage as we grow revenue.
I am very pleased with our operating margin improvements during the quarter, which improved 260 basis points to 12.1% compared to 9.5% in the prior year quarter.
This is another strong step toward our stated goal of a 13% operating margin.
The other income expense line reflects a $4 million expense compared to a $1.6 million gain in the prior year.
The change was largely the result of fluctuating foreign currencies along with a loss on an asset disposal.
Cash from operations was $20 million for the quarter as we continued our strategic investment in inventory to meet customer demand for our new products, shipped more product via ocean to reduce freight charges and built some protection from global supply chain constriction in this period of uncertainty.
We believe this elevated inventory level will decrease over the next few quarters.
We paid $19 million in dividends and repurchased $10 million of our stock with $265.4 million remaining in authorization.
Our tax rate for the quarter was 27.1% compared to 29.8%.
Our tax rate continues to be benefited by increased profits in the West, specifically the U.S.
Our manufacturing partners had another strong quarter, growing 27% with steady momentum heading into the back half of the year.
These entities continue to benefit our core business by strengthening our supply chain and bringing U.S. profit that helps our overall tax rate.
Our annual revenue guidance is $2.81 billion to $2.87 billion.
And based on ongoing efficiencies we are driving in the business, we are now raising our annual earnings per share guidance by $0.20 to a range of $4.30 to $4.50.
This guidance assumes a positive foreign currency impact of 3% to 4% and a tax rate of 25% to 29%.
While our Q3 is historically slightly softer seasonally than Q2 due to summer vacations in many markets, our prior year quarter included product launch revenue and we saw less impact from travel last year.
Our third quarter revenue guidance is $700 million to $730 million, assuming a positive foreign currency impact of approximately 2% to 3%.
Q3 earnings per share guidance is $1.10 to $1.20 and assumes a tax rate of 25% to 29%. | qtrly earnings per share $0.91.
sees q2 2021 revenue $680 to $705 million.
sees q2 2021 earnings per share $0.97 to $1.07.
sees 2021 revenue $2.80 to $2.87 billion.
sees 2021 earnings per share $4.05 to $4.30. | 0 |
Before I turn to the results, I want to take a moment and congratulate the entire Extra Space team.
One of our goals for this year was to get to 2021 stores in the year 2021.
And we've achieved that, which is a great thing.
When I first started with Extra Space, we had 12 stores and it's incredible to see the exceptional growth of this company, the value we've created for our shareholders.
I'm also happy to announce that we recently published our 2020 sustainability report with disclosures and information related to the company's environmental, social and governance initiatives.
I invite our listeners to review the report on the Sustainability page of our Investor Relations website.
Heading into this quarter -- I'm sorry, heading into the second quarter, our management team had high expectations due to our record high occupancy levels, significant pricing power and a relatively easy 2020 comparable, and actual performance far exceeded these elevated expectations.
Same-store occupancy set another new high watermark at the end of June at 97%, which is incredible, as you consider the diversification of our national portfolio.
The elevated occupancy led to exceptional pricing power with achieved rates to new customers in the quarter over 60% higher than 2020 levels.
While this is inflated by an artificially low prior year comp, achieve rates were over 30% greater than 2019 levels and accelerated through the quarter.
In addition to the benefit from new customer rates, we have continued to bring existing customers closer to current street rates as more of the state of emergency rate restrictions are lifted throughout the country.
Other income is no longer a drag on revenue due to late fees improving year-over-year and actually contributed 20 basis points to revenue growth in the quarter.
And finally, higher discounts, primarily due to higher rates were offset by lower bad debt.
These drivers produced same-store revenue growth of 13.6%, a 900 basis point acceleration from Q1, and same-store NOI growth of 20.2%, an acceleration of over 1,300 basis points.
In addition, our external growth initiatives produced steady returns outside of the same-store pool, resulting in FFO growth of 33.3%.
Turning to external growth.
The acquisition market continues to be, in our view, expensive.
Given the pricing we are seeing in the market, we have listed an additional 17 stores for outright disposition, which we expect to close during the back half of 2021.
We continue to be actively engaged in acquisitions, but we remain disciplined.
Year-to-date, we have been able to close or put under contract acquisitions totaling $400 million of Extra Space investment.
These are primarily lease-up properties and several of the properties came from our Bridge Loan Program.
We have increased our 2021 acquisition guidance to $500 million in Extra Space investments.
Looking forward, many of our acquisitions will be completed in joint ventures, and we have plenty of capital to invest if we find additional opportunities that create long-term value for our shareholders.
We were active on the third-party management front, adding 39 stores in the quarter and a total of 100 stores through the first six months.
Our growth was partially offset by dispositions where owners sold their properties.
In the quarter, we purchased 11 of these stores in the REIT or in one of our joint ventures.
Our first half outperformance coupled with steady external growth and the improved outlook for the second half of 2021 allowed us to increase our annual FFO guidance by $0.50 or 8.3% at the midpoint.
While we still assume a seasonal occupancy moderation of approximately 300 basis points from this summer's peak to the winter trough, the moderation will begin from a higher starting point than we previously expected.
As a result, we assume minimal impact on revenue growth from the negative occupancy delta in the back half of the year.
Our guidance assumes moderating but still strong rate growth for the duration of 2021, which should result in another great year for Extra Space Storage.
I would now like to turn the time over to Scott.
As Joe mentioned, we had an excellent quarter with accelerating same-store revenue growth driven by all-time high occupancy and strong rental rate growth to new and existing customers.
Core FFO for the quarter was $1.64 per share, a year-over-year increase of 33.3%.
Property performance was the primary driver of the beat with additional contribution coming from growth in tenant insurance income and management fees.
Despite property tax increases of 6%, we delivered a reduction in same-store expenses in the quarter.
These increases were offset primarily by 13% savings in payroll and 31% savings in marketing.
Our guidance assumes payroll savings will continue throughout the year, however, at lower levels due to wage pressure across the U.S. Marketing spend will depend on our use of this lever to drive top line revenue, but it should also remain down for the year.
In May, we completed our inaugural investment-grade public bond offering, issuing $450 million in 10-year bonds at 2.55%.
Access to the investment-grade bond market provides another deep capital source at low rates and will allow us to further extend our average maturities.
Our year-to-date dispositions, equity issuances and NOI have resulted in a reduction in our leverage.
Our quarter end net debt-to-EBITDA was 4.8 times, giving us significant dry powder for investment opportunities since we generally target a range of 5.5 to 6 times on this metric.
Last night, we revised our 2021 guidance and annual assumptions.
We raised our same-store revenue range to 10% to 11%.
Same-store expense growth was reduced to 0% to 1%, resulting in same-store NOI growth of 13.5% to 15.5%, a 750 basis point increase at the midpoint.
These improvements in our same-store expectations are due to better-than-expected achieved rates, higher occupancy and lower payroll and marketing expense.
We raised our full year core FFO range to be $6.45 to $6.60 per share, a $0.50 or 8.3% increase at the midpoint.
Due to stronger lease-up performance, we dropped our anticipated dilution from value-add acquisitions and C of O stores from $0.14 to $0.12.
We're excited by our strong performance year-to-date and the success of our customer acquisition, revenue management, operational and growth strategies across our highly diversified portfolio. | q1 ffo per share $1.50 excluding items.
sees ffo per share $5.95 - $6.10 for 2021. | 0 |
Please note that the information presented is preliminary and based upon data available at this time.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
For the first quarter, Hilltop reported net income of $120 million or $1.46 per diluted share, representing an increase from the first quarter 2020 of $71 million or $0.91 per diluted share.
Return on average assets for the period was 2.9% and return on average equity was 20.6%.
These results do include a $5.1 million reversal of provision compared to the first quarter of last year when we had a provision expense of $34.5 million as we introduced CECL and the outlook for credit and the economy look to be deteriorating.
Much of the momentum around mortgages from 2020 continued into this first quarter.
Notwithstanding higher long-term interest rates and refinance volumes slowing, the overall mortgage market remains strong, and our origination business was able to deliver $6.2 billion in volume, a 71% increase from Q1 2020.
Driven by PPP loan balances, the bank's average loans for the first quarter increased 7% from prior year.
And average deposits grew by $2.4 billion or 26% from prior year as well.
While pre-tax margin at the broker-dealer was down slightly from Q1 2020, we did see growth in the structured finance business, which also benefited from a strong mortgage market.
In the public finance business, efforts to improve productivity and growth are showing positive returns as net revenue increased 8% from the first quarter 2020.
During the period, Hilltop returned $50 million to shareholders through dividends and share repurchases.
The $5 million of shares repurchased are part of the $75 million share authorization the Board granted in January.
Liquidity and capital remained very strong, with a Tier 1 leverage ratio of 13% and a common equity Tier 1 capital ratio of 19.6% at quarter end.
We continue to see improvement in economic trends.
And during the quarter, we had payoffs and a return to contractual payments for a large portion of the modified loan portfolio.
This portfolio, which at the end of June 2020 was $968 million, is now down to $130 million as of March 31.
Notably, all COVID-19 modified retail and restaurant loans are now off deferral program.
Our allowance for credit losses as of March 31 totaled $144.5 million or 1.98% of the bank's loan portfolio.
This reflects a reduction in the reserve balance of $4.5 million from the fourth quarter, which was driven primarily by positive shifts in the economic outlook.
While the general economic outlook for the Texas economy has improved, the bank remains cautious and in constant communication with borrowers and certain higher risk segments of our hotel and office portfolios.
These segments were more severely impacted by the pandemic and will take longer to recover.
Moving to Slide 4.
PlainsCapital Bank had a solid quarter with a pre-tax income of $65 million, which includes the aforementioned provision recapture of $5.1 million, also contributing to the increased pre-tax income from Q1 2020 was higher net interest income from lower deposit costs and PPP loan fees and interest income.
Our bankers continue to work with small business customers on PPP program.
and as of March 31, had funded approximately 1,100 loans totaling $178 million as part of the second round, bringing the total PPP loan balance to $492 million at period end.
PrimeLending had another outstanding quarter and generated pre-tax income of $93 million, an increase of $53 million from Q1 2020.
That was driven by both a $2.6 billion increase in origination volume and a gain on sale margin of 388 basis points.
While rates increased toward the end of the quarter and margins tightened, we remain encouraged by the demand for mortgages across the country and by the PrimeLending team that continues to perform exceptionally while actively recruiting quality loan originators.
For HilltopSecurities, they had a good quarter with pre-tax income of $18 million.
The structured finance business had a strong start to the quarter with favorable volumes and spreads, then the sudden rise in interest rates adversely impacted net revenue in March.
Net revenue grew in public finance services compared to prior year from a modest increase in national insurance and recruiting efforts.
The fixed income services and wealth management businesses generated modestly lower net revenues than Q1 2020 levels.
Overall, for Hilltop, this was an excellent quarter and a great start to the year.
We believe our balance sheet is strong and our credit quality is sound.
We are excited about the strategic direction and growth potential of our three businesses, and we are grateful for the talented leadership and dedicated teams we have across Hilltop.
I'll start on Page 5.
As Jeremy discussed, for the first quarter of 2021, Hilltop reported consolidated income attributable to common stockholders of $120 million, equating to $1.46 per diluted share.
During the first quarter, revenue related to purchase accounting was $4.9 million and expenses were $1.3 million, resulting in a net purchase accounting pre-tax impact of $3.6 million for the quarter.
In the current period, the purchase accounting expenses largely represent amortization of other intangible assets related to prior acquisitions.
During the first quarter, provision for credit losses reflected a net reversal of $5.1 million and included approximately $600,000 of net recoveries of previously written off credits.
The improvement in the current macroeconomic environment as well as the outlook for continued improvement in key economic metrics positively impacted allowance for credit losses during the quarter.
Hilltop's quarter-end capital ratios remain strong with common equity Tier 1 of 19.63% and Tier 1 leverage ratio of 13.01%.
I'm moving to Page 6.
Net interest income in the first quarter equated to $106 million, including $7.5 million of previously deferred PPP origination fees and purchase accounting accretion.
Versus the prior year quarter, net interest income decreased by $4.7 million or 4%.
Further, net interest margin declined versus the fourth quarter of 2020 by 2 basis points.
In the current period, net interest margin benefited from the recognition of deferred PPP origination fees, higher yields in stock loan and lower deposit cost.
Offsetting these benefits were lower loan HFI and HFS yields, driven by market pricing and absolute yield levels in the mortgage market.
Further, PCB's excess cash levels held at the Federal Reserve increased by $365 million from the fourth quarter, putting an additional 5 basis points of pressure on net interest margin.
During the quarter, new loan commitments including credit renewals, maintained an average book yield of 4%.
This was stable with the fourth quarter of 2020.
Total interest-bearing deposit costs declined by 8 basis points in the quarter as we continue to lower customer deposit rates and returned broker deposits during the first quarter.
We expect continued consumer CD maturities and additional broker deposit declines in the coming quarters, both of which support a continued steady decline in interest-bearing deposit costs.
Given the current market conditions, we expect net interest income and net interest margin will remain pressured as overall market rates remain low, putting pressure on held for sale and commercial loan yields and that competition could remain aggressive over the coming quarters as we expect new loan demand will remain below historical levels.
Turning to Page 7.
Total noninterest income for the first quarter of 2021 equated to $418 million.
First quarter mortgage-related incoming fees increased by $131 million versus the first quarter of 2020.
During the first quarter of 2021, the environment in mortgage banking remained strong, and our business outperformed our expectations in terms of origination volumes, principally driven by lower mortgage rates which drove improved demand for both refinance and purchase mortgages.
Versus the prior year quarter, purchase mortgage volumes increased by $561 million or 24% and refinance volumes improved substantially, increasing by $2 billion or 156%.
While volumes during the first quarter were strong relative to traditional seasonal trends, gain on sale margins did decline versus the fourth quarter of 2020 as a combination of lower linked-quarter market volumes, principally purchased mortgage volumes, competitive pressures and product mix yielded a gain on sale margin of 388 basis points.
We expect pressures on margin to persist throughout 2021, and we continue to expect full year average margins to move within a range of 360 to 385 basis points contingent on market conditions.
Other income increased by $12 million, driven primarily by improvements in the structured finance business as the prior year period included a $16 million negative unrealized mark-to-market on the credit pipeline.
As we've noted in the past, the structured finance and capital markets businesses can be volatile from period-to-period as they are impacted by interest rates, origination volume trends and overall market liquidity.
Turning to Page 8.
Noninterest expenses increased from the same period in the prior year by $85 million to $367 million.
The growth in expenses versus the prior year were driven by an increase in variable compensation of approximately $63 million at HilltopSecurities and PrimeLending.
This increase in variable compensation was linked to strong fee revenue growth in the quarter compared to the prior year period.
The balance of the increase in compensation and benefits expenses is related to higher payroll taxes, salaries and overtime expenses.
Looking forward, we expect that our revenues will decline from the record levels of 2020, which will put pressure on our efficiency ratio.
That said, we remain focused on continuous improvement, leveraging the investments we've made over the last few years to aggressively manage fixed cost while we continue to further streamline our businesses and accelerate our digital transformation.
I'm moving to Page 9.
Total average HFI loans grew by 5% versus the first quarter of 2020.
Growth versus the same period of the prior year was driven by growth in PPP loans and higher balances in the mortgage warehouse lending business.
In the period, banking loans, excluding PPP, and mortgage warehouse lending have declined modestly versus the prior year period as commercial loan demand has remained tepid throughout the pandemic.
As we've noted on prior calls, we are planning to retain between $30 million and $50 million per month of consumer mortgage loans originated at PrimeLending to help offset soft demand from our commercial clients.
During the first quarter of 2021, PrimeLending locked approximately $146 million of loans to be retained by PlainsCapital over the coming months.
These loans had an average yield of 287 basis points and an average FICO and LTV of 779 and 61%, respectively.
I'm moving to Page 10.
First quarter credit trends continue to reflect a slow but steady recovery in the Texas economy as the reopening of businesses continues to provide improved customer cash flows and fewer borrowers on active deferral programs.
As of March 31, we have approximately $130 million of loans on active deferral programs, down from $240 million at December 31.
Further, the allowance for credit losses to end of period loan ratio for the active deferral loans equates to 13.4% at March 31.
As is shown in 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 first quarter at 1.98%.
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 banks' ACL to end-of-period loans held for investment ratio equated to 2.38%.
Turning to Page 11.
First quarter average total deposits were approximately $11.4 billion and have increased by $2.4 billion or 26% versus the first quarter of 2020.
Throughout the pandemic, we continue to experience abnormally strong deposit flows from our customers, driven by government stimulus efforts and shifting client behaviors as customers remain cautious during these challenging times.
Given our strong liquidity position and balance sheet profile, we are expecting to continue to allow broker deposits to mature and run off.
At 3/31, Hilltop maintained $639 million of broker deposits that have a blended yield of 34 basis points.
Of these broker deposits, $284 million will mature by 6/30 of 2021.
These maturing broker deposits maintain an average yield of 47 basis points.
While deposits 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 we remain focused on driving higher client acquisition efforts.
I'm moving to Page 12.
During the first quarter of 2021, PlainsCapital Bank generated solid profitability, producing $65 million of pre-tax income during the quarter.
The bank benefited from the reversal of credit losses of $5.2 million and the recognition of $7.5 million in previously deferred PPP origination fees.
During the quarter, the bank's efficiency ratio dropped below 50% as the focus on managing expenses, improving fee income streams through our treasury management sales efforts and working diligently to protect net interest income is proving to be a successful combination.
While we do not expect that the efficiency ratio will remain below 50%, we do expect that the bank's efficiency will operate within a range of 50% to 55% over time.
Moving to Page 13.
PrimeLending generated a pre-tax profit of $93 million for the first quarter of 2021, driven by strong origination volumes that increased from the prior year period by $2.6 billion or 71%.
Further, the purchase percentage of the origination volume was 47% in the first quarter.
While refinance remained above our expectations during the first quarter, we expect that the market will begin to shift toward a more purchase focused marketplace during the last three quarters of 2021.
As noted earlier, gain on sales margins contracted during the first quarter, yet we continue to expect the full year average range of 360 to 385 basis points is appropriate given our outlook on production, product mix and competition.
During the first quarter, PrimeLending closed on a bulk sale of $53 million of MSR value.
Somewhat offsetting the impact of the bulk sale, the business continued to retain servicing at a rate of approximately 50%, which yielded a net MSR value at 3/31 of $142 million, roughly stable with 12/31 levels.
We expect to continue retaining servicing at a rate of 30% to 50% of newly created servicing assets during 2021, subject to market conditions.
And we will be looking to potentially execute additional bulk sales throughout the year if market participation remains robust.
Moving to Page 14.
HilltopSecurities delivered a pre-tax profit and margin of $18 million and 16.2%, respectively in the first quarter of 2021, driven by structured finance and the public finance services businesses.
While activity was strong in the quarter, we have continued to execute on our growth plan, investing in bankers and sales professionals across the business to support additional product delivery, enhance our product offerings and deliver a differentiated solution set to municipalities across the country.
Moving to Page 15.
In 2021, we're focused on remaining 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 as to our most current outlook for 2021 with the understanding that the business environment, including the impact of the pandemic, could remain volatile throughout the year.
That said, we will continue to provide updates during our future quarterly calls. | hilltop holdings q1 earnings per share $1.46 from continuing operations.
q1 earnings per share $1.46 from continuing operations. | 1 |
Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC.
For the third quarter, Barnes Group delivered respectable financial performance as we continue to manage through the challenging environment presented by the ongoing global COVID-19 pandemic.
We generated earnings per share toward the high end of our July outlook, and our cash generation continues to be good.
We also saw incremental sales growth in both of our operating segments over the quarter, with promising signs of recovery in our industrial business, and the moving on from what we believe was the second quarter revenue trough in our Aerospace business.
Clearly, there remains a lot of uncertainty, but we can see signs of a path to recovery with more clarity.
Given our strong management team and thoughtful actions, we expect to drive profitable performance throughout this challenging period, while maintaining a sharp focus on accelerating our key strategic initiatives to position the business for future growth.
For the third quarter, total sales decreased 28% over the prior year period with organic sales down 26%, driven by lower volumes given the pandemic's impact on our end markets.
On a positive note, total sales did improve 14% sequentially from the second quarter, primarily driven by the performance of our Industrial segment.
Adjusted operating income decreased 53% compared to a year ago, while adjusted operating margin declined 640 basis points to 11.7%.
Earnings per share were $0.30, down 66% from last year, obviously, significant declines from a year ago, but somewhat better than expectations we laid out in July.
More importantly, total sales improved sequentially through the quarter.
At the same time, cash performance was once again solid, and our leverage continues to remain manageable.
Ongoing cost management and further working capital improvements in the quarter also helped to mitigate some of the impact of lower demand.
Moving now to a discussion of our business segments and end markets.
At Industrial, we're seeing some of our end markets exhibiting positive signs of recovery, coinciding with what has been a rapid increase of manufacturing PMIs.
U.S. and Europe PMIs have risen substantially from the second quarter lows, and China has strengthened to its already favorable reading.
Exiting the third quarter, all had solid PMI readings of 53 or better.
Overall, segment book-to-bill was slightly better than one times and orders grew 24% sequentially from the second quarter.
In our Molding Solutions business, sales of medical molds and hot runners remained solid.
And for the second consecutive quarter, we saw a nice year-over-year pickup in both packaging and personal care orders, reflecting the release of previously deferred projects.
Correspondingly, we generated a sequential sales increase in both of these end markets in the quarter.
In our automotive hot runner business, while sales were relatively flat to the second quarter, order saw a sequential bump as a few postponed projects were released.
We're seeing this market slowly ramping, in part driven by the influence of new electric vehicles.
In our Force & Motion Control business, sheet metal forming market saw a modest sequential improvement in orders and sales, while general industrial orders and sales likewise trended positively.
At Engineered Components, general industrial end markets experienced the meaningful sequential bump in orders and sales, another positive signal and fully aligned with the trend in manufacturing PMIs.
Our global automotive production markets saw the most sequential improvement, which was foreshadowed by the positive auto production forecast trend we highlighted last quarter.
While global automotive production is still anticipated to be meaningfully down in 2020, next year's growth is projected to be up in the mid-teens.
In our Automation business, we saw a solid quarter of performance with both year-over-year and sequential improvement in orders and sales.
Demand for our end-of-arm tooling solutions and various automotive applications saw a nice bounce, while precision grippers for medical and pharma applications also remained a bright spot.
For the segment, we continued to forecast sequential orders and sales improvement into the fourth quarter as the recovery progresses, albeit at a measured pace.
Moving now to our Aerospace business.
In the third quarter, total Barnes Aerospace sales were down nearly 50% with OEM down 44% and aftermarket down 58%.
Commercial aviation remained significantly disrupted by the global pandemic, yet passenger traffic has improved from the lows of April.
In the short-term, we expect our OEM business to see soft demand for its manufactured components as aircraft production rates of both Boeing and Airbus have been lower.
Although we expect our OEM sales to improve sequentially in the fourth quarter, getting back to pre-pandemic levels is forecasted to take several years.
In the aftermarket, lower aircraft utilization and weakened airline profitability will no doubt result in a slow recovery as less maintenance is required and/or gets deferred.
However, as commercial flights return with domestic traveling -- travel happening sooner than international demand, we anticipate volumes in our aftermarket business to gradually pick-up.
For the fourth quarter, we forecast flattish sequential aftermarket sales.
Despite a second consecutive quarter of 50% down sales, Aerospace delivered adjusted operating margin of close to 10%, a tribute to the quality of the team.
Also, while addressing the substantial day-to-day challenges of the current environment, Barnes Aerospace improved its position by securing a long-term agreement with GE Aviation for the manufacturer of existing and additional components on the LEAP engine program.
With this agreement, we'll employ our expertise and technology in the machining and assembly of complex hot section engine components.
The agreement provides for an increase of production share for select parts on LEAP engine programs, extends the term of previous agreements by 10 years for select parts and expands our portfolio of components on LEAP engines.
Inclusive of the contract extension benefit, the estimated sales is over $700 million through 2032.
Just before I close today, I'd like to take a few minutes to talk about another very important aspect of our business, which is Environmental, Social and Governance or ESG matters and to highlight the progress we are making.
At Barnes Group, we are committed to being an exemplary corporate citizen, and we take that responsibility very seriously.
In doing so, over the last several years we've worked to further our ESG progress and have recently published our sixth annual ESG corporate social responsibility report.
You can find our report and a summary of our ESG efforts on our company website under About BGI.
At Barnes, we began our ESG journey several years ago by educating ourselves on the global standards for measuring and reporting sustainability progress.
Barnes Group's ESG efforts are currently focused on aligning our sustainability actions around the Global Reporting Initiative or GRI.
The GRI is a common language used by organizations to report on their sustainability impacts in a consistent and credible way.
Our teams are engaged in several projects that will illustrate to our varied stakeholders how we are striving to meet those sustainability standards.
I'm also proud to report that we have recently established environmental targets for 2025.
As a company, we will work to reduce the energy we use in our factories as measured in carbon dioxide equivalents by 15%, reduce the amount of water we use by 20% and reduce the amount of industrial process waste we generate from our manufacturing operations by 15%.
These efforts are a testament to our Barnes Enterprise System.
Reducing all types of waste and inefficiencies to achieve operational excellence is the hallmark of our operating system and demonstrates our commitment to running sustainable businesses that conserve natural resources, while minimizing the impact of our footprint on the environment.
So to conclude, we continue to effectively manage our business as we deal with the disruptive effects of the pandemic on our end markets.
Across the company, we've been focused on the safety of our employees, protecting profitability and driving cash performance.
At the same time, we are pursuing various opportunities for growth, like the recent GE deal, to better position Barnes Group to leverage the speed at which we exit the current downturn.
As difficult as the last couple of quarters have been, I am very proud of the Barnes team and encouraged by the direction of our progress.
And while the level of uncertainty remains elevated, I am very optimistic that our end markets have begun the recovery and that the future looks promising.
Let me begin with highlights of our 2020 third quarter results.
Third quarter sales were $269 million, down 28% from the prior year period, with organic sales declining 26%.
As you'd expect, the severe demand disruption brought on by the global pandemic continues to impact many of our end markets.
As we previously mentioned, we view the second quarter as the sales low point, with modest recovery commencing in Q3 led by Industrial, which is indeed, what we're seeing.
We saw a 14% sequential improvement in sales relative to the second quarter.
However, on a year-over-year basis, the pandemic impact remained significant.
Also, influencing our sales results, the divestiture of Seeger had a negative impact on sales of 4%, while FX had a positive impact of 2%.
Operating income was $31.2 million as compared to $67.6 million in last year's third quarter.
Operating margin was 11.6%, down 650 basis points.
Interest expense of $3.7 million decreased $1.6 million from the prior year period due to lower average borrowings and a lower average interest rate.
Other expense decreased by $2.5 million from a year ago as a result of favorable FX.
The company's effective tax rate for the third quarter of 2020 was approximately 44% as compared to 23.4% for the full year 2019.
The increase in the third quarter's tax rate over last year's is primarily due to a change in the forecasted geography sources or the geographic sources of income with reductions incurring in several low tax jurisdictions, and the impact of global intangible low tax income, commonly referred to as GILTI.
Our current expectation for the full year 2020 tax rate is approximately 39%, which includes the recognition of tax expense related to the Seeger sale that occurred in the first quarter.
As we look out to next year, given where things stand today, we expect our 2021 tax rate to be in the range of approximately 27% to 29%.
Net income for the third quarter was $0.30 per diluted share compared to $0.89 a year ago.
Let me now move to our segment performance, beginning with Industrial.
Third quarter sales were $197 million, down 15% from a year ago.
Organic sales decreased 12%, Seeger divested revenues had a negative impact of 6%, while favorable FX increased sales by 3%.
On the positive side of the ledger, total Industrial sales increased 19% sequentially from the second quarter.
Industrial's operating profit for the third quarter was $24.4 million versus $34.8 million last year.
Like last quarter, the primary driver is lower sales volume, offset in part by our cost mitigation efforts, which included the previously announced workforce-related actions and the curtailing of discretionary spending.
Operating margin was 12.4%, down 260 basis points.
I'll close my Industrial discussion with quarterly organic orders and sales relative to last year.
Molding Solutions organic orders and sales were down approximately 10%.
Force & Motion Control organic orders were down mid-teens and sales down approximately 20%.
Engineered Components organic orders were up 8% with sales down approximately 10%.
And Automation organic orders were up high-teens with sales up low-single-digits.
Clearly the business remains under considerable pressure.
Sales were $72 million, down 49% from last year.
Operating profit was $6.8 million, down approximately 80%, reflecting the lower sales volume and partially offset by cost actions.
Operating margin was 9.4% as compared to 23.2% a year ago.
On an adjusted basis, excluding $300,000 in restructuring charges, operating margin was 9.9%.
Between the volume impact on factory absorption and the unfavorable aftermarket mix, the Aerospace team did a nice job to protect profitability.
Aerospace OEM backlog ended the quarter at $534 million, down 4% from June 2020, and we expect to ship approximately 45% of this backlog over the next 12 months.
Year-to-date cash provided by operating activities was $163 million, an increase of approximately $2 million over last year-to-date, driven by ongoing working capital improvements.
We continue to have good receivable collections, and we began to see reductions in inventory levels.
Year-to-date free cash flow was $133 million versus $124 million last year.
And year-to-date capex was $30 million, down approximately $8 million from a year ago.
With respect to our balance sheet, our debt-to-EBITDA ratio, as defined by our credit agreement, was 2.8 times at quarter end, up from 2.4 times at the end of June.
The company is in full compliance with all covenants of our credit agreements and maintained sufficient liquidity to fund operations.
As we announced last week, the company has amended on a temporary basis the debt limits allowed under our credit agreements.
For the next four quarters, our senior debt covenant maximum, our most restrictive covenant, has increased from 3.25 times EBITDA as defined to 3.75 times.
Given the level of uncertainty in several of our end markets, we believe that is a prudent risk mitigation action.
Our third quarter average diluted shares outstanding was 50.9 million shares.
Our share repurchase activity remains suspended.
For the fourth quarter, we expect organic sales will be lower than last year by approximately 20%, though up approximately 5% sequentially from the third quarter.
Operating margin is forecasted to be approximately 11%, while adjusted earnings per share are anticipated to be in the range of $0.27 to $0.35.
Forecasted 2020 capex is approximately $40 million, a bit lower than our prior view.
So to close, while significant challenges remain in the current business environment, we're focused on managing those items that we can control, whether they be growth opportunities, cost actions or cash management.
All things considered, our financial performance demonstrates that focus.
As Patrick mentioned, the sentiment is that we're starting to turn the corner on a recovery.
And while much work is still to be done, our efforts on positioning the company to best leverage and improving environment continues.
Operator, we'll now open the call to questions. | barnes group q2 adjusted earnings per share $0.45.
q2 adjusted earnings per share $0.45.
q2 gaap earnings per share $0.48.
q2 sales $321 million versus refinitiv ibes estimate of $304.2 million.
2021 adjusted earnings per share outlook of $1.83 to $1.98.2021 sales growth expectation increased to 13% to 14% with organic sales growth of 11% to 12%. | 0 |
I am pleased to report the final results for 2020.
Our performance shows the resiliency of our business.
In 2020, our team has met each challenge with confidence and conviction.
Our team is focused on providing a safe experience for residents, customers and employees.
We were able to serve our residents and customers in a challenging operating environment while maintaining our impressive customer feedback scores.
We continued our record of strong core operations and FFO growth with a 10% growth in normalized FFO per share in the quarter.
The fundamentals of our business remain strong with demographic and economic trends creating tailwinds for future growth.
In 2020, our MH portfolio increased occupancy by 293 sites.
We experienced continued strength at our MH properties with full-year rent revenue growth of 4.6%.
We saw fewer move-outs this year, primarily due to shelter-in-place orders.
We adjusted our sales and marketing efforts and were able to access new customers and efficiently showcase our homes in a virtual environment.
Throughout the fourth quarter, there were over 100 virtual home tours on our website.
Website visitors looking at our listings were three times more likely to express interest in the community and share their contact information for a follow-up from our team after reviewing a virtual tour on our website.
We see this as an opportunity to further grow RV base.
In 2020, the demand was strong for RV sites across the country.
In the quarter, we saw an increase in core transient revenue of 15%.
This growth was fueled by marketing campaigns for fall and winter campaign opportunities.
Our customers are interested in experiencing vacations in a safe environment.
We also see an increased flexibility in customer schedules that will continue to benefit us.
In 2020, our Thousand Trails membership portfolio performed in line with pre-pandemic expectations.
Our dues revenue increased over 4% to $53 million.
We sold over 20,000 camping passes, an increase of over 6% from 2019.
Our upgrade sales increased 15% over 2019 as we saw more customers interested in increasing their commitment to the Thousand Trails system.
In 2020, to help support the safety of our guests and team members, we launched a new online check-in option for our RV guests.
About one-third of guests completed the online check-in process, allowing them to get to their site more quickly and with less direct interaction.
In addition, in 2020, we provided our guests an added way to communicate with our on-site teams during their visit by launching a text message program to reduce the number of in-person interactions.
Our guests reported high satisfaction levels, based on the experience provided by our teams at our properties.
We send online service to our guests after they stay at our RV resorts and campgrounds.
Based on the fourth quarter survey results, guests responding to customer experiences questions with the rating of over 4.5 out of 5.
We have issued guidance of $2.31 at the midpoint, which is a 6.4% growth in normalized FFO per share.
The demand for our MH communities continues to increase.
Over the last five years, we have sold more than 2,200 new homes in our communities.
We finished the year strong with a 30% increase in new home sales year-over-year.
We see heightened demand for our locations and believe our home sales volume will reflect that demand.
We have noticed rent increases for approximately 60% of our residents and anticipate a 4.2% rate growth in MH revenue.
Our RV business in 2020 showed resiliency as it rebounded from pandemic-related closures.
As we head into 2021, we continue to have the backdrop of COVID-related travel issues in Canada and the U.S. hampering our results for the first quarter.
As we have discussed, our Canadian traffic has been significantly impacted by the border closures.
Our guidance for 2021 reflects the strength in our business.
Our guidance is built based on the operating climate of each property, including a robust market survey process and continuous communication with our residents.
Since our last call, we have closed on over $200 million of transactions.
We added approximately 2,100 RV sites to the portfolio and approximately 500 MH sites, with over 700 sites of adjacent expansion and 500 marina slips.
The acquisitions were geographically diverse and complementary to our existing footprint.
Additionally, we closed on four parcels of entitled land with 300 acres.
We anticipate being able to build 1,000 sites in these acquired acres.
In total, in 2020, we purchased eight parcels of land adjacent to our existing properties.
We will continue to pursue and execute on these value add transactions.
Next, I would like to update you on our 2021 dividend policy.
The Board has approved setting the annual dividend rate at a $1.45 per share, a 6% increase.
The Board will determine the amount of each quarterly dividend in advance of payment.
The stability in growth of our cash flow, our solid balance sheet and the strong underlying trends in our business are the primary drivers of the decision to increase the dividend.
Historically, we have been able to take advantage of opportunities due to the free cash flow generated by our operations.
Consistent with the past, in 2021, we expect to have an excess of $90 million of discretionary capital after meeting our obligations for dividend payments, recurring capital expenditures and principal payments.
We have increased our dividend significantly over the last few years.
Over the past five years, we have increased our dividend 71%.
2020 was a difficult year.
We have over 4,000 team members dedicated to ensuring success in our organization, and for that I am grateful.
We asked a lot of our team members this year, with each new regulation or change in operating climate, we saw increased dedication to our continued success.
Our team members strive to perform their best each day and the results of their efforts have been impressive.
I will review our fourth quarter and full-year 2020 results, and provide an overview of our full-year 2021 guidance.
Fourth quarter normalized FFO was $0.57 per share.
Strong performance in our Core Portfolio generated 3.6% NOI growth for the fourth quarter.
Core NOI growth of 2.9% for the full year contributed to our normalized FFO per share growth of 3.9%.
As Marguerite mentioned, full-year core community base rental income growth was 4.6%.
Rate increases contributed 4.1% growth while occupancy generated the additional 50 basis points.
Our 2020 core occupancy increase included a gain of 345 homeowners.
Our rental homes continue to represent less than 6% of our MH occupancy.
Full-year core resort base rental income growth from annuals was 5.6% with 4.9% from rate increases and 70 basis points from occupancy gains.
Core RV seasonal and transient revenues declined 3.7% and 8%, respectively for the year.
Fourth quarter seasonal RV revenues were approximately $2 million less than last year, mainly due to the travel-related restrictions impacting Canadian and U.S. domestic customers' decisions to spend the winter season in our Southern resorts.
For the full year, net contribution from our membership business was $2.9 million higher than 2019, an increase of 5.3%.
Dues revenues increased 4%, mainly as a result of increased rate.
Strong demand for our upgrade products is evidenced by the full-year increase in sales volume of 16%.
Full-year growth in utility and other income is mainly the result of increases in real estate tax pass-throughs and utility income.
The pass-through income represents recovery of 2019 tax increases, mainly in Florida, and the utility income increase reflects recovery of increased expense resulting from higher usage in our properties.
Full-year core property operating, maintenance and real estate taxes increased 5% compared to 2019.
This increase includes approximately $5.1 million in unplanned expenses associated with cleanup following hurricanes Hanna and Isaias, as well as expenses incurred as a result of cleaning and safety protocols and frontline employee compensation following the onset of COVID-19.
Our non-core properties, including those acquired during the fourth quarter, contributed $4.4 million in the quarter and $14.4 million for the full year.
Property management and corporate G&A were $97.2 million for the full year.
Other income and expenses, net, which includes our sales operations, joint venture income as well as interest and other corporate income, was $10.5 million for the year.
Interest and amortization expenses were $102.8 million for the full year.
This includes the partial year impact of our refinancing activity in the first and third quarters, as well as the line of credit borrowings used to fund our recent acquisitions.
As I provide some context for the information we provided, keep in mind, my remarks are intended to provide our current estimate of future results.
Our guidance for 2021 normalized FFO is $445 million or $2.31 per share at the midpoint of our guidance range of $2.26 to $2.36 per share.
We projected core NOI growth rate between 3.3% and 4.3% with 3.8% at the midpoint.
Full-year guidance includes 4.2% rate growth for MH and 4.5% for annual RV rents.
We assume flat occupancy in our MH properties for 2021.
Our guidance assumes first quarter seasonal and transient RV revenues perform in line with our current reservation pacing.
We estimate the first quarter decline in revenue from these line items compared to same period last year to be almost $10 million.
Almost 50% of that shortfall is caused by our Canadian customers deciding not to visit for the season.
Our customer reservation trends indicate a strong interest in returning to our properties for the 2021-'22 winter season.
Current reservations for seasonal stays in the first quarter of 2022 are four times higher than last time at this year.
As a reminder, in years prior to 2020, the first quarter represented approximately 50% of our seasonal RV revenues for the year.
Within our transient RV business, we have two lines of revenue, one services the customers who drive their RV to our property and the other services the cottage rental customers.
For the first quarter, we have seen an increase of 10% in the reservations from customers driving their RV to our resorts and a decline in our cottage rental business of almost 40%.
This represents approximately $1 million less cottage rental income in 2020.
While we have less visibility into the transient business for the remainder of the year, we have seen an increased reservation pace for the spring and summer season.
We expect first quarter normalized FFO per share to represent approximately 24% to 25% of full-year normalized FFO per share.
Our guidance model includes the impact of our recent acquisitions, including the RV property we acquired last week.
The model also includes the financing activity I'll discuss shortly.
The full-year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in 2021.
I'll now provide some comments on the financing market and our balance sheet.
The lender currently holds the mortgage on two of the properties to be financed.
Those existing mortgages mature in 2022 and carry a weighted average rate of 5.1%.
We intend to use the loan proceeds to repay a portion of our 2022 maturities and amounts outstanding on our line of credit.
Please note, as this loan is not yet closed, we can make no assurance that it will close pursuant to these terms or at all.
Current secured debt terms are 10 years at coupons between 2.5% and 3.5%, 60% to 75% loan-to-value and 1.4 times to 1.6 times debt service coverage.
We continue to see strong interest from life companies, GSEs and CMBS lenders to lend at historically low rates for terms 10 years and longer.
High-quality age-qualified MH assets continue to command best financing terms.
We have no secured debt maturing in 2021.
Our $400 million line of credit currently has approximately $297 million outstanding.
Our ATM program has $200 million of available liquidity.
Our weighted average secured debt maturity is approximately 13 years.
Our debt-to-adjusted EBITDA is around 5.2 times and our interest coverage is 5.1 times.
We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. | q4 revenue rose 5.1 percent to $271.9 million.
sees 2021 normalized ffo/share $2.26 to $2.36.
qtrly ffo available for common stock and op unit holders were $0.57 per common share.
sees 2021 fy normalized ffo/share to be $2.26 to $2.36.
q1 2021 normalized ffo per share is anticipated to represent 24-25% of full year normalized ffo per shar.
board has approved setting annual dividend rate for 2021 at $1.45 per share of common stock, an increase of 5.8%. | 1 |
On the call today are Jeff Jones, our president and CEO; and Tony Bowen, our CFO.
Some of the figures that we'll discuss today are presented on a non-GAAP basis.
Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance.
As such, our actual outcomes and results could differ materially.
You can learn more about these risks in our Form 10-K for fiscal 2020 and our other SEC filings.
When we last talked, we were in the middle of what was the most unique tax season in history.
The pandemic resulted in the first-ever extension of the filing deadline and changes to nearly every aspect of our operating model.
Throughout the season, our teams demonstrated agility and resilience.
We adapted to an ever-changing environment, and we delivered to our clients when they needed us the most.
The result was a strong finish, growing revenue 300% in the quarter and serving more clients than last tax season.
We've also made progress in other areas of our business.
Our results at Wave have steadily improved as they've returned to double-digit percentage revenue growth following the initial disruption caused by the pandemic.
After the close of the quarter, we also successfully issued long-term debt and signed an important agreement with MetaBank to be the provider of our suite of financial products.
These developments have resulted in a great start to our fiscal year as we continue to build positive momentum in the business.
First, I'll talk about the recently completed tax season, providing perspectives on both our performance and the overall industry.
Then I'll give some thoughts on the progress we are making on our strategic road map.
Tony will then discuss our Q1 results and share high-level thoughts on the balance of fiscal '21.
He'll also provide an update on our capital structure, including details on our recently completed debt offering, and we'll talk about our agreement with Meta.
I'd like to start with the tax season.
The majority of the season took place while the country was dealing with the pandemic.
We navigated the various state and local orders and took steps to promote the safety and well-being of our associates and clients.
A significant number of our offices were closed, and those that weren't moved to a drop-off model with a limited in-person interaction with our clients.
The reality is that from mid-March through the end of the season, there has been no such thing as business as usual in any of our offices.
This was especially true during the May through July time frame with around half of our offices closed, and those that were open, subject to various local orders.
And while this time has been challenging, we have looked at it as an opportunity to demonstrate our commitment to our clients and communities.
Additionally, we accelerated our efforts to transform our tax business as we innovate to deliver expertise to consumers in new and exciting ways.
The capabilities we've built to enable clients to digitally drop off their forms, interact with tax pros virtually, review their returns online and sign and pay remotely provide them with the expertise they wanted when they weren't comfortable with in-person service or when our offices were closed.
And these innovations helped us engage with our DIY clients in new ways, bringing our expertise to life within our software offering.
In total, our digitally enabled returns grew over 150%.
It's clear that consumers are taking notice of how the expanded H&R Block platform is bringing digital capabilities to those who want assistance and on-demand human help to those who prefer to use software to file.
Turning to category results.
I'll start with our assisted business.
We had a strong start to the tax season as we were tracking to our goals of improving our client trajectory and holding market share.
Because of the impact of the pandemic and the changes we made to our operating model, we anticipated a decline in volume as well as the loss of market share.
Our results, however, were strong as we finished with a small share loss.
This is attributable to the agility and resilience of our associates, tax pros and franchisees that I mentioned earlier as well as the digital efforts I just discussed.
In DIY, we also finished strong.
Online growth was 10.6%, which led the total DIY return growth of 8% as we held share in the category when excluding stimulus returns.
Our product continues to evolve and win accolades from third parties.
And our clients love the experience as well as Net Promoter Scores improved again, following a significant increase in the previous season.
We're also seeing this in our retention rates, which improved over two points.
Our strategy in DIY is working.
We're pricing competitively, providing tremendous value and people are taking notice as we continue to drive awareness.
Turning to the industry.
It's important to consider two key factors when reviewing the data.
First, there were millions of people who filed tax returns solely for the purpose of receiving stimulus payments.
We believe there are between seven million to eight million returns with $1 of income and are being tracked as stimulus filers.
However, there are likely more who filed solely for the purpose of receiving a stimulus payment but reported additional income, making the exact number of stimulus filers unknown.
The second factor to consider is paper filings, which fluctuated significantly during the last few weeks of the season, making that key piece of the puzzle unreliable.
Regardless of these two variables, there were a couple of significant learnings from this season.
The first is that the industry itself is strong.
The tax refund, which is typically the largest financial transaction for most Americans each year, became even more important to people as they were adversely impacted by the pandemic.
And second, the assisted category is resilient.
Given the various stay-at-home orders, mandates for business to close and the general fear of physical interaction caused by the virus, many expected a dramatic decline in assisted filings.
Instead, we saw just a 40 basis point decline in assisted e-files and a moderate change in mix between assisted and DIY when excluding the estimated number of onetime stimulus filings.
In fact, during the pandemic from mid-March through mid-July, assisted filings actually increased 50 basis points, which is telling considering the circumstances.
With this tax season behind us, I'd like to look ahead and provide some thoughts on our strategy.
As I mentioned earlier, the work of digitally enabling our business was a key enabler of our success this year.
In other words, the investments we made allowed us to adjust our operating model while still providing the expertise and service our clients expect, and these capabilities will continue to benefit us in the future.
Looking ahead, our strategy is evolving and will go beyond the digital efforts we've undertaken in our tax business.
We continue to evaluate and reprioritize our strategic imperatives and examine our cost structure as we remain focused on growing volume, revenue and earnings over time.
When we speak in December, we'll have more to share in addition to providing our outlook for fiscal '21.
With the strong finish to the tax season, our fiscal year is off to a great start.
Today, I'll share our results for the quarter; thoughts on the remainder of fiscal '21; an update on our capital structure; and finally, some color around our recent agreement with MetaBank.
Due to our seasonality, we typically report lower revenues and a net loss during our first quarter.
This quarter's results, however, improved due to the significant tax return volume during the month of May, June and July.
Before jumping into the financials, I thought it would be helpful to provide some context on our volume and net average charge performance, which we reported in late July, as well as an update on Wave.
for the third consecutive year with a 3.3% increase in returns.
This was led by continued strength in our DIY business with a 10.6% increase in online filings.
In assisted, given that we had approximately half of our total network open and those offices were operating under a modified model, we expected a decline in return volume and a loss of market share.
Our finish to the tax season was strong, however, resulting in a decline in returns of just 2.8% and a small share loss.
Regarding pricing, our net average charge in DIY declined due to mix as well as our decision to keep our free state filing promotion through the end of the tax season.
In assisted, we targeted flat net average charge coming into the year.
Those saw a slight decrease due to mix in our company offices, partially offset by improved pricing in our franchise network.
During last quarter's call, we talked about the impact that the pandemic has had on small businesses and consequently Wave's growth trajectory.
Following a couple of months of flat year-over-year revenue, I'm pleased to report that we've seen progressively better results in the subsequent months, resulting in year-over-year growth of nearly 20% during the quarter.
Considering the circumstances, this was a tremendous outcome and a positive sign that Wave's innovative platform continue to provide value to small business owners.
The increase in tax filing volume in Wave's contribution resulted in revenue of $601 million in the fiscal first quarter, an increase of $451 million or 300% compared to the prior year.
This improvement in revenue resulted in higher variable operating expenses, primarily in tax pro compensation and credit card transaction fees.
While we anticipated this increase, it was lower than expected, as we managed labor more efficiently.
In addition to the variable expenses, we spent more in marketing due to the tax season extension.
These increases were partially offset by other expense reductions, resulting in an overall increase in operating expenses of just 30% to $448 million.
Interest expense increased $11 million as a result of our line of credit being fully drawn, which I'll discuss later.
The net result of revenues increasing at a greater rate than expenses was pre-tax income from continuing operations of $124 million compared to last year's pre-tax loss of $207 million, which is typical for our fiscal first quarter.
GAAP earnings per share improved to $0.48 compared to a prior year loss of $0.72, while non-GAAP earnings per share improved to $0.55 compared to a loss of $0.66.
In discontinued operations, there were no changes to accrued contingent liabilities related to Sand Canyon during the quarter.
With that recap of the quarter, let me provide some perspective on our expectations for fiscal '21.
Before doing so, please note that our expectations assume next tax season is completed by the normal filing deadline of mid-April.
Overall, we expect to see a significant increase in revenue and cash flow this fiscal year, not just compared to fiscal '20, but also in comparison to a typical year.
This is due to both the carryover tax season '20 into our first quarter and our expectation for a normal tax season '21.
In addition to achieving these increases, we are also focused on driving cost efficiencies in order to fund our growth imperatives.
These reductions include a hiring freeze, the elimination of merit increases, examining vendor spend, renegotiating rent across our retail footprint and limiting capital expenditures.
So hopefully, that provides helpful context.
We will provide more details during our Q2 call in December.
I'll now turn to capital allocation and the balance sheet.
Despite the unique circumstances related to pandemic, our capital allocation priorities remain the same.
At the top of the list is maintaining adequate liquidity for operational needs.
We then look to make strategic investments back into the business to drive growth.
Finally, we returned excess capital to shareholders through dividends and opportunistic share repurchases.
Given our priorities are unchanged, there are four specific areas I'd like to provide additional clarity on given recent events: our line of credit, the recent issuance of long-term debt, our dividend and future share repurchases.
Let's start with our line of credit.
At the onset of the pandemic, we drew down the full balance of the line to maximize our liquidity given the uncertainty.
The draw had a six-month interest lock, which matures this month.
Given the strong finish to the tax season, we had a cash position of $2.6 billion at the end of the quarter, and as such, intend to pay down the full balance of the draw later this month.
We anticipate returning to our normal cycle of seasonal borrowings on our line of credit later this calendar year as we head into the upcoming tax season.
In addition, given the strength of our financial performance in the first quarter, we met our debt covenants and currently expect to be in compliance going forward.
Turning to our recent debt offering.
I'm pleased with our successful issuance of $650 million of 10-year notes at a coupon of 3.875%.
We intend to use the proceeds of these notes to retire existing debt that matures in October.
This was a positive result for us as we're replacing 5-year notes with 10-year notes at a lower interest rate.
It's also a sign that investors have confidence in our future.
Moving on to our dividend.
We have continued our streak of paying quarterly dividends consecutively since going public nearly 60 years ago.
As we shared in the past, we evaluate our dividend after each fiscal year, which we did in June.
This review resulted in us maintaining the dividend at its current level.
To be abundantly clear, we have no plans to change our dividend payout level for the balance of this fiscal year.
Our next evaluation of the dividend will be in June of next year.
And while we cannot guarantee future dividend payments with the level of dividend would be at that time, we do have a goal of increasing the dividend over the long term as evidenced by the 30% increase over the past five years.
Finally, turning to share repurchases.
We have decided to resume our practice of repurchasing shares to offset dilution from equity grants.
Consistent with prior practice, we will not discuss potential additional share repurchases other than mentioning they would be done opportunistically.
The last thing I'd like to discuss today is the agreement we reach with MetaBank to be the provider of our financial products, including refund transfer, refund advance, Emerald Advance and Emerald Card.
MetaBank is a leader in providing financial solutions to consumers and has significant experience in the tax preparation industry.
We worked with Meta in the past and know them to be an excellent partner.
Both of our teams are hard at work to make the transition as seamless as possible for our clients.
From a financial perspective, we expect this agreement to result in savings of $25 million to $30 million on a run rate basis.
Though that number will be approximately $10 million lower in fiscal '21 as we are transitioning midyear and will incur some onetime expenses.
In summary, we are off to a great start this fiscal year.
We recently had a successful debt issuance and are excited to be partnering with Meta for years to come.
I'm looking forward to sharing more with you regarding our expectations for the fiscal year in December.
They truly make H&R Block a special place and are why we were able to accomplish so much during such a difficult time.
We're now focusing on the future, and I'm looking forward to sharing an update with you in December. | compname reports q1 adjusted earnings per share $0.55.
q1 gaap earnings per share $0.48 from continuing operations.
q1 revenue $601 million versus refinitiv ibes estimate of $617 million.
q1 adjusted non-gaap earnings per share $0.55. | 1 |
Today I'm joined by Bill Furman, Greenbrier's chairman and CEO; Lorie Tekorius, president and COO; Brian Comstock, executive vice president and chief commercial and leasing officer; and Adrian Downes, senior vice president and CFO.
Fiscal 22 is off to a good start, driven by strong commercial performance, disciplined management of our production capacity and continued growth of our railcar and lease fleet.
Momentum in our business is being sustained.
First quarter of fiscal 2022 continued our strong ordered trajectory.
As a result, Greenbrier posted its fourth consecutive quarter with book-to-bill ratio over one times.
New railcars orders and actually were at 1.5 for this quarter.
New railcar orders of 6,300 units were worth 685 million, were across a broad range of railcars.
We ended the quarter with a backlog of approximately three billion, the highest level about three years.
Our order intake for the first quarter alone represents 35% of new orders received during all of fiscal 2021.
Our recent partnership with U.S. Steel Corporation and Norfolk Southern Railway to design and launch new high strength steel gondolas having multiple environmental benefits demonstrates this momentum.
In addition, in a moment, our chief commercial and leasing officer, Brian Comstock will share more about this and some other exciting customer focused initiatives.
And I should mention in terms of backlog do we have booked another 200 million of rebody work which is sizable but not counted in our backlog.
We are now ramping up '21 active production lines in North America and approximately eight internationally.
Importantly, we are harnessing our flexible manufacturing footprint to extract more production from each line.
We expect this to increase in deliveries to increase over the course of the year.
Meat production requirements we recently expanded our global workforce by about 10%.
Intensive management of safety, hiring and supply chain issues continue.
Continued success in these areas is key to maintaining our strong start to the year, specifically on the supply chain, our global sourcing team continues to do an exceptional job of mitigating disruptions to support increased production.
Our wheels repaired parts business is now known as Maintenance Services.
The new name doesn't change the back of this business unit endured a challenging quarter.
Labor markets and supply chain direct disruptions have both impacted its profitability.
Naturally, this lowered our consolidated margins which were below our expectations to begin with.
As we speak to the changes, we're making to improve the performance of our Maintenance Services business unit.
Greenbrier leasing continues to perform very well.
Our investment activity has considerably outpacing initial targets.
Asset utilization, a key performance metric for the leasing business is high at 97.1% for the portfolio that is well-diversified across car types and strong lessee credits as well as maturity ladders.
Additionally, we exceeded the initial investment target for GBX leasing by $200 million to a portfolio of $400 million in only nine months of operations.
This reflects the strong momentum in the business and our core manufacturing markets in North America.
The Omicron variant of COVID-19 were suddenly following the end of the quarter.
As a result of well-established safety protocols, our operations have not been significantly impacted at present by the rising cases globally and in North America, but we are closely tracking the rapid community spread of this variant and we're taking all appropriate precautions.
We continue with safeguard protocols and we will enhance these as dictated by best practices as well as adhering to local health authority requirements in the locations where we operate.
In the U.S. and Europe, it appears this wave might peak in the coming months.
There are indications that the current variant carries milder symptoms than previous versions of the virus, particularly for those who are double vaccinated and those with boosters.
Nonetheless, we must remain vigilant.
After two years, the full contours of the pandemic remain dynamic and unpredictable.
Our resolver is effectively to manage Greenbrier through evolving COVID challenges and that resolver remains steadfast.
Our outlook remains unchanged except that we believe it is growing to be much more positive.
We maintain a positive outlook for the fiscal year for a variety of reasons.
These are supported by industry metrics as well as operating momentum, driven by a strong order book, demand backlog and manufacturing ramping.
For example, a portion of idle railcars in North America decreased to 32% in July to just below 20% by December.
Industry forecast for 2022 and 2023 are very encouraging, as Brian Comstock will share with you.
All this suggest that industry fleet utilization is nearing 80%.
And again, Brian Comstock will add more on these points in a minute and we can talk in questioning and answering.
Lorie Tekorius who will be Greenberg's CEO in March takes the helm in very important and exciting time in the long history of Greenberg.
I became the CEO, when we were founded, when my partner and I cofounded a small asset leasing business in 1981.
We entered manufacturing with the acquisition of Gunderson in 1985 and have continued to build on those two foundations.
Today's manufacturing is our largest unit, comprising about 80% of our total annual revenues.
But manufacturing is both driven and complemented by a robust commercial and leasing business, as well as asset management services.
Today, our asset management maintenance services touch about one-third in the North American fleet.
It's been a remarkable journey for me and for the company.
Greenbrier steadily grown industry footprint and today is the leading railcar manufacturer in North America, allowing us to operate and scale.
We also now operated in four continents serving global railcar markets worldwide, with similar market shares issue this.
All of this has been accomplished through the hard work of remarkable people without guidance through their capacity for innovation, discipline management, and unyielding focus on the needs of our customers, as well as our workforce, and other stakeholders.
We've purposely built the company to grow at scale across business cycles.
Under Lorie's administration, she plans to do more of that along with some new initiatives of row.
As global railcar markets emerge from a cyclical trough, one that was really exacerbated by the pandemic.
I'm proud of what the Greenbrier team has accomplished and the market leading positions we've achieved.
I'm also proud of the significant value we've created for our shareholders.
I expect that this will continue for many decades to come.
As Greenbrier continues to drive innovation as an industry, broaden its footprint globally and by product line and expand this leasing and services business.
I also would like to congratulate two directors who served throughout almost the last 18 years to 20 years on our Board, Duane McDougall and Donald Washburn.
Next week, we'll put out a brief congratulatory note marking this milestone, but I want to assure them that we remember them.
I no doubt the Greenbrier will flourish under her administration.
And before I get into the details on the quarter, you may have noticed and I think they'll reference that renamed two of our reporting segments.
We'll prepare in parts segment and now maintenance services and leasing and services is now leasing and management services.
The new names more closely reflect the customer solutions we provide and have no impact on the financial results.
Greenbrier's fiscal Q1 reflected continued labor challenges in the United States, competitive pricing from orders taken during the depths of the pandemic troughs, and production and efficiencies from line changeover and ramping of capacity.
I am proud of our employees around the world that continue to perform well, even as uncertainty about.
It is certainly an understatement to say that increasing headcount safely by several thousand employees, and increasing production rates by 40% to 50% is challenging.
So with an experienced leadership team, we'll meet this opportunity to scale our operations all up keeping our workforce healthy and safe.
Safety across our organizations has been and will continue to be our number one priority.
And the quarter just ended, we delivered 4,100 units, including 400 units in Brazil.
Deliveries decreased by about 9% sequentially, which primarily reflects the timing of syndication activity, and line changeovers in North America.
Our global manufacturing continues to take a measured approach to increasing production rates and activities as they work through orders taken during this process.
Our global sourcing team continues to perform minor miracles on a regular basis, ensuring we avoid significant production delays.
Our maintenance service business was significantly impacted by labor shortages exacerbated by the COVID pandemic.
These shortages impact throughput, billing efficiencies and profitability.
We've made a number of changes to our hiring and training practices, and we're seeing improved retention rate that maintenance cycle times can be 75 to 90 days.
So it takes some time for the benefits of these changes to flow through the operation.
Further, this business was impacted by lower real change our volume.
I do believe the team has made the necessary changes that will lead to positive results over the course of fiscal 2020 and our maintenance services.
Our leasing and management services group had a good quarter with strong fleet utilization and the integration of a previously disclosed portfolio purchased in September.
Between the portfolio assets and origination from Greenbrier, GBX leasing grew by approximately 200 million in the quarter.
And as of quarter end, that fleet is valued at nearly 400 million, nearly doubling in value across the quarter.
Importantly, this growth reflects a continued disciplined approach to portfolio construction, underwriting and credit quality standards.
We are not pursuing growth at all costs.
In addition to managing our lease fleet, our Management Services or GMS group continues to provide creative railcar assets solution for over 450,000 railcars in the North American freight industry.
When other positive developments subsequent to quarter end, is that our leasing team successfully increased the size of our 300 million nonrecourse railcar warehouse facilities by 50 million to 350 million.
Our capital markets team executed well this quarter, and we expect syndication activities to grow throughout the year, similar to our overall cadence of delivery.
Syndication remains an important source of liquidity and profitability for Greenbrier.
Looking ahead, we see strong momentum for fiscal 2022 and beyond.
We have talented employees and experienced management who are focused on driving results and shareholder value.
I'm very excited about the long-term opportunities for Greenbrier.
And now Brian Comstock will provide an update on the current railcar demand environment.
As mentioned in October, I remain excited about the momentum we are seeing in all of our markets globally.
In Greenbrier's first quarter, we had a book-to-bill 1.5 reflecting deliveries of 4,100 units and orders of 6,300 units.
This is the fourth consecutive quarter with a book-to-bill ratio exceeding one times and reflective of this strengthening environment.
New railcar backlog of 28,000 units with a market value of three billion provides strong multiyear visibility.
These are the type of demand environments where Greenbrier's flexible manufacturing is a vital differentiator.
In addition to new railcar orders, we recently received orders to rebody 1,400 railcars, as part of Greenbrier railcar refurbishment program.
This program is an important part of our growing partnership with our customers to sustainably repurpose North America's aging fleet, to ensure that rail remains the most environmentally friendly mode of surface transport.
As of November 30th, our modernization backlog included 3,500 units, valued at $200 million.
This is a valuable business that is additional to our new railcar backlog and absorbs production capacity.
Each gondolas unloaded weight is reduced by up to 15,000 pounds.
Norfolk Southern will initially acquire 800 of these Greenbrier engineered gondolas.
The work done by Greenbrier and our partner promises significant benefits to all three companies and the freight transportation industry as a whole, as we lead the way to a net zero carbon economy.
One item we are clarifying is the $800 gondolas will be part of the Q2 order activity.
In December, we also announced Greenbrier's joining of the RailPulse coalition.
I'm personally excited about the prospects of this technology with the goal to aggregate North American fleet data onto a single platform.
This has a potential to improve safety and operating efficiency, while providing enhanced visibility to customers, reinforcing rails competitive share of freight transportation.
Greenbrier's leased fleet utilization ended the quarter at over 97%.
We continue to see improved lease pricing in term on all new lease originations and lease renewals as well as continued strong demand for leased equipment.
North American industry delivery projections saw an increase in nearly 49,000 units in 2022 and over 60,000 units in 2023, given the strong reduction in railcars and storage that continue to congestion as the pores, which is impacting traffic and overall economic growth.
We believe, these projections are very reasonable and see similar dynamics in Europe.
As you can see from our recently announced initiatives, Greenbrier's global commercial and leasing team remains focused on providing innovative solutions to our customers.
Now over to Adrian for more about our Q1 financial performance.
I'll discuss a few highlights and I'll also provide an update to our fiscal 2022 guidance.
Highlights for the first quarter include revenue of $550.7 million, deliveries of 4,100 units which include 400 units from our unconsolidated joint venture in Brazil.
Aggregate gross margins of 8.6%, reflecting competitive new rail car pricing from orders taken earlier in the pandemic and labor shortages.
Selling and administrative expense of $44.3 million is down 20% from Q4, primarily as a result of lower employee-related costs.
Net gain on disposition of equipment was $8.5 million, like many leasing companies we periodically sell assets from our lease fleet as opportunities arise.
We had an income tax benefit of 1.4 million in the quarter primarily reflect the net benefits from amending prior year tax returns.
Non-controlling interest provides the benefit of 5.2 million, primarily resulting from the impacts of line changeovers and production ramping at our Mexico joint venture.
Net earnings attributable to Greenbrier of 10.8 million or $0.32 per diluted share and EBITDA of 42.2 million or 7.7% of revenue.
Moving to liquidity, Greenbrier has a strong balance sheet.
Liquidity of 610 million is comprised of cacheable reforms of the ten million and available borrowings of nearly 200 million.
We are well positioned to navigate any market disruptions we expect to persist into calendar 2022.
As mentioned last quarter, our cash receivable spends at 106 million as of November 30, and we expect to receive most of these refunds in the second quarter of fiscal 2022.
This refund is an addition to Greenbrier's available cash and borrowing capacity.
Liquidity is important to support the working capital needs of the business as we significantly increase new railcar production beginning in '21 and into 2022.
Liquidity also enables Greenbrier to invest in growth, as demonstrated by the railcar portfolio purchase in Q1 and the expansion of GBX leasing at a pace exceeding our initial announcement.
It has also allowed us to continue to pay dividends throughout pandemic during a time of economic uncertainty.
Greenbrier's board of directors remains committed to a balance to find the capital.
I believe that our dividends program enhances shareholder value and attracts investors.
Today, we announced the dividends are $0.27 per share, which is our thirty-first consecutive dividend.
As of yesterday's closing price, our annual dividend represents a yield of approximately 2.3%.
Since 2014, Greenbrier returns nearly 370 million of capital to shareholders through dividends and share repurchases.
Additionally, you may have noticed an increase of approximately 70 million and Greenbrier's notes payable balance, when compared to the prior quarter.
This non-cash increase is a result of Greenbrier adopting a new accounting standard, which simplified accounting for convertible notes and no longer requires the calculation of debt discount and associated equity components.
We believe the standard provides better transparency to how the convertible notes appear on our balance sheet.
And to be clear Greenbrier did not incur any impact of liquidity or cash flows as a result of this adoption.
Based on current business trends and production schedules, we're adjusting Greenbrier's fiscal 2022 outlook to reflect the following.
Increase deliveries by 1,500 units, now to a range of 17,500 to 19,500 units, which includes approximately 1,500 units from Greenbrier-Maxion in Brazil.
Selling and administrative expenses are unchanged and expect to be approximately 200 million to 210 million for the year.
Gross capital expenditures of approximately 275 million in leasing and management services, 55 million in manufacturing, and 10 million in maintenance services.
Gross margin percent is expected to steadily increase over the course of the year from high-single-digits in the first half to between low-double-digits and low-teens by the fourth fiscal quarter, as railcar's orders during the pandemic trough are delivered and conditions in the maintenance services business improve.
We expect deliveries to continue to be back half waited with a 45%, 55% split.
As reminders in fiscal 2022 approximately 1,400 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 on a lease Greenberg's balance sheet and is owned by an external third-party.
As mentioned in the commentary earlier on the call, momentum continues to build in our business.
And I'm excited about what the future holds for Greenberg. | q1 earnings per share $0.32.
diversified new railcar backlog as of november 30, 2021 was 28,000 units with a value of $3.0 billion.
greenbrier companies - for 2022, expects increased deliveries of 17,500 - 19,500 units including about 1,500 units in greenbrier-maxion (brazil). | 1 |
With me here, I have Scott Barbour, our President and CEO; and Scott Cottrill, our CFO.
A copy of the release has also been included in an 8-K submitted to the SEC.
We had a strong second quarter of fiscal 2021, with 10% net sales growth as demand and business activity remains favorable.
I also appreciate our customers for working with us in new and imaginative ways to serve the construction markets.
We generated strong performance in key growth states, including Florida, the Carolinas, Tennessee, Georgia and Utah as well as more broadly across the south and southeast regions of the United States.
As a whole, we benefited from our national presence and geographic exposure as well as our increased residential exposure from Infiltrator and to focused homebuilder programs at ADS.
Infiltrator once again exceeded revenue expectations with 63% sales growth in the second quarter.
Infiltrator continues to see double-digit growth in tanks and leach field products, with particular strength in Florida, the Carolinas, Georgia, Tennessee and Alabama.
Recall the Infiltrator results are for two months of the prior year quarter, given the timing of the acquisition, which closed July 31, 2019.
In the residential end market, legacy ADS sales increased 15% this quarter.
We see favorable dynamics in new construction, repair, remodel and on-site septic.
Orders, backlog and sales remained strong through the period, with very limited impact from the slowdown in residential starts earlier this year.
As a whole, we are well positioned for growth in the residential market.
On the front end of the cycle, the ADS products and go-to-market strategy are positioned for the land development phase, whereas Infiltrator products come in play toward the end of the cycle when construction is nearing completion.
Additionally, both Infiltrator and ADS have a repair and remodel component that is strong and growing its home improvement activity and existing home sales continue to rise.
About 1/3 of the Infiltrator sales are related to repair and remodel, and at ADS, the repair and remodel exposure is covered through our retail and national accounts.
The company's exposure to the residential market has increased to 38% of domestic sales compared to 28% at this time last year.
Sales in our nonresidential end market were up modestly, led by strong growth in HP Pipe and Storm Tech retention detaching chambers as we continue to benefit from our exposure to horizontal construction.
We are tracking very closely to the segments of the nonresidential market that continue to do well such as data centers and warehouses as well as geographies that are experiencing growth like the southeast and Atlantic Coast.
Importantly, we believe ADS is well positioned to continue to grow above market due to our conversion strategy, national coverage and water management solutions package.
And given what we see in the market today, we believe the second half of the year will be similar to the market conditions we experienced in the first six months.
Agriculture sales were down just slightly this quarter as we called out to a tough comparison period.
Still, the agricultural sales team has had a great first half of fiscal 2021, with sales up 14% year-over-year.
In addition, the fall selling season is off to a great start as we continue to benefit from the programs we put in place around organizational changes, new product introductions and improving execution in the agriculture market.
International sales increased 3%, driven by double-digit growth in our Canadian business.
Canada is doing well across both the construction and agriculture end markets.
Mexico, on the other hand, is not performing as well and having been more significantly impacted by the COVID-19 pandemic.
Overall, strong demand is causing some regional and product level constraints.
Lead time and inventory levels are stretched as we get into this part of the season.
Based on this strong demand and our desire to more fully capitalize on opportunities in our core markets, we are stepping up our capital investments, which we now expect will total between $80 million and $90 million for this fiscal year.
The focus of our investments will be to improve safety, increase capacity for future growth and improve productivity.
We will rebuild finished goods inventory in the second half of the year by level loading production at our facilities and our traditionally slow lots, preparing both ADS and Infiltrator for good customer service and normal lead times.
This build will depend on our second half demand, ramping up new capital and dealing with the COVID-19-related circumstances like employee retention, absenteeism and local conditions.
Frankly, this is consistent with the environment we've been managing since the pandemic hit.
We are also making investments in talent, including the recent addition of a senior leader to accelerate new product introductions, marketing and innovation.
I'm pleased to announce Brian King joined our organization in September to lead this effort as the Executive Vice President of Product Management and Marketing.
Brian has 25 years of successful product management experience, and we're excited to have him join our team.
Moving to our profitability results.
We achieved another quarter of record adjusted EBITDA during the period.
Adjusted EBITDA margin increased 820 basis points overall with a 640 basis point increase in the legacy ADS business.
This was driven by favorable material costs, leverage from the growth in Pipe and Allied Products, execution of our operational initiatives and contributions from the proactive cost mitigation steps we took earlier this year.
Infiltrator also achieved record profitability in the quarter due to strong demand, favorable material costs, contributions from our synergy programs and continued execution of their proven business model.
The synergy programs are right on track to achieve the run rate targets we've previously communicated.
As we look ahead to the second half of the year, we are optimistic as our order book, project tracking, book-to-bill ratio and backlog all remain positive.
We expect the normal seasonal patterns to apply to the second half of our fiscal year as installation activity slows down in geographies with colder temperatures.
We also have some profitability headwinds coming up in the third and the fourth quarters, including inflationary costs from materials and labor.
We are working to offset these headwinds through pricing actions, operational productivity initiatives and our synergy programs.
In summary, we did a very good job executing this quarter.
We're focused on safety, managing through the COVID-19 environment, servicing our customers and driving these new levels of profitable performance.
Though uncertainty still exists regarding the broader market environment, we are well positioned to capitalize on residential development and horizontal construction while continuing to generate above-market growth through the execution of our material conversion and water management solution strategies.
We remain focused on disciplined execution as we look to build off a very strong first half of our fiscal 2021.
On slide six, we present our second quarter fiscal 2021 financial performance.
Net sales increased 10%, with 4% growth in our legacy ADS business plus 63% growth in our Infiltrator business.
Sales growth in the legacy ADS business was led by a 15% sales growth in the residential market, which remains robust.
As Scott discussed, demand in our nonresidential market remains stable, with pockets of strength in horizontal construction, data centers and warehouses.
Overall, sales were solid throughout the quarter and this trend has continued through October.
Sales grew in Infiltrator across their portfolio, driven especially by strength in their leach field and tank product lines.
Infiltrator continued to benefit from the underlying strength in the repair and remodel market as well as growth in single-family housing.
This growth was further accelerated by their material conversion strategy.
From a profitability standpoint, adjusted EBITDA increased $56 million or 47% compared to the prior year.
Adjusted EBITDA for the legacy ADS business increased $33 million or 35%, with strong performance from our sales, operations, procurement and distribution teams.
ADS is very well positioned to capitalize on the current stability in our end markets due to our market-leading position, national relationships, breadth of products and services as well as our geographic and end market diversity.
These attributes make us the premier partner and leader in the industry and led to the margin expansion and strong financial performance in the quarter.
Infiltrator's adjusted EBITDA increased $21 million or 86%, benefiting from strong demand, favorable pricing, lower input costs, productivity improvements as well as our synergy programs.
Moving to slide seven.
Our free cash flow increased $112 million to $257 million as compared to $135 million in the first half of fiscal 2020.
These impressive free cash flow results were driven by the strong sales growth and profitability we achieved in the first half of fiscal 2021 as well as execution on our working capital initiatives.
Our working capital decreased to right around 20% of sales, down from 22% at this time last year.
Further, our trailing 12-month pro forma leverage ratio is now 1.5 times, slightly below our target range of two to 3 times leverage.
We ended the quarter in a very favorable liquidity position as well, with $204 million of cash and $339 million available under our revolving credit facility, bringing our total liquidity to $543 million.
The favorable changes we have made to our capital structure have also resulted in no significant debt maturities until 2026.
While pleased with our conversion of adjusted EBITDA to free cash flow in the first half of this year, we will need to make strategic investments in working capital and capex during the second half of this year to position us to take full advantage of expected growth as well as to make the necessary investments to support our productivity initiatives at both the legacy ADS and Infiltrator businesses.
In addition, we continue to assess bolt-on acquisition opportunities through our disciplined acquisition process.
Finally, on slide eight, we introduced our guidance 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 $1,790,000,000 to $1,840,000,000, representing growth of 7% to 10% over last year; adjusted EBITDA to be in the range of $495 million to $515 million, representing growth of 37% to 42% over last year, and we expect to convert our adjusted EBITDA to free cash flow at a rate of around 60% for the full year, driven by our strong results as well as the investments we just discussed.
Operator, please open the line. | sees fiscal 2021 adjusted ebitda is expected to be in range of $495 to $515 million. | 1 |
Today's call will cover ITT's financial results for the three-month period ending October 2, which were announced yesterday evening.
These statements are not a guarantee of future performance or events and are based on management's current expectations.
Actual results may vary materially due to, among other items, the factors described in our 2020 annual report on Form 10-K and other recent SEC filings.
These adjusted results exclude certain nonoperating and nonrecurring items, including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.
I am very pleased with the results ITT delivered in the third quarter.
Once again, the resilience of our businesses and our teams has allowed ITT to execute for our customers in a tough macroeconomic environment.
As a result of the revenue growth, continued margin expansion and the effective deployment of the balance sheet, ITT delivered adjusted earnings per share of $0.99, growing 21% over the prior year.
During the quarter, it was paramount that we stay focused on execution while cultivating the significant growth opportunities ahead of us, and this is exactly what we did.
In the third quarter, I continued to work our shop floors around the world to ensure we are taking full advantage of our opportunities.
I'm encouraged by what I saw firsthand as we are not even close to being done improving our operational and business excellence.
I saw the engineering expertise and prowess on display at the Friction plant and innovation center in Barge, Italy.
The productivity and automation opportunities at our KONI plant in Oud-Beijerland, The Netherlands and the energized high-performing goods pumps team I reconnected with in Dammam, Saudi Arabia.
I was also fortunate to visit our industrial process team in Tizayuca, Mexico, where we have a good low-cost manufacturing setup poised for future growth.
And lastly, our Friction plant in Silao, Mexico is continuing to add new production lines to support the wins in EVs and share gains on conventional vehicle platforms.
There is a lot to be excited about at ITT.
Let's talk about some of the key highlights from ITT's third quarter.
We drove broad-based sales growth across all three segments and implemented strategic commercial actions to minimize the impact of rising inflation.
We drove incremental productivity in the quarter, roughly 280 basis points through a combination of shop floor and sourcing actions, and we continue to apply strict controls over our fixed costs as growth resumes.
We thought to overcome a year-over-year $0.23 or 370 basis point raw material headwind.
Our ITTers delivered 60 basis points of adjusted segment operating margin expansion, an exceptional result, considering the supply chain dynamics we see.
We generated organic orders growth of 27% with strong demand in Friction aftermarket, rail, connectors and industrial controls.
We also continued to grow nicely in IP short-cycle and projects.
Finally, we put our capital to work, repurchasing an additional $50 million of ITT shares to bring our year-to-date repurchases above $100 million, exceeding our repurchase commitment for the full year.
These accomplishments and the dedication of our ITTers drove adjusted earnings-per-share growth of over 20% compared to prior year and 2% above 2019 pre-pandemic levels.
Looking at the businesses.
Despite the supply chain disruption, the restricted auto production volumes, Friction OE continued to outperform, while also driving strong aftermarket growth.
We continue to win on both conventional OE vehicles and on new electric vehicle platforms, which will power future outperformance as they transition to hybrid and ultimately to full electric accelerate.
This quarter, we won content on six new electric vehicle platforms in China, the world's largest automotive market.
This year, we have been awarded content on 25 new EV platforms and our win rate is significantly above our current global OE share of over 25%.
Electrification will be MT's next springboard for long-term growth given our strategic focus on EV platforms.
In Connect & Control Technologies, we drove 17% organic sales growth with strong demand in North America distribution, especially in the industrial market.
This, coupled with progress on CCT's operations, generated 17% adjusted segment margin for the quarter, putting the business closer to pre-pandemic levels.
Lastly, we generated 8% organic revenue growth in industrial process, driven by short-cycle demand across parts, valves and service.
This is remarkable, given the supply chain difficulties we are experiencing.
We see positive signs in our weekly order rate.
And as you will hear shortly, continue to see sequential improvement and market share gains in the long-cycle project business, which is an encouraging sign for 2022 and beyond.
One of the most telling metrics for ITT this quarter was the 27% organic orders growth.
Our order levels again surpassed 2019, even with many of our key end markets still early in their recovery, like commercial aerospace.
In Industrial Process, we generated double-digit growth versus 2020 in short-cycle across baseline pumps, part and service.
Q3 was also the third consecutive quarter of sequential orders growth in projects with 36% organic order growth.
As a result, IP's backlog was up $28 million in the quarter.
In Connect & Control, orders grew over 40% organically, including an encouraging 70% orders growth in aerospace and the strong performance in North America distribution.
Finally, in Motion Technologies, we generated strong demand in the Friction aftermarket and in KONI/Axtone, which more than offset a slight decline in friction OE due to the chip shortage impact on our OEM customers.
Even with these challenges, MT grew over 20% organically versus 2020 and 4% above 2019.
And for the year, we now expect MT to deliver over $1.3 billion in revenue, comfortably above 2019.
As we head into the fourth quarter, we are not anticipating any improvement in the global supply chain or with raw material pricing.
With our teams executing relentlessly against these challenges, we are narrowing and raising our full year adjusted earnings per share outlook for 2021 at the midpoint to reflect the strong performance to date and our ability to execute.
We now expect adjusted earnings per share in the range of $4.01 to $4.06 at the high end, which equates to 25% to 27% growth versus prior year.
This is a $0.06 improvement at the midpoint after a $0.37 increase through the first half of the year.
This puts ITT on pace to comfortably surpass 2019 adjusted EPS.
In September, ITT released the second supplement to our 2019 sustainability report, demonstrating the company's progress on our environmental, social and governance practices.
We are continuing to integrate ESG in our business strategy and the day-to-day operations of over 10,000 ITTers.
Some highlights from the report to note: we drove a 25% reduction in greenhouse gas emissions, and a 23% reduction in waste sand to landfills, with 25% fewer workplace safety incidents.
We are expanding investments in guarantee of origin certificates throughout our European locations to increase ITT's share of electricity from renewable sources.
We are investing in more sustainable product technologies, especially in our pump business, building on the success we have achieved in MT's copper-free brake pads.
As we conduct our operating plan reviews for 2022, ESG continues to be a key element of the leadership team's mandate and there is much more for us to do.
Thus far, we have deployed capital in an amount nearly three times our year-to-date free cash flow across all our capital deployment priorities.
Our capex for the year is approximately 3% of revenue through the third quarter.
We've invested in capacity in our Friction plant to support the share gains achieved with new and existing customers as it relates to the accelerated transition to electric vehicles.
We also continue to execute value analysis, value engineering to reinvigorate our product offerings in Industrial Process and Connect & Control.
From the inception of this initiative in 2018, we have commercialized more than 100 different pump models, representing 23% of our total product portfolio.
In addition, we completed redesign for more than 30 additional pumps ahead of their commercial release.
We have only begun to scratch the surface with more than 70% of the product offerings still to be addressed.
As an example of this effort, following the success of our BB2 pumps, our year-to-date order growth for our recently redesigned magnetic drive pump is 40%.
The VA/VE announcements resulted in increased performance, better reliability and shorter lead times.
Regarding our other capital deployment priorities, we increased our dividend rate by 30% after 15% the year before.
This represents an annual dividend yield of approximately 1%.
Our share repurchases this quarter will drive a 1% reduction in our weighted average share count for the full year.
We will continue to drive repurchase activity in the future and our existing $500 million authorization.
And lastly, as we discussed last quarter, we divested our legacy asbestos liability to a portfolio company of Warburg Pincus.
This has reduced ITT's risk profile and allows us additional capital flexibility.
To accelerate our M&A activity, we're investing in our capabilities.
Bartek leads strategy development and will drive all merger and acquisition activities, including ITT's newly launched corporate venture vehicle.
On this front, we made one initial venture investment in Q3 for Connectors-related assets.
And we have a growing pipeline of leading technologies to enhance our existing product portfolio.
We have stepped up our M&A pipeline and cultivation activities and are looking forward to bringing great companies into ITT in the near future.
Emmanuel, over to you.
As you heard, Motion Technologies again delivered a solid performance, driven by strength in the Friction aftermarket.
In our OE business, Friction's market outperformance was over 1,000 basis points this quarter, significantly above our historical average despite large declines in global auto production levels.
For all of ITT, we estimate that the supply chain disruptions deducted approximately 350 basis points from our sales growth this quarter.
However, we expect to recover a majority of the pushed-out sales in the next few quarters.
We also saw double-digit organic sales growth in IP short-cycle and continued strong demand for industrial connectors.
And similar to what we saw in Q2, demand in commercial aerospace is increasing as exhibited by the 70% growth in aerospace orders.
On segment margin, CCT grew margin by 300 basis points and IP by 150 basis points, while MT declined 110 basis points, mainly due to raw material inflation.
We overcame a 470 basis point inflation headwind to drive 60 basis points of adjusted segment margin expansion.
On adjusted EPS, despite the challenges Luca highlighted in his introduction, we drove a $0.42 operational improvement year-over-year through a combination of higher sales volumes, strategic pricing actions and productivity across the enterprise.
We continue to realize benefits from prior restructuring, including our 2020 cost action plan, and we're carefully managing the unwinding of temporary cost actions taken in 2020 to ensure these costs align with the pace of ITT's recovery.
We achieved an adjusted trailing 12-month free cash flow margin of more than 11% this quarter, due to higher segment operating income.
On a year-to-date basis, excluding the asbestos payment in Q2, adjusted free cash flow declined by -- driven by strategic investments in working capital.
As I mentioned earlier, our performance this quarter was largely operationally driven.
Our year-over-year growth was significantly impacted by $0.23 headwind related to raw material inflation and a $0.09 headwind from prior year environmental settlements and temporary cost actions.
Partially offsetting these items was a roughly $0.04 benefit from foreign currency.
We also realized a slightly lower effective tax rate versus the prior year, which drove over a $0.02 benefit.
This was due to effective tax planning strategies related to our patent portfolio abroad.
We now expect our full year effective tax rate to be approximately 20.75%.
Motion Technologies Q3 organic revenue growth of 20% was primarily driven by strength in the aftermarket as the Friction OE business declined slightly given the supply chain headwinds affecting OEMs. This and the raw material inflation also impacted operating margin as we had signaled last year -- last quarter.
The Friction team is working diligently with our customers to drive equitable price recovery action, given the significant inflation we are seeing today.
We were able to pass price increases on to our customers this quarter and manage the impact of contractual price concessions.
However, there is much more to be done to compensate for the inflation we are experiencing.
Our Motion Technologies team will continue to methodically execute incremental pricing actions in Q4 and 2022.
We also experienced significant production inefficiencies resulting from large variations in customer orders patterns.
However, as with last quarter, our Friction OE business executed very well with over 99% on-time performance across all Friction plants.
In challenging economic conditions, Friction continues to be widely recognized as the quality -- as the highest quality and most reliable supplier in the market.
And in KONI, we continue to improve our quality performance and remain deeply focused on serving our customers amid supply chain disruptions.
Finally, we also continue to evaluate strategic footprint actions and announced one additional plant closure in Europe this quarter, which will drive further cost competitiveness within our rail business.
For Industrial Process, revenue was up 8% organically.
This was driven primarily by short-cycle demand across parts, valves and service.
Serving our customers this quarter require tremendous focus, coordination and effort by the IP team to overcome supply chain disruptions.
Our all-hands-on-deck approach made this happen.
As we signaled last quarter, we see the project funnel continuing to grow and IP was able to capture a significant share as evidenced by the 36% organic order growth in project this quarter.
We see this constructive momentum continuing and expect to deliver similar year-over-year growth in Q4.
IP margin expanded 150 basis points to 15.6% with an incremental margin of 33%, this was driven by higher sales volume, favorable mix, given the higher proportion of short-cycle sales, productivity and price, partially offset by labor and material inflation as well as higher freight charges given shipping delays.
Similar to MT, we're making progress on footprint optimization and have executed one plant closure during the quarter with another plant in Brazil in Q4.
In Connect & Control Technologies, we continued to drive a recovery from both the sales and margin perspective.
With incremental margin of 35%, CCT generated segment margin above 17%.
This is a 300 basis point improvement over prior year.
The margin expansion was the result of continued volume leverage and strong productivity, including restructuring savings, despite inflationary headwinds.
This margin profile is approaching pre-pandemic levels, but with approximately $20 million less in revenue.
While there is much work to be done to further solidify this performance, we are very encouraged by the work the team has done thus far and it gives us confidence in the future prospects at CCT.
As you can see, our teams have done a good job capturing the demand, leading to solid order growth in Q2 and Q3.
A few highlights to note.
It is important to note that our ability to win a majority of the EV competitions that we bid on is key to creating the long-term growth platform that Luca talked about.
Second, in Industrial Process, the strength we anticipated in short cycle is materializing.
But even more encouraging is the order growth and continuing recovery in long cycle pump projects.
Both the number and the size of orders in the funnel is increasing, and we have seen a steady sequential order increase throughout 2021.
This is the result of our relentless focus on customer centricity and operational excellence, which is increasingly recognized by our OE customers.
Third, CCT orders were up 40% organically in -- on the strength of our connector portfolio, particularly in North America.
The commercial connector performance, especially with our distribution partners is encouraging, and we're working to replicate the strong momentum across all our customers.
We also continue to see a gradual recovery in commercial aerospace, which will further bolster the sales growth in CCT over the next several years.
CCT backlog is up 17% organically or $40 million since year-end with a book-to-bill of 1.06.
This is a notable improvement for CCT since this time last quarter.
Through two quarters we had raised our organic sales outlook by 600 basis points and adjusted earnings per share by $0.37 versus the midpoint of our original guidance.
Given our strong performance, today, we are again raising the midpoint of our adjusted earnings per share range by an additional $0.06 to reflect the stronger-than-anticipated results and lower tax rate.
We're not anticipating any improvement in the market headwinds in the near term.
Nevertheless, in 2021, we expect to comfortably exceed pre-pandemic adjusted earnings per share levels.
IP will grow revenue in the low single-digit range, while CCT will drive mid-teen percent revenue growth.
Facing a tough comparison after a strong Q4 last year and the continued impact from constrained OEM demand, MT revenue will decline by mid-single digits in Q4.
However, we expect to largely outperform the global auto market.
In total, this will drive approximately flat to slightly up organic revenue growth in Q4.
From a segment margin standpoint, we expect all businesses to expand sequentially with CCT growing triple digits and IP building on its strong Q3 performance.
Year-over-year we expect segment margin to grow approximately 50 to 75 basis points.
Because of an exceptionally strong Q4 last year, Q4 adjusted earnings per share will grow in the low single-digit range year-over-year, and this will drive full year adjusted earnings per share above 2019.
With that, let me pass it back to Luca.
Let me wrap it up.
First, ITT has performed extremely well in a challenging climate.
We fought through adversity, and we're winning in the market.
Second, we have a resilient set of businesses that have demonstrated over and over again the ability to effectively manage multiple external factors while investing in long-term growth.
We delivered strong growth in revenue and margin, while not all of our markets have fully recovered yet.
Third, while we are continuing to invest for long-term growth and sustainability, our funnel of opportunities is increasing, and the growth in orders throughout 2021 will pave the way for continued outperformance.
Lastly, we have deployed over 2.8 times our year-to-date adjusted free cash flow through our asbestos divestiture, dividends and share repurchases.
And we are increasing our focus on M&A, we are in a favorable position to execute acquisitions given our balance sheet strength, and we are growing our pipeline and expanding our target cultivation activity.
As I said earlier, there is a lot to be excited about at ITT. | q3 adjusted earnings per share $0.99.
sees fy revenue up 11 to 13 percent.
raised its full-year 2021 guidance.
expect full-year 2021 adjusted earnings per share of $4.01 to $4.06 per share. | 1 |
Here is the agenda for today, Eric will begin by reviewing the highlights of the quarter, then Jim will give a brief review of operations.
Nathan will go into a more detailed review of the numbers, and then I will have a short wrap up before we open it to questions.
As part of an essential industry, we had to jump through many hoops to stay operational so that people could come to work safely and I'm just so appreciative of everyone whose dedication, intelligence and skills lead us through this unprecedented experience.
These folks are the true heroes.
Okay, so on to business.
As mentioned on our last call, we came out of the second quarter experiencing strong demand and I'm pleased to say that the trend continued throughout the third quarter.
Let me discuss each of the divisions separately, starting with Engine Management.
Engine Management sales were up 6.7% for the quarter, clawing back about a third of our sales shortfall in the first half.
Consumer demand has been robust, which we believe reflects the deferred maintenance from the early days of the pandemic when costs were idled in driveways, but we're also experiencing a general surge in the aftermarket, the result of people staying at home and working on their vehicles.
And we believe this has especially impacted the DIY segment.
Good evidence of this is a strong performance of our wire and cable business.
It fits older vehicles and is relatively easy to install which are two hallmarks of DIY business, and while this line has recently been trending down 7% or so per year due to varied [Indecipherable] in lifecycle, it spiked up 10% in the quarter, which we have to assume is a temporary phenomenon.
Customer orders for all of Engine Management have been consistently solid and this has continued into October.
That said, our forecast remains low single-digit growth over the long term.
Our Temperature Control Division was up 25% in the quarter driven by two dynamics.
The first was related to timing.
If you recall, pre-season orders from our last, from our customers were very light this year.
In fact, our first half was down almost 20%.
And then it got hard out creating a surge in demand across the country.
These two factors combined for a very strong quarter, though year-to-date we are slightly behind last year.
This is why we always suggest looking at Temperature Control on a full year basis.
There are often quarterly anomalies but they typically balance themselves out.
We are pleased to report that the quarter set an all-time record for SMP.
Jim and Nathan will provide some detail on the drivers, so I just want to take a moment to speak to COVID-related savings.
As we have mentioned in the past, we put in place short-term cost reduction measures ratcheting back various discretionary expenses as well as cutting Executive and Board compensation.
We do plan to assess what we've learned and identify areas where we believe the savings can be sustained, however, we do recognize that many of these reductions will in fact be temporary.
We had also taken steps to conserve cash including suspensions of both our quarterly dividends and our share repurchase plan and we are pleased to reinstate both of these programs as they are core aspects of how we return value to our shareholders.
So in summary, needless to say, it's been a roller coaster of a year.
After a mediocre first quarter and a truly difficult second quarter, we were able to make up much of the lost grounds with a very strong third quarter.
We always experienced a certain amount of volatility period to period, and while this year, it has been substantially more exaggerated, it does show that our business tends to balance over time, and we do expect that to continue going forward.
Before I hand this off, I would just like to make a few comments about the future.
First, we were delighted, but not surprised to see our industry once again show its resilience.
The basic fundamentals are solid and there are many favorable trends taking us forward.
And while the crisis is certainly not over, we are confident that we are smarter now than we were before, our team were stronger as a result of managing our way through it and we are well equipped to tackle whatever is thrown at us.
With that, I'll hand it over to Jim who will talk about our operations.
I will provide an overview of our business from an operational perspective.
I plan to touch on the basics from supply chain manufacturing through distribution.
As we have all experienced, the past six months to seven months has been challenging and demanding.
Our baseline was a 40% decrease in volume in April.
This was followed by a relatively quick rebound in customer POS numbers in May and June that turned into increased orders to us in June and July.
This momentum increased as we progressed through Q3 and remained steady.
From a supply chain view, this meant working feverishly with our vendors to be able to meet our materials demand.
Overall, with a few exceptions, our vendors and supply team have been able to keep supply flowing to our factories.
Turning to our manufacturing base, we face surging demand with a significant mix shift toward older technology SKUs, driven by our customer sales in the DIY channel.
Early in the third quarter, we were hampered with a shortage of available labor, a combination of higher demand and the COVID impact with high risk employees out and disruptions from contact tracing.
I'm happy to report that we have been able to secure additional manpower along with the return of our high-risk employees.
What is the result of the surge in demand?
Production levels are significantly up in all our manufacturing facilities, generating favorable overhead absorption, which can be seen in our very strong Q3 gross margins.
Engine Management was 31.5% and Temperature Control was 29.2%.
These higher margins were generated from the surge in production volume, which we expect to level off.
While this favorable momentum should carry into Q4, we expect sales and production to return to normal in 2021.
Our longer-term gross margin targets would be Engine Management, 30% plus and Temperature Control 26% plus.
We are fortunate to have a substantial manufacturing footprint in North America, including three low cost operations in Mexico, reducing our China exposure.
I will also note on occasion, we have transferred production back to the U.S., the benefit of automating previous manual assembly processes.
Quickly looking around the globe, our Poland operations, which is our coil manufacturing center of excellence, along with other switches and sensors has steadily grown in size and value.
Over the past year, we have approved the added capacity for Poland to meet our increasing ignition coil demand.
Our three China joint ventures, all in the Temperature Control product categories recovered very early from the pandemic at the start of the year.
All three JVs provide us a steady source of supply, whereby we can control costs, quality and lead times.
Finally, our North American distribution centers are our last touch point with our products.
Our Q3 surge in demand present the challenges for our DC shipping performance.
Similar to our manufacturing operations, we experienced the shortage of available labor to meet demand.
The impact from this was slower turnaround time in our DCs to ship orders.
During this period, our DCs were working six and seven days per week to keep up.
Tremendous efforts were put forward by our DC employees to satisfy our customer needs.
We have made great strides securing additional head count and I'm happy to report that we are covering [Phonetic] again and meeting our shipping turnaround goals.
In summary, we are very fortunate to be a resilient industry that bounced back so quickly.
Unfortunately, this is not the same for many other industries that have suffered dearly.
I commend our frontline heroes that were on the job, six and seven days per week to satisfy the customer.
Customer satisfaction is ingrained in our SMP culture and we just do it.
Looking now at the results in the P&L, our consolidated net sales in Q3 2020 were $343.6 million, up $35.9 million or 11.7% versus Q3 last year.
Our net sales for the first nine months of the year were $845.9 million, down $50.8 million or 5.7%.
By segment, our Engine Management net sales in Q3 excluding wire and cable sales were $190.9 million, up $10.1 million or 5.6%.
But for the first nine months of the year were down $40.5 million or 5.7%, finishing at $498.2 million.
The increase in sales during the quarter we believe was due to pent-up demand from earlier in the year and strong customer POS.
But looking in total at the first nine months, the quarter increase only partially offset the declines we saw earlier in the year related to the economic slowdown caused by the pandemic.
Wire and cable net sales in Q3 were $38.7 million, up $3.5 million or 10% and for the first nine months were $105.6 million down $2.9 million or 2.6%.
While the wire and cable business continues to be in secular decline and we still believe it will decline 6% to 8% on an annual basis, sales this year have been positively impacted by an increase in DIY sales as consumer stayed at home during the pandemic.
Our Temperature Control net sales in Q3 2020 were $110.4 million, up $22.1 million or 25%.
However, for the first nine months, sales were down $7.4 million or 3.1% versus last year, ending at $234.2 million.
As Eric noted, Temp Control net sales in the quarter were driven by a very hot summer across most of the U.S. aided by very light pre-season ordering earlier in the year.
Net sales on a year-to-date basis in this segment are more in step with last year, down slightly from the first nine months of 2019.
Our consolidated gross margin in Q3 2020 was 31.4% versus 29.9% last year, up 1.5 points, for the first [Technical Issues] 28.7% [Phonetic] [Indecipherable] versus 28.9% last year, down 0.2 points.
Looking at the segments, Engine Management gross margin in the third quarter was 31.5%, up 0.8 points from Q3 last year, while for the first nine months of 2020, it was down 0.3 points to 29%.
Temperature Control gross margin in Q3 2020 was 29.2% up 3.2 points from 26% last year and for the first nine months, it was up 0.5 points to 26%.
Margins for the quarter reflect the strong sales volumes we experienced in both segments and the positive impact of high fixed cost absorption, resulting from the compression of production into just a few short months as Jim alluded to earlier.
On a year-to-date basis, gross margin in both segments, more closely aligned with long-term trends as Engine Management margins are really flat with last year and Temp Control margins ended just slightly ahead of the prior year.
Consolidated SG&A expenses in Q3 were $59.5 million, down $0.4 million in Q3 '19 and came in at 17.3% of sales versus 19.5% last year.
For the first nine months, SG&A spending was $163.7 million, down $16.8 million at 19.4% of net sales versus 20.1% last year.
While our SG&A expenses in the quarter were roughly flat with last year, the improvement as a percentage of sales is reflective of the higher sales volumes we experienced this year.
Lower SG&A expenses in the first nine months were helped by cost reduction plans put in place as a response to the impact of the pandemic and overall better leverage of expenses as a percentage of sales.
Our consolidated operating income before restructuring and integration expenses and other income net in Q3 of '20 was $48.3 million or 14% of net sales, up 3.6 points from Q3 '19 and for the first nine months was 9.3% of net sales, up 0.5 points from last year.
As we note on our GAAP to non-GAAP reconciliation of operating income, our performance resulted in third quarter 2020 diluted earnings per share of $1.59 versus $1.02 last year and for the first nine months, diluted earnings per share of $2.53 versus $2.51 in 2019.
The increase in our operating profit for the quarter was mainly due to higher sales volumes, while the increase for the first nine months, primarily reflects lower SG&A expenses across the Company which slightly more than offset the impact of lower sales volumes.
Turning now to the balance sheet, accounts receivable at the end of the quarter were $238 million up $102.5 million from December 2019 and up $69 million from September 2019.
The increase over year-end reflects seasonal patterns in our business while the increase over last year reflects the strong sales we experienced in the third quarter as well as the timing of this in the quarter as compared to last year.
Inventory levels finished the quarter at $311.4 million, down $56.8 million from December 2019 and down $28.8 million from September 2019.
The decrease from both year-end and September last year mainly reflects the sharp recovery in sales we experienced in the third quarter, after having lower production levels earlier in the year in response to general expectations of slowdown in sales.
Looking at the cash flow statement, it reflects [Phonetic] the cash generated from operations in the first nine months of 2020 of $78.6 million as compared to a generation of $43.1 million last year.
The increased cash generation during the first nine months of this year was driven mainly by timing, both of movements in inventory and accrued customer returns and offset by an increase in accounts receivables stemming from strong sales during the quarter.
We expect this timing around cash flows to normalize as sales and production levels stabilize.
During the first nine months, we continue to invest in our business and use $13.2 million of cash for capital expenditures, which was higher than the $12.3 million used in the first nine months of 2019.
Financing activities included $5.6 million of dividends paid and $8.7 million of repurchases of our common stock, both of which occurred during the first quarter.
Financing activities also included $44.9 million of payments on a revolving credit facility.
We finished the third quarter with total outstanding borrowings of $12 million and available capacity under our revolving credit facility of $238 million.
Larry, you're on mute.
As you saw in the release, come January 1st, I'm going to be moving from Executive Chairman to Chairman of the Board and this reflects the fact that I'll be stepping back a bit from day to day activities, but I'll still remain closely connected to the Company as Chairman of the Board.
I believe this is an appropriate and a proper move after 53 glorious years, where I had the privilege of being part of the Company's growth from roughly $20 million in our core business when I began to well over a $1 billion today.
And we still have many plans for future growth.
I'm confident it's going to be a very seamless transition as all our major moves have been.
We have in place, what I believe is the strongest and deepest management team I can remember who proved themselves on how well we performed during this very difficult year.
So I am very confident about the future. | q2 sales $342.1 million versus $247.9 million. | 0 |
Mark will review our fourth-quarter and full year performance and provide our outlook for 2021 in the first quarter.
Andrew will provide an overview of select financial items.
Information presented represents our best judgment based on today's understanding.
Actual results may vary based upon these risks and uncertainties.
Today's discussion and the supporting materials will include references to adjusted earnings per share adjusted EBITDA, adjusted cash from operations, free cash flow and organic revenue growth, all of which are non-GAAP financial measures.
Please note that as used in today's discussion, earnings means adjusted earnings, and EBITDA means adjusted EBITDA.
A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website.
Let me start by saying the fourth-quarter was an unusually difficult one for our company and we are disappointed in our earnings results.
We exceeded the midpoint of our guidance on earnings per share and EBITDA for a long stretch of quarters principally because of the strength of our portfolio and our geographic balance, combined with strong execution in the face of extreme weather events and significant industry specific supply chain disruptions.
This quarter was an anomaly and we will be as transparent as always to explain what happened.
We experienced significant logistics and supply chain constraints in the US; reduced demand in the US on some lower value herbicides, lower demand in Brazil and Argentina following the drought related delay to the start of the season, and products that were held up in Argentina customs.
On the positive side, we saw strong growth in EMEA, and once again, broad growth in Asia.
We had a very strong quarter from a cash flow perspective, which led to full year free cash flow of $544 million, an 80% increase over 2019.
We also posted very solid 2020 overall results.
Despite numerous challenges related to the COVID-19 pandemic and $280 million in revenue headwinds from foreign currencies.
Our organic revenue growth of 7% and our 2% EBITDA growth shows how aggressively we manage costs and implemented price increases to offset as much of that FX headwind as possible.
The guidance for Q reflects our view of the environment in Brazil, as well as continued logistics and supply chain disruptions occurring around the world.
We believe these COVID impacts are perhaps severe as at any point over the last year.
In addition, our very strong Q1 2020 makes this quarter year-over-year comparison a particularly difficult one.
All of FMC's manufacturing facilities and distribution warehouses remain operational and fully staffed despite the ongoing pandemic.
However, one of our US toll manufacturers was disrupted in Q4 because of COVID related staffing issues, illustrating just one of the ongoing business risks during the pandemic.
We successfully completed the implementation of our new SAP system in November.
We now have a single modern system across the entire company for the first time in our history, which is enabling significant efficiencies in our back office processes.
And finally, we gave a thorough technology update to investors on November 17, highlighting the increasingly positive impact new synthetic and biological active ingredients will have on our business over the next decade and the ways in which we are driving to be the leader in crop protection innovation.
We plan to launch seven new active ingredients and four new biologicals this decade, which we expect will contribute a combined $1.8 to $2.1 billion in Incremental sales by 2013.
We recently announced a new collaboration with Novozymes, a world leader in enzyme discovery and production to research, co-develop and commercialize biological enzyme based crop solutions for growers around the world.
This adds to research collaborations and partnerships signed in 2020 with Zymergen and Cyclica and continues our trend of investing in new and innovative technologies that will enhance our long-term competitiveness.
Turning to our Q4 results on Slide 3.
We reported $1.15 billion in fourth-quarter revenue, which reflects a 4% decrease on a reported basis and 2% organic growth.
Despite those headwinds we posted double-digit sales growth in Asia, led by India, China, Japan and Australia, and in EMEA, with double-digit growth across a broad set of countries.
Adjusted EBITDA was $290 million, a decrease of 9% compared to the prior year period.
EBITDA margins were 25.2%, a decrease of 150 basis points compared to the prior year.
Adjusted earnings were $1.42 per diluted share in the quarter, a decrease of 19% versus Q4 2019.
This year-over-year decline was primarily driven by the decrease in EBITDA, an increase in tax rate compared to the very low tax rate in Q4 2019, and slightly higher D&A, partially offset by lower interest expense and lower non-controlling interests.
Moving now to Slide 4.
Q4 revenue decreased by 4% versus prior year, driven by a 5% FX headwind and a 3% volume decrease.
Price increases contributed a positive 4% impact, and offset 80% of the FX headwind, the highest in the past few quarters to deliver a positive 2% organic growth.
Volume growth in EMEA and Asia was more than offset by weakness in North America and Latin America.
Sales in EMEA increased 45% year-over-year and 42% organically.
We saw a particularly strong demand for our insect control applications for specialty crops as well as herbicides for cereals, especially in France, Spain, Russia and Germany.
We also had significant growth in the UK as customers secured orders in advance of Brexit.
In Asia, revenue increased 11% year-over-year, driven by broad volume growth in India, China, Japan and Australia.
India saw strong demand in rice and pulses in the south, and in sugarcane in the north, in addition to the growth from our recent market access expansion activities.
Last earnings call, we highlighted India as a key pillar of growth in Asia.
And the strength we saw in Q4, exemplifies this potential, with India growing over 20% organically in the quarter.
China so robust demand for diamide insecticides and fungicides on fruit and vegetables.
Growth in Australia was driven by demand in herbicides for cereals and oilseeds, while Japan's strength came from a variety of insecticides.
Moving now to Latin America.
Sales decreased 9% year-over-year, but grew 4% excluding significant FX headwinds.
Pricing actions across the region offset about 50% of the currency headwind at the earnings level in Q4, substantially more than in the prior 2 quarters.
The Brazil season was delayed by at least 30 days due to hot dry weather and this delay meant many numerous crops missed applications that will not return.
The drought persisted throughout Q4 resulting in lower than expected decline [Phonetic] across many crops, and it also impacted Argentina and other countries in the region.
For Latin America, overall we estimated the drought reduced sales by about $30 million.
In Argentina, we also had about $10 million of product held in bonded warehouses that was not released by customs officials in a timely manner.
Although these factors reduced Q4 growth in Argentina, 2020 was still our best year ever for the country.
In North America, sales decreased 34% year-over-year, roughly $40 million of this decline was due to supply chain disruptions, including COVID related factors associated with logistics and a toll manufacturing partner, impacting our ability to meet demand late in December.
An additional $30 million of the decrease was due to reduced volume and some lower value pre-emergent herbicides.
Our new herbicides such as Authority Edge, Authority Supreme and Anthem Maxx continue to add value and grow wealth.
We should also note, our biologicals business had a very strong Q4, with sales up in all regions by at least a high-teens percentage, including very strong sales of Quartzo in Brazil and successful launches of Accudo in EMEA and asset plan [Phonetic] and [Indecipherable] in South Korea.
Turning now to the fourth-quarter EBITDA bridge on Slide 5.
We had a $50 million contribution from higher pricing, which was nearly double what we realized in Q3.
We also aggressively managed costs to offset nearly all the $30 million year-over-year headwind we had anticipated.
However, the FX headwinds were more severe than expected and the late volume mixes in North America and Latin America were too large to overcome.
Moving to Slide 6 for a review of our full year results.
We reported $4.64 billion in revenue, which reflects a 1% increase on a reported basis and a 7% organic growth rate.
Adjusted EBITDA was $1.25 billion, an increase of 2% compared to 2019 even with nearly $270 million in headwinds from FX.
EBITDA margins were 26.9%, an increase of 40 basis points compared to the prior year.
2020 Adjusted Earnings was $6.19 per diluted share, an increase of 2% versus 2019.
This increase was driven by the increase in EBITDA as well as lower interest expense and lower share count, offset partially by a higher tax rate compared to the very low tax rate in the prior year and higher D&A.
Turning to Slide 7 for some of the drivers behind the full-year revenue growth.
Overall volume contributed 4% to revenue growth while price increased sales by 3%.
About $50 million of the 2020 revenue growth came from product launches within the year.
In Asia, sales increased 6% year-over-year and 9% organically, market expansion and share gains in India, coupled with a very strong market rebound in Australia were the primary drivers.
Our diamides were in high demand throughout the region in 2020 as we continue to grow in specialty crops such as rice and fruits and vegetables.
Sales in EMEA grew 4% versus in 2019% and 6% organically.
Demand was driven by diamides on specialty crops Battle Delta herbicide on cereals and Spotlight Plus herbicide on potatoes.
Latin America posted a 1% year-over-year revenue growth but high single-digit volume growth and solid price increases led to 17% organic growth.
Brazil had robust demand for our products for soybeans and sugarcane while there was reduced demand acreage for cotton.
North America sales decreased 8% as we had channeled destocking in the first half and then a tough Q4 as described earlier.
Of note, the Lucento fungicide launch had a strong second year and Elevest insect control had a good launch year.
Moving to Slide 8 where you can see our full-year EBITDA bridge.
Volume contributed 9% of the growth, while the combination of stringent cost controls and price increases offset 70% of the impact of foreign currencies.
Turning now to Slide 9 and I look at the overall market conditions for 2021.
We expect the global crop protection market will be up low-single digits on a US dollars basis.
Commodity prices for many of the major crops are higher and stock to use ratios have improved compared to this time last year.
All regions are seeing some benefit from better crop commodity prices, while the impacts from COVID on crop demand appear to be lessening.
Growth in Asia is expected to be in the low to mid single digits, driven by India, Australia and ASEAN.
Favorable weather should contribute in many countries.
The weather related recovery in Australia is expected to continue the other three regions are each projected to grow in the low single digits.
Growth in the Latin American market will be strengthened by price recovery from FX headwinds from 2020 in Brazil, continued strength in the soybean market, an increase of fruit and vegetable exports from Mexico and more normal weather patterns that are forecasted across the region.
In the EMEA market, we are seeing a solid market for cereals and specialty crops, which should be helped by improved weather in several parts of the region.
The market in North America is projected to have a firm foundation from crop commodity prices, but we are seeing a trend of distributors and retailers looking to strategically reduce their own inventory levels.
The specialty crop market is stable, but the most significant change in demand will depend on the pace of the economic recovery.
Taking all the above into consideration, we view 2021 as a more positive Ag macro environment than we did this time last year.
Having said that, we are all too well aware of the potential disruptions that COVID and the whether can cause in any one quarter.
Turning to Slide 10 and the review of FMC's full-year 2021 and Q1 earnings outlook.
FMC full-year 2020 earnings are now expected to be in the range of $6.65 to $7.35 per diluted share, a year-over-year increase of 13% at the midpoint.
Consistent with past practice, we do not factor in any benefit from planned share repurchases in our earnings per share estimates.
2021 revenue is forecasted to be in the range of $4.9 to $5.1 billion, an increase of 8% at the midpoint versus 2020%, and 9% organic growth.
We believe the strength of our portfolio will allow us to deliver this organic growth, continuing a multi-year trend of above market performance.
EBITDA is expected to be in the range of $1.32 billion to $1.42 billion, which represents a 10% year-over-year growth at the midpoint.
Guidance for Q1 implies year-over-year sales contraction of 7% at the midpoint on a reported basis and 5% organically.
We are forecasting an EBITDA decline of 15% at the midpoint versus Q1 2020, and earnings per share is forecasted to be down 18% year-over-year.
Turning to Slide 11 and full-year EBITDA and revenue drivers.
Revenue is expected to benefit from 7% volume growth with the largest growth in Asia and a 2% contribution from higher prices.
FX is forecasted to be a 1% top line headwind.
We are expecting broad growth across all regions, Asia has the best overall fundamentals.
But we're also seeing the benefit of better weather in Europe, strong soybean outlook for both Latin America and North America, and a cotton recovery in Brazil next fall.
Because of these factors, we are expecting a very strong second half of 2020, 2021 relative to the first half.
New products such as Overwatch herbicide in Australia based on our Isoflex active and Xyway fungicide in the US are expected to make meaningful contributions.
And we are also launching Fluindapyr fungicide in the US for non-crop applications.
We are focusing a strong year for each of our product areas.
In addition to continuing strength of Rynaxypyr and Cyazypyr insect controls, insecticides growth is also expected to come from products such as Talisman, Hero and Avatar.
Herbicides should see growth in several of our top brands including Authority, Gamit, Reata [Phonetic] and Spotlight Plus, in addition to the Overwatch launch.
And growth in fungicides is forecasted to be driven primarily by the Xyway launch in the US.
Our EBITDA guidance reflects strong volume and pricing benefits, offset partially by increases in R&D spending as well as the reversal of some of the temporary cost savings from 2020.
We are forecasting a $40 million increase in R&D to bring us to a level of funding that keeps all projects on a critical path to commercialization.
Additionally, we're making growth investments in our farm intelligence and the precision Ag initiatives, new product launches like Overwatch, as well as FMC Ventures.
We are also expecting some supply chain cost increases including logistics and pockets of raw materials.
These headwinds will be partially offset other realization of the final $15 million of SAP synergies which will give us a cumulative SAP synergies of approximately $65 million.
Moving to Slide 12 where you see the Q1 drivers.
On the revenue line, volume is expected to drive a 6% decline, while a 1% contribution from higher prices largely offset the FX headwind.
We expect the benefit of approximately $25 million in sales from Q4, supply and logistics delays to be captured in Q1.
This is about half of the Q4 impact.
In the US, this miss timing limits what we can recoup.
And in Argentina, ongoing customers delays and release in products could cause us to miss application windows.
There are several headwinds in Q1 revenue that more than offset the flow through from Q4.
First, we are facing a particularly difficult comparison in Latin America where sales increased 26% year-over-year and 38% organically in Q1 2020.
Brazil's cotton business is very strong for as a year ago, this will not be repeated this season as cotton acreage is down 15%.
In EMEA, we are facing continued headwinds from discontinued registrations, and the $15 million in Q4 sales related to Brexit that would normally have been sold in the first quarter.
Regarding EBITDA drivers reduced volume is the biggest factor.
While pricing is forecast to offset the FX headwind, costs are expected to be higher by $12 million, driven primarily by the increased R&D investments, we mentioned earlier.
FX was a 5% headwind to revenue in the quarter, as expected, with the impact of higher than anticipated local currency denominated sales in Brazil, offset in part by a modest tailwind in the Eurozone.
For full year 2020 FX was a 6% headwind to revenue.
The Brazilian Real represented by vast majority of the FX headwinds in 2020 followed by the Indian rupee, Pakistan rupee and a broad number of non-euro currencies in EMEA.
Pricing actions offset slightly half of the currency headwinds in the year.
Looking ahead to 2021, we expect a more stable FX environment with only a slight headwind to revenue [Phonetic].
We will continue to take pricing actions in Brazil to recover the FX impact from 2020.
But overall pricing will be somewhat dampened by price volume choices being made in our Asia business to drive higher growth.
Interest expense for the fourth-quarter was $34.2 million dollars, down $8.7 million from the prior year period, benefiting from lower debt balances and lower LIBOR rates.
Interest expense for full year 2020 was down $7.3 million from the prior year with the benefit of lower interest rates, partially offset by changes in debt outstanding.
Our effective tax rate on adjusted earnings for 2020 was 13.7%, well within our expectations and up from the very low 2019 rate due to shifts in the geographic mix of taxable earnings and inter-related impacts on the US minimum tax and [Indecipherable].
The tax rate in the fourth-quarter was 14.4% to true up with the full year actual rate.
Tax was a headwind to earnings in the quarter due to the very low tax rate in the prior year period.
We expect our effective tax rate to be in the range of 12.5% to 14.5% in 2021 similar to 2020.
Moving next to the balance sheet and liquidity.
Gross debt at year-end was $3.3 billion, essentially flat with the prior quarter with nearly $600 million of cash on hand.
We chose to hold cash on the balance sheet in advance of the seasonal working capital build we see in the first quarter to avoid having to take on as much commercial paper in the beginning of the new year.
As such, gross debt to trailing 12 month EBITDA was 2.6 times at the end of the year, while net debt to EBITDA was 2.3 times.
We are in the right leverage range given the excess cash at year-end.
We do not expect to carry this level of cash on a steady state basis going forward, so you should expect cash balances to decline through the coming year.
Moving to Slide 13 and a look at 2020 cash flow and the outlook for 2021.
Free cash flow for 2020 was $544 million with free cash flow conversion from adjusted earnings at 67%.
Both metrics up 80% percent from the prior year period.
Adjusted cash from operations increased by about $170 million in 2020 with growth in working capital, more than offset by lower non-working capital factors and increased EBITDA.
Capital additions were down $60 million due to project delays and deferrals related to COVID-19 pandemic.
Legacy and transformation spending was down $14 million with relatively stable legacy spending and transformation spending lower as we completed our SAP implementation.
We anticipate full year 2021 free cash flow to be in the range of $530 to $620 million, an increase of 6% at the midpoint, with free cash flow conversion 63% at the midpoint.
Growth in adjusted cash from operations and reduced legacy and transformation spending are expected to be partially offset by a significant year-over-year increase in capital additions.
This increase in capital additions comes as we catch up on projects that were delayed or deferred in 2020 due to the pandemic.
Turning to Slide 14, we are pleased with our strong free cash flow growth and improvement in free cash conversion.
There are a number of moving parts in our 2020 cash flow results and 2020 outlook that merits some further discussion and will help better explain this trajectory.
2020 free cash flow benefited from a planned real estate asset sale that will not repeat as well as the un-forecasted delay of a lump sum environmental liability payment we had expected to be paid in December.
Excluding these impacts, 2020 free cash flow would have been about $500 million, in cash conversion about 62%.
Similarly, 2021 free cash flow was negatively impacted by the timing shift of the environmental liability payment.
Adjusting for this timing shift, 2021 free cash flow would be about $600 million, in cash conversion 65%.
So, on a more comparable basis, free cash conversion steps up from 38% in 2019 to 62% in 2020, and 65% in 2021, getting closer to our 70 to 80% target range for 2023.
I know that this view [Phonetic] of cash flow, we've not made any adjustments for the abnormally low capital additions in 2020 or the catch up to a more normal level in 2021.
But this shift, is in large part, the reason why cash conversion steps up more slowly in 2021, as the increase in capital additions largely offsets the step down and transformation cash spending from the completion of the SAP program.
You should expect the capital additions to continue in a similar range to 2021 for the next several years to support our organic growth, including new capacity that support new active ingredient introductions.
Equally as important as growing our free cash flow is the discipline with which we deploy it.
As you can see on Slide 15, we continue our balanced approach to cash deployment.
We are fully funding our organic growth in making modest inorganic investments to enhance our growth.
We are then returning the excess cash to shareholders through dividends and share repurchases, while keeping debt at our targeted leverage levels.
In 2020, we deployed nearly $350 million of cash flow, while maintaining excess liquidity throughout the pandemic.
We deployed $65 million to acquire the remaining rights to the fungicide [Indecipherable].
We paid nearly $230 million in dividends and we repurchased $50 million in FMC shares in the fourth-quarter.
In 2021, we expect to accelerate cash deployment.
We are planning to repurchase between $400 and $500 million worth of FMC shares in the year with purchases in every quarter of the year, though more heavily weighted to the second half.
We expect to pay dividends approaching $250 million and we will continue to look for attractive opportunities to make additional modest inorganic investments to complement our organic growth and expand our technological capabilities.
I'd like to close with a final update on our SAP S/4HANA ERP system implementation.
We had a successful last go-live in November and are now operating on a single thoroughly modern system across the entire company for the first time in our history.
The go-live went better than expected and we have smoothly transitioned to operating the company in closing the books in the new system.
Our new SAP system has enabled significant efficiencies in our back office processes.
We captured over $50 million in synergies in 2020 having moved aggressively to accelerate $30 million in planned savings from 2021 to 2020.
We now expect to deliver $15 million in SAP enabled synergies in 2021, the benefit of which is reflected in our full year guidance for a total of $65 million in synergies from implementing the new system.
There will certainly be additional efficiency gains in 2022 and beyond as we further leverage this generational investments in our business process infrastructure, but we will drive them as part of our business as usual efforts to gain leverage on back office costs as we continue to grow the company.
We had a number of issues in late Q4 that we're having to address.
We do not expect all of them to results in Q1.
We do however see these issues as transitory and are focused on ensuring we can mitigate supply chain risks and continue to expand our market growth opportunities.
As you can see from our robust 2021 guidance, we are confident that 2021 will be another year of strong revenue and earnings growth for FMC.
We continue to renew our portfolio launching two new important products in Q1, we continue to invest in our R&D pipeline, and we remain fully committed to bringing new sustainable technologies to our customers.
Our overall agenda on sustainability continues to advance, with the recent appointment of our first Chief Sustainability Officer and through new partnerships like the one we recently announced with Novozymes.
We plan to return about $700 million to shareholders this year through dividends and buybacks.
And finally, with our 2021 growth rates above the long-range plan, we remain firmly on track to deliver our five-year plan commitments.
I very much appreciate his leadership and look forward to his continued involvement as non-Executive Chairman. | 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. | 1 |
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, we request that you ask one question, followed by one follow-up question, after your follow-up question, please return to the queue.
We had another period of strong financial results in the third quarter, with earnings of $1.1 billion after-tax or $3.54 per share.
In many respects, these results reflected the unique benefits of our integrated digital banking and payments model, which continues to be a source of significant competitive advantage by supporting our value proposition to consumers and merchants and differentiating our brand.
These advantages enabled our continued investment in account acquisition, technology and analytics, while generating substantial capital in an environment characterized by new entrants and intensifying competition, we believe the strengths of our model position us to accelerate our growth.
Underlying our results this quarter were three important advancements.
The first was our return to year-over-year receivables growth, which is driven by our investment in acquisition and brand marketing and continued strong sales trends.
Total sales were up 27% over 2019 levels with strong momentum across all categories, even travel sales increased, and while they dropped a bit in August due to concerns related to the Delta variant, travel has steadily improved since then.
We also continue to see attractive opportunities for account acquisition and increased our marketing investments to take advantage of this.
While the competitive environment has intensified, new accounts are now up 17% over 2019, reflecting the strength of our value proposition.
This value proposition remains anchored in our industry-leading onshore customer service model, no annual fees and useful and transparent rewards.
While some of our peers had to reinvigorate their rewards offerings and substantial cost, our rewards costs were up only 6 basis points year-over-year and nearly all of this increase was driven by higher consumer spending as evidenced in our strong discount revenue.
Given these dynamics, we will continue investing in new accounts, as long as the environment supports profitable opportunities and our robust account growth and our expectations for modest improvement in payment rates supports our view of stronger receivables growth in 2022.
The second key trend was credit, which remained exceptionally strong.
Our disciplined approach to credit management and favorable economic trends contributed to a record low net charge off rate and continued low delinquencies.
The delinquency outlook affirmed our expectations that losses will be below last year's levels for the full-year and supported additional reserve releases during the quarter.
And third is the continued expansion of our payments business.
PULSE saw a meaningful increase in debit volume with 9% growth year-over-year and a 26% increase over the third quarter of 2019, demonstrating both the impact of the recovery and an increase in debit used through the pandemic.
Our Diners business has also started to see some improvement from the global recovery with volume up 12% from the prior year as the global economy recovers, we will continue to look for opportunities to expand our international reach.
In summary, our value proposition continues to be attractive in our integrated digital banking and payments model supports profitable long-term customer relationships and is highly capital generative.
I continue to feel very good about our prospects for future growth.
I'll now ask John to discuss key aspects of our financial results in more detail.
Once again, our results this quarter reflect strong execution and that continued economic recovery.
Looking at our financial summary results on Page 4, there are three key things I want to call out.
First, our total revenue, net of interest expense is up 8% from the prior year, excluding $167 million unrealized loss due to market adjustments on our equity investments.
Including this, revenue is up 2% for the quarter.
Second, is a continuation of very strong credit performance.
Net charge-offs were down $343 million from the prior year, which supported a $165 million reserve release this quarter.
Lastly, we continue investing for growth, with increased marketing spend, higher operating expenses and other areas were largely related to the economic recovery.
I'll go over the details of our quarterly results and our full-year outlook on the following slides.
Looking at loan growth on Slide 5.
We saw the return to growth this quarter with ending loans up 1% over the prior year and up 2% sequentially.
Card loans were the primary driver and we're also up 1% year-over-year and 2% over the prior quarter.
The year-over-year increase in card receivables was driven by strong sales volume and robust account acquisition.
Sales growth continued to accelerate and was up 27% over the third quarter of 2019.
Year-to-date, new accounts were up 27% from the prior year and up 17% over 2019 levels.
The contribution from these factors was mostly offset by the ongoing high payment rates as household savings and cash flows remain elevated.
The payment rate was approximately 500 basis points over pre-pandemic levels.
We anticipate that the payment rate will moderate a bit as most federal COVID support programs have ended and consumer savings rates have started to decrease.
That said, we expect payment rates to remain above historical levels through 2022.
Looking at our other lending products.
Organic student loans increased 4% from the prior year with originations up 7% as most schools have returned to the normal in-person learning model.
Personal loans decreased 4% driven by high payment rates.
Our underwriting criteria have returned to pre-pandemic levels and we expect a return to growth in this product in future periods.
Moving to Slide 6, net interest margin was 10.8%, up 61 basis points from the prior year and 12 basis points from the prior quarter.
Compared to the prior quarter, the increase in net interest margin was primarily driven by lower interest charge-offs and lower funding costs.
This was partially offset by a higher mix of promotional rate balances.
Card loan yield was up 1 basis point sequentially as lower interest charge-offs were offset by the increased promotional balance mix.
Yield on personal loans declined 15 basis points sequentially due to lower pricing.
The margin continued to benefit from lower funding costs primarily driven by maturities of higher rate CDs and an increased mix of lower rate savings and money market balances.
Average consumer deposits were flat year-over-year and declined 1% from the prior quarter.
The quarter-over-quarter decline was largely driven by consumer CDs.
We also saw a slight decline in savings and money market deposits as consumers continue to spend excess levels of liquidity.
We also continue to optimize our funding stack.
Late in September, we executed our first ABS issuance since October 2019 consisting of a $1.2 billion security with a three-year fixed rate coupon of 58 basis points and a five-year $600 million security with a fixed coupon of 103 basis points.
These were our lowest ABS coupons ever and show good execution in timing by our Treasury team.
Looking at revenue on Slide 7.
Total non-interest income increased $90 million or 20% over the prior year excluding the unrealized loss on equity investments.
Net discount and interchange revenue was up $61 million or 26% driven by strong sales volume.
This was partially offset by increased rewards costs due to high sales in the 5% category, which was restaurants and PayPal, both this year and last.
We continue to benefit from strong sales through our partnership with PayPal, while restaurant sales were up 62% year-over-year as dining activity recovered.
Loan fee income was up $21 million or 21%, primarily driven by lower late fee charge-offs and higher non-sufficient funds and cash advance fees.
Looking at Slide 8.
Total operating expenses were up $185 million or 18% from the prior year.
The details reflect our focus on investing for future growth while managing our operating cost.
Employee compensation increased $12 million driven by a higher bonus accrual in the current year.
Excluding bonuses, employee compensation was down 3% from their prior year from lower headcount.
Marketing expense increased $70 million supporting another quarter of strong new account growth.
Other expense included a $50 million legal accrual.
Professional fees were up $47 million, primarily due to higher recovery fees.
Courts reopening combined with strong credit and economic conditions have driven an increase in recoveries and their associated fees.
Year-to-date, recoveries were up 20% compared to the prior year.
The benefits of these cost is reflected in lower credit losses.
Moving to Slide 9.
The trend of sustained strong credit performance continued.
Total net charge-offs were a record low at 1.46%, down 154 basis points year-over-year and 66 basis points sequentially.
Total net charge dollars decreased $343 million from their prior year and were down $131 million quarter-over-quarter.
Credit performance was strong across all products, as evidenced by the net charge-off rates on card, private student loans and personal loans.
Moving to the allowance for credit losses on Slide 10.
This quarter, we released $165 million from reserves and our reserve rate dropped 35 basis points to 7.7%.
The reserve release reflects continued strong credit performance.
And a largely stable macroeconomic outlook.
The impact of these was partially offset by a 2% increase in loans from the prior quarter.
Our economic assumptions include an unemployment rate of approximately 5.5% by year-end and GDP growth of just over 6%.
These assumptions were slightly less positive to no issues in the second quarter, but still reflect a strong economic outlook.
Looking at Slide 11.
Our common equity Tier 1 for the period was 15.5%, well above our 10.5% target.
We repurchased $815 million of common stock and as we had previously announced, increased our dividend payable by 14% to $0.50 per share.
These actions reflect our commitment to returning capital to our shareholders.
On funding, we continue to make progress toward our goals of having deposits be 70% to 80% of our funding mix.
Deposits now make up 68% of total funding, up from 62% in the prior year.
Wrapping up on Slide 12.
Our outlook for 2021 has not changed and reflects continued strong execution against our financial and strategic objectives.
In summary, we remain well positioned for profitable growth from improving loan trends.
Credit performance trends remain favorable, reflecting positive macroeconomic conditions and our approach to underwriting and credit management.
Investments for growth have supported a significant increase in new accounts while we've contained operating expenses.
Lastly, our integrated digital banking and payment model is highly capital generative allowing us to invest for growth and return capital to shareholders.
We look forward to providing our outlook for 2022 on our conference call in January. | compname reports q3 earnings per share $3.54.
compname reports third quarter 2021 net income of $1.1 billion or $3.54 per diluted share.
q3 earnings per share $3.54.
compname reports q3 earnings per share $3.54 (oct. 20).
quarterly total revenue net of interest expense $2,777 million , up 2%. | 1 |
Chief Investment Officer Greg Wright, Chief Technology Officer Chris Sharp, and Chief Revenue Officer Corey Dyer are also on the call and will be available for Q&A.
For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC.
Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website.
We continue to enhance our product mix with a record contribution from our sub-1 megawatt plus interconnection category.
We extended our sustainability leadership with the publication of our third annual ESG report.
We raised revenue and EBITDA guidance for the second quarter in a row, setting the stage for accelerating growth in cash flow.
Last but not least, we further strengthened the balance sheet with the redemption of high coupon preferred stock and the issuance of low-cost, long-term fixed rate debt.
Our formula for long-term value creation is a global, connected, sustainable framework.
We continue to advance along these lines during the second quarter.
Our business continues to globalize.
And, once again, we generated solid performance and strong bookings across all regions.
Our full-spectrum product offering continues to blossom with record sub-1 megawatt bookings in the second quarter and regional highs in both EMEA and APAC.
Together, with interconnection, the sub-1 megawatt category comprised nearly half of our total bookings, demonstrating customers' enthusiastic adoption of PlatformDIGITAL to help accomplish their digital transformation initiatives.
I'll discuss our sustainable growth initiatives on Page 3.
In June, we were awarded the Green Lease Leader Gold award from the Institute for Market Transformation and the U.S. Department of Energy for the third year.
We remain the only data center provider to receive this award, which recognizes Digital Realty as a leader in the real estate industry that incorporates green leasing provisions to better align our interest with our customers and drive high performance and healthy buildings.
During the second quarter, we published our third annual ESG report, detailing our 2020 sustainability initiatives, including the utilization of renewable energy for 100% of our energy needs across our entire portfolio in Europe as well as our U.S. colocation portfolio and reaching 50% of our global needs.
We also reported progress toward our science-based target, ensuring a deep focus on our renewable energy, energy efficiency and supply chain sustainability initiatives.
Our ESG report highlights many of our ongoing initiatives, including our diversity, equity and inclusion efforts along with our community involvement.
Digital Realty is committed to being an active member of and giving back to the communities where we operate globally.
We encourage and celebrate community involvement and employee engagement activities through our Do Better Together initiative.
We also recently underscored our commitment to transparency and accountability on our diversity, equity and inclusion journey with the publication of our EEO-1 report.
Events over the past year and a half have demonstrated that now more than ever, ESG belongs at the forefront of our business.
I'm proud of our leadership in this area as we advance our broader goal of delivering sustainable growth for all of our stakeholders, investors, customers, employees, and the communities we serve around the world.
Let's turn to our investment activity on Page 4.
We are continuing to invest in our global platform with 39 projects underway around the world as of June 30, totaling nearly 300 megawatts of incremental capacity, most of which is scheduled for delivery over the next 12 months.
We are investing most heavily in EMEA with 19 projects totaling over 150 megawatts of capacity under construction.
Most of this capacity is highly connected, including projects in Frankfurt, Marseille, Paris, and Zurich.
Demand remains strong across these metros, and each continues to attract service providers as well as enterprise customers from around the world, many of which contributed to a truly standout performance by the region during the second quarter in the up-to-1 megawatt category.
In North America, over half of our capacity under construction is concentrated in two hot markets, Portland and Toronto, that can sometimes be overlooked in favor of more traditional North American data center metros.
We've had tremendous recent success in these two metros.
We have 30 megawatts under construction in Portland or, more specifically, Hillsboro, that are now fully pre-leased, while our Toronto connected campus continues to gain momentum as the premier Canadian hub for global cloud service providers and enterprise customers.
Finally, in Asia Pacific, we are accelerating our organic growth in this underserved region.
We opened our third data center in Singapore, a 50-megawatt facility that received permitting prior to the moratorium on new data center construction.
Demand for this scarce capacity is robust, and we have another 18 megawatts largely presold and scheduled to open this quarter.
Also coming soon in this region are a pair of MC Digital Realty data centers in Japan.
With the world's eyes currently on Tokyo for the Olympics, we are opening a new Tokyo facility that's poised to win the gold medal.
We are also opening another data center in Osaka this quarter, along with our first data center and the first carrier-neutral offering in Seoul, Korea, during the fourth quarter.
We are very excited about the opportunity in Seoul.
Finally, earlier this month, we announced our intention to enter India in partnership with Brookfield Infrastructure.
Given the success of our existing partnership on the Ascenty platform in Latin America, the complementary skills and expertise that we both bring to this partnership, and with the significant growth opportunity available in India, we are excited to expand our footprint in this robust and dynamic market.
Let's turn to the macro environment on Page 5.
We are fortunate to be operating in a business levered to secular demand drivers.
Our leadership position provides us with a unique vantage point to detect secular trends as they emerge globally on PlatformDIGITAL.
The first of these trends is the growing importance of data gravity for Global 2000 enterprises.
Last year, we introduced the Data Gravity Index, our market intelligence tool, which forecasts the growing intensity of enterprise data creation life cycle and its gravitational impact on global IT infrastructure between key global markets.
Earlier this year, we took the next step and published an industry manifesto, enabling connected data communities to guide cross-industry collaboration, tackle data gravity head-on, and unlock a new era of growth opportunity for all companies.
Earlier this week, we announced a collaboration with Zayo to further interconnection business through the creation of an open fabric-of-fabrics.
With data sets exploding and data gravity challenges expanding, this initiative will enable multinational enterprises to connect these data oceans through fabric and orchestration.
Third-party research continues to support data gravity's growing importance.
Market Intelligence firm, Gartner, recently conducted its 6th annual survey of chief data officers, and less than 35% of these executives reported their business have achieved their data sharing objectives, including data exchange with external data sources that drive revenue-generating business outcomes.
Issues often arise due to multiple data hosting and processing meeting places together with the need for appropriate security controls and the inability to overcome latency challenges with direct private interconnection between many counterparties.
PlatformDIGITAL was designed to solve these problems.
Digital transformation is compounding this enterprise data and connectivity problem.
Recent research indicates that enterprise workflows utilize an average of 400 unique data sources, while exchanging data with 27 external cloud products.
Digital Realty's enterprise and service provider customers are turning to PlatformDIGITAL to overcome these issues by deploying their own data hubs and using interconnection to securely exchange data in and across multiple metros.
Our leadership position is resonating with industry experts and influencers.
For the second consecutive year, Digital Realty was named a global leader by IDC MarketScape for data center colocation and interconnection services, further acknowledgment of our consistently improving customer capabilities.
This recognition reflects our execution against the PlatformDIGITAL road map, providing unique differentiated value for customers with our fit-for-purpose, full-spectrum global capabilities.
Earlier this month, Cloudscene again ranked Digital Realty as the strongest provider of data center ecosystems in EMEA for the second consecutive year.
Digital Realty was ranked second in both North America as well as Latin America and jumped up three spots to No.
Also, in July, GigaOm published their analysis of edge infrastructure capabilities.
Digital Realty ranked as an industry leader on multiple criteria across three broad categories.
Our capabilities were ranked highest in vendor positioning and evaluation metrics comparison and second among the key criteria comparison.
Given the resiliency of the demand drivers underpinning our business, and the relevance of our platform to meeting customers' needs, we believe we are well positioned to continue to deliver sustainable growth for customers, shareholders and employees, whatever the macro environment may hold in store.
Let's turn to our leasing activity on Page 7.
We signed total bookings of $113 million in the second quarter, including a $13 million contribution from interconnection.
Network and enterprise-oriented deals of 1 megawatt or less reached an all-time high of $41 million, demonstrating our consistent momentum and the growing success of PlatformDIGITAL as we continue to capture a greater share of enterprise demand.
The weighted average lease term was over eight years.
We landed 109 new logos during the second quarter, with a strong showings across all regions, again, demonstrating the power of our global platform.
The geographic and product mix of our new activity was quite healthy, with APAC and EMEA, each contributing approximately 20%, the Americas representing nearly 50%, and interconnection responsible for a little over 10%.
The megawatt or less plus interconnection category accounted for almost half of our total bookings with particular strength in the cloud, content and financial services verticals.
In terms of specific wins during the quarter and around the world, we landed a top five cloud service provider to anchor our new Tokyo campus.
Close on the heels of this magnetic customer deployment, Japan's most popular social media applications selected PlatformDIGITAL on the same campus.
NAVER, the leading Korea-based cloud provider serving the greater APAC region, selected our new carrier-neutral facility in Singapore to support data-intensive workloads for their high-performance computing and I -- AI-intensive technology-based platform.
A European broadcaster is leveraging PlatformDIGITAL in Vienna and Frankfurt to rewire their network in favor of data-intensive interconnection with benefits in performance, scalability, and cost savings.
A Global 2000 enterprise data platform is adopting PlatformDIGITAL in Amsterdam, Dublin and Frankfurt to orchestrate workloads across hundreds of ecosystem applications, delivering improved performance, security, cost savings, and simplicity.
In London, PlatformDIGITAL is supporting a top three global money center banks fortification of their business continuity capabilities without compromising their data-intensive interconnection requirements.
On the continent, our connectivity and operational capabilities are helping two independent fintech customers improve performance enhance -- and enhance access to their connected data communities.
Finally, in North America, a life sciences digital marketing firm chose PlatformDIGITAL to improve their network architecture and enable future growth.
Turning to our backlog on Page 9.
The current backlog of leases signed but not yet commenced ticked down from $307 million to $303 million as commencement slightly eclipsed space and power leases signed during the quarter.
The lag between signings and commencements was a bit longer than our long-term historical average at just over seven months.
Moving on to renewal leasing activity on Page 10.
We signed $178 million of renewals during the second quarter in addition to new leases signed.
The weighted average lease term on renewals signed during the second quarter was just under three years, again, reflecting a greater mix of enterprise deals smaller than 1 megawatt.
We retained 77% of expiring leases, while cash releasing spreads on renewals were slightly positive, also reflective of the greater mix of sub-1 megawatt renewals in the total.
In terms of second quarter operating performance, overall portfolio occupancy ticked down by 60 basis points as we brought additional capacity online across six metros during the quarter.
Same capital cash NOI growth was negative 1.5% in the second quarter, largely driven by the churn in Ashburn at the beginning of the year.
As a reminder, the Westin Building in Seattle, the Interxion platform in EMEA, Lamda Helix in Greece and Altus IT in Croatia are not yet included in the same-store pool.
So these same capital comparisons are less representative of our underlying business today than usual.
Let's turn to our economic risk mitigation strategies on Page 11.
The U.S. dollar fluctuated during the second quarter but remained below the prior year average, providing a bit of an FX tailwind.
As a reminder, we manage currency risk by issuing locally denominated debt to act as a natural hedge so only our net assets within a given region are exposed to currency risk from an economic perspective.
In addition to managing credit risk and foreign currency exposure, we also mitigate interest rate risk by proactively terming out short-term variable rate debt with longer-term fixed rate financing.
Given our strategy of matching the duration of our long-lived assets with long-term fixed-rate debt, a 100 basis-point move in benchmark rates would have roughly a 75 basis-point impact on full year FFO per share.
In terms of earnings growth, second quarter core FFO per share was flat year-over-year but down 8% from last quarter driven by $0.12 noncash deferred tax charge related to the higher corporate tax rate in the U.K., which came into effect during the second quarter.
Excluding the tax charge, which was not previously contemplated in our guidance, we outperformed our internal forecast due to a beat on the top line with a slight assist from FX tailwinds as well as operating expense savings, partially due to lower property-level spending in the COVID-19 environment.
For the second time this year, we are raising our full-year outlook for total revenue and adjusted EBITDA to reflect the underlying momentum in our business.
The deferred tax charge does run through core FFO per share.
Since it is noncash, the deferred tax charge does not hit AFFO.
Most of the drivers of our guidance table are unchanged.
But I would like to point out that we are lowering our expected recurring CapEx spend for the remainder of the year, setting a stage for accelerating growth in cash flow.
As you could see from the bridge chart on Page 12, we expect our bottom line results to improve sequentially over the balance of the year as the deferred tax charge comes out of the quarterly run rate and the momentum in our underlying business continues to accelerate.
We do still expect to see some normalization in our cost structure with an increase in property-level operating expenses that have been deferred due to COVID, along with an uptick in G&A expense as we return to the office and resume a more normal travel schedule.
So your model should reflect these higher costs.
Last, but certainly not least, let's turn to the balance sheet on Page 13.
As you may recall, we closed on the sale of a portfolio of noncore assets in Europe for $680 million late in the first quarter, which impacted second quarter adjusted EBITDA to the tune of approximately $10 million.
As a result, net debt to adjusted EBITDA was slightly elevated 6x as of the end of the second quarter but is expected to come back down in line with our long-term range over the course of the year through a combination of proceeds from asset sales and growth in cash flows as signed leases commence.
Fixed charge coverage ticked down slightly, also reflecting the near-term impact from asset sales, but remains well above our target and close to an all-time high at 5.4x, reflecting the results of our proactive liability management.
We continue to execute our financial strategy of maximizing the menu of available capital options while minimizing the related costs and extending the duration of our liabilities to match our long-lived assets.
In mid-May, we redeemed $200 million of preferred stock at 6.625%, which brought total preferred equity redemptions over the prior 12 months to $700 million at a weighted average coupon of just over 6.25%, effectively lowering leverage by 0.3 turns.
In mid-June, we issued 0.5 million shares under our ATM program, raising approximately $77 million.
In early July, we raised another $26 million with the sale of the balance of our Megaport stock.
We also took our first trip to the Swiss bond market in early July, raising approximately $595 million in a dual tranche offering of Swiss green bonds with a weighted average maturity of a little over six and a half years and a weighted average coupon of approximately 0.37%.
This successful execution against our financial strategy reflects the strength of our global platform, which provides access to the full menu of public as well as private capital, sets us apart from our peers, enables us to prudently fund our growth.
As you can see from the chart on Page 13, our weighted average debt maturity is nearly six and a half years, and our weighted average coupon is down to 2.2%.
dollar-denominated, reflecting the growth of our global platform and serving as a natural FX hedge for our investments outside the U.S. 90% of our debt is fixed rate to guard against a rising rate environment, and 98% of our debt is unsecured, providing the greatest flexibility for capital recycling.
Finally, as you can see from the left side of Page 13, we have a clear runway with nominal near-term debt maturities and no bar too tall in the out years.
Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy.
Andrew, would you please begin the Q&A session? | q2 revenue rose 10 percent to $1.1 billion. | 1 |
If you do not have the releases or the slides you can find them on the company's website at www.
Jim will start with an overview of the acquisition and cover the results of the quarter in the year as well as provide our financial guidance for fiscal 2022.
Jeff will then review details of the transaction and we will have Dan discuss Barber-Nichols.
These risks and uncertainties and other factors are provided in the releases and in the slide decks as well as with other documents filed by the company with the Securities and Exchange Commission.
These documents can be found on our website or at sec.gov.
I also want to point out that during today's call we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.
We appreciate you joining Graham's year end earnings call and also to join in our discussion about Barber-Nichols, a $70 million transformative acquisition we closed today.
This is truly an exciting day at Graham, one that benefits all stakeholders, Graham shareholders, employees at both Barber-Nichols and Graham, customers, suppliers, Arvada, Colorado and Batavia, New York communities from which we draw our workforce talent and create stable well paying employment and provide a place where employees are stimulated, challenged, developed, rewarded and able to build long-term careers.
Thus we will go through year-end results and quickly move into discussing the excitement surrounding adding Barber-Nichols to Graham Corporation.
I will begin my remarks with Slide 3.
Let me start by stating I am thrilled to have completed this acquisition.
It was nearly three years in the process to get this done, initially engaging with Barber-Nichols in late summer of 2018, when Jeff first visited.
Just immediately identified BNI met most of the critical criteria for what Graham strategically wanted in an acquisition.
As we have discussed in the past, our process for identifying acquisition targets is to establish necessary key attributes of a target such as, but not limited to values and culture, IP protected products and market served operations model and revenue range.
Chris is responsible for developing the messaging for each target, creating the compelling reasons as to why Graham is an ideal strategic acquirer and outlining the value of a proposed combination.
Most often the target isn't necessarily for sale, which was the case with BNI.
Fortunately Dan Thoren, the President of BNI was intrigued by Chris's messaging and agreed to have an initial discussion that took time to earn trust, develop relationships and establish the value contributions of both organizations to the combination and agree on terms of the transaction.
Jeff, Alan Smith, Chris and I were impressed right away by Dan and the BNI management team that are remaining with us as well as BNI's culture, which represents one of their most important assets.
The employee engagement, level of positivity, passion for the company and can do approach to their business all confirmed Dan and the BNI team have created something very special and extremely powerful.
The time it took to complete the deal permitted us to observe Dan and team in action and their ability to make stretch commitments and deliver on those commitments.
We first engaged with BNI at a time when they were ramping up calendar 2018 at $40 million, up from $30 million a year earlier.
Over the ensuing two years, it was wonderful to observe the planning and forecasting processes and importantly their ability to deliver forecasted results culminating in $56 million of revenue for calendar year 2020.
This demonstrated to us that BNI has strong management capabilities and their systems at BNI have the necessary controls and that the business processes are scalable to drive future growth.
Barber-Nichols is an outstanding company.
We are fortunate to have them become part of Graham Corporation effective today.
Jeff will go through the deal rationale in detail and Dan will provide an overview of Barber-Nichols.
However, what I viewed compelling about Barber-Nichols was it fulfilled our goal of diversifying into the defense market, which provides greater stability, multiple year visibility, incredible long-term asset base loading.
The wonderful aspect about BNI products is there is no overlap with Graham's.
We serve the defense shipbuilders specifically the nuclear propulsion program while BNI serves offensive and defensive systems for the ships.
In addition, BNI serves the commercial space market with sophisticated and advanced technologies for rocket engine fuel systems and space life support systems.
This is expected to be an expanding long-term growth market due to the Internet of Things, growing communication networks and the ever-increasing way in which people throughout the world are interconnected.
Thus today we had new market segment revenue within the defense industry and also bring new markets such as commercial space, advanced power generation, alternative energy along with capabilities for system integration.
Importantly, the acquisition of Barber-Nichols is a catalyst for immediate improvement in revenue and profitability with top line expanding approximately 50% due to the addition of BNI for the 10 months in fiscal 2022 that we own them and it provides a terrific platform for follow-on organic and acquisitive growth.
I am very pleased and excited to have Barber-Nichols become part of Graham.
Actually, I've been remiss, I have mentioned Dan Thoren a couple of times.
Dan, is on the call as Deb had mentioned.
Dan was President and CEO of Barber-Nichols until this past May when he moved to Chair of the Board.
Dan joins Graham Corporation as President and Chief Operating Officer and will report directly into me.
Dan will be responsible for near and long-term performance of both Barber-Nichols and Graham's historic defense, energy and petrochemicals businesses.
Dan will work with Matt Malone, our Vice President, General Manager for Barber-Nichols.
Matt is the current President and CEO at Barber-Nichols.
Dan also will work with Alan Smith, our Vice President and General Manager for Graham.
You're all familiar with Alan and the terrific job he has done as our General Manager.
I'm really excited to get into the detailed discussion about Barber-Nichols, and its benefit to long-term shareholder return.
However, let's walk through the fourth quarter and year-end results.
I will take you through the fourth quarter performance, full year results and fiscal '22 guidance.
Jeff will walk you through the strategic rationale and deal structure and then Dan grabs the ball to provide an overview of Barber-Nichols.
I am now referring to Slide 4.
A key facet of our diversification strategy is to add revenue streams uncorrelated to energy.
Revenue that is less volatile and provides a long runway for growth and importantly offers high levels of multiple year asset base loading.
The acquisition of Barber-Nichols fulfills that objective perfectly.
Moreover, Graham's organic defense revenue reached 25% of consolidated sales and was in the mid $20 million range for fiscal 2021.
We expect modest growth in fiscal 2022 and then move into the mid $40 million range by fiscal 2025.
Complemented by Barber-Nichols defense revenue, we believe the combination will quickly approach $100 million in defense sales.
Our commitment to our installed base for crude oil refining and petrochemical markets will continue to bear fruit.
Everything we read here and observe supports continued investment in existing assets for mature markets and new capacity capital investment in emerging economies.
Graham's shift into competing in price sensitive segments of our energy and petrochemical markets, supported by innovation of our operations model has changed our participation and success in these previously underserved segments.
This strategy has been 10% to 15% of sales.
Last year was at a comparable level in fiscal 2020.
The team has done well to navigate the selling cycle to get us in position to win and also -- sorry, and also the execution side working with the global supply chain for component fabrication has created cost efficiencies and execution capacity for us.
Importantly, Alan and his team achieved margins projected for the orders completed thus far.
A key business initiative is to expand the capacity of our production workforce.
Today, we need to grow our capacity within our production workforce by 20% in Batavia.
That will permit backlog conversion velocity to improve and also expand margins due to operating leverage and reduction in subcontracting.
Energy and petrochemical markets feel different today than six months ago.
That is encouraging, however, the bid pipeline has a long way to rebuild before returning to pre-2020 levels.
We are watching this closely during the next few quarters, cost measures have not been taken due to the need to have depth across the company's sales, engineering, quality, manufacturing, IT and other critical departments.
It takes a long time to build a proficient knowledge worker at Graham.
We continue to evaluate near-term benefit and long-term implications of cost reduction measures.
We elected to protect the strength of Graham during this Black Swan event caused by COVID-19.
Let's move on to Slide 5.
Fourth quarter sales were $25.7 million.
Defense sales were strong at $6.5 million.
Also was revenue lift from short cycle sales, driven by the freeze in the US Gulf Coast region.
Also and importantly 15% to 20% of sales were due to our success penetrating the price sensitive segment of the refining market.
Earnings per share was $0.04 with net income at $400,000.
On March 31, cash was $65 million of which approximately $40 million was used for the acquisition of Barber-Nichols.
Backlog on March 31 was $137.6 million with $104 million for the defense market and acquiring Barber-Nichols approximately $100 million of backlog was added effective today.
Nearly $240 million multi-year backlog is a valuable asset for Graham.
Please move on to Slide 6.
Year-over-year revenue increased to 11% and gross profit 14%.
Profitability and margin were pressured due to decisions we made not to address business cost during the pandemic and also our inability to quickly expand production personnel.
Government support during the pandemic has made it difficult to compel potential workers to join the Graham team.
This should improve in the coming quarters, but is a headwind now as we want to convert more existing backlog more quickly by having a larger production workforce.
We have the infrastructure but not the human resources.
Let's move on to Slide 7.
Alan Smith and the operations team performed remarkably in achieving full year revenue of $97.5 million.
Due to COVID-19, full year throughput capacity was at 85% as an average of what our production workforce could produce if unaffected by lost time due to COVID.
This made planning and management of backlog conversion difficult.
Alan and his team did fantastic even though that is not apparent in the results.
Here too profitability and margins were under pressure due to under-absorption caused by 15% lower throughput and also strategic decisions to hold personnel at pre-COVID levels.
On to Slide 8.
We had strong defense bookings of $69 million for the year.
Energy and petrochemicals stayed mired due to demand destruction stemming from the range of implications of COVID-19.
We do have a terrific backlog that at March 31, as I said earlier was $137.6 million, up $25 million year-over-year.
Importantly, and again Barber-Nichols adds roughly $100 million into our backlog bringing the combined total to just under $240 million.
$40 million of Barber-Nichols backlog is expected to contribute to fiscal 2022 revenue for the 10 months we own them.
40% to 45% of our organic backlog is expected to convert into revenue during fiscal 2022.
Now let's move on to the guidance slide.
Full year revenue range is $130 million to $140 million with $45 million to $48 million from Barber-Nichols and the remainder being organic revenue.
Adjusted EBITDA is expected to be between $7 million and $9 million.
Once we complete purchase accounting treatment of the BNI acquisition, we will be in a position to provide gross margin and SG&A guidance.
This was an exciting start to the fiscal 2022.
Large elements of recent diversification strategies have come together to dramatically improve fiscal '22 results and more importantly reshape Graham's future with a path to stronger total shareholder returns.
The Barber-Nichols acquisition is transformative for Graham.
There is a platform for follow-on organic and M&A investment to propel growth.
Graham's defense revenues in the mid $20 million range with growth anticipated to yield more than $40 million of revenue by fiscal 2025.
Importantly, we are beyond first article operations and therefore margins should improve as well.
Just as a reminder, first article operations are first time fabrications that involved production R&D, production of jigs and fixturing and defining ideal build flow or order of operations.
Once beyond first article work, productivity gains should be achieved.
I am pleased by our success in winning work and previously underserved price focus segments of the energy and petrochemicals markets that represented 15% of sales fiscal '19 through '21.
It's also worth noting $7 million of new orders were secured during the month of May from the crude oil refining market.
We became involved in these opportunities in early 2019.
It is great to see significant order releases from this end market.
Both are from the installed base.
One is for US Gulf Coast refiner undertaking a revamp to enable use of lower cost, lower quality feedstocks.
The other is a Mideast refiner debottlenecking the refinery to provide more gasoline and diesel fuels to meet local demand.
With those remarks, I want to pass the call over to Jeff and Dan to walk through the acquisition.
If you could turn to the Barber-Nichols acquisition deck.
If you look at Slide 2, you will see we have a Safe Harbor statement similar to that which was in the earnings deck and I'll allow you to review rather than me reading through it.
Moving on to Slide 3.
It's great to be speaking with you from Barber-Nichols here in Denver with Dan Thoren.
As Jim mentioned, we have been working at Barber-Nichols for quite a long time.
My first visit to the Denver facility was in August of 2018, when Dan was graciously willing to meet with me.
Barber-Nichols which I may refer to as BNI is a great fit for Graham, since it meets all the criteria that most of you have heard me describe over the past several years.
It is clearly a transformative acquisition for Graham.
Certainly the most exciting activity in my time at Graham and probably in the history of the company.
It will increase the size of Graham by 60% on a pro forma basis and immediately accelerates our diversification strategy.
We expect to see 10 months of revenue in fiscal 2022 or approximately 50% growth.
BNI expands our defense business from $24 million in fiscal 2021 to a run rate of approximately $65 million to $70 million currently.
Since there was no overlap with our current defense business, this dramatically expands our platform.
Barber-Nichols also has a $10 million in the aerospace business which is mostly related to the space industry.
This will be another exciting market for us.
Looking forward, we expect more than half of our business to come from defense and aerospace.
This is a fantastic complement to our refining and petrochemical platform.
Along with defense and aerospace, BNI offers us opportunities for growth in cryogenics and advanced energy.
As Jim mentioned with a backlog of $100 million in addition to Graham's backlog of $137 million, we have a combined backlog of nearly $240 million of which 80% is in defense and aerospace.
This increased multiyear visibility reduced volatility of revenue and earnings and ability to grow organically and via M&A across multiple platforms is exciting.
We clearly see some exciting organic growth opportunities.
And yes, to be clear, once we have Graham and Barber-Nichols working well together, we intend to look for more M&A growth opportunities.
Chris Johnston and I are excited to engage with Dan to identify further businesses to add to BNI.
As part of the deal, the owners of Barber-Nichols wanted some skin in the game, so approximately $9 million in Graham shares were part of the purchase consideration.
This represent 610,000 shares or approximately a 6% increase in shares outstanding.
I have mentioned numerous times that we would use a little equity if it made sense.
Clearly having the BNI owners, who are remaining with us post acquisition to ask me for a stake in Graham was another positive aspect of the deal.
The transaction is expected to bring some very nice accretion, though the initial purchase accounting will likely put a near term damper on it.
Finally Barber-Nichols brings a strong management team, led by Dan Thoren who has nearly 30 years of Barber-Nichols, 24 of which as its President.
Dan is now ascending to President and Chief Operating Officer of Graham to utilize his capabilities across all of the combined company.
Matt Malone, has taken over as the new President of BNI.
Matt has strong leadership skills, a very high energy level which I expect will drive BNI toward a very successful future.
The remaining leadership team at BNI is similarly top notch.
This is a fantastic team that we are gaining along with the business.
On to Slide 4.
Let me talk briefly about the deal structure.
Graham paid $70 million made up of $61 million of cash and $9 million of stock for 610,000 shares.
Out of the $61 million, $41 million was in cash from our balance sheet and we entered into a $20 million term loan for the remainder.
This leaves us with over $20 million of cash, so our net debt position is zero, but it gives us flexibility to go after future organic and M&A investments.
There is an earn out provision based on fiscal 2024, essentially the third year of the deal, which will allow up to $14 million in additional cash payments.
The earn out has a threshold, which if met would kick in at $8.75 million of EBITDA in fiscal 2024 and provide a $7 million payout.
If the EBITDA achieved that year is $11 million, the payout increases to a maximum level of $14 million.
Between those two EBITDA numbers the earn out would be interpolated.
This acquisition assumed no synergies.
We believe there will be benefits for the combined organization but not needing them to justify the deal was great.
Will Graham bring some capabilities to Barber-Nichols, I believe so.
But just as likely I believe Barber-Nichols will bring new capabilities to our current Graham team.
I mentioned Dan and Matt earlier, they will become Graham named executive officers at our Annual Meeting at the end of July.
On to Slide 5.
Along with the excitement of the acquisition, we also now have a far more efficient balance sheet.
While having a lot of cash was comforting that dormant cash did not achieve a return for our shareholders.
You all know that I've desperately wanted to utilize that cash for growth and a stronger return.
Now with Barber-Nichols, I'm confident that it will.
We have entered into a new bank relationship with Bank of America and it includes a $20 million term loan, which I mentioned earlier as well as a $30 million revolver.
We also have a $10 million accordion feature available on top of that $30 million revolver.
We do not expect to utilize the revolver much in the near term, but it will -- it provides us with more dry powder and flexibility going forward.
We continue to have a relationship with HSBC now with the $7.5 million cash secured facility for certain bank guarantees in geographies where they have a strong presence.
Overall, our balance sheet will look much different, but in my view it will be far more efficient rather than overly conservative.
We are now using our balance sheet for growth today and more so going forward.
On to Slide 6.
When our business development team that would be Chris and I, talked about an ideal fit for Graham, we could not have picked a better match than BNI.
Before I continue, I would like to recognize Chris Johnston again.
He has been working behind the scenes, most of you have not met him, but as I've told many of you, he does a fantastic job for both M&A and as well as organic opportunities for us.
He is a great partner and a great leader on our team.
Now I'd like to speak briefly about Barber-Nichols and then we'll pass over to Dan to provide far more depth on the business.
Barber-Nichols is based in Arvada, Colorado, the suburb of Denver.
They have a 55-year history of engineering, development and innovation.
As a former engineer myself, they have some real cool capabilities here.
They have over 150 employees, which is double what they had just four or five years ago.
We are looking forward to adding more employees at a similarly rapid pace to support Barber-Nichols' future growth.
They recently completed construction of a 43,000 square foot state-of-the-art manufacturing plant.
This is nearly double their facility size and I cannot wait to bring some of you through the facility for a tour.
The leadership team at BNI is outstanding and most importantly, the entire workforce is tremendously skilled, continually enhancing their training and extremely engaged.
Now that I've set the bar high, I will pass over to Dan Thoren, Graham's new President and Chief Operating Officer, who will provide much more depth about Barber-Nichols.
I'm happy to be with you and provide more background on BNI.
We'll just kind of hang out on Slide 6 here and I'll tell you more about us.
Barber-Nichols is a team of about 150 engineers, machiners, inspectors, technicians, and support personnel that engineer and build specialty pump, turbine and compressor systems that are used in the highly sophisticated applications like submarines, rockets, physics research facilities, advanced power plants and thermal management systems.
We've talked a lot about numbers so far, but it's our people and the work environment that we nurture that make the numbers happen.
We have an amazing team.
Many of us came from large aerospace defense or industrial companies.
I came from a large aerospace company with 5,000 employees at my location.
I walked into BNI when it had 35 people and I was amazed that these 35 people were doing what my company was doing with 5,000, albeit at a much smaller scale.
I was sold on BNI and I decided I had to work there.
Many of us who came from a much larger companies found they can-do, continual learning, relationship driven culture at BNI invigorating.
While it's been tough during COVID, we do spend a lot of time helping our people understand the importance of what our customers are trying to do.
We excel when we are part of our customers team.
We are fully engaged during development of our equipment and their systems and we share our customers anticipation during first launch.
One last comment before we move to Slide 7.
BNI leaders and employees like to have skin in the game, Jeff talked about this.
One of the alluring aspects of this transaction was the ability to have meaningful ownership in a micro-cap company like Graham.
Most BNI stockholders took stock and many employees will now get to buy stock in their company.
That is a powerful incentive when you know your daily efforts will benefit you and your fellow investors.
Now let's move to Slide 7.
Most of Barber-Nichols business comes from defense and aerospace.
The US Navy is a large customer for submarine, Torpedo ejection systems and Torpedo power systems as well as aftermarket parts and overhaul.
Thermal management systems are used in a variety of power dense electronics and other power applications.
For Aerospace, our involvement is broader with thermal management systems, fluid management systems, propulsion and power systems that support vehicles and satellites and environmental control in life support systems for our heroes.
Slide 8 is next.
When Kim Nichols and Bob Barber started BNI, their first customer was the US Navy, for whom they designed high speed turbines.
Another near founder Jim Dillard got us involved in a prototype air turbine pump used for Torpedo ejection systems and US Navy submarines using a special manufacturing process called electrochemical machining.
This initial engineered product development focus has been leveraged into production manufacturing on several Navy programs.
We are now seeing full lifecycle with spare parts and overhaul of these systems.
Please turn to Page 9.
NASA has been a front customer over the years and we designed and built several cryogenic pumps for them in our early years.
My first job with NASA was on the ground based trainer for the space shuttle manipulator arm.
NASA also gave us our first opportunity to design and build a rocket engine turbopump using our cryogenic pump and hot gas turbine knowledge.
That early experience in 1997 through 2000 set us up well for the new space companies that have been busy developing commercial space launch services over the last 10 years.
I'm now moving to Slide 10.
BNI works across many markets and that ability has served us well over the years as all markets go through cycles.
When we are able to move from one market in decline to another on its way up, we can manage our business much better.
In the physics research arena, BNI is known worldwide as a specialty cryogenic pump supplier.
We also work with all of the air separation giants that separate oxygen and nitrogen and argon and other gases into industrial gases.
BNI's cryogenic blowers are installed in North American LNG import terminals and satellite test chambers around the world.
Since day one, BNI has been involved in advanced energy systems, building and commissioning geothermal power plants and concentrated solar power systems.
More recently, we have been involved in fuel cell power plants making anode and cathode blowers.
The new administration plans to spend more money on alternate energy storage and power gen and we see opportunity in specialty pumps for hydrogen fueling systems.
On to Slide 11.
Slide 11 gives another view of BNI from a product perspective.
One thing that jumps out that hasn't been apparent on the earlier slides is the motor generator controller product area.
When I first joined BNI, we used generation one variable frequency drive to push 3,600 RPM motors to 5,000 RPM.
The higher speed provides a more power dense turbine machine.
Since then we have driven pumps to 30,000 RPM and compressors to over 100,000 RPM.
We are now designing and building the electronic boxes that drive our motors and condition the power from our generators, sometimes doing both in the same machine.
As you can tell, I'm passionate about our people, our customers and our technologies.
I'm also very excited to learn about the employees of Graham.
Their families and their dreams, their customers and their products, together, I believe we'll do some amazing things.
Jim, I think we're back to you, my man.
I am now referring to Slide 12.
On the integration side, the operating models between BNI and Graham are different.
Graham produces large complex welded fabrications to a very tight tolerances and BNI produces very tight tolerance highly machined fabrications.
The asset bases are different in Arvada for BNI and in Batavia for Graham.
Also, the markets or segments of the markets served by BNI and Graham are different.
The transaction value as Jeff had outlined is not predicated on realizing synergies.
Of course, there may be some, however, Arvada and Batavia will run as independent operating businesses under one umbrella.
Initial integration is related to benefit plans, accounting and finance systems and public company compliance and strategic capital investment governance.
There are BNI systems and program management processes Dan and Matt's Arvada business can share with Alan's defense team.
Also there are Batavia constraint management processes and performance improvement techniques, Allan's Batavia team can share with Matt's team in Arvada and working together to share best practices, we believe margin gains can be realized in both businesses.
With Dan Thoren in the Chief Operating Officer role, working with both Matt and Alan, the talent pool is now nearly 500 person combined organization that is deep and very strong.
Dan of course knows Barber-Nichols deeply and much has been shared with Dan about Graham and in the coming quarters Dan will learn more about Graham, it's people, our culture, our markets, our customers and our competitors in the passion that every Graham employee has for ensuring our customers are successful and that Graham is successful.
I will be thrilled to continue to work directly with Dan in driving both businesses.
Let's move on to Slide 13.
This graphic projects the transformation the BNI acquisition provides.
For fiscal 2021, Graham was approximately $100 million of revenue with an end market breakdown of 41% to refining, 25% to defense industries, 24% to chemical and petrochemical markets and 10% to various other end markets.
A pro forma projection of fiscal 2022 following the BNI acquisition is for revenue to be between $130 million and $140 million comprised of 45% for defense, 26% for refining, 16% for chemical and petrochemical end markets, 6% to aerospace and 7% to other end markets served by the combined entity.
Excitingly, there is further growth in defense by entering new programs, accelerating backlog conversion and from additional mergers and acquisitions.
Refining end markets also provide growth simply from a recovery from the pandemic, also from strategies and acted to shift position in underserved price sensitive segments and our continued focus on the installed base.
For chemicals and petrochemicals like refining have the same growth options with strategic actions already enacted.
Aerospace and commercial space market is expected to grow.
BNI with its cryogenic and triple pump technology is an important supplier to this market.
There is much growth runway in this end market.
With the addition of BNI growth prospects for Graham, Graham is becoming an outstanding industrial.
I will conclude with Slide 14.
The acquisition of BNI, deployed capital to expand our presence and diversified revenue from the defense industry and also provide access to an expanding aerospace market.
Importantly, it adds significantly to our less cyclical revenue streams that reduced financial results volatility.
Defense and aerospace valuation multiples are stronger now than those in energy and chemicals due to end market fundamentals and visibility into future orders.
As we continue to grow defense and aerospace revenue, we anticipate that will enhance Graham's valuation multiple.
A catalyst was needed to break out of the revenue range Graham was in.
BNI provides that catalyst.
And that fiscal 2022 revenue is expected to be approximately 50% stronger than without Barber-Nichols.
Beyond 2022 with the addition of BNI it creates follow-on acquisition opportunities along with organic growth that is meaningful.
Once Graham's traditional refining and chemical markets get beyond the pandemic, that will provide further revenue and margin improvement.
We structured our balance sheet to take on low-cost debt and provide flexibility to invest in additional acquisitive growth or substantial organic investment that may be necessary as new defense, aerospace programs are secured.
I trust you share the excitement that Jeff and I have about adding BNI to Graham and then having Dan join our leadership team.
Fiscal 2022 is an exciting new chapter for Graham.
We have talked a lot thus far, let us open the line now for Q&A. | q3 earnings per share $0.11.
sees fy revenue $93 million to $97 million.
as of december 31, 2020, graham had no debt. | 0 |
This conference is being recorded.
I'll now introduce Webster's Chairman and CEO, John Ciulla.
CFO, Glenn Maclnnes, and I will review business, financial and credit performance for the quarter, after which HSA Bank President, Chad Wilkins; and Jason Soto, our Chief Credit Officer, will join us for Q&A.
As we look back on 2020, a challenging year for all of us in so many different ways, my first thought is how proud I am of Webster bankers as they found a way to deliver for each other, our customers, our communities and for our shareholders.
While increasing COVID cases continue to present real challenges, we are optimistic that 2021 will bring a level of normalization.
As the distribution of vaccines dramatically changes the path of the pandemic, the broader economy, including COVID impacted sectors continue to recover and the peaceful transition of power that occurred yesterday hopefully represents the beginning of a less divisive political environment.
We remain focused on prudently managing capital, credit and liquidity as we also position ourselves for growth and outperformance as the macro environment improves in 2021 and beyond.
Turning to Slide 2.
I'm really pleased with our strong business performance in the quarter.
We originated $1.9 billion in loans, generated strong loan-related fees, continue to grow deposits and HSA total footings approached $10 billion.
Credit trends are favorable and the net interest margin has stabilized.
Our adjusted earnings per share in Q4 were $0.99, up from $0.96 a year ago.
Our fourth quarter performance includes $42 million of pre-tax charges related to the strategic initiatives we announced last quarter.
Glenn will provide additional perspective on these charges in his remarks.
An improved economic outlook with continued uncertainty, along with a flat quarter-over-quarter loan portfolio, supported a $1 million CECL allowance release in the quarter.
Our fourth quarter adjusted return on common equity was 11.5% and the adjusted return on tangible common equity in the quarter was 14.2%.
On Slide 3, loans grew 8% from a year ago or 2% when excluding $1.3 billion in PPP loans.
Commercial loans grew 6% from a year ago or more than $800 million.
Deposits grew 17% year-over-year, driven across all business lines.
Loan yield increased 4 basis points linked quarter, while deposit costs continue to decline.
Slides 4 through 6 set forth key performance statistics for our three lines of business.
I'm on Slide 4.
This is a very strong quarter for Commercial Banking with more than $1.2 billion of loan originations, up solidly from Q3 and down only slightly from a strong 4Q 2019.
Loan fundings of $825 million were also up solidly from Q3.
We continue to benefit from our industry expertise and deep relationships in select sectors, including technology that have not been adversely impacted during the pandemic.
Commercial bank deposits are at record levels, up more than 35% from the prior year's fourth quarter.
The Commercial Banking loan portfolio yield increased 9 basis points in the quarter, driven by better spreads and enhanced by a higher level of acceleration of deferred fees as we saw payoff activity return to more normalized levels.
Non-interest income in Commercial Banking was up linked-quarter due to higher syndication and other fees tied to the strong origination activity.
Now turning to HSA Bank on Slide 5.
HSA Bank total footings increased 17% from a year ago and now total nearly $10 billion.
Core deposits were up 15% and 13%, excluding the State Farm acquisition, which closed in 2020.
The year-over-year increase in balances was driven by continued contributions as well as reduced account holders spending due to COVID-19 restrictions.
The TPA accounts declined from a year ago, reflecting the expected departures that occurred in Q3.
We added 668,000 accounts in 2020, 10% fewer than we added in 2019, consistent with industry trends and due primarily to lower enrollments with existing employers as COVID-19 impacted the overall employment environment.
We expect this trend to continue into the first half of the New Year.
HSA deposit costs continue to decline as we remain disciplined in this low interest rate environment and totaled 9% in the quarter -- 9 basis points, excuse me, in the quarter.
I'm now on Slide 6.
Community Banking loans grew 5% year-over-year and declined 5% excluding PPP.
As indicated on the slide, PPP loans decreased $63 million as we saw repayment and forgiveness activity begin in the quarter.
Community Banking deposits grew 14% year-over-year with consumer and business deposits growing 9% and 31% respectively.
Deposit costs continue to decline and totaled 16 basis points in the quarter.
Net interest income grew $8.3 million from a year ago, driven by overall loan and deposit growth.
The next two slides address credit metrics and trends which continue to be surprisingly stable given all the challenges in the macro environment.
On Slide 7, we show our commercial loan sectors most directly impacted by COVID, overall loan outstandings to these sectors have declined 10% from September 30th and payment deferrals have declined $64 million or 31%.
On Slide 8, we provide more detail across our $20 billion commercial and consumer loan portfolio.
The key takeaway here is the payment deferrals declined by 35% to $315 million at December 31st and now represent 1.6% of total loans compared to 2.4% of total loans at September 30th.
At year-end, $100 million or 32% of the $315 million in payment deferrals are first time deferrals.
And CARES Act and Interagency Statement defined payment deferrals, which are included in the $315 million of total payment deferrals at December 31st, decreased 29% from September 30th and now stand at $201 million.
While challenges related to the pandemic and the overall economy remain, I am pleased with the considerable support we have been able to provide to our customers as they work through these challenging times.
We continue to actively monitor risk, make real-time credit rating decisions and address potential credit issues proactively.
We remain confident about the quality of our risk selection and the underwriting processes, our portfolio management capabilities and our capital position.
I will focus on the key aspects of performance in the quarter, including stable adjusted net interest margin, an increase in non-interest income, ongoing expense control and a favorable credit profile.
I'll begin with our average balance sheet on Slide 9.
Average securities grew $160 million or 1.8% linked-quarter.
Securities represented 27% of total assets at December 31st.
Average loans declined $142 million or 0.6% linked-quarter, primarily driven by a $176 million decline in consumer loans, reflecting higher pay down rates in mortgage and home equity portfolios.
Prepayment and forgiveness on PPP loans during the quarter totaled $98 million.
In Q4, we recognized $7.3 million of PPP deferred fee accretion and the remaining deferred fee balance totaled $27 million at December 31st.
Deposits increased $276 million linked-quarter, primarily driven by growth in Community Banking and HSA.
This was partially offset by a reduction in CDs.
The strong growth in deposits allowed us to pay down borrowings, which were lower by $289 million from Q3.
At $1.9 billion, borrowings represent 5.2% of total assets compared to 7% at September 30th and 11.6% in prior year.
The tangible common equity ratio increased to 7.9% and will be 32 basis points higher, excluding the $1.3 billion and zero percent risk-weighted PDP loans.
Tangible book value per share at quarter end was $28.04, an increase of about 1% from September 30th and 3% from prior year.
Slide 10 highlights adjustments to reported net income.
Aggregate adjustments totaled $42 million pre-tax or $31.2 million after tax, representing $0.35 per share.
Of the $42 million in adjustments, $38 million is related to our strategic initiatives, which John will discuss further.
The remaining $4.1 million is associated with the debt prepayment.
The prepayment expense adversely impacted current quarter net interest income and impacted net interest margin by 5 basis points.
However, we will benefit by approximately $1.3 million in net interest income per quarter and NIM will benefit by 2 basis points.
On Slide 11, we provide our reported and adjusted income statement.
As highlighted on the previous page, the adjustments total $42 million pre-tax.
On an adjusted basis, net interest income increased by $1.3 million from prior quarter.
This was a result of a $4.5 million reduction in deposit and borrowing costs, along with $1 million in additional loan income, which was partially offset by a $4 million decline in securities income primarily as a result of elevated prepayments.
Taken together, our adjusted net interest margin of 2.8% was flat to third quarter.
As compared to prior year, net interest income declined by $11 million.
$47 million of the decline was the net result of lower market rates and was partially offset by interest income of $29 million from earning asset growth and $8 million from a reduction in borrowings.
Non-interest income increased $1.7 million linked-quarter and $5.9 million from prior year.
Loan fees increased $2.5 million from prior quarter as a result of higher syndication, pre-payment and line usage fees.
Other income increased $4.4 million reflecting higher direct investment income and swap fees.
HSA fee income decreased $3.1 million linked-quarter as Q3 included $3.2 million of exit fees on TPA accounts.
Mortgage banking revenues decreased $3 million linked quarter as a result of lower volume on loans originated for sale.
The $5.9 million increase in non-interest income from prior year reflects additional loan fees, higher mortgage banking revenue and HSA fee income, partially offset by lower deposit service fees.
Non-interest expense of $181 million reflects an increase of $2 million primarily due to technology and seasonal increases in temporary staffing to support the HSA annual enrollment.
Non-interest expense decreased $1.5 million or 1% from prior year and our efficiency ratio was 60% in the quarter.
Pre-provision net revenue was $116 million in Q4.
This compares to $115 million in Q3 and $122 million in prior year.
Our CECL provision in the quarter reflects the credit of $1 million, which I'll discuss in more detail on the next slide.
And our adjusted tax rate was 22.1%.
Turning to Slide 12, I will review the results of our fourth quarter allowance for loan losses under CECL.
The allowance coverage ratio, excluding PPP loans, declined from 1.8% to 1.76%, with total reserves of $359 million.
The reserve balance reflects our lifetime estimate of credit losses.
A small decline from prior quarter is the net effect of an improvement in the macroeconomic forecast partially offset by additional qualitative reserves.
The increase in qualitative reserves is driven by uncertainty around the resolution of a pandemic and the pace of the recovery.
The total reserves provide a more adverse scenario than shown in the baseline assumptions at the bottom of the page.
Slide 13 highlights our key asset quality metrics as of December 31st.
Non-performing loans in the upper left increased $3 million from Q3.
Commercial, residential mortgage and consumer each saw linked quarter declined, while commercial real estate increased.
Net charge-offs in the upper right decreased from the third quarter and totaled $9.4 million after $1.9 million in recoveries.
The net charge-off rate was 17 basis points in the quarter.
Commercial classified loans in the lower left increased $30 million from Q3 and represented 352 basis points of total commercial loans.
Slide 14 highlights our liquidity metrics.
Our diverse deposit gathering sources continue to provide us with considerable flexibility.
Deposit growth of $414 million exceeded total asset growth and lowered the loan-to-deposit ratio to 79%.
Our sources of secured borrowing capacity increased further and totaled $12 billion at December 31st.
Slide 15 highlights our strong capital metrics.
Regulatory capital ratios exceed well-capitalized levels by substantial amounts.
Our common equity Tier 1 ratio of 11.35% exceeds well capitalized by $1.1 billion.
Likewise, Tier 1 risk-based capital of 11.99% exceeds well-capitalized levels by $895 million.
Our guidance will continue to be impacted by the pace and duration of the pandemic over the next few quarters.
That being said, we anticipate modest loan growth, excluding the timing of PPP forgiveness and Round 2 originations.
NIM will also be influenced by the rate environment and PPP forgiveness.
Assuming today's rates, we would expect net interest income to be around Q4's level.
Non-interest income will be modestly lower linked quarter, driven by lower loan-related and mortgage banking fees.
The provision for credit losses will continue to be impacted by credit trends, the macroeconomic environment, government stimulus and the duration of the pandemic.
Core operating expenses will be lower as we begin to recognize the benefits of our strategic initiatives.
With that, I'll turn things back over to John for a review of our strategic initiatives.
I'm on Slide 16.
As we discussed on the October earnings call, we've been working through a comprehensive, strategic and organizational review since before the onset of the pandemic.
And while today we'll provide more detail on our progress in some shorter-term financial targets, I want to stress that the work we've done over the last year and the actions we are taking are transforming our company and the way we do business.
We believe that we will continue delivering incremental value to our customers and shareholders for years to come, consistent with our overarching objectives of maximizing economic profits and creating long-term franchise value.
Importantly, these actions afford us the capacity to invest in the future and provide better customer experiences through improved products, services and digital offerings, all in the furtherance of our mission to help individuals, families and businesses achieve their financial goals.
We are investing in revenue growth drivers that leverage our differentiated businesses.
These include accelerating growth in new and existing commercial banking segments, improving sales productivity, enhancing non-interest income through treasury and commercial card products and driving deeper relationships across all lines of business.
While we anticipate short-term benefits from these initiatives, they will contribute meaningfully to our financial performance in 2022 and beyond.
Additionally, we continue to invest in technology to provide better digital experiences for our customers and bankers to further improve customer acquisition and retention rates.
As shown on Slide 17, we have made significant progress on our efficiency opportunities.
We remain on track to deliver an 8% to 10% reduction in core non-interest expense.
We expect this to be fully realized on a run rate basis by the end of the fourth quarter of 2021.
Our efficiency initiatives fall into three areas of focus that we discussed last quarter: rationalizing retail and commercial estate, simplifying the structure of the organization and optimizing our ancillary spend.
We've taken actions to simplify our organizational structure, including combining like functions, automating manual processes and selectively outsourcing commoditized activities.
A portion of the project-related expense adjustments that Glenn discussed relate to these actions and the associated severance costs result from a targeted reduction in the overall workforce.
We announced in December the consolidation of 27 banking centers and we have targeted actions aimed at reducing corporate office square footage over time.
The real estate optimization plan reflects our response to changes in customer preferences and the shift in workplace dynamics that have only accelerated during the pandemic.
The remaining quarterly cost benefits will be driven by a more disciplined approach to ancillary spend, redesigning and automating internal critical processes and leveraging back office synergies.
Slide 18 provides an overview of the cost savings and an expense walk to our fourth quarter target run rate.
Achieving these efficiencies will allow us to continue to invest in our franchise and improve the customer experience.
The last slide for me is an important one.
We've updated it from prior quarters.
It aggregates our activities during 2020 related to helping our employees, our consumer and business customers and the communities we serve navigate an extraordinarily challenging time.
This is what the Webster Way is all about.
The commitment to our customers, our shareholders and to each other has enabled Webster to continue to differentiate itself.
And before we go to Q&A, I'd like to take a moment to share with you all that today is Terry Mangan's last earnings call as he will be retiring on March 31st.
Many of us and many of you have had the pleasure of working with Terry over his 18-year career at Webster.
Terry's efforts have been recognized at the national level by institutional investor as a top investor relations professional.
With that, Daryl, Glenn, Chad, Jason and I are prepared to take questions. | compname reports q3 earnings per share $0.75.
compname reports third quarter 2020 earnings of $0.75 per diluted share.
q3 earnings per share $0.75.
provision for credit losses was $22.8 million in the quarter. | 0 |
I'm pleased that you're joining us for DXC Technology's first-quarter 2022 earnings call.
Our speakers on the call today will be Mike Salvino, our president and CEO; and Ken Sharp, our executive vice president and CFO.
In accordance with SEC rules, we provided a reconciliation of these measures to their respective and most comparable GAAP measures.
A discussion of these risks and uncertainties is included in our annual report on Form 10-K and other SEC filings.
Today's agenda will begin with a quick update on our solid Q1 performance, which continues to show that revenue, adjusted EBIT margin, book-to-bill and non-GAAP earnings per share all have a positive trajectory compared to past quarters.
During our Investor Day in June, we gave you additional insights into the steps of our transformation journey, and those steps are: inspire and take care of our colleagues, focus on our customers, optimize costs, seize the market and build a strong financial foundation.
I will give updates on each step, and then hand the call over to Ken to share our Q1 financial results, guidance and more details on how we are building a strong financial foundation.
Regarding our Q1 performance, our revenues were $4.14 billion, and our adjusted EBIT margin was 8%.
This represents the fourth straight quarter of both revenue stabilization and sequential margin expansion, and we expect both trends to continue in Q2.
Book-to-bill for the quarter was 1.12.
This is the fifth straight quarter that we delivered a 1.0 or better book-to-bill, and we expect our success of winning in the market to continue in Q2.
Our non-GAAP earnings per share was $0.84 in the quarter, which is up 300%, as compared to $0.21 that we delivered in Q1 of FY '21.
The positive trajectory of all four of these numbers gives us confidence that our playbook is working.
As a refresher, our playbook has three phases.
The stabilization phase was completed in FY '21.
This phase enabled us to make great progress with our colleagues, customers, on revenue, margin, book-to-bill and reducing our debt.
We are now focused on the foundation phase.
This phase focuses on the steps that will allow us to deliver growth.
The goals of this phase are: first, continue to increase our employee engagement, all while we attract and retain highly talented colleagues; second, stabilize year-on-year organic revenue; third, expand adjusted EBIT margins; fourth, consistently deliver a book-to-bill number of 1.0 or greater, with a nice mix of new work and renewals; and finally, under Ken's leadership, deliver a financial foundation that increases discipline and improves our cash flow and earnings power.
Now I will discuss the good progress we are making on each step of our transformation journey, beginning with inspire and take care of our colleagues.
We are executing a people-first strategy.
Attracting and retaining talent is fundamental to enable our growth.
Our refreshed leadership team has deep industry experience and is delivering.
Brenda, who is our chief marketing officer, is our newest addition.
Brenda is a strategic results-oriented leader who brings deep marketing experience to DXC.
75% of our leadership team is now new to DXC and bringing in talent based on their personal credibility as talent follows talent.
What the team is finding is that the new DXC story is resonating in the market, and new-hires are wanting to join DXC because they see the opportunity to progress their careers with a company that's on the right trajectory.
We mentioned during our investor call that nearly 50% of our vice presidents across the company are new to DXC within the last 22 months.
Also, we are investing in our people.
This quarter, we rewarded high performance by paying annual bonuses that benefited roughly 45,000 of our colleagues.
In Q2, we are planning merit increases that will benefit roughly 77,000 of our colleagues.
In addition to these investments, we are doing a great job of taking care of our colleagues and their families during the pandemic.
This focus on our colleagues is unique and builds trust with them, increases employee engagement, allows us to compete for talent and enables us to deliver for our customers.
Focus on our customers is the second step of our transformation journey.
Our investment in our customers is the primary driver of revenue stabilization.
It was clear from their comments that the new DXC story is resonating with them because we are delivering.
These are all large global companies, and they are saying that their IT estates are important.
In fact, they use the word critical.
Our strategy of delivering ITO services builds customer intimacy and develops trust that when our customers want to further transform their business, they turn to us, and allows us to move them up the enterprise technology stack.
Additional evidence that our strategy is working is the nice progress we have made on our GBS business, along with the cloud and security layer of our GIS business.
All of this gives us confidence that we will deliver on our financial commitments.
Now let me turn to our cost optimization program.
We continue to do well, optimizing our costs and delivering for our customers without disruption.
These levers have helped us expand our margin going from 7.5% last quarter to 8% this quarter.
You will hear from Ken that we expect to continue to expand margins in Q2.
Next, seize the market is where we are focused on cross-selling to our existing customers and winning new work.
The 1.12 book-to-bill that we delivered this quarter is evidence that our plan is working.
In Q1, 57% of our bookings were new work and 43% were renewals.
You will see that we are running specific sales campaigns.
An example of these campaigns is ITO modernization, which is focused on improving the performance of our customers' IT estates.
Another example is our campaign to show our customers how to think about cloud, which combines on-prem, private cloud and public cloud technology.
Our ability to deliver a consistent book-to-bill of 1.0 in each of the last five quarters is evidence that these sales campaigns are working and that we can win in the IT services industry.
This momentum and success in the market gives us confidence that we will deliver another book-to-bill of 1.0 or greater in Q2.
Turning to our financial performance on Slide 12.
For the quarter, DXC exceeded the top end of our revenue, margin and earnings guidance, and continued to deliver a strong book-to-bill.
GAAP revenue was $4.14 billion, $10 million higher than the top end of our guidance range.
Adjusted EBIT margin was 8% in the quarter, an improvement of 380 basis points as compared to the prior quarter.
In Q1, bookings were $4.6 billion for a book-to-bill of 1.12, the fifth straight quarter of a book-to-bill greater than one.
Moving on to Slide 13.
Our Q1 non-GAAP earnings per share was $0.84 or $0.08 higher than the top end of our guidance, benefiting $0.05 from a lower tax rate.
Restructuring and TSI expenses were $76 million, down 58% from prior year.
Free cash flow was a use of cash of $304 million, as compared to a use of cash of $106 million in the prior year.
We expect free cash flow to improve significantly as the year progresses.
As the next slide shows, our Q1 FY '22 performance continues our trajectory as we deliver on our transformation journey.
Starting with organic growth progression, we went from approximately 10% decline in the first three quarters of FY '21 to down 6.5% in the fourth quarter and now down to a decline of 3.7%.
This is a 40% improvement from the prior quarter.
Our previous organic revenue growth calculation was not performed in this manner.
As a result, we have revised the organic growth rates for the prior-year periods in our earnings deck and have further supplemented our organic calculation to include all the information to support the calculation, providing you complete transparency.
This change does not yield a meaningful difference to our historically reported organic revenue growth rates, trajectory or guidance.
Adjusted EBIT margin expanded 380 basis points.
Excluding the impact of dispositions, margin expanded almost 600 basis points.
We continue to market with five consecutive quarters of a book-to-bill greater than one, and lastly, non-GAAP earnings per share quadrupled.
Now moving to our GBS business, composed of analytics and engineering, applications and business process services.
Revenue was $1.9 billion in the quarter.
Organic revenue growth was positive 2% as compared to prior year.
In terms of quarterly progression, organic revenues declined about 6% to 7% in the first three quarters of FY '21, declined 3.4% in the fourth quarter and turned to positive 2% this quarter.
GBS segment profit was $272 million with a 14.4% profit rate, up 450 basis points from the prior year.
GBS bookings for the quarter were $2.4 billion for a book-to-bill of 1.29.
As you have seen for a number of quarters, the demand for our GBS offerings, the top half of our technology stack have been quite robust and now yielding positive organic revenue growth.
Turning to our GIS segment, consisting of IT outsourcing, cloud and security, and modern workplace.
Revenue was $2.3 billion, down 9.1% year over year on an organic basis.
We are seeing the rate of decline moderate this quarter despite the headwinds from our modern workplace business.
GIS segment profit was $131 million with a profit margin of 5.8%, a 480-basis-point margin improvement over the prior-year quarter.
GIS bookings were $2.2 billion for a book-to-bill of 0.97, compared to 0.77 in the prior year.
It is safe to say revenues continue to stabilize and demonstrate that with improved customer intimacy and delivery, our revenue is not running away, allowing us to build our growth foundation.
Now I will break down our segment results, GBS and GIS, into the layers of our enterprise technology stack, starting with GBS.
Analytics and engineering revenues were $482 million, up 12.9% as compared to prior year.
We continue to see high demand for our offerings with a book-to-bill of 1.32 in the quarter.
Applications also continued to demonstrate solid progress with revenue of $1.246 billion, growing organically almost 1%.
Applications also continues its strong book-to-bill at 1.32.
Business process services revenues were $118 million, down 13% compared to the prior-year quarter with a book-to-bill of 1.13.
Cloud and security revenue was $549 million, up 4.9% as compared to the prior year.
The cloud business is benefiting from increased demand associated with our hybrid cloud offerings.
Book-to-bill was 0.85 the quarter.
IT outsourcing revenue was $1.13 billion, down 9% as compared to prior year.
To put this decline in perspective, last year, this business declined almost 20% year over year.
We expect this momentum to continue and organic declines to further abate as the year progresses.
Modern workplace revenues were $577 million, down 19.7% as compared to prior year.
Book-to-bill was 1.0 in the quarter.
As you may recall, modern workplace was part of our strategic alternatives and was not part of our transformation journey until recently.
As a result, we previously disclosed that the performance would be uneven as we invest in the business, enhancing our offerings and innovating the end-user experience.
As our transformation journey takes hold, we expect modern workplace performance to improve similar to the trend we have seen with our ITO business.
One of our key initiatives to drive cash flow and improve earnings power is to wind down restructuring in TSI costs.
We expect to reduce this from an average of $900 million per year over the last four years to $550 million in FY '22 and about $100 million in FY '24.
On Slide 19, we detail our efforts to strengthen our balance sheet.
We are proud of what we achieved on this front, reducing our debt by $7 billion, while improving our net debt leverage ratio to 0.9 times.
Further, we have reached our targeted debt level of $5 billion with relatively low maturities through FY '24.
From our improved balance sheet, let's move to cash flow for the quarter.
First-quarter cash flow from operations totaled an outflow of $29 million.
Free cash flow for the quarter was negative $304 million.
As you likely realize, with Mike's leadership, we will continue to make decisions to better position the company for the longer term, creating a sustainable business.
Certain of these decisions impacted cash flow this quarter.
As our guidance anticipated, we plan to take certain actions that impacted the Q1 cash flow.
We remain on track to deliver our full-year free cash flow guidance of $500 million.
Let's now turn to our financial priorities on Slide 21.
We are working to build a stronger financial foundation and use that base to drive the company forward in a disciplined and rigorous fashion, unleashing DXC's true earnings power.
Our second priority is to have a strong balance sheet.
We achieved our targeted debt level.
We are encouraged by our almost 50% year-over-year interest expense reduction.
We continue to focus on reducing interest expense and are evaluating refinancing options given the advantageous interest rate environment.
Third, we will focus on improving cash flow.
During the quarter, we paid $88 million to draw to conclusion a long-standing $3 billion take-or-pay contract for IT hardware.
These types of contracts are not efficient, and we are reducing our exposure.
Additionally, we paid down $300 million of capital leases and asset financing in order to allow us to dispose of IP hardware purchased under the previously mentioned take-or-pay arrangement and realizing tax deduction once we dispose of the unutilized assets.
Given our relatively low borrowing cost, it makes less sense to enter into capital leases as the borrowing costs are higher and creates other complexities.
We continue to reduce capital lease and asset financing origination from approximately $1.1 billion in FY '20 to $450 million in FY '21 and believe that we will remain at that level or lower for FY '22.
As we continue to curtail capital lease origination, our average quarterly lease payment will reduce from about $230 million a quarter in FY '21 to about $170 million near term.
Our efforts to limit capital leases does create upward pressure on capital expenditures.
Though, on balance, we expect to reduce cash outflows for both capital leases and capital expenditures over time.
Lastly, we terminated our German AR securitization program, negatively impacting cash flow by $114 million for the quarter.
Going forward, this will result in interest savings, strengthen our balance sheet, but more importantly, it will bring us closer to our customers as cash collections is tied to their success.
Fourth, we will reduce restructuring and TSI expense, improving our cash flow.
Fifth, as we generate free cash flow, we will appropriately deploy capital to invest in our business and return capital to our shareholders, all the while continuing to maintain our investment-grade credit profile.
During the quarter, we executed $67 million of stock buybacks to offset dilution, taking advantage of what we believe was an attractive valuation in the market.
I should note, we continue to make progress with our efforts to optimize our portfolio, unlocking value as we divest noncore assets, including both businesses and facilities.
We expect to continue these efforts.
Our results today include the benefit from the sale of assets, partially offset by other discrete items, and the headwind of 30 basis points of margin associated with the disposition of our healthcare provider software business.
Moving on to second-quarter guidance on Slide 22.
Revenues between $4.08 billion and $4.13 billion.
This translates into organic revenue declines of down 1% to down 3%.
Adjusted EBIT margins of 8% to 8.4%.
Non-GAAP diluted earnings per share in the range of $0.80 to $0.84.
As we look forward to the rest of the year, I would note that we expect $175 million of tax payments in Q2 related to the gains on dispositions.
We also updated our FY '22 interest guidance to approximately $180 million, a $20 million improvement; and reduced our full-year non-GAAP tax rate by 200 basis points to 26%.
As noted on Slides 23 and 24, we are reaffirming our FY '22 and longer-term guidance.
Lastly, we expect to see further improvement in the quarterly year-over-year organic revenue growth rates as we move through the year.
Let me leave you with three key takeaways.
First, I couldn't be more pleased with the trajectory of the business.
Our improvement in revenue, margins and earnings per share is evident, and we expect this success to continue.
Second, we have momentum and continue to win in the market.
We expect our progress in driving a book-to-bill of over 1.0 to continue.
Third, our financial foundation is coming together nicely under Ken's leadership.
We have made great progress on debt reduction, reducing our restructuring and TSI expense, and delivering on our capital allocation priorities.
These three key takeaways show that we have good momentum, we are building the foundation for growth, and we are confident that we will deliver on our financial commitments. | q1 non-gaap earnings per share $0.84.
q1 revenue $4.14 billion versus refinitiv ibes estimate of $4.11 billion.
bookings of $4.6 billion and book-to-bill ratio of 1.12x in q1 fy22. | 1 |
Joining me on the call today is Rusty Gordon, our vice president and chief financial officer; and Mike Laroche, vice president, controller, and chief accounting officer.
I'll begin by sharing broad commentary on our consolidated performance for the quarter.
Mike will provide details on our segment results and Rusty will conclude our formal comments with our outlook for the fiscal 2022 third quarter.
Our comments will be on an adjusted basis and all comparisons are to the second quarter of fiscal 2021 unless otherwise indicated.
For the fiscal 2022 second quarter, consolidated sales increased 10.3% to $1.64 billion driven by continued robust demand for paints, coatings, sealants, and other building materials.
This top-line performance was slightly ahead of the outlook we provided last quarter.
Our second quarter sales growth could have been even stronger if not for continuing supply chain challenges that limited access to certain raw materials and cost us roughly $200 million of lost or deferred sales in the quarter.
Organic sales growth was 8.6%, foreign currency translation provided a tailwind of 0.4% and acquisitions contributed 1.3%.
Adjusted earnings per share was $0.79 decreasing 26% compared to the strong adjusted diluted earnings per share growth of nearly 40% in the prior-year period.
Consolidated adjusted EBIT for the quarter was a $157.3 million decrease of 21%, which was in line with our outlook and as a result of continued material, wage, and freight inflation, as well as supply chain disruptions that were exacerbated by hurricane Ida.
At the beginning of the second quarter and increased our conversion costs because of this supply disruption.
We lost the equivalent of nearly 300 production days across RPM facilities globally during the second quarter, which was similar to our lost production days in the first quarter.
We partially offset these challenges with price increases, which average in the high single digits across RPM, and continued operational improvements from our map to growth program, which provided $19 million in incremental cost savings.
It's also worth noting that we face a difficult comparison to the prior year when consolidated adjusted EBIT increased nearly 30%.
Largely due to higher sales volumes driven by extraordinary demand for our home improvement products in our consumer group during the pandemic.
To recover lost margin from the inflation, we are implementing an additional round of price increases this quarter across our business segments as appropriate.
In many instances, this will be the third round of price increases in a 12-month period.
The next slide provides high-level results by segment much like last quarter.
Our performance reflects the benefits of our balanced business portfolio where softness in one segment is generally offset by strength in others.
During the second quarter of fiscal 2022, three of our four operating segments Construction Products Group, Performance Coatings Group, and Specialty Products Group generated strong double-digit sales growth.
Combined sales in these three segments increased more than 18% with roughly 10% being unit volume growth year over year while our Construction Products and Performance Coatings Group generated strong adjusted EBIT growth especially products and consumer group faced extreme supply chain constraints that put pressure on their earnings.
In particular, the Specialty Products Group restoration equipment business was affected by worldwide semiconductor chip shortages that delayed sales to a growing backlog and unfavorably drove product mix.
The Consumer Group continued to experience inflationary pressures, as well as shortages of key raw materials driven largely by last year's production outage at a key resins supplier that negatively impacted conversion costs.
In addition, the consumer group faced a difficult comparison to the prior-year period when sales increased more than 21% and adjusted EBIT was up 66%.
These growth rates in the prior-year period were largely due to the extraordinary DIY demand during the pandemic.
All indicators suggest that the underlying demand for our consumer products remains strong and that is continuing to grow in our third quarter.
Before we move to the details on our segment results, I'd like to touch on two larger trends and RPM is well-positioned to capitalize on.
First, as the US government has passed a number of bills over the last two years that will direct billions and potentially trillions of dollars toward construction in infrastructure and markets.
Based on our strong position with these markets with well recognized highly regarded brands such as Tremco roofing systems and commercial sealants, [Inaudible] corrosion control coatings, Euclid concrete admixtures, and Nudura Insulated Concrete Forms all of which have been gaining market share in this fiscal year.
We are well-positioned for continuing meaningful growth in North America and globally.
Two years ago, we introduced the tag line building a better world.
In a number of our communications, it certainly represents our products and services, which literally contribute to making structures better through beautification, protection, restoration, and sustainability.
But it's also meant to be aspirational, as we strive to make the world a better place for those we serve including our customers, entrepreneurs, associates, shareholders in the communities in which we operate.
As we all continue to manage through the global pandemic, we remain focused on coming together to make the world a better place for everyone.
There are many examples where RPM is doing so.
Some of the ways our PM is building a better world include, the development of sustainable products such as our AlphaGuar Liquid Applied roofing products, which are gaining market share and allowing roofs to be restored and eliminating the need for tear-off a replacement and significant contributions to waste sites.
In addition, our Tremco roofing business has been named a bio preferred program pioneered by the USDA because of our early adoption of sustainable product solutions within our roofing division and the industry.
Talent development which includes the right education and training initiative that is part of our WTI business and was developed in response to the shortage of qualified roofers includes an element called ELEVATE.
This involves the training of incarcerated individuals in roofing so that they have skills and job opportunities upon their release at which time they are guaranteed a job at our Tremco roofing business.
And sustainability practices across our operations such as initiatives to reduce water usage that are saving millions of gallons a year to Day-Glow, Rust-Oleum, and other businesses.
You can learn more about how RPM is building a better world on our website and in our ESG report at www.
We have a great story to tell and we will be organized to tell it better in the coming quarters and years.
We remain focused on long-term growth and despite COVID-related challenges especially in supply chains continue to invest in initiatives that will drive our business forward in the coming years.
This includes operational improvements, the development of innovative new products, acquisitions, and manufacturing capacity expansions.
Case in point 178,000 square foot plant we purchased in September, which is located on 120 acres in Texas.
This will serve as a manufacturing center of excellence for multiple RPM businesses.
In just two months, it is already improving the resiliency of our supply chain and fill rates.
During the second quarter, we began production of alkyd resins, which are the important raw materials for a number of our products, particularly in our Consumer Group.
In the coming quarters, the plant expansion expanded the production of a number of our high-growth product lines.
Turn to the next slide.
Our Construction Products Group generated all-time record sales of $614.2 million.
Sales grew 22% for the quarter the highest rate among our four segments,19.9% was organic.
Foreign currency translation provided at 0.3% tailwind and acquisitions contributed 1.8%.
CPG is market-leading top-line growth and positive mix were primarily driven by innovation and its high-performance building solutions, market share gains, and strong demand in North America for its construction and maintenance products.
The businesses that generated the highest growth included those providing insulated concrete forms, roofing systems, concrete admixture and repair products, and commercial sealants.
Sales of our Nudura ICF have been particularly robust because they offer an alternative to lumber, which is in short supply and experiencing skyrocketing costs, and because Nudura ICF provides structural, insulation, and labor benefits.
Performance in international markets was mixed with Europe fairly flat while emerging markets showed signs of recovery.
The segments adjusted EBIT increased 16.5% to a record level due to volume growth, operational improvements, and selling price increases, which helped offset material inflation.
Moving to the next slide, positive trends from the first quarter carried over into the second for our Performance Coatings Group.
Sales grew 16.9% to a record level reflecting organic growth of 12.2%, a foreign currency translation tailwind of 0.8% and a 3.9% contribution from acquisitions.
Nearly all of PCGs major business units contribute to the positive growth largely due to the catch-up of maintenance projects previously deferred by industrial customers.
Particularly, as COVID restrictions relaxed on contractor access to construction sites improved.
Sales growth was also facilitated by price increases and improved product mix driven by new decision support tools that helped improve salesforce efficiencies and product mix.
Leading the way, were the segments largest businesses providing polymer flooring systems and corrosion control coatings.
Serving growing end markets including electric vehicles, semiconductors, and pharmaceuticals.
Sales also remain strong and its recently acquired bison-raised flooring business and in emerging markets.
Adjusted EBIT increased 41.3% to a record level as a result of pricing, volume growth, operational improvements, and product mix.
Advancing to the next slide.
Our specialty products group reported a sales increase of 10% to a record level as its businesses capitalized on the strong demand in the outdoor recreation, furniture, and OEM markets they served.
The segments fluorescent pigments business also generated good top-line growth.
Organic sales increased 9%.
Recent acquisitions added 0.4% and foreign currency translation increased sales by 0.6%.
Adjusted EBIT decreased 29.4% due to higher raw material and conversion costs from supply disruptions, as well as unfavorable product mix.
Particularly, in our disaster restoration equipment business, which has been hindered by the semiconductor chip shortage as Frank had mentioned.
In addition, the segment experienced higher expenses resulting from investment, investments and future growth initiatives, plus higher legal expenses.
These factors were partially offset by operational improvements.
On the next slide, you'll see that the severe raw material shortages that the consumer group experienced during the fiscal 2022 first quarter persisted during the second quarter.
The resulting production outages negatively impacted segment sales by approximately $100 million.
Segment sales decreased 3.3% with organic sales down 3.5% and foreign currency translation of 0.2% despite raw material shortages.
The segments fiscal 2022 second quarter sales were still 17.4% above the pre-pandemic levels of the second quarter of fiscal 2020.
Demand for its products remains high and inventories and many of its channels are low.
We expect to recover these sales when raw material and supply conditions stabilize.
As Frank mentioned in his opening comments, the consumer group also faced a challenging comparison to the prior-year period when sales increased 21.4% and adjusted EBIT increased 65.8%.
Due to extraordinarily high demand for its home improvement products during the first phase of the pandemic.
Earnings decline during the fiscal 2022 second quarter from inflation of materials, freight, and labor, as well as the unfavorable impact of supply shortages on productivity.
These factors were partially offset by price increases and operational improvements.
The segment continues to add capacity to meet demand and build resiliency in its supply chain to secure the raw materials it requires in order to meet customer demand.
It is using contract manufacturing at higher costs until it can bring new manufacturing capacity online.
It is also qualifying new sources for raw materials including our new manufacturing plant in Texas.
Looking ahead to our fiscal 2022 third quarter we expect that the strong demand for our paints, coatings, sealants and other building materials will continue.
Supply chain challenges and raw material shortages have persisted in December further compounded by disruptions from the Omicron variant on RPM's operations and those of our supplier base.
These factors are expected to put pressure on our top line and productivity.
In spite of these challenges, we expect to generate double-digit consolidated sales growth in the fiscal 2022 third quarter versus last year's record third quarter sales, which increased 8.1%.
We anticipate high double-digit sales growth along with margin accretion in our Construction Products Group and Performance Coatings Group.
SPG sales are expected to be at the low double digits as compared to last year's third quarter.
The Consumer Group faces a tough comparison to the prior-year period when its sales increased 19.8% and as a result, its sales are anticipated to increase by low single-digit.
Consolidated adjusted EBIT for the third quarter of fiscal 2022 is expected to decrease 5% to 15% versus the same period last year when adjusted EBIT was up to 29.7%.
We anticipate that earnings will be affected by ongoing raw material, freight, and wage inflation, as well as the impact of raw materials shortages, on sales volume, plus the renewed COVID disruption from the surging Omicron variant.
These challenges will disproportionately impact our consumer segment.
We continue to work to offset these challenges by implementing price increases, improving operational efficiencies, and bringing on additional manufacturing capacity.
Finally, I'd like to note that we remain laser-focused on executing our strategies for sustained growth.
We remain vigilant about protecting the health of our employees, their families, and the communities in which we operate with the rise in COVID cases worldwide.
We remain focused on processes and procedures to maintain safe and productive working environments for our associates.
We continue to be agile in our management of the business allowing us to navigate supply chain issues, and meet customer needs.
We expect that margins will recover toward pre-pandemic levels once supply challenges abate.
Lastly, we are investing in employee training and other initiatives that will drive long-term growth including operational improvements, innovations, acquisitions, capacity expansions, and information technology.
These actions will optimally position RPM to deliver long-term growth and increased value for our stakeholders.
This concludes our formal comments. | q2 adjusted earnings per share $0.79.
q2 sales rose 10.3 percent to $1.64 billion.
expects to generate double-digit consolidated sales growth in fiscal 2022 q3 versus last year's q3 sales.
anticipates that q3 earnings will be affected by ongoing raw material, freight and wage inflation.
q3 sales volumes to be impacted by operational disruptions by surging omicron variant of covid-19 & raw material shortages. | 1 |
Additionally, the content of this conference call may contain time-sensitive information that is only accurate as of the date hereof.
We do not undertake and specifically disclaim any obligation to update or revise this information.
As a reminder, Annaly routinely posts important information for investors on the company's website, www.
Today, I'll provide an overview of the current macro environment, briefly discuss our performance during the quarter and full year 2021 and close with our outlook for the year ahead.
Ilker will then provide more detailed commentary on our investment portfolio, while Serena will discuss our financial results.
And as noted, our other business heads are also here to provide additional color during Q&A.
Now, beginning with the macro landscape, we saw increasingly challenging market conditions in the fourth quarter and into 2022 as the robust performance of the U.S. economy has made it evident that a withdrawal of pandemic era stimulus is imminent.
economy grow 5.7% in real terms in 2021, marking the best annual growth in nearly 40 years.
Meanwhile, the labor market has seen a rapid recovery as employers added 6.4 million jobs last year and the unemployment rate fell to 3.9%.
Both measures suggest that the labor market has recovered significantly since the onset of the pandemic.
Stimulus measures fueled this rapid recovery, which has also spurred inflation to generational highs as seen in December when the consumer price index reached 7% year over year.
Although much of this increase in prices was initially seen as temporary, ongoing elevated price gains across various categories of goods and services raise the risk that inflation could persist for some time.
Accordingly, current macroeconomic conditions have led to a meaningful shift by the Fed, which now views less accommodative monetary policy is the primary way to ensure parts of its mandate, full employment and stable prices are being met.
In addition to an accelerated taper, Fed has begun to signal a larger number of hikes than previously expected.
Front-end rate markets are pricing roughly 25 basis point rate hikes this year beginning in March, up from just two -- one quarter ago.
Given the uncertainties around the economy, the Fed is likely to direct market pricing and hike in line with it rather than provide forward guidance well ahead of time.
The Fed has also begun to discuss shrinking its balance sheet, and we expect the Fed will let assets run off at a pace faster than the prior taper of $50 billion per month.
Now, this notable shift in policy expectations and higher volatility have led to a tightening of financial conditions and an underperformance of assets most closely tied to monetary policy, best seen through the spread widening in agency MBS in recent weeks.
Turning to Annaly's portfolio, agency MBS underperformed given weaker demand following the initiation of Fed taper and a flattening of the yield curve.
In anticipation of wider spreads, we managed the portfolio to decrease leverage and optimize our asset allocation with total assets decreasing by approximately $5 billion to $89 billion in the quarter.
As a result, economic leverage declined slightly from 5.8 times to 5.7 times.
Now, we were certainly not immune to the spread volatility as we experienced an economic return of negative 2.4% however, we generated earnings available for distribution of $0.28, unchanged from the prior quarter and exceeding our dividend by $0.06 per share.
With respect to capital allocation, in line with recent quarters, we increased the allocation to our credit businesses by approximately 200 basis points to 32% in the fourth quarter as prospective returns continued to favor credit.
Looking back on the full year, our credit allocation increased approximately 10 percentage points from December 2020, even with the successful sale of our commercial real estate business, which underscores the favorable fundamentals and strong execution from our resi credit and middle market lending businesses.
Now, I'll touch more on our outlook shortly, but notably, both market and business-specific tailwinds remain favorable for our credit businesses.
Now, 2021 was a transformative year for Annaly, marked by the sale of our CRE business, the launch of our mortgage servicing rights platform and the expansion of our residential credit business.
The collective impact of these initiatives has increased our presence throughout residential housing finance and allow us to allocate capital effectively where returns are most attractive, a key differentiator for Annaly.
Now, I'd like to briefly touch on notable milestones in our businesses and how they have better equipped Annaly to be nimble in the midst of volatility.
First, our MSR business had a solid year with assets increasing over $500 million throughout 2021 to $645 million.
We successfully established our MSR platform last year through the addition of key hires, procurement of strategic partnerships and build out of the operations and infrastructure necessary to scale the business efficiently.
As a result of these efforts, we have proven to be a key player in the market ending the year as the fifth largest bulk buyer of MSR.
And with over $200 million of MSR commitments already through the end of January, we're continuing to see progress toward fully scaling the platform and we expect to see increased market activity given diminished originator profitability.
Our residential credit platform, which grew nearly 90% last year, remains diversified with the ability to deploy capital efficiently in either whole loans or securitized markets.
The generation of assets for Annaly's balance sheet, while controlling strategy, diligence and servicing outcomes remains paramount to our investment approach.
Business activity was enhanced by the launch of our whole loan correspondent channel which expanded our sourcing capabilities through the addition of new strategic partners and product offerings.
We've also benefited from new bulk partnerships established outside of our correspondent channel and altogether, these efforts helped drive the group's record $4.5 billion in whole loan purchases last year, which exceeded the amount of originations in both the prior two years combined.
Further, Onslow Bay remains a programmatic issuer of securitizations, pricing 13 whole loan transactions totaling $5.3 billion since the beginning of 2021 with OBX being the fourth largest nonbank issuer of prime jumbo and expanded prime MBS over the past two years.
And with housing fundamentals expected to stay strong, residential credit should remain a key driver of our overall portfolio growth in the year ahead as we build on our origination and securitization momentum.
Now, shifting to our 2022 outlook.
Our portfolio is well prepared for volatility, which we anticipated would materialize as the Fed normalizes monetary policy.
First, we have thoughtfully reduced our economic leverage to one and a half turns since the onset of COVID to 5.7 times, the lowest it's been since 2014.
Our defensive leverage profile is further supported by our low capital structure leverage with 88% of our equity in common stock and minimal asset level structural leverage as highly liquid agency MBS make up the vast majority of our portfolio.
Second, we have substantial liquidity with $9.3 billion of unencumbered assets up $500 million year over year.
And this liquidity is complemented by a wide array of financing options, including our own broker-dealer.
And finally, we are conservatively hedged to mitigate interest rate risk with a year-end hedge ratio of 95%, and we expect to remain close to fully hedged over the near term.
Now, with ample liquidity and historically low leverage, we are well positioned to take a more offensive posture if and when the opportunity presents itself.
While agency returns are increasingly attractive as Ilker will elaborate on, we believe there will be better tactical opportunities out the horizon, and we'll be patient given uncertainty around the market and the Fed.
But should assets continue to widen past current levels, which we deem close to fair value, we stand ready to add fundamentally desirable assets.
Now, Finally, before handing it off to Ilker to discuss our portfolio in greater detail, I wanted to congratulate him on recently being named our Chief Investment Officer.
I've worked with Ilker at three different institutions for the better part of the past 20 years, and I cannot think of an individual more knowledgeable about mortgages and prepayments or better suited to help us drive success for Annaly into the future.
As you discussed, the fourth quarter was challenging for Agency MBS due to a combination of factors.
The Fed initiated and then accelerated the taper, which in conjunction with risk of sentiment caused by the virus variant and geopolitical risks led to significant curve flattening and an uptick in interest rate volatility.
Mortgage investors, notably banks turned their attention to 2022 without Fed support and decreased the pace of their purchases.
MBS underperformance was broad-based across the coupons stack with supply weighing on to upside threes, while higher coupons struggled into the curve flattening.
Although our portfolio was not immune to these sectors, we had been proactively reducing our MBS based exposure throughout 2021.
In fourth quarter, we reduced our agency holdings by roughly $5 billion, primarily through TBA sales, bringing the total 2021 portfolio reduction to $10 billion.
Through this resizing, our portfolio construct remains well positioned across the coupon stack.
In lower coupons, we continue to favor TBAs, which maximize our liquidity profile and despite the initiation of the taper, dollar roll financing remains special in the context of 30 to 40 basis points.
Meanwhile, our specified portfolio is based up in coupon, up in quality and is roughly four years season, which should provide resilient cash flows as we shift out of the financing environment and into on debt favors for extension protection.
In terms of our interest rate exposure, we adjusted hedges toward the front end of the yield curve by selling additional short-term treasury futures, which increased our hedge ratio to 95% of our liabilities.
We have also added short-term software swaps, which are an efficient hedge to our repo-funding levels.
Our conservative hedge portfolio is integral to managing high volatility market environments like the one we experienced recently.
At the current rate levels, to converge the profile of the Agency MBS market has improved meaningfully, but we continue to pursue a conservative approach to managing interest rate risk.
Since the year-end, we have seen a higher in rates and repricing in MBS as the market digests technical impact of Fed monetary policy tightening.
Following the move, wider MBS spreads are within a few basis points of their average 2018 levels, which was the last time the Fed was reducing balance sheet.
When drawing historical comparisons, we believe mortgage cash flows are currently more attractive compared to 2018 for multiple reasons.
Other fixed income alternatives are relatively tight from a historical perspective.
More of the mortgage universe is locked away in Fed and bank held-to-maturity portfolios and the prepayment outlook is much better for the mortgage universe.
In higher coupons, remaining borrowers did not refinance after months with historically low mortgage rates.
So we anticipate they would be less reactive to changes in rates going forward.
Meanwhile, due to very high realized home price appreciation, cash-out refinancings should alleviate extension risk in lower coupon mortgages.
All these factors should materially improve the profile and predictability of mortgage cash flows.
Consistent with these trends, our portfolio paid 21.4 CPR in Q4, 7% slower than in Q3, and we expect a further deterioration of approximately 15% in Q1 of 2022.
With respect to our MSR platform, our fourth quarter purchases brought the portfolio to nearly $650 million in market value net of runoff.
Additionally, as David mentioned, with over $200 million in bulk MSR commitments in January and the recent price appreciation due to the sell-off in rates, our current MSR portfolio has reached nearly $1 billion in market value.
The sector remains very active due to consistent disposition of MSR by the originator community.
Coupled with wider spreads, we see this as an attractive growth opportunity for our MSR business which is complementary to our core agency strategy.
Turning to residential credit.
We continue to execute our primary strategy of acquiring expanded residential whole loans through Onslow Bay.
The economic value of residential credit portfolio grew by approximately $330 million quarter over quarter, primarily through the addition of $1.7 billion of whole loans, the retention of assets manufactured through our OBX securitization platform and the deployment of capital into short spread duration securities.
Return on our securitization strategy remains in the low double digits with minimal recourse leverage.
The residential credit portfolio ended Q4 with $4.6 billion of assets representing $3.1 billion of the firm's capital.
Our view on housing fundamental strength remains intact despite mortgage rates increasing as the shortage of one to four units single-family housing in the United States continues to be a long-term structural issue that has no near-term resolution.
The supply demand imbalance of housing stock, combined with the strength of the consumer's balance sheet has continued to play out in outsize on price appreciation, positive resolution out of forbearance agreements and stable delinquency roll rates, all benefiting our existing portfolio.
Lastly, our middle market lending portfolio had an active quarter closing nine deals totaling over $325 million in commitments, while five borrowers repaid.
Middle market lending ended the fourth quarter with nearly $2 billion in assets, up 4% from the prior quarter.
The portfolio's strong credit profile is demonstrated through a 10% increase in underlying borrowers' average EBITDA since closing and a nearly 30% reduction in system reserves throughout the year with no loans on non-accruals.
And as discussed last quarter, the close of our private closed-end fund allows for increased capital allocation flexibility and provides recurring fee revenue to the REIT.
As David discussed, the current environment is marked by challenging conditions as the Fed begins to remove with accumulative policy that has supported asset prices and financial conditions since the onset of the pandemic nearly two years ago.
We remain focused on protecting the portfolio through defensive positioning and proactive hedging.
In addition, a key focus will be to opportunistically grow our MSR and residential credit businesses which should provide strong returns and diversification benefit to our broader portfolio.
Although we remain patient in light of recent spread widening in Agency MBS, the improving cash flow fundamentals and increased prospective returns on the sector should provide attractive reinvestment opportunities and even potentially bring leverage back to levels more consistent with our historical leverage considerate of our overall capital allocation framework.
With this, I will hand it over to Serena to discuss our financials.
Today, I'll provide brief financial highlights for the quarter and as of December 31, 2021 and discuss select year-to-date metrics.
As discussed earlier, the last quarter of the year exhibited challenging market conditions resulting from a risk off sentiment over the Omicron variant and anticipation around the initiation of the Fed tapering.
Notwithstanding this more difficult economic return environment, we have again delivered solid earnings and ample coverage, approximately 125% of our dividend.
To set the stage with some summary information.
Our book value per share was $7.97 for Q4, and we generated earnings available for distribution per share of $0.28.
Book value decreased $0.42 for the quarter primarily due to lower other comprehensive income of $680 million or $0.47 per share on higher rates and spread widening and the related declining valuations on our agency positions, as well as the common and preferred dividend declarations of $349 million or $0.24 per share, partially offset by GAAP net income of $418 million or $0.29 per share.
Our multifaceted hedging strategy continued to support the book value, albeit in a more muted fashion this quarter due to the aforementioned spread widening with swaps, futures and MSR valuations contributing $0.16 per share to the book value during the quarter.
Combining our book value performance with our fourth quarter dividend of $0.22, our quarterly and tangible economic returns were negative 2.4%.
Subsequent to quarter end, as Ilker and David both mentioned earlier, we continue to see significant spread widening impacting the valuation of our assets, which is partially offset by the benefit of our MSR investments and rate hedging strategy through January with our book value ending the month down 3% compared to December 31, 2021.
Diving deeper into the GAAP results, we generated GAAP net income for Q4 of $418 million or $0.27 per common share, net of preferred dividends, down from GAAP net income of $522 million or $0.34 per common share in the prior quarter.
The most significant drivers of lower GAAP income for the quarter is the unrealized losses on investments measured at fair value through earnings of $15 million in comparison to unrealized gains of $91 million in Q3 and realized losses on disposal of investments in the quarter of $25 million as compared to gains of $12 million in Q3 along with the previously referenced lower net gains on the swaps portfolio by $42 million.
As I mentioned earlier, the portfolio continued to generate strong income with EAD per share of $0.28, consistent with Q3 earnings, and we continue to generate strong earnings while prudently managing lower leverage resulting in an EAD ROE per unit of leverage of 2.3%.
We have previously communicated that we anticipate earnings to moderate.
Notwithstanding this, we expect earnings to sufficiently cover the dividend for the near term, all things equal.
Average yields remained flat at 2.63% compared to the prior quarter.
However, dollar roll income contributed to EAD in Q4 reaching another record level at $118.5 million.
EAD also benefited from higher MSR net servicing income associated with the growth of the MSR portfolio and lower G&A expenses, which I will cover further later.
The portfolio generated 203 basis points of NIM ex PAA, down one basis point from Q3 driven by the improved TBA dollar roll income, offset by higher swap expense on a lower average receive rate.
Now, turning to our financing.
As I noted in the prior quarter, we have benefited from our ample liquidity position and the robust financing market during 2021 with the previous quarter marking nine consecutive quarters of reduced economic cost of funds for the company and our year-to-date economic cost of funds being 79 basis points, down 55 basis points in comparison to the prior year.
During Q4, the market pricing a more aggressive Fed tightening cycle, resulting in repo rates increasing across the curve.
This upward trend along with higher swap rates impacted our overall cost of funds for the quarter rising by nine basis points to 75 basis points in Q4, and our average REPO rate for the quarter was 16 basis points compared to 15 basis points in the prior quarter.
Moving now to our operating expenses.
Efficiency ratios improved by seven basis points in the fourth quarter with opex to equity of 1.21%.
And for the entire year, the opex to equity ratio was 1.35% compared to full year 2020 of 1.55% as we realize the benefits we projected from the reduction in compensation and other expenses following the disposition of our acreage business and the internalization of our management.
As a result of our continued build-out of our MSR and residential credit businesses, which are more labor-intensive and additional vesting of stock compensation issued in prior years, we anticipate that the range of opex to equity for 2022 and long range will be 1.4% to 1.55%.
And to wrap things up, Annaly maintained an abundant liquidity profile with $9.3 billion of unencumbered assets down modestly from the prior quarter at $9.8 billion, including cash and unencumbered Agency MBS of $5.2 billion.
Much of the reduction in unencumbered agency securities was due to pressure on valuation, which is partially offset by increased unencumbered CRT, CMBS and non-agency securities.
Operator, we can now open it up to Q&A. | q4 gaap earnings per share $0.27. | 1 |
Certain risk factors inherent in our business are set forth in filings with the SEC including our most recent 10-K and subsequent filings.
We caution you not to place undue reliance on these statements.
Some of the comments made refer to non-GAAP financial measures such as adjusted net revenue, adjusted operating margin, and adjusted earnings per share, which we believe are more reflective of our ongoing performance.
Joining me on the call are Jeff Sloan, CEO; Cameron Bready, President and COO; Paul Todd, Senior Executive Vice President and CFO.
We delivered our best performance since the end of 2019 because of our focus on technology enablement coupled with the excellence in execution.
Our results demonstrated strong sequential momentum from the fourth quarter of 2020 and improved monthly throughout the first quarter of 2021.
We are encouraged by the overall run rates we are seeing in the business.
We exited the first quarter in a better position than we entered it.
We are delighted to haveto return to growth in the first quarter of 2021.
We were able to deliver revenue, margin, and earnings-per-share growth despite facing difficult year-over-year comparisons as the pandemic did not begin to impact our business until mid-March 2000.
We are pleased today to announce two strategic acquisitions for approximately $1 billion in total that further are software-driven technology enabled strategy and deepen our presence in the most attractive markets globally we expect to continue to gain market share and extend our lead.
In combination with the roughly $1 billion in share repurchases we've affected since returning to our capital allocation strategy at the end of last year, we continue to balance appropriately reinvestment in the future growth of our business with efficient return of capital.
First with our agreement to acquire Zego, we enter one of the largest and most attractive vertical markets worldwide.
Real estate is the contestants of the type of market that we seek, sizable, global in scope, fragmented and right for further software digital commerce and payments penetration, and COVID-19 has accelerated the underlying changes that make this $6.5 billion target addressable market so attractive.
Zego is a leading software and payments technology company with significant scale delivering a comprehensive real estate technology platform to 7300 customers representing more than 11 million residential units in the United States.
Zego is digital omni-channel solutions support property managers and residents throughout the real estate life cycle, from leasing and on-boarding, to work orders, utility management, resident communications, renewals, off-boarding and of course, payments.
Through its integrated payments offering, legal processes approximately $30 billion in payments annually in a market with a volume opportunity that exceeds $1 trillion, the company delivers its full value stock through cloud native SaaS platform to enable seamless digital property management and best-in-class resident engagement and omni-channel experiences.
It is a highly scalable and predictable flywheel with compelling recurring revenue, strong retention rates, booking trends and lifetime customer value returns with double-digit organic revenue growth.
Importantly, we have significant opportunities to accelerate Zego's growth.
We intend to leverage Global Payments scale and digital expertise to further payments penetration into Zego's base, generate incremental property and software partner referrals to more than 3500 sales and sales support professionals expanded footprint outside the United States and generate meaningful cross-selling opportunities into its vertical market including innovative products we already deliver into our merchant business like payroll, data and analytics and replication management.
We could not be more excited about further capitalizing on the convergence of software and payments and we look forward to welcoming Zego team members to Global Payments.
Second, we are excited to have reached an agreement to our Erste joint venture to purchase Worldline's PAYONE business in Austria consisting of roughly 8,000 primarily SMB merchant customers in Erste banks home market.
We entered Austria through organic market expansion of our Continental European joint venture roughly 18 months ago.
This pending acquisition enables us to bring our distinctive distribution and marketing technology to add scale to get another attractive market.
In addition to these strategic accomplishments in early 2021, we also produced a solid first quarter results across our existing businesses.
First, in our merchant segment we delivered significant sequential improvement fueled by our technology-enabled focus and the conversion of last year's share and bookings gains into revenue.
And we generated these results while absorbing ongoing lockdowns in Canada and renew restrictions in selected markets in Europe and Asia Pacific.
Some highlights in the first quarter of 2021 include record new sales in our Global Payments Integrated business in March and in our US relationship-led business for the quarter, record revenue growth at GPI for the quarter well in excess of pre-pandemic levels, record bookings at Xenial for a cloud-based restaurant POS software and solutions and continued sequential acceleration in our omni-channel businesses.
It is worth highlighting that volumes accelerated throughout the quarter, a trend that has continued into April.
Key customer wins include subway, CKE Restaurants A&W Foods and [Indecipherable].
It's also notable that several of these businesses that were most impacted by COVID-19 saw substantial sequential growth in revenue and bookings in the first quarter as our home market end of recovery.
For example, active in gaming achieved significant improvement as better macrotrend strong execution and solid bookings over the course of 2020 benefited performance in 2021.
In fact, we continue to see positive booking trends across our software portfolio as the ability to deliver a full value stock is increasingly becoming table stakes in the markets we serve.
We also made considerable progress on the partnership with Google that we announced in February.
We expect for Google as a merchant customer in select Asian markets in the third quarter with North America to follow shortly thereafter.
We have initiated our coastal programs and are beginning to see referrals from Google on a number of their enterprise class clients.
We anticipate launching our Wanting Grow [Phonetic] My Business product that integrates Google solutions with our innovative capabilities in our digital portal environment in the fourth quarter of this year and we have launched our co-innovation efforts to develop new commerce enablement tools for our merchant customers.
Second, our issuer business continues to benefit from strong relationships with market leaders and we are excited to announce today that we have entered into a multi-year renewal with Barclays Consumer Bank in the United States.
Barclays is one of our largest customers globally and we provide a range of processing and support technologies for both Barclays consumer and commercial credit card portfolios.
We look forward to working with Barclays to enable a best-in-class customer experience with unparalleled levels of security and resiliency for its newest partner, the gap and its portfolio of accounts, yet another competitive takeaway.
Partnering with issuers that are gaining share in the marketplace is a key element of our strategy.
We were also pleased to have signed agreements with Mission Lane and UMB Financial with the latter being a competitive takeaway in which with the prior processing relationship had spanned decades.
In collaboration with AWS, UMB will adopt our cloud-based data and analytics platform which we also successfully deployed during the quarter for a multi-country customer in Latin America.
We continue to capitalize on the broad and deep pipeline we have the good fortune to have in our issuer business.
Today, we have 12 letters of intent with financial institutions worldwide, six of which are competitive takeaways.
Turning to AWS, we expect to go live with our first joint takeaway with a multinational financial institution in Asia by the end of the year.
Our Cloud Prime Instant [Phonetic] is now up and running currently in that market in preparation for the launch.
We have another dozen active customers in our pipeline of AWS, up from four at the end of 2020.
Third, our business and consumer segment delivered record revenue growth.
I am very proud that Netspend once again facilitated the rapid distribution of stimulus funds to customers most in need.
Since late December 2020, we have processed more than 2 million deposits accounting for over $3.5 billion in stimulus payments disbursed by the IRS to American consumers, and this was done days in advance of many of our traditional financial institution and financial technology peers.
In combination with the 2020 stimulus payments, we have disbursed more than $5 billion in aid to customers through the first quarter of 2020.
The pandemic accelerated move toward cashless solutions is also benefiting Netspend.
For example, we are seeing rapid adoption of our tips solution and we've reached a new agreement with Flynn Restaurant Group for its Pizza Huts and Wendy's franchise locations, which will drive additional PayCard and potential tips opportunities across our combined footprint in more than 1000 restaurants.
We also launched our cashless stadium card linked to a digital wallet with the Phoenix Suns at the Phoenix Suns Arena.
These achievements serve as proof points of our differentiated strategy that includes product extensions into the P2P, B2B and B2C segments.
I cannot be more pleased with all that we accomplished across our businesses this quarter.
In March, we returned to year-over-year growth in each of our three segments and the underlying trajectories are tracking for the long-term goals just as we predicted it would, despite the impact of ongoing restrictions and lockdowns in some of our markets outside the United States.
We are pleased with our financial performance in the first quarter of 2021 which demonstrated meaningful sequential momentum and reflected our ongoing strong execution across the business.
Specifically, we delivered adjusted net revenue of $1.81 billion representing 5% growth compared to the prior year and marking an 800 basis point improvement relative to the performance we reported in the fourth quarter of 2020.
Adjusted operating margin for the first quarter was 40.6%, a 160 basis point improvement from the prior year that was achieved despite the return of certain cost we temporarily reduced at the onset of the pandemic.
On a comparable basis, underlying margin trends would have improved approximately 300 basis points.
Adjusted earnings per share were $1.82 for the quarter, an increase of 15% compared to the prior year period and was especially impressive in light of the difficult year-on-year comparison due to COVID-19.
The pandemic did not begin to impact our business meaningfully until the second half of March of last year and that as a reminder, we delivered 18% adjusted earnings-per-share growth in the first quarter of 2020.
Taking a closer look at our performance by segment, Merchant Solutions achieved adjusted net revenue of $1.15 billion for the first quarter and 4.4% improvement from the prior year which marked a nearly 900 basis point improvement from the fourth quarter.
We delivered an adjusted operating margin of 463% in this segment, an increase of 90 basis points from the same period in 2020 as we continue to benefit from our improving technology enabled business mix.
Global Payments Integrated produced a stellar quarter generating in excess of 20% adjusted net revenue improvement, which is ahead of the levels of growth this business was delivering pre-pandemic.
Additionally, our worldwide e-commerce and omni-channel businesses excluding T&E delivered roughly 20% growth as our value proposition that seamlessly spans both the physical and virtual worlds continues to resonate with customers.
As for our own software portfolio, we are encouraged to see that several of our businesses most impacted by the pandemic improved meaningfully sequentially as Jeff mentioned, and it is worth highlighting that our gaming business returned to growth this quarter and across our vertical markets portfolio bookings continue to prove resilient in the first quarter, providing us with a positive tailwind for the balance of 2021.
We are also pleased that our US relationship-led business generated high single-digit adjusted net revenue growth for the first quarter, which is consistent with our long-term targeted growth rate for this channel despite a difficult comparison to the first quarter of 2020 and notwithstanding a challenging environment in several of our international markets, our portfolio of businesses across Europe and Asia improved significantly and delivered adjusted net revenue that was essentially flat with last year for the quarter.
Importantly, because our international businesses are largely focused on the best spending in the markets in which we operate, we are seeing improvement in these businesses well in advance of cross-border commerce recovery.
Moving to Issuer Solutions, we delivered $439 million in adjusted net revenue for the first quarter, which was roughly flat versus the prior year period and exceeded our expectations given traditional fourth quarter to first quarter sequential trends.
Excluding the commercial card business, our Issuer segment grew in the low single digits for the quarter and in the month of March, Issuer delivered growth in aggregate despite continued commercial card headwinds as we benefited from the ongoing recovery in transaction volumes across many of our markets.
We also saw non-volume based revenue increased mid-single digit in the first quarter.
Notably, our Issuer business achieved record first quarter adjusted operating income and adjusted segment operating margin expanded 370 basis points from the prior year also reaching a new first quarter record of 43.2% as we continue to benefit from our efforts to drive efficiencies in the business.
Additionally, our Issuer team signed three long-term contract extensions and three new contracts since the start of the year and our strong pipeline bodes well for future performance consistent with our long-term expectations.
Finally, our Business and Consumer Solutions segment delivered record adjusted net revenue of $244 million, representing growth of nearly 20% from the prior year.
Gross dollar volume increased 26% or $2.5 billion as we benefited from the stimulus we disbursed to our customers.
Trends within our DDA products were also very strong helped by the stimulus and we realized an acceleration in active account growth of more than 45% compared to the prior year.
Excluding the impact of stimulus payments and tax, we believe that this business achieved underlying growth in the roughly mid-single digit range in line with our long-term targets.
Adjusted operating margin for this segment improved an impressive 750 basis points to a record 33.2% as the benefits of the stimulus and long-term cost initiatives post-merger took effect.
The solid performance we delivered across our segments highlights the resiliency of our technology enabled portfolio, consistency of our execution and the strong tailwinds in our business coming out of the pandemic.
We are also pleased that our integration continues to progress well and we remain on track to achieve our increased goals from the TSYS merger of annual run rate expense synergy of at least $400 million and annual run rate eevenue synergies of at least $150 million within three years.
From a cash flow standpoint, we generated adjusted first quarter free cash flow of roughly $583 million after reinvesting $86 million in capital expenditures.
We expect adjusted free cash flow of more than $2 billion and capital expenditures to be in the $500 million to $600 million range for the full year.
In mid-February, we successfully issued $1.1 billion in senior unsecured notes maturing in 2026 at an attractive interest rate of 1.2%.
The transaction was credit neutral with the proceeds used to redeem $750 million of notes outstanding with a rate of 3.8% due in April 2021.
The balance of the proceeds were used to reduce our outstanding revolver.
We have no significant maturities until 2023.
Our strong cash generation and healthy balance sheet have enabled us to create significant value through our capital allocation strategy to the benefit of our shareholders.
We are pleased to have repurchased roughly 4 million of our shares for approximately $783 million during the first quarter, which includes the execution of the $500 million accelerated share repurchase program we announced last quarter.
We ended the quarter with roughly $3 billion of liquidity and a leverage position of roughly 2.6 times on a net debt basis, and we are excited to announce that we have reached agreements to make additional investments in our technology enabled strategy and market expansion.
As Jeff highlighted, we executed a definitive agreement to acquire Zego and Worldline's PAYONE business in Austria for an aggregate of approximately $1 billion.
We expect to finance these transactions using cash on hand and our existing credit facility.
We are targeting closing the Zego transaction by the end of the second quarter and the Worldline acquisition in the second half of 2021 both subject to regulatory approvals.
Upon completion of both transactions, given our current cash balance and strong cash generation, we expect our leverage position will be relatively consistent with current levels leaving us with ample continuing firepower.
Based on our current expectations for continued recovery from the COVID-19 pandemic worldwide, we have increased our guidance for adjusted net revenue to now be in a range of $7.55 billion to $7.625 billion reflecting growth of 12% to 13% over 2020.
We expect adjusted operating margin expansion of up to 250 basis points compared to 2020 levels.
This outlook is consistent with an adjusted operating margin expansion of up to 450 basis points on a normalized basis given the operating leverage in our business and expense synergy actions related to the TSYS merger.
However, this is being partially offset by the reinstatement of certain expenses in 2021 that were temporarily reduced at the onset of COVID-19 for most of 2020.
At the segment level, we have increased our expectations for adjusted net revenue growth for our Merchant Solutions segment to be in the high teens, which assumes the current pace of recovery continues worldwide.
We expect underlying trends in our issuing business to be in the mid to high single-digit range and above our mid-single digit growth target.
It is worth noting that our Issuer business generated high single-digit growth on a normalized basis for the month of March as we begin to lap the pandemic impacts.
As we discussed last quarter, Issuer is being impacted by two distinct and relatively equal sized headwinds.
First, we are not anticipating a recovery in our commercial card business as we expect corporate travel to remain depressed throughout 2021.
Second, we are absorbing a portfolio sale by one of our customers, which will impact us for the remainder of the year.
Taking these two items into account, we forecast our Issuer business to deliver adjusted net revenue growth in the low single-digit range for the year.
Lastly, incorporating the benefits of the incremental stimulus, we are now forecasting adjusted net revenue growth for our business and consumer segment to be in the mid to high-single digits for the full year consistent with our long-term expectations for this business.
This guidance takes into account lapping the benefits of the 2020 CARES Act, which will provide for a more difficult comparison in the second quarter of 2021.
Regarding segment margins, we expect the up to 250 basis points of adjusted operating margin improvement for the total company to be driven largely by Merchant Solutions while we expect Issuer and Business and Consumer to deliver normalized margin expansion consistent with the underlying profiles of these businesses.
This follows the 500 and 400 basis points of adjusted operating margin expansion delivered by Issuer and Business and Consumer respectively in 2020.
From a quarterly phasing perspective, having now lapped muted growth characteristics in the first quarter given the start of the pandemic in mid-March 2020, we will experience the opposite effect in the second quarter before returning to more normalized rates of growth in the back half of the year, a highlight that while we expect to achieve our strongest adjusted revenue growth, adjusted margin expansion and adjusted earnings-per-share growth for the total company in the second quarter, our business and consumer segment will be lapping the impact of the CARES Act stimulus last year.
While we anticipate Netspend to deliver modest adjusted net revenue growth for the second quarter, we expect adjusted operating margins to decline for that segment year-on-year as a result.
On an absolute basis, we would expect business and consumer adjusted operating margins for the second quarter to be consistent with the levels achieved in the fourth quarter of 2020 period that also saw more limited benefits from stimulus.
Moving to non-operating items, we continue to expect net interest expense to be slightly lower in 2021 relative to 2020 while we anticipate our adjusted tax rate will be relatively consistent with last year.
Putting it all together, we now have increased our expected adjusted earnings per share for the full year to a range of $7.87 to $8.07 reflecting growth of 23% to 26% over 2020.
Our raised outlook presumed we remain on a path toward recovery worldwide over the balance of the year and it does not include any impact from the Zego and Worldline Austrian business acquisitions we announced today.
We will further update our guidance when these transactions close, but it is worth noting now that we do not expect these transactions to have a discernible impact on adjusted earnings per share for 2021.
Our business is one rating at accelerated levels.
The trends of digitization, commerce enablement, software differentiation and omni-channel prevalence driving our performance will serve to catalyze future growth.
We said over the course of the last year that we would not stand still or wait for a better day to continue to deepen our competitive mode despite one of the most challenging periods any of us have seen.
As a result of our team members terrific efforts, 20 bookings have begun to translate into 2021 outside revenue gains.
The announcement today of our return to strategic investments will provide further avenues for future growth.
And all that is playing out against the backdrop of recovery, further differentiation from technology enablement, deeper penetration into attractive markets, sustained share gains and substantial and efficient returns of capital.
We now look forward to continuing progress for the remainder of 2021, 2022 and beyond.
Before we begin our question-and-answer session, I'd like to ask everyone to limit their questions to one with one follow-up to accommodate everyone in the queue.
Operator, we will now go to questions. | compname reports q1 adj. earnings per share of $1.58.
q1 adjusted earnings per share $1.58.
implemented cost initiatives that co expects to deliver at least an incremental $400 million of savings over next 12 months.
truist financial has selected global payments to be its provider of issuer processing services for its combined business.
remain on track to achieve at least $125 million in annual run-rate revenue synergies from tsys merger.
remain on track to achieve at least $350 million in annual run-rate expense synergies from tsys merger. | 0 |
If you do not yet have a copy, you can access them on our website.
We are providing that information as a supplement to information prepared in accordance with generally accepted accounting principles.
With us on the call today are Doug Pasquale, Chairman and Interim Chief Executive Officer; Bryan Giglia, Chief Financial Officer; Robert Springer, Chief Investment Officer; and Chris Ostapovicz, Chief Operating Officer.
On todays call, Doug will discuss our recent value-enhancing hotel transactions and provide his thoughts on the companys near-term priorities and objectives.
Bryan will then discuss the current operating environment and recent trends in our business.
And finally, Ill provide a summary of our current liquidity position and a recap of our prior quarter financial results.
As many of you know, I have been affiliated with Sunstone for quite some time now, having joined the Board in 2011 and taking on the role of Chairman in 2015.
During my tenure, I have facilitated the management teams efforts as they repaired the companys balance sheet and upgraded its portfolio following the global financial crisis, and most recently, as we navigated the unprecedented challenges brought on by the pandemic.
Now as interim CEO, Ive had the opportunity to become increasingly involved in the day-to-day operations of the company.
With that enhanced perspective, Im more confident than ever that Sunstone has the portfolio, the balance sheet and the management team to deliver incremental value to its shareholders and do so on a more accelerated basis.
As a first step in this process, we announced a series of hotel transactions yesterday that reflect our renewed commitment to value creation through the sale of assets, which are no longer consistent with our strategy, the selected disposition of core assets when pricing is compelling and through the acquisition of long-term relevant real estate.
Going forward, you should expect that Sunstone will do more of the same as we further position the company for growth by actively recycling capital and more effectively utilizing leverage in our tax attributes while still maintaining a solid balance sheet with capacity and flexibility.
Overall, I am very pleased with the progress we have made in the first two months of my tenure, and I look forward to continuing to work with the management team to unlock further value for our shareholders.
When I assume the interim CEO role, I made it clear that my tenure in this position would be for a year or less and that the Board was committed to identifying a permanent CEO, who would further advance our existing strategy.
The search committee was established in tandem with my appointment and the search process is underway.
While we intend to conduct an efficient search, we will be thoughtful and farsighted.
We will not rush the process and we will do everything possible to ensure the right new leader is selected.
We expect to have an update as part of our next quarterly call.
And to share some encouraging recent trends we are seeing across our portfolio that give us reasons to be more optimistic as we head into the final months of the year and into 2022.
Ill start with a review of the third quarter operating results.
which, as Doug just mentioned, materially exceeded our expectations with EBITDA more than doubling the prior quarter and marking the return to positive quarterly FFO for the first time since 2019.
I will provide an update on the current operating environment and forward booking trends, which point to continued growth in the fourth quarter and into 2022 despite the effects of the Delta variant.
Last, I will provide some additional details on the exciting and value-enhancing hotel transactions that were announced yesterday.
So lets begin with the third quarter operations, which came in stronger on both the top and bottom lines.
Total revenue was $167 million, an increase of 43% from the second quarter, driven by a nearly 10-point sequential increase in occupancy at an average rate for the comparable portfolio that not only grew 13% from the second quarter of 2021, but was also just above the third quarter of 2019.
These strong results were primarily the result of strong leisure demand over the summer vacation season that peaked in July and then moderated in August and September, partly as a result of typical seasonal patterns but also due to a short-term pause in travel demand due to the spread of the Delta variant.
While occupancy increased to nearly 55% and benefited from growth in all segments, transient demand remained a standout, with room nights increasing 27% compared to the second quarter.
Our total portfolio third quarter average daily rate was $30 higher than the second quarter and even when excluding Montage Healdsburg, which ran a very robust average daily rate of nearly $1,250, our comparable portfolio ADR of just over $248 in the third quarter came in higher than 2019 levels.
A strong desire for leisure travel and a healthy U.S. consumer contributed to strong demand in certain markets and allowed our operators to push rates far beyond pre-pandemic levels.
We achieved meaningful rate growth in Key West, Orlando, New Orleans and Wailea.
In fact, Oceans Edge saw rates increase in astonishing 103% as compared to 2019 and Wailea Beach Resort vested their pre-pandemic rate by 40%.
In addition to a stronger rate performance, out-of-room spend also increased with food and beverage revenues higher by 79% in the third quarter as compared to the second quarter, representing a 47% increase in food and beverage spend per occupied room.
Other hotel revenues also increased as higher occupancy drove increased destination fees, spa and parking revenues.
Banquet and catering contribution per occupied group room increased over the second quarter by $96 and achieved approximately 70% of 2019 levels.
Combined with stronger ADR, the growth in nonrooms revenue generated a quarterly comparable TRevPAR of $207, a 41% increase from $146 achieved in the second quarter.
We have been focused on working with our operators to deliver a safe and enjoyable guest experience while looking for ways to achieve efficiencies and permanent expense reductions.
Year-to-date, we have eliminated nearly $11 million of costs from our hotels, which we believe will be lasting savings and can be sustained, even as business levels and occupancies increase.
We recognize that there is a need to balance appropriate service levels and amenities with pricing and profitability, and there will not be a one-size-fits-all approach to margin enhancement at every hotel.
And so we are continuing to work with our operators to identify creative ways to drive profitability across the portfolio.
During the quarter, our comparable hotels generated hotel EBITDA margins of 24.3%.
While this is below the low 30% range we maintained historically, delivering mid-20% margins at a portfoliowide occupancy of just below 55% is a significant accomplishment and gives us confidence that we will be able to achieve higher stabilized margins once demand returns to a more normalized level.
The combination of higher rates, stronger nonroom revenue, permanent expense reductions and other cost controls contributed to third quarter EBITDA that exceeded expectations and represented a more than twofold increase over the prior quarter.
While strong demand for leisure travel seems to be well established at this point, in fact, Saturday of Labor Day weekend was our portfolios highest demand night of the year, with occupancy of 84% at an average rate of nearly $275.
We are also seeing positive trends in both group and business transient demand that we expect will accelerate as we move forward.
Lets take a look at each of these segments in a bit more detail, starting with group.
While total group room nights for the quarter increased only marginally from the second quarter to 82,000 nights.
What is more important to note is that the group activity we saw in the third quarter was increasingly comprised of more traditional corporate and association events as opposed to the rooms-only and event-driven group business that composed much of the demand in the first two quarters of the year.
Corporate group activity in the quarter grew nearly 30%, and the association business was more than five times higher than the previous quarter and generated 24,000 room nights.
The Renaissance Orlando, Hilton San Diego and JW Marriott New Orleans, had a substantial increase in association and corporate group business and the Wailea Beach Resort experienced a meaningful return of incentive business, with 8,000 incentive room nights at a very attractive rate of nearly $600 compared to 6,700 room nights and a rate of $400 in the same quarter of 2019.
The Delta variant impacted group business later in the quarter as our hotels experienced increased cancellations, a decrease in group lead volume and a decline in overall group production.
The majority of the cancellations occurred in August and coincided with the peak in case counts witnessed in late summer from the spread of the Delta variant and were skewed toward corporate group as opposed to association business.
Approximately 9% of our third quarter group room nights canceled, which were primarily for events in August and September, and approximately 16% of our fourth quarter group rooms canceled, which were primarily for events in October.
We believe these headwinds from the Delta variant are largely behind us as group demand and lead volume began to reaccelerate post Labor Day and have continued into the fourth quarter.
In fact, we expect the fourth quarter production to be the strongest of the year.
For our five large group hotels, which make up 2/3 of our fourth quarter room nights, 77% of our forecasted group room nights have already been picked up.
Moving on to transient, which accounted for roughly 75% of our total room nights in the third quarter.
Total transient rate for the third quarter came in at $285 compared to $261 in the second quarter, an increase of more than 9%.
Even more encouraging was the increased contribution of business travel to the overall transient demand.
The number of special corporate rooms increased 103% from the second quarter with rates higher by 20%.
Several of our hotels, including the Hyatt San Francisco, Boston Park Plaza and Hyatt Chicago witnessed a meaningful acceleration in special corporate room nights during the quarter.
While our third quarter business transient volume was only 50% of pre-pandemic levels, future transient booking pace continues to grow every week and we expect this to accelerate into 2022 as companies increasingly return to the office and business transient travel becomes more widespread.
As I mentioned earlier, our operators have been able to aggressively push rates in response to very healthy leisure demand.
We saw strength in leisure rates at hotels across the portfolio, including Key West, Orlando, New Orleans, Napa, Sonoma and Wailea.
The ability to achieve premium pricing has been most evident in our resort properties with Montage Healdsburg achieving a rate of approximately $1,250 for the quarter, and Oceans Edge in Wailea Beach Resort seeing rate increases of 103% and 40%, respectively, compared to the third quarter of 2019.
This level of rate growth should also translate into profitability that exceeds our underwriting at Montage and that outpace pre-pandemic levels at Oceans Edge and in Wailea.
Given the substantial pricing increase our operators have implemented, we are closely monitoring guest feedback to ensure our satisfaction scores remain competitive and that we are balancing near-term profitability with each hotels long-term positioning.
Wailea continues to command a strong TripAdvisor rating despite a $185 higher rate than third quarter of 2019, an impressive achievement, especially given its luxury peers.
As we move into the fourth quarter, were encouraged by what we are seeing for October.
Our preliminary results for the month show a reacceleration of demand with RevPAR of approximately $150 made up of occupancy of 57% and a $264 average daily rate.
October RevPAR is second only to our peak month of July and is above August and September by nearly 10% and 14%, respectively.
Given the current trends, we expect a strong finish to the end of the year, with November and December benefiting from increased levels of business transient and group demand and continued ability to drive strong leisure rates during the holiday season.
Shifting to our capital projects.
We invested $25 million into our portfolio in the third quarter with a focus on enhancing the quality and future earnings potential of the portfolio.
In July, we completed work on Boston Park Plazas newest meeting space, The Square, a 7,000 square foot indoor space that will give the hotel incremental capacity to host in-house group business and reduce its reliance on citywide events.
At the Hilton San Diego Bay front, we completed a total redesign of the food and beverage options, including an addition of a market concept that will provide a better guest experience at a higher profit margin.
Additionally, in San Diego, we converted unused space into 6,800 square feet of new, high-quality meeting space that looks out onto the San Diego Bay.
During the quarter, we also continue to make progress on the transformation of the soon-to-be rebranded Westin Washington, D.C. The ballroom and meeting space renovations will be completed by the end of the year and work on the guest rooms and lobby will occur in 2022.
Once the meeting space is completed, the hotel will be able to host group business next year while the rooms renovation is completed.
We are pleased with the reception, the in-process conversion is receiving from meeting and event planners, and look forward to the incremental growth the hotel will generate as it captures higher rates and incremental share under the Westin brand.
Moving on to transaction activity, as Doug noted, yesterday, we announced three transactions that enhance our portfolio quality, strengthen our balance sheet and provide additional capacity for future growth and acquisitions.
First, we completed the sale of the 348-room Renaissance Westchester for gross proceeds of approximately $19 million.
This hotel was a noncore asset in a challenged market that lacks sufficient demand to Marriott reopening after operations were suspended at the onset of the pandemic The net proceeds from the sale, after the payment of termination fees and severance costs, was approximately $11 million and the disposition removes an asset that was expected to be a drag on cash flow and growth going forward.
Next, we are under contract to sell the 340-room Embassy Suites La Jolla for $226.7 million or approximately $667,000 per key.
This is a tremendous outcome and is a perfect example of the embedded value that can be generated from the ownership of long-term relevant real estate.
In addition to being a high-quality Embassy Suites and a productive cash generator, the hotel sits on phenomenal real estate.
We were able to capitalize on its highly desirable location and sell the hotel to a buyer that will be able to better optimize the entire parcel.
We expect the sale to close during the fourth quarter.
Net proceeds after the mortgage loan are expected to be approximately $165 million.
Finally, we are excited to announce the acquisition of the Four Seasons Resort Napa Valley.
This one-of-a-kind asset located on the Famous Silverado Trail is a terrific example of long-term relevant real estate.
We are acquiring the resort for a gross purchase price of $177.5 million, a meaningful discount to its development cost.
In addition to the 85-room resort and its abundant event space and full suite of luxury amenities, the acquisition price also includes nearly 4.5 acres of vineyards and the Elusa Winery along with the inventory of prior wine vintages.
The investment in the Four Seasons Napa Valley is the perfect complement to our previous Wine Country acquisition, Montage Healdsburg, which we acquired in April and is already surpassing our expectations.
Between the Four Seasons and the Montage, we will have approximately 10% of our asset value in one of the most supply constrained sought after and highest-rated leisure destinations in the country.
We will own the two premier assets and establish a market-leading position in Wine Country with ownership of approximately 24% of the luxury room inventory and 32% of the luxury event space.
The purchase of the Four Seasons Resort in Napa Valley is consistent with our stated strategy of acquiring long-term relevant real estate, in the early phases of a cyclical recovery and its addition further elevates our overall quality and earnings potential of our portfolio.
We expect Four Seasons to contribute meaningfully to our per share future earnings as we deploy more of our balance sheet capacity and benefit from the strong demand for leisure travel.
To sum things up, third quarter results exceeded expectations as a result of continued strong leisure demand, steady improvement in business transient travel and an improving group mix.
Although expectations for the fourth quarter have moderated due to group cancellations related to the Delta variant, we have seen demand reaccelerate in recent weeks.
And based on forward-booking information, we are optimistic that these trends will continue in the fourth quarter and into 2022.
Additionally, our investments both internally and externally will provide additional growth as travel demand moves closer to pre-pandemic levels.
Furthermore, we are in the enviable position to use our strong balance sheet and debt capacity to grow the company and to create value for our shareholders.
As of the end of the third quarter, we had approximately $222 million of total cash and cash equivalents, including $42 million of restricted cash.
In addition to cash on hand, we also maintained full availability on our $500 million revolving credit facility, which equates to over $700 million of total existing liquidity.
We are excited to close on the acquisition of Four Seasons Resort Napa Valley in the fourth quarter and expect to fund the transaction through a combination of cash on hand and from borrowings under our credit facility.
As Bryan mentioned earlier, net cash proceeds from the sale of Embassy Suites La Jolla are expected to be approximately $165 million after the buyers assumption of the existing $57 million mortgage loan.
We expect the sales to also be completed in the fourth quarter.
The quarterly results reflect an improving operating environment driven by continued strong leisure demand, an increasing amount of commercial transient volume and improving mix of group business.
Third quarter adjusted EBITDAre was $35 million and third quarter adjusted FFO was $0.10 per diluted share.
These results surpassed our previous expectation and marked the return to positive quarterly FFO for the first time since the end of 2019.
During the third quarter, we recognized $1.6 million of restoration expense and an impairment charge of $1 million as a result of damage incurred at our two hotels in New Orleans following Hurricane Ida.
The Hilton New Orleans, St. Charles sustained the bulk of the damage, and we are working with our insurers to identify and settle a property damage claim, but we expect that future losses from the restoration work at this hotel will be mitigated by the propertys insurance deductible of approximately $3 million.
Now turning to dividends.
We have suspended our common dividend until we return to taxable income.
Separately, our Board has approved the quarterly distributions for each of our Series G, H, N, and I preferred securities.
And with that, we can now open the call to questions. | compname reports q3 adjusted ffo per share $0.10.
q3 adjusted ffo per share $0.10. | 1 |
Our featured speakers today are Mark Parrell, our President and CEO; Michael Manelis, our Chief Operating Officer; and Bob Garechana, our Chief Financial Officer.
Alec Brackenridge, our Chief Investment Officer, is here with us as well for the Q&A.
Also, as Marty mentioned, we are pleased to have Alec Brackenridge, EQR's Chief Investment Officer, available during the Q&A period.
For those of you who do not know Alec, he's a 28-year veteran in this company.
He literally started work here the day we went public in 1993 and took over as our CIO in 2020.
As you can see from the release, he and his team have done exceptional work of late on the transactions side.
All of our operating metrics continue to improve at a faster rate than we assumed earlier in the year.
We are seeing demand levels well above 2019 in all our markets.
And this has allowed us to continue growing occupancy, while at the same time raising rates.
This resulted in the company materially raising annual same-store revenue, NOI and normalized FFO guidance.
While our quarter-over-quarter same-store revenue and NOI results remained negative, the decline was less than what we expected, and our sequential same-store revenue and NOI showed positive growth for the first time since the pandemic began.
As we have discussed on prior calls, improvement in our reported quarter-over-quarter same-store numbers will lag the recovery in our operating fundamentals as we work these now higher rents and lower concessions through our rent roll.
We believe that our business is set up for an extended period of higher-than-trend growth beginning in 2022 as we recapture revenue loss due to the pandemic and continue to benefit from strong demand and growing incomes in our target demographic.
Also, the more diverse portfolio we are creating should improve long-term returns and dampen volatility going forward.
On the investment side, we are active buyers and sellers in the second quarter and expect to continue being active capital recyclers.
Consistent with what I've said on prior calls, we are allocating capital to places that are attractive to our affluent renter base, including the suburbs of our established coastal markets as well as Denver and our two new markets of Austin and Atlanta.
We are making these trades with no dilution, even given higher pricing levels for the properties we are targeting because we are able to sell our older and less desirable properties at low cap rates and at prices that exceed our pre-pandemic value estimates.
Earlier this month, we reentered the Texas market after an 11-year absence by acquiring two well-located new assets in Austin, Texas.
These properties are located in a desirable area with high housing costs that is equidistant between Downtown Austin and the Domain Hub on the north side.
We acquired these two properties for $96 million, and approximately, a 3.9% cap rate and about $195,000 per unit.
We expect to acquire a mix of urban and suburban assets in the Austin market.
During the second quarter and in July, we acquired two properties in Atlanta.
SkyHouse South in Midtown for $115 million with a 3.6% cap rate.
This is a deal we did previously disclose.
And a few days ago, we acquired a second property in Atlanta in the bustling Midtown West neighborhood.
We acquired this new property for $135 million, and it is about half occupied.
And once it completes lease-up, we expect it will stabilize at a 4.1% cap rate.
We also continued adding to our Denver presence by purchasing an asset in the suburban Central Park area of Denver for $95 million.
This property is located just west of the large and growing Fitzsimons medical campus and draws residents attracted to its access to abundant outdoor amenities.
We expect this property, which is also in lease-up currently, to stabilize at a 4.2% cap rate.
We're also pleased to add to the portfolio of property each in the suburbs of Boston and Washington, D.C. The Boston property is located in Burlington, Massachusetts, and is a new asset that we acquired for $134.5 million at a 4.1% cap rate.
This property is in a difficult-to-build suburb of Boston with high single-family housing costs and good access to high-paying jobs.
The D.C. asset is located in Fairfax, Virginia, and is a 2016 asset that we acquired for $70 million at a 4.3% cap rate.
This property is well located with both good highway and good metro access and proximity to the growing job base in Northern Virginia.
Both the Burlington and Fairfax assets are located in submarkets, where our existing assets have performed particularly well.
Year-to-date, we have bought $645 million of properties and expect to close on another $850 million in acquisitions, a good number of which are in various states of advanced negotiation by the end of the year.
We'll fund these buys with an approximately equivalent amount of dispositions, mostly from California of older and less desirable assets, which we sold or are under contract to sell at significantly above our pre-pandemic estimate of value.
We've put into service and began leasing our newly developed property in Alameda island, a short ferry ride to the city of San Francisco.
Built on the side of a former naval base, this property has terrific views of the skyline and an evolving restaurant and bar scene that we think is attractive to our clientele.
Over the next few months, we'll complete our other two current development projects, including the Alcott in Central Boston, the largest development project in the company's history.
Early leasing efforts on this project and our development project in Bethesda, Maryland, are going well.
And our current estimates are that these three projects will stabilize at a development yield of approximately 5%, considerably higher than prevailing acquisition cap rates.
These properties will be meaningful contributors to NFFO starting in late 2022.
We see development as a good complement to our acquisition activities as we spread more of our footprint to the suburbs of our established markets as well as to our new markets.
We expect a significant amount of our development activity going forward to be done through joint venture arrangements.
This allows us to leverage our partners in place sourcing and entitlement teams in locations like our new markets where we do not currently have a development presence.
You're doing an exceptional job during this particularly busy leasing season, and we're all very proud and grateful.
As evidenced by our revised guidance, the pace of recovery has been very strong.
Let me highlight a few of the overall trends.
So first, we continue to see very good demand for our apartment homes.
Our national call center in Ella, our AI leasing agent, are responding to record high levels of inbound interest for our apartments, which is converting into high volumes of self-guided tours.
This overall level of demand continues to drive applications and move-in activity that is exceeding move-out, and ultimately, is delivering stronger-than-expected recovery in occupancy.
Portfoliowide, physical occupancy is currently 96.5%, which is back to 2019 levels.
San Francisco and Seattle are still trending slightly below 2019, and Southern California markets are slightly above.
At this point, we expect to run the portfolio above 96% through the remainder of the third quarter.
This strength in occupancy is allowing us to push rate and drive revenue growth.
Overall, we are more than halfway through the typical peak leasing season, and the momentum has been very strong, providing us the opportunity to raise rates, reduce concessions and grow occupancy.
These fundamentals are delivering RV recovery.
From March to December of 2020, pricing trend, which includes the impact of concessions, declined approximately $500 per unit.
From January 2021 to today, pricing trend has grown $660, and is now not only above prior year levels in all markets but every market, except for San Francisco is also above 2019 peak pricing trend levels.
Today, the portfolio is approximately $100 higher per unit than our peak 2019 levels.
Our priority has been to test price sensitivity in every market by raising rates and reducing both the value and quantity of concessions being granted.
At the end of the first quarter, about 20% of applications were receiving on average four weeks in concessions.
As of July, we are now running with less than 3% of our applications receiving on average just over two weeks, and we expect this to continue to drop-off even further.
To give you perspective, the total dollar of concessions granted peaked in the month of February at just north of $6 million for the same-store portfolio.
For July, we will be at $1.5 million for the month, and August should be less than $750,000.
Last week, only 12 properties had any concessions being offered.
The percent of residents renewing has stabilized around 55%, which is very much in line with historical averages but below the record high 60% levels that we had in 2019 and early 2020.
As we progress through the remainder of the year, our focus will continue to be to push rates in our markets and manage our renewal negotiations.
Both markets are recovering nicely with concession use nearly nonexistent in our New York portfolio and declining rapidly in San Francisco.
New York is seeing stronger demand right now, and we think it is primarily due to greater clarity around employer return-to-office plans.
New York employers, particularly the banks and financial firms have called their employees back to the office, and you could feel it in the economic activity in many areas of Manhattan.
We see it in our portfolio after nine consecutive weeks of record application volume.
In San Francisco, however, the return to office and reopening is a little more ambiguous.
Employers have been slower to call employees back in, with many initially targeting after Labor Day.
Adding to the uncertainty in San Francisco is the reintroduction of strong recommendations for indoor masking and some delays in reopening, which were announced last week.
The situation in San Francisco is likely to lead to a delayed leasing season in that market and a slower full recovery of occupancy.
That said, occupancy is 95.4% today in San Francisco and is growing as is pricing trend.
At this pace, we expect the San Francisco pricing trend to be back to pre-pandemic levels by the end of the third quarter.
Meanwhile, we are seeing some indicators that we could see an extended leasing season with a second wave of demand in New York, Boston and Seattle.
Our leasing teams in these markets have been dealing with prospects that are looking for move-in dates in late August and September and hearing from them that these moves are in connection with their need to be back in the office, or in the case of Boston, back on campus.
This demand is more robust than historical patterns, which could suggest an extended peak leasing season in those markets, and matches up nicely with our lease expirations, which are more weighted toward the back of the year than usual.
Finally, I want to take a minute and give you an update on the government assistance program for renters.
As we've discussed on previous calls, approximately $50 billion in rental assistance for those impacted financially by the pandemic was made available in the various relief bills.
We are laser-focused on accessing the rental relief funds and are working very closely with our eligible residents to apply for this relief.
Processing to date has been relatively slow in our markets, but we were able to recover approximately $5 million in the quarter.
Bob will provide some color on our expectations for collections for the remainder of 2021 in his remarks.
This pace of recovery would not be possible without them, and they remain relentless in taking care of each other and serving our customers.
As Michael just discussed, the recovery is well underway and is exceeding our prior expectations for the same-store portfolio.
The continued strong operating momentum from this leasing season has led us to raise our annual same-store revenue guidance from negative 6% to negative 8% to negative 4% to negative 5%, an improvement at the midpoint of 250 basis points.
Strong expense controls and favorable real estate tax outcomes, which I will talk about in a moment, also allowed us to reduce our same-store expense guidance range to an increase of 2.75% to 3.25%, resulting in an NOI range of negative 7.5% to negative 8.5%, which is a 400 basis point improvement at the midpoint relative to our prior guidance.
Drivers of our revenue guidance increase of 250 basis points are roughly 150 basis points of improving operating fundamentals that Michael just outlined; 60 basis points or $15 million for the full year in related lower bad debt, primarily due to anticipated rental assistance collections; and the remaining 40 basis points is due to improved performance in our nonresidential business.
Before I move on to expenses, a quick comment on our bad debt assumptions.
The back half of the year has about $10 million of additional assumed rental assistance collections on top of the $5 million we've already received.
We feel very confident about this amount because we either received it in July, or after some real digging, can see that it is far along in the approval process.
There are other resident accounts being worked on, but they are not as far along.
Given the lack of transparency and the relative slow processing speed to date, it is difficult to handicap how much will successfully get processed and whether we will receive these funds in 2021 or it will spill over into 2022.
On the expense side, we have also seen improvements versus prior expectations, which led us to center the midpoint of expense guidance at 3%, which was the low end of our prior guidance range.
This reduction is in part due to the modest growth experienced in second quarter 2021 even with a really challenging comparable period from second quarter of 2020.
While some expense categories experienced a typically high percentage growth change quarter-over-quarter due to this comparability issue, overall expenses were less than originally anticipated.
Key categories driving the current period and anticipated full year lower were real estate taxes and payroll.
Reduction in growth expectations for real estate taxes is primarily driven by lower than forecasted accessed values in some key markets.
Lower payroll growth expectations are primarily driven by our progress in optimizing staffing utilization as well as higher-than-usual staffing vacancies.
We expect that 2021 will be our third consecutive year of low payroll growth, having delivered a three-year average below 1%, while keeping other controllable expenses like repairs and maintenance in check.
As a result of these same-store guidance changes, we raised the midpoint of our normalized FFO from $2.75 to $2.90.
A couple of closing comments on the balance sheet and debt capital markets.
With the impact of the pandemic on our operations increasingly in the rearview mirror, it is clear that our balance sheet has held up remarkably well.
Despite unprecedented pressure on operations, our credit metrics have remained well within our stated net debt-to-EBITDA leverage policy of between 5.5 times to 6.5 times.
The debt capital markets are also incredibly attractive at the moment for issuers like us.
This creates opportunities to term out commercial paper with treasuries and credit spreads at or near record lows, the potential of which has been incorporated into our revised guidance range. | sees fy 2021 same store noi change down 8.5% to down 7.5%. | 1 |
We are still in a virtual environment, so our usual cast of characters will be on the call, but we're all in different places or most of us are anyway.
Susan Kreh, CFO; Molly VandenHeuvel, our COO; Jessica Moskowitz, vice president and general manager of the consumer products division, Fred Kao, our VP of global sales for Amlan International; Laura Scheland, our VP and general counsel; and Leslie Garber, our manager of investor relations, are all on hand today.
And Leslie, please walk us through the safe harbor.
Actual results in those periods may materially differ.
We ask that you review and consider those factors in evaluating the company's comments and in evaluating any investment in Oil-Dri stock.
As you guys know, I took over as General Manager of Amlan International, right around November 1, and we have made some really, really good changes together.
It's been a complete team effort cross-functionally.
We brought in some new players.
I can distill it to people, poultry, clay and target markets.
And let me start with the people.
I mean, Fred and I, Fred Kao, who's our global VP of sales, have worked really hard at building our team.
Fred joining Oil-Dri was an initial badge of validation for the incredible opportunity we have because he's a 20-plus year, very successful career.
He's made great contacts, and people took notice when he joined the company.
And so we've been in the enviable position of being able to attract a lot of talent quickly as these people first got to know Oil-Dri through Fred, but then spend a lot of time with Molly and Hangyu and our team out at the research center, getting to get comfortable with our data that they knew had to have existed because they knew Fred was joining us for a reason.
And it's because this global vacuum that's been created by the elimination of antibiotics in the food chain, has created an incredible market opportunity for Oil-Dri.
So just in this short period of time since November 1, we've been able to onboard Heath Wessels, who is covering all North America for us; Jay Hughes, who is our Americas tech service; , who's covering APAC; and then Dr. Wade Robey, who is our vice president of marketing and product development, who has had a stellar career in the animal health.
We've put out news releases on this, so I encourage our investors, if you miss them, to track them down.
You can just search Amlan, and you'll find our latest news releases.
But we really have created a dream team in general, but in particular, they have incredible poultry experience.
So no means are we walking away from dairy or swine, but we are going to lean heavily into poultry.
Poultry represents about 40% of the $3 billion global opportunity that's been created by the elimination of antibiotics in the human food chain.
And so you're talking a $1.2 billion opportunity, where from Fred to that team that I just mentioned, their -- with a quick phone call, they can get to every level at all the major decision-makers around the world, and we are getting interest like never before.
So it's very, very exciting.
So I mentioned people, poultry.
Why didn't I mention clay?
Because clay is our unique entrée into this market.
We are the only player that has quality to the source.
So we have, as you well know, if you're a long time Oil-Dri investor, we have hundreds of millions of tons.
We have 100 million proven, but we have to equal that amount inferred, meaning we don't even bother doing the drilling because we're not going to need it in any of our lifetimes, but mother nature put it there.
So we have hundreds of millions of tons of clay to choose from, and we have specifically identified a particular reserve that has given us the highest quality and quantity of these animal health products that we're actually discovering new applications for as we speak because the more we understand our mineral, the more beneficial things we realize it's doing in the animals gut and to the animals well-being.
And so we selectively mine these.
We have always a minimum of 40 years reserves in every product line.
So you have no worries.
As this product explodes, we have the capacity to mine and supply this industry.
You look, we may have to spend some capital along the way, but we have the reserves, and that's very exciting.
So our people, our poultry and our clay.
And then, finally, our target markets.
We're going to fish where the fish are.
And 11 markets really are where we think we have a unique position to go after a large percentage of that $1.2 billion opportunity.
My math is it's between $700 million and $800 million of that $1.2 billion, so maybe two-thirds.
Don't hold me to it, but it's, obviously, large enough to dramatically change the financial landscape of Oil-Dri.
And the best part is one of our most exciting markets is pristine because we have stayed away from it.
I'm not really sure why, honestly, but our prior management had decided that the South America and Asia was more important than North America.
But our current team realizes we have a great right to win in America, and we are getting a lot of interest right in our backyard.
It's a language I speak.
It's a currency we trust.
It's contracts that are honored.
And so -- and we don't have to open up new business entities to do business here.
So very excited about the opportunity in the United States, and we are hitting the ground running.
But as I mentioned, things financially were going to get worse before they get better.
We put on a lot of SG&A, a lot of infrastructure.
And while these guys are getting a lot of interest, we are not getting a lot of orders.
We've actually gotten some orders, but not enough to cover the investment we're making in people.
So you're going to see our SG&A continue to trickle up in the short run, but these are all long-term investments for Oil-Dri.
None of them will impact -- it is expected, I don't think I have to qualify.
Laura will definitely want me to do this, I will qualify, that it is expected that none of these will impact our ability to continue our dividend policy.
These are all just using cash flow in a very wise investment pattern for the B2B side.
You'll be hearing from Jessica on the retail side, and we are continuing to really gain share both with our brand and our private label lightweight.
You did see in our news release that short term, we got hit with a lot of cost pressures, all at once and what she's been able to do to offset those going forward.
But none of that was -- none of that pricing was able to impact the second quarter, but the cost certainly did.
So that's my color.
And today, I'm going to recap the second quarter for you.
So in our second quarter of fiscal 2021, Oil-Dri delivered another solid quarter of top-line growth with net sales of $74.5 million, growing 5% over net sales during the same quarter in the prior year.
Both our business-to-business products group, which grew 7%, and our retail and wholesale products group, which grew 4%, contributed to this growth, demonstrating that as Dan said, we are achieving success in two of the key areas of our strategic focus, and those are mineral-based animal feed additives and lightweight cat litter.
Additionally, it was a very strong quarter within our business-to-business products group as all product lines experienced year-over-year growth in net sales.
We are seeing evidence that the focus on our mineral-based strategy in animal health and nutrition products is paying off, with 20% net sales growth during the quarter over the second quarter of the prior year.
During the quarter, we saw the benefit of enhanced distribution of Varium and natural alternative to antibiotic growth promoters for poultry.
We also experienced strong growth in China, Latin America and Mexico.
So an all-around good story for Amlan and the investments that we're making there.
Now switching to other business-to-business products.
Agricultural and horticultural products also had a strong quarter, achieving 10% growth over the same quarter in the prior year, driven primarily by increased sales with existing customers.
And in our fluids purification products, the decrease in sales of our jet fuel purification products that have been adversely impacted by the reductions in air travel due to the global pandemic were more than offset by the growth of our other products as our overall fluids purification products grew 3% in the quarter over the prior year.
This growth was favorably impacted by increased sales to our foreign customers during the quarter.
And finally, our co-packaged cat litter product, which sits within our business-to-business products portfolio, grew 5% during the second quarter of fiscal 2021.
Now similarly, within our consumer products group, cat litter sales grew 6% over the prior year.
We believe that our continued strategic focus on growing our lightweight litter products contributed to this growth in both the U.S. and Canada.
We also experienced increases in private label and branded scoopable litter sales, as well as growth through e-commerce sales.
Our second-quarter gross profit of $18.2 million was down $800,000 from the same quarter in the prior year, representing a 4% year-over-year decrease.
Despite the favorable growth in net sales, the quarter was unfavorably impacted by cost increases particularly in the categories of freight, which was up 13% per manufactured ton over the same quarter in the prior year due to domestic trucking supply constraints that resulted in significant increases in transportation costs.
Our packaging costs were also up 13% per manufacturing ton as increased resin pricing resulted in increased costs, particularly in our jugs and pales, and natural gas costs were up 8% per manufactured tons, which we used to operate kilns to dry our clay.
Overall, our cost of goods sold per manufactured ton was up 8% over the same quarter in the prior year, driven, in large part, by these market-based factors that were partially offset by operating cost reductions and efficiencies during the quarter.
We responded to the significant cost challenges posed by these economic headwinds through implementing mid-fiscal-year price increases.
So all of our products are impacted to various extents.
consumer cat litters particularly impacted due to the amount of freight and resin-based packaging costs that are included in those products.
Switching to our total selling, general and administrative expenses for the second quarter of $13.9 million, they were $843,000 higher than the prior year, representing a 6% increase.
However, the second quarter of the prior fiscal year included a onetime curtailment gain of $1.3 million related to the freeze of the company's supplemental executive retirement plan, which has since been terminated.
Excluding that $1.3 million onetime gain in the prior year, SG&A was down 3% during the quarter.
However, there was also an underlying shift in costs as corporate expenses, including the impact of the fiscal 2020 onetime gain or excluding the impact of the onetime gain of $1.3 million, decreased from the prior year and SG&A costs to support our business-to-business products, particularly the investments that we're talking about in our animal health and nutrition products, grew 26% or approximately $600,000 over the same quarter of the prior year.
This incremental expense is consistent with our commitment to invest in this high value-add product line to drive growth for our future, and Dan did share some of those highlights at the beginning of the call.
Our second-quarter other income of $1.1 million included an $800,000 gain upon the annual actuarial valuation of our pension plan.
So as a reminder, during the fourth quarter of fiscal 2020, the company executed a lump sum buyout for the terminated vested participants in our defined benefit pension plan who had elected to take this buyout payment option.
A majority of the participants that were eligible for this lump sum buyout opted to take it, which contributed to the favorable annual actuarial valuation of this obligation.
And finally, net income attributed to Oil-Dri for the second quarter of fiscal 2021 was $4.3 million, which represents an 11% decrease from the prior year for the cost and investment reasons we just reviewed.
Our financial position remains strong, as is reflected in our balance sheet.
We ended the quarter with cash and cash equivalents of $31 million and have very little debt, equating to a debt to total capital ratio of only 6%.
The one of the primary uses of our cash flow is to fund our trade working capital.
During the first six months of fiscal 2021, our accounts receivable increased $3.8 million, reflecting our sales growth and a shift in our customer mix, including an increase of sales to foreign customers who tend to have longer payment terms.
We also use our cash to fund capital investments in our business, including those required for growth and those required to drive cost reductions, in addition to normal repair and replacement capital.
Because of our strong position during the quarter, we also repurchased 33,594 shares of Oil-Dri common stock for $1.2 million at an average price of $36.09 per share.
So based on our strong financial position, we often get asked if we are interested in pursuing acquisitions.
And the answer is, yes, for the right opportunity.
Because of our low leverage, we are well-positioned to capitalize on strategic investment opportunities that may become available.
So that's my summary for the second quarter.
So yes, at this time, I'd like to open up to Q&A. | q2 sales rose 5 percent to $74.5 million. | 1 |
Now, turning to our business.
In reviewing 2020, prior to the pandemic, ACC was off to an excellent start.
After delivering nearly 5% earnings growth in 2019, the Q1 delivered NOI that exceeded our expectations for each of the three months.
Additionally, our velocity for fall 2020 lease-up was over 3% ahead of the prior year with rental rate growth trending well relative to targets.
New supply for fall 2021 was also near decade lows.
The fundamentals in our sector were strong and all facets of our business were exceeding our internal expectations.
With COVID- 19 being declared a pandemic, the student housing sector like most businesses faced unprecedented and unanticipated disruptions.
The U.S. Higher Education System was dramatically impacted by the governmental shelter in-place orders put in place across the country.
Over the last 3 quarters of 2020, we responded by attempting to do the right things on behalf of all of our stakeholders, while continuing to provide a central housing services to students all across America, all the while attempting to mitigate long term negative impacts to our business and providing thought leadership in action to help universities return to a sense of normalcy.
Despite the negative financial impacts to our business in 2020, we were encouraged by students' strong desire to be physically present in their college environment, demonstrating that the desired educational experience is much more than simply attending a classroom lecture.
Ultimately fall 2020 enrollment levels at Tier 1 universities we serve remained relatively consistent with 2019, and most students returned to their college towns for the fall term, regardless of whether their university was holding in-person classes or providing them online.
This was evidenced by the fact that our portfolio achieved approximately 90% occupancy for fall of 2020 with the sector as a whole being over 88% occupied.
As we look forward, 2021 will be a year of transition on the path back to normalcy.
While the virus continues to have a lingering impact on the student housing sector, we are seeing signs of improvement.
During the fourth quarter, we saw an increase in collection rates, a diminished necessity for on-campus rent refunds and a reduction in request for rent relief under our resident hardship program.
We also had strong demand for spring leases signing over 3600 new leases commencing in the spring term, 50% more in the prior year.
While the current transitionary environment causes us to believe there could be softness in our ability to backfill May-ending leases at historical levels and that we may not return our summer camp and conference business to normal levels.
We are cautiously optimistic regarding the 2021-2022 academic year commencing this fall.
In discussions with our university partners, the vast majority are indicating that admission applications are up over the last year and many are projecting strong enrollment growth for fall 2021.
There is also incrementally positive news in terms of universities planning to return to in-person classes for fall of 2021 as exemplified by the recent announcements by both the University of California and Cal State Systems as well as several other major universities who have been fully online in the current academic year.
With regard to their statements, they will be returning to in-person classes.
Also, Arizona State University, our largest university partner recently announced plans for full availability of in-person classes in fall of 2021 and encouraged students to register early and at this time, they expect to reinstate their on-campus housing expectation for first year students.
Although, we cannot yet give you a reasonably accurate estimate of fall 2021 occupancy levels, these are certainly encouraging signs.
As we fully expected and consistent with what has been reported by our private peers and in third party market research, across the industry pre-leasing for the 2021-2022 academic year is tracking behind the traditional historical pace.
We did see accelerating leasing velocity in the weeks after students return from winter break and there will be significant acceleration in April, May and June, which we expect to compare favorably relative to those months last year when leasing activity dramatically dropped off during the height of the pandemic.
Finally, the new supply picture continues to provide tailwind for the sector as a whole as fall 2021 deliveries are flat compared to 2020, which as I mentioned earlier was at the lowest amount of new supply in the past decade.
Turning to our ongoing development at Walt Disney World.
As we discussed last quarter, with the current suspension of the Disney College Program, we did commence in earnest [Phonetic] marketing and leasing of the project at Disney cast members and employees of operating partners in late Q4.
With the holiday season in the start of the New Year, being a slow leasing period for conventional multifamily, we have signed 88 leases to date and anticipate the velocity will accelerate through the remainder of the year as cast members' current leases expire.
The original pre-COVID proforma projected Disney College Program to deliver approximately $14 million in operating income after ground rent in 2021.
However, based on a standard multifamily leasing stabilization trend of 25 to 100 leases per month, we now expect 2021 to have a net operating loss after ground rent between $2.7 million and $5.4 million.
As Disney brings the DCP intern program back online, occupancy will increase more rapidly than the current conventional market leasing velocity.
Disney continues to be fully committed to the full reopening of Walt Disney World as soon as possible, evidenced by their continued investment in the parks and resorts, including the continued construction of Flamingo Village Crossing Town Center, a 200,000 square feet mixed used entertainment center set to open in fall of 2021 across the street from our community.
And as Disney discussed on their recent earnings call, they have significant demand for attendance at the parks and are very pleased with future bookings, and as they stated at this point, it's only a matter of the rate of public vaccination that will allow them to start to see a return to normal levels of operations at the parks with corresponding increases in cast members and ultimately DCP participants.
Although the timing and velocity of the reinstatement of the Disney College Program continues to be influx at this time, we currently expect the completed project to be fully stabilized and pro forma occupancy and rents within 12 to 24 months of the originally anticipated date of May 2023 at its originally targeted stabilized yield of 6.8%.
Now looking to transactional activity in the student housing sector.
As with many sectors, 2020 volumes were down significantly, with CBRE reporting student housing transactions decreasing approximately 20% versus 2019.
While deep interest from capital sources looking to invest in the sector held cap rates in line with pre-COVID levels, pricing has been lower as valuations have been impacted by COVID's disruption to historical revenues and NOIs.
Based on our discussions with the investment community, we expect transaction volume to remain low in the first three quarters of 2021, with potential improvement later in the year, as lease-ups are finalized for the upcoming 2021-2022 academic year.
As it relates to our capital recycling plants for '21, we will continue to monitor the market to assess the optimum timing to maximize our own asset valuations and we'll update the market at the appropriate time.
Turning to on-campus public-private partnership, P3 opportunities, as universities are expecting a return to normalcy in the fall, they are now beginning to refocus their efforts to modernize on-campus housing.
We started to see progress with regard to our projects awarded pre-COVID that are in pre-development as well as a pickup in new pursuits.
We continue to believe that P3 opportunities on-campus may well be greater in a post-COVID environment, given the significant financial impacts universities experienced related to the de-densification and consumer rejection of older community bath residence halls coupled with the funding and budget cuts university space in the post-COVID environment.
As the recognized industry leader, ACC is uniquely positioned to capitalize on this expanding opportunity.
Currently, we are tracking over 60 universities that are evaluating potential on-campus projects.
With respect to guidance, while we believe the student housing sector has exhibited impressive resiliency, despite the significant disruption the pandemic has had on the universities of students we serve, and while we see many encouraging signs of a steady return to normalcy, the range of potential financial results for 2021 is still too wide for us to provide full year earnings guidance, with a reasonable and useful range.
Instead, we'll be providing guidance for each forward quarter until we can provide an estimate further into the future, that we can stand behind.
As such, we're providing Q1 FFOM guidance in the range of $0.54 to $0.56 per share.
As we look beyond Q1, we would encourage everyone to review the normal quarterly seasonality of our business and further take into consideration some of my earlier comments, regarding the fact that the transitionary environment causes us to believe that there may be softness in our ability to backfill May-ending leases at historical levels, and that we will likely not see a return to normal summer camp and conference business in 2021.
We also expect to see significantly higher same-store operating expense growth levels than normal, as 2020 presents a tough comparison year given that operating expenses were approximately 6% below our original 2020 guidance for expenses.
This will be especially notable in Q2 and Q3, as we anticipate more normal expense levels that will be compared to the same periods in 2020, when many expense activities were halted.
This could lead to expense growth in the high-single digits in Q2 and Q3 of this year.
In closing, I'd like to convey our excitement related to the recent appointments of three new outstanding independent directors to the ACC Board.
These three new directors have extensive real estate and capital allocation experience and bring valuable diverse perspectives that will serve the interest of our shareholders well.
Ed has helped oversee our company's transformation from an owner of only 16 student housing properties at IPO to becoming the industry leader, and we'd also like to congratulate Ms. Cydney Donnell, who will be assuming the role of Board Chair up on Ed's departure. | american campus communities - maintaining recently increased guidance range for year ending dec 31, 2021. | 0 |
We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially.
With Josh and me on the call today are Mark Olear, our Chief Operating Officer; and Danion Fielding, our Chief Financial Officer.
Similar to prior quarters in 2020, we will provide an update on our business in the context of the ongoing COVID-19 pandemic and also provide our quarterly review of our portfolio and financial statements.
Regarding COVID-19, I am pleased to report that our third quarter results are further evidence of the stability of our triple-net lease rents and growth platform.
Our portfolio of convenience stores, gas stations and other automotive assets produced another strong quarter of rent collections, operating performance and growth at Getty.
I am especially proud of our Company as we achieved our results during a difficult time for the overall US economy and related challenges to many aspects of the retail, real estate sector.
The entire Getty team is working hard to continue what has been a very strong for our Company.
We are proud of our accomplishments year-to-date and expect to continue executing on all of our initiatives for the remainder of 2020.
Turning to our results, we benefited from the stability of our triple-net lease rents and our active an accretive acquisition program.
As a result, our third quarter revenues from rental properties increased by more than 4% to $37.2 million, and our AFFO per share by more than 9% to $0.47 per share.
The success of our acquisition strategy year-to-date has been a key contributor to our earnings growth, including transactions that closed just after the third quarter ended.
Getty has acquired 32 properties for approximately $140 million so far this year.
These high quality assets are located in numerous markets across the country and include portfolios of both convenience and gas assets as well as car washes.
While the COVID-19 pandemic cause disruptions in transaction activity across the commercial real estate sector, Getty has been able to maintain momentum and close on several opportunities which we had underwritten earlier in the year.
In addition, as Mark will mention, we completed our redevelopment project with 7-Eleven and the Dallas-Fort Worth MSA for a remodeled convenience and gas location, bringing our total number of completed projects to 2018, since the inception of our redevelopment.
Let me now share some additional details on Getty's performance during the pandemic.
For the third quarter, the performance of the convenience and gas and other automotive asset classes in general and our portfolio more specifically was strong.
Our collections have continued to improve and in the quarter, we collected 98% of our rent and mortgage payments and agreed to a small number of short-term deferrals for rent and mortgage payments.
Perhaps more importantly, we received substantially all of the deferred rent and mortgage payments, which were due to be repaid during the third quarter.
Looking ahead to the fourth quarter, as of today, our collections rate currently remains at 98% for the month of October and we are continuing to collect substantially all the COVID-related rent and mortgage deferrals that were due to be repaid this month.
Although uncertainty remains regarding the forward impact of COVID-19 to the broader economy, we are encouraged by the strength exhibited by our tenants and assets since the beginning of the pandemic.
We will continue to be vigilant in monitoring the health of our tenants as we believe the severity of the COVID-19 pandemic on the US economy will continue to impact consumer and retail activity generally and therefore could negatively affect Getty's rent collections and financial results.
The operating environment for our tenants remains stressed as many tenants continue to adjust their operations to reflect ongoing health and safety challenges.
Despite these challenges, most of our properties and tenants have performed well during this difficult time.
Nationally, fuel volumes continue to recover and are now down 17% year-over-year compared to the 50% decline we saw at the height of the pandemic impact during the second quarter.
In addition, fuel margins remain elevated on a national basis from comparable periods in 2019, meaning that on average operators are making more money on a cents per gallon basis.
The net impact of fuel gross profit remains highly regional with certain of our tenants experiencing year-over-year declines and others reporting increases in annual fuel gross profit.
The convenience store side of the business has generally performed well across the Board during the pandemic, with the majority of our tenants reporting that results are slightly ahead of the prior year's performance.
To touch on our balance sheet and liquidity position, we ended the quarter with $58 million of cash on hand and $190 million of availability on our revolving credit facility, with some of the cash on hand being used to fund acquisitions we have already closed during the fourth quarter.
We believe we have sufficient access to capital at this point in time to execute on our business plan.
Turning to our dividend, given our performance, I am pleased to report that our Board approved an increase of 5.4% to $0.39 per share in our quarterly dividend.
This represents the seventh straight year with a dividend increase.
Our Board believes this annual increase is appropriate as it maintains a stable payout ratio and is tied to the Company's growth over the past year.
Looking ahead, while the situation remains fluid, we are continuing to effectively navigate this uncertain environment.
We believe that our execution of our strategic objectives over the last several years, the essential nature of our tenants businesses, the net lease structure of our leases and our stable balance sheet all position us well.
Furthermore, we believe there will continue to be opportunities for Getty to grow its business.
We are confident that our targeted investment strategy, which focuses on the largely internet resistant service oriented convenience and gas and other automotive sectors across metropolitan markets in this country will continue to create value for our shareholders over the long term.
We remain committed to an active approach in managing our portfolio of net leased assets, expanding our portfolio through acquisitions and selective redevelopment projects.
We are confident in our ability to continue to successfully execute on our strategic objectives over the long term.
This approach and focus on these critical components should result in driving additional shareholder value as we move through the remainder of 2020 and beyond.
Before turning the call to Mark, let me just address our recently announced executive transition.
Danion Fielding, our CFO, is going to be leaving the Getty team for personal reasons.
Danion led his team and the Company's finances, and was the key part of Getty's success.
We expect that Danion will leave Getty before year end, and we wish his family and him well in his future endeavors.
The search is under way and we anticipate a smooth transition of the CFO role.
In terms of our investment activities, for the third quarter and the first two weeks of October, we are very active in the transaction market.
During the quarter, we invested $36.1 million for the acquisition of nine properties.
Subsequent to the end of the quarter, we invested an additional $36.6 million for the acquisition of eight properties.
The majority of our completed acquisitions during the third quarter come from an acquisition leaseback transaction with a subsidiary of Go Car Wash.
The properties acquired are subject to a unitary triple-net lease with the 15 year based term and multiple renewal options.
These properties are located within San Antonio MSA.
Properties we acquired have an average lot size of 2 acres and an average tunnel length of more than 160 feet, both of which we believe, enhance the quality and diversity of our portfolio.
We invested $28 million at closing and expect to generate a cash yield that is in line with our historic acquisition cap rate range.
Additionally, we closed on the acquisition of two newly constructed car wash locations in North Carolina and Ohio.
The sites are subject to a 15 year triple net lease with Zips Car Wash.
Getty's aggregate initial cash yield on our second quarter acquisitions was 7.2%.
Subsequent to the quarter end, we completed a sale leaseback with Fikes Wholesale, one of the leading independent convenience store operators in the Southern United States.
In the transaction, Getty acquired Fikes [Phonetic] properties for $28.6 million.
The properties acquired are subject to a unitary triple-net lease with a 15 year base term and multiple renewal options.
The properties are located throughout the state of Texas.
The properties we acquired have an average lot size of 2.7 acres and an average store size in excess of 5,300 square feet which reflect that the assets we acquired have all the attributes of today's modern full service convenience stores.
Our initial cash yield is in line with our historical acquisition cap rate range.
We also closed on the acquisition of two car wash locations in the Kansas City and San Antonio MSA.
The sites were added to our 15 year triple net lease with Go Car Wash.
We remain highly committed to growing our portfolio in the convenience and gas sector as well as our other oil-related categories including car washes and automotive service centers.
While the COVID-19 pandemic continues to impact the overall transaction market, business conditions for our target asset classes have stabilized and we are seeing an increase in the transaction activity in the marketplace.
As a result, we expect that we will remain active in the underwriting and acquiring and inquiring assets.
Getty will remain committed to its core principles of acquiring high quality real estate and partnering with strong tenants and our target asset classes.
Moving to our redevelopment platform.
For the quarter, we invested approximately $0.6 million in both completed projects and sites which are in progress.
In the third quarter, we return one redevelopment project back to our net lease portfolio.
Specifically in July, a project was returned to the portfolio in the Dallas-Fort Worth MSA where we leased a site to 7-Eleven for the state-of-the-art convenience and gas location.
Our total investment in this project is $0.8 million and we expect to generate a return on our investment of 18%.
In terms of redevelopment leasing, we ended the quarter with 12 signed leases which includes seven active projects and five signed leases and properties, which are currently subject to triple-net leases, but which have not yet been recaptured from the current tenants.
All these projects are continuing to advance through the redevelopment process.
Again, I note that due to the impact of the COVID-19 pandemic, we continue to experience delays in certain of our projects as contractor suppliers, municipalities deal with restrictions on business and regulatory activities, social distancing requirements and other impediments to normal function.
In total, we have invested approximately $1.5 million in the 12 redevelopment projects in our pipeline.
We expect to have one additional rent commencement in Q4 2020.
From a capital investment perspective, we expect that these 12 projects will require total investment by Getty of $7.9 million and will generate incremental returns to the Company in excess of where we could have invested these funds in the acquisition market today.
We remain committed to optimizing our portfolio and continue to anticipate redevelopment opportunities over the next five years, possibly involving between 5% and 10% of our current portfolio with targeted unlevered -- unlevered redevelopment program yields of greater than 10%.
Turning to dispositions, we sold one non-core property during the third quarter, realizing proceeds of approximately $0.2 million.
We also exited one property, which we previously leased from a third -- of third-party landlord.
As we look ahead, we continue to selectively dispose of properties where we have made the determination that the property is no longer competitive as a C&G location and did not have redevelopment potential.
As a result of our activity, we ended the quarter with 939 net lease properties, seven active redevelopment sites and eight vacant properties.
Our weighted average lease term is approximately 10 years and our overall occupancy excluding active redevelopments increased to 99.2%.
For the third quarter, our total revenues were $37.9 million, an increase of 4% over the prior year's quarter and our rental income, which excludes tenant reimbursement and interest on notes and mortgages receivable also grew 5.3% to $31.9 million.
Our growth and rental income continues to be driven by rent escalated in our leases plus additional rent from recently completed acquisitions and redevelopment projects.
During the third quarter of 2020, we benefited from a reduction in both property costs and environmental expenses offset by an increase in general and administrative expenses due to increases in employee-related expenses and legal and other professional fees.
Our FFO for the quarter was $20.8 million or $0.48 per share as compared to $19.1 million or $0.46 per share for the prior year's quarter.
Our AFFO for the quarter was $20.2 million as compared to $18.1 million in the prior year's quarter.
On a per share basis, our AFFO was $0.47, up 9% from $0.43 in the prior year.
Turning to the balance sheet and capital markets activities.
We ended the third quarter 2020 with $560 million of total borrowings, which includes a $110 million under our credit agreement and $450 million of long-term fixed rate debt.
Our weighted average borrowing cost is 4.3%.
The weighted average maturity of our debt is 4.5 years with 80% of our debt being fixed rate and our earliest debt maturity remains at $100 million Series A which matures in February 2021.
We are in the process of refinancing this upcoming debt maturity and will provide an update at the particular time.
As of today, we have $190 million of undrawn capacity on our revolving credit facility, which can be used to fund operations or for growth over the near to medium term.
At quarter end, our debt to total capitalization stood at 34%.
Our debt to total asset value is 41% and our net debt to EBITDA ratio was 4.9 times.
Additionally, we utilized our ATM program in the quarter and efficiently raised permanent capital.
For the quarter, we raised $27 million at an average price of $29.41 per share, which helped to fund our growth and maintain our low leverage profile.
We still have $40 million available to us to fund under our existing at-the-market program.
As we look ahead and think about our capital needs.
We will remain committed to maintaining a well-laddered and flexible capital structure.
On environmental liability ended the quarter at $49 million, down $1.7 million for the year.
For the quarter, Company's net environmental remediation spending was approximately $1.4 million [Phonetic].
While our tenants in Getty have fared well so far through the COVID-19 pandemic, uncertainties persist with the rest of possible reimplementation of shelter-in-place restrictions and the length and depth of economic impact to the US economy and businesses.
We withdrew our 2020 AFFO per share guidance range in conjunction with our first quarter 2020 results, and given the continued uncertainty related to the COVID-19 pandemic, we are not reinstating guidance at this time. | getty realty increases quarterly dividend by 5% to $0.39 per common share.
getty realty corp - increases quarterly dividend by 5% to $0.39 per common share. | 1 |