text
stringlengths 2.82k
70.1k
| summary
stringlengths 23
1.68k
| score
int64 0
1
|
|---|---|---|
The year is off to a good start.
In the first quarter, we generated earnings of $2.43 per share, a 59% increase over the fourth quarter, primarily driven by strong credit quality.
Our ROE grew to over 18% and our ROA was 1.68%.
I am pleased to report that we are hearing more optimism among our customers and colleagues across our markets.
Stimulus payments to individuals and enhanced unemployment benefits, along with PPP loans to small- and medium-sized businesses have provided much needed relief to those that are struggling.
Also, the Infrastructure Bill that is being considered is expected to spread spending over many years.
This fiscal stimulus and the ramp up in the vaccine distribution, in combination with ample liquidity and low borrowing costs, has the potential to spur substantial activity.
The economic metrics are improving quickly and the outlook for the back half of the year is for strong economic growth.
As the economy continues to reopen and pre-pandemic conditions return, many businesses are beginning to experience accelerating activity.
I remain very proud of the unwavering commitment of our team to serve our customers, communities and each other.
We've again stepped up our efforts to support those affected by the pandemic.
Last month, Comerica and the Comerica Charitable Foundation pledged approximately $16 million to support small businesses and communities impacted by COVID.
This support is in addition to the $11 million committed in 2020.
As you know, last year, we funded $3.9 billion in the first round of PPP loans.
Also, so far this year, through the hard work of colleagues across the Bank, we further assisted businesses by funding close to $1 billion in the second round of PPP.
In addition, in the first quarter, we processed over $600 million in PPP loan repayments, mainly through forgiveness.
Turning to our first quarter financial performance on Slide 4.
Compared to the fourth quarter, average loans decreased with seasonally lower home purchase volumes impacting our Mortgage Banker business.
Also, total line utilization across nearly all businesses have remained low.
However, our loan pipeline has continued to grow.
Average deposits increased over $1 billion to another all-time high as customers received additional stimulus payments.
Net interest income was impacted by $17 million in lease residual adjustments in an expiring legacy portfolio.
Excluding this impact, pre-tax pre-provision net revenue increased 5% despite the shorter quarter and the decline in loan volume.
This increase in PPNR was due to continued robust fee generating activity in our expense discipline.
As far as credit, our conservative culture, diverse portfolio, as well as deep expertise has served us well.
Strong credit performance and an improvement in our economic forecast resulted in a negative provision of $182 million.
The credit reserve remains healthy at 1.59%.
Net charge-offs were only 3 basis points.
Through the cycles, our net charge-offs have typically been at or below our peer group average, including during the past year as we navigated the pandemic.
With more confidence in the economic recovery and an estimated CET1 ratio of 11.09%, we plan to restart share repurchases.
In the second quarter, we expect to make significant strides toward our 10% target, giving careful consideration to earnings generation, as well as capital needs to fund future loan growth.
Our ongoing goal is to provide an attractive return to our shareholders, which includes a dividend that currently has a yield of about 4%.
Turning to Slide 5, average loans decreased approximately $800 million.
As Curt mentioned, the biggest driver was Mortgage Banker, which declined from its record high in the fourth quarter due to lower purchase volumes.
Energy decreased as higher oil prices are resulting in improved cash flow and capital markets activity.
We had expected National Dealer loans would begin to rebound in the first quarter.
However, supply chain issues, most notably with computer chips have STIMI [Phonetic] production.
In addition, March auto sales were the second highest of all-time for that month, further depleting inventory.
Dealer loans were $1.5 billion below the first quarter of 2020.
We remain confident in the floor plan balances will eventually rebuild to historical levels.
Equity Fund Services was a bright spot, increasing over $200 million with strong fund formation.
Total period end loans reflected decreases of $900 million in Dealer and $700 million in Mortgage Banker.
Line utilization for the total portfolio declined to 47%.
We feel good about the pipeline, which now sits above pre-pandemic levels.
It increased to nearly every business line and loans in the last stage of the pipeline nearly doubled over the fourth quarter.
Ultimately, we would expect this to translate into loan growth.
As far as loan yields, there were $17 million in lease residual value adjustments, mostly on aircraft and an expiring legacy portfolio.
We have not done business in this segment for many years and no further adjustments are expected.
Excluding the 14 basis point impact from the residual adjustment, loan yields increased 3 basis points with the benefit of accelerated fees from PPP forgiveness.
Continued pricing actions, particularly adding rate floors when possible as loans renew, offset the decline in LIBOR.
Average deposits increased 2% or $1.1 billion to a new record as shown on Slide 6.
Consumer deposits increased nearly $1 billion, primarily due to seasonality and the additional stimulus received in January.
Customers continue to conserve and maintain excess cash balances.
With strong deposit growth, our loan-to-deposit ratio decreased to 69%.
The average cost of interest-bearing deposits reached an all-time low of 8 basis points, a decrease of 3 basis points from the fourth quarter and our total funding cost fell to only 9 basis points.
Slide 7 provides details on our securities portfolio.
Period end balances are up modestly as we recently began to gradually deploy some of our excess liquidity by opportunistically increasing the size of the portfolio.
Lower rates on the replacement of about $1 billion in payments received during the quarter resulted in the yield on the portfolio declining to 1.89%.
Yields on repayments averaged approximately 235 basis points, while recent reinvestments have been in the low-180s.
We expect to mostly offset the yield pressure on MBS in the near term with a modestly larger portfolio.
However, maturing treasuries will likely be a slight headwind in the back half of the year, depending on the mix of MBS and treasuries we would likely replace them with, as well as market conditions.
Turning to Slide 8, excluding the impact of the lease residual adjustment and two fewer days in the quarter, net interest income was roughly stable and the net interest margin would have increased 2 basis points.
As far as the details, interest income on loans decreased $28 million and reduced the net interest margin by 8 basis points.
This was primarily due to the $17 million of lease residual adjustments, which had a 9 basis point impact on the margin, as well as two fewer days in the quarter, which had a $7 million impact.
Lower loan balances had a $5 million impact and were partially offset by a $3 million increase in fees related to PPP loans.
Other portfolio dynamics had a $2 million unfavorable impact and included lower LIBOR, partially offset by pricing actions.
Lower securities yields, as I outlined in the previous slide, had a $2 million or 1 basis point negative impact.
Continued prudent management of deposit pricing added $3 million and 1 basis point to the margin and a reduction in wholesale funding added $1 million and 1 basis point.
Average balances of the Fed were relatively steady and remain extraordinarily high at $12.5 billion.
This continues to weigh heavily on the margin with the gross impact of approximately 41 basis points.
Credit quality was strong and metrics are moving in the right direction as shown on Slide 9.
Net charge-offs were only $3 million or 3 basis points.
Non-performing assets decreased $34 million and at 64 basis points of total loans, they are about only half of our 20-year average.
Inflows to non-accrual were also very low.
Criticized loans declined $366 million and comprised 5% of the total portfolio.
Positive migration in the portfolio, combined with growing confidence and improving economic forecast, resulted in a decrease in our allowance for credit losses.
Of note, both the social distancing-related segments, as well as the Energy portfolio have performed better-than-expected.
However, we continue to apply a more severe economic forecast to these areas.
Our total reserve ratio is very healthy at 1.59% or 1.72% excluding PPP loans and remains well above pre-pandemic levels.
Non-interest income increased $5 million as outlined in Slide 10, sustaining the positive trend we've seen for the past year.
Derivative income increased $11 million as volumes remain robust, particularly for energy hedges, combined with a $10 million benefit from a change in the credit valuation adjustment.
Note that we have made a change in reporting, we have combined foreign exchange and customer derivative income, which was previously included in other non-interest income into a combined derivative income line item.
Prior periods have been adjusted to reflect this change.
Warrants and investment banking fees moved higher and we had smaller increases in fiduciary and deposit service charges.
Partly offsetting this, commercial lending fees decreased $6 million with the seasonal decline in syndication activity.
Deferred comp asset returns were $3 million, a $6 million decrease from the fourth quarter and are offset in non-interest expenses.
Note, card fees remained elevated.
They were over 20% higher than a year ago due to government card and merchant activity spurred by the economic stimulus and changes in customer behavior related to the COVID environment.
All in all, another strong quarter for fee income.
Turning to expenses on Slide 11, which decreased $18 million or 4%.
Starting with salaries and benefits, which were up $11 million due to seasonal factors.
This increase was driven by annual stock compensation and payroll taxes resetting.
Providing a partial offset was a decrease in deferred comp, as well as a reduction due to two fewer days in the quarter and seasonally lower staff insurance costs.
All other expenses decreased $29 million.
As discussed last quarter, strong investment performance in 2020 has resulted in an $8 million reduction in pension costs, which is included in other non-interest expense.
In addition, effective January 1, we adopted a change in the accounting method for our pension plan.
Previous quarters have been adjusted, specifically fourth quarter pension expense was reduced by $8 million.
This change also decreased AOCI and increased retained earnings at year-end by $104 million, which resulted in a 16 basis point increase to our CET1 ratio.
Finally, we realized seasonal decreases in advertising and occupancy, lower operating losses and FDIC expense, as well as smaller decreases in other categories.
Our strong expense discipline is assisting us in navigating this low rate environment as we invest for the future.
Our CET1 ratio increased to an estimated 11.09% as shown on Slide 12.
As always, our priority is to use our capital to support our customers and drive growth while providing an attractive return to our shareholders.
In this regard, we have maintained a very competitive dividend yield.
As far as share repurchases, we have a long track record of actively managing our capital and returning excess capital to shareholders.
With more confidence in the path of the economic recovery, we plan to resume share repurchases in the second quarter.
We expect to make significant strides toward our CET1 target of 10%.
Slide 13 provides our outlook for the second quarter relative to the first quarter.
In addition, we have provided expected trends for the second half of the year relative to the second quarter outlook.
In the second quarter, excluding PPP loans, we expect loan volume to be stable.
We expect growth in several lines of business led by middle market as a result of increasing M&A, as well as working capital and capex needs.
However, this will be offset by continuing headwinds in Mortgage Banker, National Dealer and Energy.
In line with the MBA forecast, Mortgage Banker is expected to decline as refi volumes begin to cool with higher rates.
We expect National Dealer to continue to decrease as auto inventory levels are challenged by strong demand combined with supply issues.
Also, Energy loans are expected to remain on the current declining trend as higher oil prices are driving improved cash flow and capital markets activity.
As far as PPP loans, it is difficult to predict.
However, we believe loan forgiveness will pick up toward the end of the second quarter and the bulk should be repaid by year-end.
Excluding PPP loan activity, we believe loans should grow across nearly all business lines in the second half of the year.
This is based on our robust pipeline and expectations that the economy will continue to strengthen.
We expect average deposits to remain strong with the second quarter benefiting from the latest federal stimulus.
These record levels are expected to wane in the back half of the year as customers start to put cash to work.
As far as net interest income, the $17 million lease residual adjustment we took in the first quarter will not recur.
That aside, all other factors, including PPP are expected to offset each other in the second quarter.
For example, headwinds from lower reinvestment yields on securities should be offset by a modestly larger portfolio.
As we move into the second half of the year, we expect pressure on securities yields and swap maturities to be roughly offset by non-PPP loan growth.
In addition, lower PPP loan volume and accelerated fees are expected to be a headwind.
Of course, PPP activity is difficult to predict and may result in variability.
Credit quality is expected to remain strong.
Assuming the economy remains in the current path, we expect our allowance should move toward pre-pandemic levels.
We expect non-interest income in the second quarter to benefit from higher card fees driven by recent stimulus payments, as well as increased syndication fees following lower seasonal activity in the first quarter.
Also, we expect growth in fiduciary income reflecting annual tax-related activity and new business generation.
This growth is expected to be more than offset by a decline in derivatives and warrants income from elevated levels, as well as deferred comp, which is not assumed to repeat.
As we progress through the year, we believe customer-driven fee categories in general should grow with improving economic conditions.
However, card fees are expected to be a headwind as the benefit from growing merchant and corporate volumes could be more than offset by lower government card activity due to the absence of further individual stimulus payments.
We expect expenses to be stable in the second quarter.
Salary and benefit expenses are expected to decrease in the second quarter with lower stock comp, as well as lower payroll taxes, partly offset by annual merit and one additional day.
Offsetting this decrease, we expect a rise in outside processing tied to growth in card fees, as well as seasonally higher marketing and occupancy expenses.
As far as the second half of the year, by maintaining our focus on expenses, we expect to offset higher tech spend.
In addition, we expect increases in certain line items due to seasonality and revenue growth.
Finally, as I indicated on the previous slide, we plan to restart share repurchases in the second quarter.
As I mentioned at the beginning of the call, we are off to a good start and we expect the economy will continue to improve throughout this year.
We believe firming manufacturing conditions, increasing business and consumer confidence, as well as pent-up demand will support strong economic growth.
It is hard to believe that just over a year ago we drastically changed the ways in which we work and live.
We have demonstrated the resilience of our business model as we embraced our core values and rose to the occasion to support our customers, communities and each other.
Our success is anchored by our ability to provide our expertise and experience to build and solidify deep, enduring relationships, particularly during challenging times.
I'm extremely proud of the work our team has done to ensure we continue to deliver the same high-level of service.
We are focused on delivering a more diversified and balanced revenue base with an emphasis on fee generation, and our progress is demonstrated in our results as non-interest income has increased in each of the past four quarters.
Our robust card platform is a great example has helped position us for the recent and likely ongoing changes in customer behavior.
Also, our fiduciary business is growing with strong collaboration between Wealth Management, Commercial and Retail Bank divisions.
In February, we increased the breadth and scale of our Trust Alliance business through the acquisition of a small group with expertise in this area.
In addition, we are committed to maintaining our strong expense discipline.
Our technology investments are enhancing the customer and colleague experience, helping to attract and retain customers and improving colleague efficiency.
Finally, our disciplined credit culture and strong capital base continue to serve us well.
These key strengths provide the foundation to continue to deliver long-term shareholder value. | confirmed its financial guidance for full year 2021.
qtrly net sales increased 6.5%, organic sales increased 4.5%. | 0 |
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-19 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.
Danish was tragically killed while on assignment in Afghanistan last month.
The impact of his loss has been significant for all of us, especially his Reuters News colleagues, and we will continue to honor his memory.
Now we'll move to our financial performance for the second quarter.
I'm pleased to report the momentum we saw in the first quarter accelerated in the second quarter.
Our strong performance was above our expectations and positions us well for the second half of the year.
This strong performance reflects several things: First, the solidity of our franchises, our must-have products and our market positions.
Second, the strength of the information services market itself, which is presenting us with opportunities to expand our positions and further accelerate growth.
Third, the realization and conviction by our customers that they need to reapportion their spend toward our products and solutions that can fit their workflow and drive growth and productivity.
And finally, customers have growing confidence in both an improving economic environment and their own future prospects.
So we're pleased with our first half performance, which increases our confidence in our prospects for the second half of the year and for 2022.
Now to the results.
Prevailing tailwinds are playing to our strengths and contributing to strong revenue and sales growth.
The second quarter's total company organic revenue growth of 7% was the highest in over a decade, and the big three businesses also grew at 7%.
This revenue growth was mirrored by strong sales growth across the company as customers position themselves to meet expected demand.
We also continued to execute aggressively on our Change Program and achieved run rate savings of $90 million as of June 30th.
The program is on track and we will continue to ramp it up in the second half.
Given this strong first-half performance, we are raising our full-year guidance.
We now forecast total company organic revenue growth between 4% and 4.5% and organic revenue growth for the big three of between 5.5% and 6%.
Total company EBITDA margin is forecast to range between 31% and 32%.
And the big three EBITDA margin is now forecast to be approximately 39%.
And free cash flow is now expected to range between 1.1 and $1.2 billion.
Lastly, today, we announced a new $1.2 billion share buyback program.
If we are able to complete the buyback program this year, we will have returned over $2 billion to shareholders in 2021, including dividends.
Second quarter reported revenues were up 9% with organic revenues up 7%.
Revenue growth was solid for each business segment, including strong growth from our Latin American and Asia and emerging markets businesses, which grew organically more than 20% and 10%, respectively.
Adjusted EBITDA increased 5% and to $502 million, reflecting a margin of 32.7%.
Excluding costs related to the Change Program, the adjusted EBITDA margin was 35.4%.
This strong performance resulted in adjusted earnings per share of $0.48 compared to $0.44 per share in the prior-year period.
Turning to the results for the segments.
As I mentioned, the big three achieved organic revenue growth of 7% for the quarter, a very strong performance.
Legal second-quarter performance was impressive with organic revenue growth of 6%, the highest quarterly growth since 2008, and building on 5% growth for the first quarter.
The U.S. legal market is quite healthy, particularly in small law, where sentiment continues to be strong as attorneys anticipate solid demand over the next 12 months.
But this strong growth isn't isolated to small law, it's across the business: small, mid, and large firms, government and across our product lines and geographies.
First, Westlaw Edge continues to achieve strong sales growth and ended the quarter at 57% ACV penetration compared to 52% at year-end 2020.
We continue to forecast an ACV penetration rate between 50% -- between 60% and 65% by year end.
Second, Practical Law, as reported in the legal segment, continued its strong performance, growing double digit.
We forecast similar growth going forward, and we continue to invest in this key growth initiative.
Third, our government business, which is managed within our legal segment, continues to see good momentum and grew 8% organically.
We forecast government's growth to accelerate in the second half of the year.
And fourth, FindLaw and our businesses in Canada, Europe, and Asia all grew mid to upper single digit in the quarter.
Finally, legal also achieved very strong sales for both the quarter and half year, recording double-digit recurring sales growth, reflecting the strength and health of the legal market and our customers' willingness to spend.
Turning to the corporates business.
Organic revenues grew 4%.
We forecast revenues will accelerate in the second half of the year with healthy growth expected from our direct and indirect tax businesses, risk, the legal products sold into corporates and from Europe, Latin America, and Asia and emerging markets.
Tax and accounting's organic revenues grew 15%, benefiting from a 43% increase in transactional revenues, primarily driven by the year-over-year timing of individual tax filing deadlines.
Recurring revenue growth was also strong at 9%.
Reuters News' organic revenues grew 6% in the quarter, a very good performance, driven by the professionals business, including strong Reuters events growth as it begins to recover from the negative impact from COVID-19 in 2020.
And Global Print organic revenues also grew 6%, partly due to an easier prior-year comparable, but also attributable to a gradual return to office by our customers and higher third-party revenues.
In summary, it was a very strong quarter and our businesses are in a solid position.
But we take nothing for granted, and we still have much hard work to do in executing our Change Program.
With this in mind, I would like to express my gratitude to our employees, our colleagues for a strong first-half performance, which will allow us to intensify our investments in the health and growth of our businesses, enabling us to further support our customers in the second half and into next year.
The increase in our full-year 2021 organic revenue guidance puts us on a path to exceed our pre-COVID 2019 organic revenue growth rates for both total company and the big three.
And it also increases our confidence to achieve our 2023 revenue growth target of 5 to 6%.
Our confidence is also increasing as our legal business is now achieving 5%-plus organic growth.
We believe legal has multiple levers to pull to drive organic growth to between 5 and 6% by 2023.
And the corporates segment is expected to build on its first-half 2021 results over the balance of this year.
We continue to forecast organic growth for corporates between 7% and 9% by 2023.
And we forecast Tax & Accounting will achieve solid organic revenue growth this year and be able to achieve a growth of 6% to 8% by 2023.
So in closing, we're working to transform Thomson Reuters into a leading content-driven technology company.
We're making good progress, but we still have much to accomplish.
We're off to a strong start, and we're confident that 2021 is setting the foundation to position us to be able to consistently and sustainably drive strong operating and financial performance that builds value for our customers, colleagues, and shareholders for the long term.
Let me now hand it off to Mike, who will discuss the second quarter's results in detail.
As a reminder, I will talk to revenue growth before currency and on an organic basis.
Let me start by discussing the second-quarter revenue performance of our big three segments.
Organic revenues and revenues at constant currency were both up 7% for the quarter.
This marks the fourth consecutive quarter our big three segments have grown at least 5% and represents the highest growth for our big three segments in over a decade.
Legal professionals revenues increased 7%, and organic revenues were up 6%.
Recurring organic revenue grew 6%, and transaction revenues increased 14% due to our Westlaw, Practical Law, and government businesses.
Please note, 60% of Practical Law's revenues are recorded in the legal professionals segment and 40% is recorded in the corporates segment.
Westlaw Edge continued to contribute about 100 basis points to legal's organic revenue growth while continuing to maintain a healthy premium.
And Edge has now been adopted by all U.S. federal government courts, and by courts, in 44 states.
Our government business, which is reported within Legal and includes much of our risk, fraud, and compliance offerings, had a strong quarter with total revenue growth of 10% and organic growth of 8%.
In our corporates segment, total and organic revenues increased 4%, led by recurring organic revenue growth of 5%.
Transactions organic revenue grew 1% due to a difficult prior-year comparison when 4 million of onetime CLEAR revenue was recorded and did not reoccur this year.
We forecast corporates revenue to accelerate in the second half of the year.
And finally, tax and accounting's total and organic revenues grew 15%.
Growth was driven by the Latin American businesses, audit solutions, which includes confirmation, and a 43% increase in transaction revenues resulting from the year-over-year timing of individual tax filing deadlines.
I will remind you, last year, pay-per-return revenue shifted from the second quarter to the third quarter.
Normalizing for this timing, organic revenues for tax and accounting were up 10% in Q2.
Moving to Reuters news.
Total and organic revenues increased 6% primarily due to our professional business, which includes Reuters events.
This performance was slightly better than we had anticipated.
And Global Print total and organic revenues increased 6% in the quarter.
This performance was better than expected, driven by higher third-party revenues for printing services and a gradual return to office by our customers.
Despite this higher performance, we still forecast full-year revenues to decline between 4% and 7%.
On a consolidated basis, second-quarter total and organic revenues each increased 7%.
Before turning to profitability, let's look closer at recurring and transaction revenue results for the second quarter.
Starting on the left side, total company organic revenue for the second quarter of 2021 was up 7% compared to a 2% decline in the second quarter of 2020 due to the impact of COVID-19.
If we look at Q2 2021 performance for the big three, you will see organic revenues increased 7%, a strong performance and well above the 2% performance in Q2 2020.
Total company recurring organic revenues grew 5% in Q2, 210 basis points above Q2 2020.
And the big three recurring organic revenues grew 6%, which was above last year's second quarter growth of 4%.
Turning to the graph on the bottom right of the slide, transaction revenues were up significantly year over year as the second quarter of 2020 was impacted by COVID-19, which affected our implementation services and the Reuters events business.
We continue to remain encouraged by the momentum in 2021, especially for recurring revenues, giving us confidence in the trajectory of the business and the sustainability of higher revenue growth beyond 2021.
We are also providing guidance for the third quarter given the various impacts related to COVID-19.
Starting with the total TR chart on the top left, we estimate third-quarter total and organic revenues will grow between 3.5% and 4%.
The big three total and organic revenues are forecast to grow between 5% and 5.5% in the third quarter.
Big three growth will be slightly depressed due to the timing of tax and accounting's pay-per-return revenues in 2020 that shifted 6 million from Q2 to Q3 due to the delay in the tax filing deadline.
We forecast third-quarter revenue growth of low-single digit for tax and accounting.
On a normalized basis, we expect revenue growth of mid-single digits for tax and accounting.
Moving to Reuters news.
We forecast third-quarter total and organic revenues to grow between 2% and 3%, driven by all Reuters news business lines.
Finally, Global Print third-quarter revenues are expected to decline between 5% and 8%, and we forecast full-year revenues to decline between 4% and 7%.
Turning to our profitability performance in the second quarter.
Adjusted EBITDA for the big three segments was 487 million, up 14% from the prior-year period, and the related margin increased 180 basis points due to strong margin improvement across each of the segments.
The strong EBITDA margin improvement for each of the three businesses was driven by higher revenue growth and a benefit from 2020 cost savings initiatives.
I will remind you the Change Program operating costs are recorded at the corporate level.
Moving to Reuters news.
Adjusted EBITDA was 35 million, 10 million more than prior-year period, driven by revenue growth, 2020 cost savings initiatives, and timing.
Global Print's adjusted EBITDA was 56 million with a margin of 37.9%, a decline of about 260 basis points due to higher costs and the dilutive impact of lower-margin third-party print revenue.
So in aggregate, total company adjusted EBITDA was 502 million, a 5% increase versus Q2 2020.
The increase resulted in higher revenues partially offset by Change Program costs, which I will address in a moment.
The second quarter's adjusted-EBITDA margin was 32.7% and was 35.4% on an underlying basis, excluding costs related to the Change Program.
This slide provides more granularity regarding our expectations for our reported adjusted-EBITDA margin for the full-year 2021.
For the first six months, total company adjusted-EBITDA margin was 34.1%, and the big three segment's adjusted-EBITDA margin was 40.5%.
On an underlying basis, excluding Change Program cost, total company adjusted-EBITDA margin was 35.7%.
And as Steve mentioned, we are increasing our full-year total company guidance for adjusted-EBITDA margin to a range of 31% to 32%, and for the big three segments to approximately 39%.
And while first-half performance is impressive, we continue to recommend you assess our adjusted-EBITDA margin on a full-year basis as we expect the margin to decline in the second half for several reasons.
First, we expect to increase our investment in the Change Program, which will have a negative impact of between 150 to 200 basis points for the total company.
Second, we forecast additional business-as-usual investments outside of the Change Program in advance of 2022.
For example, we will invest more in go-to-market initiatives, enterprise technology, and data and analytics capabilities.
This will dilute the margin between 150 and 200 basis points for the total company and between 200 and 250 basis points for the big three segments.
And finally, savings from the Change Program are forecast to provide a benefit to total company and big three adjusted-EBITDA margin of 100 to 150 basis points.
We believe we have good visibility into the levers at our disposal to achieve our updated full-year margin guidance and are confident in our ability to achieve our target of 31% to 32%.
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 $0.48 per share versus $0.44 per share in the prior-year period, a 9% increase.
The increase was mainly driven by higher adjusted EBITDA.
Currency had no impact on adjusted earnings per share in the quarter.
Let me now turn to our free cash flow performance for the first half.
Our reported free cash flow was 618 million versus 340 million in the prior-year period, an improvement of 278 million.
Consistent with previous quarters, this slide removes the distorting factors impacting free cash flow performance.
Working from the bottom of the page upwards, the cash outflows from discontinued operations component of our free cash flow was 36 million more than the prior-year period.
This was primarily due to payments to the U.K. tax authority related to the operations of our former Refinitiv business.
Also in the first half, we made 28 million of Change Program payments, as compared to Refinitiv-related separation cost of 76 million in the prior-year period.
So if you adjust for these items, comparable free cash flow from continuing operations was 692 million, 311 million better than the prior-year period.
This increase is primarily due to higher EBITDA, favorable working capital movements, and dividends from our interest in LSEG.
Now an update on our Change Program costs for the second quarter and the rest of 2021.
Let me start by saying none of the annual estimates have changed from what we provided last quarter for the full year.
Spend during the second quarter was within the range provided last quarter at 71 million, including 41 million of opex plus $29 million of capex.
This brings the first-half total spend to 91 million.
We now anticipate spending between 210 and 260 million in the second half, opex plus capex.
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 expect Change Program spend, opex plus capex to be at the lower end of the range of 300 million to 350 million.
And 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 as we move through the year.
Now an update on our run-rate Change Program savings for the second quarter.
In the second quarter, we achieved 71 million of annual run-rate operating expense savings.
This brings the total annual run-rate operating expense savings up to 90 million for the Change Program.
We are currently on track with our run-rate savings expectations.
As a reminder, we anticipate operating expense savings of 600 million by 2023 while reinvesting 200 million back into the business for a net savings of 400 million.
We will continue to provide quarterly updates on our annual run-rate Change Program savings as we move through the year.
And as Steve outlined, today, we increased our full-year outlook for revenue growth, margin, and free cash flow, which is reflected on the slide.
Lastly, we reaffirmed 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.
So, Sue, if we can have the first question please. | compname reports q3 adjusted earnings per share $0.88.
q3 adjusted earnings per share $0.88.
q3 sales rose 20 percent to $1.358 billion.
sees fy adjusted earnings per share $3.20 to $3.30.
tempur sealy - for full year, company currently expects net sales growth to exceed 35% over prior year. | 0 |
Additionally, the content of this conference call may contain time-sensitive information that is accurate only 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.
Please also note this event is being recorded.
Back on our first-quarter 2020 earnings call, I discussed the conceptual three-phase process for how our portfolio strategy would evolve coming out of COVID.
To review briefly, the first phase was about preserving capital and shoring up liquidity, which we did successfully as the crisis unfolded, positioning us with the healthiest liquidity and capital position this company has exhibited in years.
Phase two characterized the majority of last year, was about deploying capital in the agency sector, which I referred to as the shelter in the storm, while making opportunistic investments within credit, while the Fed and fiscal intervention provided strong support for both our assets and liabilities.
We then outlined phase three, which involves more transformative and strategic reallocation of capital to best position the company in a new environment.
We were prepared to utilize our liquidity, benefit from the dislocations across markets and sharpen our strategic focus.
Today, I will provide an update on our progress on this third phase which reflects our macro views and the vision for the company going forward.
Following changes to the senior leadership team, including my appointment as CEO last March, was an opportune time to reevaluate certain businesses and revisit our expense structure, while also actively building out the necessary infrastructure and personnel to broaden our operational capabilities within residential housing finance.
Now before I go too far down that path, I'll begin with the commentary on the rates market, the price action this past quarter was notable.
First quarter was marked by a meaningful sell-off in interest rates as the 10-year note rose over 80 basis points, signifying one of the largest quarterly sell-offs in the past 5 years.
The sharp repricing was driven by a meaningful boost in economic growth expectations, best seen in the Federal Reserve's economic forecast for 2021 GDP growth.
While FOMC members had forecasted a strong 0.2% growth this year at the December meeting, they revised their projections up to 6.5% by the March meeting.
annual growth would be the strongest in nearly 40 years as the significant progress made on vaccinations appears to be paving the path out of the pandemic.
And at the same time, substantial government stimulus, a very healthy consumer balance sheets are also boosting the U.S. economy.
Longer-dated rates also reflect the anticipation of higher inflation base effects and consumers' willingness to pay elevated prices given the receipt of stimulus checks are noticeably lifting prices.
Inflation is likely to temporarily rise above the Fed's 2% target in the near term, but it remains uncertain as to whether persist and higher inflation will take hold until we see meaningfully higher wages for consumers.
In addition, all the factors that have been associated with lower inflation over the past three decades, changing demographics, automation, and increased globalization to name a few remain in place, which does reduce the risk of a continued sharp sell-off.
That being said, volatility in rate markets suggests that investors are not yet efficient in pricing the economic response to consumer enthusiasm.
However, any turbulence should be dampened by a Federal Reserve that continues to signal patients when it comes to its monetary policy decisions despite the strong improvement in the outlook in recent months.
Further down the road, the Fed will face difficulties extricating its sizable policy footprint for markets, necessitating any withdrawal to be gradual and well communicated.
While we still see strong tailwinds for Agency MBS, which Joe will expand upon following my commentary, the forecasted strong economy and the interest rate landscape tilts the relative value equation modestly in favor of certain pockets of credit.
Our capital allocation to credit rose from 22% to 27% this past quarter primarily driven by $1.4 billion of gross residential credit investments.
I'll also note that the nominal increase in the percentage was in part due to capital optimization decisions for certain credit products made possible by our excess liquidity cushion.
Now turning to our strategic activity in the quarter.
We announced the sale of our commercial real estate business to Slate Asset Management for a purchase price of $2.33 billion.
And we feel the transaction achieves great execution for our shareholders and is a validation of the quality of the portfolio that has been on balance sheet since 2013 and the experience of our team.
The rationale for the transaction is best illustrated by briefly revisiting history.
Turning back to the environment when we acquired CreXus, bringing commercial assets onto our balance sheet, the Fed was a few months into QE3, and Agency MBS looked rich on a risk-adjusted basis relative to credit given the first-order impacts of the MBS bond-buying program.
Moreover, we were still in the somewhat early stages of the economic cycle and could therefore pick up 200, 300 basis points of excess spread and senior transitional light loans with strong visibility of business plan in top markets.
That relationship has sharply reversed over time as the commercial market has seen strong investor interest and record levels of capital raised, which subsequently eroded the compatibility of the commercial platform with our core Agency strategy.
We had embarked upon an evaluation of the optimal size and structure of the commercial business pre-COVID, but the pandemic required CRE participants to confront the fundamental structural changes in the industry that we expect to occur over time.
With the unprecedented support injected in the economy, we had certainty the recovery would prevail when the data began to turn, we were well prepared and confident that the sale of our commercial platform would provide the strongest outcome for the company and our shareholders.
After a comprehensive exploration and a process to find firms that represent strong fits for the business going forward, we identified a potential buyer to acquire the platform, including its assets in the majority of the people.
In addition to the economics to the buyer, we will maintain a favorable carry profile on the assets until close, mitigating our reinvestment risk.
With respect to use of proceeds, while Agency may serve as a placeholder for capital return, considerate of spreads, over time, we will rotate the capital across our other investment strategies as opportunities arise.
Given the customary closing conditions and regulatory approvals, we're still multiple months away from receiving the capital back from the sale, which will be approximately $650 million.
The transaction will give us additional capacity to further expand our leadership and operational capabilities across all aspects of the residential mortgage finance market, which has been the cornerstone of Annaly's strategy since our founding.
The current environment reaffirms the strength of the housing sector, and we continue to be excited about the growing synergies between our agency and residential credit businesses.
Now the first area in which we're expanding our capabilities is the MSR sector.
Previously, we owned MSR via a servicer that we acquired in connection with our Hatteras acquisition and later sold.
But our portfolio has been in runoff mode for the past year, and therefore, we've employed a multifaceted approach to investing in the asset class today.
We have committed third-party partnerships that we've developed as part of our build-out to own and overseas servicing of MSR in-house, and we have made several key hires with decades of industry experience, lead this effort.
Additionally, we've witnessed significant progress with licensing our base subsidiary, established a satellite office, and have begun to grow our portfolio again.
We are a complementary strategic partner to originators because of the breadth of products we can acquire from them and the certainty of our capital as a takeout.
This has become particularly useful as the primary-secondary spread has contracted, reducing originator profitability, leading to increased secondary MSR volumes.
MSR is highly additive to our prospective returns as a positive yielding hedge to our core agency strategy, while also modestly reducing our agency basis exposure.
However, as we have said in the past, in the absence of a severe pricing dislocation, we do not see capital allocated to the sector much above 10% on a run-rate basis given the implied structural leverage and liquidity of the asset.
Our view is that MSR is a very attractive ingredient in the portfolio, but the measurements and the recipe require precision in light of potential volatility and risks.
Now additionally, we continue to add to our third-party and in-house sourcing capabilities on the residential credit front, which drove the over $450 million of whole loan purchases we saw in the quarter, and our pipeline continues to grow.
We also continue to believe that a diversified platform beyond residential is a key differentiator for us, including the optionality embedded in our alternative strategies like our middle-market lending platform.
Through that business, which has been on balance sheet since 2010, we generate leading returns with cycle agnostic investments.
And we'll also retain a $500 million commercial mortgage-backed securities portfolio, which we expect to grow over time depending on pricing and our outlook.
The portfolio delivered another solid quarter despite a very volatile interest rate environment, characterized by sharp sell-off in the intermediate and long end of the curve.
MBS performance was mixed with lower coupon price performance lagging higher coupons due to extension of the cash flows and resulting delta hedging costs.
However, spreads generally continued their trend tighter as investor demand outpaced issuance, which remains near-record levels.
Most notably, the bank demand we discussed last quarter remained robust, as expansionary and fiscal policies continue to drive the level of deposits higher, while commercial and industrial loan growth has been muted.
The size of our agency portfolio remained stable as we reinvested runoff primarily into TBAs, which benefited from negative implied financing rates over the quarter.
Within our TBA position, we shifted exposure into two and a halfs and threes, while we reduced lower coupons as we expect Fed and bank purchases to migrate hiring coupons following the rise in rates.
In specified pools, our average portfolio payout declined by approximately three-quarters at a point due to higher rates.
However, their good prepayment and resulting profile contributed to specified pools outperforming both TBA and duration hedges over the quarter.
While the sell-off brought mortgage rates above 3%, we remain in high prepayment environment due to technological latencies and increased capacity in the originator community.
And therefore, we expect protection to continue to prove valuable part in higher coupon specified pools.
Now shifting to our hedges.
We were well-positioned for the steepening of the yield.
As we mentioned on our Q4 call, we added additional treasury futures and swaption positions during Q3 and Q4 of last year.
These lower-cost duration hedges, especially on the longer end of the curve, proved instrumental to our portfolio performance as yields rose sharply on the back of fiscally induced inflation fears.
In particular, the options that we bought throughout 2020 at lower levels of implied volatility and lower float rates proved to be an excellent convection duration hedge against the extended duration in Agency MBS assets.
Although we actively rebalanced our portfolio through the rising yields this quarter, due to our prior positioning, delta hedging needs were minimal compared to the size and momentum of the sell-off.
These hedges were primarily in treasury and interest rate swaps and all swaps were executed with floating retails benchmark as we continue to decrease our LIBOR footprint.
Finally, as yields stabilize at the of the quarter, we took the opportunity to add protection against a rally as we were able to purchase receiver options at attractive levels with the market commanding higher price protection against the sell-off.
We expect to grow this position in coming quarters as it complements our planned growth in our MSR portfolio.
After the performance in Q1, spread tightening potential for MBS looks somewhat limited.
But the framework we have been operating still holds.
tailwinds such as Fed and bank demand are likely to persist, financing rates remain extremely attractive and nearly all other asset classes are trading to tight valuations.
So looking ahead, we anticipate maintaining our conservative leverage posture, while our existing core portfolio provides a solid income and enables us to grow our higher-margin businesses that David talked about.
Turning to our residential credit business.
We continue to remain bullish on both consumer and housing fundamentals given considerable government stimulus monetary policy in addition to a systemic undersupply of one to four single-family homes.
consumers have been able to successfully navigate the COVID pandemic with household net worth at all-time highs personal savings rates in excess of 10%, household debt to income at historical lows, and year-over-year declines in credit card and auto delinquencies.
The health and resurgence of the consumer has also benefited the residential credit market with outstanding forbearance plans declining to 4.4% of the total market as of mid-April, down from 5.2% as of year end and first-lien delinquencies down over a hundred basis points on the quarter coming in at five spot zero two percent.
The housing market continues to exhibit strong momentum regarding both construction and home price appreciation as a result of low mortgage rates, limited available inventory for sale, strong household formation, and changing homeowner preferences regarding both location and the desire for space.
National home prices were up 12% on a year-over-year basis in most recent release, and will most likely continue to see outsized depreciation as the supply/demand imbalance is a long-term structural issue that will not be resolved at the current pace of housing completions.
Regarding our rental credit portfolio, consistent with our comments on our last earnings call surrounding attractive residential credit spreads and net interest margin, we were active in deploying capital by purchasing approximately $910 million of residential credit securities and settling $467 million of predominantly expanded credit residential whole loans.
The residential credit portfolio ended the quarter at $3.4 billion of economic risk, excluding our committed loan pipeline.
Leverage across the residential credit portfolio has remained conservative with financial recourse leverage at one spot zero debt equity, with resi ending the quarter comprising $1.8 billion of the firm's capital.
Within securities, greater than 95% of our purchases were concentrated in the unrated MPL, RPL, and seasoned CRT subsectors.
In the beginning of the year, both of these products displayed attractive ROEs per unit of spread duration and have benefited from continued improvement in the financing market.
The shorter duration par priced assets should yield high single digits to low double-digit lifetime ROEs and serve as an excellent accretive hedge to our longer-dated CMBS portfolio.
Moving to residential whole loans.
We continue to be proactive in sourcing accretive assets and had a robust pipeline of $410 million that we anticipate will settle over the next few months.
We continue to see opportunities in the non-QM market and have started to capitalize on opportunities in the agency investor market given recent changes to the GSE's preferred stock purchase agreements.
Turning to our resi securitization platform.
In March, we securitized $257 million of expanded credit hold loans in a non-QM transaction, generating $15 million of term-funded subordinate securities with an expected low mid-double-digit ROE with minimal recourse leverage.
We also priced our inaugural prime jumbo securitization earlier this week, a $354 million transaction where we retained all of the subordinate securities, approximately $14 million in market value.
The organic creation of nonrecourse term funded assets through our whole loan strategy, allowing us to control asset acquisitions, overseas diligence, and the selection of our preferred subservicers with the ability to control loss mitigation remains our team's primary focus.
With the reopening of the economy on the horizon, a healthy consumer, and the housing market poised for strength in 2021, the residential credit market should see continued positive performance.
Q1 of the middle market lending group was influenced by a combination of our portfolio success through the pandemic as exhibited by the year-end watch list decreasing by 41% versus the prior year, followed by a very intense refi driven market in the absence of any meaningful new issue M&A throughout Q1.
This resulted in the portfolio modestly declining from $2.39 billion at year end to $2.07 billion at quarter end $331 million.
Returns, both economic and core increased meaningfully in the quarter versus year end as the team remains disciplined about new investment activity and we'll protect the existing portfolio selectively.
As in 2020, we are very pleased with underlying portfolio performance with continuation of zero nonaccrual credits versus the Water Direct Lending index average of 2.9% and and a watch list presenting less than 4% of the Annaly middle market total portfolio size.
In addition, the portfolio continues to migrate toward a first lien -- moving three full percentage points from 66% at year end to 69% at 331.
As we have reiterated over the past 10 years, Annaly middle-market significant outputs during periods of intense turbulence is a function of staying true to the industries in which we want to invest, the forecastability of underlying credits to survive tumult, and partnering with private equity owners that exhibit like-mindedness and track records consistent with our own inside the very industries in which we want to be active.
Consistent with our behavior since joining in 2010 we have historically countered market periods dominated by refinancing with pipelines weighted alongside sponsors that acquire businesses differently.
We anticipate 2021 will be no different in that respect.
and investing in concert with freshly contributed equity from sponsors, will continue to dominate our thinking when putting money to work.
Reignited convergence in the fixed income market and more specifically the loan markets makes us wary of leverage multiples more so than pricing.
With refi-driven markets coming out of the pandemic, the broad array of issuers capturing contracting spreads for last year's performance seems to be an acute contradiction, but nonetheless, our reality.
Inside of Annaly, middle-market lending is very aware of the current credit risk versus interest rate risk equation.
And with today's yield curve, we are comfortable with middle markets current allocation.
As always, middle markets growth or contraction for the balance of the year will remain subject to the underlying credit and our perception of adequate unlevered compensation for the risk, both absolute and relative.
We continue to generate strong core results from the portfolio for the first quarter of 2021, benefiting from the continued low interest rates in the funding market and sustained specialness in dollar to set the stage with some summary information, our book value per share was $8.95 for Q1, a slight increase from Q4 2020.
Book value increased on GAAP net income of $1.75 billion or $1.25 per share, partially offset by the common and preferred dividends of $335 million or $0.24 per share and lower other comprehensive income of $1.7 billion or $0.98 per share.
A significant impact to GAAP net income and therefore, book value for the quarter was the held-for-sale accounting entries recorded in association with the announcement of the sale of our commercial real estate platform, particularly the impairment of goodwill of $71.8 million or $0.05 per share.
We generated core earnings per share, excluding PAA, of $0.29, a decrease of 3% or $0.01 per share from the prior quarter.
Combining our book value performance with the $0.22 common dividend we declared during Q1, our quarterly economic return was 2.8%.
As I noted earlier, our book value increase reflected a $0.05 impairment of goodwill.
Excluding this impairment, our tangible economic return for the quarter was 3.6%.
Economic return and tangible economic return for Q4 were 5.1% and 5.2%, respectively.
Taking a closer look at the GAAP we generated GAAP net income of $1.8 billion or $1.23 per common share, up from $879 million or $0.60 per common share in the quarter.
GAAP net income increased primarily on higher unrealized gains on our interest rate swaps and derivatives portfolio.
Specifically, GAAP net income benefited from rising interest rates reflected in unrealized gains on interest rate swaps of $772 million, which was $258 million in the prior quarter; other derivatives led by futures of $517 million, which was $12 million of unrealized losses in the prior quarter, and swaptions of $306 million, which was $4 million of unrealized losses in the prior quarter.
GAAP net income also benefited from lower interest expense on lower average repo rates and slightly lower average repo balances at roughly $65 billion.
I will cover more details on interest expense later on.
Now to provide more color on the impact to book of the commercial real estate divestiture.
The transaction is expected to close in the second or third quarter, following receipt of customary consents and approvals from regulators and joint venture partners.
As a result, as of March 31, 2021, we met the criteria for held-for-sale accounting, including the small number of commercial real estate assets excluded from the transaction, given our intent to exit those positions.
The held-for-sale criteria require all assets in the disposal group to be recorded at the lower of cost or fair value.
Therefore, under held for sale accounting, assets are written down, but not up with gains recognized at closing.
This evaluation resulted in recognition of valuation allowances and impairments of approximately $157.4 million on loans, real estate, and securities offset by annualized gains on CMBS available for sale of $16.8 million.
As the various closings of the traction occur, we will realize gains that more than offset the net valuation allowances and impairments recorded on the portfolio.
As the portfolio is now held for sale, it is no longer in the scope of CECL.
And in Q1, we reversed the previously recorded reserves of $135 million through earnings.
In aggregate, the divestitures of our commercial real estate platform through the sale to Slate Asset Management and our opportunistic sale of a portion of our skilled nursing facilities in the fourth quarter of 2020 will result in a $0.02 portfolio benefit to tangible book value at closing, which will be fully recognized over time due to GAAP accounting.
In conjunction with the acquisition of CreXus in 2013, we recognized an intangible asset of Given our intention to exit the commercial real estate business, we have impaired the carrying value of the goodwill, again, $71.8 million or $0.05 per share in Q1.
Moving on now to CECL reserves.
Consistent with the prior quarter, we continue to see a general improvement in market sentiment and the economic models we use in this process.
And given the commercial real estate disposition, The CECL reserve now relate solely to our middle-market lending assets.
We recorded a decrease in reserves of $6.2 million on funded commitments during Q1, driven by a reduction in the portfolio and improved macroeconomic assumptions.
Total reserves net of charge-offs comprised 1.58% of our MML loan portfolio as of March 31, 2021.
We expect that CECL reserves will be an immaterial part of our financial statements in the future.
Turning back to earnings.
I wanted to provide more detail surrounding the most significant factors that impacted core earnings quarter over quarter.
First, consistent with my commentary around GAAP drivers, interest expense of $76 million was lower than $94 million in the prior quarter due to lower average repo rates and balances.
We had increased expenses related to the net interest component of interest rate swaps of $80 million relative to $67 million in the prior quarter as the swap portfolio position increased by $5.5 billion.
Finally, We had lower interest income primarily driven by lower average agency balances and a reduction in average agency yield.
And while the amount is consistent with Q4 at $97 million, dollar roll income contributed meaningfully to core for the quarter, given continued record levels.
Our treasury group's view on the funding markets came to fruition in Q1, with continued tightening of rates and flattening in term curves.
Today, we see overnight rates in the low single digits and term market north of six months at 12 to 14 basis points in the bilateral market.
As a result, we successfully executed our strategy to add duration to our repo book, with our weighted average days to maturity up compared to prior quarter at 88 days versus 64.
Providing further color regarding our reduced interest expense for the quarter, while overall cost of funds is consistent with the prior quarter at 87 basis points, the composition differs from Q4, with repo interest expense lower, the cost of funds associated with hedges increasing due to the increase in added.
Our average REPO rate for the quarter was 26 basis points compared to 35 basis points in the prior quarter.
And we ended March with a repo rate of 20 basis points, down from 32 basis points at the end of December 2020.
We continue to actively manage our repo book and look for further opportunities to reduce our cost of funds and improve liquidity.
For instance, we experienced lower haircuts across the board for our agency book.
And considering our liquidity profile, we selected to fund the most liquid credit assets and utilize capital to The portfolio generated 191 bps of NIM, down from 198 bps as of Q4, driven primarily by the decrease in asset yields.
Moving now to our efficiency ratios.
Previously, we've provided a range of OPEX targets associated with potential cost savings from our internalization of 1.6% to 1.75%.
And in the prior year, we incurred G&A costs for an annual OPEX ratio in this range of 1.62%.
We expect to realize cost savings due to the disposition of our commercial real estate business, and began to see these in Q1 with an OPEX to equity ratio of 1.4%.
Giving consideration to the pivot in our strategy in commercial real estate to resi credit MSR and our MML business, we believe that a revised estimated range For OPEX to equity for 2021 would be 1.45% to 1.6%.
And to wrap things up, Annaly ended the quarter with an excellent liquidity profile with $8.9 billion of unencumbered assets, slightly up from prior quarters of $8.7 billion, including cash and unencumbered Agency MBS of $6.2 billion.
And, operator, we can now open it up to Q&A. | nike q4 earnings per share $0.93.
q4 earnings per share $0.93.
gross margin for q4 increased 850 basis points to 45.8 percent.
q4 revenue growth was led by higher wholesale shipments.
q4 reported revenues were $12.3 billion, up 96 percent compared to prior year.
during q4 of 2021, nike, inc. resumed share repurchase activity. | 0 |
This is Tim Argo, Senior Vice President of Finance for MAA.
Actual results may differ materially from our projections.
As detailed in our fourth quarter earnings report, MAA ended 2020 on a positive note, results were ahead of expectations, and we carry good momentum into calendar year 2021.
During the fourth quarter, leasing traffic was strong, and we captured 6% higher move-ins as compared to prior year.
And despite the normal seasonal slowdown during the holidays, we were able to capture positive blended lease-over-lease rent growth that equaled the prior third quarter with particularly strong renewal lease pricing averaging 5.2% in Q4.
Average physical occupancy also remained strong at 95.7% in the fourth quarter, a slight improvement from the performance in Q3.
We believe these trends supported by improving employment conditions and the positive migration trends across our footprint positions MAA for continued outperformance into the coming spring and summer leasing season.
Overall, conditions are setting up for a solid recovery cycle for apartment leasing fundamental across the Sun Belt over the next three years or so as demand recovers and supply levels moderate a bit into 2022.
I believe for several reasons that MAA is in particularly strong position as we head into the recovery part of the cycle.
First, we expect that our Sun Belt markets will continue to capture job growth, migration trends and demand for apartment housing that will be well ahead of national trends.
While there were clearly favorable Sun Belt migration trends by both employers and households prior to COVID, this past year the trends accelerated.
The primary reasons behind these favorable migration trends, including enhanced affordability, favorable business climates and lower taxes will still be with us well past the point we get the pressures associated with COVID behind us.
Secondly, the efforts we have under way this past year implementing change to a number of our processes involving new technology and web-based tools will continue to drive more opportunity for margin expansion.
Specifically, steps taken to automate aspects of both our leasing and maintenance service operations will drive more efficiency with personnel cost.
We expect to begin harvesting some of those early benefits later this year.
Our redevelopment operation aimed at upgrading and repositioning many of our existing properties continues to capture very attractive rent growth and returns on capital.
These higher levels of -- the higher levels of new apartment supply introduced into a number of markets over the past year will actually expand this redevelopment opportunity for us over the next couple of years.
Our external growth pipeline executed through in-house development, prepurchase of joint venture development projects and the acquisition of existing properties will continue to expand over the next year.
Finally, and importantly, our balance sheet remains in a very strong position with ample capacity to support both our redevelopment and our new growth initiatives.
Calendar year 2020 was certainly not the year we expected, but MAA's full cycle strategy with a uniquely diversified portfolio across the Sun Belt supported by a strong operating platform and balance sheet position the company to hold up well.
Our strategy is working and our platform capabilities are strong.
However, it's your intensity and passion for serving those who depend on our company that enables us to truly excel.
The recovery we saw beginning in May and June continued across the portfolio through the fourth quarter.
Leasing volume for the quarter was up 6%.
This allowed us to improve average daily occupancy from 95.6% in the third quarter to 95.7% in the fourth quarter.
In addition to the improvement in occupancy, we were able to hold blended rents in the fourth quarter, in line with the third quarter and an 80 basis point increase.
All in-place rents or effective rent growth on a year-over-year basis improved 1.3% for the fourth quarter.
As noted in the release, collections during the quarter were strong.
We collected 99.2% of build rent in the fourth quarter.
This is the same result we had in the third quarter of 2020.
We've worked diligently to identify and support those who need help because of COVID-19.
The numbers of those seeking assistance has dropped over time.
In April, we had 5,600 residents on relief plans.
The number of participants has decreased to just 491 for the January rental assistance plan.
This represents less than 0.5% of our 100,000 units.
We saw steady interest in our product upgrade initiatives.
During the fourth quarter, we made progress on our interior unit redevelopment program as well as the installation of our Smart Home technology package that includes mobile control of lights, thermostat and security as well as leak detection.
For the full year 2020, we installed 23,950 Smart Home packages and completed just over 4,200 interior unit upgrades.
January's collections are in line with the good results we saw in the fourth quarter.
As of January 31, we've collected 98.7% of rent build which is comparable to the month end number for the third and fourth quarters of 2020.
Leasing volume in January was strong, up 4.9% from last year.
Blended lease-over-lease rent growth effective during January exceeded last year's results for the first time since March.
Effective blended lease-over-lease pricing for January was positive 2.2%, 40 basis improvement from the prior year.
Effective new lease pricing for January was negative 1.8%.
This is a 70 basis point improvement from January of last year.
January renewals effective during the month were up 6.3%.
Our customer service scores improved 110 basis points over the prior year.
This aids to our retention trends, which are positive for January, February and March, as well as lease-over-lease renewal rates for those months, which are in the 5.5 to 6.5 range.
Average daily occupancy for the month of January is 95.4%, which is even with January of last year.
60-day exposure, which is all vacant units plus notices through a 60-day period, is just 7.8%.
We're well positioned as we move into 2021.
Led by job growth, which is expected to increase 3.4% in 2021 versus the 6.1% drop we saw for our markets in 2020, we expect to see the broad recovery in our region and the country continue.
We expect Phoenix, Tampa, Raleigh and Jacksonville to be our strongest markets and expect Houston, Orlando and D.C. to recover at a slower rate.
They served and care for our residents and our associates, and they have adapted to new business conditions that drive -- and they drive our recovery.
While most buyers have returned to the market, the lack of available for sale properties continues to restrict transaction volume.
Investor demand for multifamily product within our region of the country is very strong.
And this supply/demand imbalance is driving aggressive pricing.
Due to the robust demand, supported by continued low interest rates, cap rates have compressed further and are frequently in the high 3% and low 4% range for high-quality properties in desirable locations within our markets.
We expect to remain active in the transaction market this year.
So based on pricing levels we're currently seeing, we're not optimistic that we will succeed in finding existing communities that will clear our underwriting hurdles in 2021.
While acquiring will be a challenge, as noted in the earnings guidance, we do plan to come to market with $200 million to $250 million of planned property dispositions this year.
We will redeploy those proceeds into our growing development pipeline, which currently stands at $595 million with eight projects in just over 2,600 units.
In the fourth quarter, we started construction on the MAA Windmill Hill in Austin, Texas as well as Novel Val Vista, a prepurchase in Phoenix, Arizona.
Both of these are lower density suburban projects that we expect to deliver stabilized NOI yields around 6%, well in excess of our current acquisition cap rates.
Despite increased construction costs as well as some supply chain issues related specifically to cabinets and appliances, our development and prepurchase projects remain on budget with no significant delay concerns at this point.
We have several other development sites owned or under contract that we hope to start construction on in 2021 and into 2022.
We are encouraged that despite facing some supply pressure, our Phase two lease-up property located in Fort Worth continues to lease up at our original expectations as does our soon to be completed Phase two in Dallas, where over 90% of the units have been delivered.
Turning to the outlook for new supply deliveries in 2021.
Based on our assessment and the projection data we have, new supply deliveries across our major markets are projected to remain flat with 2020 levels, at 2.8% of existing inventory.
Consistent with previous year's, we expect delayed starts, extended construction schedules, canceled projects and overall construction capacity constraints to continue to impact actual supply deliveries to some degree.
While clearly, new supply does have an impact on our business, it's just one side of the equation with demand playing a significant role as well.
And for reasons Eric mentioned in his comments, we believe the demand for multifamily housing within our region of the country will remain strong and improve this year as the economy continues to recover.
When looking at the ratios for expected job growth to new supply deliveries in 2021, we expect leasing conditions in our footprint to improve from last year.
Encouragingly, the data on permitting activity and construction starts for our region of the country continue to show activity below prepandemic levels.
This group -- this drop in activity will likely lead to a moderating level of new supply deliveries into 2022, setting up for what we believe will be an improved leasing environment beyond this year.
That's all I have in the way of prepared comments.
Core FFO of $1.65 per share for the fourth quarter produced full year core FFO of $6.43 per share, which represented a 2.7% growth over the prior year and is well above our internal expectations following the breakout of the pandemic.
Stable occupancy, strong collections and positive pricing performance were the primary drivers of continued same-store revenue growth for the fourth quarter, which is 1.8% and for the full year, which is 2.5%.
As expected, same-store operating expenses for the fourth quarter were impacted by growth in real estate taxes, insurance costs and the continued rollout of the bulk internet program, which is included in utilities expenses.
And though some of this pressure will carry into 2021, we expect overall same-store operating expenses to begin moderating this year, which I'll discuss just a bit more in a moment.
Our balance sheet remains in great shape.
We had no significant refinancing activity during the fourth quarter, but we continue to fund the development pipeline and internal redevelopment programs.
As Brad mentioned, our development pipeline has increased to eight deals with total projected costs of $595 million.
During the quarter, we funded $104 million of development costs, leaving less than half or another $259 million remaining to be funded toward the completion of the current pipeline.
Though still growing, our pipeline is still is only about 3% of our enterprise value, which is a modest risk, given the overall strength of our balance sheet and a diversified portfolio strategy.
As Tom mentioned, we also made good progress toward the -- during the quarter on our internal programs, funding a total of $40 million toward the interior unit redevelopments, Smart Home installations and external amenity upgrades, bringing our full year funding for lease programs to $76 million, which is expected to begin contributing to our growth more strongly late in 2021 and 2022.
We ended the year with low leverage, debt-to-EBITDA of only 4.8 times and with $850 million of combined cash and borrowing capacity under our line of credit.
Finally, we provided initial earnings guidance for 2021 with our release, which is detailed in our supplemental information package.
Core FFO for the full year is projected to be $6.30 to $6.60 per share, which is $6.45 at the midpoint.
The primary driver of earnings performance is same-store revenue growth, which is projected to be around 2% for the year.
This growth is based on the expectation of continued improving economic trends and job growth in our markets, as Tom outlined, and we believe these trends will support both stable occupancy levels, averaging around 95.5% for the year.
And modestly improving pricing trends through the year, driving effective rent growth for the year of around 1.7%.
An additional contribution of 30 to 40 basis points of projected revenue growth for the year is related to the final portion of our Double Play bulk internet program.
We do expect the first quarter to be our lowest revenue growth for the year as it will bear the full impact of 2020's pricing performance growing from there as the -- head from there as improving leasing trends take full effect.
Same-store operating expense growth is projected to moderate some as compared to 2020, will continue to be impacted by the rollout of Double Play and higher insurance costs with these costs combining for an estimated 1.4% of the same-store expense growth in 2021.
But excluding Double Play and insurance, all other same-store expenses are expected to increase in a more modest 2.5% to 3% range for the full year.
And this includes real estate tax growth of 3.75% at the midpoint, which is moderating, but still somewhat elevated.
Overhead costs for 2021 are projected to be more normalized, with total overhead expenses expected to be about $107 million for the year, which is a 2.8% increase over the midpoint of our original guidance for 2020.
Our forecast also assumes development funding of $250 million to $350 million for the year, primarily provided by projected asset sales of $200 million to $250 million.
And given our current forecast, we have no current plans to raise additional equity, and we expect to end the year with our debt-to-EBITDA just below 5 times.
So that's all we have in the way of prepared comments. | sees 2021 core ffo per share – diluted $6.30 to $6.60. | 1 |
We hope that everyone listening continues to be safe and healthy as we work through the challenges related to the pandemic.
It is impossible to review ARI's 2020 performance or discuss current market conditions and the implications for ARI's future strategic priorities without acknowledging the initial and ongoing impact of the pandemic.
Ultimately, the real estate market resides at the intersection of the economy and the capital markets.
To frame my comments in the appropriate context, it is important to note that despite initial concerns expressed by those who viewed the pandemic through the lens of the Global Financial Crisis, over the past 11 months the capital markets have remained functioning and experienced an historically rapid recovery.
However, overall economic performance is recovering slowly, and the ultimate trajectory of the economy will depend on the pace at which fiscal and regulatory policies and capital investment are able to minimize the impact of the pandemic and the ongoing vaccination efforts enable the reopening of as much of the pre-pandemic economy as possible.
Unlike every other year-end earnings call in ARI's history when we would typically highlight origination volume, growth in the capital base and portfolio as well as capital efficiency, we believe ARI's performance in 2020 is best measured by the company's balance sheet durability and effective proactive asset management.
During the year, the in-place strength of the balance sheet was enhanced through effective liquidity management predicated on strong relationships with each of our lenders as well as opportunistic and well-priced asset sales.
ARI's asset management efforts benefited from our ongoing investment in both talent and systems and our historic practice of keeping originators involved with their transactions, which facilitates dialogue with and information flow from our borrowers.
The tremendous skill set of Apollo's commercial real estate debt team and the resources, thought leadership and relationships that come from being part of the broader Apollo organization were instrumental to ARI's achievements in 2020 and continue to differentiate ARI in the marketplace.
Importantly, the net result of our 2020 efforts was ARI's continued ability to pay a well-covered dividend to our shareholders.
The onset of the pandemic immediately led to concerns over liquidity throughout the real estate sector and heightened security of balance sheet strength and bank lending relationships across mortgage REITs.
In managing ARI's balance sheet, we have always focused on implementing a leverage strategy consistent with our asset mix, balancing the use of leverage with return targets, not relying on max leverage on any one asset to generate a target return and maintaining an unencumbered pool of loans.
We have consistently maintained strong relationships with our lenders, always seeking to keep an open and candid dialogue and ensuring that ARI fully benefits from the One Apollo approach to managing relationships with key financial partners.
This approach was validated during 2020, as we materially increased ARI's short-term liquidity without the need for any form of rescue capital or having to access the capital markets from a position of weakness during the peak of capital markets volatility.
Beyond ARI's basic financial strategy, we also chose to opportunistically sell loans at attractive pricing, generating excess liquidity and eliminating some of our construction and future funding commitments.
During 2020, ARI sold approximately $634 million of loans at a weighted-average price of 98.1% of par, generating net proceeds of $208 million.
Given the significant amount of capital searching for yield, the market for loan sales remains active, and when and if appropriate we may consider additional sales on behalf of ARI.
Another highlight of 2020 was ARI's considered use of its share repurchase plan.
In growing ARI, we have maintained our commitment to only issue common stock above book value.
In 2020, we remained thoughtful with respect to how our capital allocation could positively impact book value given the pandemic-driven downward pressure on our common stock price.
As such, we determined repurchasing ARI's common stock would achieve the best risk-adjusted return on equity for our excess capital.
As a result, we repurchased over $128 million of common stock at an average price of $8.61, resulting in approximately $0.61 per share of book value accretion.
I also want to highlight that yesterday we announced our board of directors authorized a $150 million increase to ARI's share repurchase plan, providing us with total capacity of $172 million.
Pivoting to the portfolio, ARI's focus for 2020 was proactive asset management.
Our efforts were greatly enhanced through the access to the resources of the Apollo platform, providing our team with extensive real-time data and information.
In prior quarters, we have spoken extensively about the challenges within various property types or specific assets in our portfolio.
Given the underlying LTV of our loans, the ongoing dialogue with our borrowers and the measured recovery in the economy, I am pleased to report that there are no material changes to the credit quality of the portfolio or to our credit outlook since the last call.
Anecdotally, with respect to our loans underlying the hospitality assets, we continue to see steady improvement within the roughly 65% of our portfolio which are resort or destination locations, while business-oriented hotels continue to face challenges.
With respect to the Anaheim hotel that was foreclosed upon and is being carried as REO, the hotel is under contract to be sold, and a hard deposit has been posted.
Lastly, with respect to two of our largest focused loans, we have had positive momentum at both the Miami Design District loan and the Fulton Street loan.
With respect to Miami Design, since the last earnings call we entered into a partnership with an extremely well regarded local developer who is converting the space into an open-air marketplace and working on leasing the existing space, while retaining the option to redevelop the property at a later date.
On Fulton Street, we partnered with a best-in-class New York developer to redevelop the site into a multifamily property.
The one additional loan I want to discuss is our first mortgage secured by an urban retail property in London.
The property is located in one of the most trafficked locations on Oxford Circus in London, and it houses Topchop's and Nike's flagship stores.
Last quarter, Topshop's parent company, Arcadia, filed for bankruptcy.
This was an outcome we considered when we underwrote the loan, as we were extremely familiar with the credit.
The property is currently being marketed for sale, and the initial feedback from the process indicates the proceeds will be well in excess of our loan.
The loan is currently accruing interest, including default interest, and we believe we are well covered.
As we look ahead, we believe ARI is well positioned to capitalize on the significant increase in real estate transaction activity which began in the latter part of 2020 and has continued in 2021.
The commercial real estate market is benefiting from the low interest rate environment and record amounts of dry powder in real estate funds, which is leading to increased deal activity.
ARI entered 2021 with excess capital on its balance sheet and is positioned to deploy that capital into attractive risk-adjusted return opportunities.
Also, given the current strength of the capital markets, we believe ARI will be repaid on some of its existing loans, thereby providing additional capital to be invested.
Apollo's real estate credit platform remained active throughout 2020 and continues to see a tremendous amount of transaction flow, which has enabled ARI to thoughtfully build a pipeline of potential new deals.
Importantly, ARI's lenders have indicated their willingness to provide ARI with financing for new transactions, and we are confident that levered returns achievable today are consistent with the returns on the capital we are expecting back this year.
As always, our focus on capital allocation will remain on generating the most attractive risk-adjusted ROE.
We will remain steadfast to our credit-first methodology, and we will be prudent in our capital management in funding new business.
We recently committed to our first transaction in 2021, a large first mortgage loan in Europe, and the pipeline continues to build.
This was achievable even with excess liquidity on our balance sheet through most of 2020.
Our common stock offers investors in excess of an 11-plus percent dividend yield, which we believe is extremely attractive in this current low yield environment.
Before we review earnings, I wanted to discuss our secured financing arrangements.
From March 15 of last year, total deleveraging on our $3.5 billion financing arrangements were $190 million, which is less than 6% of our outstanding balance.
Our strong relationships with key counterparties were beneficial as we navigated volatility in the capital markets throughout the past 11 months.
We also proactively worked with our financing partners and availed ourselves of the benefits of the broader Apollo platform to ensure adequate liquidity and term-out financing.
I want to highlight that beginning of this quarter we will use the words "distributable earnings" instead of "operating earnings," with no change to the definition.
For the fourth quarter of 2020, our distributable earnings prior to realized loss on investments were $51 million, or $0.36 per share of common stock.
Distributable earnings were $21 million, or $0.15 per share, and the realized loss on investments was comprised of $25 million in previously recorded specific CECL reserves and $5 million on loan sales and restructurings.
GAAP net income available to common stockholders was $33 million, or $0.23 per share, and the common stock dividend for the quarter was $0.35 per share.
As of December 31, our General CECL Reserve remained relatively unchanged, declining by three basis points to 68 basis points, and our total CECL reserve now stands at 3.24% of our portfolio.
Moving to book value.
GAAP book value per share prior to the General CECL Reserve was $15.38, as compared to $15.30 at the end of the third quarter.
The increase was primarily due to the accretive share repurchases Stuart mentioned earlier.
Since the end of the first quarter of last year, our book value prior to General CECL Reserve increased by $0.44 per share.
At quarter-end, our $6.5 billion loan portfolio had a weighted-average unlevered yield of 6.3% and a remaining fully extended term of just under three years.
Approximately 90% of our floating-rate U.S. loans have LIBOR floors that are in the money today, with a weighted-average floor of 1.46%.
We completed $109 million of add-on fundings during the quarter for previously closed loans, bringing our total add-on fundings to $413 million for 2020.
And lastly, with respect to our borrowings we are in compliance with all covenants and continue to maintain strong liquidity.
As of today, we have $250 million of cash on hand, $30 million of approved undrawn credit capacity and $1.1 billion in unencumbered loan assets. | compname reports q4 earnings per share $0.23.
q4 earnings per share $0.23.
apollo commercial real estate finance - company's board of directors authorized increase of $150 million to existing share repurchase plan. | 1 |
This is Kasey Jenkins, Vice President of McCormick Investor Relations.
We'll begin with remarks from Lawrence Kurzius, Chairman, President and CEO; and Mike Smith, Executive Vice President and CFO.
During our remarks, we will refer to certain non-GAAP financial measures.
These include information in constant currency as well as adjusted gross margin, adjusted operating income, adjusted income tax rate and adjusted earnings per share that exclude the impact of special charges, transaction and integration expenses related to the acquisitions of Cholula and FONA.
In our comments, certain percentages are rounded.
Actual results could differ materially from those projected.
It is important to note, these statements include expectations and assumptions which will be shared related to the impact of COVID-19 pandemic.
It is now my pleasure to turn the discussion over to Lawrence.
Starting on slide 4.
Our first quarter results were outstanding.
As we said in our year-end earnings call in January, we have confidence in our strategies and are well positioned to deliver another year of differentiated growth in 2021.
Following an extraordinary year in 2020, in 2021 we expect strong underlying base business performance and recent acquisitions to drive significant sales growth as well as strong operating income growth, even considering extraordinary COVID-19 cost and business transformation investments highlighting our focus on profit realization.
During the first quarter, we delivered double-digit sales, adjusted operating income and earnings growth.
We expect growth to vary by quarter in 2021 given 2020's level of demand volatility and the pace of COVID-19 recovery.
But importantly, we have started the year with outstanding first quarter performance, giving us confidence in an even stronger outlook for 2021.
As seen on slide 5, we have a broad and advantaged global flavor portfolio with compelling offerings for every retail and customer strategy across all channels.
The breadth and reach of our portfolio across segments, geographies, channels, customers and product offerings creates a balanced and diversified portfolio to drive consistency in our performance, as evidenced again by our first quarter results.
The sustained shift in consumer behavior to cooking and eating more at home continued to drive substantial increases in our Consumer segment demand in all regions as well as increases in our packaged food company customers in our Flavor Solutions segment.
On the other hand, in our Americas and EMEA regions, we continued to experience reduced demand from our restaurant and other foodservice customers given the pressure on away-from-home consumption driven by continued COVID-19 government imposed restrictions which in several areas increased during the first quarter.
Notably, our APZ region had substantial growth in both segments, driven not only by lapping the significant disruption last year caused by the COVID-19 related lockdown in China, but also by the sustained increase in at-home consumption and an increase in away from home consumption as restrictions have eased and the recovery momentum is building.
Finally, with the addition of our Cholula and FONA acquisitions, we have further extended the reach and breadth of our portfolios, with new product offerings, channels and customers and are excited about their contributions to our first quarter and beyond.
These impacts continue to demonstrate the strength and diversity of our offering, and we are confident our balanced portfolio will continue to differentiate McCormick and sustainably position us for growth.
After that, Mike will go more in depth on our first quarter results and provide an update on our 2021 guidance.
Starting with our outstanding first quarter results, as seen on slide 6.
Total sales grew 22%, including a 2% favorable impact from currency.
In constant currency, we grew total sales 20%, with increases in both segments.
Base business growth, new products and acquisitions, our three long-term growth drivers, all contributed to the increase.
In addition to our top line growth, adjusted operating income increased 35%, including a 3% favorable impact from currency, and adjusted operating margin expanded by 160 basis points.
Growth from higher sales, favorable mix and CCI-led cost savings more than offset COVID-19 related costs and higher planned brand marketing investments.
Our first quarter adjusted earnings per share was $0.72 compared to $0.54 in the prior year, driven by our strong operating performance, partially offset by a higher adjusted tax rate.
Turning to our first quarter segment business performance.
Starting on slide 7.
In our Consumer segment, we grew sales by 35%; on constant currency, 32%, with double-digit increases across each of our three regions.
Our Americas constant currency sales growth was 30% in the first quarter, with incremental sales from our Cholula acquisition contributing 5%.
The momentum Cholula carried in from last year continues to be strong, with consumption growing at twice the category rate.
Excluding Cholula, our total McCormick US branded portfolio, as indicated in our IRI consumption data and combined with unmeasured channels, grew 15%, which reflects the strength of our categories as consumers continued to cook more at home.
For the first time in several quarters, our sales increase was higher than our US IRI consumption growth.
We are realizing the benefit of our capacity expansion at the end of last year.
The difference between shipments and consumption is attributable to beginning to catch up on the undershipment of consumption across all quarters of last year that resulted in depleted retailer and consumer pantry inventories.
Demand has remained high as the steps we've taken to increase supply are beginning to show.
As we mentioned in our January earnings call, after experiencing real pressure on our US manufacturing operations throughout 2020 due to elevated demand levels, we ended the calendar year with considerable incremental capacity and restoration plans for products which had been suspended.
Throughout our first quarter, we removed products from suspension and continued to see service levels improve, which, combined with our overshipping consumption, indicates we are beginning to rebuild the inventory pipeline.
As we've said previously, inventory replenishment will progress throughout the year.
We continue to work with all our customers on improving shelf conditions and estimate more than half the suspended products are now back on shelf.
The level of restoration is very customer specific.
Focusing further on our US branded portfolios.
In spice and seasonings and all other categories, excluding dry recipe mixes, we grew first quarter consumption at double-digit rates and again increased our household penetration and repeat buy rates.
In the first quarter, we continued to gain share in categories less impacted by supply constraints, including snacks and broths, barbecue sauce, wet marinates and Asian products.
The categories most impacted affected by supply constraints, spice and seasonings and dry recipe mix, we know there is a high correlation between our share performance and the shelf conditions resulting from product suspension or allocation.
Products that have had strong supply and remained on shelf have performed well, and as suspended products are restocked on shelf, we're seeing similar performance.
We anticipate regaining share as conditions continue to improve.
All of our key categories continued to outpace the center of store growth rates favorably impacting not only the McCormick brand, but smaller brands as well such as Stubb's, Lawry's, Simply Asia, Thai Kitchen, Zatarain's and Kitchen Basics.
And in e-commerce, we had strong double-digit pure-play growth, with McCormick branded consumption outpacing all major categories.
We continue to use our strong category management capabilities in working with our customers as inventory is replenished throughout the supply chain to optimize category shelf sets, drive both growth for our customers and for McCormick.
We are well positioned for success in 2021 and have implemented efficient long-term solutions and strengthened our supply chain resiliency to support continued growth.
Now turning to EMEA, which continued its momentum with outstanding performance in the first quarter.
Our constant currency sales rose 26%, with broad-based growth across the region.
Each of our markets drove double-digit total branded consumption growth, with market share gains across the region.
Spices and seasonings consumption was strong in all markets, driving market share gains across total EMEA region.
And our Vahine brand in France again had strong consumption growth and outpaced the homemade desserts category.
In the UK, both Frank's RedHot and French's Mustard also had strong consumption and gained share.
Since the beginning of the pandemic, our EMEA supply chain has been very well positioned to meet the elevated demand and this has contributed to our ability to grow share across the region.
In EMEA, our household penetration and rate of repeat buyer increased again in the first quarter for the fourth consecutive quarter across our major brands and markets compared to last year, and we continue to work closely with our customers to ensure that elevated consumer demand will be met, even obtaining incremental placement for our branded portfolio as other manufacturers and private label faced supply challenges.
We're excited with our growth trajectory in EMEA following challenging market conditions in the past.
In the Asia-Pacific region, our constant currency sales grew 55%.
During the first quarter of last year, China's consumption was disrupted by the COVID-19 related lockdown.
Recovering from that disruption increased sales in the first quarter of 2021 versus last year.
Notwithstanding that recovery, the region still had double-digit growth, driven by strong China consumer and branded foodservice demand, partially fueled by the Chinese New Year holiday as well as strong consumer consumption in the rest of the region.
For instance, in Australia, we continued to see elevated consumption in the brands where we gained household penetration last year such as Frank's RedHot, Gourmet Garden and Grill Mates.
Across all regions, we know second quarter consumption will start to be compared to the highly elevated levels from last year.
And while we do not expect consumption at those same levels, we do expect continued and long-lasting growth from the increase in consumers' cooking more at home.
Constant currency sales in our Flavor Solutions segment grew 3%, driven by our Americas and APZ regions.
In the Americas, we drove constant currency sales growth of 2%, driven by our FONA and Cholula acquisitions as well as growth with our consumer packaged food customers or our at-home base.
With strengthened base business as well as new product momentum, we continued to shift our portfolio to more value-added and technically insulated products, not only with the combination of FONA's flavor portfolio, but also with considerable growth from snack seasonings in the US and Mexico as well as flavors from both savory and beverage applications.
Demand from our away from home customer base, the branded foodservice and restaurant customers declined and continue to be impacted by the COVID-19 environment.
Sales in our EMEA region were comparable to the first quarter of last year for Flavor Solutions, with demand declines in our away from home customer base, offset by strong sales for our consumer packaged food customers.
This growth was driven by a significant increase in new product growth versus last year as well as continued strength in the base business, partially from our customers' promotional activities.
Our sales growth in the Asia Pacific region was outstanding, up 18% in constant currencies.
Both China, excluding the recovery impact from last year's lockdown, and Australia delivered double-digit growth from quick service restaurants or QSR customers.
This growth was driven by significant momentum in limited time offers as well as strength in the core business.
I mentioned our results related to Cholula and FONA.
And now I'd like to provide a brief update on their integration status.
, For both acquisitions, our integration activities are progressing according to our plan.
We continue to deliver on opportunities quickly and aggressively to drive growth and are pleased with our momentum on capturing our synergy opportunities.
We remain on track to achieve synergies according to plan.
As expected, our integration of the business has been straightforward.
As of March 1, all functions have been integrated into our McCormick processes, and importantly, we are now servicing customers from our McCormick US distribution center.
From a consumer commercial perspective, we are expanding distribution and are fueling growth, with robust brand marketing investments.
We'll be activating both digital, where Cholula was underpenetrated, and in-store merchandising in the next few weeks for our exciting Cinco de Mayo campaign.
In Flavor Solutions, we're also expanding distribution with new and existing branded foodservice customers and are leveraging Cholula's authentic Mexican flavor for increased menu participation, particularly in Cinco de Mayo menu offers.
The employees of FONA have been part of building a great business, and we are excited to be working with them to collectively integrate the business and drive plans to capitalize on growth opportunities.
Our functional integration is very much on track and is using a best of both approach to ensure we optimize our operating model, similar to the approach we have with our RB Foods integration.
The alignment of our organization is well under way, and we have had significant commercial collaboration yielding quick wins and identifying long-term strategic opportunities.
Customer reaction has been extremely positive.
They were impressed with our early collaboration and excited about the increased customer value proposition created by the combination of McCormick and FONA, a more comprehensive product offering, broader technical platform, deep technical and flavor talent and best-in-class customer collaborations.
And we were excited with FONA's performance starting the year, with great results and a robust momentum across the business.
For both Cholula and FONA, we are pleased with our progress so far and our contribution to our results.
Our enthusiasm for these acquisitions and our confidence that we will deliver on our acquisition plans, accelerate growth of these portfolios and drive shareholder value has only increased over the last few months.
Now I would like to briefly comment on the conditions we're seeing in our markets, their potential impact and our 2021 organic growth plans, starting on slide 10.
Local demand for flavor remains the foundation for our sales growth.
We are capitalizing on the growing consumer interest in healthy flavorful cooking, trusted brands as well as digital engagement and purpose-minded practices.
These long-term trends have only accelerated during the pandemic, and our alignment, combined with the breadth and reach of our portfolio, sustainably positions us for continued growth.
These underlying trends, current market conditions and our robust 2021 plans position us well to successfully execute on our growth strategies in both segments.
Turning to slide 11.
Starting with our Consumer segment, around the world, we continue to experience sustained elevated consumer demand, which is real incremental consumption and reflects the trend of consumers cooking more at home.
Across our APZ region, consumer demand continues to be strong.
In China, consumer consumption remains strong, and we continue to see recovery in foodservice, which, in China, is in our Consumer segment, with approximately 90% of restaurants open during the Chinese New Year period.
In Australia, even with restaurant restrictions eased and away from home demand increasing, at-home consumption has remained elevated.
And as I mentioned earlier, we are retaining households that came into our brands last year.
And we're also realizing growth with our away from home customer.
In many of our largest markets in EMEA, restrictive COVID-19 measures are still in place, further fueling at-home consumption, and we are seeing sustained levels of demand.
In the Americas, as restrictions are easing and vaccinations are continuing, consumption remains elevated.
Consumers are continuing to come to our brand, having a good experience and buying our products again.
Consumers are cooking more from scratch and adding flavor to their meal occasions is a key long-term trend which has accelerated during the pandemic.
As we've shared previously, our proprietary consumer survey data, supported by external research indicates consumers are enjoying the cooking experience as it provides a creative outlook, reduces stress and connects the family.
And consumers feel meals prepared at home are safer, healthier, better tasting and cost less.
In our recent consumer survey from February, these positive sentiments are not only still true but have strengthened.
Consumers' interest in cooking has increased in recent months versus the end of last year because they want to cook versus have to cook.
For example, approximately 50% of the consumers surveyed indicated they are cooking more now because they want to try new recipe, ingredient, cooking method or tool or simply just cook from scratch, and approximately 40% also indicated they're trying to recreate restaurant meals at home.
Importantly, over two-thirds of consumers surveyed claim they would maintain or increase their current level of cooking at home even if life were to return to normal next week, whatever normal may be.
We continue to believe that consumer behavior and sentiment driving an increased and sustained preference for cooking at home will continue globally and persist beyond the pandemic, further driving consumer demand for our products in 2021 and beyond, fueled by robust brand marketing, differentiated new products and our strong category management initiatives.
Our category management initiatives are designed to continue to strengthen our category leadership by driving growth for both us and our customers.
In the US, in 2020 we began our initiative to reinvent the in-store experience for spices and seasonings consumers by introducing new merchandising elements to improve navigation and drive inspiration, transforming and at times confusing shelves with three shoppable sections.
Our rollout has continued in 2021, with plans to implement in thousands of stores, and the early indication is positive, with the category and McCormick branded growth outpacing the rest of the market in transformed stores.
We are also investing in e-commerce to drive McCormick and category growth.
In the first quarter, we delivered over 90% global e-commerce growth, with particular strength in omnichannel.
We are investing in content, retail research and innovation specifically for e-commerce, trialing new items of packaging in the direct-to-consumer channel first.
For example, in the Americas we've launched unique flavor inspiration products such as Frank's RedHot Everything Bagel Seasonings, and in China we are launching a ready to eat chili paste on our direct to consumer platform.
In EMEA, following the successful launch of the innovative street food seasonings the last year, we are now accelerating online growth with variety, bundle packs and multi-buy offers on our main e-commerce channels.
Turning to global brand marketing.
We continue to increase our investments across our entire portfolio as evident in our 17% increase in the first quarter and plan for another significant increase in the second quarter.
Our investments have proven to be effective, and we will continue to connect with consumers online, turning real-time insights into actions by targeting messaging focused on providing information and inspiration.
We expect our brand marketing investments, combined with the valuable brand equities and strong digital consumer engagement will continue to drive growth with existing consumers and the millions of consumers gained in 2020.
Highlighting some of our first quarter investments in the Americas and EMEA regions on slide 12.
Starting with the Americas.
We continued our advertising campaign, It's Gonna Be Great, with a focus on consumers' continuing traditions and preparing the families' signature holiday dishes even if their celebrations look different.
Our Frank's Super Bowl campaign integrated across digital, social, online, video and TV featured fan favorite Eli Manning promoting Frank's RedHot as approachably hot and was our best Super Bowl campaign yet garnering record high impressions.
As part of our Zatarain's Bold Like That campaign, we partnered with New Orleanian author and poet Cleo Wade to promote virtual Mardi Gras celebrations with authentic New Orleans flavors, #Zatarain'sPorchParty, and recognizing virtual celebrations replace live Mardi Gras events, we supported Culture Aid NOLA, an organization which distributes food to hospitality workers impacted by pandemic restrictions.
Turning to EMEA, where we have invested a substantial portion of our brands' marketing, our digital marketing and promotional activities included our holiday campaign featuring a festive gold cap limited edition packaging which drove strong holiday results in our major markets.
In the UK, with our New Year flavor resolutions campaign, we inspired consumers with recipes and products to flavor their healthy kick, whether it be through the heat of Frank's or spicing it up through Schwartz.
And in France, we're giving families another reason to celebrate in 2021.
In 2020, birthday celebrations were not just a piece of cake.
So with the inspiration of our Half-py Birthday marketing campaign, consumers can celebrate their half birthdays, complete with Vahine's launch of a decimal comma-shaped candle to top their cakes made with our Vahine baking products.
Looking at just a few of our second quarter plans, in the Americas we'll inspire restaurant quality cooking with our It's Gonna Be Great campaign.
Our Vahine brand in EMEA is sponsoring a prime-time French baking program which will showcase our homemade dessert line.
In both regions, we launched Easter campaigns, bringing the family together with baking and crafting ideas.
Finally, our plans include support of our robust new product launches.
New products are integral to our growth.
In our Consumer segment, new product innovation differentiates our brands and strengthens our relevance with our consumers.
Our 2020 launches have made exceptional trials and are providing significant momentum into this year.
And in 2021, we have a robust global pipeline of new product launches, and I'm happy to share some of our first half launches as seen on slide 13.
We're meeting consumers at the intersection of flavor and health.
We're launching Just 5 dry recipe mixes in the US, dips and dressing mixes in flavors like French onions and Homestyle Ranch, the clean and short ingredient statements, five simple ingredients delivering a classic flavor experience.
And in France, we are expanding our range of organic products in our Vahine homemade dessert line.
When it comes to heat, we're continuing to broaden our French portfolio globally.
In the US, we're expanding French green sauces, with a milder tangy Buffalo flavor and a garlic Buffalo flavor or combining savory garlic with spicy eats.
Also in the US, we have just launched Cholula wing sauces in two flavors: Mexicali Cilantro Lime and Caliente Spicy Arbol Peppers in a unique bottle with the iconic wooden cap.
And in the UK, we're launching Frank's craft additions, capitalizing on interest in Frank's heat with differentiated flavors such as roasted Jalapeno and raw [Phonetic] Habanero.
We are responding to consumers' demand for convenience and flavor.
In the US, our launch of frozen appetizers, providing hot chicken bites and Buffalo chicken dips with Frank's flavor that are ready in minutes is gaining momentum with one of our best new product starts.
We're excited at the launch of new Grill Mates all-purpose grilling seasonings for consumers who want to respect the need.
Simple course ground seasonings for the open flame that cling to the meat and lock in juiciness.
Finally, our innovation is not only all about flavor but also staying relevant with our consumers through our packaging innovation.
We're continuing the rollout of our first choice bottle with its consumer preferred transparent and functional design, modern look and a reinforcement of fresh flavor into our Eastern European markets.
These markets have predominantly been sachet markets for spices and seasonings and perceive the bottle packaging as a premium offering.
And in Canada, we're beginning the relaunch of our gourmet line in the First Choice bottle as well as adding new flavor varieties.
In the UK, not only are we building on our Schwartz recipe mix momentum with the introduction of flavorful line extensions.
We're also advancing on our sustainable packaging commitment with sachet packaging that is 100% recyclable.
Schwartz will be the first brand in the UK dry recipe mix category with recyclable packaging.
And in France, with the redesign of our Ducros grinder.
Its appearance not only has greater consumer appeal, but it also reduces our carbon footprint.
Turning to Flavor Solutions.
In this segment, we have a diverse customer base, and have seen various stages of recovery.
From a food at home perspective, our Flavor Solutions' growth varies by packaged food customer.
Overall, we are carrying our growth momentum with these customers into 2021, driven by strength in their iconic core products as well as new products and bigger-bet innovation in 2021.
Overall, the sell-in of our new product launches and big bet innovations from these customers slowed in 2020 due to the focus on keeping core items on shelf.
There are still new product launches, and in many cases they are smaller expansions of the core and more channel oriented.
Moving into 2021, we're excited about the momentum of the 2020 launches, but even more excited about the robust 2021 pipeline.
Our customers have bigger bet innovations in their plans.
I would look forward to collaborating with them and driving growth from those launches.
The key enablers driving our success and developing winning flavors for our customers is our insight on consumer and culinary trends.
We've been at the forefront forecasting emerging flavors for 21 years.
Through the McCormick flavor forecasts, we have a history of identifying the top trends in ingredients, catering to future of flavor, many of which have stood the test of time, whether it was Ma Turmeric or pumpkin pie spices, the flavor of Chipotle or dishes with [Indecipherable].
In April, we'll be launching our newest addition that will shake up the way we cook, flavor and eat.
We'll feature new trends, flavors and recipes that will not only flavor our Consumer segment innovation, but also drive wins with our Flavor Solutions' customer.
In our away from home portion of this segment, as I mentioned earlier, we are seeing growth from our restaurant and other foodservice customers in our APZ region as restrictions have eased.
The QSR demand momentum continues to strengthen, particularly as they continue to expand their menu options with limited time offers and are increasing promotional activities.
Branded foodservice demand as it relates to entertainment, stadium for hospitality venues, for instance, is recovering at a slower pace.
In EMEA and the Americas, during the first quarter our restaurants and other foodservice customers were still impacted by government imposed COVID-19 restrictions in many markets.
There is now optimism with many of these customers related to restrictions' easing and reopening plans.
Focus has shifted from adapting operating model to the supply chain preparedness for the second half of the year.
We're collaborating with our customers to ensure a strong recovery with pent-up demand being met.
We expect the recovery of some of our branded food customers will start to begin, similar to what we've seen in APZ.
As QSR customers are oriented less to dine-in, their recovery will be at a faster pace than the rest of the restaurant and foodservice industry.
We have positive fundamentals in place to navigate through this period and are excited about the recovery momentum.
Across our entire Flavor Solutions portfolio, we were advantaged by our differentiated customer engagement and plan on driving further wins for both us and our customers in fiscal 2021.
With our customer intimacy approach, we will continue to drive new product wins, collaborate on opportunities and solutions, manage through recovery plans and, importantly, further strengthen our customer partnerships.
When we collaborate with our customers and our technical innovation center, we have a high win rate.
Since we could not connect in person during 2020, we adapted to new ways of collaborating through creative, digital and virtual solutions.
The interactive experience for our customers build their excitement, awareness and confidence in our unique capabilities in an engaging and inspiring way.
We continue to not only strengthen our engagement in 2020, but we also proved we could maintain a high win rate whether physically in our innovation centers or not, and have carried that momentum into 2021.
In our Flavor Solutions segment, the execution of our strategy to migrate our portfolio to more technically insulated and value-added categories will continue in 2021.
The top-line opportunities gained from our investments to expand flavor scale, our momentum in flavor categories as well as opportunities from our FONA acquisition, we expect to realize further results from this strategy.
Lastly, we continue to be recognized for our efforts for doing what's right for people, communities and the planet, our purpose-led performance.
Following being named by Corporate Knights in their 2021 Global 100 Most Sustainable Corporations Index as number one in the packaged food and processed foods and ingredients sector, McCormick was also recently named to Barron's 2021 100 Most Sustainable Companies list for the fourth consecutive year.
As we continue our sustainability journey, I'm excited to announce that later this week we will begin using 100% renewable electricity in all our Maryland and New Jersey-based facilities.
This includes our manufacturing operations, distribution centers, offices and technical innovation center and will result in an 11% reduction in our global greenhouse gas emissions.
Moving to slide 16.
In summary, we continue to capture the momentum we have gained in our Consumer segment and with our Flavor Solutions' at home customers, have positive fundamentals in place to navigate through the Flavor Solutions away from home recovery and are excited about our Cholula and FONA acquisitions, all of which bolster our confidence for continued growth in 2021.
Our fundamentals, momentum and growth outlook are stronger than ever.
Our achievements in 2020, our effective strategies, our robust operating momentum and the breadth and reach of our portfolio reinforce our confidence in delivering another strong year of growth and performance in 2021.
Following an extraordinary year in 2020, our 2021 outlook reflects both our strong underlying base business performance and acquisitions driving significant sales growth as well as strong operating income growth, even considering extraordinary COVID-19 costs and our business transformation investments which highlights our focus on profit realization.
Our top-tier long-term growth objectives remain unchanged and we're positioned for continued success.
I'll now provide some additional comments on our first quarter performance and an update on our 2021 outlook.
As Lawrence mentioned, our first quarter results were outstanding.
Starting with our top line growth.
As seen on slide 18, we grew sales 20% in constant currency during the first quarter.
Our volume and product mix, acquisitions and pricing each contributed to the increase.
Our organic sales growth was 16%, driven by our Consumer segment, and incremental sales from our Cholula and FONA acquisitions contributed 4% across both segments.
The Consumer segment sales grew 32% in constant currency, with double-digit growth in all three regions.
The sustained shift in consumer consumption continues to drive increased demand for our consumer product, fueled by our brand marketing, new products and category management initiatives and resulted in higher volume and mix in each region.
On slide 19, Consumer segment sales in the Americas increased 30% in constant currency versus the first quarter of 2020, with 5% of the increase from the acquisition of Cholula.
The remaining increase from higher volume and product mix was broad based across majority of categories and brands as well as private label products, with particular strength in the McCormick, Frank's RedHot, French's, Zatarain's, Lawry's, Simply Asia and Gourmet Garden brands.
In EMEA, constant currency Consumer sales grew 26% from a year ago, with double-digit growth in all countries and categories across the region.
The most significant volume and mix growth drivers were Schwartz and Ducros branded spices and seasonings.
Vahine homemade dessert products, packing products and our Kamis branded products in Poland.
Consumer sales in the Asia Pacific region increased 55% in constant currency, driven primarily by the recovery from the disruption in China consumption last year, as Lawrence mentioned.
Excluding that recovery impact, the region had double-digit growth due to strong China consumer and branded foodservice demand, partially driven by the timing of Chinese New Year and related holiday promotions as well as continued strength in Australia.
Turning to our Flavor Solutions segment on slide 22.
We grew first quarter constant currency sales 3%.
In the Americas, Flavor Solutions constant currency sales grew 2%, driven by the FONA and Cholula acquisitions, a 7% increase, as well as pricing to offset cost increases.
Volume and product mix declined due to a reduction in demand from branded foodservice and other restaurant customers, partially offset by higher demand from packaged food companies, with particular strength in snack seasonings and savory flavors.
In EMEA, constant currency sales were comparable to last year as pricing actions offset cost increases.
Volume and product mix declined due to lower sales to branded foodservice and other restaurant customers, partially offset by sales growth with packaged food companies, with strength in snack seasonings.
In the Asia Pacific region, Flavor Solutions sales rose 18% in constant currency, driven by higher sales to QSRs in China and Australia, partially due to our customers' limited time offers and promotional activities as well as the China recovery impact from last year's COVID-19 related lockdown.
As seen on slide 26, adjusted operating income, which excludes transaction and integration costs related to the Cholula and FONA acquisitions as well as special charges, increased 35% or, in constant currency, 32%, in the first quarter versus the year ago period.
The Consumer segment adjusted operating income grew 59% to $190 million.
The 54% constant currency growth from higher sales, favorable mix and CCI-led cost savings more than offset COVID-19 related costs and a 17% increase in brand marketing.
In the Flavor Solutions segment, adjusted operating income declined 4% to $73 million with minimal impact from currency.
Higher sales and CCI-led cost savings were more than offset by unfavorable manufacturing costs.
As seen on slide 27, adjusted gross profit margin expanded 60 basis points in the first quarter versus the year ago period due to favorable mix, both within the Consumer segment and due to the sales shift between segments.
In addition, CCI-led cost savings were partially offset by COVID-19 related costs.
Our selling, general and administrative expense as a percentage of net sales was down year-on-year by 100 basis points from the first quarter of last year.
Leverage from sales growth drove the decline, partially offset by the increase in brand marketing I mentioned a moment ago.
With the gross margin expansion and SG&A leverage, adjusted operating margin expanded 160 basis points from the first quarter of 2020.
Turning to income taxes on slide 28.
Our first quarter adjusted effective tax rate was 22.7% compared to 18.4% in the year ago period.
The first quarter adjusted tax rate in 2020 was significantly impacted by a favorable discrete item related to a refinement of our entity structure.
Income from unconsolidated operations increased 28% in the first quarter of 2021 due to strong underlying performance of our joint venture in Mexico.
At the bottom line, as shown on slide 30, first quarter 2021 adjusted earnings per share were $0.72 as compared to $0.54 for the year-ago period.
The increase was due to our higher adjusted operating income performance, partially offset by a higher adjusted income tax rate.
On slide 31, we summarize highlights for cash flow and the balance sheet.
Our cash flow from operations was an outflow of $32 million for the first quarter of 2021 compared to an inflow of $45 million in the first quarter of 2020.
This change was primarily due to a lower level of cash generated from working capital associated with increased sales, higher incentive compensation payments and the payment of transaction and integration costs related to our recent acquisitions.
In February, we raised $1 billion through the issuance of five year 0.9% notes and 10 year 1.85% notes.
We took the opportunity in a low interest rate environment to optimize our long-term financing following our Cholula and FONA acquisitions.
We also returned $91 million of cash to our shareholders through dividends and used $49 million for capital expenditures this quarter.
We expect 2021 to be another year of strong cash flow, driven by profit and working capital initiatives, and our priority is to continue to have a balanced use of cash: funding investments to fuel growth, returning a significant portion to our shareholders through dividends and paying down debt.
Now I would like to discuss our 2021 financial outlook on slides 32 and 33.
With our broad and advantaged flavor portfolio and robust operating momentum and effective growth strategies, we are well positioned for another year of differentiated growth and performance.
In our 2021 outlook, we are projecting top line and earnings growth from our strong base business and acquisition contribution, with earnings growth partially offset by incremental COVID-19 costs and ERP investments as well as a higher projected adjusted effective tax rate.
We also expect there will be an estimated 2 percentage point favorable impact of currency rates on sales, adjusted operating income and adjusted earnings per share.
At the top line, due to our first quarter results and robust operating momentum, we are increasing our expected constant currency sales growth to 6% to 8% compared to 5% to 7% previously, which continues to include the incremental impact of the Cholula and FONA acquisitions at the projected range of 3.5% to 4%.
We anticipate our organic growth will be primarily led by higher volume and product mix, driven by our category management, brand marketing, new products and customer engagement growth plans.
As Lawrence mentioned earlier, we expect sales growth to vary by region and quarter in 2021, given 2020's level of demand volatility and the pace of the COVID-19 recovery, but importantly, we continue to expect we will drive overall organic sales growth with the full year in both of our segments.
We're now projecting our 2021 adjusted gross profit margin to be comparable to 2020 due to increasing inflationary pressure, mainly due to transportation costs.
But our inflation expectation for the full year remains a low single-digit increase.
Our adjusted gross margin projection reflects margin accretion from the Cholula and FONA acquisitions as well as unfavorable sales mix in both segments and COVID-19 costs.
Our estimate for COVID-19 costs remains unchanged at $60 million in 2021 as compared to $50 million in 2020 and weighted to the first half of the year.
As a reminder, fiscal 2021's COVID-19 costs are largely from third-party manufacturing costs.
Reflecting the increase in our sales outlook, we are also increasing our expected constant currency adjusted operating income growth.
Our adjusted operating income growth rate reflects expected strong underlying performance from our base business and acquisitions projected to be 11% to 13% constant currency growth compared to 10% to 12% previously.
This is partially offset by a 1% impact from increased COVID-19 costs compared to 2020 and a 3% impact of the estimated incremental ERP investment.
This results in total projected adjusted operating income growth rate of 7% to 9% in constant currency, increase from 6% to 8% previously.
This projection reflects the inflationary pressure I just mentioned as well as our CCI-led cost savings target of approximately $110 million.
We also continue to expect a low single-digit increase in brand marketing investments, which will be heavier in first half of the year.
We also reaffirm our 2021 adjusted effective income tax rate projected to be approximately 23%.
This outlook versus our 2020 adjusted effective tax rate is expected to be a headwind to our 2021 adjusted earnings-per-share growth of approximately 4%.
We are increasing our 2021 adjusted earnings per share expectations to growth of 5% to 7%, which includes a favorable impact from currency.
This increase reflects our higher adjusted operating profit outlook and the impact from optimizing our long-term financing, which I mentioned earlier.
Our guidance range for the adjusted earnings per share in 2021 is now $2.97 to $3.02 compared to $2.91 to $2.96 previously.
This compares to $2.83 of adjusted earnings per share in 2020.
This growth reflects strong base business and acquisition performance growth of 11% to 13% in constant currency, partially offset by the impacts I just mentioned related to COVID-19 costs, our incremental ERP investments and the tax headwind.
Based on the expected timing of some expense items such as COVID-19 costs and brand marketing investments as well as a low tax rate in the first half of last year, we expect our earnings growth to be weighted to the second half of the year.
Our first quarter performance was a strong start to the year, and we are optimistic for the balance of the year, though we recognize we are lapping a very strong earnings performance in the second quarter of 2020 while also making investments to drive growth in 2021.
In summary, we are projecting strong underlying base business performance and growth from acquisitions in our 2021 outlook, with earnings growth partially offset by incremental COVID-19 costs, the ERP investments as well as a higher projected effective tax rate.
Now that Mike has shared our financial results and outlook in more detail, I would like to recap the key takeaways, as seen on slide 34.
Our first quarter results, with double-digit sales, adjusted operating income and earnings growth bode an outstanding start to the year and bolster our confidence in a stronger 2021 outlook.
We have a strong foundation and a balanced portfolio, which drives consistency in our performance.
We are confident the sustainability of higher at-home consumption will persist beyond the pandemic and we are well positioned to capitalize on accelerating consumer trends as well as prepared for away from home consumption recovery.
Cholula and FONA have both started the year with strong momentum in results.
Our enthusiasm for these acquisitions and our confidence that we will deliver on our plan has only strengthened over the last few months.
Our fundamentals, momentum and growth outlook are stronger than ever.
Our 2021 outlook reflects another year of differentiated growth and performance while also making investments for the future.
We are confident we will continue on our growth trajectory in 2021 and beyond. | q1 sales rose 22 percent.
q1 adjusted earnings per share $0.72 excluding items.
sees fy sales up 8 to 10 percent.
operating income in 2021 is expected to grow by 5% to 7% from $1.00 billion in 2020.
expects to drive organic sales growth in both its consumer and flavor solutions segments in 2021.
sees fy 2021 adjusted earnings per share $2.97 to $3.02 excluding items. | 1 |
In addition, on the call, we will discuss non-GAAP financial measures.
Investors can find both a detailed discussion of business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the company's Annual Reports, quarterly reports and other forms filed or furnished with the SEC.
A few weeks ago, my wife and I spent a day at Six Flags Over Texas.
I wanted to get some firsthand feedback by chatting with employees and guests.
What really struck me on that visit though, was what I saw all around me.
It was something simple, but meaningful.
I saw people getting out in the fresh air, riding roller coasters, eating funnel cakes, and our other great food items, and having fun, while spending quality time together.
COVID has been a worldwide crisis.
But to many of us, it has also revealed what really matters.
And while COVID has obviously had a severe impact on our business, it has demonstrated just how important the work of Six Flags really is, having fun together is vital to our happiness and well-being.
You've helped families and friends connect.
You have lifted morale.
You have given someone a brighter day during a difficult time.
I've never been more proud of what we do or how we do it.
As usual, we will provide our quarterly results.
But in addition, we will also describe the outlines of our transformation plan, which is already well under way.
First, I will focus on the transformation plan.
Then Sandeep will discuss our quarterly financial results, including our cash outflow and liquidity.
He will also provide details on the financial implications of our transformation plan.
Finally, I will conclude with a few comments and why I'm so confident that Six Flags' future is bright.
Even though Six Flags offers a truly unique combination of thrills and fun for guests of all ages, our base attendance growth have slowed for several years prior to the pandemic, because we did not evolve at the same pace as our guest expectations.
Specifically, our guests expect a seamless and personalized experience that blends the heritage of our theme parks with the conveniences of modern technology.
People still want roller coasters and indulgent foods like our great funnel cakes, cakes.
They just want it to be an easier and faster experience.
In order to provide our guests with the value for their time and money that they have come to expect, we launched a transformation plan earlier this year to modernize our operations, and to improve the guest experience.
While the transformation work is ongoing, we have already developed a strategic framework, and are focusing on specific high value areas, that we believe will lead to significant revenue and earnings growth.
We engaged outside consultants to assist with facilitation and provide agility, capacity, and a fresh outside introspective.
However, it is our Six Flags team that is leading and completing the work.
We are also creating an internal office to take on this work, beginning in the second quarter of 2021.
Functionally, we have broken our transformation plan into two distinct components; cost efficiencies and revenue enhancements.
On the cost side, we need to make sure that we are operating efficiently at both the corporate and park level, and then we are eliminating any unnecessary costs within our operations.
On the revenue side, we need to ensure that we improve the guest experience from the moment our guests log-on to our website, to the moment they exit our park, in order to maximize our attendance and per capita spending.
Starting with the cost side, our three productivity initiatives are to, first, optimize our corporate overhead structure.
Second, reduced non-headcount operating costs; and third, optimize our park level labor expense.
On the corporate overhead piece, we have updated our organizational design to reduce the layers in our organization, so that we are leaner and more agile.
Lowering our total costs and improving our speed of decisionmaking.
I've installed a new senior leadership team, that is about 30% more affordable than 2019, but includes a dedicated guest experience team and a transformation team to focus on the guest experience, and ensure we operate more efficiently and effectively.
We will also be consolidating certain positions out of the parks into a new park support shared services center.
These positions are primarily back office functions such as finance, human resources and IT.
Moving some workflows in the functional shared service centers, allows us to become more efficient.
As previously announced, we reduced our full time headcount by 240 employees or about 10% of the workforce.
These have been very difficult decisions, as they affect many dedicated and talented team members, but we do believe this will improve our efficiency as an organization.
Despite these changes, one key element of our corporate overhead structure will remain the same, local leaders will continue to lead local markets.
Park leaders know their parks, communities, employees and markets best.
We want to enable them to provide the best guest experience for the unique demands of each local market.
Our second productivity initiative is to reduce non-headcount operating costs.
This essentially means that we are reviewing each operating cost with a fine toothcomb to eliminate excess.
For example, we are eliminating two of our satellite offices and modifying our T&E policies to lower our corporate expenditures.
A large portion of our non-headcount operating cost reductions will involve leveraging the scale of Six Flags as a whole, to centralize procurement, consolidate vendors and renegotiate contracts.
As we go through this process, we are leaving no stone unturned, examining light items, as small as our lettuce expense, which serves as an interesting example.
If we standardize that one order and by just one kind of lettuce, we will save $40,000 per year.
We have hundreds of goods, where this concept would apply, from napkins to paint, to chlorine, to uniforms.
In addition, optimizing our rides will save us enough capex to fund a new ride every single year.
Our park Presidents, engineers and maintenance teams have studied the performance of each and every ride, calculating the cost against the ride's throughput productivity.
We now know which rides to redeploy across parks, which rides need to be refurbished, and which can be removed entirely.
We are eliminating 15 underperforming rides this year, reducing maintenance costs, and freeing up significant capex resources.
Our third and final productivity initiative, is to optimize park level labor.
We have developed a system that enables us to model more narrow attendance bands by park, by time of day, and by guest location, in order to better forecast our labor needs, better data analysis will allow us to align labor with guest demand by season, by day, and by hour.
Better staffing will also increase guest transaction opportunities and decrease wait times.
So we expect a revenue benefit from this initiative as well.
Moving to the revenue side, our five revenue initiatives are to optimize the following areas; first overall guest experience in our parks.
Second, website and search engine optimization.
Third, pricing and promotions.
And fifth, our culinary and retail offerings.
Let's start with the most important initiative, modernizing the overall guest experience.
We have already begun to implement systems like advanced reservation systems, prepaid parking, mobile ordering, contactless security and cash to debit card kiosks, to provide a contactless experience on purchase transactions.
All these improvements allow guests to spend more time having fun, and less time waiting.
We also started testing virtual queuing, in order to learn how we can enable our guests to better plan, when they can ride their favorite roller coasters and reduce waiting in line.
Our second revenue initiative, redesigning the website and improving search engine optimization, can be a significant revenue driver, and we have already witnessed it's powerful impact through higher conversion rates.
We launched our new website at one of our parks in August, and realized improved conversion of website traffic to sales by a double digit percentage.
More than half of our revenue was derived from our website, so this is a very encouraging sign.
We launched the new website across all of our parks in mid-October.
We've also seen how our third initiative, optimizing pricing and promotions can drive attendance and revenue growth.
Before the pandemic, we began to change our pricing and outreach to target more single-day guests.
In the first quarter, prior to shutting the seven parks that were open during that timeframe.
We sold 38% more paid single-day tickets compared to the previous year, with total attendance up 19%.
The fourth revenue initiative is to optimize media spending.
Our marketing team and media partners began using a new customized artificial intelligence tool, to analyze the return on our media spending by park and by media channel.
We've tested this new tool and found that a highly targeted media spend has a clear and demonstrable impact on our attendance growth.
So in addition to improving the efficacy of our media spend by using our new analytical tool, we intend to increase our marketing spend to 4% to 5% of revenue versus the historical 3% to 4%, based on observed returns of increased investments to drive incremental EBITDA dollars.
Our fifth revenue initiative, is to optimize our culinary and retail offerings.
Food and beverage consistently rates as our lowest score in terms of guest satisfaction.
We know that our guests expect more from us, and we intend to focus on providing a greater breadth of higher quality options, including healthy, indulgent and premium food and beverage choices.
We have tested several enhanced food and beverage concepts, and are pleased with the initial uptick in our sales.
This is a very big opportunity for us, since more than a third of our revenue comes from in-park spending and the majority of that is food and beverage.
While we will take time to fully implement all of our initiatives, we are already starting to see the impact on our results and look forward to updating you on our continued progress in the months ahead.
My first 90 days on the job have only reinforced my belief, that this is a great business.
Six Flags has an exceptional brand and the largest portfolio of thrill rides, that have been providing lasting memories to our guests for generations.
I'm thrilled to help drive the transformation efforts that are already under way.
Results for the third quarter were not comparable to prior year, because we suspended the operations at nine of our 26 parks for almost the entire quarter, and had attendance limitations at our other parks, that were open.
The parks that were open, represented slightly more than 50% of our 2019 attendance, and invested approximately 35% of prior levels in the quarter.
We have been pleased with the sequential improvement in our attendance trends, since we began reopening our parks.
Upon our initial reopening in the second quarter, attendance at our open parks averaged 20% to 25% of prior levels.
That grew through the third quarter from 27% in July to 43% in September.
In October, so far, we are indexing more than 30% [Phonetic] of prior year, with the number of parks beating prior attendance on several operating days.
Our guests, government officials, and health authorities, have given us high marks for our safety standards and procedures, and we expect that we will continue to see improvement in our attendance trends.
Currently, we are operating a modified Halloween event called HALLOWFEST at seven of our theme parks, and we plan to keep these parks open for Holiday in the Park in November and December.
In addition, we reopened our water park in Mexico on September 12th; our theme park in Mexico City on October 23; and we plan to open a holiday walkthrough experience at our Great America Park, outside of Chicago in late November through December.
We are pleased to reopen our parks in Mexico, as they are able to operate year round, given the favorable climate conditions.
Total attendance for the quarter was 2.6 million guests.
371,000 of which came from our Drive-Through Safari at our park in New Jersey.
As a result of the 81% decline in attendance, revenue in the quarter was down $495 million or 80% to $126 million.
Sponsorship, international and accommodations revenue declined by $22 million, due to the following three things.
Number one; the termination of the company's international contracts in China, resulting in no revenue from those contracts in 2020.
Number two, the deferral of most sponsorship revenue, while many of our parks were not operating.
And number three, the suspension of a majority of our accommodations operations.
Guest spending per capita in the quarter increased 10%, driven by an 11% increase in admissions per capita, and a 9% increase in in-park spending per capita.
The increase in admissions per capita spend, was primarily driven by recurring monthly membership revenue from members who retained their memberships, after their initial 12-month commitment period ended.
Excluding the impact of membership revenue, admissions per capita spending was approximately flat.
The increase in in-park spending per capita, was primarily driven by higher mix of single day guest, who tend to spend more on a per-visit basis.
In addition, recurring monthly all season membership products such as all-season dining pass, contributed to the increase.
On the cost side, cash operating and SG&A expenses decreased by $94 million or 39%, primarily due to the following; first, cost-saving measures, primarily related to salaries and wages, especially at the parks, that were not operating.
Second, lower advertising costs.
And third, savings and utilities and other costs related to many of our parks not operating.
While we have taken measures to reduce our variable costs, we have decided to retain the balance of our full-time members and maintain their benefits, in order to position ourselves to reopen safely and quickly, as soon as we receive authorization from government authorities.
Employees at closed parks are on a 25% salary reduction, as are our senior leadership team and other corporate executives.
We will continue to evaluate all options in the future, given the fluidity of the situation.
Adjusted EBITDA for the quarter was a loss of $54 million, compared to income of $307 million in the prior year period.
Deferred revenue of $199 million was up $1 million or less than 1% to prior year, driven by suspension of operations at our parks and extension of the 2020 season passes to the 2021 operating season.
This was mostly offset by fewer membership and season pass sales.
We are making significant efforts to ensure the continued loyalty of our active pass base.
We recently extended the use privileges for all 2020 season passes through the end of 2021.
For our members, we added an additional month to the membership for every month they paid, when their home park was closed.
All members have the option to pause their membership payments at any time until the spring of next year, but we have offered a menu of benefits, including upgrades to higher membership tiers, if they elect to continue on their normal payment schedule.
We also are rolling out a gift card program that members can choose to use in our parks, in lieu of adding the initial months to their membership.
We are very pleased with the loyalty and retention of our very large active pass base of 3.7 million, which included 1.9 million members and 1.9 million season pass holders at the end of the third quarter.
In fact, our active pass base is close to flat versus the end of the second quarter of this year, when we had 2.1 million members and 1.7 million season pass holders.
Although the active pass base at the end of the third quarter is down 49% compared to the same time last year, this is primarily due to substantially lower sales of new season passes and memberships, due to the short-term impact on demand from the pandemic.
To-date, 14% of current members have chosen to pause their membership and we anticipate that most of these paused members will return to active paying members, once we reopen our remaining parks.
In the first nine months of 2020, we spent $90 million on capital expenditures, net of property insurance recoveries, but expect to spend minimal capital in the fourth quarter.
Our liquidity position as a September 30th, was $673 million.
This included $459 million of available revolver capacity, net of $22 million of letters of credit, and $214 million of cash.
This compares to a pro forma liquidity position of $756 million as of June 30, 2020, a reduction of $83 million, representing approximately $27 million per month of net cash outflows, in line with our prior estimates.
We estimate that our net cash outflows will continue to average $25 million to $30 million per month through the end of 2020, including partnership park distributions that represents an average run rate of $7 million per month for the last three months of the year.
The operating environment is quite fluid, and changes almost daily.
So it is difficult to project more than three months into the future.
However, the first quarter has historically consumed more cash than the rest of the year, when we have been in a normal operating environment.
We expect this to be the case next year as well, but will have better visibility into the operating environment, by the time we report our fourth quarter results next year.
Now, let me take a minute to talk about breakeven levels for the company, on an annual basis.
There are three levels of breakeven that we calculate.
First, park breakeven levels.
All parks that are operating are generating positive cash flow on a variable basis.
We wouldn't operate them otherwise.
Second, breakeven EBITDA levels for the company.
This level is definitely mix driven, but we estimate breakeven EBITDA levels in an attendance range of 45% to 55% of 2019.
Third, free cash flow breakeven levels for the company.
This level is also mix driven, but would cover our cash interest and partnership park distributions.
We estimate breakeven free cash flows at an attendance range of 65% to 75% of 2019.
We believe we have adequate liquidity through the end of 2021, even if we need to close our parks.
In August, we further amended our credit facility to extend the covenant waiver period by one year, from the fourth quarter of 2020, to the fourth quarter of 2021, and the covenant modification period by one year, to the end of 2022.
Between our current liquidity and our recent covenant modifications, we have given ourselves significant runway to navigate through this challenging period.
I would now like to turn to the financial impact of our transformation plan.
Executing the transformation will require one-time cost of approximately $69 million through 2021.
$60 million of which is expected to be cash and $9 million of non-cash write-offs.
So far, $29 million has been incurred through the end of the third quarter of 2020, $6 million of which was incurred in the second quarter and $23 million of which was incurred in the third quarter.
We anticipate that we will incur approximately $5 million in charges in the fourth quarter of 2020, including the $3 million in employee termination costs related to our full time headcount reduction, previously discussed.
The remainder of the $69 million in costs are expected to be incurred by the end of 2021, approximately two-thirds of which will be technology investments.
Financially, we expect the transformation to unlock $80 million to $110 million in incremental annual run rate EBITDA, once fully executed.
Taking the midpoint of our pre-pandemic 2020 adjusted EBITDA guidance of $450 million, this implies a new earnings baseline of at least $530 million to $560 million, once the transformation plan is completed, and we are operating in a normal business environment.
Of the $80 million to $110 million in transformation value, roughly half the value is expected to be realized through a reduction of fixed costs, that is independent of attendance levels and is fully in our control.
The other half is expected to be realized from incremental revenue initiatives and lower variable costs from better labor optimization.
These estimates are based on historical data, tested at operating parks before and during COVID-19 and through the validation of our teams.
From our revenue initiatives, we expect to deliver $30 million to $40 million of EBITDA.
For our three cost productivity initiatives, we expect to deliver $50 million to $70 million in EBITDA.
Of this, $40 million to $55 million will be realized through a reduction of fixed costs that is independent of attendance levels.
We expect to deliver $30 million to $35 million in EBITDA in 2021, from the reduction of the fixed costs.
We expect to deliver the full $40 million to $55 million in EBITDA by 2022, independent of attendance levels, with incremental benefits to be realized from revenue, and variable labor initiatives, depending on overall attendance in both 2021 and 2022.
Our capital allocation strategy will be focused on growing the base business and paying down debt to return our net leverage ratio, to between three and four times adjusted EBITDA over time.
We have suspended our dividend and share repurchases for the foreseeable future, to allow us to focus on these two objectives.
In summary, despite the challenges our entire industry is facing, we have adapted our operations in response to the crisis, and have not let these difficulties slow down our efforts to transform our business.
We are very excited about the value creation opportunity for the company, that comes from implementing our transformation plan.
Now, I will pass the call back over to Mike.
Despite a challenging operating environment, I am very optimistic about Six Flags' future, for the following reasons.
First, we have an incredible portfolio of regional theme parks, serving all of the top 10 DMAs in the U.S., as well as major metropolitan areas in Mexico and Canada.
Our parks provide a unique live experience for families and teens, that cannot be replicated by other forms of entertainment.
They are outdoors and spread over hundreds of acres, making them naturally conducive to social distancing, and our guests continue to visit our parks and engage with our brand, despite the sub-optimal operating environment.
Second, our recent surveys of several thousand consumers reveal that 93% of them would visit a theme park, if they were guaranteed a COVID free environment by rapid testing.
In addition, 87% of consumers say they would visit a theme park after vaccine becomes available.
So while the current environment is tough, we are confident that our guests will return, once the pandemic subsides.
Third, our transformational agenda will provide what our customers want and it is readily achievable from a business perspective.
I have overseen three distinct transformational agendas over my career, and I am confident that we can execute on our goals.
Finally, we have an exceptional team of dedicated people working at our company.
They love Six Flags and are excited to up our game and deliver an outstanding guest experience.
We're also fortunate to be aided by two new exceptional board members.
Esi Eggleston Bracey and Enrique Ramirez Mena, are highly accomplished business leaders who bring complementary, diverse skills and experiences to our organization.
Skills that are specially critical, as we focus on getting closer to our customers and on operating more effectively and efficiently.
In the coming months, we will remain focused on modernizing the guest experience, making it easier for our guests to enjoy Six Flags, as the thrill rides destination of the world.
We want to provide our guests a memorable experience, and an excellent value for both their time and their money.
We remain intently focused on executing our transformational plan, to achieve our earnings baseline of at least $530 million to $560 million, once we are operating in a normal business environment.
I look forward to updating you on our continued progress in the months ahead.
Operator, at this point, could you please open the call for any questions? | q3 revenue $126 million versus refinitiv ibes estimate of $142.7 million.
six flags entertainment - believes it has sufficient liquidity to meet its cash obligations through end of 2021 even if open parks are forced to close. | 1 |
The Everest executives leading today's call are Juan Andrade, President and Chief Executive Officer; Mark Kociancic, Executive Vice President and Chief Financial Officer.
We are also joined by other members of the Everest management team.
Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these filings.
Management may also refer to certain non-GAAP financial measures.
Everest delivered an outstanding second quarter with strong growth and excellent underwriting and investment performance.
We set multiple records for our company on both the top and bottom lines.
These results serve as the foundation for our exceptional net income result of over $1 billion through the first half of 2021, and another important step to achieving our three-year strategic plan objectives and the delivery of superior results to our shareholders.
Everest achieved an annualized total shareholder return of 22.5% through the first half of 2021, while exceeding our three-year strategic planned target of 13%.
We capitalized on market opportunities to expand our franchises in both reinsurance and insurance, driven by relentless execution and the strength of our value proposition to our clients and brokers.
Disciplined underwriting drove strong profitability in both reinsurance and insurance, and our investment return was a quarterly record for the company.
The standout performance this quarter demonstrate the progress we have made in executing our strategy and the quality of Everest's diversified earnings.
As I discussed at our Investor Day in June, our strategy has three building blocks.
First is building our underwriting franchises.
We are growing our specialty P&C insurance platform while expanding its margins.
We are solidifying our leadership position in global P&C reinsurance, while we are growing and diversifying this business.
Our investment portfolio is a core tool to generate solid returns, and we're optimizing the portfolio while sharpening our strategy.
Second, we continuously pursue operational excellence.
This starts with underwriting discipline, supported by a system of management oversight and checks and balances.
Beyond underwriting, we are transforming the operating model of the company to achieve greater scalability over time.
We are also optimizing capital within our underwriting and investment portfolios.
Capital is valued and respected.
We are using the most efficient sources of underwriting capital from the capital markets, including ILS investors.
In our industry, those who execute best, win.
We're leveraging our flat, agile organization to deliver best-in-class service and risk solutions to our brokers and customers.
They routinely site our responsiveness and capabilities as a key reason why they choose to do more business with Everest.
Finally, ESG principles are core to Everest.
This includes focusing on the culture our company.
Culture is one of our key differentiators, and it is one of the reasons we can attract and keep top talent.
Our culture fuels our success by helping our team be the best it can possibly be.
We're investing in the talent of the organization as well as the diversity of our team.
At Everest, we have three drivers of earnings.
The first driver is about building a high-quality specialty commercial P&C insurer, the underwriting excellence and a compelling value proposition.
We are embedding data and analytics across the organization, enabling more effective pricing and decision-making.
This means we make better underwriting decisions at improved loss ratios.
We are improving our claims outcomes while delivering excellent service to our clients, and we're focusing our distribution efforts to be more sales and results oriented.
Our second driver of earnings is Everest leading global P&C reinsurance platform.
We enjoy the leading market position of a fully scaled platform, and we are focused on continuing to grow and optimize our reinsurance business.
We're executing an underwriting transformation by improving operational oversight, governance and controls.
Our reinsurance division is entrepreneurial and nimble.
We will maintain it within a framework of pricing, reserving and process discipline.
We're further diversifying into higher-margin opportunities.
And finally, we're expanding our risk financing by further partnering with capital markets and ILS investors.
The third core driver of earnings is the investment portfolio.
We have a high-quality portfolio, and we're focused on the efficient use of capital.
The successful execution of our strategies in all three drivers of earnings is clearly evident in our results.
I will now discuss our group reinsurance and insurance first quarter 2021 results.
Starting with the group results.
We grew gross written premiums by 35% and net written premiums by 39%.
Our growth was broad and diversified, stemming from: one, increased exposures and new business opportunities as the U.S. economy recovers; two, continued double-digit rate increases; three, expanded shares on attractive renewals; and four, strong renewal retention.
The combined ratio was 89.3%, an 8-point improvement year-over-year.
The attritional combined ratio was 87.6%, almost a four point better than prior year, with both segments expanding margins.
We generated $274 million in underwriting profit compared to $51 million in the second quarter last year.
Underwriting profitability remains at the core of everything we do.
Net investment income was simply outstanding at $407 million, compared to $38 million in the prior year second quarter.
These strong operating results led to a net income for the quarter of $680 million, resulting in an annualized return on equity of over 28%.
Gross written premiums in reinsurance were up 40% over the second quarter of 2020.
We are pleased with the ongoing execution of our 2021 plan.
This growth was broad-based in the areas we discussed during Investor Day as attractive.
We achieved this growth while also coming off or reducing shares on less attractive business.
We drove continued targeted growth in property cap, which we achieved while lowering our PMLs in peak zones, thus reducing expected volatility and improving risk-adjusted economics.
Much of our growth came from our core trading partners that are looking to grow with Everest because of our strong ratings and balance sheet, significant capacity and the ability to ride across all lines.
The attritional combined ratio, ex COVID-19 pandemic impact was 86.1% for the quarter, a 60 basis point improvement year-over-year, resulting from our continued focus on loss and expense management.
We see risk-adjusted returns expanding in almost all treaties and classes of business globally.
We're also benefiting from investments in data and analytics.
As you can see in our results, our focused actions improved the quality and profitability of the book.
We are writing a more balanced portfolio with improved economics at an appropriate level of risk.
We have achieved improved portfolio economics across all of our 2021 property renewal dates.
We improved in every dimension.
We increased top line, increased margin and achieved higher ROEs.
In casualty and professional lines, primary rate increases continued to outpace expected loss trends.
Jim Williamson is available to provide additional details during the Q&A.
Our insurance division continued its strong performance with excellent growth in underwriting results.
We continue to expand margins as we execute our strategy.
We wrote over $1 billion in gross written premiums for the first time in a quarter.
This represents 25% growth year-over-year or 30% growth, excluding workers' compensation.
This growth is driven by disciplined cycle management, new business opportunities, continued double-digit rate increases and strong renewal retention on existing business.
We're also starting to see a steady improvement in overall economic activity.
The growth was well diversified in target classes of business, where market conditions are prime for profitable growth, including specialty casualty, professional liability, property, transactional liability and trade credit and political risk.
We are pleased with this diversification as it is a core tenet of our strategy.
We also delivered strong underwriting results with a 93.5% combined ratio, a 10-point improvement over the same period last year, which was impacted by COVID.
The underlying performance was also excellent with a 92.1% attritional combined ratio, a 1.6% improvement over last year and almost four points better than the second quarter of 2019.
Renewal rate increases continued to exceed our expectations for loss trend, up 14% in the quarter, excluding workers' compensation, and up 11%, including workers' compensation.
Rate increases were led by excess casualty, up 22%; property, up 16%; financial lines, up 14% and general liability, up 9%.
We are building a diversified portfolio, steering our mix toward product lines with better rate adequacy and higher long-term margins.
We also continued to manage average limits deployed to mitigate volatility.
We are pleased with the progress we have made.
And this strategic direction and granular portfolio management should continue to possibly impact our results going forward.
We continue to thoughtfully manage the workers' compensation line, which now represents 10% of our second quarter premiums, down from 14% year-over-year.
While this line remains profitable, we have pared back monoline guaranteed cost writings and shifted to more loss sensitive loss ratable business, where we share more risk with our customers with more focus on risk mitigation.
Workers' compensation is an area of expertise at Everest, and we're monitoring market conditions closely for potential opportunities, but these efforts illustrate our disciplined cycle management.
Lastly, our strong position in both the E&S and retail channels continues to give us access to a wide set of opportunities.
Mike Karmilowicz is available to provide additional details during the Q&A.
In summary, Everest had an outstanding second quarter with strong growth and exceptional underwriting and investment performance.
We have vibrant and well-diversified reinsurance and insurance businesses with experienced leadership and underwriting teams providing industry-leading solutions to our customers.
We have significant momentum as we continue to execute our strategic plan.
The company has excellent financial strength, top talent and a prudent capital management philosophy.
We are focused on sustained profitable growth, a more diversified, targeted and deliberate mix of business and superior risk-adjusted returns.
We believe the relentless and disciplined execution of our strategy will result in maximizing shareholder returns.
I am confident in Everest's future and our ability to deliver on our commitments to customers and shareholders.
Everest reported excellent results for the second quarter of 2021, with robust premium growth, excellent underwriting results and truly outstanding investment returns.
I'll provide more detail on these points over the next few minutes.
For the second quarter of 2021, Everest reported gross written premium of $3.2 billion, representing 35% growth over the same quarter a year ago.
By segment, reinsurance grew 40% to $2.1 billion and insurance reported its first-ever $1 billion top line quarter, representing 25% growth year-over-year.
Turning to net income.
For the second quarter, Everest reported net income of $680 million, resulting in an annualized return on equity of 28%.
We also reported net operating income of $587 million, equal to operating earnings of $14.63 per share and an annualized operating return on equity of 24.5%.
All three of our earnings engines provided meaningful contributions with significant underwriting income from both our reinsurance and insurance franchises, capped off by net investment income of $407 million, a record quarterly net investment income result.
The underwriting income during the quarter of $274 million reflects Everest's disciplined execution of our strategy to grow and expand margins.
The combined ratio was 89.3% for the quarter, compared to 97.5% last year.
Catastrophe losses during the quarter of $45 million are pre-tax and net of reinsurance and reinstatement premiums, with $35 million in the reinsurance segment and $10 million in the insurance segment, representing additional IBNR provisions for Winter Storm Uri.
Reinsurance segment cat loss includes a provision for minor events and preliminary IBNR for the European convective storms of late June.
Finally, I note we have not added to our COVID-19 incurred loss provision, which remains at $511 million, with the vast majority remaining as IBNR.
Second quarter results continue to reflect the impact of our underwriting and portfolio management initiatives.
Our underlying attritional profitability remained strong during the second quarter.
Excluding the catastrophe losses, reinstatement premiums, prior year development and COVID-19 pandemic impact, the attritional loss ratio for the group was 60.3% in the second quarter of 2021, compared to 60% in the second quarter of 2020.
The year-to-date attritional loss ratio for the group was 60.5% compared with 60.7% a year ago.
The attritional combined ratio for the group was 87.6% for the second quarter compared to 88.5% for the second quarter of 2020, representing a 0.9 point improvement.
Year-to-date, attritional combined ratio for the group was 87.4% compared with 89.1% a year ago, representing a 1.7 point improvement.
For insurance, the attritional loss ratio improved to 64.2% in the second quarter of 2021 compared with 65.1% year-over-year.
The attritional combined ratio for insurance improved to 92.1% as compared to 93.7% over the same period of time.
Our U.S. insurance business, which makes up the majority of our insurance business overall continues to run very well with an attritional combined ratio in the high 80s.
For reinsurance, the second quarter 2021 attritional loss ratio was 59.1% compared with 58.2% a year ago.
The increase was due to a mix of business shift and more prudent initial loss picks.
The attritional combined ratio was 86.1% for the second quarter, down from 86.7% for the second quarter of 2020.
The group commission ratio of 21.8% for the second quarter of 2021 was down 100 basis points from 22.8% reported in Q2 2020, largely due to changes in the composition of our business mix.
The expense ratio remained low at 5.5% for the quarter as compared with 5.8% reported a year ago, and the expense ratio continues to benefit with our continued focus on expense management and the increased scale and efficiency of our operating model.
For the second quarter, investment income had an exceptional result of $407 million as compared to $38 million for Q2 2020.
Alternative investments accounted for $266 million of income during the second quarter, largely due to increases in the reported net asset values of our diversified limited partnership investments.
And as a reminder, we report our LP income one quarter in arrears.
And in 2020, the market and the world were starting to experience the impact of COVID-19, while so far, in 2021, results continue to benefit from economic and financial markets recovery.
Invested assets at the end of the second quarter totaled $27.1 billion compared to $21.6 billion at the end of Q2 2020 and $25.5 billion at year-end 2020.
Approximately 80% of our invested assets are comprised of a well-diversified high credit quality bond portfolio with a duration of 3.6 years.
The remaining investments are allocated to equities and other investment assets, which include private equity investments, cash and short-term investments.
Our effective tax rate on operating income for the second quarter of 2021 was 9.3% and 10.6% on net income.
This was a favorable variance versus our estimated tax rate of approximately 11% based on the geographic distribution of income.
For the first six months of 2021, Everest generated a record $1.6 billion of operating cash flow, compared to $1.1 billion for the first half of 2020, reflecting the strength of our premium growth year-over-year.
Our balance sheet remains very strong with a capital structure that allows for the efficient deployment of capital and ample capacity to continue to execute on market opportunities.
Shareholders' equity was $10.4 billion at the end of the second quarter 2021, compared with $9.7 billion at year-end 2020.
We repurchased $16.8 million of shares in the quarter.
Our debt leverage ratio is 13.3% or approximately 15.5% inclusive of our $310 million short-term loans from the Federal Home Loan Bank.
Book value per share was $260.32 at the end of the second quarter compared with $241.57 at the end of Q1 2021, reflecting dividend adjusted growth of 8.4%.
And I'll close with one final number.
The total shareholder return or TSR target that we detailed in our Investor Day a few weeks ago, recall that TSR is defined as the annual growth in book value per share, excluding unrealized gains and losses on fixed maturity investments plus dividends per share.
And for the year-to-date, the TSR number is 22.5% annualized. | q2 operating earnings per share $14.63.
qtrly gross written premium growth of 35% and net written premium growth of 39%. | 1 |
At the heart of McDonald's is the experience we offer.
And for 65 years, we've created iconic experiences for billions of people around the world.
Along the way, we've always focused on following our customers' needs, finding the most convenient and engaging ways for them to enjoy McDonald's.
At our founding, the restaurant experience was relatively simple: Customers would walk up to the front counter, place their orders and get hot, delicious fresh food served to them quickly.
In the early 1970s, McDonald's pioneered the drive-thru as a new service channel for customers.
And in the last few years, we've added even more service channels with delivery, curbside pickup, kiosks and table service.
At the heart of each of these innovations was our global mobile app, which has evolved our customer experience from the physical world to the digital world.
As this evolution continues, our digital offerings will become even more important to serving, interacting with and delighting our customers around the world, and the insights generated from these platforms will help us further improve their experience.
Our marketing power and scale will continue to be critical throughout this journey, turning the various customer touch points into a holistic and compelling brand experience.
But our aspirations are even higher.
And to reach these goals, we need to create a more frictionless customer experience across all our service channels.
Our customers should be able to move seamlessly between the in-store, takeaway and delivery service channels so that we offer even more convenience and better personalization.
That's why we were excited to announce earlier this week the creation of a team that has oversight for the end-to-end customer experience under the leadership of our first Chief Customer Officer in McDonald's history, Manu Steijaert.
Manu will oversee everything from the physical restaurants that we design and build to the digital experiences that we embed along each step of the customer journey.
As we finished the global rollout of EOTF, Manu and his team will now be focused on what's next to drive a new layer of sustained growth for our system that leverages the foundations that we've built.
For the past 18 months, our digital customer engagement, global marketing, data analytics and restaurant solutions teams have worked to standardize our infrastructure and align the system against some common frameworks.
These efforts ultimately paved the way for MyMcDonald's Rewards, our first global digital offering that we are now deploying across our largest markets.
MyMcDonald's Rewards is just the first example of how we will lead as a digital innovator by leveraging our scale and engaging with our customers in a truly integrated way.
Manu is the ideal choice to integrate these teams and take their work to the next level, with an intense focus on driving incomparable customer-centric innovation.
He's been an important part of the McDonald's system for more than 20 years at every level.
Manu knows these teams well and has an incredibly deep understanding of the needs of our customers, one rooted in his early experience as a crew member in his parent's McDonald's franchise in his native Belgium.
We believe that connecting these teams will enable us to deliver the seamless omnichannel experience that our customers want and only McDonald's can provide, transforming the way customers connect with, interact with and experience our brand.
Further strengthening our ways of working to better serve our customers is one of many ways we're working to accelerate the Arches today.
This complements the work underway to accelerate the Arches with investments in customer-centric creative marketing that only McDonald's can offer so fully.
That marketing made a measurable impact in the second quarter with the global debut of our incredibly successful Famous Orders marketing platform.
I'll have more to say about that a bit later.
We're accelerating the Arches by committing to our core menu.
We're tapping into customer demand for the familiar and making the chicken, burgers and coffee our customers love even more delicious.
We're borrowing from what has worked well in other markets like the growing success of the McSpicy Chicken Sandwich.
McSpicy launched in China over 20 years ago, and customers can now enjoy this great-tasting sandwich in multiple markets around the world.
Late last year, we launched McSpicy in Australia as part of their new chicken sandwich lineup.
And earlier this month, it debuted in the U.K. to great fanfare.
We also continue to leverage our familiar favorites and create new ones to make our menu even more craveable.
In the U.S., the momentum from the successful launch of our Crispy Chicken Sandwich continued into the second quarter as we supported the platform with culturally relevant advertising, just one more way that our beloved core menu continues to drive growth while anchoring a customer experience that is second to none.
We also know that the customer experience today reaches beyond the physical walls of our restaurants.
And that's why we're accelerating the Arches to better serve our digitally connected customers.
To give you a sense of the growing digital connection we have to our customers, we have the most downloaded QSR app in the United States.
And earlier this month, we were proud to launch our new loyalty program, MyMcDonald's Rewards, in the U.S. The loyalty of every McDonald's fans has been unmatched for 65 years.
And with these new digital connections, we're able to do an even better job of rewarding them for it.
We already have over 22 million active MyMcDonald's users in the U.S., with over 12 million enrolled in our new loyalty program, MyMcDonald's Rewards.
And that's before national advertising for loyalty, which began earlier this week.
Well, it is a good example of how our core menu and personalized marketing come together through digital channels to build a stronger relationship with our customers.
Our digital systemwide sales across our top six markets were nearly $8 billion in the first half of 2021, a 70% increase versus last year.
And that's why we're moving aggressively to bring MyMcDonald's Rewards to our top six markets.
We currently have loyalty programs in place in France and the U.S. Germany and Canada plan to launch MyMcDonald's Rewards before the end of this year, followed by the U.K. and Australia in 2022.
We're just as excited about our drive-thrus through which much of our business has come from this year and about delivery.
Over 80% of our restaurants across 100 markets globally now offer delivery.
We're excited about our success with multiple 3PO partners.
And as I said last quarter, we continue to innovate.
Overall, our recent successes show that our M, C and D growth pillars working in concert can deliver unmatchable experiences for our customers and drive growth unlike anything else in customer retail.
Of course, our work to accelerate the Arches is built on the foundation of the very core of McDonald's success: running great restaurants.
As we open our dining rooms, return to regular hours and get back to full staffing, we know that world-class execution will be more important than ever.
While the Delta variant has brought more stops and starts to the COVID story around the world, people are venturing out and establishing new routines.
That includes a return to in-person dining.
Today, about 70% of our dining rooms in the U.S. are open.
By Labor Day, barring resurgences, it will be nearly 100%.
Internationally, the majority of our restaurants are now operating all channels, including dine-in, but many continue to operate with limited hours or restricted capacity.
We're working hard to get back to normal.
Not only are we more resilient today than we were heading into the pandemic.
As Kevin will tell you, we are building from a position of strength.
I'm pleased to share that global comp sales were up 40% in the second quarter or 7% on a two-year basis.
Our performance has continued demonstration of the broad-based strength and resiliency of our business.
We've surpassed 2019 sales levels for the second consecutive quarter and now at an accelerated rate.
Turning to the segment performance for the quarter.
We grew comp sales across all segments versus 2019 levels as business recovery progresses at varying degrees around the world.
In the U.S. our momentum continued with Q2 comp sales up 26% or 15% on a two-year basis, our strongest quarterly two-year growth in over 15 years.
And we saw double-digit positive comps across all dayparts on a two-year basis, while at the same time, franchisees continue to achieve record-high operating cash flow.
Our performance in the U.S. is the result of an accumulation of decisions that we've made over the last 18 months.
This includes bold marketing initiatives, investing in the core menu and strengthening our digital offerings with an underlying focus on running great restaurants.
As customers in the U.S. began to venture out more during the second quarter, we continued to see strong average check growth driven by larger order sizes and menu price increases.
That's been bolstered by growth in delivery and digital platforms as well as robust menu and marketing programs.
This includes an advertising rehit of our Crispy Chicken Sandwich, which continues to perform at an elevated level and the success of our BTS meal.
Both initiatives attracted customers and drove incremental sales in the quarter.
In our International Operated Markets segment, which has been historically strong, recovery is taking hold.
Comp sales were up 75% in the quarter or nearly 3% on a two-year basis as we lapped the peak in 2020 restaurant closures.
Remember, in some cases, full country operations were shut down in Q2 last year due to the pandemic.
Although we're continuing to monitor recent resurgences of COVID in countries around the world, Western Europe began to reopen during the quarter, allowing us to bring back indoor dining, still with some restrictions in place.
IOM segment comp sales began exceeding 2019 levels in May.
Strong performance continued in Australia.
The market benefited from continued growth in delivery and successful marketing and core menu news, including the BTS Famous Orders and 50th Birthday Big Mac promotion.
While Australia produced strong results for the quarter, outbreaks of the COVID-19 Delta variant throughout the country have led to recent lockdowns and reduced customer mobility.
Momentum accelerated in both the U.K. and Canada in Q2.
In the U.K., the national lockdown ended, and the market reopened dining rooms in mid-May.
The market saw record digital engagement with a significant portion of sales coming through digital channels, where customers place delivery orders and used self-order kiosks as dining rooms reopened.
Canada benefited from strong marketing activity featuring our core menu, including the BTS Famous Orders meal.
In France and Germany, comp sales were still below 2019 levels for the quarter.
While some restrictions are still in place, indoor dining reopened for both markets in June, and we've seen steady improvement since then.
As we look ahead to Q3, we expect comps to surpass pre-pandemic levels across all of our big five international markets.
The past year has shown us that when markets reopen, customer demand for McDonald's returns quickly.
Comp sales in the International Developmental Licensed segment were up 32% for the quarter or relatively flat on a two-year basis.
Performance was largely driven by positive results in Brazil, Japan and China.
Japan maintained momentum in Q2 with comps up nearly 10%, achieving an impressive 23 consecutive quarters of comp sales growth.
The market's performance was driven by strong menu and marketing promotions, delivery growth and our ability to continue serving customers their favorites safely and conveniently throughout state of emergency waves across the country.
In China, comps were strong for the quarter but have yet to return to 2019 levels due to COVID resurgences in Southern China, resulting in operating restrictions.
The market continues to build its digital member base with a successful MyMcDonald's app launch and focused delivery expansion in the breakfast and evening dayparts.
In addition, China surpassed the 4,000-restaurant mark in June and is now on pace to open over 500 new restaurants this year.
Given our slightly quicker recovery and continued momentum around the world, we now expect full year systemwide sales growth in the mid- to high teens in constant currencies.
However, there's still some uncertainty as we continue to see pandemic-related stops and starts in markets around the world, especially now with the Delta variant.
As we look ahead to the rest of 2021, we're finding ways to capitalize on our strengths.
As we've seen, the growth pillars of accelerating the Arches are deeply interconnected, reinforcing and bolstering one another.
It is at the intersection of our MCD that we continue to deepen our connection with customers and create a consistent and enjoyable experience, proving that the whole is greater than the sum of its parts, which brings us back to our Famous Orders platform.
When it launched in the U.S. last year, our goal was to create an ambitious marketing campaign, one that would leverage our customers' favored core menu items, speak to a new generation in authentic ways and increase digital engagement without adding any restaurant complexity, all while positioning us for the longer term.
The Famous Orders platform was based on a simple idea but unites all our customers, including famous celebrities, is everyone has their go-to McDonald's order.
The Travis Scott then J Balvin Famous Orders broke records in the U.S.
This quarter, the BTS Famous Order took that ambition global, connecting our marketing, core menu and digital strategies in 50 markets.
And it was our first Famous Order with custom packaging and app-exclusive content.
It has been, to borrow a BTS lyric, Dynamite.
We saw significant lifts in McNuggets sales and record-breaking levels of social engagement.
McDonald's customers and BTS fans all over the globe downloaded our app, ordered Chicken McNuggets with delicious sweet chili and cajun dipping sauces and posted about it on social media, leading McDonald's to trend number two on Twitter globally and number one in the U.S. And then the BTS ARMY took it a step further and memorialized the partnership, creating shoes, accessories and frame memorabilia from our packaging.
They were so appreciative of the meal that the BTS ARMY went out of their way to prepare snacks for our crew and managers in Malaysia, the Philippines and Vietnam to support them on launch day.
The Famous Order platform is the M, C and D in action.
Both Famous Orders and MyMcDonald's Rewards are also reminders of the unrivaled convening power of McDonald's.
And this is just the beginning of the digital customer journey at McDonald's.
As we create more personal and seamless McDonald's experiences and make it easier for our crew to connect with our customers, we're giving customers multiple reasons to continue to come back to McDonald's.
By using digital, we'll also leverage our advantages in value and convenience, daypart and menu breadth and our biggest advantage, our size and scale.
Now for more on the financial performance in Q2, I'll pass it back to Kevin.
Adjusted earnings per share in Q2 was $2.37, which excludes a gain on the further sale of some of our ownership in McDonald's Japan and a onetime income tax benefit in the U.K. In year-to-date, adjusted operating margin was 43%, reflecting improved sales performance across all segments and higher other operating income compared to last year.
Total restaurant margin dollars grew $1.3 billion in constant currencies with improvement in both franchised and company-operated restaurant margins, mostly driven by higher comp sales as a result of COVID-19 impact last year.
Company operating margins in the U.S. were strong as we continue to see top line growth driven by higher average check.
In the IOM segment, company operating margins improved significantly in Q2 as sales have recovered to pre-pandemic levels.
G&A decreased 1% in constant currencies for the quarter, primarily due to lapping our $160 million incremental marketing investment last year, offset by higher incentive-based compensation and increased spend in restaurant technology.
Our adjusted effective tax rate was 21.7% for the quarter.
And we're projecting the tax rate for the back half of 2021 in the range of 21% to 23%.
And finally, foreign currency translation benefited Q2 results by $0.13 per share.
Based on current exchange rates, we expect FX to benefit earnings per share by about $0.03 to $0.05 for Q3, with an estimated full year tailwind of $0.20 to $0.22.
As usual, this is directional guidance only as rates will likely change as we move through the year.
I'm proud of all that we've accomplished during the past 18 months.
It's a remarkable testament to the resiliency of the McDonald's system.
But as we turn our focus to the incredible opportunities that lie ahead of us, it's also reminded us of where we must go.
For 65 years, the one unassailable truth about McDonald's is that we get better together.
There's a reason why it's one of our core values.
Continually finding ways to better ourselves and our system is how we keep our business relevant, not just for this generation but the next.
How do we get better together today?
We get better together by focusing on our people.
In this highly competitive market for talent, successful employee recruitment and retention is fundamental to drive growth.
That's why in May, we announced a 10% increase in the average hourly wage at our company-owned restaurants in the U.S., with the goal to get to a $15 an hour wage by 2024.
We get better together through diversity, equity and inclusion.
Today, 23% of our U.S.-based suppliers come from diverse backgrounds, more than double the industry average.
We have set a goal to increase purchases of goods and services from diverse-owned suppliers by 10% over the next four years.
That will put us in a position where 1/4 of our U.S. spend is with diverse-owned suppliers by 2025.
And we've committed to doubling our national advertising spend with diverse-owned media here in the United States between 2021 and 2024.
We get better together by serving our customers but also serving a larger purpose in communities across the world.
Our part in the national We Can Do This campaign continues this month with McDonald's hot McCafe cups and McDelivery seal stickers, both of which lead customers to vaccines.gov.
In Canada, we're doing something similar around This Is Our Shot.
It's a national campaign through which McDonald's will supply information in restaurant and drive-thru orders, while supporting a digital campaign to replace vaccine hesitancy with confidence.
Finally, we get better together through our commitment to our planet.
In May of 2014, we were one of the first major corporations of our size to publicly commit to a sustainability framework.
We promised that we would report on our progress against our 2020 sustainability goals by the fall of this year.
As we prepare to release our impact report, I've never been prouder of the difference we are making in the world.
We are working closely with partners across the globe today to source food locally and responsibly, to expand our use of sustainable packaging and to power our restaurants with renewable energy sources.
It's the ultimate example of our three-legged stool in action, where owner-operators, suppliers and employees each play a critical role in our efforts to protect the planet.
We're working every day to set ambitious goals and to hold ourselves accountable, to be known not just for what we do as a company but how we do it.
It's part of our broader commitment to transparency and to following clear science-based guidelines from the experts.
We know we still have much work to do, but our internal strategy and the external landscape are converging to create a moment unlike any other.
We are aware of our unique role in the world.
We are inspired by all the opportunities that lie ahead.
Over the back half of this year, I'm looking forward to getting back into the restaurants around the world and spending more face time with our people.
I'm amazed with everything that our system has accomplished over the past 18 months, and we can't wait to write the next great chapter of the McDonald's story together.
With that, we'll begin Q&A. | mcdonald's - qtrly earnings per share $2.95; qtrly adjusted earnings per share $2.37.
mcdonald's - crispy chicken sandwich, bts famous order promotion, growth in delivery, digital platforms contributed to qtrly u.s. comparable sales growth.
mcdonald's - for international operated markets, qtrly results reflected strong positive comparable sales in the u.k. and france.
mcdonald's - foreign currency translation benefited earnings per share by $0.13 for quarter. | 1 |
Such statements are based upon 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 annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings.
We'll also be making reference to certain non-GAAP financial measures such as segment operating income and operating statistics.
This past fourth fiscal quarter was one of the most challenging in the company's 100-year history.
The destruction of oil demand induced by COVID is well documented.
And in terms of drilling activity, our rig count hit bottom in August.
Despite the challenging quarter, our strong financial position has enabled us to remain focused on our long-term strategies.
Our people are developing new commercial models and innovative drilling and digital technologies that will help to transform the customer experience and shape the future of this business.
These efforts have progressed despite this difficult environment and will serve as the foundation from which the company will build as the market continues to recover.
Our customer-centric approach is one that prioritizes providing customized solutions by employing a combination of people, processes, rigs and automation technology to deliver more value and lower risk for our customers.
This approach is distinctive in the industry, resonates well across our customer base and with further developments on the horizon will be a major driver of growth as activity levels improve.
Excluding our two idle but contracted rigs, our current US FlexRig activity has improved to 80 rigs and we expect our active rig count will exit the first quarter at approximately 90 rigs.
This is almost double the number of rigs turning to the right compared to the lowest level reached in August.
The Permian has led the industry rig count recovery and H&P has earned approximately two-thirds of the incremental work in that basin.
As we anticipated, our rig count growth has exceeded that of our peers coming off of the bottom, allowing us to recoup 4 to 5 points of market share.
We believe that the quality of our field leadership, rig crews, FlexRig fleet and digital technology solutions will continue to advance this trend.
Concurrent with the increase in near-term activity, we are also experiencing increased customer utilization of our performance-based contracts in our rig automation software, AutoSlide.
We expect adoption of both to increase and become more prevalent in the industry.
H&P's touch of a button autonomous drilling approach is designed to optimize drilling of the vertical, curve and the lateral.
These automated solutions include real-time automated geosteering, rotary and sliding execution and improved wellbore quality and placement.
The uniqueness of our automated solutions is backed by a patented economic-driven approach where the software not only makes optimal cost benefit decisions and also directs the rig to execute those decisions without the need of human intervention.
This improves reliability, enhances value and reduces risk for our customers.
Let me give an example of the H&P value proposition autonomous directional drilling provides.
When customers use AutoSlide on our FlexRig, directional drilling personnel are no longer required at the rig site.
This is possible because the directional drilling decisions are being calculated using an algorithm in our patented rig guidance system, which can accurately process through thousands of variables in seconds rather than relying on the manual calculations of the traditional directional driller.
The software-enabled FlexRig allows the curve to be landed more accurately and reliably and the lateral to be placed more precisely in the shale, which results in lower drilling costs, improved production, reduced long-term maintenance costs for our customers and lower environmental impact.
Commercial models that reward performance coupled with rig automation software that enhances value are being adopted across the spectrum of the industry.
Mark will give additional details on performance contracts, but we have been successful in expanding our customer base with a wide range of E&Ps from super majors to small private companies.
Today, H&P owns more than a third of the estimated 635 super-spec rigs in the US market.
With many rig count forecasts ranging from 450 to 550 rigs over the next couple of years, we see significant further super-spec FlexRig market share growth and opportunities for improved pricing.
H&P continues to invest in new and diversified technologies for the long-term sustainability of the company.
Recently, we have made investments in and are supporting the efforts of a few companies driving the evolution of the geothermal industry.
The core of this evolution is a transition from geographically concentrated and naturally occurring hydrothermal resources to enhanced geothermal systems and closed loop systems.
John, could I ask you to pause for just a moment?
I think I'm understanding from my team that we're having a difficulty with their web link not working.
So we're going to pause for just one moment.
Get that online and continue.
Bear with us folks.
It is now my pleasure to turn today's program over to Mark Smith.
Again, our sincere apologies to all those on the phone -- on the telephone.
So, again, we do apologize.
We appreciate your patience and your interest in H&P.
In order to cure the problem, we will be posting the audio recording from this conference call within two hours from the conclusion.
We will be restarting from the top.
We will conduct a full one-hour conference call.
We hope you are available to stick with us and join us as we give you our fourth quarter fiscal '20 results and look ahead to fiscal 2021.
Such statements are based upon current information and management's expectations as of this date and are not guarantees of future performance.
As such, our outcomes and results could differ materially.
You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings.
We'll also be making reference to certain non-GAAP financial measures such as segment operating income and operating statistics.
This is yet another example that this fourth fiscal quarter is unprecedented in many ways and really challenging during the company's 100-year history.
The destruction of oil demand induced by COVID is well documented.
And in terms of drilling activity, our rig count hit bottom in August.
Despite the challenging quarter, our strong financial position has enabled us to remain focused on our long-term strategies.
Our people are developing new commercial models and innovative drilling and digital technologies that we believe will help transform the customer experience and shape the future of this business.
These efforts have progressed despite this difficult environment and will serve as the foundation from which the company will build as the market continues to recover.
Our customer-centric approach is one that prioritizes providing customized solutions by employing a combination of people, processes, rigs and automation technology to deliver more value and lower risk for our customers.
This approach is distinctive in the industry, it resonates well across our customer base and with further developments on the horizon will be a major driver of growth as activity levels improve.
Excluding our two idle but contracted rigs, our current US FlexRig activity has improved to 80 rigs and we expect our active rig count will exit the first quarter at approximately 90 rigs.
This is almost double the number of rigs turning to the right compared to the lowest level reached in August.
The Permian has led the industry rig count recovery and H&P has earned approximately two-thirds of the incremental work in that basin.
As we anticipated, our rig count growth has exceeded that of our peers coming off of the bottom, allowing us to recoup 4 to 5 points of market share.
We believe that the quality of our field leadership, our rig crews, our FlexRig fleet and our digital solutions will continue to advance this trend.
Concurrent with this increase in near-term activity, we are also experiencing increased customer utilization of our performance-based contracts in our rig automation software, AutoSlide.
We expect adoption of both to increase and become more prevalent in the industry.
H&P's touch-of-a-button autonomous drilling approach is designed to optimize drilling in the vertical, the curve and the lateral.
These automated solutions include real-time automated geosteering, rotary and sliding execution and improved wellbore quality and placement.
The uniqueness of our automated solutions is backed by a patented economic-driven approach where the software not only makes optimal cost benefit decisions but also directs the rig to execute those decisions without the need of human intervention.
This improves reliability, enhances value and reduces risk for our customers.
Let me give an example of the H&P value proposition autonomous directional drilling provides.
When customers use AutoSlide on our FlexRig, directional drilling personnel are no longer required at the rig site.
This is possible because the directional drilling decisions are being calculated using an algorithm in our patented rig guidance system, which can accurately process through thousands of variables in seconds rather than relying on the manual calculations of the traditional directional driller.
The software-enabled FlexRig allows the curve to be landed more accurately and reliably and the lateral to be placed more precisely in the shale, which results in lower drilling costs, improved production, reduced long-term maintenance costs for our customers and lower environmental impact.
Commercial models that reward performance coupled with rig automation software that enhances value are being adopted across the spectrum of the industry.
Mark will give additional details on performance contracts, but we have been successful in expanding our customer base with a wide range of E&Ps from super majors to small private companies.
Today, H&P owns more than a third of the estimated 635 super-spec rigs in the US market.
With many rig count forecasts ranging from 450 to 550 rigs over the next couple of years, we see significant further super-spec FlexRig market share growth and opportunities for improved pricing.
H&P continues to invest in new and diversified technologies for the long-term sustainability of the company.
Recently, we have made investments in and are supporting the efforts of a few companies driving the evolution of the geothermal industry.
The core of this evolution is a transition from geographically concentrated and naturally occurring hydrothermal resources to enhance geothermal systems and closed loop systems.
The technologies and techniques these companies are exploring are expected to improve project economics, leading to the ultimate scalability of geothermal as a source of energy.
The growth potential of unconventional geothermal energy applications represents a new opportunity for H&P to increase the utilization of its installed FlexRig asset base along with our digital technology solutions.
Our leadership position as a drilling solutions provider is a natural fit for the evolving geothermal market.
This is driven in part from our technology offerings that have already been utilized by some geothermal companies in Europe and are a proven success in unconventional oil and gas drilling in the US and internationally.
Modern geothermal drilling applications require the benefits that autonomous drilling and digital technology delivers for wellbore quality and placement.
We are encouraged by the successes, but we are also cognizant that a substantial amount of uncertainty remains in the market surrounding the impact of the pandemic.
It may take several quarters to understand what the new normal activity environment will look like.
That said, I continue to be impressed with our team's ability to manage through this difficult time and particularly the diligence they have demonstrated in keeping our employees and customers health and safety top of mind.
Today, I will review our fiscal fourth quarter and full year 2020 operating results, provide guidance for the first quarter and full fiscal year 2021 as appropriate and comment on our financial position.
Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 30, 2020.
The company generated quarterly revenues of $208 million versus $317 million in the previous quarter.
The quarterly decrease in revenue is due to further declines in our rig count caused by the energy demand destruction associated with the COVID-19 pandemic as well as lower early termination revenues compared to the prior quarter.
Correspondingly, total direct operating costs incurred were $164 million for the fourth quarter versus $207 million for the previous quarter.
General and administrative expenses totaled $33 million for the fourth quarter, lower than our previous guidance.
During the fourth quarter, we closed on the sale of a portion of our real estate investment portfolio comprised of six industrial developments in Tulsa, Oklahoma for $40.7 million, which had an aggregate net book value of $13.5 million.
The resulting gain of $27.2 million is reported as the sale of assets on our consolidated operations.
Our Q4 effective tax rate was approximately 28% as we recognized an Oklahoma tax benefit related to the sale of our industrial properties in the state net operating losses.
To summarize this quarter's results, H&P incurred a loss of $0.55 per diluted share versus a loss to $0.43 in the previous quarter.
Absent these select items, adjusted diluted loss per share of $0.74 in the fourth fiscal quarter versus an adjusted $0.34 loss during the third fiscal quarter.
For fiscal 2020 as a whole, we incurred a loss of $4.60 per diluted share.
This was driven largely by the $563 million non-cash impairment announced in our second quarter as well as other select items, including restructuring charges and mark-to-market losses on our legacy securities portfolio.
Collectively, these select items constituted a loss of $3.74 per diluted share.
And absent these items, fiscal 2020 adjusted losses were $0.86 per diluted share.
Capital expenditures for the full fiscal 2020 totaled $141 million, below our previous guidance due to the combination of ongoing capital efficiency efforts as well as the timing of a small amount of supply chain spending that crossed into fiscal 2021.
This annual total is a reduction of $145 million from our initial fiscal 2020 budget and a reduction of over $315 million from fiscal 2019 capex.
H&P generated $539 million in operating cash flow during fiscal 2020, representing a decrease of approximately $317 million.
I will note that our cash and short-term investments balance increased by $176 million sequentially year-over-year, which I will discuss more in detail later in my remarks.
Turning now to our three segments, beginning with the North America Solutions segment.
We averaged 65 contracted rigs during the fourth quarter, approximately 15 of which were idle but contracted on some form of cold or warm stack rate.
I will refer to idle but contracted rigs with the acronym IBC hereafter.
This contracted average was down from an average of 89 rigs in Q3.
During the fourth quarter, we bottomed to 62 rigs contracted with about 16 IBC rigs resulting in 46 active rigs at the low activity point.
We exited the fourth quarter with 69 contracted rigs, of which 11 were IBC.
The exit count was slightly above our guidance expectations as demand for rigs found footing from the bottom late in the quarter.
Revenues were sequentially lower by $105 million due to the aforementioned activity decline as well as the IBC count.
Included in this quarter's revenues were $12 million of early termination revenue.
North America Solutions operating expenses decreased $43 million sequentially in the fourth quarter, primarily due to reduced activity and to the proactive operating initiatives at the field level that I discussed during the third quarter call.
That said, the sustained decline in rig activity during the quarter did cause per day expenses to increase on a per revenue day basis.
Expenses absorbed in the field include overhead for our field management and maintenance organizations, ongoing stacking costs, consumption of on-hand average cost inventory as we exhaust penny stock and limited reactivation costs for rigs returning to work.
Further, we had higher-than-expected self-insurance expenses, including numerous former employees on continued health and welfare benefits that will mostly expire toward the end of the first quarter fiscal 2021.
One comment to put these self-insurance expenses in context.
Our prior period self-insurance claims were generated with higher average rig activity, but some of these incurred but not reported claims are just now being developed when current operations are much smaller.
While we see both positive and negative volatility in our claims expenses as we true up the estimated liability each quarter, the percentage impact is more pronounced when our operations are smaller as they are today.
Now looking ahead to the first quarter of fiscal 2021 for North America Solutions.
As I mentioned earlier, we exited Q4 fiscal 2020 with more rigs contracted and running than expected.
The activity level has continued to grow as operators add rigs with oil hovering around $40 per barrel.
As of today's call, we have 82 rigs contracted with only two IBC rigs remaining.
The market remains uncertain with macro COVID demand pressures, political uncertainties and forward crude supply balances.
In all but two situations, operators with idle but contracted rigs have put them back to work and we are winning select opportunities for incremental rigs.
We expect to end the first fiscal quarter of 2021 with between 88 and 93 contracted rigs and we also expect the remaining two IBC rigs to return to work in late December or early January.
While the decrease in IBC rigs will not increase our contracted rig count, it will be accretive to activity and margins.
Almost all of these IBC rigs are on term contracts at rates entered into during the previous super-spec upgrade cycle.
As John discussed, our performance contracts are gaining customer acceptance.
And of the approximately 21 rigs we have added or expecting to add to the active H&P rig count, after September 30 through December 31, just over 30% are working under performance contracts.
As we mentioned in the May and July calls, our focus on solution-based performance contracts has driven us to evolve the nomenclature we used to present our business with investors.
We began this transition as we shifted our segment guidance to focus on the segment margins driven by rig and technology solutions rather than individual rig rates.
In the North America Solutions segment, we expect gross margins to range between $40 million to $50 million with approximately $1 million of that coming from early termination revenue.
This margin guidance is greater than the prior quarter in total.
And further, it is not impacted in any significant way by early termination revenues.
However, Q1 margins will be temporarily adversely impacted by reactivation costs as we rapidly add rigs from the recent bottom and recommissioning costs for a couple of walking rig conversions.
Our current revenue backlog from our North America Solutions fleet is roughly $554 million for rigs under term contract, but importantly is not inclusive of any potential performance bonuses.
This amount does not include the aforementioned $1 million of early terminations expected in Q1.
Regarding our International Solutions segment, International Solutions business activity declined from 11 active rigs during the third fiscal quarter to five active rigs at fiscal year-end.
This decrease is the result of rig releases in Argentina and Abu Dhabi, due in large part to the ongoing COVID-19 pandemic.
As we look toward the first fiscal quarter of 2021 for international, our activity in Bahrain is holding steady with the three rigs working, while our two rigs in Abu Dhabi and our entire Argentina and Colombia fleets are now idle.
In Argentina, we continue to work within an arduous regulatory environment, which has prevented us from reducing labor costs to levels that are more in proportion with reactivity potential.
This will lead us to incur a legacy cost structure into at least the first quarter and will cause international margins to be negative.
In the first quarter, we expect to have a loss of between $5 million to $7 million, apart from any foreign exchange impacts.
We still have a pending rig deployment in Colombia, but it has been delayed as our customer is still waiting on all the required regulatory approvals to begin work.
On the marketing front, our international business development team is seeing some bidding tendering activity in Argentina, Colombia, the Middle East and certain other markets.
At this juncture, these prospects are early in the process and are not included in our forward outlook.
Finally, turning to our Offshore Gulf of Mexico segment.
We have four of our eight offshore platform rigs contracted.
Offshore generated a gross margin of $4.6 million during the quarter, below our estimates, in part due to unfavorable adjustments to self-insurance reserves related to a prior period claim.
The previously mentioned gross margin also includes approximately $1 million of contribution from management contract rigs.
As we look toward the first quarter of fiscal 2021 for the Offshore segment, we expect that offshore rigs will generate between $5 million to $7 million of operating gross margin with offshore management contracts contributing an additional $1 million to $2 million.
Now, let me look forward to the first fiscal quarter and full fiscal year 2021 for certain consolidated and corporate items.
As we discussed in our May and July calls, we implemented numerous rightsizing efforts by reducing capital expenditures; reducing North America Solutions overhead; rightsizing selling, general and administrative overhead; and taking similar actions in the International segment where possible.
As mentioned, we are continuing to assess our international offices to appropriately calibrate for activity.
In all areas, we will continue to identify cost reduction opportunities and drive efficiency in our daily work activities.
Capital expenditures for the full fiscal 2021 year are expected to range between $85 million to $105 million, which is a reduction of approximately 33% to fiscal 2020 capex.
This capital outlay is comprised of three approximately equal buckets: First, maintenance capex to support our active rig fleet.
Given current activity levels, we have sufficient capacity to minimize new maintenance capex expenditures for the foreseeable future.
As you may recall, in fiscal 2019, we had bulk purchases in capex to scale up rotating componentry [Indecipherable] 200 plus working super-spec FlexRig count.
In addition, we continue to harvest components from previously impaired and decommissioned rigs to conserve capital.
As such, we expect fiscal 2020 year maintenance capex will range between $250,000 to $400,000 per active rig in the North America Solutions segment, well below our prior year guidance of $750,000 to $1 million.
Second, skidding to walking capability conversions.
For the customer with a want or need for walking rigs, we will invest to convert certain rigs from skidding to walking pad capability in exchange for a term contract as opposed to competitors walking rig capacity is fully utilized.
We have select customers who prefer certain rig design elements and are willing to enter into a contract with at least a year of term to enable that investment.
We estimate walking conversions to approximately $6 million to $7 million per rig.
Third, corporate capital investments.
The majority of this bucket is comprised of modernization for data center, data and analytics platforms and enterprise IT systems.
Our on-site data center has elements at the life cycle renewal stage and we are seizing the opportunity to move to both co-located data centers and cloud computing configurations that will be less capital intensive prospectively.
The data and analytics modernization focuses on the cloud forward approach for increased capability and scalability.
In the enterprise IT systems arena, we were implementing a new Human Capital Management system to better accommodate how we manage our diversified and dispersed employee base, including all phases of the employment cycle and employee experience.
Finally, a smaller amount of corporate capital is being allocated to office build outs as we reconfigure for new flex work arrangements with enhanced office capabilities that can facilitate smaller forward office footprints.
Depreciation for fiscal 2021 is expected to be approximately $430 million.
This is approximately $50 million less in fiscal 2020, primarily due to the second quarter impairments of non-super-spec rigs and associated capital spares.
Our general and administrative expenses for the full fiscal 2021 year are expected to be approximately $160 million.
The decrease sequentially is driven by our rightsizing efforts as discussed in the July conference call.
We believe our restructuring will enable us to achieve activity growth going forward without significant accretion of SG&A.
We are continuing our investment in research and development through the cycle as we push toward autonomous drilling.
Such innovation efforts will yield the next solution offering from our technology roadmap.
We expect R&D expenditures to be approximately $30 million in fiscal 2021.
The statutory US federal income tax rate for our fiscal 2021 year end is 21%.
In addition to the US statutory rate, we're expecting incremental state and foreign income taxes to impact our tax provision, resulting in an expected effective income tax rate range of 19% to 24%.
Based upon an estimated fiscal 2021operating results and capex, we are projecting a decrease to our deferred tax liability with no resulting material cash tax.
Now looking at our financial position.
Helmerich & Payne had cash and short-term investments of approximately $577 million at September 30, 2020 versus $492 million at June 30, 2020.
Including our revolving credit facility availability, our liquidity was in excess of $1.3 billion.
Our debt to capital at quarter end was about 13% with a positive net cash position as our cash on hand exceeds our outstanding bond.
Our debt metrics continue to be best-in-class measurement among our peer group.
As a reminder, we have no debt maturing until 2025 and our credit rating remains an investment grade.
Now, a couple of notes on working capital.
We earned cash flow from operations in the fourth quarter of approximately $93 million versus $214 million in fiscal Q3.
Our trade accounts receivable at fiscal year end was approximately $150 million with the preponderance being less than 60 days outstanding.
Our inventory balance is reduced $9 million sequentially from June 30 to $104 million at September 30 as we have leveraged consumables across the entirety of US basins and have reduced our min/max carrying targets to reflect the new activity levels.
As mentioned in the previous call, we commenced a project to optimize our accounts payable terms and negotiate additional or early payment discounts from suppliers.
These efforts continued to bear fruit during the fourth quarter.
We expect further benefits, but the impact will be relatively modest in comparison to what we have realized to-date.
The macro environment in fiscal 2020 drove capital allocation decisions, cost management measures and the rightsizing of the company to new activity levels.
These collective efforts undertaken to-date are aimed at generating free cash flow of that, when combined with the modest uses of cash on hand, will cover our capital expenditure plan, debt severance [Phonetic] cost and dividends in fiscal 2021.
Based on our budget for 2021 fiscal year, we expect to end fiscal 2021 with cash and short-term investments of approximately $450 million to $500 million.
The maintenance of our balance sheet strength and liquidity are foundational elements in our 100-year tradition of capital stewardship and they continue to be a significant differentiator in this volatile and cyclical industry. | compname posts q4 loss per share of $0.55.
q4 loss per share $0.55.
expects its q1 of fiscal 2021 north america solutions rig count to exit at approximately 90 rigs up over 30% during quarter. | 1 |
With me on the call today are Vic Grizzle our CEO; and Brian MacNeal, our CFO.
Actual outcomes may differ materially from those expected or implied.
Both are available on our website.
I'm pleased to be with you today from our corporate campus in Lancaster, Pennsylvania.
Armstrong, like many companies, is adapting to a new normal of hybrid work activity.
Here at Armstrong, safety protocols are in place and our physical spaces have undergone a first phase of modifications to allow our organization to return to the office safely.
We're actively working on more permanent changes to our facilities, including the use of new ceiling and grid solutions to create healthier spaces for our staff and visitors.
Our manufacturing and distribution facilities continue to operate well and safely.
Quality and service levels are high and our connectivity to customers, enabled by our digital tools, remains excellent.
Overall, demand in the quarter improved sequentially much as we had expected.
On a seasonally adjusted basis, Q3 was 14% better than Q2, down 11% versus 25%.
In addition, we saw sequential improvement within the quarter, as daily Mineral Fiber sales improved from down 15% in July to down 11% in September.
And October has continued this trend and is progressing better than September.
Our top seven territories, which had lagged significantly in the second quarter, returned to the overall national average during the quarter.
But the New York Metro area, our highest AUV territory, continues to lag.
Overall, sales of $247 million were down 11% a quarter versus prior year.
Volume was down 10% and Mineral Fiber AUV was slightly negative.
Positive like-for-like pricing improvement and favorable product mix were offset by negative channel mix and negative territory mix, primarily driven by the lag in New York metro area.
In addition, sales to big box customers were up in the quarter versus 2019, which is good from a volume perspective, but given the lower sales price in this channel, it was also a headwind to mix.
While the overall demand trends in the quarter progressed largely as expected, there were some developments that we observed that I want to share with you to provide context on the market conditions.
As expected, construction activity picked up in the territories most impacted by COVID-related restrictions in the second quarter, namely the seven largest territories we referenced on our last call.
The easing of state and local regulations on job sites and the increasing ability of contractors to work with the newly imposed restrictions both helped this situation.
However, as the quarter progressed we saw delays emerge in previously less impacted territories, namely the South and the Midwest following the migration of the virus.
This shift in regional activity reflects the impact of increasing COVID cases on construction activity and the overall uneven nature of the market reopening.
New construction activity has fared pretty well overall, as existing projects continue toward completion, while smaller and midsized renovation projects experienced greater headwinds.
In our conversations with our customers, it is clear that there remains a lot of near-term uncertainty as building owners work to determine the best path forward to adapt their facilities to enable the safe return of occupants.
This is also true with schools, with some remodel activity remaining on hold, as many students learn from home.
Also in the quarter we continued to experience softness in our low visibility flow business.
These are the small discretionary repair/remodel type projects that flow through our distribution partners and often without a specification.
In addition to the uneven opening of the markets, we also experienced minor business interruptions in the quarter due to protest activity in certain cities and Hurricane Sally which closed our Pensacola, Florida plant for a few days.
The Armstrong team and our partners continue to earn my admiration as they overcome obstacles and continue to deliver for our customers.
Adjusted EBITDA in the quarter of $92 million was down 19% from 2019.
The pandemic-driven volume decline is really the entire story as the business continues to operate well and as expected otherwise.
Brian will provide more details on our financial results in a moment.
But it has been an impressive performance by our operations team in an extraordinary environment.
I could not be more proud of the work that they have done thus far.
Despite the challenges in the market, our strong cash flow performance continues, and we remain on track to deliver over $200 million in adjusted free cash flow.
Based on this continued strong cash flow generation and our confidence to continue to do so, our Board has approved a 5% increase in our regular quarterly dividend to $0.21 per share and we are restarting our share repurchase program.
The third quarter was also notable, in that we completed two M&A transactions.
The previously discussed, acquisition of Chicago-based Turf Design, the leading provider of custom felt-based ceilings and walls and then on August 24, we acquired Moz Designs.
Moz is a Northern California-based designer and fabricator of custom architectural metal ceilings, walls, dividers and column covers.
Moz brings unique capabilities that can be utilized to improve the product offerings of our three existing metal ceiling facilities, and further strengthens our already leading position in the growing category of metal ceilings and walls.
This transaction marks our seventh acquisition since 2017.
We are truly building an unmatched platform of specialty ceilings and walls and we are not done.
Our M&A pipeline continues to grow as we see more and more opportunities to build out the most unique set of capabilities in the industry, and our financial strength allows us to do so.
Today, I'll be reviewing our third quarter results.
Beginning on slide 4, for our overall third quarter results, sales of $246 million were down 11% versus prior year, a significant sequential improvement from the second quarter when year-over-year sales were down 25%.
Adjusted EBITDA fell 19% and margins contracted 370 basis points, again a substantial sequential improvement from the second quarter when year-over-year EBITDA was down 36% and margins contracted 590 basis points.
Adjusted diluted earnings per share of $1.07, fell 22% and adjusted free cash flow declined by $53 million versus the prior year.
I'll address the reasons for this decline in a moment.
Our cash balance at quarter-end was $139 million, and coupled with $315 million of availability on our revolver, positions us with $454 million of available liquidity, down $33 million from last quarter as we completed the Turf and Moz acquisitions during this past quarter, and down $24 million from the third quarter of 2019.
Net debt of $542 million is $4 million higher than last year as a result of our acquisitions, partially offset by cash earnings and the receipt of $19 million from the sale of our Qingpu plant in China, which was idled.
As of the quarter-end, our net debt to EBITDA ratio was 1.5 times versus 1.6 times last year as calculated under the terms of our credit agreement.
Our covenant threshold is 3.75 times, so we have considerable headroom in this measure.
Our balance sheet is in solid shape.
In the quarter, we did not repurchase any shares as our repurchase program remains suspended to preserve liquidity in light of the COVID-19 impact on the market.
Last week, our Board of Directors approved the restart of the program.
Going forward, we will look to return to our customary approach of repurchasing shares subject to our normal processing protocols.
Since the inception of the repurchase program, we've bought back 9.6 million shares at a cost of $596 million for an average price of $62.13.
We currently have $604 million remaining under our share repurchase program, which now expires in December of 2023.
Slide 5, illustrates our Mineral Fiber segment results.
In the quarter, sales were down 14% versus prior year, but sequentially improved from the prior quarter when year-over-year sales declined 26%.
COVID-19 driven volume declines were the key driver.
AUV was a headwind, as positive like-for-like pricing and favorable product mix, were offset by the channel and geographic mix issues that Vic mentioned.
While sales in our key seven territories improved sequentially and converged with the performance in other territories, performance within these key seven territories was inconsistent and was a headwind to overall price and mix for the Mineral Fiber segment.
AUV in the remaining territories was positive.
Adjusted EBITDA was down $20 million or 21% as the volume decline fell through to the bottom line and AUV was a drag.
Continued manufacturing productivity and cost reduction initiatives, lower raw material and energy costs, and SG&A cost management were all positive in the quarter.
WAVE equity earnings were down due to lower sales and also as a result of a year-to-date true-up of allocated costs from Armstrong and Worthington.
Moving to Architectural Specialties segment on slide 6, sales were up 1% as the acquisitions of Turf and Moz contributed almost $8 million in the quarter and offset COVID-driven organic sales decline of 12% which were sequentially better than the 22% decline we experienced in the second quarter.
While current period sales activity was challenged given state and local restrictions, we continue to have exciting wins and have been awarded the Kansas City International Airport and the Princeton University Residential College projects.
These jobs will ship in 2021 and 2022 and demonstrate our continued ability to win complex and iconic projects.
Despite flat sales direct margins expanded significantly driven by the higher margins of the Turf and Moz acquisitions relative to our base business and ongoing productivity in the network particularly at acquired facilities.
Fixed manufacturing costs and SG&A were up driven by the costs of Turf and Moz.
Slide seven shows our consolidated results for the quarter and clearly illustrate the impact of COVID-related volume declines.
Slide eight shows adjusted free cash flow performance in the quarter versus the third quarter of 2019.
Cash flow from operations was down $48 million, largely driven by volume due to COVID-19.
Also in the quarter despite lower income in Q3 2020, we actually paid $14 million more in cash taxes than in the third quarter of 2019.
This is largely driven by timing in certain discrete items in the base period.
Not included in this cash flow bridge are two significantly positive non-recurring cash items.
In the quarter, we applied a $27 million tax refund related to the sale of our international operations.
And we received $19 million from the sale of our closed Qingpu facility in China.
We have received an additional $2 million from the sale in October and this transaction is now complete.
Slide nine shows our year-to-date results.
As you can see sales were down 12%, adjusted EBITDA is down 18%, and adjusted free cash flow is down 16%.
Slide 10 is our year-to-date bridge.
Again, COVID-related volume declines are the main driver followed by the geographic and customer AUV issues we've called out.
For the year product mix and like-for-like pricing are both positive contributors to sales, but mix is a headwind to EBITDA due to geographic and channel mix.
Input costs, deflation and the savings we are driving in manufacturing and SG&A despite our acquisitions helped mitigate the sales fall through the EBITDA.
Slide 11 reflects our year-to-date free cash flow.
As with the quarter, operating cash flow was impacted by volume declines due to COVID-19, the tax refund in Qingpu sales proceeds mentioned earlier are excluded.
Capital expenditures reflects the delaying actions we are taking to finalize or to prioritize cash in the near-term.
Interest expense is lower as a result of our refinancing in September of 2019.
WAVE earnings were impacted by volume declines.
Slide 12 is our guidance for the year.
We now anticipate full year revenues in the range of $920 million to $935 million or down 10% to 11%.
Overall the decline will be entirely volume as we anticipate AUV to be essentially flat for the full year.
EBITDA will be in the range of $320 million to $330 million as the sales decline drops down and is partially offset by productivity and the impact of our cost containment actions.
Actions are in place to drive $40 million to $45 million of savings in manufacturing and SG&A down slightly by $5 million from our previous outlook as we invest for future growth.
Our cash flow guidance is adjusted from our prior outlook as we have taken capital expenditures up, acquired the working capital of Turf and Moz and adjusted the seasonal trajectory of our fourth quarter to account for continued sequential improvement.
These are challenging times but Armstrong is laser-focused on controlling what we can control investing to drive growth and building on an already best-in-class platform.
Our ability to execute two meaningful acquisitions during a global pandemic is testament to our focus and confidence.
I have no doubt that we will emerge on the other side of this crisis in an even stronger position to grow and create value.
Healthy spaces is the dominant topic in commercial construction conversations today.
92% of architects and designers surveyed said they are having conversations with their clients on how to make their spaces healthier and safer.
And it's a universally known fact that we spend 90% of our lives indoors.
And even though healthy spaces have always been important this pandemic has made it an even greater priority, possibly the highest priority and the standards for which health and safe are measured are being raised to a whole new level.
At Armstrong, we have been the leading supplier of ceilings and spaces where healthy has mattered the most in operating rooms, in ICU wards and other isolation room applications.
Now, we are bringing that experience to today's conversation about creating healthy spaces and how to create one.
We believe a healthy space and safe space is a space that protects us and fosters a feeling of well-being and comfort that allows people to be at their best.
So where do ceilings come in?
You're already familiar with how ceilings play a role in acoustics and aesthetics and in making the most of natural and supplemental light in interior environments, all of which are part of the healthy spaces equation.
As the structural capstone of any space, the right ceiling system can make a meaningful difference by bringing the additional elements of healthy spaces together.
Our ceiling grid and partition solutions contribute to maximizing ventilation and minimizing the transmission of harmful pathogens.
In most buildings, the ceiling system is part of the supply and return air ducting.
We're already very in tuned with that with our current solutions for healthcare spaces.
We are now adapting this technology to be more affordable and effective in the office, the classroom and other settings to meet the new definition and the new standards for a healthy space.
I'm very pleased to introduce a new family of products called 24/7 Defend.
These products represent innovative new solutions against harmful pathogens and other particles in indoor environments.
Our 24/7 Defend product family already includes infusion partitions and CleanAssure disinfectable products, which are proven cleanable products.
What's new is the AirAssure family of gasketed ceiling tile products that self-seal to the grid system and a new integrated VidaShield ultraviolet air purification and ceiling tile system.
When placed in our standard grid system, AirAssure gasketed ceiling panels form a tight seal and reduce air flow leakage into the plenum by 300% over standard ceiling panels.
Reducing air leaks significantly increases the effectiveness of air ventilation and filtration systems allowing more air to flow through the return air vents where it can be filtered and purified and ensuring greater air quality.
In addition to allowing more filtering and cleaning of air vent spaces, AirAssure can also reduce the risk of pathogens traveling between spaces in a building, further protecting a greater number of people.
In addition to offices and healthcare facilities, this is vital for schools and senior living facilities as they are being asked to create more isolation rooms to prevent the spread of infections.
Reducing air leakage with AirAssure is an easy way to retrofit existing rooms and is available with our popular Sustain and Total Acoustics solutions.
Now in a complementary way, the new patented scientifically proven VidaShield system pairs an active ultraviolet air purification system with Armstrong ceiling panels to provide cleaner, safer air in any commercial space.
An unobtrusive drop in ceiling system that draws air into a chamber above the ceiling exposes the air to UV light, neutralizing harmful pathogens and then returning clean air to the room.
VidaShield can be used as a stand-alone solution or for even better results it can be integrated with AirAssure panels.
Together these two new solutions reduce the risk of indoor air transmission of harmful pathogens.
This pandemic is serving as a catalyst to renovating commercial spaces to create healthy and safer spaces unlike anything we've seen before.
And we believe it will continue to evolve for many years to come because healthy spaces are now essential.
These new products are just the beginning of 24/7 Defend family as we have solutions in our innovation pipeline that we will add to this family in the coming quarters.
Armstrong is a clear leader in the commercial construction market and we have been for many, many years.
As the need for healthier buildings evolves, we will be at the forefront driving positive change in our industry.
We believe these changes in the short and long-term will allow market leader like Armstrong to further grow our business and bolster our competitive advantage.
Together with our industry-leading position, our digitalization investments and now with our expanding health spaces platform Armstrong is well positioned for profitable top line growth.
With appending renovation renaissance in the medium-term and a whole new way of thinking about commercial interior spaces longer-term, we are both ready for and excited about the possibilities ahead.
And this is all aligned with our commitment to continue to deliver strong returns for our shareholders and to making a positive difference by creating healthier spaces where people live, work, learn, heal and play. | maintaining 2021 guidance: net sales of +10% to +13% and adjusted ebitda of +9% to +13%. | 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. | q4 non-gaap earnings per share $0.45.
q4 revenue rose 10 percent to $9.5 billion.
organic revenues (non-gaap) grew 9% for quarter and 16% for full year.
global unit case volume grew 9% for quarter and 8% for full year.
for full year 2022 company expects to deliver organic revenue (non-gaap) growth of 7% to 8%.
company expects commodity price inflation to be a mid single-digit percentage headwind on comparable cost of goods sold in 2022.
coca-cola- for 2022 comparable net revenue (non-gaap), expects a 2% to 3% currency headwind based on current rates, including impact of hedged positions.
for full year 2022 comparable earnings per share percentage growth is expected to include a 3% to 4% currency headwind.
sees q1 comparable earnings per share (non-gaap) percentage growth is expected to include an approximate 5% currency headwind.
for q1 2022, comparable net revenues are expected to include an approximate 3% currency headwind.
for full year 2022, expects to deliver comparable currency neutral earnings per share growth of 8% to 10% and comparable earnings per share growth of 5% to 6%. | 0 |
I'm Christine Marchuska, Vice-President of Investor Relations for Diebold Nixdorf.
Additional information on these factors can be found in the company's periodic and annual filings with the SEC.
Participants should be mindful that subsequent events may render this information to be out of date.
And now I'll hand the call over to Gerrard.
I am pleased to say that customer demand for our solutions remained robust in Q3 despite supply chain constraints, logistics and inflationary headwinds.
I'm encouraged by the support of our customers and the innovative spirit of our workforce as we navigate on-going supply chain challenges.
Most of all, I'm encouraged by how our company is positioned to offer solutions and growth opportunities for our customers who aren't who are addressing rapidly changing consumer demands, and difficult competitive landscapes.
More than ever, consumers are not only embracing, but expecting self service solutions.
Whether it's at a bank, grocery store, or retailer, and more than ever, we are committed to helping our customers deliver more digital, flexible, and effective customer consumer journeys.
In banking, consumer practices are shifting away from the traditional teller window toward ATMs with more omni channel functionality.
At the same time, banks are looking for more self-service options to meet consumer needs, the fewer tellers and fewer branch locations.
There is on-going steps toward reducing the branch footprints, and optimizing the real estate is crucial.
And our ATMs are helping our banking customers to continue providing the same level of customer service, including customer outreach through marketing, while at the same time, making better use of their available space.
In retail, the pandemic resulted in more focused shopping experiences and growth in e-commerce, while at the same time, as cited by recent studies, 75% or more of consumer purchases broadly, are still happening in the physical store.
It's important to understand, however, that while our consumers prefer physical shopping, they also prefer lower touch options during the purchase process.
Our self-checkout offerings create a safe, convenient and lower friction shopping experience, providing self-protection, produce scanning, the market leading camera technology to assist in age restricted purchases.
In short, what we're seeing is that consumers and retailers alike are embracing self-checkouts.
According to RBR, the self-checkout installed base will reach nearly 1.6 million terminals by 2026, almost tripling the global install base as of the end of 2020.
Indeed, we believe automation provides much needed cost efficiencies for the retailer and a more efficient shopping experience for the consumer at the last mile of the store.
We believe the accelerating demand for self service and automation signaled a structural change to the way business will be done going forward and gives us a long runway of opportunity.
I like to now provide remarks around our third quarter performance.
Although demand remain strong in Q3, fulfilment of product orders shifted from Q3 to Q4, and from Q4 to 2022 as we continue to work through supply constraints and logistics challenges.
Our entry continues to exceed our original models, and our backlog increased approximately 19% versus the same period last year.
Revenue for the quarter was down 4% as a portion of revenue has shifted out to future quarters due to the temporary supply constraints and logistics challenges we're currently facing.
Our retail segments continue to perform well, with growth and revenue of 10% as compared to the third quarter of 2020.
Moving on to our business highlights starting with banking.
Momentum for DN Series ATMs continued in Q3 as a great percentage of our total orders for these next generation devices.
And we see this trend continuing based on our orders for Q4 and early 2022.
Additionally, the DN Series is now live and fully certified in over 60 countries globally, contributing to our market expansion in the space.
I like to highlight some notable DN Series wins for the third quarter.
We secured a contract for over $12 million with Banco Azteca in Mexico, including our DN Series cash recyclers, a new service contract and software licenses expanding across 500 branches.
With this win, over 75% of Banco Azteca's fleet is not composed of DN devices.
In Greece, we displace the competitor and doubled our presence at Piraeus Bank.
Approximately 200 branches and 40 off-premise locations will be equipped with a modern technology including our DN Series cash recyclers.
Introduction of cash free cycling is a significant change for this market, which had not previously had recycling capabilities by branching DN's.
We earned this win based on the higher mechanical reliability of our hardware, the higher capacity of our ATMs and on cleaner, more environmentally sustainable profile.
This win also includes a five year maintenance coverage contract.
Lastly, we built a competitive win with Standard Chartered Bank Malaysia, upgrading all of their legacy vices to our DN Series, increasing our fleet to consist of 100% DN Series ATMs. We continue to see growth in demand for our AllConnect Data Engine with a number of connected ATMs, increasing approximately 23% sequentially in Q3 2021.
This is a significant milestone for us as more than 100,000 banking self-service devices are connected to this solution, which leverages real time Internet-of-Things connections from our deployed devices, and has consistently reduced customer downtime, by as much as 50%, resulting in greater than 99% uptime.
This drives multiple business benefits, such as higher end user satisfaction, lower total cost of ownership that increased operational efficiencies.
I'm proud to share that we also were awarded technology and service industry association's 2021 Star Award for best practices in the delivery of field services for our AllConnect Data Engine.
We believe that demand for differentiated market leading solutions that meet the needs of today's consumer will remain solid.
This is especially evident in our robust pipeline, our healthy backlog, the bank successes of our sales team in Q3 and the growth in our AllConnect Data Engine.
Moving on to our retail business, we continue to see strong demand for our self-checkout products as retailers look to be bought next door for comprehensive solutions that provide favorable consumer experiences and cost efficiency as they face staffing challenges and tough performance comparisons.
We secured a competitive takeaway with an Italian retailer to replace their competitor's advices with our DN Series, self-checkout solutions, along with our full self-checkout suite and other offerings from our retailer solution portfolio.
We also expanded an important customer relationship with a large multi country retailer in Europe, which included a competitive takeaway with SCO devices.
This win secures a strategic rollout of self-checkout devices, beginning with two stores before expanding to 300 stores in 13 countries and our eventual full rollout of 2500 stores in 15 countries over the span of two or three years.
Additionally, this retailer signed a three year services and maintenance contract.
We are well positioned for growth in retail services.
In the third quarter, we won a contract renewal with a large global petrol convenience store for the Malaysia sites.
This was a significant renewal totalling over $16 million for our systems and services, including point of sale, helpdesk support, software, and other solutions.
Overall, we feel confidence and the strength of our retail business as our large global retail customers reconfirmed their commitments to their store formats.
While some retailers are considering fewer locations, they all remain focused on increasing the level of automation and technology investment per store.
Additionally, in 2021, we're seeing growth in the absolute number of our self-checkout devices on a year-on-year basis.
And we anticipate that our retail business blend the year above our pre-pandemic levels witnessed in 2019.
Our core portfolio continues to benefit from the industry trends I discussed earlier.
Around consumers' desire for more self-service options and banking retail, resulting in our customer's needs for more automation and greater cost efficiencies.
It also lends itself to layering on additional offerings with large addressable markets, such as managed services, software, our dynamic payments platform and other adjacencies that provided trajectory for sustainable growth for the future of our business.
We are particularly proud of the progress we've made with our retail and banking customers.
We recently received the results from our annual customer satisfaction survey.
And I'm delighted that our customers are awarding us some of the highest levels of net promoter scores we've seen reinforcing what is now been a multi-year trend of improving results.
Turning now to our growth initiatives.
In managed services, we continue to move forward on securing more new business and remain in productive discussions with multiple financial institutions.
We also see a promising pipeline for managed services in 2022.
In Q3 in North America, we were awarded a large managed services agreement with a tier one financial institution, including a large order of DN Series ATMs. We continue to scale our debit and credit platforms, with our Vynamic Payments offering at a top 10 global bank cross more than 17,000 ATMs. As we continue to implement and scale our existing customers for our Payments Platform, our go-to-market team is growing a strong fire fighter [Phonetic] sales pipeline for 2022.
Additionally, I'm pleased to announce our entry into new horizontal electric vehicle charging stations.
This is a natural fit for our services business.
With our global network of 8000 experienced service technicians, and the similarities between ATMs and EV charging stations.
There are an estimated 1.5 to 2 million public charging stations even in the United States and Europe by 2025.
And this is an approximately an increase of over 200% from roughly 500,000 charging stations today split between about 300,000 in Europe, and 200,000 in the U.S.
We are currently in discussions with the top EV charging station private companies that have already secured contracts for our solution with some of the key players in this space.
This is a promising and rapidly growing market.
And we look forward to hearing more on this new offering in future quarters.
Now turning to another important area of our business sustainability.
Not only do we focus on attaining sustainable growth for our shareholders, we also focus on environmental sustainability of our facilities, practices and processes.
I'm proud to say that we were recently awarded Germany's best energy scouts 2021.
The German government initiative that encourages energy saving opportunities.
We installed a green roof, constructed a regional brasses [Phonetic] to improve energy savings at our Paderborn facility.
Additionally, we included a solar panel system and out of 36 charging ports, for cars and e-bikes in parking areas.
We consistently are working on initiatives that drive sustainable programs, with the goal to have no adverse effects or public health for the communities where we operate.
We look to operate our other facilities around the globe in sustainable greenways as part of our focus around environmental, social, and governance commitments.
Looking ahead to Q4, we remain confident in our market leadership, and ability to close out the year strong on a year-over-year basis.
As of today, our owners are 100% confirmed with customers committed to our products.
We see negligible risk of loss sales, with strong strength and demand for America's banking and retail business segments.
Additionally, in Q4 for our banking segments, we are starting this quarter with a backlog of approximately $205 million higher than the beginning of Q4 2020.
Specifically for America's banking, we're seeing over a 50% increase in our backlog as we enter the fourth quarter 2021 as compared to the same time last year.
We're working with all of our customers on a continuous basis to fulfill the high level of orders we're receiving on a timely basis.
As far as focus, we're taking steps to increase our stock of key components as well as pre-booked vessels further advance to accelerate revenue conversion from our backlog.
Furthermore, on a year-over-year basis, our outlook remains robust, as I confirmed orders for the first half of 2022, or above the levels for the first half of 2021 as of this same time last year.
While we continue to see significant opportunity in the markets, and in our ability to meet our customer's needs, we like many global companies for navigating inflationary pressures, and supply chain logistics that continue to impact our business.
As I discussed earlier, delays in delivering or in delivery of our products will cause some revenue to shift to future quarters.
Thus, we are revising our guidance for year-end 2021.
However, I believe it is important to note that we see Q3 broadly, as a peak inflection point in supply chain disruptions.
Our visibility into semiconductor chip markets has increased meaningfully, providing us with a line of sight to many of the two providers through the first half of 2022.
Additionally, they've deployed other strategic tactics internally, such as shifting our production capacity which leaves some of the dependencies we've previously had on logistics and shipping.
I'm extremely proud of the work of our DN team to mitigate these issues.
We are squarely positioned to meet the needs of our customers and expand our base of banks and retailers as consumers continue to demand more access, more convenience, and more innovation through automation and self-service.
Although supply chain challenges have led to a temporary pullback in performance, it's important to understand that we are doing everything possible to mitigate these challenges, and delivering for our customers remains a top priority.
My further remarks will include references to certain non-GAAP metrics such as gross profit, gross margin, and adjusted EBITDA.
Total revenue for the third quarter2021 was $958 million, a decrease over third quarter 2020 of approximately 4% as reported, a decrease of 5% excluding foreign currency benefit of $16 million and an $8 million impact from domestic businesses.
Adjusted for foreign currency and divestitures, product revenue decreased 3%, services revenue decreased 6% and software revenue increased 3% compared to Q3 2020.
During the quarter, approximately $90 million of revenue was delayed due to extended transport times and inbound technology component delays.
This primarily impacted the U.S., Latin America and certain APAC countries and reduced total revenue by approximately 900 basis points.
On a sequential basis, total revenue increased approximately 2%.
Non-GAAP gross profit for the third quarter was $263 million, or a decrease of approximately $22 million versus the prior year period on lower gross margins of 27.4%.
The deferral of revenue and non-billable inflation resulted in a reduction to third quarter gross margin of approximately $33 million.
Service margins increased 40 basis points versus the prior period and more in line with our expectations.
Product gross margins were down approximately 180 basis points versus the prior year period, primarily due to $10 million as a result of inflationary pressures and supply chain logistics, partially offset by a favorable DN Series versus legacy ATM and geographic customer mix.
Software gross margins declined 500 basis points versus the prior year period excluding the impact of a prior year prayer cost benefit of approximately $5 million that did not recur in 2021.
Software gross margins were down approximately 40 basis points due to unfavorable mix.
Operating expense of $182 million for the quarter decreased approximately $14 million versus the prior period, period and decreased $17 million sequentially.
Compared with prior year key variances include reductions in variable compensation, partially offset by unfavorable effects and investment and growth projects.
When compared with our second quarter operating expense decreased due to reductions in variable compensation.
The net result was an operating profit of $81 million and operating margin of 8.5% in the quarter, the same trends drove adjusted EBITDA of $103 million and adjusted EBITDA margin of 10.7% in the quarter.
Now I will discuss our segment highlights.
Eurasia group banking revenue of $323 million decreased approximately 11% versus the prior period and 12% after adjusting for foreign currency benefit of $7 million and a $3 million impact of divestitures.
Lower revenue was primarily due to supply chain delays affecting timing of deliveries and installations of product with collateral impact of services and software and revenue plus the termination of expired service contracts.
As expected, following a strong order entry in Q2 and several non-recurring liabilities in the prior year, segment product order growth decreased 35%.
We are forecasting a strong order entry end of Q4.
Gross profit for the segment decreased to $98 million year-over-year included favorable foreign currency balances of $4 million and an unfavorable divestiture impact of $1 million.
Gross margin at 30.3% was down 50 basis points, the decrease was primarily due to inflationary pressures, offset by our focus on cost management.
Americas banking revenue decreased $22 million, or approximately 6% to $347 million, primarily due to declines in software and services revenue due to the negative collateral impact of unfavorable geographic mix of installations from North America to Latin American.
Americas banking continues to be disproportionately affected due to the location of our customers and our primary manufacturing facilities for DN Series ATMs, which are located in Europe and Asia.
Segment gross profit of $86 million was down $17 million due to lower revenues.
Gross margin percentage declined due to the impact of supply chain inflation and unfavorable geographic mix as previously noted.
Our retail segment had another quarter of strong performance.
Retail revenue of $288 million increased 10% year-over-year as we reported an 8% after adjusting for $6 million currency benefit and investor headwind of $2 million.
Demand for our point-of-sale checkout -- self-checkout continued to increase versus the prior year period with proprietary growth of approximately 23%.
Retail gross profit increased 15% at $79 million driven by revenue growth, gross margin expanded by 110 basis points directly attributable to growth in self-checkout revenue.
As we continue, continue to work to optimize our portfolio and focus our core business segments, we made the decision to enter the share purchase agreement to sell our reverse expanding business with an approximate deal close date targeted for year end.
This business is less than 2% of our total annual retail revenues in order was a strategic fit for the second going forward.
Turning to our capital structure metrics.
Unlevered free cash flow used in the quarter increase $121 million versus the prior year primarily due to increases in inventory, which are necessary to support both Q4 production and delivery targets as well as increases in critical components for 2022 orders.
Company ended the quarter with $325 million of total liquidity, including $230 of cash and short term investments.
The company's cash balance as of September 30th reflects increased inventory levels and interest payments made during the quarter.
At the end of the quarter, the company's leverage ratio was 5.4 times, which continues to be below our covenant maximum of six times.
Turning to our updated outlook for 2021.
We are revising our revenue range to $3.9 million to $3.95 billion, which reflects approximately $140 million in revenue deferral from 2021 to 2022 due to the current supply chain challenges.
Accordingly, we are revising our adjusted EBITDA outlook by approximately $40 million to a range of $415 million to $435 million taking into account the gross margin associated with the aforementioned revenue deferral and an incremental $20 million for supply chain related inflation over previous estimates.
The total estimated impact on supply chain related inflation is now approximately $45 million.
Our free cash flow outlook is now $80 million to $100 million, reflecting our revised EBITDA outlook and the net incremental working capital timing impact of the revenue deferred.
I will now hand the call back to the operator for the Q&A session. | sees 2021 total revenue $4.0b - $4.1b. | 0 |
First, I'd like for Brian to give the safe harbor statement.
Next, I will have some preliminary comments on our quarter results, and then Brian will review the details.
I'll end with some additional comments, and then we'll take questions.
During the course of this conference call, management may make statements that provide information other than historical information and may include projections concerning the company's future prospects, revenues, expenses and profits.
We'd refer you to our Form 10-K and other SEC filings for more information on those risks.
Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year, unless we specify otherwise.
Our first quarter results exceeded our expectations, providing an exceptional start to 2021.
Recurring revenues, which comprised 75% of our first quarter revenues, were strong, led by a 25% growth in subscription revenues.
However, software licenses and services revenues continue to be pressured by longer sales cycles and delays in projects as clients deal with the ongoing effects of the pandemic.
A favorable revenue mix with strong subscription growth, coupled with cost efficiencies, drove a 270 basis point expansion of our non-GAAP operating margin to 26.8%.
Cash flow continued to be very robust as cash from operations grew 26% and free cash flow grew almost 34%.
We're pleased to see signs of growing activity in our public sector markets and expect that federal stimulus under the American Rescue Plan Act will have a positive impact on government technology spending going forward.
Bookings in the first quarter were solid at approximately $247 million, but were down 22.8% against a very challenging comparison with the first quarter of 2020.
Our largest deal in the quarter was a SaaS arrangement for our Munis ERP solution with the City of Fresno, California valued at approximately $10 million.
Other significant SaaS contracts included ERP deals with Hall County, Georgia and Fort Smith, Arkansas and Odyssey Courts deal with Val Verde County, Texas.
Our largest on-premises contracts include an ExecuTime time contract with the U.S. Virgin Islands, public safety and Brazos citations contracts with Montgomery County, New York and Cicero, Illinois and an EnerGov contract with the Commonwealth of the Bahamas.
So far this year, we've been busy on the M&A front.
On March 31, we completed two tuck-in acquisitions, DataSpec and ReadySub, for a total purchase price of $12 million in cash.
DataSpec is a market-leading provider of software for the electronic management of veterans claims.
DataSpec's web-based Software-as-a-Service system called VetraSpec allows for secure electronic claims submission to the Federal Department of Veterans Affairs and reporting capabilities in addition to scheduling, calendaring and payments.
DataSpec offers county, state and national versions of VetraSpec, with state solutions making a majority of its implementations.
The solution allows state departments to execute and analyze reports on the entire state, individual offices, regions and districts and individual users.
ReadySub is a cloud-based platform that delivers comprehensive absence and substitute teacher management solutions, serving approximately 1,000 school districts across the United States, with only approximately 20 of which overlapping with Tyler's 2,000 school district clients.
The solution helps districts with the labor-intensive and demanding task of filling both planned and unplanned staff absences with the most highly qualified substitute resources.
With continuous pressure due to substitute teacher shortages, exacerbated by the COVID-19 pandemic, districts can more easily retain a pool of qualified substitutes and automate the searching and filing of needed substitute spots.
Additionally, ReadySub can integrate districts' payroll processes, eliminating duplicate work and streamlining related payroll tasks.
Most importantly, last week, we completed the $2.3 billion cash acquisition of NIC, a leading digital government solutions and payments company that serves more than 7,100 federal, state and local government agencies across the nation.
NIC delivers user-friendly digital services that make it easier and more efficient for citizens and businesses to interact with government, providing valuable conveniences like applying for unemployment insurance, submitting business filings, renewing licenses, accessing information and making secure payments without visiting a government office.
In addition, NIC has extensive experience and expertise and scale in the government payments area, processing more than $24 billion in payments on behalf of citizens and governments last year, which will accelerate Tyler's strategic payments initiative.
With the addition of NIC's highly complementary industry-leading digital government solutions and payment services to Tyler's broad client base and multiple sales channels, the combined company will be well equipped to address the tremendous demand at the federal, state and local levels for innovative platform services.
Together, Tyler and NIC will connect data and processes across disparate systems and deliver essential products and services to all public sector stakeholders.
NIC had revenues of $460.5 million and net income of $68.6 million in 2020.
NIC's core first quarter revenues, excluding the TourHealth and COVID initiatives that are expected to wind down after the second quarter, grew more than 10% over last year.
In addition, NIC's operating income, again excluding the TourHealth and COVID initiatives as well as acquisition costs, rose more than 20%.
Now I'd like for Brian to provide more detail on the results for the quarter.
Yesterday, Tyler Technologies reported its results for the first quarter ended March 31, 2021.
Both GAAP and non-GAAP revenues for the quarter were $294.8 million, up 6.6% on a GAAP basis and 6.5% on a non-GAAP basis.
As you may recall, we were off to a very strong start in the first two months of 2020 before the COVID-19 pandemic began to significantly affect our business in March.
So we're generally pleased with our growth this quarter against that comparison.
Software license revenues declined 20.3%, reflecting both extended sales cycles and a high mix of subscription deals at 66% of new software contract value.
Software services revenue declined 8.6% as a result of the continued impact of the COVID-19 pandemic, and our shift to remote delivery of most services resulted in a decline in billable travel revenue.
On the positive side, subscription revenues rose 25.4%.
We added 84 new subscription-based arrangements and converted 39 existing on-premises clients, representing approximately $52 million in total contract value.
In Q1 of last year, we added 131 new subscription-based arrangements and had 19 on-premises conversions, representing approximately $98 million in total contract value.
Subscription contract value comprised approximately 66% of total new software contract value signed this quarter, compared to 73% in Q1 of last year.
The value weighted average term of new SaaS contracts this quarter was 4.0 years, compared to 5.9 years last year.
Revenues from e-filing and online payments, which are included in subscriptions, were $26.9 million, up 22.4%.
That amount includes e-filing revenue of $15.6 million, up 4.8%, and e-payments revenue of $11.3 million, up 59.3%.
For the first quarter, our annualized non-GAAP total recurring revenue, or ARR, was approximately $886 million, up 12.9%.
Non-GAAP ARR for SaaS arrangements for Q1 was approximately $302 million, up 26.3%.
Transaction-based ARR was approximately $108 million, up 22.4%, and non-GAAP maintenance ARR was approximately $476 million, up 4.1%.
Our backlog at the end of the quarter was $1.55 billion, up 3%.
As Lynn noted, our bookings in the quarter were solid at $247 million.
However, this was down 22.8% compared to a difficult comparison to Q1 of last year.
Last year's first quarter bookings included several large contracts, including two significant follow-on SaaS deals with the North Carolina courts, with a combined contract value of approximately $38 million.
For the trailing 12 months, bookings were approximately $1.2 billion, down 13.3%, although they do not include the majority of the $98 million extension of our Texas e-filing contract signed in Q4 of 2020 because of certain termination provisions in that contract.
If the Texas e-filing renewal was fully included, trailing 12-month bookings would have been down only 6.4%.
The prior trailing 12-month bookings also included four significant SaaS deals with the North Carolina courts, with a combined contract value of approximately $123 million.
The bookings growth rate in Q1 was also affected by a shorter average term for new subscription contracts.
Our subscription -- software subscription booking in the first quarter added $10.2 million in new annual recurring revenue.
Cash flow was once again very strong in the first quarter as cash from operations increased 26.4% to $71.7 million and free cash flow grew 33.9% to $61.7 million, representing an all-time high for first quarter free cash flow.
We financed the NIC acquisition with a mixture of debt at very attractive rates that gives us a flexible capital structure.
In March, we completed a $600 million offering of 0.25% convertible senior notes due 2026.
The notes are convertible into Tyler common stock at a conversion price of $493.44, which represents a 30% premium over our closing price on March 4.
On April 21, concurrent with the closing of the NIC acquisition, we entered into a new $1.4 billion senior unsecured credit facility with a group of eight banks.
The facility includes a $300 million term note due in 2024 and a $600 million term note due in 2026, both of which can be prepaid without penalty.
The facility also includes a new five-year $500 million revolving credit agreement that replaces our prior $400 million revolver.
The combination of the convertible debt, term notes and revolver provide us with a great deal of flexibility.
Our balance sheet remains very strong and its pro forma net leverage at the NIC closing was approximately 3.2 times trailing 12-month adjusted EBITDA.
And we expect to end the year with net leverage under 2.5 times.
The current blended interest rate on the $1.75 billion of debt we have outstanding today is 1.1%.
We remain on track to achieve or exceed the annual revenue and earnings per share guidance that we communicated in February for Tyler, excluding the impact of the NIC acquisition.
As Lynn mentioned, NIC also had a very strong first quarter results that exceeded their plans.
We expect the NIC acquisition will be accretive to our non-GAAP earnings and EBITDA as well as to our recurring revenue mix and free cash flow per share in 2021.
Because of antitrust restrictions, we took a conservative approach to our integration and strategic planning for NIC prior to closing the transaction last week.
We are currently working closely with NIC's leadership to evaluate strategic growth opportunities that take advantage of the combined strength of the two businesses and determine the impact on our 2021 plan.
We expect to complete the fine-tuning of our joint operating and financial plans for the remainder of the year and issue 2021 guidance for the combined company during the second quarter.
Our team of professionals, including our new NIC team members, executed at a high level in the first quarter, driving results that surpassed expectations for both Tyler and NIC and provided a great start to 2021.
Exiting 2020, our financial position was stronger than ever, allowing us to continue to pursue strategic acquisitions, including NIC, the largest acquisition in our history with a purchase price of $2.3 billion in cash.
We've also been able to continue to invest in and, in some cases, accelerate all of our long-term strategic initiatives, in particular, our shift to a cloud-first approach.
As a result, our competitive position has also continued to strengthen.
We believe we will continue to see an acceleration of the public sector's move to the cloud, and we are in a great position to support that move.
I'm happy to say that we are on track with the strategic investments in optimizing our products for the cloud that we discussed on our fourth quarter call.
This quarter, we saw early indicators that our market is beginning to recover as some delayed procurement processes are moving forward and RFP activity is growing from the levels of the second half of 2020.
We also expect that the $350 billion of aid to state and local governments under the American Rescue Plan Act will provide a significant measure of relief to budget pressures faced by many of our clients and prospects and have a positive impact on recovery of our markets.
One topic I've not discussed on these calls before pertains to our efforts regarding environmental and social initiatives.
Tyler's culture guides our commitment to being a responsible partner in the communities where we live, work and serve our clients.
This year marks the 50th anniversary of the Tyler Foundation, which since its creation has provided millions of dollars to charities and causes that positively impact our communities.
Our culture is also the foundation for our belief in the importance of providing an inclusive and diverse workplace.
We are proud to have been included in the Forbes America's Best Employers for Diversity List for the past two consecutive years.
The pause in normal office occupancy and business travel due to the pandemic provided an opportunity for us to evaluate our environmental impact across our major office locations and identify opportunities to make our practices more consistent and effective.
Last year, we formed an environmental task force to strengthen our sustainability efforts across our office locations and the communities we impact.
We achieved a significant milestone last year by responding to Tyler's first invitation to the Dow Jones Sustainability Index survey.
More than 3,500 of the world's largest publicly listed companies provide detailed data and background to this global survey for evaluation by its independent sustainability ranking body.
Completing the survey was an important opportunity for Tyler to uncover opportunities to strengthen our core responsibility strategy.
We recently published our second annual corporate responsibility report, which is available on our website.
This report represents a significant expansion of our reporting on our ESG efforts, and we look forward to continuing our journey and sharing our progress in this area.
Finally, this week, we are virtually hosting more than 5,000 clients at Connect 2021, our annual user conference with a theme called Virtually Possible.
Team members from across Tyler are providing nearly 700 hours of valuable content for our clients using our advanced virtual event platform.
We are excited to be able to connect with so many clients at our virtual event, and we look forward to connecting with them in person at Connect 2022.
With that, we'd like to open up the line for Q&A. | compname reports q3 adjusted earnings per share $0.85 from continuing operations.
q3 adjusted non-gaap earnings per share $0.85 from continuing operations.
q3 earnings per share $0.82 from continuing operations.
textron aviation backlog at end of q3 was $3.5 billion.
bell backlog at end of q3 was $4.1 billion. | 0 |
Kevin Blair, president and chief executive officer, will begin the call.
We ask that you limit yourself to one question and one follow-up.
During the call, we will reference non-GAAP financial measures related to the company's performance.
And now Kevin Blair will provide an overview of the quarter.
Our team delivered another solid quarter with growth in revenue and earning assets while maintaining an expense discipline that resulted in year over year quarterly expenses declining 5%.
Additionally, we continue to see an improving credit outlook that produced a release in allowance.
Finally, we continue to successfully deliver on our Synovus Forward initiatives and investments with the $75 million in pre-tax run rate benefit achieved through the second quarter and an additional $100 million in pre-tax run rate benefits to come by year-end 2022.
Before I proceed, let me take a second to remind you of our performance to date as it compared to our expectations at the beginning of the year.
We shared with you that we would deliver loan growth, excluding PPP and ramp it up in the second half of the year.
We also said we would improve the deposit mix and lower our cost of funds to stabilize the margin.
Also, we would drive efficiency initiatives that will assist in returning to positive operating leverage while continuing to manage effectively through the uncertain credit environment and produce the planned benefits from Synovus Forward.
I'm pleased to share with you today that we are delivering on those objectives, and we concluded the first half of 2021 with considerable momentum and are optimistic about the prospects for growth and expansion moving forward.
Our commercial loan pipelines are back to pre-pandemic levels with continued growth in C&I outstandings and commitments and line utilization actually increased slightly during the quarter.
Client liquidity remains strong, which has allowed us to further optimize our deposit mix and reduce our cost of funds again this quarter.
We expect this trend to continue in this low rate environment.
Our Wealth and Treasury and Payment Solutions businesses are performing at a high level.
Continued growth and operating margin expansion in these fee income-generating business units will help to offset the industrywide reduction in mortgage activity.
Criticized and classified loans declined for the quarter, another proof point that the elevated credit concerns raised by the pandemic continue to abate and signal the opportunity to continue to move the allowance over time back down toward day one CECL levels.
And during the first half of the year, we continued to invest in the future of Synovus.
Key priorities to enhance the customer experience and deliver new sources of growth.
A couple of examples of this include: our Treasury and Payment Solutions business launched a new suite of integrated receivable solutions called Synovus Accelerate AR.
This solution has been well received, and the sales pipeline has already begun to fill which will create a new source of revenue while significantly benefiting our customers by saving them time and money.
We also have migrated approximately 25,000 business clients to Synovus Gateway, our new digital platform for business and commercial banking.
With expanded functionality and capabilities, we are making it easier for our customers to do business and promoting higher levels of business retention.
Lastly, our smart analytics tool, which we've shared previously, has been further rolled out across our bankers and our markets, and is beginning to have an impact on increasing pipelines and opportunities to expand the share of wallet from our customers.
We are also reminded during the second quarter that our focus on delivering a personalized and value-added customer experience matters and will continue to provide a foundation for future growth.
Industrywide consumer satisfaction surveys, again show that our clients are more satisfied and loyal than those of our competitors.
And we also received two awards of excellence for our family office during the quarter.
These scores and accolades are not success in and of themselves, but rather affirmation that our efforts and our approaches are having meaningful impacts for our customers.
For all of these reasons, as well as the vibrant economic expansion that we expect to continue in the Southeast, we remain confident in our path forward.
Moving to Slide 3, which includes our financial highlights for the quarter.
Total adjusted revenue of $489 million, adjusted expenses of $268 million and a $25 million reversal of provision for credit losses resulted in adjusted net income of $179 million or $1.20 diluted earnings per share.
Without adjustments, net income was $178 million or $1.19 diluted earnings per share.
Pretax run rate benefits from Synovus Forward of $75 million have increased by $25 million from the first-quarter results.
Our work on completed and future initiatives continues to give us confidence in our ability to achieve an aggregate pre-tax run rate benefit of $100 million by year-end 2021 and $175 million by the end of '22.
Total loans, excluding P3 loans, were up $194 million in the second quarter.
Growth in the quarter was delivered in our core C&I portfolio, as well as third-party consumer lending, given the continued high liquidity environment.
Despite solid production levels, elevated prepayment activity remains a headwind in our commercial and consumer real estate portfolios.
Core transaction deposits increased $702 million or 2%, led by core noninterest-bearing deposits growth of $601 million or 4%.
With the current loan-to-deposit ratio, we continue to remix the deposit base strategically reducing higher cost categories, including CDs and broker deposits.
Key credit metrics were stable with the NPA ratio declining by 4 basis points to 46 basis points, and the ACL coverage remains strong.
A more favorable economic outlook and a 14% reduction in criticized and classified loans supported further allowance releases.
The ACL ratio, excluding P3 loans, declined 15 basis points to 1.54%.
We remain well capitalized with the CET1 ratio increasing to 9.8%, while completing nearly half of our $200 million share authorization in the quarter.
We also executed on additional earning asset growth activities to monetize excess liquidity while keeping capital above our operating target.
As shown on Slide 4, we ended the quarter with earning assets of $51 billion.
Total loans declined $569 million, led by P3 balance declines of $763 million.
While gross production levels continue to improve, the liquidity environment continues to result in downward pressure on loan demand.
While our customers are utilizing less of their line commitments, we are continuing to grow overall commitments to new client relationships and deeper existing relationships.
The annualized growth rate and total commitments over the past two years is more than 3% compared to an annualized increase in funded loan balances of approximately 1%.
A material portion of that growth will translate into funded balances once C&I line utilization begins to normalize closer to the long-term average of 46 to 47%.
Based on market intelligence and conversations with our clients, we believe increases in line utilization will occur later in the cycle as client liquidity subsides.
Our base assumption included in our loan growth guidance is that line utilization will remain near current levels through year-end.
While commitment growth will support longer-term loan growth, our confidence in the forecast for the near term is based on continued strong production, growth in the commercial loan pipeline and our expectation that the elevated level of payoffs and paydowns will abate.
Another factor that gives us confidence in loan growth is more recent monthly data.
In June, total loans, excluding changes in P3 balances grew by approximately $200 million.
In the second quarter, further declines in consumer mortgage and HELOC portfolios of $98 million and $74 million, respectively, continued to be impacted by accelerated prepayment activity and excess liquidity.
CRE loan declines of $173 million this quarter largely resulted from accelerated payoffs as many owners are selling with the expectation that capital gains taxes will increase in 2022.
C&I balances, excluding changes in P3, increased $220 million with $469 million in commitment growth while C&I line utilization remained near historic lows.
As a reminder, a normalization in C&I line utilization would result in more than $700 million in funded balances.
We had approximately $150 million in fundings of round two P3 loans, net of unearned fees, which partially offset forgiveness of $927 million.
Total P3 balances ended the quarter at $1.6 billion.
There's more detail related to P3 loan activity in the appendix.
Lastly, as a function of this liquidity environment, we increased the securities portfolio about $616 million and third-party consumer portfolio about $273 million.
The risk profile of asset acquisitions was largely consistent with those completed in the first quarter with emphasis in mortgage-backed securities and secured third-party consumer loans.
Investment securities accounted for 17% of total assets at the end of the quarter and could increase further as we look for opportunistic deployments of liquidity in the second half of 2021.
As shown on Slide 5, we continue to grow core transaction deposits, which increased $702 million, or 2% from the prior quarter.
This was led by core noninterest-bearing deposit growth of $601 million or 4%, which offset strategic declines in higher cost deposits.
We continue to have success reducing our total deposit costs in the second quarter with a reduction of 6 basis points from 22 basis points to 16 basis points.
This was driven by a combination of deposit mix optimization with a continued focus on strategic reductions in high-cost time deposits, as well as a reduction in the expense associated with interest-bearing deposits.
While the pace of CD maturities will slow significantly, there are opportunities to further improve the deposit mix and reduce rates paid on other interest-bearing deposits as we progress through the second half of 2021.
For the month of June, total deposit costs were 15 basis points, and we expect further reductions in total deposit costs this year.
Slide 6 shows net interest income of $382 million, an increase of $8 million from the prior quarter.
NII increased as benefits from asset growth, reduced deposit costs and day count more than offset the reduction in P3 fee income.
The net interest margin of 3.02%, a decline of 2 basis points was primarily impacted by P3 forgiveness as P3 fee accretion decreased $5 million from the prior quarter.
Other dynamics are similar to recent quarters as the headwind from asset repricing is being offset by further reductions in liability costs.
As expected, slower prepayment activity in the latter part of the quarter helped to improve the yield on the securities portfolio, supporting both margin and NII.
Based on current mortgage trends, we'd expect modest further improvement in that yield in the third quarter as the impact of a full quarter of more normalized prepay activity is realized.
Deceleration of prepayment activity resulted in a $3 million reduction of premium amortization in the second quarter, down from $20 million in the first quarter.
In terms of asset sensitivity, we remain positively exposed to potential increases in interest rates.
That dynamic continues to be supported by the aforementioned shifts in our balance sheet, including funding mix, with the estimated exposure being split between both short-term and long-term rates.
As of June 30th, our loan portfolio is 54% variable and approximately 30% of those variable rate loans have floors at or above short-term index rates of 25 basis points.
Based on current market conditions and our expectations for loan growth, we reiterate our expectation that quarterly net interest income, excluding P3 fee accretion, should increase in the second half of the year driven by loan growth, deployment of liquidity, a deceleration of prepayments and further deposit cost reductions.
Using the quarter-end forward curve and absent rate hikes, we expect a NIM of approximately 3%, excluding the impact of P3, with headwinds from the lapse of P3 fee accretion being offset by the continued deployment of excess liquidity and with notable upside coming from increases in either short-term or long-term interest rates.
As we've shared previously, we estimate NIM dilution of approximately 6 basis points per $1 billion of excess cash on deposit at the Federal Reserve.
Slide 7 shows a total adjusted noninterest revenue of $106 million, down $6 million from the previous quarter.
Embedded in the continued strength in fee revenue is diversified growth across our fee revenue sources, partially offsetting the continued normalization of the mortgage business from all-time high levels of production.
Core banking fees were $41 million, up $3 million.
Increases were broad-based, led by $1 million increases in account analysis fees that benefit from our treasury and payment solutions team and our recently in-sourced merchant business.
NSF, or overdraft fees, which have received a lot of attention throughout the industry, were flat at $6 million, accounting for less than 6% of noninterest revenue and 1.3% of total revenues.
Net mortgage revenue declined $8 million in the second quarter to $14 million due to reductions in secondary production and gain on sale.
This remains above pre-pandemic levels, and we expect continued normalization in the second half of 2021.
Increases in fiduciary revenues of $3 million helped offset decreases in other areas, including capital markets income.
Assets under management grew 3% in the quarter and 28% from the previous year.
The build-out of wealth management and other fiduciary services, particularly in South Florida, will continue to provide meaningful growth opportunities.
Total noninterest expense of $271 million is highlighted on Slide 8.
Adjusted noninterest expense was $268 million up $2 million from the prior quarter and down $6 million from the prior year.
Adjusted items include the impact of an earn-out liability, nonqualified deferred compensation and restructuring fees primarily related to branch closures.
Employment expense of $159 million was down $1 million from the prior quarter as seasonal decreases in payroll taxes was partially offset by an increase in pay days, as well as commissions and other variable compensation.
Expenses of $42 million associated with occupancy, equipment and software increased $1 million from the previous quarter, largely due to an increase in the repairs and maintenance.
As Kevin will touch on later, we continue to evaluate and optimize our branch and non-branch real estate for additional efficiency opportunities.
Other expenses of $67 million were up $3 million primarily due to the $4 million increase in third-party processing fees associated with the expenses from additional P3 forgiveness and third-party consumer loans.
Our commitment to prudent expense management and profitable growth allows us to continue to invest in strategically compelling high-return growth vectors.
We have reduced our head count 6% year over year, approximately 85% of which was on the support side.
This reduction in headcount is a key priority in our expense management efforts, However, there are some offsetting costs as we promote team members who are taking on more responsibility and continue to hire customer-facing team members.
Our expectations for expenses and benefits from Synovus Forward remain unchanged.
Slide 9 highlights stable credit metrics, which remain near historical lows.
We continue to see improvement in the overall economic outlook, which is reflected in the reversal of provision for credit losses of $25 million and a 14% reduction in criticized and classified loans.
Support for the ratings improvements comes from client conversations and cash inflows.
As shown in the appendix, cash inflows from March to May are each up more than 10% compared to the same period from 2019, which we use as a pre-pandemic baseline.
The annualized net charge-off ratio for the quarter was 0.28%.
We expect net charge-offs to remain relatively stable in the second half of the 2021, assuming no material change in the economic outlook.
During the second quarter, the NPA ratio declined 4 basis points to 46 basis points.
Criticized and classified loans fell 14%, and we expect further reductions as we progress through the rest of the year.
The ACL ratio of 1.54%, excluding P3 loans, was down 15 basis points from the prior quarter and 27 basis points from the end of the year.
We continue to use a multi-scenario framework in our CECL modeling and a sign of 40% weighting to adverse scenarios, 55% weighting to the base scenario and 5% weighting to an upside scenario.
As noted on Slide 10, the CET1 ratio increased 1 basis point to 9.75% as a result of strong performance.
The building capital was deployed via risk-weighted asset growth, share repurchases and our common equity dividend.
In the second quarter, we repurchased $92 million of the $200 million share repurchase authorization in place for 2021, which resulted in a 1.3% reduction of average diluted outstanding shares.
We have completed approximately $15 million of additional repurchase activity in July.
Based on current conditions and economic outlook, we expect to complete the full authorization in the second half of the year.
We will continue to opportunistically deploy capital on our balance sheet and to our shareholders as we remain above our 9.5% operating target for CET1.
We remain well positioned to complete our key strategic objectives including profitable growth with the highest priority being multi-solution relationships.
At the beginning of 2020, we laid out our Synovus Forward plan to deliver significant upside in earnings power through a set of strategic actions to enhance our efficiency and accelerate top line growth.
The Synovus Forward initiatives are aligned with our strategy of building a high-growth, low-risk, nimble bank that can continue to take market share in our attractive southeastern markets.
As I highlighted earlier, throughout the second quarter, we have continued to add to our Synovus Forward pre-tax run rate benefits, now totaling approximately $75 million.
As you can see on Slide 11, we have delivered these results through a combination of expense and revenue initiatives.
Based upon our progress to date, as well as the ongoing plan and execution, we remain confident in achieving the 2021 and 2022 milestones of $100 million and $175 million, respectively.
Success to date on the expense front has largely come from three primary areas: a reduction in third-party spend, a decrease in head count, as well as branch and corporate real estate consolidation.
Approximately $50 million of the $75 million pre-tax run rate benefit we have achieved by the end of the quarter relates to these specific efficiency initiatives.
We have plans to increase the savings in each of these categories, but also are adding new initiatives and areas of focus to achieve an incremental 30 to $40 million in pre-tax benefits by the end of 2022.
Additional third-party savings, workforce optimization, a reduction in branch and non-branch square footage, process automation and additional tax strategies will all contribute to drive future efficiencies.
We have also had success to date on the revenue side of Synovus Forward with $25 million in pre-tax run rate benefits.
The Treasury and Payment Solutions pricing-for-value initiative has resulted in annualized pre-tax run rate benefits of approximately $12 million in the second quarter.
The realization of a broad-based increase in pricing has been supported by the competitive landscape, enhancements to our products and services and a commitment to providing proactive needs-based advice.
In addition, with the deployment of a new pricing tool and the continued low rate environment, we have also been able to reduce our cost of funds to levels lower than was originally expected, and we now have a more robust capability and tool to better manage customer rate elasticity as we move into a higher rate environment in the future.
Additional areas where we have seen incremental revenue include the in-sourcing of our merchant business, and expansion of our merchant sponsorship business and expanded solutions such as trade finance and international payment and currency capabilities.
As we turn to future plans and initiatives, the 60 to $70 million in expected pre-tax revenue benefits will largely be accomplished through analytics, new products and solutions, balance sheet management strategies, as well as ongoing talent and specialty team expansion.
As it relates to analytics, we continue to make progress on our aforementioned commercial analytics pilot, which we refer to as the SMART tool.
The feedback and utilization thus far are encouraging as our bankers are working to actionable leads and insights that are now translating into new sales and overall expansion of the share of wallet of our existing clients.
We will continue to pilot in the third quarter with a companywide rollout in the fourth.
In addition, we have begun to develop our retail analytics program, which will also have a meaningful impact in our ability to deepen the share of wallet of our consumer and wealth customers while reducing the overall levels of attrition.
We are expanding our premium finance and specialty lending businesses, adding strong new teams and highly attractive specialized verticals, as well as launching targeted, innovative products and capabilities to serve as new sources of revenue growth.
As I have noted in the past, Synovus Forward is a constant improvement mindset, not just a collection of initiatives.
I am pleased with our team members focused on the art of possible as we continue to innovate and find new ways to become more efficient and drive new sources of revenue.
And I would be remiss if I didn't end this slide with an update on technology in general.
We clearly feel that our competitive advantage will come from our high-touch approach, complementing our high-tech investments and partnerships.
We continue to make progress in enhancing both the consumer and the commercial client digital experience.
We are partnering with the right fintechs to build and deliver new products and solutions, and we have a road map to move to a modern core over time in a segmented and controlled fashion.
We will continue to focus on ways to increase online origination capabilities and evaluate new technological opportunities, especially in the payment and banking as a service areas.
Moving to Slide 12.
This includes our 2021 outlook, which have a few key changes.
With the first half of the year behind us and greater certainty in the economic outlook, we'd like to provide some updates and additional clarity.
I'll begin with loan growth.
We still expect to be within our 2 to 4% loan growth guidance excluding P3 loans, and third-party consumer loans.
However, we think it's likely that we're at the low end of this range due primarily to the elevated prepayment activity that we have seen to date that was not anticipated at the beginning of the year.
This assumes line utilization remains at current low levels and prepayment activity returns to a more normalized level.
As a reminder, we do not include third-party consumer loans in this guidance.
This asset class represents $1.5 billion in period-end balances, up $776 million in 2021.
Pre-pandemic, this portfolio was approximately $2 billion in held for investment outstandings.
Over the past five-plus years, we have had a successful track record with originating and managing these credits providing incremental revenue and solid returns.
We will continue to employ this strategy as long as the excess liquidity environment persists, as well as the relative returns of future purchases are constructive.
We're raising our expectation for total adjusted revenue and total adjusted expense.
As a reminder, it's appropriate to consider these together because areas that are providing additional revenue, including mortgage production and higher third-party consumer balances have associated expenses related to them, and these examples commission and servicing expense.
And while we remain committed to taking advantage of growth opportunities in the Southeast.
We also remain committed to achieving positive operating leverage, and that is one of our top priorities for 2021.
We are not incorporating any significant change in interest rates as part of the updated guidance.
Although it's important to note the increased asset sensitivity Jamie referenced earlier, as any increase in rate will provide a meaningful tailwind to NII.
Our capital management target now includes a CET1 ratio greater or equal to 9.5% target.
A continuation of strong operating performance and a stable economic outlook is likely to result in a CET1 ratio above 9.5%, even after completing the entire $200 million share repurchase authorization for the current year.
Additional focus and execution related to various tax strategies are expected to result in an effective tax rate of 22 to 24%.
Year-to-date, the ETR is 22% or 23% before discrete items.
The actions we've mentioned throughout today's call further position us for success in the second half of the year but also long-term success.
It's important to note that the efforts and continued investment in Synovus strengthens our currency and provides opportunities for strategic growth, both organic and inorganic.
We're looking forward to the second half of 2021, and I feel an increased level of excitement from our entire team as we roll out our future of work operating environment this quarter.
Our balance sheet is well positioned for growth with strong capital and liquidity.
Our team members are delivering, and they're very passionate about winning.
And our pipeline show that clients are poised to grow their business with Synovus as their partner. | q2 adjusted earnings per share $1.20.
q2 earnings per share $1.19. | 1 |
This is Sonic Automotive.
That was very choppy from our perspective.
I want to be sure that the listeners can hear.
That must a bad connection.
I'm David Smith, the Company's CEO.
Joining me on the call today is our President, Mr. Jeff Dyke; our CFO, Mr. Heath Byrd; our Executive Vice President of Operations, Mr. Tim Keen; our Chief Digital Retail Officer, Mr. Steve Wittman; and our Vice President of Investor Relations, Danny Wieland.
During the first quarter of 2021, we continue to build on our strong momentum coming off record adjusted earnings in 2020.
We generated record first quarter total revenues of $2.8 billion, up 21% on a year-over-year basis and record first quarter earnings per share of $1.23 per share, tripling our adjusted earnings per share of $0.40 per share in the first quarter of last year.
These results were driven by strong performance in our franchise dealerships, and another all-time record quarter for our EchoPark business, reflecting increasing consumer demand and continued execution by our team.
I'm pleased to report positive trends in the first quarter have continued into the second quarter, and we continue to see strength in all facets of our business.
We remain extremely confident in our long-term growth targets based on our current results and near-term outlook and the increasing number of Americans that are receiving vaccinations and beginning a return toward normalcy.
Given these trends in our progress to date, we are confident we can attain our goal of more than doubling total revenues to $25 billion by 2025.
And significantly increasing profitability going forward.
In our core franchise dealership segment, first quarter revenues were $2.3 billion, a 15% increase from last year.
Total franchise pre-tax income was $70.5 million, an increase of $47.9 million or 211% compared to last year.
On a two-year comparison compared to the first quarter of 2019, same-store franchise dealership revenues increased 14% and pre-tax income increased by $49.8 million, which is a 240% increase, reflecting the impact of our lower expense structure as a result of strategic actions that was taken last year.
Turning now to EchoPark.
We continue to experience rapid growth during the first quarter, achieving all time record quarterly revenues of $507 million, which is up 53% compared to the same period last year.
We also achieved record quarterly retail sales volume of nearly 19,700 units, which is up 41% year-over-year and ahead of 18,000 to 19,000 units we guided to on our February call.
In addition to top line growth, we have to -- build of our EchoPark model that currently use vehicle pricing environment during the total gross profit per unit of $2,339 and above our target of $2,150.
Our first active part delivery center in Greenville, South Carolina continues to outperform our model selling 160 vehicles in March at nearly $1,750 in total gross profit per unit.
Generally $100,000 and store level profit for the month.
Our outlook in the EchoPark stores and delivery centers also continue to ramp aggressively.
With our Phoenix hub selling 228 vehicles in its full month in March, driving $125,000 of store level profit.
The unit ratio of December's used car acquisition is already ramping up nicely selling 300 plus in total gross profit per unit.
And we continue to apply our learnings to each new EchoPark store we opened or acquired.
And results are proving the scalability and momentum of the EchoPark model.
We believe these results showcase the flexibility, value proposition and consumer demand or EchoPark's unique pre-owned vehicle shopping concept as more guests choose to visit our stores and or shop echopark.com for the incredible inventory selection on diesel pricing and a unique guest experience that we offer.
As an update on our expansion of EchoPark's nationwide distribution network and omnichannel retailing platform, we opened five new locations in the first quarter.
In April, we opened our latest retail hub in Birmingham, Alabama and our third delivery center in Charleston, South Carolina.
We remain committed to opening 25 new EchoPark locations in 2021 and we're on track for our 140 plus point nationwide distribution network by 2025, which we expect to retail over 0.5 million pre-owned vehicles annually by that time.
With our progress to-date and the continuing development of our omnichannel retailing platform, we are confident that we can reach $14 billion in EchoPark revenue by 2025.
It's important to recall that Sonic actually grew earnings per share in the first quarter of last year compared to 2019 due to the strength of our January and February results despite the initial impact of the pandemic in March of 2020.
Since that time, we have substantially improved our expense structure, which was reflected in the current quarter's profitability and operating margins and our expectations for the remainder of 2021 and beyond.
In the first quarter of 2021, total SG&A expenses as a percentage of gross profit were 72.2% representing a 830 basis point improvement compared to the first quarter of last year and 790 basis points better than the first quarter of 2019 which in dollar terms, while same store franchise gross profit increased 34.5 [Phonetic] last year, same-store franchise SG&A expenses decreased $7.5 million, demonstrating the permanent expense reductions we had previously [Technical Issues].
Turning now to our balance sheet, we ended the first quarter with $435 million in available liquidity and set an all time high liquidity mark in April at $570 million which included over $300 million in cash on hand.
More recently, the Company closed a new four-year $1.8 billion credit facility.
The credit facility was substantially oversubscribed with strong support from both new and incumbent financial partners.
We are very pleased with this transaction which has extended our debt maturities, improved our borrowing costs and raised our total available liquidity and fore-playing capacity to facilitate our growth plans.
Reflecting our current business momentum, expansion of liquidity resources, I'm very pleased to report that our Board of Directors recently approved 20% increase to the Company's quarterly cash dividend to $0.12 per share payable on July 15, 2021 to all shareholders of record on June 15, 2021.
Additionally, the Board increased our share repurchase authorization by $250 million, bringing our total remaining authorization to $277 million.
In summary, our record first quarter performance reflects steadily increasing automotive retail demand as well as constantly improving operating conditions.
EchoPark has rapidly become one of the leading success stories in the pre-owned automotive retail industry, and we look forward to continuing its rapid expansion in 2021.
We expect to see continued strong demand for both new and pre-owned vehicles in the near term, which should drive further growth for our franchise dealerships and the EchoPark brand.
At the same time, our efficiency improvements have enabled us and had enabled us to operate in a much leaner more profitable manner.
Despite the challenges we all faced in the last year during this global pandemic, Sonic and EchoPark has emerged as much stronger, more efficient organization.
We are encouraged by our successes to-date and remain confident in our long-term strategic plans. | q2 non-gaap earnings per share $2.40 from continuing operations.
sees q3 non-gaap earnings per share $1.95 to $2.05.
sees 2021 capital expenditures of $2.2 billion - $2.3 billion.
ryder system - in scs & dts, on track to meet/exceed revenue growth targets, but anticipate returns to be impacted by increased labor, insurance costs.
now expect nearly all of our leases to perform above target returns. | 0 |
Speaking today will be Jim Herbert, the bank's founder, chairman, and co-CEO; Gaye Erkan, co-CEO and president; and Mike Roffler, chief financial officer.
All are available on the bank's website.
It was another very strong quarter with robust growth in loans, deposits and wealth management assets.
Our client-centric business model is continuing to perform very well across all of our segments and all of our geographic markets.
Since 1985, First Republic's success has been grounded in colleague empowerment and a service culture of taking care of each client one at a time while operating in a very safe and sound manner.
This straightforward and personal approach has led to a very consistent organic growth for 36 years.
The growth is not predicated on mergers or acquisitions.
Let me review for a moment the results of the second quarter.
Total loans outstanding were up 18.9% year to date annualized.
Total deposits have grown 37% year over year.
Wealth management assets were up 55% year over year to a total of more than $240 billion.
This across-the-board, very organic growth drove our strong financial performance.
Total revenue year over year has grown 34% and net interest income was up 27%.
Quite importantly, tangible book value per share increased 15.5% year over year.
The safety and soundness of the First Republic franchise continues to reflect our strong credit quality.
Net charge-offs for the quarter were only $1.2 million, just a fraction of a basis point.
Nonperforming assets at quarter end were only 8 basis points of total assets.
We remain, as always, focused on capital and liquidity.
At quarter end, our Tier 1 leverage ratio was 8.05% and our HQLA was 14.3% of total average assets during the second quarter.
This included higher-than-normal cash levels.
Our clients remain very active as the reopening of our urban coastal markets takes hold.
This is particularly evident in the strong growth of single-family home loans during the quarter and so far this year.
As represented -- this growth represented a substantial portion of the quarter's total loan activities, including both purchase and refinance.
For some perspective on the long-term stability of First Republic's service model, residential loans have remained steady at approximately 60% of our loan portfolio for the entire past two decades.
This is a very safe asset class, particularly with our stringent underwriting standards and is a key to us attracting new households.
During the second quarter, we opened our first banking offices in Hudson Yards.
Clients are responding well to our presence in the area and foot traffic has been actually quite good.
Our other new markets, including Palm Beach and Jackson Wyoming, continue to perform very well.
Overall, it's been a strong and successful first half of 2021.
Before turning the call to Gaye, I would like to take a moment to congratulate her on her appointment as co-CEO.
Gaye has been an inviable contributor to our performance, and I'm really delighted to continue our successful partnership at this new level.
Working together, we intend to ensure the consistency of First Republic's culture, which is particularly important as we emerge from the pandemic.
I'm honored to be appointed co-CEO and continue to serve this truly special organization alongside you and our leadership team.
We will work hard to keep scaling our people-first culture, with an unwavering focus on safety and soundness and doing more of what we do best, delivering exceptional service to our clients.
I'm excited about opportunities ahead and look forward to continue to work with all of our extraordinary colleagues at First Republic.
Turning to our earnings results, it was a terrific quarter that reflects our continued focus on safe, sound, organic growth.
Our top priority as an organization is taking care of our exceptional colleagues and empowering them to provide unparalleled client service.
Our client satisfaction results and exceptionally low client attrition, which, in turn, fuels our growth through repeat business and client referrals.
Happy people lead to happy clients, and the more happy clients we have, the more repeat business we do and the more client referrals we get.
Each year, more than 75% of our safe organic growth comes from these sources.
Over the past several years, we have continued to make strategic investments in technology and risk infrastructure.
These investments allow us to scale our service model, while keeping our bank safe and sound.
Our digital and tech investments are geared toward minimizing transactional time to create more time to build further trust and deepen relationships with clients and to serve our communities.
Let me now provide some additional comments about the quarter.
Loan origination volume was $16.8 billion, our best quarter ever.
I would note that the weighted average loan-to-value ratio for all real estate loans originated during the second quarter remained conservative at 58%.
Single-family residential volume was $8.7 billion, also a record.
Refinance accounted for 49% of single-family residential volume during the second quarter.
A large percentage of refinance activity continues to come from clients with loans at other institutions, which provides us with great opportunities for new client acquisition.
For perspective, throughout the past 10 years across varying interest rate environments, refinance activity has always accounted for at least 40% of single-family volume.
Turning to business banking.
Business loans and line commitments, excluding PPP loans, were up 27% year over year.
Capital call outstanding balances were down quarter over quarter, driven mainly by a reduction in the utilization rate from 40% to 36%.
This is in line with our historic utilization range of mid-30s to low 40s.
In terms of funding, it was an exceptional quarter.
Total deposits were up 37% from a year ago, supported by client activity, as well as a very meaningful impact from both fiscal and monetary policy.
We continue to maintain a diversified deposit funding base.
Checking deposits increased by $5.3 billion in the second quarter and represented 68% of total deposits.
Business deposits represented 61% of total deposits, up modestly from the prior quarter.
The average rate paid on all deposits for the quarter was just 7 basis points, leading to a total funding cost of 20 basis points.
Turning to wealth management, assets under management increased to $241 billion.
This is an increase of $46 billion year to date, of which more than half was from net client inflows.
Year to date, wealth management fees were up 39% from the same period a year ago.
The strength of our integrated model continues to attract very high-quality teams.
Our second-quarter results demonstrate the power of our service model and the dedication of our exceptional colleagues.
Our strong second-quarter results reflect the consistency of our business model.
Revenue growth for the quarter was exceptional, up 34% year over year.
This was driven by strong organic growth across the franchise, including loans, deposits and wealth management assets.
Our net interest margin for the second quarter was 2.68%.
This includes the impact of our elevated cash position from fiscal and monetary policy, which has resulted in significant deposit growth.
We continue to expect our net interest margin for the full-year 2021 to be in the range of 2.65% to 2.75%.
Importantly, net interest income was up a very strong 27.5% year over year.
This is due to the robust growth in earning assets and a stable net interest margin.
We are pleased with our efficiency ratio, which was 62% for the second quarter.
Our expense growth remains proportionate to our revenue growth as we continue to invest in the franchise to deliver outstanding client service.
I would note that our 2020 Net Promoter Score actually increased from the prior year.
We continue to expect our efficiency ratio for the full-year 2021 to be in the range of 62% to 64%.
Let me talk for a moment about CECL, which has been in place for six quarters now.
CECL's formulaic guidelines take into account our loan growth, loan mix and historic credit performance.
In accordance with CECL, our provision for credit loss during the quarter was $16 million, reflecting our continued loan growth.
Since CECL became effective at the start of 2020, we have added $160 million to our reserves, while only experiencing $4 million of losses.
Turning to the tax rate.
Our effective tax rate for the second quarter was 17.4%.
The decline in the tax rate from the prior quarter was due to increased tax benefits resulting from stock awards vesting during the second quarter.
These tax benefits added $0.11 to earnings per share in the second quarter.
This compares to $0.03 in the same quarter last year.
Under current tax law, we continue to expect our tax rate for the full-year 2021 to be in the range of 20% to 21%.
Overall, this was a great quarter in the first half of the year.
Our time-tested quite straightforward business model remains very focused on delivering the highest possible level of client service, doing only what we do best and operating very safely and soundly.
And it continues to work quite well.
Now we'd be delighted to take any questions. | q2 revenue $1.2 billion versus refinitiv ibes estimate of $1.18 billion.
net interest income $1.0 billion for quarter, up 27.5% compared to q2 a year ago. | 1 |
The Everest executives leading today's call are Dom Addesso, President and Chief Executive Officer; Juan Andrade, Chief Operating Officer; Craig Howie, EVP and Chief Financial Officer; John Doucette, EVP and President and CEO of the Reinsurance Division; and Jonathan Zaffino, EVP and President and CEO of the Everest Insurance Division.
Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these SEC filings.
Management may also refer to certain non-GAAP financial measures.
In the third quarter, Everest produced operating earnings of $3.39 per share, despite experiencing $280 million of cat losses.
Our underlying performance continue to be excellent, as our attritional underwriting gain of $250 million nearly offset the cat loss.
On a year-to-date basis, our underwriting profit was $365 million and $700 million, excluding cats.
This is a solid outcome and demonstrates our ability to absorb cat volatility due to a large and well diversified book of business.
When combined with another solid quarter of investment income the year-to-date operating income is at $742 million.
These outcomes are being driven by an organization that has evolve dramatically over the last several years due to an intentional strategic focus and supported by market conditions.
What you see, for example, is a continued effort to reduce cat volatility as a result of growth, diversification and exposure reductions.
In reinsurance, the growth has been focused largely on mortgage risk and casualty lines, where rates, terms and conditions have been improving.
Keep in mind that our push into these lines, especially casualty, was more recent vintage.
For many years, we de-emphasized casualty only recently, as the market has been improving and we've been growing premium.
The greatest diversify, however, has been our successful push into the specialty insurance space.
By year-end, we will be closing in on $3 billion of annual gross premium, and as you have seen, the profit picture there remains solid.
Our timing on these initiatives has been good.
Rates are improving in many sectors.
And yes, while there have been pockets of frequency and severity trends to take note of, these are managed through conservative loss picks through the cycle.
We are in a long-term business, and at times cost of goods sold may seem uncertain.
But we are less worried about that and what we see on trend versus rate, given our book of business and where we have impact.
The market is poised to continue higher as it grapples with trend, increasing weather events and anemic investment returns on new money, but now is not the time to retreat.
With that, let me pass it over to my colleagues to give you some of the details around this story.
First Juan Andrade, who as you know is my successor, effective January 1.
It's a privilege to be here as a member of the Everest team.
After 8 weeks on the job, I've had the opportunity to start getting deeper into our businesses and to meet our employees, major customers and our key distribution partners in the US and around the world.
I'm very appreciative for Dom's support and that of the entire leadership team.
As we transition responsibilities at the end of the year.
Dom has built a great business that we will continue to advance.
Everest is well positioned for the current market environment.
We have a highly diversified franchise with a strong team of smart and experienced leaders, a rock-solid balance sheet and enduring customer relationships.
I've been very pleased with the talent, division, the energy, the focus and the pride in Everest that everyone I have met has shown.
The feedback that I have received from our customers has been universally passed.
They value the longevity of our trading relationship, our financial strength and sizable capacity, our knowledgeable underwriters and the access to products in the right locations, along with our responsiveness and innovation.
We have two very strong and complementary businesses.
We are a top 10 global reinsurer with a 47-year history.
We have a seasoned and strong underwriting team around the globe, broad product capabilities, a dynamic strategy that is responsive to market conditions, best-in-class data-driven management systems and a competitive expense advantage.
We also have an entrepreneurial and growing primary specialty insurance business with a 'client first' culture of providing solutions with more than 150 products and services.
This team is led by highly skilled industry professionals who are focused on sustainable profitability and growth and who have the underwriting discipline and built the tools and processes required to ensure continued success.
While being very cognizant to the challenges facing our industry, we also see opportunity.
These industry challenges are resulting in improving pricing and terms and conditions in both insurance and reinsurance.
In some classes of business, we are seeing the strongest rate movement than many years.
This change in the market is long overdue, and we remain committed to being selective to where we dedicate resources and capacity.
At Everest, we will continue to focus on underwriting profitability and sustainable growth with a relentless focus on execution, diversifying our, business always strengthening our enduring relationships, managing our cat exposure and maintaining our strong balance sheet that provides the foundation for the security that we provide to our customers.
I am optimistic about the future of Everest.
We have a strong franchise that is positioned to succeed, regardless of market conditions.
For the third quarter of 2019, Everest reported net income of $104 million.
This compares to net income of $198 million for the third quarter of 2018.
On a year-to-date basis, Everest had net income of $792 million compared to net income of $474 million for the first nine months of 2018.
The 2019 result represents an annualized net income return on equity of 13%.
These results were driven by a strong underwriting performance across the Group, our highest quarterly investment income in the last nine years and lower catastrophe losses compared to the first nine months of 2018.
In the third quarter of 2019, the group incurred $280 million of net pre-tax catastrophe losses compared to $230 million in the third quarter of 2018, the catastrophe losses related to Hurricane Dorian at $160 million and Typhoon Faxai at $120 million.
On a year-to-date basis, the results reflected net pre-tax estimated catastrophe losses of $335 million in 2019 compared to $795 million in 2018.
Average reported $52 million of favorable prior year reserve development in the quarter.
This primarily related to a one-time commutation of a multi-year contract that reduced prior year carried loss reserves by $44 million, which was offset by $44 million of commission paid.
Effectively, no material impact to the underwriting result in the quarter.
Another $4 million of the favorable development was identified through reserve studies completed in the third quarter of 2019.
Excluding the catastrophe events and favorable prior year development, the underlying book continues to perform well with an overall current year attritional combined ratio of 87.7% through the first nine months compared to 87% for the full year of 2018.
This increase was primarily due to the business mix in the Reinsurance segment, which as we have noted has been writing more casualty business over the past several quarters.
Pre-tax investment income was $181 million for the quarter and $501 million year-to-date on our $20 billion investment portfolio.
Investment income was up $60 million or 14% from one year ago.
This result is primarily driven by the growth in invested assets coming from our record cash flow, which was $1.5 billion during the first nine months.
Some of the strong cash flow comes from the increase in overall premium volume, including an increase in the casualty writings, which has a longer tail and allows us to invest the money longer.
Before moving into taxes, I'd like to point out that we included for the first time on Page 15 in the financial supplement a split of our net investment income between the Insurance segment and total Reinsurance.
This shows an indication of the contribution provided by each segment to pre-tax operating income and reflects $361 million allocated to reinsurance and $140 million of net investment income allocated to the insurance segment.
The split is based on gross carried loss reserves, excluding catastrophe reserves.
We are including this information to better demonstrate the total contribution by business segment and illustrate the unrecognized embedded value of the growing insurance franchise.
This is consistent with previous comments encouraging investors to look at Everest on a 'sum of the parts' basis.
On income taxes, the tax benefit we recorded in the quarter was the result of the amount and geography of the losses associated with the catastrophes and the favorable prior year reserve development associated with the one-time commutation of a multi-year contract that I previously mentioned.
The year-to-date effective tax rate of 9% is an annualized speculation that includes planned catastrophe losses for the remainder of the year.
Higher-than-expected catastrophe losses would cause the tax rate to trend lower than the current 9%.
Shareholders' equity for the Group ended the quarter at $9 billion, up over $1 billion or 14% compared to year-end 2018.
The increase in shareholders' equity is primarily attributable to $792 million of net income and the recovery in the fair value of the investment portfolio.
Our balance sheet and overall financial position remained strong.
We maintain industry-low debt leverage, a high quality investment portfolio and continue to generate positive cash flow.
You will notice some minor revisions related to foreign exchange in our financial supplement, none of these revisions impact operating income.
And now John Doucette will provide a review of the reinsurance operations.
The magnitude of industry losses over the past three years has been extraordinary for the reinsurance market.
Although the insurance industry would have hoped for a quieter 2019 to regroup, this has not been the case.
The losses have shaken up the primary reinsurance and retro markets, creating dislocation and in turn opportunity.
Though not an across-the-board traditional hard market, we see a foundationally more sustainable environment for the near and medium term in many lines.
Multiple factors are pushing the market, including 2017, '18 and '19 cat losses, with corresponding trapped capital and negative sentiment for ILS; emerging industry loss trends in casualty; improving primary market and underwriting actions taken by major participants; and continued low investment income yields.
Given the above, we are increasingly optimistic on the treaty and facultative global reinsurance markets heading into renewal and our improving opportunity to deploy capital profitably in n 2020 and beyond.
We continue to see increased demand for reinsurance globally, driven by our clients' desire to reduce volatility, manage regulatory capital constraints and decrease net capacity deployed.
That increase in demand, in conjunction with improved insurance and reinsurance pricing terms and conditions, will result in more opportunities hitting our underwriting requirements and pricing targets.
At the same time, the supply of reinsurance capital is relatively flat or down considering trapped capital, given that over 50% of the retro capacity is supported by unrated alternative capital.
And there will be more collateral trapped by the recent events, in addition to the remaining collateral still trapped from the 2017 and '18 events.
Not all rated reinsurers are position to right multiple classes of business across all territories to clients, large and small, but we are.
With our solid financial strength in ratings, multi-decades long trading relationships, we are one of a few global reinsurers writing in all P&C lines in most developed territories, making us well positioned to take advantage of these positive trends to drive differentiated results.
Year-to-date reinsurance premium is $4.7 billion, up 3% from last year.
Growth in our business is being driven by increased casualty writings, more proportional business.
, mortgage, more treaties with our global clients and increased back opportunities.
This growth was muted by the reunderwriting of some portions of our property book, as we pushed pricing and reduced lines or came-off programs that did not meet our required pricing targets.
Year-to-date reinsurance underwriting profits are $310 million, impacted this quarter by the Dorian and Faxai losses mentioned by Craig.
Year-to-date reinsurance attritional losses are 57.5% compared to 57% for the full year 2018, due predominantly to shift in mix, increased casualty business as well as overall more proportional business to capture the primary rate movements.
This is offset by increased mortgage writings, which have a lower combined ratio.
Heading into the renewal season, we are optimistic about the market conditions in casualty, fac, mortgage and certain property markets, including retro and loss affected areas.
In US casualty, reinsurance terms are improving.
Primary rates are increasing on loss-affected programs, along with some tightening of terms and conditions.
Some market participants have signaled reducing capacity.
Combined, this results in some interesting opportunities.
Since 2018, we have been increasing our casualty reinsurance writings based on these improving conditions.
And this trend will likely continue heading into January 1 renewals.
Facultative is seeing meaningful increased submission activity globally, improved rates and terms in both property and casualty, resulting in an increased business at much improved economics.
As mentioned last quarter, our global fac book is well over $400 million gross written premium in force, and we see continued growth opportunities there, given favorable market conditions.
Fac is typically a leading indicator of client risk appetite and therefore shows increased future demand for our treaty capacity.
The global impact of Lloyd's and other major insurers reunderwriting is meaningful.
Significant premium is coming to market, which is then subject increased rate and improved terms and conditions.
This is in addition to some large primary insurers' tightening capacity and pushing rate in both property and casualty lines.
The mortgage market remains favorable as the large GSEs, Fannie and Freddie continue to privatize risk.
Our well-seasoned mortgage portfolio continues to produce strong earnings with growth potential.
Currently, our annualized mortgage book is about $200 million of gross written premium, including many multi-year deals with future premium that has not yet been recognized.
We continue to proactively scrutinize relevant economic trends and underwriting standards, which remain attractive, and we'll continue to look for more opportunities there.
Given these multiple areas to deploy profitably our capital, our pricing targets for cat-exposed property reinsurance and retro continue to rise.
We remain committed to manage volatility through our long-standing disciplined underwriting, robust portfolio construction and through increased property hedging in both traditional and alternative hedges.
The current property momentum is generally favorable and likely will last well into 2020.
But additional improvement in rates terms and conditions are required in global property reinsurance and retro markets, given the elevated risk factors and increased exposures in certain territories, as well as the recent substantial industry losses.
More rate is required to get back to adequate levels to achieve a long-term, appropriate and sustainable return on capital.
Concentrating property underwriting on our core clients has created a better risk-adjusted portfolio with significantly more dollars of profit per unit of risk.
And we do have the capacity to increase our participation in improvement markets when returns increase enough to warrant.
We expect January 1 property rates generally be up in most regions and more recently loss-affected territories will see greater impact.
In retro, we anticipate double-digit rate increases.
With Hagabis causing further losses in trapped capital late in the year and uncertainty of ultimate loss, rates may improve more.
Improvement in retro is necessary, given those rates have been under the most pressured by non-traditional capital, but also because retro bore a disproportionate share of losses since 2017.
Everest has the capital and capability to effectively right in this market.
We believe there will be select opportunities to deploy additional capital, depending on market conditions.
Overall, we are in a reinsurance market where favorable trends exists for those able to capture and maximize the best opportunities.
With our financial strength, nimble culture, global capabilities and diversified capital sources, we are prepared to meet our clients' needs, while delivering superior results to our shareholders.
Everest Insurance has just completed another quarter of solid execution, resulting in excellent top line growth and more importantly continued profitability.
We continue to advance our strategy to build a world-class diversified specialty insurance group fueled by talent, partnerships and a deep set of specialty products that are well positioned within this changing market.
Our solid result this quarter build on the first two quarters of this year and mark the 19th consecutive quarter of growth for the insurance operations.
Our gross written premium growth of 29% quarter-over-quarter has once again balanced across all major business segments.
Our growth accelerated this quarter beyond our year-to-date trend line of plus 21%, in part reflecting the changing nature of the market, which is impacting nearly all major product lines.
This is particularly the case for business originated within the excess and surplus lines market, which accounted for over 1/3 of our premium written in the quarter.
Our new business this quarter provide some additional context on our balanced growth.
It was driven by a multitude of areas reflecting the specialty nature of our portfolio, including specialty casualty, which once again experienced meaningful rate increases in the quarter; our property and short-tailed businesses, led by both our retail and excess and surplus property division, both of which also achieve meaningful rate increases; and our various other specialty product lines, including transactional risk, credit and political risk and surety.
Each of these businesses continues to see meaningful increases in opportunity.
The segments I just referenced to make up approximately 75% of our business growth in the quarter and represent the balanced portfolio we seek to build.
The combined ratio for the quarter is 96.4%, 3.2 points better than the third quarter of 2018, and year-to-date is 96% or 2.1 points better year-over-year.
This is due to both lower catastrophe losses impacting our repositioned property portfolio and to an improved attritional loss ratio.
The expense ratio remained stable, despite our continued commitment toward investments in people, technology, new business unit and a new facility.
New underwriting capabilities established in Bermuda and a regulatory approval of the London branch of our Irish Insurance company are good examples of these new facilities and represent our continued commitment to international expansion.
Further, new and expanded office locations in the US are bringing us closer to the customers and trading partners we serve.
Turning to the rate environment, we are encouraged by the results we see here.
In the quarter, we experienced pure rate increases, which excludes the impact of exposure, of 7.6%, excluding workers' compensation, and a positive 6.7% year-to-date.
The quarterly ex work comp rate increase is the largest increase seen since the second quarter of 2012 and continues to be led by double-digit rate increases within our property and commercial auto portfolios.
Financial line and Umbrella & Excess are also showing improvement in the mid to high single digits, while general liability rate lift continues to build momentum with rate increases in the mid-single-digit range.
So London wholesale market is also improving, showing double-digit improvement this quarter, driven by professional indemnity, management liability, and property.
Year-to-date, international is showing a 7% improvement.
We are very well positioned to take advantage of this improved pricing environment in terms of our people, product sets and our ability to offer compelling solutions to the market.
This, coupled with strong retention rates within both our wholesale and retail books, is an encouraging sign.
In other words, the strategic plan we have been executing over the last several years has positioned us well in this current rate environment.
Most importantly, this growth in top line, coupled with improved business metrics, has resulted in Everest Insurance continuing to post an underwriting profit, over two times greater for the year-to-date period and now standing 10 of the past 11 quarters.
As Craig mentioned in the new investment disclosure, the pre-tax net investment income per insurance is $140 million year-to-date, plus our pre-tax operating income year-to-date now stands at $195 million.
In conclusion, we remain pleased with the continued progress we are making in the establishment of a world-class specialty insurer.
The over 90,000 new business submissions we have received year-to-date in our direct broker operations speak to our relevance and positioning in this market.
Further, the underlying performance of our diverse books of business remain solid, and hence, we are well positioned to create value for all of our constituents in the evolving market ahead.
We look forward to reporting back to you on our progress next quarter. | q2 operating earnings per share $14.63.
qtrly gross written premium growth of 35% and net written premium growth of 39%. | 0 |
I am joined by Tom Greco, our President and Chief Executive Officer and Jeff Shepherd, our Executive Vice President and Chief Financial Officer.
We hope you're all healthy and safe amid the ongoing pandemic and recent surge of the delta variant.
It's because of you that we're reporting the positive growth in sales, profit and earnings per share we're reviewing today.
In Q2, we continued to deliver strong financial performance on both the one and two year stack, as we began lapping more difficult comparisons.
In the quarter, we delivered comparable store sales growth of 5.8% and adjusted operating income margin of 11.4%, an increase of 11 basis points versus 2020.
As a reminder, we lapped a highly unusual quarter from 2020 where we significantly reduced hours of operation and professional delivery expenses reflective of the channel shift from pro to DIY.
As we anticipated, the professional business accelerated in Q2 2021, and between our ongoing strategic initiatives and additional actions, we expanded margins.
Our actions offset known headwinds within SG&A and an extremely competitive environment for talent.
On a two-year stack, our comp sales improved 13.3% and margins expanded 227 basis points compared to Q2 2019.
Adjusted diluted earnings per share of $3.40 increased 15.3% compared to Q2 2020 and 56.7% compared to 2019.
Year-to-date, free cash flow more than doubled, which led to a higher than anticipated return of cash to shareholders in the first half of the year, returning $661.4 [Phonetic] million through a combination of share repurchases and quarterly cash dividends.
Our sales growth and margin expansion were driven by a combination of industry-related factors as well as internal operational improvements.
On the industry side, the macroeconomic backdrop remained positive in the quarter as consumers benefited from the impact of government stimulus.
Meanwhile, long-term industry drivers of demand continued to improve.
This includes a gradual recovery in miles driven along with an increase in used car sales, which contributes to an aging fleet.
While we delivered positive comp sales in all three periods of Q2 our year-over-year growth slowed late in the quarter as we lapped some of our highest growth weeks of 2020.
Our category growth was led by strength in brakes, motor oil and filters, with continued momentum in key hard part professional categories.
Regionally, the West led our growth benefiting from an unusually hot summer, followed by the Southwest, Northeast and Florida.
To summarize channel performance, we saw double-digit growth in our professional business and a slight decline in our DIY omnichannel business.
To understand the shift in our channel mix, it's important to look back at 2020 to provide context.
Beginning in Q2, we saw abrupt shifts in consumer behavior across our industry due to the pandemic, resulting from the implementation of stay-at-home orders.
This led to more consumers repairing their own vehicles, which drove DIY growth.
In addition, our DIY online business surged as many consumers chose to shop from home and leverage digital services.
Finally, as we discussed last year, our research indicated that large box retailers temporarily deprioritized long tail items, such as auto parts, in response to the pandemic.
These and other factors resulted in robust sales growth and market share gains for our DIY business in 2020.
Contrary to historical trends, the confluence of these factors also led to a slight decline in our professional business in Q2 2020.
As we began to lap this highly unusual time, we leveraged our extensive research on customer decision journeys.
This enabled us move quickly as customer shifted how they repaired and maintained their vehicles.
Our sales growth and margin expansion in Q2 demonstrates the flexibility of our diversified asset base as we adapted to a very different environment in 2021.
Specific to our professional business, we began to see improving demand late in Q1 2021, which continued into Q2, resulting in double-digit comp sales growth.
This is directly related to the factors just discussed, along with improved mobility trends as more people returned to work and miles driven increased versus the previous year.
Strategic investments are strengthening our professional customer value proposition.
It starts with improved availability and getting parts closer to the customer as we leverage our dynamic assortment machine learning platform.
Within our Advance Pro catalog, we saw improved key performance indicators across the board including, more online traffic, increased assortment and conversion rates and ultimately growth in transaction counts and average ticket.
We also continued to invest in our technical training programs to help installers better serve their customers.
Our TechNet program is also performing well as we continue to expand our North American TechNet members, providing them with a broad range of services.
Each of these pro-focused initiatives have been a differentiator for Advance, enabling us to increase first call status with both national strategic accounts and local independent shops.
Finally, we're pleased that through the first half of the year, we added 28 net new independent Carquest stores.
We also announced the planned conversion of an additional 29 locations in the West as Baxter Auto Parts joins the Carquest family.
We're excited to combine our differentiated pro customer value proposition with an extremely strong family business, highlighted by Baxter's excellent relationships with their customers in this growing market.
In summary, all of our professional banners performed at or above our expectations in Q2, including our Canadian business, despite stringent lockdowns.
Moving to DIY omnichannel, our business performed in line with expectations, considering our strong double-digit increases in 2020.
While Q2 DIY comp sales were down slightly, DIY omnichannel was still the larger contributor to our two-year growth.
DIY growth versus a year ago gradually moderated throughout the quarter as some consumers returned to professional garages.
Within DIY omnichannel, we saw a shift in consumer behavior back to in-store purchases, consistent with broader retail.
We've also been working to optimize and reduce inefficient online discounts.
These factors along with highly effective advertising contributed to an increase in our DIY in-store mix and a significant increase in gross margins versus prior year.
We remain focused on improving the DIY experience to increase share of wallet through our Speed Perks loyalty platform.
We made several upgrades to our mobile app to make it easier for Speed Perks members to see their status and access rewards.
We continue to see positive graduation rates among our existing Speed Perks members.
In Q2, our VIP membership grew by 8% and our Elite members representing the highest tier of customer spend, increased 21%.
Shifting to operating income, we expanded margin in the quarter on top of significant margin expansion in Q2 2020.
This was led by our category management initiatives, which drove strong gross margin expansion in the quarter.
First, our work on strategic sourcing remains a key focus as consistent sales growth over several quarters resulted in an increase in supplier incentives.
Secondly, we've talked about growing own brands as a percent of our total sales.
This has been a thoughtful and gradual conversion and we began to see the benefits of several quarters of hard work in Q2.
This was highlighted by our first major category conversion with steering and suspension, where we saw extremely strong unit growth for our high margin Carquest premium products.
In addition, the CQ product is highly regarded by our professional installers.
With consistent high level of quality standards, they are now delivering lower defect rates and improved customer satisfaction.
We also recently celebrated the one-year anniversary of the DieHard battery launch.
Following strong year one share gains in DIY omnichannel, we've now extended DieHard distribution into the professional sales channel, where we're off to a terrific start.
Further expansion of the DieHard and Carquest brands is planned for other relevant categories.
In terms of strategic pricing, we significantly improved our capabilities, leveraging our new enterprise pricing platform.
This platform enabled us to respond quickly as inflation escalated beyond our initial expectations for the year.
Moving to supply chain, while we're continuing to execute our initiatives, we faced several unplanned, offsetting headwinds in Q2.
Like most retailers, we experienced disruption within the global supply chain, wage inflation in our distribution centers and an overall shortage of workers to process the continued high level of demand.
In addition, our suppliers experienced labor challenges and raw material shortages.
Despite a challenging external environment, we continue to execute our internal supply chain initiatives.
This includes the implementation of our new Warehouse Management System or WMS, which we're on track to complete in 2022.
In the DCs that we've converted, we're delivering improvements in fill rates, on-hand accuracy, and productivity.
The implementation of WMS is a critical component of our new Labor Management System or LMS. Once completed, LMS will standardize operating procedures and enable performance-based compensation.
We also continue to execute our Cross Banner Replenishment or CBR initiative, transitioning stores to the most freight logical servicing DC.
In Q2, we converted nearly 150 additional stores and remain on track with the completion of the originally planned stores by the end of Q3 2021.
In addition to CBR, we're on track with the integration of Worldpac and Autopart International, which is expected to be completed early next year.
Shifting to SG&A, we lapped several cost reduction actions in Q2 2020, which we knew we would not replicate in 2021.
We discussed these actions on our Q2 call last year, primarily a reduction in delivery costs as a result of a substantial channel mix shift along with the reduction in store labor costs at the beginning of the pandemic.
Jeff will discuss these in more detail in a few minutes.
In terms of our initiatives, we continue to make progress on sales and profit per store.
Our team delivered sales per store improvement and we remain on track to reach our goal of $1.8 million average sales per store within our timeline.
Our profit per store is also growing faster than sales per store, enabling four wall margin expansion.
In addition to the positive impacts of operational improvements we've implemented to drive sales and profit per store, we've also done a lot of work pruning underperforming stores and we're back to store growth.
In the first half of the year, we opened six Worldpac branches, 12 Advance and Carquest stores and added 28 net new Carquest independents, as discussed earlier.
We also announced the planned conversion of 109 Pep Boys locations in California.
We're very excited about our California expansion with the opening of our first group of stores scheduled this fall.
The resurgence of the delta variant has resulted in some construction related delays in our store opening schedule.
We expect to complete the successful conversion of all stores to the Advance banner by the end of the first quarter 2022.
Finally, we are focused on reducing our corporate and other SG&A costs, including a continued focus on safety.
Our total recordable injury rate decreased 19% compared to Q2 2020 and 36% compared to Q2 2019.
We're also finishing up our finance ERP consolidation, which is expected to be completed by the end of the year.
Separately, we are in the early stages of integrating our merchandising systems to a single platform.
Both of these large scale technology platforms are expected to drive SG&A savings over time.
The last component of our SG&A cost reduction was a review of our corporate structure.
In terms of the restructuring of our corporate functions announced earlier this year, savings were limited in Q2 due to the timing of the actions.
We expect SG&A savings associated with the restructure beginning in Q3.
In summary, we're very pleased with our team's dedication to caring for our customers and delivering strong financial performance in Q2.
We're optimistic as the industry-related drivers of demand continue to indicate a favorable long-term outlook for the automotive aftermarket.
We remain focused on executing our long-term strategy to grow above the market, expand margins and return significant excess cash back to shareholders.
Now let me pass it to Jeff to discuss more details on our financial results.
In Q2, our net sales increased 5.9% to $2.6 billion.
Adjusted gross profit margin expanded 239 basis points to 46.4%, primarily as a result of the ongoing execution of our category management initiatives, including strategic sourcing, strategic pricing and own brand expansion.
We also experienced favorable inventory-related costs versus the prior year.
These benefits were partially offset by inflationary costs in supply chain and unfavorable channel mix.
In the quarter, same SKU inflation was approximately 2% and we expect this will increase through the balance of the year.
We're working with our supplier partners to mitigate costs where possible.
Year-to-date, gross margin improved 156 basis points compared to the first half of 2020.
As anticipated, Q2 adjusted SG&A expenses increased year-over-year and were up $109 million versus 2020.
This deleveraged 228 basis points and was a result of three primary factors.
First, our incentive compensation was much higher than the prior year, primarily in our professional business as we lapped a very challenging quarter in 2020 when pro sales were negative.
Second, we experienced wage inflations beyond our expectations in stores.
We remain focused on attracting, retaining and developing the very best part people in the business and we'll continue to be competitive.
We expect both headwinds to continue in the back half of the year.
Third, and as expected, we incurred incremental costs associated with professional delivery and normalized hours of operations when compared to Q2 2020.
These increases in Q2 were partially offset by a decrease in COVID-19 related expenses to approximately $4 million compared to $15 million in the prior year.
As a result of these factors, our SG&A expenses increased 13.3% to $926.4 million.
As a percent of net sales, our SG&A was 35% compared to 32.7% in the prior year quarter.
Year-to-date, SG&A as a percent of net sales improved 88 basis points compared to the first half of 2020.
While we've seen a decrease in COVID-19 related costs year-to-date, the health and safety of our team members and customers will continue to be our top priority.
As the current environment remains volatile and the delta variant remains a concern, we may see increased COVID-19 expenses in the back half of the year.
Our adjusted operating income increased to $302 million compared to $282 million one year ago.
On a rate basis, our adjusted OI margin expanded by 11 basis points to 11.4%.
Finally, our adjusted diluted earnings per share increased 15.3% to $3.40 compared to $2.95 in Q2 of 2020.
Our free cash flow for the first half of the year was $646.6 million, an increase of $338.4 million compared to last year.
This increase was driven in part by our operating income growth along with continued momentum in our working capital initiatives.
Our capital spending was $58.7 million for the quarter and $129.6 million year to-date.
We expect our investments to ramp up in the back half of the year.
And in line with our guidance, we estimate we will spend between $300 million and $350 million in 2021.
Due to favorable market conditions along with our improved free cash flow in Q2, we returned nearly $458 million to our shareholders through the repurchase of 2 million shares at an average price of $197.52 and our recently increased quarterly cash dividend of $1 per share.
We're pleased with our performance during the first half of the year and moving into the first four weeks of Q3 on a two-year stack, our comparable store sales are in line with Q2.
We're continuing to monitor the COVID-19 situation as well as other macro factors, which may put pressure on our results, including, inflationary cost in commodities, wages and transportation.
Based on all these factors, we are increasing our full year 2021 guidance ranges, including net sales in the range of $10.6 billion to $10.8 billion, comparable store sales of 6% to 8% and adjusted operating income margin of 9.2% to 9.4%.
As you heard from Tom on our new store openings, we've encountered some delays in the construction process of converting Pep Boys stores, primarily permitting and obtaining building materials related to the ongoing pandemic.
As a result, we're lowering our guidance range and now expect to open 80 to 120 new stores this year.
Additionally, given the improvement of our free cash flow and our accelerated share repurchases in the first half of the year, we are also increasing our guidance for free cash flow to a minimum of $700 million and an expected range for share repurchases of $700 million to $900 million.
We remain committed to delivering against our long-term strategy as we execute against our plans to deliver strong and sustainable total shareholder return. | q1 adjusted earnings per share $3.34.
q1 sales $3.3 billion versus refinitiv ibes estimate of $3.28 billion.
q1 same store sales rose 24.7 percent. | 0 |
Many factors could cause future results to differ materially.
A more detailed description of such factors can be found in our filings with the Securities and Exchange Commission.
Joining us for today's call are Jerry Grisko, President and Chief Executive Officer; and Ware Grove, Chief Financial Officer.
Throughout the past year, I emphasized the fundamental characteristics of our business that I believe enable us to continue to perform well in both favorable and less favorable business climates.
As I described on our second quarter call, these characteristics include that approximately 70% of our revenue is generated from essential services, including our tax services, insurance services, payroll services and a host of others that we provide to our clients regardless of economic conditions in the market.
We generally retain approximately 90% of our clients from year-to-year.
We have a broad geographic footprint.
We serve a diverse client base in terms of size and industry.
We enjoy strong and constant cash flow and have a substantial amount of variable expenses in our business.
Our ability to grow throughout the challenging business climate that was 2020 is a testament to those characteristics, the strength of our business model and the agility and resilience of our team.
As expected and reflected in our results, some of our businesses performed better than others in more uncertain and volatile business environments.
Generally, the essential services described earlier tend to continue to perform well even in more challenging business climates while certain more discretionary services are less predictable.
Many of our more discretionary services are in higher demand when our clients are pursuing or making decisions around growth, such as acquisitions or significant expansion plans.
We saw much of this play out during 2020.
Within our Financial Services group, we experienced strong performance from our core tax & accounting business and our litigation support business and continued steady performance from our government healthcare consulting business.
We also experienced a slowdown in the second and third quarters in demand for certain of our more discretionary project-oriented services, such as our valuation business and portions of our private equity advisory practice.
However, demand for many of those services began to rebound in the fourth quarter, particularly for those services that are tied to supporting our clients' pursuit of acquisition opportunities.
One note on our government healthcare consulting practice.
On our last call, we discussed how the rate of growth had temporarily slowed during COVID due to restrictions of access to client facilities and delays in receiving client information.
In the fourth quarter, we were pleased to see the rate of growth for that business resume to more normal levels, and we expect demand for the services provided by that business to remain strong throughout 2021.
Turning to our Benefits and Insurance group.
We had a similar experience to our Financial Services group with strong performance from the essential services that we provide, including our employee benefits business, the commercial and personal lines portion of our property and casualty business, the advisory services we provide for our clients on the retirement plans and demand for our upmarket, more robust payroll platform.
From a consolidated view, the solid results that we experienced for those services were somewhat clouded by the softer results from a relatively small portion of our property and casualty business tied to the hospitality and adventure sports, a decline in the number of payrolls processed for some of our smaller clients, particularly those tied to the restaurant industry and a number of other more project-oriented service lines.
The encouraging note here is that we expect the portions of that business that were negatively impacted by the soft economic conditions to return to more normal growth levels once the economy improves.
One last note as it relates to our Benefits and Insurance business.
We have made substantial investments over the past several years in hiring, training and supporting new producers within this group.
Those investments are essential to drive sustained long-term organic revenue growth.
The early report card on those investments is very encouraging.
And as a group, the new producers that we brought into this program are outperforming our projections.
As a result, we are continuing to invest in our new producer program and to expand this program to other business lines.
Now looking forward, we enter into this year in a position of financial strength with a very strong balance sheet, low debt and ready access to capital.
As we demonstrated in 2020, we also have a significant amount of variable expenses and considerable discretionary spending items that we can manage to preserve liquidity, if economic conditions are worse than currently anticipated.
While much remains uncertain, we expect client demand for our core essential services to remain strong and for client interest in many of our more discretionary services to increase as business conditions continue to improve.
Based on our performance in 2020, the financial strength of the business, the cost control measures that we have at our command and our current view of the business climate for 2021, we have elected to reinstate guidance for this year.
I want to caution that while we are comfortable issuing annual guidance, we do expect more volatility than we ordinarily experience when comparing a given quarter to the same period in the prior year.
So we would caution against doing so.
These assumptions include the first six to nine months of 2021 will be similar to what we experienced in the second half of 2020, and we expect continued recovery in the M&A market, which impacts many of our more project-based and private equity services.
We saw improvement in the fourth quarter and expect this trend to continue throughout 2021.
The total revenue growing by 1.6% for the full year and margin on pre-tax earnings from continuing operations increasing by 90 basis points.
We were pleased to report earnings per share of $1.42 for the full year, up 11.8% over $1.27 reported a year ago.
To recap a few important points.
As the impact of the COVID pandemic unfolded, there was considerable risk and uncertainty everywhere.
We took a number of immediate actions to protect our liquidity, and we took measures to prudently control expenses with a view toward preserving our ability to serve clients in order that we could emerge as a strong and healthy business ready to resume growth.
We have not been completely immune, but with many actions we took, coupled with the dedication of our CBIZ team, we are pleased that our business model has weathered the storm, and we are now a stronger company for the experiences in 2020.
Our primary concern operating under the pandemic environment was to protect our liquidity.
Perhaps the best measure of our success in 2020 is the continuing nature of our strong positive cash flow.
We ended 2020 with $108 million of outstanding debt on our credit facility, increasing only $2.5 million from $105.5 million at year-end a year ago.
After an active first quarter in 2020, repurchasing 1.2 million shares and closing three acquisitions, we paused both acquisitions and share repurchase activity from mid-March through mid-September until we could develop more confidence with the stability of our cash flow trends.
For the full year of '20, we closed seven acquisitions and utilized $89.7 million of capital for acquisition activities.
We also deployed $57.6 million to repurchase approximately 2.3 million shares for the full year, including the repurchase of one million shares in the fourth quarter.
For the full year, with $147.3 million of capital used for these two purposes, our borrowing increased by only $2.5 million.
This results in a leverage ratio of approximately 0.8 times on adjusted EBITDA of $132.1 million, with $286 million of unused capacity.
Going into '21, this offers us great flexibility to continue to deploy capital for acquisitions and for continuing our share repurchase activity.
Through February 16 to date this year, we have repurchased an additional 600,000 shares, and we intend to continue to repurchase shares.
With this recent activity, when combined with shares repurchased in 2020, this has resulted in the repurchase of more than 5% of our shares outstanding.
When you also consider the 1.2 million shares repurchased in the prior year 2019, we have repurchased approximately 4.1 million shares or roughly 7.5% of shares outstanding within the past two years, and we've utilized nearly $100 million of capital for these activities.
Considering our strong balance sheet and cash flow attributes, we can repurchase this level of shares without compromising our capacity for acquisitions.
With the seven acquisitions closed in 2020, plus an eighth transaction we announced effective on January one this year, collectively these newly acquired operations will generate approximately $48 million of annualized revenue.
Strategically, these acquired operations will further strengthen Benefits and Insurance services.
We'll add an important component to our financial advisory services and we'll add capacity in order to accelerate the rollout of our integrated payroll services platform that focuses on upmarket clients.
Acquisition-related payments for earn-outs from previously closed transactions are estimated at $13.6 million in 2021.
In 2022, we estimate a use of approximately $15.4 million, approximately $9.1 million in 2023, $13 million in 2024 and approximately $800,000 in 2025.
For 2020, capital spending for the full year was $11.7 million, of which $2.2 million was in the fourth quarter.
We expect capital spending within a range of $12 million to $15 million, looking ahead into 2021.
Depreciation and amortization expense for the full year of '20 was $23.1 million, $9.6 million of depreciation with $13.5 million of amortization.
In the fourth quarter, depreciation and amortization expense was $5.9 million.
A major concern for us as the pandemic unfolded in 2020 was our clients' ability to pay receivables.
As we transition to remote work conditions at the end of the first quarter in 2020, our team did a great job refining and adopting new processes and digital tools for billing and management of receivables.
These tools are now a more permanent fixture in our workflow processes and in our communication with clients.
Days sales outstanding performance on receivables improved this past year despite the volatile conditions and financial stress throughout the economy.
At the end of the year, days sales outstanding stood at 72 days compared with 75 days a year earlier.
Although not completely immune to financial stress, this is also good evidence that with our diverse client base, there is no significant concentration of clients in the more severely impacted areas of the economy, such as hospitality, travel, restaurant or entertainment businesses.
At the end of the first quarter in 2020, we recorded an additional $2 million of reserve for bad debt.
With continuing uncertainty in the economy, although days sales outstanding performance has improved, we continue to carry that level of reserves for bad debt.
For the full year of '20, bad debt expense was 45 basis points of total revenue compared with 25 basis points of total revenue for 2019.
Total consolidated revenue for the full year was up 1.6%, with same unit revenue declining slightly by 0.4%.
In the fourth quarter, total revenue grew by 3.9% and same unit revenue grew by 1.1%.
Within Financial Services, total revenue for the full year was up 2.1%, with same unit revenue up 0.8%.
In the fourth quarter, total revenue in Financial Services was up 6.6% with same unit revenue up 3.3%.
Turning to Benefits and Insurance.
For the year, total revenue grew by 0.5%, with same unit revenue declining by 3%.
And in the fourth quarter, revenue declined by 0.8% and same unit revenue declined by 3.2%.
As I indicated in our third quarter conference call, revenue growth numbers were impacted by a relatively small number of our operations, where the nature of advisory or transactional services was more severely impacted by economic conditions.
For the full year, these businesses represented 16% of our total revenue, but collectively, these businesses declined by 12.8% in 2020 compared with the prior year.
Adjusting total revenue to exclude the impact of these businesses, the remaining core revenue would reflect growth of 4.9% rather than the 1.6% reported.
Same unit revenue would reflect growth of 2.5% rather than the 0.4% decline reported.
Fourth quarter revenue adjusted to exclude these businesses, grew by 8.3% versus the reported 3.9% and same unit revenue grew by 4.7% versus the reported 1.1%.
With pre-tax income margin improving by 90 basis points to 10.7% from 9.8% the prior year, we saw a favorable impact resulting from the cost control measures we took in deferring discretionary items, plus the favorable impact from the natural reduction in travel, entertainment expense and from the lower cost for our self-funded healthcare benefits.
Among other things, for 2020, T&E costs came in at approximately 30% of the prior year levels, and healthcare costs came in at approximately 85% of expectations as discretionary and elective medical procedures were deferred.
Adjusting the reported operating margin to remove the impact of accounting for gains and losses on assets held in the deferred compensation plan, operating income was 11.2% for the full year, up 70 basis points compared with 10.5% in 2019.
As Jerry outlined, we think business conditions in 2021 will look very much like the environment we experienced during the second half of 2020.
Of course, the timing and impact of a successful COVID vaccination rollout is very unclear, and there is still risk and uncertainty ahead.
Considering the stability and performance of our core businesses in 2020, together with the impact of recent acquisitions, we think revenue will continue to grow in a similar matter, as I just described.
We are projecting total revenue growth in 2021 within a range of 5% to 8%.
As a reminder, we do not provide guidance for quarterly results.
But as you think about the year ahead, bear in mind, the first quarter last year was a relatively strong quarter before we felt a COVID impact in the second half of March.
With the 5% to 8% revenue growth expectation, we are looking to increase earnings per share within a range of 8% to 12% over the $1.42 recorded for 2020.
Consistent with our longer-term goals, we can manage a number of discretionary items, and we expect to improve margin within a range of 20 to 50 basis points.
You will note the effective tax rate was 24.3% in 2020.
Aside from any change in tax law that may arise from the new administration, there are a number of variables that can impact our tax rate, either up or down.
But as we look ahead to 2021, we are projecting a 25% effective tax rate.
Ongoing share repurchase activity will impact the fully diluted weighted average share count.
At this time, we are estimated 54.5 million fully diluted shares for the full year, down from 55.4 million shares in 2020.
As I mentioned, we are continuing to repurchase shares, and we will update this estimate at the end of the first quarter and throughout the year.
Adjusted EBITDA for 2020 came in at $132.1 million or 13.7% of revenue, a 9.6% increase from the prior year, and we expect to further improve that margin in '21.
So in conclusion, we were pleased to see stability in client demand and cash flow as we progress through the year.
We have emerged from the challenge of 2020 as a stronger company with stronger processes.
Going into 2021, we think our business will continue to reflect the stability, evidenced by the performance this past year.
We recognize the uncertainty and risks ahead, and we will plan to update our expectations as conditions dictate throughout the balance of the year.
First, I would like to talk about our unique position in the market and how it allows us to provide solutions to our clients that are unmatched in our industries.
While we have a large number of very capable competitors for many of the services we provide, they are often not aligned and lack the ability to provide the holistic, multidisciplinary solutions that our clients need when analyzing decisions that relate to their most impactful opportunities or greatest challenges.
We witnessed the strength of our business model throughout 2020 as we move quickly to collaborate across businesses, service lines and geographies to bring CBIZ's resources and expertise to bear in coordinated services that were responsive to our clients' most pressing needs.
We are encouraged by the value that our holistic multidisciplinary solutions approach brings to our clients and are excited for the opportunities that it presents for CBIZ to further distinguish us from our competitors.
Next, relating to M&A.
The acquisition of BeyondPay brings additional implementation capacity to support sales of our upmarket payroll solution and follows another similar acquisition earlier in 2020.
We also acquired Borden Perlman Insurance Agency within our property and casualty business.
Based in New Jersey, Borden Perlman is a leading provider of property and casualty insurance with an over 100-year history of serving clients on the East Coast.
Both of these acquisitions provide strategic value, but are also strong cultural fits, which is the most important factor when we consider acquisition opportunities.
As Ware mentioned, overall, we completed seven acquisitions in 2020, all of which bring expertise, capacity, talent and a strong client base to our business.
As I mentioned earlier, in 2021, we've already completed one acquisition with our core accounting and tax practices with the addition of Middle Market Advisory Group in Denver, Colorado.
MMA provides tax complying and consulting services to middle market companies and family groups across a number of attractive industries and complements our rapidly growing Colorado practice.
Acquisitions continue to be an essential component of our growth strategy.
While the M&A market slowed in the second and third quarters of last year, we are seeing activity resume.
We are finding that our performance throughout the pandemic allows us to tell a compelling story when it comes to potential partners.
The challenges faced by many of our smaller competitors throughout COVID shined a light on the value that CBIZ can bring to our team members and our clients as a result of our scale, breadth and depth of services and expertise.
As a result, our pipeline of outstanding acquisition prospects is stronger than it has been in many years, and we have access to capital to be aggressive as we seek to take advantage of many of these opportunities as we can. | sees 2021 total revenue up 5% to 8%.
sees 2021 earnings per share from continuing operations up 8% to 12%. | 1 |
The company undertakes no obligation to update this information.
Whitestone's third quarter earnings news release and supplemental operating and financial data package have been filed with the SEC and are available on our website www.
whitestonereit.com in the Investor Relations section.
Now over to Jim Mastandrea, our Chairman and CEO, to update you on our third quarter results.
Operating portfolio occupancy increased to 90.2% from 89.9% last quarter and annualized base rent increased to $20.41 from $19.95 last quarter.
Our overall foot traffic at our centers in 3Q '21 was 35% higher than the same quarter in 2020.
With the resurgence of the COVID through its delta variant, we maintained a steady, but slightly lighter pattern versus 2Q '21.
We continue to experience active recurring traffic from existing and new community members visiting our centers as population shifts continue with the ongoing migration from corporations and individuals to Arizona and Texas.
Regarding our financial performance for the quarter, revenue grew by 9% to $32.4 million this quarter compared to $29.9 million in 3Q '20.
Same-store net operating income growth of 7% in this quarter and 8% in Q2 was driven by increases in occupancy and annual base rent per square foot as previously noted, as well as positive leasing spreads.
A key financial indicator for REIT is FFO.
Funds from operations core was $0.25 per share and $0.75 per share in the quarter and the nine months ended September 30, 2021 respectively.
Along with this noted growth, we continue to make progress toward one of our long-term goals of deleveraging the trust.
We reduced our debt to EBITDA, which is now 8.1 times down from 9.4 times a year ago.
Equally important to the trust is our dividend, which we consider sacred.
Regarding our quarterly dividend, we now have paid dividends to our shareholders for the 134th consecutive months since our IPO.
Our dividend yield of 4.3% remains at a premium and our payout ratio to FFO core is exceptionally strong at 42%.
This quarter we reactivated our external growth plan with the acquisition of Lakeside Market in Plano, Texas at a purchase price of $53.25 million.
Importantly, this acquisition did not require any additional corporate overhead, which is a key component toward our attaining economies of scale.
Along with this acquisition, we're actively pursuing additional properties in our strong pipeline of assets in Austin, Dallas and Phoenix.
Looking at our current portfolio, we now have 4.6 million of our 5.1 million square feet of space leased.
Our approximately 1,500 tenants' average lease space is 3000 square feet per tenant, complemented by a mix of larger square footage leases by our grocery anchors.
Our strong tenant relationships and rigorous vetting process ensures the quality of our revenue for our portfolio and stability of our cash flow.
I would like to point out that our tenant improvement costs to bring a new smaller tenant into one of our centers is much lower per square foot than the cost of a big box tenant.
By doing so, we spread our risk among a group of tenants in a relatively the same space as a larger tenant, achieve higher rent per square foot, annual escalators of 2% or 3% and some of our tenants pay percentage lease of revenues.
In addition, typically our tenants pay taxes, insurance and common area maintenance.
Our strong leasing activity is one of the key drivers and performance this quarter.
Some important metrics to highlight that our new lease count for 3Q '21 is 38 versus 35 in the prior quarter and 32 in the prior year.
Our leasing spreads for 3Q '21 are 5.4% versus 3.1% in the prior quarter and 2.9% in the prior year, both of which are moving in a positive direction.
In summary, the update I've shared with you today highlights, in particular, our business model continues to perform exceptionally well.
Our leasing strategy focusing on entrepreneurial tenants continues to produce consistent results.
And most notably, we are continuing to make good progress to achieving our long-term goals.
While we are pleased with our continued improving performance, we know that the work ahead of us is cut out, but our team remains committed to serving our shareholders and increasing long-term value.
I appreciate the opportunity to share some great results for the third quarter.
During the quarter, our best-in-class geography and strategically designed tenant mix have produced strong top line and bottom line growth, and our long-term focus and day-to-day execution have allowed us to make significant progress toward our long-term goals of scaling our infrastructure and improving our overall debt leverage.
The MSAs that we operate in, continue to see significant population migration and corporate relocations producing jobs from other areas of the country.
This is best evidenced by record leasing activity, occupancy and annualized base rent growth, year-over-year and quarter-over-quarter topline revenue, NOI and FFO growth, robust leasing spreads, strong same-store NOI growth, reduced debt levels and interest cost resulting in improved debt leverage metrics and greater scale of our G&A infrastructure.
Total revenue was $32.4 million for the quarter, up 6% from the second quarter and up 9% from the third quarter of 2020.
The revenue growth was driven by a sequential 0.3% increase in same-store occupancy from Q2 and a 1.2% improvement compared to Q3 of 2020.
We are also benefiting from our ABR per square foot, rising 2.3% sequentially and 5.3% from a year ago along with lower and collectability reserves.
Property net operating income was $23.2 million for the quarter, up 5% sequentially and up 9% from the third quarter of 2020.
Q3 same-store NOI increased 7% from Q3 of 2020.
Net income for the quarter was $0.06 per share, up from $0.02 per share in the prior year quarter.
Funds from operations core was $0.25 per share in the quarter, up 9% from the second quarter of 2020 and year-to-date FFO core per share was $0.75 per share, up 9% from the same period of 2020.
Our leasing activity in the quarter continued to build on our very strong first and second quarters, with 38 new leases, representing 90,000 square feet of newly occupied spaces.
Our new leasing activity for the nine months was 56% higher on a square foot basis than 2020 and 48% higher than 2019.
On a total lease value basis, our new leasing activity for the nine months was 112% higher than 2020 and 191% higher than 2019.
Leasing spreads on a GAAP basis have been a positive 8.5% over the last 12 months and third quarter leasing spreads increased by 5.4% on new leases and 14.1% on renewal leases signed.
Our annualized base rent per square foot on a GAAP basis at the end of the quarter grew 2.3% to $20.41 from $19.95 in the previous quarter and increased 5.3% from a year ago.
Total operating portfolio occupancy stood at 90.2%, up 1.2% from a year ago and up 0.3% from the second quarter.
Including our newest acquisition Lakeside Market, our total occupancy is 89.9%, up 1% from a year ago.
Our collections continued to be very strong in the third quarter, reflecting the overall high collection levels and collections on tenants classified as cash basis.
Our tenant receivables decreased by $1 million, an improvement of 4.4% from year-end 2020.
Our interest expense was 4% lower than a year ago, reflecting our lower net debt.
At quarter end, we had $22 million in accrued rents and accounts receivable.
Included in this amount is $17.8 million of accrued straight-line rents and $1.3 million of agreed upon deferrals.
Our agreed upon deferral balance is down 43% from year-end reflecting tenants honoring their payment plans.
Turning to our balance sheet.
Since early last year, we have implemented various measures to strengthen our liquidity.
Our total net debt was $616.6 million, down $20.5 million from a year ago, improving our debt to gross book real estate cost ratio to 51% down from 55% a year ago.
Our debt to EBITDA ratio improved 1.3 turns from a year ago and 0.1 turn from the second quarter to 8.1 times in Q3.
We are pleased with the significant progress we are making toward our long-term debt reduction goal and remain steadfast in our commitment in this area.
As of quarter end, we have $155.5 million of undrawn capacity and $81.8 million of borrowing availability under our credit facility.
During the quarter, we sold 3 million common shares under our ATM program, resulting in $28 million in net proceeds to the company at an average sale price of $9.49 per share.
These strong results in 2021 are a testament to the strength of Whitestone's strategic geographic focus and business model.
We are encouraged by the acquisition of Lakeside Market in the quarter and look forward to continued delivery of value to all of Whitestone's stakeholders.
With that now -- we will now take questions.
Operator, please open the lines. | compname reports q2 ffo core per share of $0.26.
qtrly revenues of $30.6 million versus $27.6 million in 2q 2020.
qtrly ffo core per share of $0.26. | 0 |
These risks and uncertainties may cause actual company results to differ materially.
On the call today are Kathy Warden, our chairman, CEO, and president; and Dave Keffer, our CFO.
Kathy Warden -- Chairman.
We delivered another quarter of strong results in an increasingly complex environment.
In the last quarter, we've seen developments in the global fight against COVID-19 and macroeconomic changes, such as a tightening labor market, supply chain challenges, and growing inflation.
But we've also seen evolving threats to our National Security, which has further eliminated the value of Northrop Grumman products and services.
I am proud of how our team has demonstrated remarkable resiliency and adaptability during these dynamic times.
Our company continues to deliver strong operating performance.
As we announced earlier today, we had a segment operating margin rate of 11.9% in the third quarter, and year to date, an exceptional segment operating margin rate of 12%.
In addition, earnings per share in the quarter were $6.63, an increase of 13% compared to last year.
And our transaction-adjusted free cash generation continues to be strong, increasing 15% year to date.
We ended the quarter with just over $4 billion in cash, providing significant flexibility in support of our capital deployment initiatives.
With respect to the top line, our year-to-date organic growth was 8%.
This robust growth reflects the alignment and strength of our broad portfolio to our customers' priorities and future needs.
As expected, our organic growth rate slowed in the quarter from the rapid pace that we saw in the first half of the year.
In addition to having fewer working days in the second half of the year, which we discussed on each of our last two calls, we are also seeing an impact on our sales from the broader economic environment due to COVID-19.
During the third quarter, this included employee leave-taking at a higher level than planned, a tighter labor market, and certain supply chain challenges.
We continue to focus on the safety and well-being of our employees, customers, and partners as we work to mitigate the impact of these factors.
As you know, the president recently issued an executive order generally requiring employees to federal contractors to be fully vaccinated by early December.
We have shared the details of this mandate with our U.S. workforce, and we are working to help them meet the requirements.
We also increased our hiring plans for the fourth quarter to help mitigate the potential impact of any increased attrition.
Based on the team's strong third-quarter performance and in consideration of macroeconomic factors as we see them today, we are increasing our guidance for segment OM and earnings per share for the year and narrowing our sales guidance to approximately $36 billion.
Dave will provide more details on the quarter, our updated guide, as well as our initial outlook for 2022.
Turning to budget updates from Washington.
We're seeing strong bipartisan support for National Security broadly and Northrop Grumman programs specifically.
We are pleased that an agreement was reached on the continuing resolution and debt ceiling that will fund the government through December 3.
We are hopeful that Congress will finalize the fiscal year 2022 appropriations and avoid a protracted continuing resolution.
With respect to the FY '22 defense budget overall, we see bipartisan support for increased defense spending, including adding funding above the president's budget request.
We are hopeful that this additional funding will be supported in final appropriations.
Over the past several weeks, senior customers, members of Congress, and administration officials have made increasingly public comments about strategic competition in the National Security environment and the need to counter and deter evolving threats.
One clear and consistent message has been the need to invest in and more rapidly field advanced capabilities.
Our company's portfolio and capabilities are strongly aligned to the five National Security priority areas, particularly in advanced weapons, strategic deterrence, mission systems, and space.
And we're using digital technologies to develop and deploy capabilities faster and more efficiently than ever before across our entire portfolio.
I'll share a few highlights to demonstrate how our performance today continues to position us for the future.
With the emergence of more sophisticated air defense systems, the need for standoff capabilities and speed to target is critical for our customers.
To address this requirement, Northrop Grumman developed AARGM-ER, a high-speed, long-range air-to-ground missile.
And in the third quarter, after just 28 months in engineering, manufacturing, and development, we achieved a critical milestone, clearing the wafer production.
In September, we received our first low-rate initial production award for the program.
Also during the quarter, we, along with our industry partner, Raytheon, successfully tested the hypersonic air-breathing weapon concept known in HAWC.
Northrop Grumman supplies the scramjet propulsion system for HAWC, allowing speeds of greater than Mach 5.
AARGM-ER and HAWC are just two examples of how we're providing the higher speed and longer-range weapons needed to be relevant in today's threat environment.
Another key area where we are supporting our customers is in the need and urgency to enhance our country's strategic deterrence capabilities, especially in light of recent disclosures of investments that other nations are making in modernizing their strategic capabilities.
The triad is the foundation of the security strategy for the U.S. and its allies and has been an effective deterrent for decades, preserving peace and deterring aggression.
As highlighted by recent customer and administration comments, modernizing the triad remains a high priority.
Northrop Grumman is the prime on two of the three legs of the triad with the bomber and strategic missiles, and we're a significant supplier for submarines as well.
For the bomber, the B-21 program continues to advance.
As Air Force Secretary, Frank Kendall recently noted, there are now five units in various stages of production and the systems are, in his words, making good progress to real fielded capability.
For strategic missiles, we continue to make solid progress on the EMD portion of the ground-based strategic deterrent program.
We completed key milestones earlier this year, and we are tracking toward our first flight as planned.
The GBSD program has ramped significantly this year, and we now expect that it will add just over $1 billion in incremental revenue to our 2021 results and another approximately $500 million of incremental revenue in 2022.
For both B-21 and GBSD, we have applied digital transformation concept as a key enabler to reduce risk, increase productivity, shorten cycle time, and improve the system's ability to adapt to changing threats.
In today's rapidly changing threat environment, our Mission Systems portfolio, including in communications and artificial intelligence, is making a critical contribution in the advancement of technology and capability needed to allow legacy platforms to be more capable and survivable, and therefore, more relevant toward addressing the increasingly sophisticated threats.
To this end, during the third quarter, our next-generation electronic warfare system, which will equip domestic F-16, had its first test flight on a testbed aircraft at the Northern Lightning exercise.
This system, in conjunction with our SABR radar, demonstrated full interoperability in a simulated contested electromagnetic spectrum environment.
With the radio frequency spectrum becoming increasingly contested, this critical set of electronic warfare capabilities will allow the platform to remain survivable.
We anticipate an EMD contract for next-generation electronic warfare in 2022 with an overall lifetime opportunity of up to $3 billion.
And in Missile Defense, emerging threats from hypersonic missiles are creating new challenges for customers.
We are helping to provide differentiated solutions to these challenges by applying our advanced technology and domain expertise.
Earlier this year, we were awarded a contract to deliver a prototype satellite as part of MDA's hypersonic and ballistic tracking-based sensor, HBTSS, program.
This program is designed to detect and track hypersonic vehicles which have a very different flight profile and signature than ballistic missiles.
They required new sensing capabilities in order to detect and track them.
In September, we conducted a successful HBTSS critical design review and are progressing toward a 2023 launch.
In the space domain, Northrop Grumman is working with our customers on advanced capabilities to address a range of new and evolving threats.
Many of these programs are classified.
And consistent with increased demand in this area, we received $1.2 billion in restricted space awards in the third quarter.
I've touched on several major contributions that we've made this quarter to National Security, all of which highlight our strong performance, technology leadership, and broad portfolio.
I also want to share examples of our collaboration with partners to accelerate innovation and create discriminating technologies.
As I've noted before, we are actively engaging in partnering with early stage technology and nontraditional defense companies.
In the quarter, we closed an investment in Orbit Fab, a space logistics company whose goal is to put gas stations in space.
Their vision fits well with our on-orbit satellite refueling and space logistics capabilities.
We also continue to work with Deepwave Digital, an innovative company we invested in at the end of last year.
Deepwave Digital provides a hardware and software solution, enabling very efficient AI-enhanced, software-defined radios for deep learning applications at the edge, which we believe will enhance our efforts in both autonomy and JADC2.
These partnerships, as well as other venture investments, support our strategy to create solutions at speed for our customers' toughest national security challenges.
I'll begin my comments with third-quarter highlights on Slide 3.
We continued to generate strong operating results, delivering another quarter of solid organic sales growth, higher segment operating margin rate, and outstanding earnings per share and transaction-adjusted free cash flow.
We continued to return cash to shareholders through our buyback program and quarterly dividend, returning over $800 million in the quarter.
Slide 4 provides a bridge between third-quarter 2020 and third-quarter 2021 sales, excluding sales from the IT services divestiture, our organic growth was 3%.
This rate was below our first-half growth due in part to the broader labor market and supply chain trends that Kathy outlined.
Next, I'll review our earnings per share results on Slide 5.
Compared to the third quarter of 2020, our earnings per share increased 13% to $6.63.
Strong segment operational performance contributed about $0.14 of growth and lower corporate unallocated added another $0.55.
This included a $60 million benefit from insurance settlements related to shareholder litigation involving the former Orbital ATK business prior to our acquisition.
Corporate unallocated expense also decreased due to a change in deferred state income taxes, as well as lower intangible asset amortization and PP&E step-up depreciation.
Pension costs contributed $0.17 of growth, driven by higher non-service FAS income.
Our marketable securities performance represented a headwind of $0.17 compared to the third quarter of 2020, which benefited from particularly strong equity markets.
Lastly, we experienced a slightly higher federal tax rate in the period due to lower benefits from foreign-derived intangible income.
Turning to sector results on Slide 6.
We saw some broad-based COVID-related impact.
the most significant of which were in our Aeronautics sector.
Aeronautics sales declined 6% for the quarter.
Year to date, its sales are down 1%.
As we've described in recent quarters, several programs in our AS portfolio are plateauing or entering a phase of their life cycle where you would not expect to see growth.
This quarter, we experienced slightly lower volume across the portfolio, including restricted efforts, F-35, B-2 DMS, and Global Hawk programs.
We expect this overall trend to continue at AS in 2022, which we'll discuss in more detail momentarily.
At Defense Systems, sales decreased by 24% in the quarter and 22% year to date.
On an organic basis, sales were down roughly 2% in the quarter and year-to-date periods driven by the completion of our activities on the Lake City small-caliber ammunition contract last year.
Lake City represented a sales headwind of roughly $75 million in the quarter and $335 million year to date.
This was partially offset by higher volume on several mission-readiness programs.
Mission Systems sales were down 5% in the quarter and up 4% year to date.
Organically, MS sales increased 1% in Q3, and year to date, they are up a robust 9%.
As we've noted previously, the timing of material volume at MS has been weighted more toward the first half of 2021 than the second.
Organic sales growth in the third quarter and year-to-date periods was broad-based across programs such as G/ATOR, JCREW, and various restricted efforts.
And finally, Space Systems continued to deliver outstanding sales growth, increasing 22% in the third quarter and 28% year to date.
Sales in both business areas were higher in the quarter and year-to-date periods reflecting continued ramp-up on GBSD and NGI, as well as higher volume on restricted programs and Artemis.
Turning to segment operating income and margin rate on Slide 7.
We delivered another quarter of excellent performance with segment operating margin rate at 11.9%.
Aeronautics third-quarter operating income decreased to 10% due to lower sales volume and a $42 million unfavorable EAC adjustment on the F-35 program.
The adjustment was driven by labor-related production inefficiencies, reflecting COVID-related impacts on the program.
The AS operating margin rate decreased to 9.7% in Q3 as a result of this adjustment with year-to-date operating margin slightly ahead of last year at 10.1%.
The Defense Systems operating income decreased by 19% in the quarter and 16% year to date largely due to the impact of the IT services divestiture.
Operating margin rate increased to 12.4% in the quarter and 12% year to date, largely driven by improved performance and contract mix in Battle Management and Missile Systems, partially offset by lower net favorable EAC adjustments.
At Mission Systems, operating income was relatively flat in the quarter and up 10% year to date.
Third-quarter operating margin rate improved to 15.3% and year to date was 15.5%, reflecting strong program performance and changes in business mix as a result of the IT services divestiture.
Space Systems operating income rose 29% in the quarter and 36% year to date, driven by higher sales volume.
Operating margin rate was also higher at 10.7% in the quarter and 10.9% year to date, driven by higher net favorable EAC adjustments.
Moving to sector guidance on Slide 8.
Note that this outlook assumes a relatively consistent level of impact in Q4 with what we've been experiencing so far this year from the effects of COVID on the workforce and supply chain, and it does not include any potential financial impacts on the company related to the vaccine mandate.
We have updated our 2021 sales estimates for each segment based on our year-to-date results and current expectations for Q4.
For operating margin rate, we're increasing our guidance at Defense and Space, and the margin rates at AS and MS remain unchanged.
Before we get to our consolidated guidance, I'd also like to take a moment to discuss some of the factors to consider in comparing our fourth-quarter revenue to last year on Slide 9.
In Q4 of 2020, the IT services business contributed almost $600 million of sales, and the equipment sale at AS generated over $400 million.
Q4 of 2021 also has four fewer working days than the same period in 2020, representing a headwind of about 6%.
Adjusting for these three items, our Q4 2021 sales would grow at 3% to 4% based on our latest full-year guidance.
Moving to Slide 10.
Based on what we now see, we expect sales of approximately $36 billion.
We're raising our 2021 outlook for segment and total operating margin and for EPS.
Our segment operating margin rate guidance is 10 basis points higher at 11.7% to 11.9%, reflecting our continued strong performance.
Our net FAS/CAS pension adjustment has increased $60 million for the full year as a result of the annual demographic update we performed in Q3.
Other corporate unallocated costs are $70 million below our previous guidance, now at approximately $120 million for the year.
As I mentioned, our corporate unallocated costs benefited from a $60 million insurance settlement in Q3, as well as additional benefits from state taxes.
These updates translate into an increase of 50 basis points in our operating margin rate to a range of 16% to 16.2% in our updated guidance.
Remember that the gain from the IT services divestiture in Q1 contributed approximately 5 percentage points of overall operating margin benefit for the full year.
We continue to project the 2021 effective federal tax rate in the high 17% range, excluding the effects of the divestiture, which is consistent with our prior guidance.
Lastly, we're raising our earnings per share guidance, which I'll cover on Slide 11.
Segment performance is contributing about $0.15 of the increase with the benefits to corporate unallocated and pension contributing the remainder.
In total, this represents an $0.80 improvement in our transaction-adjusted earnings per share guidance.
With this latest increase, our 2021 earnings per share guidance is up by about $2 since our initial guidance in the beginning of the year.
Before we move to 2022, I wanted to give you an update on our cash performance.
Year to date, we've generated over $2.1 billion of transaction-adjusted free cash flow, up 15% compared to 2020, and we ended the quarter with over $4 billion in cash on the balance sheet.
Keep in mind that we have a roughly $200 million payroll tax payment in Q4 from the Cares Act legislation with the second similar payment in 2022.
Additionally, we expect to pay the balance of our transaction-related tax from the IT services divestiture in the fourth quarter.
Our healthy cash position has enabled us to repurchase over $2.7 billion of stock so far this year, on track with our full-year target of $3 billion or more.
As we look ahead to 2022, on Slide 12, our outlook is based on the same set of assumptions that we described for 2021 guidance regarding the COVID environment and vaccine mandate.
It also assumes that the continuing resolution does not extend beyond 2021.
And like our 2021 guidance, it assumes that we do not experience a breach of the debt ceiling.
We expect Space to be our fastest-growing segment again in 2022, driven by GBSD, NGI, and several restricted efforts as they continue to ramp.
Mission Systems and Defense Systems should also produce organic growth.
Regarding Aeronautics Systems, after several years of strong growth, our latest 2021 sales guidance calls for a mid-single-digit decline, and we see that trend continuing in 2022.
We've talked in recent quarters about the headwinds in our HALE portfolio.
We're also projecting lower sales on JSTARS, F-18, as well as our restricted portfolio.
Looking further to the future, it's an exciting decade for defense aerospace.
Rapidly evolving threats are spurring a new wave of autonomous vehicle and sixth-generation fighter development.
So, the opportunity set in AS remains solid, and we will continue to invest in the cutting-edge technologies that allow our customers to stay ahead of the threat environment.
Altogether, we currently expect 2022 sales at the company level to reflect continued organic growth.
Looking at segment margin, we expect the strong results we've demonstrated in 2021 to continue in 2022 with excellent program performance offsetting a portion of the 20 to 30 basis point benefit we generated from pension-related overhead rate changes in Q1 of 2021.
While we project higher sales and strong segment operating margin, we expect transaction-adjusted earnings per share to be down next year as a result of several nonoperational headwinds.
Lower CAS pension recoveries and higher corporate unallocated expenses are currently projected to create an earnings per share headwind next year of more than $2.
For FAS pension, our outlook for 2022 will depend on our updated actuarial assumptions, including discount rates and plan asset returns, which we will determine at the end of the year.
Earnings per share driven from sales growth, strong operating margin performance, and lower share count will help to offset these nonoperational items.
Next, I'd like to spend a moment discussing cash.
We expect relatively stable cash flow at the program level in 2022, but there are a few temporal items that should be factored into the year-over-year comparison of overall free cash flow.
First is lower CAS pension recoveries.
As you can see on Slide 13, our CAS recoveries are currently expected to be lower by $350 million next year.
The second is cash taxes.
Excluding the impact of the IT services transaction, we expect cash taxes to be modestly higher next year.
In addition, as we've noted in the past, current tax law would require companies to amortize R&D costs over five years, starting in 2022, which would increase our cash taxes by around $1 billion next year and smaller amounts in subsequent years.
There continues to be uncertainty in the tax environment with potential new legislation that could change the R&D amortization provision and other provisions.
We will provide updates on each of these items on our January call.
Taking all of these cash flow factors into consideration, we would expect to decline in 2022 transaction-adjusted free cash flow, followed by a double-digit growth CAGR through 2024, driven by strong operational performance.
Regarding capital deployment, investing in the business through disciplined R&D and capital spending continues to be our priority.
We expect capex to be roughly flat next year in absolute dollar terms.
We believe these investments allow us to stay at the forefront of technology as we invest in our business.
And as we've said, we continue to expect to return the majority of our 2022 free cash flow to shareholders through dividends and share repurchases.
Kathy Warden -- Chairman.
In summary, we have delivered excellent year-to-date results and operating performance, and we are pleased to be increasing our full-year earnings per share guidance for the third consecutive quarter.
We are actively engaged with our supply chain and our employees as we work to mitigate broader COVID-related risks and continue to keep our programs on track.
As shown by the many milestones in the quarter, we have highly relevant capabilities and programs that align well to National Security requirements and our customer funding priorities.
So, as we look forward, 2022 is expected to deliver another year of organic sales growth and excellent performance, paving the way for longer-term margin expansion and free cash flow growth.
We remain focused on protecting the safety and well-being of our employees, delivering the capabilities our customers need to protect National Security and sustain our planet, and delivering value to our shareholders. | northrop raises full-year forecast on space unit strength.
qtrly earnings per share $6.42; qtrly transaction-adjusted earnings per share $6.42.
qtrly total sales $9.15 billion, up 3%.
raises 2021 sales guidance to $35.8 billion to $36.2 billion.
sees 2021 mtm-adjusted diluted earnings per share $31.30 to $31.70; sees 2021 operating margin 15.5% to 15.7%. | 0 |
These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainty.
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 second quarter, Hilltop reported net income of $99 million or $1.21 per diluted share.
Return on average assets for the period was 2.29% and return on average equity was 16.4%.
Despite certain headwinds in each business, our collective business model was able to generate strong earnings and grow capital, while at the same time returning capital to shareholders through dividends and share repurchases.
PlainsCapital Bank generated pre-tax income of $87 million compared to a pre-tax loss of $17 million in Q2 2020.
Improvements in the economic outlook and positive credit migration drove a $29 million reversal of provision, compared to a provision expense of $66 million in Q2 2020.
Outside of a few pockets of weakness such as business focused hotels, our borrowers generally are seeing improved results with the economy reopening and robust activity.
Strong deposit growth has continued with average interest-bearing deposits, excluding broker deposits and HilltopSecurities sweep deposits, increasing by 26% from Q2 2020.
This growth was partially offset by the planned run-off of approximately $858 million in broker deposits and the reduction in HilltopSecurities sweep deposits of approximately $690 million, as we optimize our liquidity sources and defend our net interest margin.
We attribute this core deposit growth primarily to increased liquidity in the market from government stimulus and the work our bankers have done to increase deposits from existing and new clients.
Total average bank loans declined modestly by 2% versus Q2 2020 as PPP loans have run off and commercial loan growth remains pressured.
Quality loan demand has been muted as our borrowers are flushed with liquidity, leading to pay-downs and payoffs or the use of elevated liquidity to fund capital expenditures and other investments before seeking bank debt.
However, the Texas markets we are in continue to experience significant activity from business and household migration, which should drive meaningful long-term opportunities for the bank, specifically in higher growth markets such as Austin and Dallas, with products like multifamily.
Importantly, our business model has allowed us to selectively retain high quality mortgages from PrimeLending to support loan balances and provide improved yield opportunities for our elevated liquidity and capital.
PrimeLending had another solid quarter, generating $49 million in pre-tax income.
While the mortgage market has begun to normalize compared with the frenzied activity in 2020, volumes and profitability still remain elevated relative to the historical levels.
PrimeLending originated $5.9 billion in volume with a gain on sale margin on loans sold to third parties of 364 basis points.
Although, average mortgage interest rates declined year-over-year, refinance volumes decreased to 32% of total origination compared to 47% in Q2 2020.
A decrease in mortgage interest rates typically leads to an increase in refinancing volume.
However, significant refinancing activity during 2020 has limited the population of loans eligible for refinance.
Importantly, our focus on home purchase mortgage origination should allow us to outperform the broader market.
As the third-party market for mortgage servicing has continued to improve, we have reduced our retained servicing to 25% of total mortgage loans sold during the quarter and executed an MSR sale of $32 million, reducing our MSR assets to $124 million.
In addition to rate, inventory and affordability are the main themes we are paying attention to in the mortgage industry.
With low inventory continuing to drive home prices higher, the properties that are available are increasingly getting out of reach for buyers.
This phenomenon affects both volume as well as gain on sale margins as certain products are more competitive in this environment.
Despite the ever-shifting mortgage landscape, PrimeLending continues to execute well on its growth strategy, primarily centered on hiring purchase-oriented loan officers.
In the second quarter, PrimeLending had a net gain of 11 loan officers that we believe could add incremental annual volume of nearly $300 million.
For HilltopSecurities, they generated $6.9 million of pre-tax income on net revenues of $94 million for a pre-tax margin of 7.3%.
This was a challenging quarter for the mortgage-centric and fixed income businesses.
Although these businesses have performed exceptionally over the past year, they are subject to volatility, which illustrates the importance of diversified revenue streams within HilltopSecurities.
The Structured Finance business was adversely impacted by mortgage market volatility in March and April and generated net revenue of $11.5 million, a decline of 75% from Q2 2020.
On a positive note, lock volumes remain relatively strong compared to pre-2020 historical level as we continue to add and maintain strong relationships with the existing clients.
Importantly, our Public Finance and Wealth Management businesses generated revenue and income growth and we are pleased with their positive momentum.
Moving to Page 4, Hilltop maintained strong capital with common equity tier 1 capital ratio of 20% at quarter end.
During the quarter, Hilltop returned $55 million to shareholders through dividends and share repurchases.
The $45 million in shares repurchased are part of the $75 million share authorization the Board granted in January.
This week, the Hilltop Board authorized an increase to the stock purchase program to $150 million, an increase of $75 million.
Factoring in shares repurchased made during the first half of 2021, Hilltop now has approximately $100 million of available capacity through the expiration of the program in January 2022.
Even with sizable capital distributions to shareholders over the past two years, including the opportunistic tender offer executed in 2020, our tangible book value per share has grown at a compound annual rate of 21%, because of the profitability of our unique business model.
We plan to continue to prudently distribute capital to our shareholders through dividends and share repurchases.
In closing, Hilltop's performance in the quarter highlights the versatility of our franchise and the value of our diversified operating model.
Although near term headwinds and volatility may occur, we believe each of our businesses are well positioned to take advantage of profitable growth opportunities and that we have the leadership, capital, and strategies in place to build on our franchise.
I'll start on Page 5.
As Jeremy discussed, for the second quarter of 2021, Hilltop reported consolidated income attributable to common stockholders of $99 million, equating to $1.21 per diluted share.
Included in the second quarter results was a net reversal of provision for credit losses of $28.7 million, which included approximately $500,000 of net charge-offs in the quarter.
On Page 6, we've detailed the significant drivers to the change in allowance for credit losses for the period.
The most significant drivers in the quarter were the positive migration of certain credits in the portfolio and the further improvement in the expected macroeconomic outlook.
First, related to the macroeconomic outlook, we leveraged the Moody's S7 scenario for our second quarter analysis.
This scenario highlights improving real GDP and unemployment trends coupled with increasing risk of higher inflation in future periods versus the economic scenarios selected for our first quarter assessment.
The impact of the improving economic outlook resulted in the release of $11 million of ACL during the second quarter.
The second key driver was the ongoing improvement in credit quality across the portfolio.
During the quarter, the restaurant portfolio experienced positive migration, resulting from improving financial performance and more resilient outlook for future periods.
Further, the business saw broader-based improvement across the served clients whereby their full-year 2020 results were not as severely impacted as was previously expected and their first half results were improving from prior risk rating assessment periods.
The result of the improvements at the client level equated with net release of ACL of $17 million during the second quarter.
The combination of improved client performance and the improving macroeconomic inbound [Phonetic] outlook which were only modestly offset by net charge-offs resulted in allowance for credit losses for the period ending June 30 of $115 million or 1.51% of total loans.
Further, the coverage ratio of ACL to total loans increases to 1.86%.
The loans that we believe have lower loss potential include PPP, broker dealer, and mortgage warehouse loans are excluded.
Turning to Page 7, net interest income in the second quarter equated to $108 million, including $12.4 million of PPP-related interest and fee income as well as purchase accounting accretion.
Net interest margin declined versus the first quarter of 2021 driven by lower PPP fee recognition, higher average cash balances, and continued pressure on loan held for investment yields.
Somewhat offsetting these items were higher loans held for sale yields resulting from higher overall mortgage rates, coupled with lower interest bearing deposit costs, which should continue to trend lower as expected, finishing the quarter down 9 basis points at 32 basis points.
We continue to expect that interest-bearing deposit cost will move modestly lower over the coming quarters as the consumer CD portfolio continues to mature and reset the lower yields.
As it relates to asset yields, the current competitive environment for commercial loans is resulting in substantial pressure on new business loan yields as well as our ability to maintain current floor rates.
Further, with funded loan growth continuing to be slower than we expected, we are increasing the level of one-to-four family loans we are retaining on the balance sheet to approximately $50 million to $75 million per month from the prior outlook of $30 million to $50 million per month.
As we've alluded in the past calls, we are using the one-to-four family loan retention approach to offset the slower growth in commercial lending environment.
While this does provide a high quality source of asset and net interest income, these loans generally carry a yield below that of our traditional commercial loans, and as a result, will put downward pressure on NIM.
To that end, we expect that NIM will maintain -- will remain pressured into the second half of 2021 moving lower toward 240 basis points and 250 basis points by year-end.
Turning to Page 8, total non-interest income for the second quarter of 2021 equated to $340 million.
Second quarter mortgage-related income and fees decreased by $99 million versus the second quarter of 2020, driven by lower origination volumes, declining gain on sale margins and lower lock volumes.
As it relates to gain on sale margins, we note in our key driver tables on lower right of the page, the gain on sale margin on loans fell 22 basis points versus the prior quarter.
Further, we are providing the impact on gain on sale margin related to these loans that have been retained on the balance sheet.
For additional clarity, the reported gain on sale is the margin reported by our mortgage origination segment and replaced all loans distributed and retained on the balance sheet.
Gain on sale of loans sold to third parties provides the margin on those loans that were distributed outside of Hilltop Holdings or purchased at market value.
During the second quarter of 2021, the environment in mortgage banking remained solid, and as expected, continued to shift to a more purchase mortgage-centric marketplace.
For the second quarter, purchase mortgage volumes increased by $1.1 billion or 38.5%, while refinance volumes declined 43% or $1.4 billion versus the first quarter origination level.
We expect this trend to continue toward a more purchase mortgage-centric market over the coming quarters, which should continue to pressure gain on sale margins into the future.
We continue to expect the gain on sale margins for third-party sales will fall within the full year average range of 360 basis points and 385 basis points.
Other income declined by $37 million, driven primarily by declines in TBA lock volumes, volatility in market rates and volatile trading and fixed income capital markets.
As we noted in the past, the structured financing fixed income to capital market businesses can be volatile from period to period and they are impacted by interest rates, market volatility, origination volume trend and overall market liquidity.
Moving to Page 9, non-interest expenses decreased from the same period in the prior year by $27 million to $343 million.
The decline in expenses versus the prior year was driven by decline in variable compensation of approximately $35 million at HilltopSecurities and PrimeLending.
This decline in variable compensation was linked to lower revenues in the quarter compared to the prior year period.
Looking forward, we continue to 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.
Moving to Page 10, end of period HFI loan equated to $7.6 billion.
As we've noted on prior calls, we expected that loan growth will be challenging during the first half of 2021 and the results bear that out.
We've seen substantial increases in competition for quality loans across our Texas markets, which we expect will continue into 2022.
Further, the ongoing growth in available liquidity both on bank balance sheet and customer balance sheets could further delay a return to more normal commercial loan growth rates for at least a few quarters.
We continue to expect full year average total loan growth, excluding PPP loans, will be within a range of zero to 3%.
As noted earlier, we are increasing the level of retention of one-to-four family loans originated in PrimeLending to between $50 million and $75 million per month.
During the second quarter of 2021, PrimeLending locked approximately $176 million loans to be retained by PlainsCapital over the coming months.
These loans had an average yield of 3.11% and an average FICO and LTV of 780% and 64%, respectively.
Turning to Page 11, second quarter credit trends continue to reflect the slow but steady recovery in the Texas economy as the reopening of businesses continues to provide for improved customer cash flows and fewer borrowers on active deferral programs.
As of June 30, we have approximately $76 million of loan on active deferral programs, down from $130 million at March 31.
Further, the allowance for credit losses to end-of-period loan ratio for the active deferral loan equates to 16.8% at June 30.
As is shown in the graph at the bottom right of the page, the allowance for credit loss coverage ratio, including both mortgage warehouse lending as well as PPP loans at the bank ended the second quarter at 1.64%.
We continue to believe that both mortgage warehouse lending as well as our PPP loans will maintain lower loss content over time.
Excluding mortgage warehouse and PPP loans, the bank's ACL to end-of-period loans HFI ratio equated to 1.86%.
Turning to Page 12, second quarter end-of-period total deposits were approximately $11.7 billion and remained stable with the first quarter 2021 levels.
While the overall balances were relatively unchanged, the mix of deposits continues to improve as brokered deposits declined approximately $300 million and non-interest-bearing deposits rose by approximately $200 million versus the first quarter 2021 levels.
Given our strong liquidity position and balance sheet profile, we are expecting to allow brokered deposits to mature and run-off.
At 6/30/21, Hilltop maintained $268 million of brokered deposits that have a blended yield of 31 basis points.
While deposit levels remains 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 focused client acquisition efforts.
Turning to Page 13, in 2021, we continue to remain nimble as the pandemic evolves to ensure the safety of our teammates and our clients.
Further, our financial priorities for 2021 remains centered on delivering great customer service to our clients, attracting new customers to our franchise, supporting new communities where we serve, maintaining a moderate risk profile, and delivering long-term shareholder value.
Given the current uncertainties in the marketplace, we are 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 call. | q2 earnings per share $1.08 from continuing operations.
q2 earnings per share $1.42 including items. | 0 |
Due to the large number of participants on the Q&A portion of today's call, we're asking everyone to limit themselves to one question to make sure we can give everyone an opportunity to ask questions during the allotted time.
We are willing to take follow-up questions, but ask that you rejoin the queue if you have a second question.
Before I get into the slides, let me give you some perspective on our second quarter.
And I think as you'll see in our results, we are continuing to demonstrate the strength of our diverse portfolio and the benefit of content growth across our businesses.
We are delivering organic growth ahead of our markets as well as strong operational performance and free cash flow generation.
I would say this performance is in a world with an improving economic backdrop that is dealing with global supply chains that are trying to keep up with the broader macro recovery.
We are continuing to execute our business model, and you can see this in our second quarter results as well as the guidance that we provide for the third quarter, and I'll talk about a little bit more today.
So let me also provide some key messages about today's call.
First off, I am very pleased with our execution in the second quarter.
We delivered sales growth of 17% and generated record quarterly adjusted earnings per share of $1.57, and this earnings per share represents growth of 22% year-over-year.
Our sales were ahead of our expectations, and it was broad across each segment, driven by the continued recovery in most end markets we serve, our broad leadership positions and the benefits of the secular trends that we're strategically positioned to capitalize on.
Also, our adjusted operating margins expanded 80 basis points year-over-year to 17%, and this was driven by margin expansion in both our Transportation and Communications segments.
I also believe that you're going to continue to see us demonstrate our strong cash generation and truly evident of that is our year-to-date free cash flow, which was approximately $1 billion, which is also a Company record for the first half of the fiscal year.
And as we look into our third quarter, we are expecting our strong performance to continue, with sales and adjusted earnings per share at similar levels to what we just delivered in the second quarter.
With that as a little bit of a backdrop, I do want to take a moment to frame out the current market environment and our business relative to where we were just 90 days ago when we last spoke.
In our Transportation segment, consumer demand in autos continues to remain strong, and auto production is remaining stable in the range of 19 million to 20 million units per quarter globally, even with the well-documented semi shortages, and we've also seen further strength in our commercial transportation end markets.
The trends around content growth remain strong as we continue to benefit from increased electrification of vehicles and higher production of electric vehicles, which will enable us to continue to outperform auto production going forward.
In our Industrial segment, we see increased momentum in the recovery of industrial equipment markets due to factory automation and increasing manufacturing capital expenditure trends.
Also in our Industrial segment, the Commercial Aerospace and Medical businesses are still being impacted by COVID, and this is similar to what we mentioned last quarter, but we do continue to see indicators of stability in our orders in both of these businesses.
In our Communication segment, the market trends we mentioned last quarter are continuing.
Consumer demand is getting stronger, and globally we've seen an increase in appliance demand.
We continue to see strong ongoing capital expenditure trends in the cloud applications as well as acceleration of demand around the data center.
And when you think about these trends I just covered in our segments as a backdrop, the faster than expected recovery in the markets that I mentioned has resulted in some challenges as the industries we serve replenish their supply chain and look to further secure supply.
While this dynamic has benefited our orders, which remains strong, it has caused broader supply chain pressure, and the pressure we're experiencing is factored into our expectations for the third quarter guidance, and Heath will provide more color on this in his section.
And the last thing I want to highlight is, let's all remember that we are still in a world that's still on COVID.
We continue to see countries go into lockdown again, and this is impacting some of our customers and their supply chains.
And certainly while vaccines are getting rolled out in certain parts of the world, the pace of the deployment and availability of the vaccines varies greatly by country, so some uncertainty remains.
Our focus has been and will continue to be on keeping our employees safe while also helping our customers capitalize on the improving economic conditions.
Second quarter sales of $3.7 billion were better than our expectations in each of our segments.
They were up 17% on a reported basis and 11% organically year-over-year.
We had 15% organic growth in our Transportation segment, with double-digit growth across all businesses.
We also had very strong performance in our Communications segment, with organic growth of 29%, which was strong double-digit growth in both of the businesses in that segment.
And in our Industrial segment, sales were down 4% organically due to the ongoing weakness in the commercial aerospace market.
From an orders perspective, second quarter orders were $4.6 billion, and this was up 36% year-over-year.
It reflects both the improvement in the markets that I mentioned, along with inventory replenishment in the supply chain by our customers.
Our earnings per share was a record at $1.57 in the quarter, and this was up 22% year-over-year and was driven entirely by our operating performance, resulting in adjusted operating margins being up 80 basis points year-over-year.
I am pleased that we were able to manage the broader supply chain pressures which all companies are dealing with and had margin expansion.
From a free cash flow perspective, in the second quarter free cash flow was $477 million, with approximately $340 million being returned to shareholders.
As we look forward, we expect our strong performance to continue into the third quarter, with sales and adjusted earnings per share being similar to our second quarter levels.
For the third quarter, we expect sales to be approximately $3.7 billion, and this is up significantly year-over-year on both a reported and an organic basis, and we expect adjusted earnings per share to be $1.57, which is in line with the levels we just saw in the quarter we just closed.
As I already stated in the quarter, our orders were very strong at approximately $4.6 billion, and we had a book to bill of 1.22.
Orders in transportation and in Communications were up 50% and 45% respectively.
And this increase reflects both market recovery and supply chain replenishment in both of those segments.
In these segments, customers are not only placing orders to meet current production needs, but also replenishing the supply chains that were depleted during fiscal 2020.
I would also highlight that with some of the shortages in semiconductors and certain passive components, we are seeing some areas where customers are placing orders to secure supply beyond our lead times.
In our Industrial segment, it is a different picture than what we're seeing in Transportation and Communications.
But what is nice is that despite the year-over-year sales decline we had in this segment, we have seen orders growth of 7%, and that's driven by the continued recovery in the industrial equipment market, partially offset by the weakness in commercial aerospace segment.
Let me also, on orders, add some color what we're seeing organically on a geographic basis, and I want to do this on a sequential basis to show where order momentum is.
In China, our orders were up 3% from a strong base from fiscal quarter one.
And that growth was really driven by our Industrial and Communication segments.
Orders on a sequential basis in Europe were up 14%, and North America sequential orders were up 22%, and that was broad based growth across all our segments than those two regions.
So let me get into our year-over-year segment results and there are slides 5 through 7.
Transportation sales were up 15% organically year-over-year, with growth in each of the businesses.
In auto, our sales were up 14% organically.
And year-to-date, we are generating content outperformance over production in our expected 4% to 6% range.
We continue to benefit from our leading global position and increased production of electric vehicles, and as you've probably seen, the number of EV launches are increasing by our customers around the world.
In commercial transportation, similar to our first quarter, we saw 25% organic growth, driven by ongoing emission trends, content outperformance and ongoing share gains.
We are continuing to benefit from stricter emission standards and the increased operator adoption of Euro 5 and 6 in China which reinforces our strong position in that country.
We saw growth in all regions in our commercial transportation business, along with double-digit growth in all market verticals that we serve in this business.
The other nice thing that we continue to see is, we see increased wins on electric powertrain platforms and trucks which give us confidence about the future content potential in this market in out years.
In our sensors business, we saw 13% organic growth with growth in all markets and double-digit growth in auto applications.
We do continue to expand our design win pipeline in auto sensing and expect growth as these platforms continue to increase in volume.
From a margin perspective, adjusted operating margins for the segment expanded 80 basis points to 18.1%, driven by higher volumes versus the prior year and despite the supply chain pressures.
So if we now turn to the Industrial segment.
As I said earlier, our sales declined 4% organically year-over-year.
During the quarter, the segment continued to be impacted by the decline in the commercial aerospace market, with our aerospace, defense and marine business declining 21% organically year-over-year.
As I covered already, based upon the order patterns we do believe this business is showing signs of stabilization at the current quarter levels.
And when you think about our industrial equipment market, it was very strong and up 16% organically, with growth in all regions and increasing strength in factory automation applications where we're benefiting from accelerating capital expenditures in areas like semiconductor equipment as well as along the auto manufacturing supply chain.
We continue to see weakness in our medical business in our Industrial segment, and it was down 13% organically year-over-year, and this is being driven by ongoing delays in interventional elective procedures caused by COVID, and the dynamics we're experiencing in medical are consistent with what our customers are seeing, and we expect this market to return to growth as these procedures start to increase later in the year.
And lastly in the Industrial segment, our energy business, we saw 4% organic growth, and this was driven by increase in penetration of renewables, especially benefiting from solar applications around the world.
From a margin perspective, in Industrial Solutions our margins declined year-over-year to 12.5%, and that was really driven by the significant drop in commercial aerospace volumes.
So let me cover the Communications segment.
And in this segment, we continue to benefit from both the market recovery and share gains while delivering very strong operational performance.
Sales in the segment grew 29% organically year-over-year, with strong growth in both data & devices and appliances.
In data & devices, our sales grew 24% organically year-over-year due to the strong position we have built in high-speed solutions for cloud applications.
Favorable secular trends in cloud services are leading to increased capital expenditure by our customers and our content and share gains are enabling us to grow on cloud-related sales at double the market rate.
Just to give you an example, at one of the major cloud providers we are now providing 6x the content on the next-generation server applications versus the prior generation.
In our appliances business, we are also seeing strong growth trends.
Sales grew 35% organically year-over-year, driven by our leading global market position, share gains and ongoing market improvement across all regions.
From a margin perspective, our Communications segment and team delivered very strong execution in the quarter and delivered 21% adjusted operating margins, and these were up 720 basis points versus the prior year.
I am pleased with the way our team has worked through the supply chain pressures to deliver the strong operating margin expansion in this environment and our Communication teams are capitalizing on growth trends in their end markets, while delivering strong operational execution, and you see this reflected in our results.
Adjusted operating income was $637 million, up approximately 23% year-over-year with an adjusted operating margin of 17%.
GAAP operating income was $612 million and included $17 million of restructuring and other charges and $8 million of acquisition-related charges.
We continue to optimize our manufacturing footprint and improve the cost structure of the organization and continue to expect total restructuring charges in the ballpark of $200 million for fiscal '21.
Adjusted earnings per share was $1.57 and GAAP earnings per share was $1.51 for the quarter and included restructuring, acquisition and other charges of $0.06.
The adjusted effective tax rate in Q2 was approximately 17%.
For the third quarter, we expect our tax rate to be up slightly sequentially and continue to expect an adjusted effective tax rate around 19% for fiscal '21.
Importantly, we expect our cash tax rate to stay well below our reported ETR for the full year.
Now turning to slide 9.
Sales of $3.7 billion were up 17% versus the prior year and 6% sequentially, demonstrating the strength of our portfolio.
Currency exchange rates positively impacted sales by $115 million versus the prior year.
Adjusted earnings per share of $1.57 was up 22% year-over-year and 7% sequentially, reflecting our strong operational performance.
Adjusted operating margins were 17% and expanded 80 basis points versus the prior year.
While we would have expected higher fall-through on this level of sales growth, we saw impacts of higher freight charges and other supply chain pressures in the quarter, and these will continue into the third quarter.
And as you are aware, these supply chain issues are having a broader impact on our customers and suppliers as well.
As Terrence mentioned, the supply chain is catching up to the increased level of demand we are seeing in many of our end markets, and given these dynamics, I'm pleased with the results we delivered in the quarter and of our momentum going forward, as shown in our third quarter guidance.
In the quarter, cash from operating activities was $580 million.
We had very strong free cash flow for the quarter of $477 million and a year-to-date free cash flow of approximately $1 billion, which is a record for the first half of a fiscal year.
We returned approximately $340 million to shareholders through dividends and share repurchases in the quarter.
Our strong free cash flow performance demonstrates the strength of our cash generation model, and we expect to -- we continue to expect free cash flow conversion to approximate 100% for the full year.
We remain committed to our disciplined use of cash, and over time, we expect two-thirds of free cash flow to be returned to shareholders and one-third to be used for acquisitions.
Before we go to questions, I want to reiterate that we remain excited about how we have positioned our portfolio with leadership positions in the markets we serve, along with organic growth and margin expansion opportunities ahead of us.
To summarize, the outlook for many of the markets we serve is consistent with what we were seeing 90 days ago, along with some acceleration of growth in the commercial transportation, industrial equipment and communications markets.
We are continuing to see the benefits of secular trends across our portfolio and are capitalizing on these opportunities.
The economic recovery has been faster than expected, and we are seeing the corresponding near-term pressures in the broader supply chain as a result.
These impacts will be resolved, and nothing has changed with respect to our growth and margin expansion expectations.
We are executing well with things we can control, and our outlook for Q3 continues to reflect the strength of our portfolio.
We expect to continue to generate strong free cash flow, maintain a disciplined and balanced capital strategy and drive to our business model performance.
And we remain focused on value creation for our stakeholders going forward.
Michele, could you please give the instructions for the Q&A session? | q1 adjusted earnings per share $1.47.
q1 gaap earnings per share $1.13 from continuing operations.
q1 sales $3.5 billion versus refinitiv ibes estimate of $3.26 billion.
sees q2 adjusted earnings per share about $1.47.
sees q2 sales about $3.5 billion.
qtrly orders of approximately $4 billion, up 25% year over year. | 0 |
These statements are based solely on information that is now available to us.
Additionally, our future performance may differ due to a number of factors.
We also discuss financial measures that do not conform to U.S. GAAP.
We appreciate your interest in SEE and hope you and your families are staying safe and healthy.
We're working through very exciting and challenging times as we transform SEE.
We're accelerating our strategy to take us to world-class in everything we do.
As you can see on Slide 3, we're in the business to protect, to solve critical packaging challenges and to make our world better than we found it.
I'll share our strategy for growth in automation, digital and sustainability within our global markets.
Chris will review our financial results and outlook in more detail.
I will then end with closing remarks and before opening the call for Q&A.
Net sales increased 15% with 9% volume growth, led by strength in Americas, in Europe, Middle East and Africa regions.
Adjusted EBITDA increased 1%, and margins were under pressure at 19.8% compared to 22.6% last year.
This year, we experienced higher volumes, additional productivity gains and pricing actions against dramatic inflationary cost pressures and supply disruption.
Also, relative to last year, we had pandemic-induced surges in essential products and minimized expenses due to lockdowns.
On a per-share basis, earnings of $0.79 were up $0.03 compared to last year.
We generated free cash flow of $102 million in the first six months of the year, which compared to $129 million in the first half of last year.
We are raising our full year sales and adjusted earnings per share outlook and reiterating our prior guidance for adjusted EBITDA and free cash flow.
Our SEE Operating Engine is delivering sales growth and productivity gains mitigated the adverse supply environment in the second quarter.
This engine, coupled with expected price realization, is enabling us to maintain our adjusted EBITDA guidance for the full year and drive continuous improvement going forward.
I want to highlight our SEE operating model on Slide 5, which clearly defines where we're taking SEE in the future and what you should expect us to deliver.
Our organic sales target is built up in a historically stable packaging market that grows 1% to 3%.
We've been adding to this base with our innovations in automation, digital and sustainability to take us to an organic sales growth target of 3% to 5%.
Our operating leverage target is over 30%, which drives adjusted EBITDA growth to 5% to 7%.
We're targeting adjusting earnings-per-share growth of greater than 10% and free cash flow conversion of more than 50%.
Our SEE operating model delivers significant cash for our disciplined capital allocation.
We are fueling growth opportunities with our investments in innovation and capex.
Through SEE Ventures investments, we're utilizing our balance sheet to incubate disruptive technologies and new business models to accelerate our future growth.
We're also returning value to our shareholders through share repurchase and dividends.
We approved a new $1 billion share repurchase program and recently increased our dividend by 25%.
Our approach to capital allocation reflects our confidence in our vision, strategy and execution of our SEE Operating Engine.
We encourage you to visit our website where you can read about our innovation and customer success stories.
We create measurable value for our customers through automated and sustainable solutions that are designed to maximize safety, minimize waste, protect goods and deliver productivity savings.
In the second quarter, we had strong growth across our end markets.
We are leading a dramatic shift to a touchless, automated environment for all customers, resulting in more than 30% growth in our SEE automation portfolio.
We're ahead of our plan to double our equipment business in the next three years.
For our food customers, our SEE Automation growth is a result of our integrated touchless systems with our high-performance Cryovac materials.
Bookings for AUTOBAG and auto box equipment were up more than 50% in the first half of the year, and we're investing more than $30 million in capacity expansion to help meet the strong demand for our equipment solutions.
Our automated solutions address labor shortages, productivity and employee safety.
We're at the table with our customers, providing connectivity from our operations to theirs, which is helping all of us exceed our sustainability commitments.
Restaurants, sporting events, conferences and other large public menus are cautiously reopening.
Our solutions with high exposure to food service returned to growth for the first time since Q1 2020.
We are seeing growth in our Cryovac Barrier Bags utilized across all proteins, including cheese and seafood; and Cryovac pouches for soups, sauces, beverages and other liquids.
Our industrial markets were up double digits in the Americas, Europe, Middle East and Africa regions compared to last year when there were pandemic-related shutdowns.
We continue to capitalize on global e-commerce growth and increased demands for recyclable materials, fiber-based solutions and automated packaging that minimizes waste.
In medical, pharma and life sciences, we play a key role in the COVID-19 vaccine distribution benefit from growth in online shipments of medical equipment and pharmaceuticals.
Now turning to Slide seven for an update on SEE Automation.
In the first half of the year, equipment, systems and service sales were up 26% and accounted for 8% of our net sales.
We're on track to achieve approximately $425 million or 12% growth in 2021, of which more than $250 million will come from equipment and systems.
Our bookings for automated equipment are strong.
We're confident in our ability to exceed $500 million by 2025.
When you factor in a 3 times plus solutions multiplier, including growth in parts and service from the installed base and the flow-through of materials, this results in a $5 billion plus potential growth opportunity over the 10-year solutions life cycle.
The solutions multiple is why we are so excited about SEE Automation.
Sustainability is in everything we do and fueling our growth.
We are making significant progress on our 2025 sustainability pledge with nearly 50% of our solutions already designed for recyclability.
Our innovation strategy is focused on maintaining the high-quality standards that our customers are accustomed to in food safety, minimizing waste and protecting goods.
We are continuously optimizing our high-performance materials and incorporating more recycled and/or renewable content to drive circularity and make sustainability more affordable.
We're also collaborating and investing with partners on mechanical and advanced recycling.
As part of SEE Ventures, we recently joined the Closed Loop Circulars Plastics Fund.
This fund invests in scalable recycling technology, equipment upgrades and infrastructure solutions to advance the recovery of plastics in the U.S. and Canada.
You can see a handful of our solutions designed for recyclability on this slide with many more shared on our website.
Earlier this year, we established a net-zero carbon emissions goal across our operations by 2040.
We're taking many actions to reduce our energy consumption, such as investing in touchless automation, upgrading air compression systems and utilizing LED lighting.
We're also investing in renewable energy sources, including solar and wind.
Between 2012 and 2020, our greenhouse gas emissions intensity decreased by a remarkable 50%.
We'll share more details in our upcoming annual sustainability report that will be available on our website in the early fall.
I'll now pass the call to Chris to review our results in more detail.
Let's start on Slide nine to review our quarterly net sales growth by segment and by region.
In the second quarter, net sales totaled $1.3 billion, up 15% as reported, up 11% in constant dollars.
Food was up 6% in constant dollars versus last year, and protective increased 20%.
EMEA and the Americas were both up double digits: EMEA up 16%; and the Americas up 13%.
APAC was flat versus last year with a modest decline in volumes, offset by favorable price.
On Slide 10, you see organic sales volume and pricing trends by segment and by region.
In the second quarter, overall volume growth was up 9% on favorable price of 3%.
Let's start with volumes.
Food volumes were up 4%; with the Americas, up 7%; and EMEA up 2%.
This was offset by a 3% decline in APAC, largely related to Australia herd rebuilding.
Protective volumes were up 15%; with the Americas, up 13%; and EMEA up 36%, while APAC had a modest decline.
Q2 price was favorable 3%.
You can see that Protective had 5% in favorable pricing, and Food was 1% due to timing of pricing actions and formula pass-throughs.
We have implemented several price increases and expect 2021 price realization to be $275 million.
On Slide 11, we present our consolidated sales and adjusted EBITDA walks.
Having already discussed sales, let me comment on our adjusted EBITDA performance in Q2.
We delivered adjusted EBITDA of $263 million, up 1% compared to last year, and margins of 19.8%, down 280 basis points, reflecting the impact of the current inflationary environment and supply chain disruptions.
We are leveraging our higher volumes at 40% as we experienced a more favorable product mix.
Despite favorable pricing in the quarter, you can see how higher input costs weighed on our EBITDA performance with an unfavorable price/cost spread of $36 million.
Operational costs increased approximately $13 million relative to last year.
This increase reflects investments to support growth, inflation on labor and indirect material costs as well as the normalization of spend in the quarter.
This was partially offset by $13 million in Reinvent SEE productivity benefits.
We expect our price/cost spread to improve sequentially in the third quarter.
However, we do not expect to see positive price/cost spread until Q4.
Adjusted earnings per share in Q2 was $0.79 compared to $0.76 in Q2 2020.
Our adjusted tax rate was 25.6%, reflecting a more favorable mix of foreign earnings.
Our weighted average diluted shares outstanding in the quarter were 153 million.
We exited the quarter with 150 million shares outstanding.
Turning to Slide 12.
Here, we provide an update on Reinvent SEE.
We have achieved $28 million of benefits in the first half of the year and remain on track to realize approximately $65 million in 2021.
Our commercial work stream is accelerating innovation and driving new customer wins in core and adjacent markets.
Turning to segment results on Slide 13, starting with Food.
In Q2, Food net sales of $737 million were up 6% on a constant dollar basis.
Cryovac Barrier Bags and pouches returned to growth, increasing approximately 10% and accounting for nearly 50% of the segment sales.
This growth reflects the beginning of food service recovery relative to last year when protein plants and restaurants, sporting events and other large venues were shut down.
Sales in case-ready and roll stock retail applications, which accounts for just over 40% of segment sales, were down low single digits as supply disruptions impacted our results.
In addition, this is against the backdrop of tough comps given the surge in demand from shutdowns a year ago.
Equipment parts and sales -- and service sales, which accounts for 8% of the segment, were up nearly 40% in the quarter.
We are experiencing increased demand for our automated solutions as our customers around the world invest in their processing plants to upgrade aged equipment and drive productivity.
Adjusted EBITDA in Food of $158 million in Q2 declined 6% compared to last year with margins at 21.5%, down 360 basis points.
This decline was related to elevated input costs, supply disruptions and the timing of pricing actions.
On Slide 14, we highlight Protective segment results.
In constant dollars, net sales increased 20% to $592 million.
Industrial was up approximately 30% relative to last year when automobile and general manufacturers were forced to temporarily shut down their operations.
Fulfillment, which is largely driven by e-commerce growth, was up approximately 10% on a global basis, led by double-digit growth in automated equipment, inflatable solutions, paper and temperature assurance.
We leveraged our broad portfolio and global scale to meet increased demand despite ongoing supply issues, such as industry-related chip shortages out of Asia.
The $30 million investments in capacity that Ted referenced earlier will help us meet increased customer demands for automation equipment.
As a reminder, approximately 55% of our Protective sales are derived from industrial end markets and the remaining 45% from fulfillment and e-commerce.
Adjusted EBITDA of $107 million increased 17% from Q2 with margins at 18.1%, down 100 basis points versus last year.
Higher sales and productivity gains helped mitigate higher input and supply disruption costs.
Now let's turn to free cash flow on Slide 15.
In the first half of 2021, we generated $102 million of free cash flow.
Relative to the same period last year, higher earnings and lower restructuring payments were offset by higher employee-related costs and capex investments to support growth and innovation.
On Slide 16, we outline our capital allocation strategy.
We will maintain a strong balance sheet while driving attractive returns on invested capital and supporting profitable growth initiatives.
In addition, we have a healthy acquisition pipeline that aligns with our growth strategy.
On this slide, I want to highlight our growth investments.
We are focusing our capex on breakthrough processes, automation, digital and sustainability.
With SEE Ventures, we have invested approximately $40 million in early stage disruptive technologies and business models that are expected to accelerate our strategy and innovation efforts.
As it relates to returning capital to shareholders, in Q2, we were an active buyer of our stock.
We repurchased 6.1 million shares for $299 million during the first six months of 2021, reflecting confidence in our vision, strategy and execution.
And as Ted noted, today, we announced a new $1 billion share repurchase program, continuing our commitment to return value to shareholders.
This new program has no expiration date and replaces the previous authorization.
During the second quarter, we also announced an increase to our quarterly cash dividend of 25%.
We are raising our net sales guidance, reflecting strong first half sales performance and outlook for the remainder of the year.
For net sales, we estimate $5.4 billion to $5.5 billion or 10% to 12% as-reported growth and 8% to 10% in constant dollars compared to our previously provided $5.25 billion to $5.35 billion range.
At the midpoint, the $150 million increase in constant dollar sales largely reflects additional pricing.
We continue to anticipate adjusted EBITDA to be in the range of $1.12 billion to $1.15 billion.
On a reported basis, adjusted EBITDA is expected to grow 7% to 9%.
Higher sales are expected to help offset increased material and supply disruption costs.
Given the timing of pricing actions, we anticipate a modest sequential improvement in EBITDA in Q3 with a more meaningful improvement in Q4.
We are raising our 2021 outlook for adjusted earnings per share to $3.45 to $3.60, and we continue to expect a 45-55 first half, second half percentage split.
Our outlook assumes 153 million average shares outstanding, one million reduction from our prior guidance, given share repurchases in the first half, and an adjusted effective tax rate of approximately 26%.
And lastly, our free cash flow outlook continues to be $520 million to $570 million.
There is no change to our outlook for 2021 capex of approximately $210 million and Reinvent SEE restructuring and associated payments of approximately $40 million.
As you can see on the slide, we wanted to provide a few variables as it relates to our 2021 guidance range.
The low end of our range would assume the magnitude and duration of material inflation and supply chain headwinds persist longer than anticipated and a slower pace of food service recovery.
The high end implies market and geographic share gains; continued strength in automation, industrials, e-commerce and food; and overperformance of our SEE Operating Engine.
With that, let me now pass the call back to Ted for closing remarks.
We are clearly defining where we are taking SEE in the future and what you should expect us to deliver with our SEE operating model.
We differentiate ourselves in the markets we serve with a broad set of innovative packaging solutions, global service scale, entrepreneurship and agility.
Our people are working hard to exceed our customers' expectations.
This is core to who we are.
Our talent is driving our transformation to world-class.
We will continue to focus on 0 harm and protecting our people as the pandemic continues.
We are reinventing everything we do from how we innovate to how we solve our customers' most critical packaging challenges.
Our strategy is working.
We are creating sustainable long-term value for our stakeholders in making our world better than we found it.
Operator, we would like to begin the Q&A session. | stepan co increases quarterly cash dividend.
stepan co - board authorized company to repurchase up to $150 million of its common stock.
stepan co - approved an increase of $0.030 per share, or 9.8%, on its quarterly cash dividend to $0.335 per share.
compname posts q3 adjusted earnings per share $1.57.
q3 adjusted earnings per share $1.57.
stepan - surfacant volumes in north american consumer product end markets will continue to be challenged by raw material, transportation availability. | 0 |
Joining us today will be our Chief Executive Officer, Dennis Gilmore; and Mark Seaton, Executive Vice President and Chief Financial Officer.
The year is off to a great start with our core businesses achieving strong financial results.
Our outlook remains optimistic based on market trends, and we are confident that 2021 will be another good year.
Today, I'll focus my remarks on the progress we are making on a number of key strategic initiatives as well as our venture investment program.
Mark will then provide details on the first quarter results.
A transformation is well under way in the real estate sector, as paper intensive processes convert to digital.
First American is investing the time, expertise and capital to continue to lead the change within the title and settlement industry.
We continue to make significant investments in technology across all of our major businesses to enhance the customer experience through digital solutions.
Many of these efforts are now finding success in the marketplace.
In our commercial business, we've launched ClarityFirst, a platform that enables a streamlined closing process and provides greater transparency and efficiency relative to conventional methods.
We believe this is the first end-to-end digital solution for commercial real estate transactions.
Since the nationwide rollout in June, we have facilitated over 60,000 commercial transactions.
Endpoint is another example of First America's commitment to innovation.
A digital start-up that we've launched in Seattle in 2019 to reimagine the closing experience has captured a 2% market share in that area.
Encouraged by our success, we've recently entered six new markets, and we plan on growing to 20 markets by the end of the year.
In addition to providing a digital consumer experience, Endpoint is redesigning the closing process, and we anticipate significant productivity gains versus today's traditional settlement transactions.
Not only are we deploying new digital tools to reimagine the customer experience, we are accelerating our investment in data, we need to enhance our long-term competitive position.
Our data business has grown steadily over the last ten years.
Years ago, we set out to create a world-class property data company.
Today, we have the industry's most comprehensive and accurate property data, including title plant information.
In 2020, our data business exceeded $100 million of pre-tax earnings, a significant milestone.
A number of years ago, we set out to automate the manual data entry process.
We currently hold 11 patents covering OCR and data extraction, which has facilitated us to caption over 60% of our data in a fully automated manner.
We expect this percentage to continue to grow in the future.
This technology has allowed us to vastly increase the amount of data we capture.
We are currently capturing virtually every data point on 5 million documents per month.
Today, we have 500 title plants, which is the largest data repository in the industry to support title underwriting decisions.
Because of our patent extraction process, we have started the journey to add an additional 1,000 title plants on a go-forward basis.
In short, we are leading the effort when it comes to property data.
One benefit of having a strong data foundation is that it feeds automation of our title production.
Today, 96% of our Company's refinance transactions run through our automated underwriting engine.
Based on our own risk profile, we've achieved a fully automated underwriting decision on 50% of those orders, and we are semi-automated on additional 40%.
Given the success we've had with refinance automation, we have turned our attention to the purchase transactions.
All of these initiatives, whether related to closing data or title production, will improve the experience of our customers and our own productivity, which is why we have dedicated the necessary talent, capital and focus to lead the title and settlement industry in the digital era.
Turning to our venture strategy.
Since 2019, we've invested $225 million in venture-backed companies in the proptech ecosystem.
These investments give us insight into the high growth technology companies, and most of which have become strategic partners.
Not only have these investments added value from a strategic perspective, but they are providing financial upside as well, and Mark will elaborate further in his comments.
Venture investments have continued to be a component of our capital allocation strategy.
We believe the strategic and financial value of these investments to our shareholders will be attractive over the long term.
Additionally, I'm pleased to announce that we were recently named a Fortune 100 Best Company to Work For, for the sixth consecutive year.
Amid the challenges of 2020, we never lost sight of the fact that our employees are the key to our Company's success.
In closing, I'm very confident that 2021 will be another great year for First American.
We're pleased to report excellent results this quarter.
We earned $2.10 per diluted share.
Included in this quarter's results were $0.46 of net realized investment gains.
Excluding these gains, we earned $1.64 per diluted share.
I'll start with our title business.
Revenue in our Title segment was $1.9 billion, up 45% compared with the same quarter of 2020.
All three of our major markets; Purchase, Refinance and Commercial, were favorable this quarter.
Purchase revenue was up 27%, driven by a 15% increase in the number of closed orders, coupled with an 11% increase in the average revenue per order.
Refinance revenue climbed at 79% relative to last year and was flat relative to the fourth quarter, as refinance closings continued to be elevated as a result of low mortgage rates.
Notably, Commercial showed its first year-over-year revenue increase since the pandemic.
Commercial revenue was $163 million, a 2% increase over last year.
A number of large transactions closed at the end of the quarter, signaling the overall strength in the commercial environment.
On the agency side, revenue was a record $845 million, up 41% from last year.
Given the reporting lag in agent revenues of approximately one quarter, we are experiencing a surge in remittances related to Q4 economic activity.
Our information and other revenues were $275 million, up 32% relative to last year.
This line item represents revenue from a collection of business lines that are not premium or escrow related and therefore, not risk-based.
The largest component of information and other is revenue from our data and analytics business, which totaled $89 million, a 17% increase from last year.
Investment income within the Title Insurance and Services segment was $43 million, down 29%, primarily due to the impact of the decline in short-term interest rates on the investment portfolio and cash balances, partially offset by higher interest income from the Company's warehouse lending business.
In our Title segment, pre-tax margin was 17.1%.
Excluding the impact of net realized investment gains, pre-tax margin was 14.1%, a record for the first quarter.
I'll note that we've lowered the loss rate 100 basis points to 4% this quarter.
This brings our loss rate in line with where we booked prior to the pandemic.
By booking at 5% in 2020, we added $52 million to our IBNR.
Given relatively low claims activity, significant levels of home equity, rising home prices and a strengthening economy, we elected to lower the loss rate this quarter.
Turning to the Specialty Insurance segment.
Pretax earnings totaled $6 million, down from $13 million in 2020.
Our home warranty business, which accounts for 75% of the revenue for the segment, continued to see growth in the top line.
Revenue was up 11% over last year.
Importantly, revenue in our direct-to-consumer channel increased 18%.
We continue to see elevated claims largely as a result of people spending more time at home.
Our property and casualty business posted a loss of $7 million this quarter.
The wind down of our property and casualty business is progressing on schedule with policies beginning to non-renewal in May.
Based on our current plan, we expect at least 50% reduction in our policies in-force by the end of the year.
The effective tax rate for the quarter was 23.4%, in line with our normalized tax rate of 23% to 24%.
With respect to the information security incident, the SEC and New York Department of Financial Services matters remain ongoing.
We continue to believe that they, along with all other matters relating to the incident, will be immaterial from a financial perspective.
Turning to capital management, we repurchased $65 million of stock at an average price of $52.86 during the quarter.
Since March of 2020, we've repurchased $203 million of stock, which is close to the amount of our annual dividend to stockholders.
We have not repurchased shares thus far in the second quarter.
However, as we referenced on our last earnings call, we intend to be more active with share repurchases in the future.
As Dennis mentioned in his remarks, we've invested a total of $225 million in venture-backed companies.
Our largest investment was in OfferPad, an iBuyer that is now party to a merger with Supernova Partners Acquisition Company, who last month announced that the value of the aggregate equity consideration to be paid to OfferPad's stockholders and option holders will be equal to $2.25 billion.
If the transaction is consummated at that valuation, we would expect to book a gain later this year of approximately $237 million on our $85 million investment.
Additionally, this quarter, we recorded $42 million of gains related to other venture investments, including in Side [Phonetic] a real estate SaaS company that serves high-performing agents, teams and brokers.
We remain optimistic about our 2021 outlook.
Although refinance orders have declined, corresponding to an increase in mortgage rates, the purchase and commercial markets continue to grow.
Our claims experience is favorable and the general improvement in the economy to tail into our business. | q1 earnings per share $2.10.
q1 revenue rose 43 percent to $2.0 billion. | 1 |
Joining me on the call today are Gene Lee, Darden's CEO; and Rick Cardenas, CFO.
We plan to release fiscal 2021 second quarter earnings on December 18 before the market opens followed by a conference call.
And then Rick will provide more detail on our financial results and share our outlook for the second quarter.
As a reminder, all references to the industry benchmark during today's call refer to estimated Knapp-Track, excluding Darden, specifically, Olive Garden and LongHorn Steakhouse.
During our first fiscal quarter, industry same restaurant sales decreased 26%.
Given the ever-changing environment we continue to operate in, I am very pleased with what we accomplished during the quarter.
We are focused on four key priorities.
The health and safety of our team members and guests, in restaurant execution in a complex operating environment, investing in and deploying technology to improve the guest experience and transforming our business model.
The progress we made in these areas combined with our operating results, gave us the confidence to repay the $270 million term loan and reinstate a quarterly dividend.
Let me provide more detail on the four priorities.
First, the health and safety of our team members and guests remains our top priority.
Following CDC guidelines and local requirements, our teams continue to practice our enhanced safety protocols, including daily team member health monitoring.
We also continue to configure our dining rooms with social distancing that create a safe, welcoming environment, while maximizing allowable capacity.
A key part of this work is installing booth partitions to enable us to safely increase capacity where permissible.
At the end of August, we had completed installation in just over 500 restaurants in our total portfolio.
Operating in this environment adds another layer of complexity to an already complex operation, and I'm proud of the commitment our teams make every day to keep our guests and each others safe.
Second, we are laser focused on our back to basics operating philosophy to drive restaurant-level execution that creates guest experience, whether that's in our dining rooms, outdoors on our patios or in their homes, but it's not easy.
Executing at a high level is more complex today due to COVID-19 restrictions that vary by market.
Additionally, the constantly changing mix between on-premise and off-premise, plus expanded outdoor dining that is weather-dependent, leads to unpredictability in sales.
This is why the work we continue to do to streamline our menus and improve our processes and procedures is so important.
Moving complexity from our operations has allowed our restaurant teams to execute more consistently in this unique environment.
Our operators continued to deliver great guest experiences by displaying a high level of flexibility, creativity and passion every day, and I'm thrilled to see that reflected in our guest satisfaction metrics.
Third, we are continuing to invest in and implement technology to remove friction from the guest experience.
This includes providing multiple ways for our guests to order inside and outside the restaurant across our digital storefronts.
Additionally, we are deploying mobile solutions to make it easy for our guests to let us know when they have arrived to dine or pickup curbside order to go.
We are also expanding mobile payment options providing additional convenience for our guests.
For our three largest brands combined, more than 50% of our off-premise sales during the quarter were fully digital transactions where guest ordered and paid online.
Finally and most importantly, we transformed our business model.
Even with the sales declines we are experiencing, our restaurants continue to produce high absolute sales volumes.
Therefore, we made the strategic decision to focus on adjusting our cost structure in order to generate strong cash flows, while making the appropriate investments in our businesses.
This provides us a stronger foundation for us to build on sales as build on sales -- build upon as sales trends improve.
The first step in this process was to reimagine our offerings.
This resulted in simplified menus across the platform driving significant efficiencies in food waste and direct labor productivity.
Additionally, due to capacity restrictions, we significantly reduced marketing promotional spending along with other incentives we have historically used to drive sales.
We will continue to evaluate our marketing promotional activity as the operating environment evolves.
Finally, we have further optimized our support structure which is driving G&A efficiencies.
The results of all these efforts to transform our business model can be seen in the fact that we generated adjusted EBITDA of $185 million for the quarter.
Turning to our business segments.
Olive Garden delivered strong average weekly sales per restaurant of $70,000 while significantly strengthening our business model, resulting in higher segment profit margin than last year.
They were able to capitalize on simplification initiatives that strengthen the business model while making additional investments in abundance and value.
This work was critical to position Olive Garden to drive future profitable top-line sales as capacity restrictions ease.
Olive Garden same-restaurant sales for the quarter declined 28.2%, 220 basis points below the industry benchmark.
Overall, capacity restrictions continue to limit their top-line sales, particularly in key high volume markets like California and New Jersey where dining rooms were closed for the majority of the quarter.
In fact, restaurants that had some level of dining room capacity for the entire quarter averaged more than $75,000 in weekly sales, retaining nearly 80% of their last year's sales.
Given the limited capacity environment during the quarter, Olive Garden made a strategic decision to reduce their marketing spend as well as incentives and eliminate their promotional activity.
They will continue to evaluate their level of marketing activity as capacity restrictions ease.
Additionally, off-premise continue to see strong growth with off-premise sales increasing 123% in the quarter, representing 45% of total sales.
Finally, Olive Garden successfully opened three new restaurants in the quarter, which are exceeding expectations.
LongHorn had a very strong quarter.
Same-restaurant sales declined 18.1%, outperforming the industry benchmark by 790 basis points.
Their strong guest loyalty and operational execution helped drive their outperformance, while they also benefited from their geographic footprint.
In fact, same-restaurant sales were positive for the quarter in Georgia and Mississippi.
Additionally, the LongHorn team made significant investments in food quality and operational simplicity, which led to improve productivity and better execution.
They also took a number of steps to improve the overall guest -- the overall digital guest experience.
Off-premise sales grew by more than 240%, representing 28% of total sales.
Finally, LongHorn successfully opened two restaurants during the quarter.
The brands in our Fine Dining segment are performing better than anticipated.
While weekday sales continued to be impacted by a reduction in business travel, conventions and sporting events, we saw strong guest traffic on the weekends, and believe there will be additional demand as capacity restrictions begin to ease.
And lastly, our other business segment also delivered strong operational improvement with segment profit margin of 12.8%.
This was only 130 basis points below last year despite a 39% decline in same-restaurant sales.
Yard House's footprint in California is impacting same-restaurant sales in this segment.
Finally, I continue to be impressed by how our team members are responding to take care of our guests and each other.
The encouraging trends and performance we experienced toward the end of the fourth quarter continued into the first quarter of fiscal '21.
Furthermore, the actions we took in response to COVID-19 to solidify our cash position, transform the business model, simplify operations and strengthen the commitment of our team members helped build a solid foundation for the future.
These actions and our continued focus on pursuing profitable sales have resulted in strong first quarter performance that significantly exceeded our expectations.
For the quarter, total sales were $1.5 billion, a decrease of 28.4%.
Same-restaurant sales decreased 29%.
Adjusted EBITDA was $185 million.
And adjusted diluted net earnings per share were $0.56.
Turning to the P&L.
looking at the food and beverage line, favorability from menu simplifications more than offset increased To Go packaging costs.
However, beef inflation of over 7%, primarily impacting LongHorn, drove food and beverage expense 20 basis points higher than last year for the company.
Restaurant labor was 20 basis points lower than last year, with hourly labor as a percent of sales improving by over 350 basis points, driven by operational simplifications.
This was mostly offset by deleveraging management labor.
Restaurant expense, including $10 million of business interruption insurance proceeds related to COVID-19 claims submitted in the fourth quarter of fiscal 2020.
Excluding this benefit, we reduced restaurant expense per operating week by over 20% this quarter.
For marketing, we lowered absolute spending by over $40 million, bringing marketing as a percent of sales to 1.9%, 130 basis points less than last year.
As a result, restaurant-level EBITDA margin was 17.8%, 20 basis points below last year, but particularly strong given the sales decline of 28%.
General and administrative expenses were $10 million lower than last year as we effectively reduced expenses and rightsized our support structure.
Interest was $5 million higher than last year, mostly related to the term loan that was outstanding for the majority of the quarter.
And finally, our first quarter adjusted effective tax rate was 9%.
All of this culminated in adjusted earnings after-tax of $73 million, which excludes $48 million of performance-adjusted expenses.
These expenses were related to the voluntary early retirement incentive program and corporate restructuring completed in the first quarter of fiscal '21.
Approximately $10 million of this expense is non-cash and the remaining will be cash outflows through Q2 of fiscal 2022.
This restructuring resulted in a net 11% reduction in our workforce in the restaurant support center and field operations leadership positions.
It is expected to save between $25 million and $30 million annually.
We expect to see approximately three quarters of these savings throughout the remainder of fiscal '21.
Looking at our segment performance this quarter.
Despite a sales decline of 28%, Olive Garden increased segment profit margin by 110 basis points to 22.1%.
This strong profitability was driven by simplified operations, which reduced food and direct labor costs as well as reduced marketing spending.
LongHorn Steakhouse, Fine Dining and the other business segment delivered strong positive segment profit margins of 15.1%, 11.9% and 12.8% respectively despite a significant sales decline experienced in the quarter.
These brands also benefited from simplified operations, keeping segment profit margin at these levels.
In the first quarter, 68% of our restaurants operated with at least partial dining room capacity for the entire quarter.
These restaurants had average weekly sales per restaurant of $69,000 and the same-restaurant sales decline of 21.9%.
And while Olive Garden and the Fine Dining segment had fewer dining rooms opened than our average, these restaurants had the highest average weekly sales per restaurant of almost $76,000 and $90,000 respectively.
At the start of the second quarter, we had approximately 91% of our restaurants with dining rooms opened operating in at least limited capacity.
Now turning to our liquidity and other matters.
During the quarter, as we saw steadily improving weekly cash flows, we gained confidence in our estimated cash flow ranges.
We fully repaid the $270 million term loan we took out in April.
We ended the first quarter with $655 million in cash and another $750 million available in our untapped credit facility, giving us over $1.4 million of available liquidity.
We generated over $160 million of free cash flow in the quarter and improved our adjusted debt to adjusted capital to 59% at the end of the quarter, well within our debt covenant of below 75%.
Given our strong liquidity position, improvements in our business model and better visibility into cash flow projections, our board reinstated a quarterly dividend.
The board declared a quarterly cash dividend of $0.30 per share.
This dividend represents 53% of our first quarter adjusted earnings after-tax within our long-term framework for value creation.
We will continue to have regular discussions with the board on our future dividend policy.
Our first quarter results were significantly better than we anticipated.
The actions we took to simplify menus and operating procedures and capture other cost savings, along with our choice to pursue profitable sales, have yielded strong results.
And now, with a full quarter operating under this environment, we have even better visibility into our business model.
We anticipate EBITDA between $200 million and $215 million and diluted net earnings per share between $0.65 and $0.75 on a diluted share base of 131 million shares.
In this environment, we continue to focus on building absolute sales volumes week-to-week and quarter-to-quarter.
This may result in variability in sales comparisons to last year as capacity constraints lead to less seasonality than we would have experienced historically.
Said another way, if capacity and social distancing restrictions remained similar to where they are today, it will be challenging to dramatically increase our on-premise average unit volumes.
Our second quarter is typically our lowest average unit volume quarter and our third quarter is typically our highest.
Additionally, as capacity restrictions ease and sales normalized, we will be able to reinvest to drive the top-line and a better overall guest experience.
Based on our strong business model enhancements, we now think we can get to our pre-COVID EBITDA dollars at approximately 90% of pre-COVID sales, while still making appropriate investments in our business. | sees q2 earnings per share $0.65 to $0.75 from continuing operations.
q1 adjusted earnings per share $0.56 from continuing operations excluding items.
qtrly same-restaurant sales down 28.2% for olive garden.
darden restaurants -reiterated full year outlook for 35-40 net new restaurants and total capital spending of $250 to $300 million. | 1 |
During today's call we will reference non-GAAP metrics.
We had an excellent finish to a strong year.
We achieved another quarterly sales record and earnings per share was up 32% in fourth quarter, resulting in full year sales and earnings per share that were both near the high end of our guidance ranges.
As we look ahead, conditions will likely become more challenging, particularly in the first half of fiscal '22.
We are already facing supply chain disruptions primarily due to labor shortages in the Americas and raw materials inflation puts significant pressure on gross margin.
While the magnitude of these issues are greater than what we have experienced in recent years, our playbook for addressing them is time-tested.
We are pursuing growth opportunities in our Advance and Accelerate businesses, we are raising prices to mitigate the impact of cost increases and we are leveraging our strong relationships to remediate and overcome the current supply chain challenges.
When we roll these things together, we feel good about where we land.
Our plan reflects continued progress on our strategic initiatives and we expect to deliver record levels of sales and record profit in fiscal '22.
We will share more details about that later in the call.
So I will now provide some context on fourth quarter sales.
Total sales were $773 million, which is up 25% from last year as we compare it against the toughest patch from the pandemic.
If you normalize the trend with a two-year stack comparison, fourth quarter is right in line with what we had in the third quarter, suggesting we are maintaining sales momentum.
In Engine, total sales were up 28% and the increase was again led by our first-fit businesses.
Fourth quarter sales in Off-Road were up 58%, including about 15 points of growth from Exhaust and Emissions.
We won a significant amount of new business over the past few years in anticipation of a new emission standard in Europe.
These programs were slower to launch due in part to COVID and we are now seeing a dramatic ramp-up in demand.
It is worth noting, these sales create mix pressure for us.
We are enhancing the Exhaust and Emissions cost structure to reduce the impact on margin, but based on the nature of this business that will only get us part of the way.
Staying with Off-Road, we continue to have strong growth in our innovative razor to sell razor blade products.
These products make up about one-third of Off-Road filter sales and they grew substantially faster than their non-proprietary counterparts in fourth quarter.
This trend continues to reinforce that our strategy is working.
We develop value-added products that drive aftermarket retention for our customers and us.
We are experiencing similar trends in On-Road.
Fourth quarter sales were up 36% from prior year and innovative products, which make up nearly half the business, grew twice as fast as the non-proprietary counterparts.
In the US, fourth quarter On-Road sales continued to benefit from higher Class 8 truck production and there was also an impact from a strategic choice we made.
During the quarter, we stopped selling some directed-buy equipment to a large OEM customer.
If we adjust our current and prior-year sales to exclude these products, the like-for-like growth in the US is about 35% and we are left with a more profitable business that allows us to focus on what we do best, technology-led filtration.
I also want to call out Latin America where fourth-quarter sales of On-Road tripled versus the year ago.
The growth was from large OEM customers in Brazil.
And although it is exciting to see the sharp growth, I want to note that is on a very small base.
In Engine aftermarket sales were up almost 26%.
In fact, fourth quarter sales of $376 million were the highest ever, beating the record we set last quarter.
Supplier constraints are one of the more challenging parts of the aftermarket business right now and those issues seem to be more severe in the Americas.
Despite that pressure, independent channel sales grew in the high 20% range and fourth-quarter sales in the aftermarket OE channel were up in the low 20% range.
Innovative products remain a strong contributor to growth in aftermarket.
These razor blade products accounted for more than a quarter of total aftermarket sales and they grew in the mid 20% range during fourth quarter.
I would be remiss if I did not mention PowerCore.
We launched the brand almost 20 years ago and sales of these products have grown every year since at least 2010.
We finished fiscal '21 at another record and we anticipate a long runway for continued growth.
We are compounding aftermarket growth with share gains in less-developed markets like Latin America, Russia and South Africa.
These were some of our fastest-growing markets and we believe our strong distribution and comprehensive product offering position us for long-term success in these regions.
In Aerospace and Defense fourth quarter sales declined 8%.
Commercial aerospace remains under pressure from the pandemic, particularly in Europe.
That decrease was partially offset by higher sales of ground defense equipment.
As always Aerospace and Defense sales can be lumpy quarter to quarter, but we are optimistic about returning to growth in the new fiscal year.
Before turning to the Industrial segment, I want to make a point about our Engine business in China.
One year ago, Engine sales in China were up almost 25%, while the rest of the region suffered through the pandemic.
Fourth quarter Engine sales were up again this year by about 2%.
The strategy in China continues to do well as we win new programs with local manufacturers, but it's the one place in the world where we face the tough comparison from last year, so I wanted to point that out.
The Industrial segment also had a solid quarter with total sales growing 19.5%.
Sales in Industrial Filtration Solutions, or IFS, were up more than 23% in fourth quarter, reflecting strong growth in new equipment and replacement parts.
New equipment makes up nearly half of IFS sales and these products grew in the mid-teens last quarter, which builds on the recovery that began six months ago.
There is still a cautious tone in the market, but we see some signs of improvement and our order intake trends add to our confidence.
The replacement parts of dust collection are a more optimistic story with fourth quarter sales up nearly 40%.
Activity continues to accelerate factories and we continue to gain share with our proprietary dust collection products.
Another growth engine within IFs is Process Filtration, which serves the food and beverage market.
Fourth quarter sales were up almost 20%, reflecting growth in new equipment and replacement parts.
The market opportunity for Process Filtration is fantastic and new high-growth areas like plant-based food and beverages only increase our opportunities.
Consequently, we will continue to expand the team and look for another year of strong growth in fiscal '22.
Sales of Special Applications grew 27% in fourth quarter with strong contributions from both Disk Drive and Venting Solutions.
Disk Drive benefited from timing and Venting Solutions continued to make ground with automotive customers.
Fourth quarter sales of venting products grew 50% with almost two-thirds of the increase coming from Asia-Pacific.
With our high-tech powertrain and battery vents, we are winning new programs and expanding with existing customers across the world, resulting in another year of growth for Venting Solutions.
Fourth quarter sales of Gas Turbine Systems, or GTS, were down 11%.
The decline came from the US, which is typically our largest GTS market as sales to small turbines were under pressure.
We continue to operate this business with discipline.
So our focus in GTS remains squarely on growing replacement parts, while being selective in which new turbine projects we pursue.
Overall, the theme of discipline comes into everything we do and that gave us a significant advantage during the pandemic.
We achieved record sales in each of the last two quarters and our full year earnings per share is an all-time high.
We did that work safely.
We focused on our people.
We implemented protocols that made sense based on local conditions and our employees acted as one team to deliver outstanding results.
We plan to follow that up with another year of record sales and record profit in fiscal '22 and I'm excited about what we can accomplish.
Every way you look at it, fiscal '21 was a solid year.
We generated strong sales despite the pandemic hanging over us and margin growth contributed to record full year EPS.
What was more impressive was how our people operated.
The level of teamwork was unbelievable and I am inspired by the commitment they showed.
Before getting to the details of the new year, let me share some 2021 highlights.
Fourth quarter sales grew 25%, operating income was up 36% and earnings per share of $0.66 was 32% above the prior year.
As I know you've heard me say, we are committed to increasing levels of profitability on increasing sales and we did that in 2021.
I want to add a short disclaimer that commitment is over time and it won't be easy to achieve in the first half of fiscal '22.
I'll touch on that in a few minutes.
So back to the fourth quarter recap.
Fourth quarter operating margin was 14.5%, an increase of 110 basis points from the prior year.
Most of the increase was from gross margin, which grew 70 basis points to 34.4%.
Strong volume leverage and initial pricing benefits more than offset the impact from higher raw material costs and mix headwinds.
The impact from raw materials increased throughout the quarter, as inflation has begun coming through in full force.
We were in front of this impact of price increases in certain businesses, while increases in areas with supply agreements that had index clauses tend to lag the market.
That's true when prices go up or down so it works out over time.
Leverage and pricing also accounted for higher fourth quarter gross margin in both segments.
However, challenges from inflation and an unfavorable mix will likely be the themes in fiscal '22.
Operating expenses at a rate of sales was favorable at 40 basis points driven primarily by volume leverage.
That was true in both segments with industrial gaining a lot of improvement from leverage.
The strong volume leverage was partially offset by higher incentive compensation due in part to a soft comparison last year and incremental investments in our strategic growth priorities, which will continue in fiscal '22.
I also want to touch on corporate and unallocated line in our segment reporting.
The fourth quarter increase of almost $10 million reflects a couple of factors [Indecipherable] expense, which includes additional incentive compensation and higher benefit costs and a much easier comparison in the prior year.
Moving down the P&L, fourth quarter other income was $5 million.
While the amount itself is not material, I bring it up because we ended the year above our guidance.
So in case there are questions, the favorability reflects a handful of non-recurring items including a tax settlement in Brazil and lower loss on foreign exchange.
In terms of our other financial metrics, fourth quarter was in line with expectations.
Therefore, our full year interest expense and tax rate were both consistent with guidance.
Fiscal '21 capital expenditures were also in line with our forecast and way down from 2020 as we took a planned pause following the investment cycle over the past three years.
We directed about $0.25 billion to shareholders in fiscal '21.
We repurchased 1.9% of our outstanding shares for $142 million and we paid dividend of $107 million, including the 5% increase we announced earlier this year.
We are on pace for more than 25 years in a row of annual dividend increases, which is a trend we are extremely proud of.
I also want to highlight the fiscal '21 adjusted cash conversion of 116%.
Our DSO and DPO metrics were both favorable versus the prior year.
Inventory churns improved and capex was down.
While strong net income obviously helped our cash conversion, I am pleased with the way we managed our balance sheet.
We continue to have the flexibility we need to invest in our strategic priorities, including organic and inorganic growth.
That's the setup for fiscal '22.
We begin the year on solid ground and we are well positioned to deliver our objectives.
Based on that we use wide ranges for total and segment-level guidance to reflect the realities.
Of course, we will tighten things up as the year progresses.
With that, fiscal '22 sales are expected to grow between 5% and 10% with currency translation being negligible.
Engine is also planned to up between 5% and 10% and Industrial is a bit higher at 6% to 11%.
Within Engine, sales of our first-fit businesses are expected to remain healthy, particularly in the first half of the year.
Fiscal '22 On-Road sales are planned up in the low single digits, while Off-Road sales are projected up in the low double digits.
The Off-Road first-fit growth also includes benefits from new programs in Exhaust and Emissions, which gives us top line leverage and gross margin mix headwinds.
For Engine aftermarket, we expect full year sales growth in the mid-single digits with equipment utilization being complemented by share gains from our innovative products and under-penetrated markets.
We anticipate low double-digit growth in Aerospace and Defense due in large part to comparing against the challenges of fiscal '21.
Sales of Industrial Filtration Solutions are firm [Phonetic] up in the low double digit range, reflecting a few things.
We expect a rebound in sales of new equipment, particularly for dust collection and continued growth in dust collection replacement parts.
We also expect another year of strong growth in process filtration, which reflects benefits from further investments to expand the team.
Fiscal '22 sales in GTS are planned up in the high single digits, while sales of Special Applications are planned down in the low single digits.
Within Special Applications, we expect lower sales of disk drive filters to be partially offset by growth in Venting Solutions.
In terms of operating margin, we expect a full year rate between 14.1% and 14.7%.
This range implies an increase of 10 basis points to 70 basis points from the fiscal '21 adjusted operating margin and we expect the improvement to come from expense leverage.
Gross margin is expected to be flat to slightly down from the prior year with raw materials being the single biggest headwind.
At today's prices, we expect to pay 8% to 10% more for our raw materials this year and that translates to a gross margin impact of nearly three full points in fiscal '22 margin.
There is still a lot of variability and where prices have come down some, it is only a modest change relatively to the massive run-up over the past few months.
So we do not yet have signs of meaningful release.
And one final dynamic to keep in mind is that we had raw materials favorability during the first half of fiscal '21.
Consequently, we expect substantial pressure on our first-half gross margin and then moderating pressure as the timing of our price increases roll in and catch up to the current market pricing.
Importantly, we have already taken action to limit the impact.
We implemented several off cycle pricing actions over the past few months and we have more plan for this fiscal year, but those will take time to roll in.
As benefits from pricing compound and costs stabilize, we anticipate gross margin in the second half of fiscal '22 should be up versus '21.
Restructuring action we initiated in fiscal '21 will help reduce the impact a bit.
We continue to expect annualized savings of about $8 million, with about $5 million to $6 million landing in fiscal '22.
A large portion of these savings benefit operating expense and there are a handful of other puts and takes we considered in our operating expense budget.
For example, we anticipate savings from incentive compensation as we reset our annual bonus plans and we expect to increase travel and expense as the pandemic-related restrictions subside and we get back to visiting customers.
We are also making incremental investments in our Advance and Accelerate businesses, including another 10% increase in research and development spending.
Altogether, we expect total operating expenses will be up from the prior year, but to a lesser extent than sales, resulting in net leverage that drives year-over-year growth in operating margin.
In terms of other key financial metrics, fiscal '22 interest expense is planned to be about $14 million, other income is projected between $7 million and $11 million and the tax rate is expected between 24% and 26%.
Capital expenditures are planned up in fiscal '22 with a full-year estimate of $100 million to $120 million.
We are expanding PowerCore capacity, primarily in North America and [Indecipherable] with our new programs and cost reduction initiatives.
At the same time, we will further optimize and leverage the investments we made a few years ago with the goal of growing ROI again this year.
Additionally, we expect to repurchase about 2% of our shares in fiscal '22, keeping with our multi-decade trend and reaffirming our commitment to shareholders.
Finally, we will maintain a strong balance sheet to allow us to act on any acquisition opportunities in the life sciences space.
Based on these forecasts, we plan for a new earnings per share record between $2.50 and $2.66 and implying an increase from last year's adjusted earnings per share of 8% to 15%.
To help with modeling, I want to also offer a few comments about the anticipated cadence of results in fiscal '22.
It's actually pretty straightforward.
The first half has an easier sales comparison, meaning we plan for more of our full year increase to come from the first half than the second.
The reverse is true for operating margin.
As I said a moment ago, gross margin will be under substantial pressure in the first half.
While we pursue expense leverage all year, it won't be enough in the first half.
Then as things normalize and pricing takes hold, operating margin should be up year-over-year in the second half.
Overall, our Company has a long history of solid expense management and we have responsible leaders across the world that will invest where appropriate.
What we need to do is achieve pricing and that takes a global coordinated response.
We talked about it a lot during our planning process and I know every level of the organization is committed to protecting gross margin and delivering another year of strong profit improvement.
I think we are in an excellent position to deliver on our strategic and financial goals in fiscal '22 due to the dedicated employees around the world.
While there is a lot to consider in our fiscal '22 plan, our priorities are straightforward, gain share and outperform our markets, protect gross margin, deliver best-in-class levels of service and continue to invest in our team and Company culture.
Let me share a few of the ways we are attacking these priorities.
The best tactic for growing our share is continued investment in our Advance and Accelerate portfolio.
We are adding staff and developing tools to help these teams deliver strong growth again in fiscal '22.
Areas like Process Filtration, dust collection replacement parts and Engine Aftermarket are all positioned to have another very successful year.
We will also drive above-market growth by capitalizing on the market recovery related to new equipment.
We seek opportunities to plan first-fit seeds in both segments from Engine products to new industrial equipment and we must take advantage of this moment to capture future aftermarket growth.
We have a strong value proposition for every customer and this year we have aggressive plans to get back into the field and drive selling.
Additionally, we remain committed to growth through acquisitions.
We continue to work a robust pipeline of potential targets with the primary focus on expanding into life sciences and supporting our Industrial segment growth.
While there is no update to share today, I'm confident that our strong balance sheet, laser focus and disciplined adherence to our long-term strategy gives us an excellent opportunity for success.
Another priority of fiscal '22 is protecting our gross margin.
At our Investor Day two years ago, we talked about our plans to improve gross margin.
Since then we have executed.
Compared with fiscal '19, fiscal '21 sales are about flat and gross margin is up 90 basis points.
We acted with speed and fiscal '22 will be no different.
We proactively took price increases when we saw early signs of inflation and we planned for additional increases to catch up with the massive acceleration we saw in raw material costs.
Given the magnitude of the incremental headwind, especially in the first half of fiscal '22, we will stay vigilant and continue to pursue margin-accretive price and cost reduction opportunities.
We are also closely monitoring our supply chain to improve the situation.
With labor shortages now superseding raw materials availability as a top concern, our global operations team is having to adapt quickly.
With our global footprint and strong relationships with customers and suppliers, I'm confident we will navigate the situation and deliver the best-in-class service Donaldson is known for.
Finally, we will continue to invest in our team as part of our multi-year journey to further strengthen our human resources processes.
This year our focus is on global alignment around career, planning and development.
We are also expanding our diversity, equity and inclusion efforts, which will be part of how we continue to build out and strengthen our ESG program.
We turned 106 years old this year.
So we clearly value long-term thinking.
Our investments in supporting our team and embracing the positive changes in society are critical parts of how we will succeed in advancing filtration for a cleaner world.
I've been with the Company for 25 years and this team continues to find new ways to impress me. | q4 gaap earnings per share $0.66.
fiscal 2022 sales forecasted to increase between 5% and 10%; earnings per share projected at $2.50 to $2.66. | 1 |
Today's discussion is being broadcast on our website at atimetals.com.
Participating in today's call are Bob Wetherbee, President and Chief Executive Officer; and Don Newman, Senior Vice President and Chief Financial Officer.
Bob and Don will focus on our first quarter highlights and key messages.
Slides are available on our website, atimetals.com, and provide additional color and details on our results and outlook.
Navigating through the pandemic has sharpened our focus and provided absolute clarity on how we need to operate.
We've consistently followed our guiding principles, keep our people safe, reduce costs quickly, strengthen and protect our balance sheet and remain recovery ready for our customers.
Focusing on these principles have been critical to mitigating the impact of the pandemic and the resulting global economic decline on ATI's financial results.
As our key end markets began to show signs of coming recovery, ATI is positioned for significantly improved margins.
These are amplified by our recent share gains and new business awards, especially in our High Performance Materials & Components segment.
That said, we still reported a loss for the quarter of $0.06 per share.
Our objective, as with all public companies, is to generate a level of profitability greater than our cost of capital.
And we have the clear strategy, defined actions and passionate team to do that.
The results achieved so far are a result of the relentless efforts of our entire global team.
We value each of our employees for their commitment and hard work.
Before Don reviews our first quarter financial performance and outlook in detail, I want to address four important topics.
First, my view of the current business environment and what it means for ATI.
Second, update progress on and commitment to strategic transformation and share some good news on a few recent business awards.
Third, address the ongoing strike by our USW-represented employees at several facilities in the Specialty Rolled Products business unit; and finally, share my views on our performance and outlook by end market.
Let's begin with the context of what we're seeing in the current business environment and what it means for ATI.
2021 began much like 2020 ended with optimism for a speedy vaccine rollout across the U.S. and Europe and slow but steady progress moving to the next normal.
The vaccination statistics are encouraging predictors of what may be possible in the not-too-distant future.
We're seeing increased optimism in the jet engine supply chain as improved domestic leisure travel demand accelerates.
More airplanes in the sky is a great thing.
Beyond the U.S., demand for products produced in China continues to be strong, while India grapples with the effects of a major COVID infection surge.
And in Europe, we're seeing mixed signals as vaccination rates vary across the region.
Since 2020, we've been laser-focused on streamlining our cost structures to improve our competitiveness and maintaining healthy cash balances to weather a storm of unpredictable duration.
Looking forward, our cash balances will fund working capital to support long lead time customer orders as the economic recovery takes hold.
Self-improvement actions continue and they'll make us a stronger company.
On an earnings per share basis, as I mentioned earlier, we lost $0.06 per share versus our guidance range of a loss between $0.23 and $0.30.
Our dedication to more closely aligning capacity with near-term demand was a key contributor to achieving first quarter results that exceeded expectations.
There were two additional drivers of our financial outperformance, both related to the growing expectation for a global economic recovery.
First and foremost, raw material prices rose significantly leading up to and within the quarter.
Nickel, ferrochrome and cobalt increases led to higher surcharge pricing and favorable timing between higher selling prices and lower inventory values, largely in our Specialty Rolled Products business.
These year-over-year tailwinds are outside of our control and are neither predictable nor sustainable.
This quarter, favorable metal prices provided a benefit of over $20 million or about $0.19 per share in total and $0.08 more than the metal price assumptions used for our Q1 guidance.
Early in Q2, metal prices retreated but have recently stabilized.
As a result, we anticipate a modest headwind from raw materials in the second quarter.
Second, our Precision Rolled Specialty Strip business in China, known as STAL, exceeded expectations with the strongest quarterly earnings in its history.
Our local team following the Chinese government's recommendation to avoid travel over the Lunar New Year holiday, instead worked diligently to fulfill our significant customer order backlog.
I'm pleased to report that our third major increment of capacity, which came online in 2019, is performing well, serving continued strong customer demand in the region.
As I mentioned earlier, we're seeing continued modest demand recovery for our jet engine forgings and the first signs of recovery for our other jet engine materials.
Those positive signs were largely accounted for in our original guidance range.
While an extended recovery in our markets will continue to dampen our results, our focus on what's within our control is making a difference.
Don will provide additional details on our financial performance in a few minutes.
Now let's shift to what's going on within ATI.
As we often discussed in 2020, our decremental margins benefited from our decisive and structural cost reduction actions.
First quarter 2021, year-over-year decremental margins were 16% for ATI overall, marking a significant improvement from prior quarters.
It's worth noting that we've maintained this key metric below 30% in each pandemic-impacted quarter to date.
The actions required to make this trend possible were comprehensive and significant, and the results are visible and impactful.
Most importantly, they're sustainable for the long term.
Prior to the pandemic, we began a significant growth capital project within our HPMC segment.
This project expands our isothermal forging capacity and related heat treating, machining and testing capabilities.
It's required to support future jet engine demand, including our recent narrowbody-related share gain.
The new machining and testing capabilities are operational.
Don and I visited this new facility in Appleton, Wisconsin a few weeks ago, and were impressed by its advanced machining capabilities and technologies.
Over the next two quarters, additional portions of this multiyear investment will be completed.
At the same time, we're seeing a solid uptick in demand for components made possible by these new investments well ahead of industry production growth rate.
These new assets are on track to provide growth for HPMC's top line and improve its bottom line for years to come.
Moving to the AA&S segment.
In December, we announced plans to transform our Specialty Rolled Products business, exiting low-margin standard stainless sheet products and eliminating associated costs and investments.
We remain on track to complete this footprint rationalization in the second half of the year.
The current strike by the United Steelworkers does not change our plans or our time line.
Each of our business units must earn more than its cost of capital on a stand-alone basis.
This means having cost structures and capital investment aligned to its profit-making capability.
We dispassionately apply this standard across our business portfolio over a complete industry cycle.
The Specialty Rolled Products business has struggled to consistently meet this profitability threshold for some time.
Without transformation, it will not meet this objective in the foreseeable future.
So we're decisively taking the actions necessary to fix it.
This is critical not just to survive, but to thrive against global competitors.
Otherwise, the business will continue to wither and die.
The performance over the last quarter confirms that our strategic transformation is the right course of action.
When we successfully transformed, we'll have a streamlined, more profitable and thriving Specialty Rolled Products business, focused on delivering high value in our key end markets.
Our AA&S transformation strategy also includes growth in high-value materials and increased utilization rates at our HRPF.
I'm pleased to report progress on both objectives in 2021.
As a result of our commercial and operational team's hard work, we earned two significant customer wins that will benefit ATI and the AA&S segment going forward.
We were awarded a contract for roughly $40 million of specialty nickel alloy sheet materials for use in a pipeline off the coast of South America.
We're in the process of finalizing product testing with the customer and expect to deliver the full value of the contract in the second half of 2021.
Bidding activity in this market space remains active, and we expect continued success over the next several quarters.
Second, we signed a multiyear extension to our existing long-term agreement with Boeing to supply titanium mill products for both of our operating segments.
This share-based agreement provides the opportunity to gain share over the contract term through emergent demand.
Our long-term titanium raw material agreement, providing the inputs to our mill product supply chain, remains in place throughout this extension.
This removes the variability associated with raw material prices over the term of the Boeing agreement.
While important for our long-term market position, we expect subdued financial benefits from the airframe submarket until widebody aircraft production improves.
Now I'll address the ongoing strike by our USW-represented employees at several facilities within our Specialty Rolled Products business unit.
We're incredibly disappointed that the union leadership chose this course of action.
No one wins in a strike, not customers, not communities, not employees or their families.
At a time when we're losing money, we have a generous four-year contract proposal on the table.
We want our USW-represented employees to come back to work.
We're offering annual raises as well as a premium free healthcare plan for the first three contract years.
Beginning in year four, we're asking them to contribute modestly to their healthcare cost.
We know it's possible.
Our other USW-represented and nonrepresented employees already do, so do their USW-represented counterparts at our close competitor.
We must find an equitable mechanism to mitigate the impact of healthcare cost inflation.
We can't continue to shoulder this burden alone.
We're committed to reaching an agreement that both rewards our hard-working employees and contributes to the long-term viability of our Specialty Rolled Products business.
We'll persevere to create an appropriate and predictable cost structure for this business.
In the meantime, we're successfully deploying our business continuity plan to operate the affected facilities.
While this plan will take time to fully implement, the operations are gaining momentum, and we expect to reach our run rate goals in June.
We're absolutely delivering on orders at the required quality levels.
We're quoting and winning new business.
We've partnered with our customers to understand their needs against our projected capacity, prioritizing our production for what's most critical to them.
This includes the high-value nickel alloys for the pipeline project I mentioned earlier.
They're protecting our business, investing their time and energy in ATI's future.
Their dedication provides the opportunity for the USW-represented employees, who have chosen to strike to their jobs, to return to.
Our competitors are hoping we fail.
I'm confident we won't.
Let me emphasize one more point.
Would we rather be operating with our longtime USW-represented employees in place?
That's why we've improved our offer repeatedly throughout negotiations and worked hard to address the issues between us.
And with that, let me conclude my opening comments with a perspective on our performance and outlook by end market.
Let's start with our most significant market, commercial aerospace, specifically for our jet engine forgings and materials.
The fourth quarter 2020's modest improvement trend continued with sales of our advanced isothermal and hot-die forgings improving faster than our specialty material.
Although jet engine sales declined significantly versus a robust prior year quarter, they grew nearly 30% sequentially.
As a reminder, our forgings are more finished components with shorter lead times compared to our other engine materials.
Forgings demand growth is directly linked to higher jet engine builds and additionally, in our case, to share gains.
All of this is driven by increasing narrowbody production rates.
Our specialty materials tend to have longer lead times and are delivered to intermediate forgers, both internally and externally.
Inventory levels differ between materials and customers, which leads to today's multispeed demand recovery.
With increasing OEM production rates, we expect jet engine customer destocking to be largely complete in the second half of the year.
At that point, we anticipate our forgings and materials growth rates will more closely align with our customers' requirements.
We expect our jet engine product sales and related earnings to continue improving across 2021, again, driven mainly by narrowbody production increases, share gains and our previously implemented margin improvement actions.
We saw continued lower year-over-year sales, as expected, due to lackluster international travel demand, impacting widebody production rates.
These planes consume a large percentage of our total airframe titanium sales.
We expect our primary OEM customer to continue to destock across 2021, with new business from another large global OEM, partially offsetting the decline in the second half of the year.
We agree with industry analysts' projections that widebody production will remain at low levels for an extended time.
We've adjusted our cost structure accordingly.
We continue to see sales growth adding to our double-digit year-over-year gains in 2020.
First quarter sales growth was very robust for military aerospace products, including jet engines, airframes and rotorcraft.
As expected, this was partially offset by a steep decline in ground vehicle armor plate as our primary customer completed the initial phase of a large product program.
Looking ahead, we expect continued military aerospace growth and ongoing solid demand levels for naval nuclear products.
We'll see lower armor sales in the second quarter in advance of a new customer program kicking off later in 2021.
In total, we anticipate overall defense market growth in 2021 and beyond as we expand in new applications, materials and customers.
Shifting to our broader energy markets.
Sales declined year-over-year but at a slower pace than in previous quarters.
Sales to our specialty energy markets expanded including robust double-digit growth for nuclear energy and pollution and control material.
Sales to our traditional oil and gas markets declined versus prior year, but at a slower rate than in the most recent quarters.
Improving demand for fuel needed to support travel and commerce is driving an increase in upstream production activity.
Additionally, the market for clad pipe applications continues to gain momentum.
As I noted earlier, we recently won a contract worth roughly $40 million for nickel alloy clad pipe materials to be produced and shipped in the second half of 2021.
Looking ahead, we expect oil and gas market conditions to continue to improve with the coming economic recovery.
We anticipate ongoing growth in specialty energy markets, likely at a slower pace as compared to the first quarter.
In our smaller electronics and medical markets, Q1 produced mixed results.
On the positive side, we saw ongoing strong electronics customer demand for both Precision Rolled Specialty Strip in Asia and for our growing specialty alloy powders globally.
The latter materials are used in a wide variety of next-generation consumer products, including 5G networks, autonomous vehicles and advanced computing.
We expect continued year-over-year electronics market growth in 2021, but at a slower pace than the first quarter.
In our medical markets, in the first quarter, both MRI and implant material sales continued to be negatively impacted by COVID challenges that included restricted access to hospitals and lower elective surgery volume.
As we enter Q2, we're seeing increased forward order commitments.
We expect our sales in the medical market to improve in the second half of this year.
Finally, another potentially significant development is a likely national infrastructure improvement plan currently unfolding in the U.S. ATI would indirectly benefit in two ways: first, this program will create jobs, leading to increased discretionary spending for travel and consumer goods.
The delivery of people, products and materials require airplanes, trucks and cars that consume fuel.
This will benefit ATI's two largest markets, aerospace and energy.
Second, and opportunistically, ATI will indirectly benefit from increased building material consumption.
While ATI does not produce these basic materials, we're a key link in a cost-effective supply chain for those who do.
Our HRPF is uniquely positioned to generate increased cash flow from rolling carbon steel slabs for domestic producers.
During the next few minutes, I'll provide my thoughts in several key areas.
First, our Q1 financial performance; second, an update on our liquidity levels; and third, an updated view on our 2021 outlook.
As a whole, ATI lost $0.06 per share in Q1, well ahead of our expected loss range heading into the quarter.
In many ways, our financial performance reflected benefits from our 2020 cost actions.
The cost reductions have positioned us to take advantage of the coming global economic recovery, particularly within commercial aerospace, our largest end market.
As Bob noted, increased domestic travel rates are giving Boeing and Airbus the confidence to increase narrowbody production rates.
In turn, we are seeing early demand signals for our specialty forgings and materials produced by the HPMC segment.
Let me add some color to the Q1 results.
HPMC sales decreased year-over-year compared to a robust prior year pre-pandemic quarter.
But as an encouraging sign that we have seen the bottom, HPMC sales increased nearly 10% sequentially.
This growth was led by nearly 30% gain in commercial jet engine sales and a 17% pickup in defense sales.
Within jet engines, we saw a significant sequential uptick in engine forgings demand.
To that end, we are pleased to note that we have moved from a minority to a majority share on several LEAP engine isothermal forge components.
We're encouraged by these trends and expect them to continue expanding across 2021, and as domestic travel rates increase.
In the defense market, our growth was largely attributable to forgings and materials for military jet engines.
As expected, airframe sales continued to lag due to ongoing customer destocking.
Sequentially, HPMC earnings margins improved significantly due to revenue growth and favorable product mix.
Within our jet engine sales, highly profitable next-generations forgings and materials comprised over 40% of the Q1 total, up from 35% and 19% in the prior two quarters, respectively.
In addition to product mix, margin enhancements included in our renewed LTAs provided a tailwind as did transitory benefit from rapidly rising cobalt prices during Q1.
Overall, we're encouraged by the improving aerospace trends in both HPMC business units and expect to continue to gain momentum as Airbus and Boeing increase narrowbody production volumes.
Turning to AA&S, segment revenues decreased 16% year-over-year largely due to a 25% decrease in Specialty Rolled Products, or SRP, business unit sales.
The decline in SRP sales was across all major markets, except automotive.
Sales at our STAL JV increased by over 50% year-over-year, fueled by demand for consumer electronics and elevated automotive production in China.
Looking at the sequential revenue change, AA&S sales improved 4%, largely due to SRP's 15% increase in standard value stainless products, which generate minimal profit.
AA&S segment EBITDA improved year-over-year and sequentially, led by record STAL earnings.
Our Specialty Alloys & Components, or SA&C, business unit, along with STAL continued to generate double-digit percentage margins.
Those business units are also well positioned to take advantage of coming demand in their respective markets.
SRP posted a positive EBITDA this quarter.
It's important to note that nearly 75% of the SRP Q1 EBITDA was due to rising nickel and, to a lesser degree, ferrochrome prices in the quarter.
If this unpredictable benefit is removed, SRP earned an EBITDA margin of about 2% and generated a loss after appropriately considering depreciation and interest charges.
The SRP business has the potential to be a solid and consistent contributor to ATI's profitable growth story.
SRP's first quarter results are a reminder of why a transformation is needed within this business.
The cost structure does not allow for acceptable returns, and we make far too many products that generate little or no margin.
The good news is that we know exactly what needs to be done to transform SRP into an outstanding business; exit Standard Stainless Sheet Products, consolidate the footprint to streamline product flow, and maximize production capabilities.
The cost structures in the SRP unit need to be fixed and the product mix improved.
We are on it.
We are hitting the milestones laid out in our transformational plan.
SRP's performance will look dramatically different in 2022, no longer dependent on good luck from metal prices to generate meaningful profits.
We're optimistic about these changes, and we will keep you in the loop as the transformation unfolds.
Before jumping to the balance sheet, I want to highlight that we've limited year-over-year decremental margins to 16% this quarter.
Soon, the conversation should shift from decremental margins to outsized incremental margins, driven by increasing aerospace volumes and ongoing cost structure reductions.
Looking beyond the income statement, 2020's groundwork to strengthen our balance sheet and generate and preserve cash continues to benefit us.
We reshaped our debt maturity profile, shifting our next significant maturity to mid-2023, and we've lowered our annual interest costs.
Beyond traditional base debt, we made progress on reducing the financial burden from our U.S. defined benefit pension plan in 2020.
The combination of strong pension asset returns and 2020 calendar year contributions overcame the decline in discount rates.
The result, an improved funding status and reduction in required 2021 pension contributions and expense.
During the market chaos, we've maintained a strong total liquidity, ending the first quarter with roughly $540 million in cash and about $360 million of ABL availability.
This is below year-end 2020 levels due to our anticipated seasonal cash usage in Q1.
We will continue to actively manage our debt maturity profile in the coming quarters.
We will leverage available cash and liquidity to further improve our long-term leverage profile and our profitability.
As we've said several times today, the fundamentals underpinning our jet engine business are improving for both forgings and materials.
We anticipate HPMC's sequential revenue and earnings growth in Q2, driven by improving commercial aerospace, energy and defense demand.
As a result of the improved outlook, we've eliminated all planned Q2 facility outages and are preparing for an expected production ramp in the second half of 2021.
The ramp is needed to fulfill increased customer demand levels, including elevated isothermal forgings due to our share gains, exciting developments as we respond to the coming road.
Within AA&S, we have line of sight into STAL and SA&C for Q2.
But the ongoing USW strike clouds the visibility and degrades the near-term expectations for the SRP business.
Sticking with what we can accurately predict, we expect continued solid performance from STAL in Asia as customer demand remains strong.
We anticipate higher revenues and earnings from SA&C, driven mainly by defense end market sales.
And lastly, in our SRP business, we see improvement in some end markets, but we'll be unable to capitalize on this strength if the USW strike continues.
As a result, SRP will produce and ship fewer materials in Q2 than we did in Q1.
Additionally, we expect a modest raw material headwind as the price of nickel has declined quarter to date.
In aggregate, we expect sequential Q2 financial improvements in our HPMC segment, along with continued solid results from our SA&C business and STAL JV.
However, we are not able to provide Q2 earnings guidance due to the uncertainty caused by the USW strike.
We will return to providing quarterly earnings guidance in our normal cadence as soon as we can do so with confidence.
Despite not being able to provide Q2 earnings guidance, we remain confident in our full year 2021 free cash flow guidance range of $20 million to $60 million, excluding pension contributions.
A longer time horizon and actionable cash flow levers make achieving this metric more predictable.
From a cadence perspective, we anticipate a working capital release in the second quarter that will likely be offset within the calendar year when inventories are rebuilt after a new labor agreement is reached.
Now let's discuss the pension.
Last quarter, we announced that we anticipated contributing $87 million to the pension plans in calendar 2021.
During the first quarter, the federal government passed new pension plan legislation, effectively reducing our 2021 minimum contribution requirements.
Under new rules, we would not be required to make any further pension contributions in 2021.
While we appreciate the flexibility that new rules provide, I want to be clear, we are committed to our pension glide path.
We intend to manage our net pension obligation to a fully funded status within a handful of years, given the anticipated recovery in our key end markets.
We will evaluate throughout the year what, if any, additional contributions will be made in 2021.
We will share those plans with you in future quarters.
For the time being, assume no further pension contributions this year as we ensure efficient capital allocation in the business.
Let me wrap this up by saying that the team's aggressive 2020 cost reduction efforts, coupled with improving market conditions, have put ATI squarely on the path to recovery.
Four out of our five business units are moving in the right direction and the need to transform our SRP business was confirmed by its Q1 financial results.
Our North Star remains the same, and we are excited about the future.
For SRP specifically, the current production disruption is temporary.
It does not change our commitment or time line to reshape the SRP business into a more profitable, consistent and growing enterprise, one that out earns its cost of capital and competes for investment within our business portfolio.
We will be successful in this effort.
I agree with you regarding our excitement for the future.
A lot of great work being done by really some hard-working people across the globe for ATI.
Our first quarter financial results showed solid sequential improvement and reinforced our belief that commercial aerospace recovery is on the horizon.
Demand for new fuel-efficient planes is growing, and we can feel momentum building at ATI, particularly within our HPMC segment.
Improving aerospace market conditions will create an outsized benefit for ATI as we've streamlined our cost structures and have higher shares of our critical customer programs.
I'm confident that when these volumes return to pre-pandemic levels, we'll be an even stronger, more profitable company.
Transformation is on track in our Specialty Rolled Products business.
Without significant and structural changes to rationalize our product portfolio, align our footprint and cost structure, the business will not survive against continuously intensifying global competition.
We're focused on building a leaner, more profitable SRP business that out earns its cost of capital, has substantial profitable growth opportunities and competes successfully for investment within the company.
I'll close by saying that ATI is a growth-focused company, set to benefit from the coming commercial aerospace and broad economic recovery.
With a clear strategy and innovative team, we're taking action to accelerate our future.
Quickly, there are a few parameters for today's Q&A session.
First, please limit yourself to two questions to ensure time for all analysts questions.
Operator, we're ready for the first question. | q4 non-gaap earnings per share $3.17.
q4 sales $8.45 billion versus refinitiv ibes estimate of $7.8 billion. | 0 |
Before turning the call over to Ron, I'd like to make a few comments about forward-statements.
Dan Malone, our CFO, will begin our call with a review of our financial results for the fourth quarter and the year-end 2020, and I will then provide a few more comments on these results.
The key takeaways from our fourth quarter and full year 2020 results are: fourth quarter sales were down 3.8%, record full year sales were up 4% with the help of acquisitions, but down 11% without.
Fourth quarter net income and earnings per share were down 16% from the prior fourth quarter on a GAAP basis and down about 6% on an adjusted basis.
Full year net income and earnings per share were down 10% from prior year on a GAAP basis, but increased more than 2% year-over-year on an adjusted basis.
Full year adjusted EBITDA was up 11.6% from the prior year and essentially flat to the third quarter trailing 12-month result with adjusted EBITDA margins expanding by nearly 100 basis points over prior year.
Record full year operating cash flow of $184.3 million was up 108% over prior year, and fourth quarter operating cash flow exceeded an unusually strong operating cash flow performance in the prior year quarter.
Outstanding debt was reduced by $158.6 million in 2020, and our debt net of cash position improved by $166.5 million during the year.
Record backlog of $354.1 million was up 35.6% over the prior year-end.
Fourth quarter 2020 net sales of $288.6 million or 3.8% lower than the prior year quarter.
While we saw a strong rise in order rates and backlog, the COVID-19 pandemic continued to negatively impact our manufacturing efficiencies and inbound supply chain during the quarter.
Also the timing of these new orders and the fact that strong customer demand hasn't been consistent across all of our business segments has limited the immediate top line impact.
Full year 2020 net sales of $1.16 billion were a Company record and 4% higher than the prior year with the contribution of the Morbark and Dutch Power acquisitions.
Without these acquisitions, organic sales were down 11% from prior year.
Net income for the fourth quarter was $8 million or $0.68 per diluted share compared to prior year fourth quarter net income of $9.6 million or $0.81 per diluted share.
Excluding the Morbark inventory step-up expense, severance cost related to a plant closure, one-time acquisition transaction cost and acquisition-related amortization expense, adjusted fourth quarter 2020 net income was $13 million or $1.10 per diluted share compared to $13.8 million or $1.18 per diluted share in the prior year quarter.
Net income for full year 2020 was $56.6 million or $4.78 per diluted share compared to net income of $62.9 million or $5.33 per diluted share for the prior year.
Excluding the full year impact of the adjustments I just mentioned in the quarter comparison, adjusted full year net income was $70.3 million or $5.94 per diluted share compared to $68.4 million or $5.80 per diluted share in the prior year.
Industrial Division fourth quarter 2020 net sales of $202.7 million represented an 8.9% decrease from the prior year quarter due to the pandemic-related impact on customer demand and disruptions to our supply chain and operations.
While this division ended the year with higher backlog than the previous year-end, the surge in orders that created this favorable comparison is largely concentrated in forestry and tree care products.
Other business units, notably those serving the municipal government sector, finished the year with order backlog below pre-pandemic levels.
Agricultural Division fourth quarter 2020 sales were $85.9 million, up 10.5% from the prior year fourth quarter.
During the quarter, we continued to see strong organic growth across this division.
The immediate top line benefit of the surge in customer demand was constrained by the negative impact of the pandemic on inbound supply chain and manufacturing efficiencies, as previously mentioned.
Full year 2020 adjusted EBITDA was $145.2 million, up $15.1 million or about 11.6% over the prior year and was essentially flat to the third quarter trailing 12-month results.
Our adjusted 2020 EBITDA as a percentage of net sales improved by nearly 100 basis points over prior year.
Higher Morbark margins, favorable product mix, the benefits realized from facility consolidations and other cost containment measures more than offset the negative impact -- the negative pandemic impact previously mentioned.
During 2020, we generated $184.3 million of operating cash flow compared to $88.8 million in the prior year, an increase of 108%.
Strong operating cash flows continued during the most recent quarter, as we exceeded an unusually strong operating cash generation in the prior year fourth quarter and we further delevered our balance sheet.
We ended the fourth quarter with a record $354.1 million in order backlog, an increase of over 35% since the prior year-end.
During the fourth quarter, we saw an acceleration of customer demand, particularly for our forestry and agricultural products, while demand has grown overall for the Company and all of our units have seen improvements in customer demand since the pandemic impacted the second quarter.
Order rates for some of our businesses are still below pre-pandemic levels.
To recap our fourth quarter and full year 2020 results, fourth quarter sales down 3.8%; record full year sales, up 4%, but down 11% without acquisitions; fourth quarter net income and earnings per share down 16% on a GAAP basis and down 6.8% on an adjusted basis; full year adjusted EBITDA up 11.6% from prior year and essentially flat to the third quarter trailing 12-month result with adjusted EBITDA margins expanding by nearly 100 basis points over prior year; record full year operating cash flow, up 108% over prior year with favorable comparisons continuing in the fourth quarter; full year debt reduction of almost $159 million and debt net of cash improvement over $166 million; and record backlog, up more than 35% over the prior year-end.
We're particularly pleased to see that the momentum, which we have -- which has been building for the last several quarters, really since the slowness in the -- the end of this -- in the second quarter and -- but it's built in the third, continued into fourth and with strong bookings and a record backlog at the end of the year, and I'm pleased that this trend has continued even into the first quarter of 2021 with our backlog continuing to grow even further, and now it's over $400 million.
However, there were also issues related to the pandemic that impacted our operations in the fourth quarter.
These included sporadic cases of COVID that, while not large and not at a lot of locations, were -- always had a follow-on effect that like you could have one person that went home sick and then suddenly we close down the whole department for several days while we clean it and get things better and ready to make sure everybody else in there is OK.
We've always had [Phonetic] a couple of things like that.
We are also experiencing more supply chain issues, but again can be small.
You cannot ship a product as you have -- are missing a [Indecipherable] O-ring, but that's the kind of ripple effect these can have.
All of this together caused shipments in the fourth quarter to be a little below our expectations, but still good.
And margins were even better, particularly when adjusted for the non-cash charges that were above average in the fourth quarter for 2020.
The two major non-cash charges were the inventory step-up charge related to the acquisition of Morbark and the reorganization reserve related to the proposed plant consolidation we've announced in the Netherlands.
We are not finished with the inventory step-up charges at Morbark, which affected us every quarter since we bought them.
But as of the end of the fourth quarter, all goals are now finished and should not be affecting our results going forward.
And the plant consolidation in Europe, we're actually -- even though we took a charge in the fourth quarter, it's actually -- the timing was a little bad because that actually, within the next year, will have a projected payback of less than one year on that investment -- on that the plant consolidation.
So, it's a very positive move in the long term, even though it impacted the fourth quarter results.
But net of these two items, net income from the quarter was just below the previous year's -- adjusted net income was just below the previous year's adjusted net income, despite soft sales and less organic sales and certainly the ongoing COVID issues.
So, all in all, we're pleased.
On top of this, we were extremely pleased with our efforts in the fourth quarter and throughout 2020 in controlling cost and managing our assets, which, as Dan pointed out, resulted in very strong levels of cash generation, record EBITDA and reductions in outstanding debt, ensuring the Company's solid financial stability despite the certainly challenging economic environment, which we are all operating.
In addition, we are pleased that even with the limitations imposed on us during most of the year 2020 that certainly restricted our travel and caused many of our office personnel to have to work remotely for some periods of time, we were able to complete many of our operational developments that we already had planned for the year.
These include most of the integration initiatives related to the 2019 acquisitions of Morbark and Dutch Power.
We also completed the construction of a new manufacturing plant for our Super Products unit in Wisconsin that allowed us to consolidate three facilities into one modern efficient facility, and we were able to complete that project totally in 2020.
And there was continuous progress on a range of other product development and operational improvement initiatives ongoing throughout the year.
So, actually, we really made a lot of progress in a very challenging year.
Alamo Group's Industrial Division performed well in both the fourth quarter of 2020 and for the full year, even though for us, they probably had the most market challenges due to COVID.
The biggest end user of their products are governmental entities, most of which struggled with budgetary issues during the year and are still being impacted today.
Yet while organically, our sales were off, they still held up well due to the stable nature of demand for our types of products that continued to be used through the year for infrastructure maintenance.
And we're pleased bookings, which were very soft in the second quarter and gradually and steadily increased each quarter since then, have continued this trend as we moved into 2021.
As Dan pointed out, some of it's a little spotty.
Some units are doing better than other units.
But certainly in total, they're up.
And it's interesting like -- say like Morbark, one of our new units, they were probably hurt the most early on COVID, and yet, they have come back the most -- the strongest, as things have continued to build back up.
So, it had been a little spotty but in total, as I said, it continues to be good and strong.
Certainly, our Agricultural Division has held up even better and actually showed a small increase in sales for the year and margins did even better.
We were -- I think the ag sector in general was helped by increased subsidies to farmers during the year, and actually we started -- COVID [Phonetic] period started with fairly low levels of dealer inventories going into the year 2020 due to the weak agricultural industry of the last several years.
So as a result, at the end of the year, as I said, we have record backlogs.
Dealer inventories are still fairly on the low end, so there's still more upside potential there.
But we're also seeing improved commodity prices in the ag industry.
So, the outlook for further growth in this division is very positive as we move into 2021.
In fact, we believe the positive trends we are seeing in both of our divisions bode well for Alamo Group's outlook for 2021, though the pandemic and its repercussions, as well as all the impacts it has had on the global economy are still far from over.
For us specifically, ongoing COVID infections are spotty, but certainly are still causing challenges.
Supply chain issues are affecting us and many -- almost everybody in our industry.
Everything from truck chassis, tractors and all are out -- the lead times on them have nearly doubled for many of our key inputs.
Certainly, even the adverse weather conditions of the last several weeks, especially in Texas, not only were a couple of our plants closed for couple days, but we saw like one major supplier that -- they said they were closed four days, and so now they are two weeks later than their plan.
So, that's causing some issues.
And we're also seeing a few inflationary pressures too in this which -- I think with our reactions to that, that will -- most of that will flow through fairly quickly.
But in the short term, it can have some effect on our -- all of our operations.
So, all these issues together will certainly dampen our first quarter performance, but we actually feel quite good about the year 2021 in total.
There is positive momentum in our markets.
There is stable demand for our types of products, which continue to be used daily in maintenance and operations and are wearing out on a regular basis.
In addition, contributions from recent acquisitions, ongoing operational improvement initiatives, as I've said, such as the plant consolidation initiatives we've taken on, altogether make the outlook for the full year of 2021 very bright for Alamo Group.
And we certainly hope that the greater availability of the new COVID vaccines will start to take -- have a impact on the pandemic and will begin to abate and we can all return to a little bit more conditions.
But regardless, we actually feel quite good about the outlook for Alamo for 2021. | compname reports q4 earnings per share of $0.68.
q4 earnings per share $0.68.
q4 sales $288.6 million versus refinitiv ibes estimate of $289.8 million.
q4 net sales of $288.6 million, down 3.8%.
backlog at $354.1 million at quarter end, up 35.6% compared to year end 2019.
qtrly acquisition adjusted diluted earnings per share non-gaap $1.10. | 1 |
Our call 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 a question-and-answer session.
During the Q&A session, please limit yourself to one question, and if you have a follow-up question, please get back into queue, so we can accommodate as many participants as possible.
Last April, if you told me that a year into the pandemic we'd be reporting excellent credit performance, positive sales trends, and solid earnings growth, I wouldn't have believed it.
While the pandemic is far from over and there may be twists and turns ahead, as a nation, we have made tremendous progress toward addressing the health crisis and reopening the economy.
This quarter, we earned $1.6 billion after-tax or $5.04 per share.
I'm very pleased with these results, which reflect our robust business model, strong execution, including a disciplined approach to managing credit, improving economic trends and the impact of federal support for US consumers.
Since the end of 2020, our view on economic conditions has improved.
The rapid pace of the recovery has lessened our concern of job losses spreading to the white collar workforce and there is also been substantial support for the US consumer through stimulus in January and in March.
Our current expectation is that credit losses in 2021 will be flat to down year-over-year.
This improved economic view, combined with lower loan balances and continued strong credit performance, were the primary drivers of $879 million reserve release in the quarter.
As discussed in previous quarters, the strong credit performance was accompanied by elevated payment rates that continue to put pressure on loan balances, which were down 7% year-over-year.
Payment rates were over 350 basis points higher than last year and at their highest level since the year 2000.
While the impact from stimulus payments should abate over the next few months, we expect payment rates will remain elevated for the rest of the year as household use savings to meet debt obligations and continue to benefit from payment relief programs, such as federal student loan and mortgage payment forbearance.
Despite this pressure, we still expect modest loan growth this year supported by several factors.
First, there has been a significant increase in sales volume, up 11% from a year ago and up 15% from the first quarter of 2019.
Improving trends in categories like retail and restaurants are positive signs for future growth.
Additionally, based on our credit performance in our current outlook for macro conditions, we have begun to migrate our credit standards back to pre-pandemic levels.
This is particularly true in card, where our value proposition centered on best-in-class customer service, valuable rewards and no fees continues to resonate strongly among consumers.
We're also expanding credit standards and personal loans, but not quite back to 2019 norms.
To offset the higher payment rate, as well as leverage these credit actions, we intend to increase our marketing spending through the rest of this year.
Outside of marketing, we expect that expenses will be relatively flat year-over-year as we remain committed to expense management.
We're reinvesting some of the benefits from our strong credit performance and efficiency gains into technology and analytics to further improve our account acquisition targeting, fraud detection and collections capabilities.
The rapid pace of the economic recovery and strong credit performance may provide additional opportunities to lean further into growth.
We intend to take advantage of these opportunities and may make additional marketing and non-marketing investments that will create long-term value.
On the payment side, we had continued strong performance in our PULSE business, with volumes up 23%, driven by stimulus payments in the first quarter and higher average spend per transaction.
We also continue to expand our global acceptance through network partnerships, and this quarter, we signed new partners in Jordan and Malaysia.
Our digital banking model generates high returns and we remain committed to returning capital to our shareholders.
This quarter, we restarted our share repurchase program with $119 million in buybacks, in line with the regulatory restrictions still in place.
Looking at our strong credit performance and robust earnings, we see an opportunity to revisit our capital return to shareholders in the second half of the year.
As I look toward the future, I'm excited about Discover's prospects.
Our products continue to bring value to our customers.
We remain flexible as we support our employees and their families through the pandemic.
And we are well positioned to continue driving long-term value for our shareholders.
Today is her birthday.
So I want to wish Wanji a very Happy Birthday.
With that, I'll now ask John to discuss key aspects of our financial results in more detail.
I'll begin by addressing our summary financial results on Slide 4.
As Roger indicated, the results this period reflects many of the same dynamics we've seen over the past few quarters.
The influence of stimulus resulted in elevated payment rates, which pressured loan growth.
It also contributed to the strong asset quality and our significant reserve release in the quarter.
Revenue, net of interest expense, decreased 3% from the prior year, mainly from lower net interest income.
This was driven by a 7% decline in average receivables and lower market rates, partially offset by a reduction in funding costs as we continued to manage deposit pricing and optimize our funding mix.
Non-interest income was 5% lower, primarily due to a $35 million net gain from the sale of an equity investment in the prior year.
Consistent with our excellent credit quality, lower loan fee income reflects a decline in late fees, while net discount and interchange revenue was up 12% from the prior year, reflecting the increased sales volume.
The provision for credit losses was $2 billion lower than the prior year, mainly due to an $879 million reserve release in the current quarter, compared to a $1.1 billion reserve build in the prior year.
Our improved economic outlook, lower loan balances and strong credit drove the release.
Additionally, net charge-offs decreased 30% or $232 million in the prior year.
Operating expenses decreased 7% year-over-year as we remain disciplined on expense management.
Other than compensation, all other expenses were down from the prior year, led by marketing, which decreased 33% year-over-year.
Looking ahead, we intend to accelerate marketing investments over the remainder of the year.
We'll go into details on our spending outlook in a few moments.
Moving to loan growth on Slide 5.
Total loans were down 7% from the prior year, driven by a 9% decrease in card receivables.
The reduction in card receivables was driven by two primary factors.
First, the payment rate remains elevated, driven by the latest round of stimulus and improved household cash flows.
Second, promotional balances have continued to decline, reflecting the actions we took at the onset of the pandemic to tighten credit.
As a result, these balances were approximately 300 basis points lower than the prior year.
Although we expect new account growth will cause promotional balances to begin to stabilize.
As the economy reopens further, we believe consumer spending and prudent expansion of our credit box should drive profitable loan growth going forward.
Looking at our other lending products.
Organic student loans increased 5% from the prior year and originations returned to pre-pandemic levels.
We continue to gain market share through mini peak season.
Personal loans were down 9%, primarily due to the actions we took early in the pandemic to minimize credit loss.
As we previously mentioned, we see opportunity to expand credit a bit given the strong performance of this portfolio.
Moving to Slide 6.
The net interest margin was 10.75%, up 54 basis points from the prior year and 12 basis points sequentially.
Compared to the prior quarter, the improvement in net interest margin was driven by lower deposit pricing as we cut our online savings rates from 50 basis points to 40 basis points during the quarter.
We also continue to benefit from the maturity of higher rate CDs and a favorable shift in funding mix.
Our funding from consumer deposits is now at 65%.
Future deposit pricing actions will be dependent upon our funding needs and competitor pricing.
Average consumer deposits were up 14% year-over-year and flat to the prior quarter.
Consumer CDs were down 7% from the prior quarter, while savings and money market increased 4%.
Loan yield was flat to the prior year.
Seasonal revolve rate favorability and a lower mix of promotional rate balances were offset by the impact of reduced pricing on personal loans.
Looking at Slide 7.
Total non-interest income was $465 million, down $25 million, or 5% year-over-year, driven by the one-time gain in the prior year that I previously mentioned.
Excluding this, non-interest income was up 2%.
Net discount and interchange revenue increased 12% as revenue from higher sales volume was partially offset by higher rewards cost.
The decrease in loan fee income was driven by lower late fees, which move in line with delinquency trends.
Looking at Slide 8.
Total operating expenses are down $78 million, or 7% from the prior year.
Marketing and business development decreased $77 million, or 33% year-over-year.
The reduction reflects actions we implemented in March of last year to align marketing spend with tightened credit criteria.
However, we accelerated our marketing spend late in the first quarter and plan to continue this through the year.
These investments will drive new account acquisition and loan growth.
The year-over-year decrease in other expenses was mainly driven by lower fraud volume to an -- due to enhanced analytics around disputed transactions and decreased fraud in deposits.
This improvement demonstrates a small part of the benefit we expect from the investments we've made in the analytics over the past few years.
Partially offsetting the favorability was a $39 million increase in employment compensation, that was driven by two factors: $22 million from a higher bonus accrual in the current year.
The remaining increase was driven by higher average salaries, reflecting the talent build in our technology and analytics team.
Moving to Slide 9.
We had another strong quarter of very strong credit performance.
The total charge-offs were 2.5%, down 79 basis points year-over-year and up 10 basis points sequentially.
The card net charge-off rate was 2.8%, 85 basis points lower than the prior year with the net charge-offs dollars down $209 million, or 31%.
Sequentially, the card net charge-off rate increased 17 basis points and net charge-off dollars were up $11 million.
The increase in card net charge-offs from the prior quarter was driven by accounts that had been in Skip-a-Pay and did not cure.
The program ended six months ago, and at this time, most of the accounts that were in Skip-a-Pay have returned to making payments.
Looking forward, we expect minimal impacts to charge-offs from this population.
The card 30-plus delinquency rate was 1.85%, down 77 basis points from the prior year and 22 basis points lower sequentially.
With the influence of the Skip-a-Pay group now largely complete, we think that delinquencies are the most clear indicator of our loss trajectory over the short-term.
Credit remained strong in private student loans.
Net charge-offs were down 15 basis points year-over-year and 18 basis points compared to the prior quarter.
The 30-plus delinquency rate improved 55 basis points from the prior year and 19 basis points sequentially.
In personal loans, net charge-offs were down 79 basis points year-over-year with a 30-plus delinquency rate down 47 basis points from the prior year and 24 basis points from the prior quarter.
The positive impact of additional stimulus, combined with an improved economic outlook, have shifted our expectation on the timing of losses.
We had previously expected losses would increase in the second half of this year and remain elevated into 2022.
That is no longer the case.
Based on our current delinquency trends, we believe losses are likely to be flat to down this year with the possibility of some increase in 2022.
That said, a material shift in the economic environment could offer the timing and magnitude of losses.
Moving to the allowance for credit losses on Slide 10.
This quarter, we released $879 million from the allowance.
This reflected several factors, including favorable changes to our macro assumptions, a moderate decrease in our loan balance, the continued decline in delinquencies, and lower losses.
Relative to our view in January, the economic outlook has continued to improve.
As we've done in prior quarters, we've modeled several different scenarios and took a conservative but more optimistic view.
Our assumptions on unemployment for a year-end 2021 rate of 6%, with a return to full employment in late 2023, we assume GDP growth of about 4.6%.
Our reserve assumptions did not contemplate any additional stimulus directed to consumers, but did anticipate broader economic benefits from infrastructure spending beginning in the second half of this year.
The modest increase to reserves in our student loan portfolio was driven by loan growth coming out of the mini peak season.
Looking at Slide 11.
Our common equity Tier 1 ratio increased 180 basis points sequentially to 14.9%, well above our internal target of 10.5%.
We have continued to fund our quarterly dividend at $0.44 per share and repurchased $119 million of common stock during the quarter.
Our Board of Directors previously authorized up to $1.1 billion of repurchases.
We will likely accelerate our share repurchases in the second quarter and we see the potential for capital returns to increase in the second half of the year.
As I mentioned earlier, we continue to optimize our funding mix and consumer deposits now make up 65% of total funding.
Our goal remains to have 70% to 80% of our funding from deposits, which we feel is achievable.
Though, we expect some quarter-to-quarter variability in this figure.
Moving to Slide 12.
Our perspectives on 2021 have evolved from last quarter.
We continue to anticipate modest positive loan growth for the year.
We are investing in new account acquisition and have already seen strong sales growth through the first quarter.
High payment rates will continue to pressure loan growth near-term but should become less of a headwind over the course of the year.
Versus the first quarter level, we expect our NIM to remain in a relatively narrow range over the rest of the year.
While we'll continue to benefit from improved funding cost and mix, we may experience modest yield pressure over the next few quarters from variability in the revolve rate.
Our commitment to expense management has not changed.
But as Roger mentioned, we believe there is an opportunity to drive long-term growth through increased marketing and further investments in data and analytics.
Excluding marketing, expenses should be near flat from the prior year.
Credit performance has remained stronger than originally anticipated, and we now expect credit losses to be flat to down compared to 2020.
Lastly, we remain committed to returning capital to shareholders through dividend and buybacks.
Given the level of reserve release and the strength of our fundamental performance, we plan to revisit our capital plan -- capital return levels for the second half of this year.
In summary, we're pleased with our first quarter results.
Our sales trend, credit expansion and marketing investments positioned us well for growth going forward.
We released $879 million of reserves.
NIM continue to improve, driven by lower funding costs, and expenses were down, but we'll invest in marketing and analytics that will drive revenue, as well as operating and credit cost improvements over the longer-term.
As the economy reopens, I'm positive regarding the opportunities for growth.
We have a strong value proposition that resonates with consumers and our digital banking model positions us well for strong returns going forward. | compname reports first quarter net income of $1.6 billion or $5.04 per diluted share.
compname reports first quarter net income of $1.6 billion or $5.04 per diluted share.
q1 earnings per share $5.04.
net interest income for quarter decreased $68 million, or 3%, from prior year period.
q1 of 2021 included an $879 million reserve release, compared to a reserve build of $1.1 billion in q1 of 2020. | 1 |
We appreciate your time today.
This is how we measure and manage these divisions internally.
The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed.
The supplemental schedule just mentioned also include our revenue schedule showing this information back for 2018, 2019, as well as 2020.
Fourth-quarter results for both our Protiviti and staffing operations were very strong and exceeded the top end of our guidance range.
Protiviti reported its 13th consecutive quarter of year-on-year revenue gains, with particular strength in its technology consulting practice and managed solutions with staffing.
Our staffing operations reported broad-based, double-digit, quarter-on-quarter sequential revenue growth on an as-adjusted basis.
I could not be more proud of how our teams have managed through this extraordinary year.
Over the last several months, they have made significant impacts helping our clients succeed and job candidates find meaningful work.
Companywide revenues were $1.304 billion in the fourth quarter of 2020, down 15% from last year's fourth quarter on a reported basis, and down 16% on an as-adjusted basis.
Net income per share in the fourth quarter was $0.84, compared to $0.98 in the fourth quarter one year ago.
Cash flow before financing activities during the quarter was $85 million.
In December, we distributed a $0.34 per share cash dividend to our shareholders of record, for a total cash outlay of $39 million.
We also acquired 1.1 million Robert Half shares during the quarter for $63 million.
We have 9.9 million shares available for repurchase under our Board-approved stock repurchase plan.
Return on invested capital for the Company was 31% in the fourth quarter.
Let's start with revenues.
As Keith noted, global revenues were $1.304 billion in the fourth quarter.
This is a decrease of 15% from the fourth quarter one year ago on a reported basis and a decrease of 16% on an as-adjusted basis.
On an as-adjusted basis, fourth quarter staffing revenues were down 24% year-over-year.
US staffing revenues were $723 million, down 25% from the prior year.
Non-US staffing revenues were $219 million, down 23% year-over-year on an as-adjusted basis.
We have 326 staffing locations worldwide, including 88 locations in 17 countries outside the United States.
In the fourth quarter, there were 61.7 billing days, equal to the number of billing days in the fourth quarter one year ago.
The current first quarter has 62.3 billing days, compared to 63.1 billing days in the first quarter one year ago.
The billing days for 2021 by quarter, are 62.3 days, 63.4 days, 64.4 days and 61.7 days for a total of 251.8 days, which is approximately one day less than 2020 due to it being a leap year.
Currency exchange rate movements during the fourth quarter had the effect of increasing reported year-over-year staffing revenues by $8 million.
This increased our year-over-year reported staffing revenue growth rate by 0.7 percentage points.
Temporary and consultant bill rates for the quarter increased 2% compared to a year ago, adjusted for changes in the mix of revenues by line of business.
This rate for Q3 2020 was 3.1%.
Now, let's take a closer look at results for Protiviti.
Global revenues in the fourth quarter were $362 million; $294 million of that is from business within the United States, and $68 million is from operations outside the United States.
On an as-adjusted basis, global fourth quarter Protiviti revenues were up 18% versus the year-ago period, with US Protiviti revenues up 23%.
Non-US revenues were down 2% on an as-adjusted basis.
Exchange rates had the effect of increasing year-over-year Protiviti revenues by $3 million and increasing its year-over-year reported growth rate by 1 percentage point.
Protiviti and its independently owned Member Firms serve clients through a network of 86 locations in 28 countries.
As first noted last quarter, changes in the Company's deferred compensation obligations are now included in SG&A or in the case of Protiviti, direct cost, with offsetting changes in the investment trust assets presented separately below SG&A.
As a reminder, our historical discussion of consolidated operating income has been replaced with the non-GAAP measure of combined segment income.
This is calculated as consolidated income before income taxes, adjusted for interest income and amortization of intangible assets.
This is a non-GAAP disclosure, so we also show a reconciliation to GAAP.
Turning now to gross margin.
In our temporary and consultant staffing operations, fourth quarter gross margin was 38.5% of applicable revenues, compared to 38% of applicable revenues in the fourth quarter one year ago.
The year-over-year increase in gross margin percentage is primarily due to lower payroll taxes, insurance and other fringe costs.
Our permanent placement revenues in the fourth quarter were 9.7% of consolidated staffing revenues versus 10.3% of consolidated staffing revenues in the same quarter one year ago.
When combined with temporary and consultant gross margin, overall staffing gross margin increased 10 basis points compared to the year-ago fourth quarter, to 44.4%.
For Protiviti, gross margin was $96 million in the fourth quarter or 26.5% of Protiviti revenues.
This includes $5 million, or 1.5% of Protiviti revenues, of deferred compensation expense related to increases in the underlying trust investment assets.
One year ago, gross margin for Protiviti was $90 million or 29.7% of Protiviti revenues, including $2 million of deferred compensation expense or 0.7% of Protiviti revenues, related to investment trust activities.
Companywide selling, general and administrative costs were 32.6% of global revenues in the fourth quarter compared to 32.8% in the same quarter one year ago.
Deferred compensation expenses related to increases in underlying trust investments had the impact of increasing SG&A as a percent of revenue by 2.7% in the current third quarter and 1.2% in the same quarter one year ago.
Staffing SG&A costs were 39.7% of staffing revenues in the fourth quarter versus 36.7% in the fourth quarter of 2019.
Included in staffing SG&A costs was deferred compensation expense related to increases in the underlying trust investment assets of 3.7% and 1.5%, respectively.
We ended 2020 with 7,800 full-time internal staff in our staffing divisions, down 32% from the prior year.
Fourth-quarter SG&A costs for Protiviti were 14.1% of Protiviti revenues, compared to 17.1% of revenues in the year-ago period.
We ended 2020 with 7,300 full-time Protiviti employees and contractors, up 34% from the prior year.
Operating income for the quarter was $89 million.
This includes $41 million of deferred compensation expense related to increases in the underlying investment trust assets.
Combined segment income was therefore $130 million in the fourth quarter.
Combined segment margin was 9.9%.
Fourth quarter segment income from our staffing divisions was $79 million with a segment margin of 8.4%.
Segment income for Protiviti in the fourth quarter was $51 million with a segment margin of 13.9%.
Our fourth-quarter tax rate was 27% for both the current and prior period years.
Accounts Receivable at the end of the fourth quarter, accounts receivable was $714 million, and implied days sales outstanding or DSO was 49.4 days.
Before we move to first-quarter guidance, let's review some of the monthly revenue trends we saw in the fourth quarter of 2020 and so far in January 2021, all adjusted for currency and billing days.
Our temporary and consultant staffing divisions exited the fourth quarter with December revenues down 20.8% versus the prior year, compared to a 23.8% decrease for the full quarter.
Revenues for the first three weeks of January were down 23% compared to the same period one year ago.
Permanent placement revenues in December were down 25.4% versus December of 2019.
This compares to a 28.5% decrease for the full quarter.
For the first three weeks of January, permanent placement revenues were down 20% compared to the same period in 2020.
We provide this information so that you have an insight into some of the trends we saw during the fourth quarter and into January.
But, as you know, these are very brief time periods.
We caution against reading too much into them.
With that in mind, we offer the following first-quarter guidance.
Revenues; $1.29 billion to $1.37 billion, income per share; $0.74 to $0.84.
The midpoint of our guidance implies a year-over-year revenue decline of 11.7% on an as-adjusted basis, including Protiviti and earnings per share returning to prior-year levels.
The major financial assumptions underlying the midpoint of these assumptions are as follows.
Revenue growth on a year-over-year basis, staffing down 19% to 21%, Protiviti, up 23% to 25%, overall, down 11% to 13%.
Gross margin percentages; temporary and consultant staffing, 37% to 38%, Protiviti; 25% to 26%, overall; 38% to 39%.
SG&A as percent of revenues, excluding deferred compensation investment impacts: staffing: 35% to 36%, Protiviti: 14% to 15%, overall: 29% to 30%.
Segment income, staffing: 8% to 9%, Protiviti: 10% to 12%, overall: 8% to 10%.
2021 capital expenditures and capitalized cloud computing costs for the year: $85 million to $95 million, with $15 million to $20 million in the first quarter.
Tax rate: 27% to 28%, shares: 113 million.
We limit our guidance to one quarter.
We enter 2021 with renewed optimism about Robert Half's positioning for future growth.
We have retained our key staff, and they are committed to driving our success as the backbone of the enterprise.
Our aggressive go-to-market strategy during the pandemic with clients in the public sector and financial institutions of all sizes has yielded meaningful wins and new relationships.
Our technology investments have facilitated remote working models internally and with our advanced AI- driven capabilities are providing clients with real-time choices of candidates from outside their local market area.
Owing to its diversified solution offerings, Protiviti continues its record of multiyear double-digit revenue growth and very positive pipeline.
The collaboration between Protiviti and staffing is at an all-time high as evidenced by the 82% year-on-year growth rate this quarter from the unique blend of consulting and staffing solutions.
Staffing services provided to our mid-cap clients now approaches one-third of our revenues and growing and this is incremental to our traditional focus on SMB clients and prospects.
With multiple vaccines now rolling out throughout the world and fiscal and monetary policy support expected to continue globally, economists are increasingly expecting GDP growth to follow.
GDP driven early cycle growth is traditionally particularly robust for SMB clients that are lean and nimble from the downturn and have pent-up demand to restore and upskill their workforce as they return to growth.
More than ever, we believe the strength of our brands, our people, our technology and our professional business model position us for future success in 2021 and beyond.
Please ask just one question and a single follow-up, as needed.
If there's time, we'll come back to you for additional questions. | compname reports quarterly earnings per share $0.67.
quarterly earnings per share $0.67.
quarterly revenue $1.19 billion.
return on invested capital for co was 25.8 percent in q3. | 0 |
I'm joined by our President and CEO, Joe Raver; our Executive Vice President and incoming CEO, Kim Ryan; and our Senior Vice President and CFO, Kristina Cerniglia.
These statements are not guarantees of future performance, and our actual results could differ materially.
Before I start, I'd like to take a moment to introduce our new Investor Relations' Director, Sam Mynsberge who kicked off today's call.
Sam brings more than a decade of finance experience to the position and has been with Hillenbrand since 2014 serving in a variety of finance roles.
Given Sam's knowledge of our business and strong financial acumen, we're excited to have him lead our Investor Relations efforts.
I'll now turn to an overview of the year.
Fiscal 2021 was marked by record performance for Hillenbrand, achieving new milestones for order intake, revenue, earnings and cash flow, driven by strong demand for our products and solutions and outstanding execution by our people.
We capped off this strong performance with a solid fourth quarter, as all three segments delivered margins and cash flow that exceeded our expectations coming into the quarter, which Kristina will discuss in more detail later in the call.
As we approach the second anniversary of the Milacron acquisition, the integration continues to progress well.
We accelerated our synergy realization and exceeded our goal for the year, achieving approximately $30 million of incremental cost savings, bringing our total synergy realization to date to nearly $60 million.
We remain confident in achieving our target of $75 million in run rate synergies by the end of year three.
The Milacron integration has served as a catalyst in establishing the foundation for accelerating value capture from future M&A and in driving many of the improved processes that have allowed us to effectively navigate this difficult operating environment.
We are a stronger company because of the Milacron acquisition, and I'm excited about the opportunities that lie ahead.
We also achieved significant strategic milestones, successfully streamlining our portfolio through the announced divestitures of Red Valve and ABEL during the fiscal year and just last month, TerraSource Global.
We made good progress on our sustainability journey this year, including the hiring of our first Chief Sustainability Officer and the issuance of our second sustainability report in September.
This year was not without its challenges however as global supply chains remain stressed, inflation in commodities and transportation has not abated, the impact of COVID-19 continues to persist, and labor shortages continue throughout the US.
Nevertheless, I'm proud of the dedication and resiliency displayed by our associates as they successfully executed our strategy and served our customers in the face of these external challenges.
Hillenbrand has a proven track record of execution, and I'm confident in our position as we enter fiscal 2022.
Our experienced leadership team, healthy balance sheet, strong backlog and focused portfolio position us well for continued growth and success.
As I've mentioned before, Kim and I have worked together for a number of years at Hillenbrand, and we have a high degree of trust.
Together with our Board, we've been executing a detailed plan to ensure a smooth and effective transition.
I'm confident that Kim and the rest of our executive team will do a great job leading Hillenbrand into the future.
Joe has led the transformation of Hillenbrand into a global industrial company through the integration of Coperion and the acquisition of Milacron.
He also led the transformation of talent and capabilities of the company by bringing in excellent leaders with strong industrial background and deep operational expertise at all levels of the organization.
I'm grateful for his mentorship and partnership over the years.
And I'm confident that our leadership team will be able to build upon our strong foundation to drive profitable growth for years to come.
Now, let me turn to our strategy.
The company achieved strong results in 2021 despite the escalating global challenges that we are all facing.
During these times, it's critical that we remain focused on executing our strategy to drive long-term shareholder value.
And I believe our performance demonstrated that throughout the year.
As you know, our strategy is comprised of four pillars.
The first strategic pillar is to strengthen and build business platforms, both organically and through M&A.
Over the past 12 months, we completed the divestitures of three businesses from our APS segment.
This enables us to focus our capital allocation toward driving growth in our large industrial platform where we partner with our customers to develop highly engineered equipment and solutions that optimize quality, output and energy efficiency to achieve a lower total cost of ownership.
The strength of our customer relationships, our deep application expertise and our innovative product offerings enabled us to achieve record order intake in fiscal 2021, resulting in a strong backlog that positions us well for growth in fiscal 2022 and beyond.
We continue to see significant opportunity in several areas of strategic focus, such as food, including texturized proteins, recycling, biopolymers and batteries, which tend to be less cyclical than our other industrial end markets and have attractive long-term growth prospects.
As customer needs in these markets evolve toward higher output and more technically demanding applications, we are confident in our ability to win due to three key factors, our leading product offerings, our application engineering expertise, and finally, our global service network.
Additionally, the opportunities we see in these end markets aligned with our purpose of shaping a more sustainable future.
We are making organic investments to better position ourselves to win in these end markets, while also evaluating strategic acquisitions to accelerate our growth.
In recycling, for example, our investments have resulted in the introduction of several new products, the establishment of reference sites across all three recycling processes and key strategic partnerships that position us well for our future in this exciting area of opportunity.
Our next strategic pillar is to manage Batesville for cash.
As we continue to grow our industrial product platforms, Batesville is becoming a smaller part of the portfolio, now comprising only about 20% of the company revenues.
Throughout this unfortunate and unprecedented pandemic, the Batesville team has remained relentlessly focused on serving our customers and living up to their mission of helping families honor the lives of those they love.
Batesville's strong execution over the last two years has delivered over $200 million of free cash flow paying -- playing a key role in the actions we took to aggressively pay down debt, accelerate growth investments in our industrial platforms and return cash to shareholders.
Our third strategic pillar is to build scalable foundations for growth using the Hillenbrand Operating Model.
The Hillenbrand Operating Model is at the core of how we run and grow our businesses.
During Joe's tenure, the Hillenbrand Operating Model evolved from a lean manufacturing system to a full operating model that enables continuous improvement across all aspects of the business, including operations, supply chain, global support functions and strategy.
I've been fortunate to partner with the leadership team and the development of the operating model, while also experiencing firsthand the benefits of its deployment during my time as President of Coperion and through my involvement in the integration of Milacron.
The Hillenbrand Operating Model is a key enabler of the success we've seen so far in the Milacron integration, but the benefits will go far beyond the synergies realized from this particular acquisition.
We are confident that the capabilities we have developed and the organizational structures we have established will enable us to accelerate the integration and synergy realization of future acquisitions.
As we continue to utilize the tools and expand the capabilities of the HOM, we expect to drive further efficiencies throughout the enterprise, while also enhancing our growth tools, specifically around innovation, digitization and commercial excellence.
Our fourth and final pillar is to effectively deploy strong free cash flow.
We generated record cash flow in fiscal 2021.
This allowed us to reinvest in the business for growth and productivity to strengthen our balance sheet and to return over $180 million in cash to shareholders through share repurchases and quarterly dividends.
Since acquiring Milacron two years ago, we've reduced our leverage by nearly 2.5 turns.
We have a healthy and flexible balance sheet enabling us to further accelerate our growth through strategic investments in our industrial platforms, exploring potential inorganic opportunities that maximize long-term shareholder value and considering opportunistic share repurchases.
As always, we remain disciplined in our approach to deploying cash.
We issued our second sustainability report this past September.
We introduced a framework for how we prioritize our efforts based on the feedback of our stakeholders.
We also aligned our reporting framework to the United Nations Sustainable Development Goals and the Global Reporting Initiative.
We believe sustainability is a source of opportunity, innovation and competitive advantage for Hillenbrand, which will ultimately drive long-term profitable growth and shareholder value.
This is a priority of mine, and I'm excited to continue sharing our progress with you over the quarters and years to come.
Throughout my section, I will be referencing year-over-year comparisons on a pro forma basis, which are adjusted for acquisitions and divestitures.
We believe these pro forma comparisons provide a better assessment of our ongoing operations.
And you will find a reconciliation of reported and pro forma results in the appendix of the earnings slide deck.
During the fiscal fourth quarter, we delivered total revenue in the quarter of $755 million, an increase of 12% on a pro forma basis or a 11% excluding the impact of foreign currency.
We saw year-over-year increases in all three segments, led by volume growth in the injection molding product line within MTS.
Adjusted EBITDA of $140 million increased 2%, while adjusted EBITDA margin of 18.5% decreased 180 basis points, as cost inflation, unfavorable mix and an increase in strategic investments more than offset operating leverage from higher volume, favorable pricing and productivity improvements, including approximately $7 million of year-over-year synergies realized in the quarter.
Despite the decline compared to prior year, adjusted EBITDA margins in the quarter exceeded our expectations for all three segments.
As communicated last quarter, we have been actively taking pricing actions to help mitigate the impact of rising inflation.
We had approximately 70% price/cost coverage in the quarter, which was more favorable than we had expected, primarily due to better pricing realization in some of our shorter cycle injection molding products and in Batesville.
However, we expect to see continued price/cost pressure in the first half of fiscal '22, due -- in part due to the delivery of longer lead time injection molding equipment from the backlog that was priced at pre-inflationary levels.
Additionally, we expect our primary commodity costs of steel, electrical components, wood and fuel to remain elevated through at least the first half of fiscal 2022.
We will continue to monitor our pricing structures and take further action as appropriate.
We reported GAAP net income of $55 million, or $0.74 per share, which increased from a loss of $0.09 per share in the prior year.
Adjusted net income was $74 million, or $1.00 per share, an increase of $0.08 or 9%.
And the adjusted effective tax rate for the quarter was 29.2%.
We had cash flow from operations of $86 million in the quarter, which was better than our expectations coming into the quarter, but lower than last year, primarily due to timing of working capital requirements.
Capital expenditures were approximately $18 million.
We repurchased approximately 1.8 million shares for $78 million in the quarter and returned $16 million to shareholders in the form of quarterly dividends.
Moving to segment performance.
APS revenue of $340 million increased 9% on a pro forma basis, driven by higher volume of large plastics projects and separation equipment.
Aftermarket revenue was relatively flat year-over-year, but up 6% sequentially.
And we had another solid quarter of aftermarket orders.
We expect continued growth in this highly profitable part of the business in fiscal year 2022.
Adjusted EBITDA of $69 million increased 8% on a pro forma basis, while adjusted EBITDA margin of 20.3% was higher than expected, down only 30 basis points from the prior year.
Cost inflation was largely offset by price, but the impact of unfavorable mix from a higher proportion of large plastics projects and strategic investments for growth more than offset operating leverage from higher volume and productivity improvements.
Order backlog of $1.3 billion increased 41% year-over-year on a pro forma basis, primarily driven by large plastics projects.
While backlog declined 2% sequentially, it remains at a high level, providing us a strong foundation for growth in fiscal '22 and beyond.
The pipeline for large plastics projects continues to be healthy, particularly in Asia.
And as Kim mentioned, we have made solid advances in our product innovations and strategic partnerships in recycling as well as food, biopolymers and batteries.
Although these areas are not significant portions of our revenue today, we are focused on building our capabilities to win in these end markets in the future through strategic partnerships and organic investments, while also evaluating inorganic opportunities.
Turning to Molding Technology Solutions.
We saw year-over-year growth in all product lines, led by strong volume growth for injection molding equipment.
Both revenue and margins exceeded our expectations coming into the quarter.
Revenue of $260 million increased 20% compared to the prior year.
The team executed well in the quarter and was able to largely mitigate the impact of a chip shortage that we communicated coming into the quarter.
Adjusted EBITDA of $54 million increased 6%, while adjusted EBITDA margin of 20.6% decreased 270 basis points, as higher volume and productivity were more than offset by unfavorable mix due to an increased proportion of injection molding equipment, which comes at a lower margin compared to hot runners, cost inflation, not fully offset by price, and higher labor and manufacturing premiums, including outsourcing.
We continue to deploy the Hillenbrand Operating Model in the MTS segment, particularly in injection molding where we expect to achieve sustained margin improvement over the coming years.
Order backlog of $366 million increased 51% compared to the prior year and decreased 6% sequentially as order volumes normalized, in line with our expectations.
Batesville performed above our expectations for both revenue and margin given the unfortunate circumstances with the Delta variant.
Revenue of $155 million increased 5%, due to higher average selling price and an estimated increase in deaths associated with the pandemic.
While we are closely monitoring the continued impact of COVID-19, we expect deaths to normalize as we progress through fiscal year 2022.
Adjusted EBITDA margin of 21.6% declined 270 basis points compared to the prior year, primarily due to cost inflation and higher transportation and manufacturing cost premiums required to respond to the increased demand driven by the ongoing COVID-19 pandemic.
As we've discussed before, the Batesville team has been fully focused on meeting the elevated demand needs of their customers throughout the pandemic.
When demand normalizes, the business plans to reallocate resources to drive productivity projects.
Now, I'll briefly cover our full year results.
Consolidated pro forma revenue of $2.8 billion increased 13% or 10%, excluding the impact of foreign currency exchange.
Pro forma revenue for APS of $1.2 billion increased 5% compared to the prior year, including a 4% contribution from the impact of foreign currency.
MTS revenue of $996 million grew 25% on a pro forma basis or 22% excluding the impact of foreign currency.
Batesville revenue of $623 million increased 13%.
Pro forma adjusted EBITDA of $534 million increased 20% compared to the prior year, while pro forma adjusted EBITDA margin of 18.8% improved 100 basis points, primarily driven by operating leverage from higher volume in Batesville and MTS and productivity improvements, including synergies.
We accelerated the timing of our synergy capture in the year, realizing approximately $30 million of incremental cost savings, which exceeded our target of $20 million to $25 million, and we remain on track to achieve our three-year run rate synergy target of $75 million.
GAAP net income of $250 million resulted in GAAP earnings per share of $3.31.
Adjusted net income of $286 million resulted in adjusted earnings per share of $3.79, an increase of $0.60, or 19% compared to the prior year.
And our adjusted effective tax rate was 28.7% for the full year.
We generated record operating cash flow for the year of $528 million, up $174 million compared to the prior year, and our free cash conversion rate was 171% of adjusted net income for the year.
We continue to leverage the Hillenbrand Operating Model to drive greater efficiency across the business, including focused initiatives on improving working capital management, particularly within the MTS segment.
Capital expenditures for the year were $40 million, which was lower than originally expected due to longer lead times from suppliers.
We remain focused on investing for growth as we head into fiscal '22.
Turning to the balance sheet.
Net debt at the end of the fourth quarter was $767 million, and the net debt to adjusted EBITDA ratio of 1.4 times was down from 2.7 times at the beginning of the fiscal year.
As of quarter end, we had liquidity of approximately $1.3 billion, including $446 million in cash on hand and the remainder available under our revolving credit facility.
As of September 30, we had no borrowing on our revolver and no near-term debt maturities due.
Moving to capital deployment, we returned approximately $185 million to shareholders during the year through the repurchase of 2.8 million shares for approximately $121 million and $64 million through our quarterly dividend.
Subsequent to the year end, we repurchased an additional 620,000 shares for $29 million, and we have $50 million remaining under our share repurchase authorization.
Our top priorities for capital continues to be strategic investments to accelerate profitable growth and our large platforms in APS and MTS.
Additionally, we are evaluating acquisition targets that are a good strategic fit and that we expect will provide a high return to shareholders over the long term.
We will also continue to evaluate opportunistic share repurchases.
Our guidance will be on a pro forma basis, which excludes the divested Red Valve and ABEL businesses from the prior year.
Our guidance also excludes the divested TerraSource Global business from the prior year and the period of October 1 through October 22, 2021.
As the basis for our outlook, we expect supply chain disruptions, high transportation costs and labor market shortages to persist through the majority of the fiscal year.
And as I mentioned earlier, we expect commodity costs to remain elevated through at least the first half of the fiscal year.
Additionally, we expect currency to be a headwind on a year-over-year basis.
We expect full-year revenue of $2.8 billion to $2.9 billion, an increase of 1% to 4%, driven by our strong backlog and solid underlying growth in our industrial end markets, partially offset by Batesville, the impact of supply chain disruptions and foreign currency translation.
We expect adjusted earnings per share in the range of $3.70 to $4.00 for the full year.
Total material and supply chain inflation for the year is expected to be approximately $95 million.
We anticipate offsetting the majority of this impact with price on a dollar-for-dollar basis, but this will have a dilutive impact to margins.
We expect inflation to be more of a headwind in the first half of the year with price/cost coverage of approximately 70% improving to approximately 100% in the second half.
For our fiscal first quarter, we expect adjusted earnings per share in the range of $0.87 to $0.94, down versus the prior year, primarily due to lower volume in Batesville, higher inflation and supply chain costs, and the impact of the divestitures.
We expect free cash flow as a percent of adjusted net income to be approximately 100% for the year.
Including capex of approximately $75 million.
Now to our segment outlook.
Turning to Advanced Process Solutions, we expect full-year revenue to be up 8% to 12%, primarily due to continued strength in large plastics projects as well as solid growth in aftermarket revenue.
This growth includes an anticipated currency headwind of 3%.
We expect adjusted EBITDA margin of 21% to 21.5%, up 150 basis points to 200 basis points.
We anticipate supply chain challenges will more heavily impact the segment in the first half of the fiscal year, and we expect price to generally cover inflation for the year.
For the first quarter, we expect low-double-digit revenue growth year-over-year, but down high-single-digits sequentially, which is in line with historical seasonality trends.
Turning to Molding Technology Solutions, we expect full-year revenue to be up 2% to 5% with modest growth in both hot runners and injection molding equipment.
We have a strong backlog, and underlying demand trends remain solid, but we anticipate supply chain disruption and labor shortages to be a headwind throughout the year.
Additionally, we expect sales for the hot runner equipment to be negatively impacted over the near term, primarily in the first quarter due to disruptions in China.
We expect adjusted EBITDA margin of 20% to 21% compared to 20.3% in fiscal '21.
We anticipate a higher degree of price/cost pressure in the first half of the year, due to injection molding equipment converting to revenue from the backlog, which was priced pre-inflation.
We expect price/cost coverage to improve in the second half.
For Q1, we expect revenue to be modestly higher than prior year, but down sequentially.
And we anticipate modest year-over-year margin pressure, due to inflation and unfavorable mix from a higher proportion of injection molding equipment, which comes at a lower margin.
Finally, with Batesville, we expect revenue to be down 11% to 13%, due to an anticipated decline in burial demand as just normalized during the year.
We expect COVID-related volumes to be significantly lower than the prior year, in line with external estimates.
While we anticipate price/cost coverage will be better than it was in fiscal '21 due to the pricing actions we have taken, we expect adjusted EBITDA margin of 19% to 20% to be down 570 basis points to 670 basis points, primarily due to lower volume as well as supply chain premiums and inflation, not fully covered by price.
We expect price/cost coverage to be approximately 60% in the first half of the year, and we anticipate this will improve in the second half.
For Q1, we expect Batesville to be approximately flat on revenue with modestly higher margin on a sequential basis compared to Q4.
We expect the impact of the price increase to be largely offset by lower base deaths and continued pressure from inflation and other supply chain premiums.
Overall, heading into fiscal year 2022, we have a strong backlog and our key industrial end markets remain healthy.
We continue to be focused on investing for growth and serving our customers, while continuing to leverage the Hillenbrand Operating Model to help us navigate through the difficult global operating environment.
Our teams have demonstrated the ability to execute through challenging circumstances, and I'm confident that we will continue to drive sustainable improvement and achieve our targets for the coming year.
First, underlying industrial end market demand remains solid, and we have a strong backlog as we head into 2022.
This provides visibility and gives us confidence as we operate in this uncertain macro environment.
Second, through the Milacron integration, we've significantly expanded our capabilities and improved our operating model.
And this has enabled our strong execution during the past year, provides a scalable foundation for future growth.
And last, we have a talented and experienced leadership team to drive Hillenbrand's profitable growth strategy into the future.
Finally, it's been a great honor and privilege to serve at Hillenbrand over the last 28 years.
I've been fortunate to lead the organization through a period of significant transformation, which could not have been possible without our dedicated employees, our talented leadership team and the support of our Board, shareholders, customers and other stakeholders.
I'm excited about Hillenbrand's future, and I'm confident in its continued success under Kim's leadership. | compname reports q1 gaap earnings per share $1.01.
q1 gaap earnings per share $1.01.
sees q2 adjusted earnings per share $0.85 to $0.95.
q1 adjusted earnings per share $0.96.
q1 revenue rose 22 percent to $693 million.
qtrly gaap earnings per share of $1.01.
fiscal q2 2021 total quarterly revenue expected to increase 12% to 16% year over year on a pro forma basis".
believe we are well positioned for remainder of fiscal year 2021 with a solid balance sheet and healthy backlog". | 0 |
During today's call, we'll refer to adjusted operating income or loss, adjusted EBITDA and adjusted free cash flow, which are non-GAAP financial measures.
Adjusted operating income or loss is income or loss from operations, adjusted for items that affect trends and underlying performance from year-to-year and are not considered normal recurring cash operating expenses.
Adjusted EBITDA is net income or loss before interest expense, interest income, income taxes, depreciation, amortization and adjusted for items not considered as part of the Company's normal recurring operations.
Adjusted free cash flow is net cash provided by or used in operating activities less capital expenditures, adjusted for items not considered as part of the Company's normal recurring operations.
Starting with the third quarter of fiscal 2019 and through fiscal 2020, we have reported operating metrics such as student applications and starts, excluding our Norwood, Massachusetts campus.
As we have shared previously, Norwood stopped accepting new student applications in the second quarter of fiscal 2019 and the campus was fully closed in July 2020.
So we believe it is appropriate to exclude its impact.
Before I jump in, please indulge me, while I once again share heartfelt debt of gratitude to the UTI team who in 2020 represented the very best in human spirit and dedication, while helping our institution, our students, our industry partners navigate some of the most challenging conditions imaginable.
Troy will then provide some guidance on a handful of key metrics for 2021.
The three areas I'd like to focus on in the next few minutes are outcomes, accomplishments and our vision for the future of UTI.
Outcomes are metrics and standards that have truly set us apart in the industry for the past five decades, continue to underscore our unique value proposition today and will be critical to the success of our business strategies going forward.
With respect to accomplishments, I'll share with you some thoughts and examples of the effectiveness and importance of the credentials our students earn, as well as innovations we put into place to help our students succeed more efficiently and effectively in the workforce.
And finally, I'd like to share with you our vision for the future of UTI by updating you on our growth and diversification plans.
Let me start with outcomes.
At the very heart of our operating model and UTI's unique value proposition is the relentless focus on improving the employment and career outcomes for our current students and graduates.
This starts with ensuring that they succeed in their vocational curriculum and successfully graduate.
Our keen kept on the number of students who persistent in their education and graduate is one of the ways which we prove our value every day.
Nationally, just 40% of college students earn a certificate or degree within six years of beginning their post-secondary studies, yet at UTI nearly 70% of our students graduate within two years.
This is in no small part due to the investment our faculty and support teams make in the success of our students.
We worked closely and individually with them to work through the many challenges that life brings so that they can stay focused on their passion, finish their studies and go on to rewarding careers.
One such recent example is Jonathan Pagen.
After graduating from high school, Jonathan joined the U.S. Army, where he served four years as a mechanic.
Following this further, after leaving the military he enrolled in a local community college to pursue a degree in electronics engineering.
Jonathan soon found that there was his word, just too much involved with navigating the community college courses including general education requirements and electives that were not part of his chosen field.
He said it was just to challenging to keep up and was looking for a more focused education, so he enrolled at our Avondale, Arizona campus, where he completed our core auto program and went on to our forward advanced training program.
Jonathan graduated during the pandemic, and immediately went to work in Arizona for a dealership.
He told us that he loves the security of having a good steady job and doing something that he likes, and wants to do every day, rather than in his words, struggling through college or working in a random job that would not be as much fun or fulfilling.
Jonathan's goal is to become Ford master technician.
The story of Jonathan and all students like him makes us proud at UTI and is all too familiar example of the student who is struggling or a traditional career path and found success at UTI.
His journey also underscores another area of focus for UTI, employment.
While only 47% of those who attend traditional post-secretary of institutions are working in their field of study today, approximately 80% of UTI's graduates go to work in their chosen field after graduation.
Over the years, our teams have worked diligently to build our industry partnerships and employer networks in order to directly connect our students to employment opportunities during school and upon graduation.
As we've outlined in past updates, the Bureau of Labor Statistics projects the year there are nearly 160,000 new technicians annually needed in our subject areas over the next 10 years.
While technician training will only provide the market with a combined set of credentials of about 50% of those needed to go out into the workforce, this disconnect underscores that the jobs are there, students just need programs designed to match their interest and talents, industrial training that provides the hard and soft skills and credentials employers require and connections to industry opportunities.
In the last three years, we brought innovative agreements with over 4,500 employers offering a range of incentives to attract and retain our graduates.
Over 3,500 of them offer lucrative tuition reimbursement programs up to $25,000.
These programs help students more easily evaluate and find employment opportunities, erase debt they accumulated while in school, and lower the possibility of student loan default.
We've also created an early employment partnership program with key employers designed to offer employment, mentoring and hands-on experience to students, while they're in school, with the opportunity to continue after graduation at higher salaries and receive tuition reimbursement.
Employers and manufacturer partnerships like these are at the heart of how we maintain such high employment outcomes for our students and deliver trained talent to our industry partners at the same time.
Nothing underscores the value of these types of partnerships more than the story of Volare Cantare, who recently graduated from our Houston campus.
Although Valerio says he has always been a car guy, he initially chose to enroll in a four year college for engineering degree right out of high school.
By the second year, he knew it wasn't right for him and he transferred to our Houston campus for automotive and diesel program.
Valerio itself here, he was among one of the top students in this program, and only one of 12 students Nationwide selected to participate in the most recent Porsche advanced training program.
For someone like Valerio, whose Venezuelan heritage talking that Porsche is the brand, it was in his word, a boyhood dream come true.
He started and completed the program during the pandemic, using our new blended learning model following his graduation in late September, he went for work right away at Momentum Porsche in Houston, a job he loves.
Four year degree programs can be right choice for many young adults,.
but for others like Valerio, a fast track, quality technical education can be a powerful path to success.
Valerio who has experienced both education models told us college was no comparison to what he learned at UTI.
Now Valerio story is not an isolated case, all the graduates of Valerio's class in the course technology apprenticeship program, which is offered exclusively in partnership with Universal Technical Institute, whet immediately to work at Porsche dealerships in New York, California, Texas, Florida, Pennsylvania North and South Carolina and Alabama.
All tuition and housing costs are covered by Porsche and the Company also arranges local part-time employment for students, while they're in the 23-week program.
The Porsche program is offered in a blended format combining online education with hands on training and CDT compliant labs.
Porsche directly supports, equips and invests in the program, allowing students to receive training on all the latest Porsche vehicles and technologies.
We've seen similar results during the pandemic for our recent graduating classes coming out of other manufacturer specific advanced training programs, including 98% employment for the Volvo graduates, a 100% employment for Peterborough program, who graduated on October 30.
As you can see the outcomes and metrics that mean the most to us are aligned with those that mean the most to our students, manufacturer partners and employers.
Persistence, graduation and ultimately employment rates are what have defined the success of our education model for the past five decades and will continue to do so going forward.
Now, I'd like to highlight some of the past year's accomplishments.
Candidly, there were times in 2020 where it felt like just staying on our feet was a Herculean task, yet due to the hard work and discovery of new and innovative approaches, all of our 12 campuses in eight states are fully operational and have been serving our students throughout the entire quarter.
We continue to follow the CDC federal recommendations and guidelines as well as local health authority guidelines and recommendations.
We continue to work closely with students with respect to concerns about their health to help them continue their education toward achieving their career goals.
Despite the challenges, we continue to provide the high quality, state of the industry technical training for which we're known.
Our campuses have accomplished a great deal.
Since resuming hands on labs last quarter, we graduated over 2,770 technicians and continue to see high employment rates as the transportation industry continues to serve the nation as critical infrastructure.
It's taken innovative new approaches to teaching and learning in order to continue to meet the robust employer demand and support students in completing their education through this challenging year.
We're maintaining a key focus on investing capital to hone our new blended learning approach, fine-tuning the student experience and ensuring student success in this new environment.
Blended learning model will be how UTI students learn going forward.
This innovation offers increased safety, and flexibility to our UTI students, better prepares them for high-tech careers that require both hands on and digital skills and aligns with how industry increasingly trains, up skills, and rolls out new technology to its own workforce.
With that in mind, we're also providing students with laptops, to ensure that each and every student has viable, cost effective means of accessing the online portion of the curriculum and will serve as an important tool to take with them as they begin their careers.
To date with the assistance provided by CARES Act funding we've distributed over 12,000 computers and we'll be continuing the program going forward.
It's important to note, that combining the $17.1 million that we've now distributed directly to students in CARES Act emergency grants, with the funds utilized to purchase the laptops for students, $23 million or approximately 70% of UTI's Higher Education Emergency Relief Fund allocation has been distributed directly to students in the form of cash and technology.
Other accomplishments in 2020 also include the continued expansion of our successful welding technology training program.
We added our fourth and fifth programs at our Houston and Long Beach campuses during the fiscal year 2020.
Our current plan is to launch welding technology at Lisle campus early in the second quarter and a seventh program in fiscal 2021 as well.
We continue to see strong demand for our welding program across campuses.
On average, once fully ramped, each new welding site launch increases overall student starts by about 1.5%.
Welding is an important component of our growth and diversification strategy as it broadens our student base and allows us to serve a much wider range of industry customers.
At the same time, it complements our core technical training business and is consistent with our commitment to quality education that prepares students for rewarding careers.
The U.S. Bureau of Labor Statistics projects that there will be more than 400,000 total job openings for welding over the next decades.
With our campuses is fully operational, our new blended learning model firmly in place, and our welding expansion continuing, I'd like to highlight the positive trends and momentum in our business right now.
As of October, nearly 80% of our students are on regular course schedules, which means they are no longer making up labs.
This is a dramatic improvement from last quarter, when that figure was running at 40%.
Now nearly 3% of our population are exclusively participating online; again, a significant improvement over the last quarter.
Further, the introduction of the new learning model has enabled us to double our class densities since the beginning of the year, while still maintaining CDC health protocols.
This increased capacity allows us to better meet the growing demand for our education in more efficient and effective manner.
Another innovation I've touched on in the past is our marketing and admissions operating models.
Our messages have been hone to highlight the robust and durable job opportunities in our field.
This sharpening of our strategy is paying off.
Media inquiries were up 25% in both Q3 and Q4 compared to 2019.
Now, we did see some slowdown due to the election, as the campaigns poured millions, and if not billions of dollars into the marketplace seeking that much coveted 18 to 24-year-old voter.
But we're already seeing double-digit rebound in November, which bodes well for our December, January and February starts.
Our admissions organization has also transitioned to primarily a virtual model, and we're seeing some of the upside benefits and efficiencies created by cutting down on travel and other impediments in what was primarily a high touch strategy.
Not only are increase increasing as noted above, but conversion rates for those increase in the last few months were up nearly 30%.
New students scheduled to start for the coming quarters and fiscal year are looking very strong right now and momentum across the business continues to build.
As far as student starts in the fourth quarter, overall starts trailed 2019, yet were up 1.1% on a comparable basis.
In September, we saw double-digit increases in starts and more importantly showed nice improvement over July and August in the third quarter.
Looking briefly into Q1 2020, October was great and November is trending even stronger.
The number of students who are scheduled to start and start themselves are up double digits.
We're off to a strong start in 2021.
The overall message here is that, we have our new normal operating model firmly in place.
The front-end of our business funnel is continuing to strengthen and gain momentum.
Troy will share with you some of the details on Q4 and 2020 results and how this momentum translates into guidance for 2021 in just a few minutes, but let me first spend a few minutes looking forward.
We're moving into 2021 with the strongest financial foundation we've had in decades.
And as I just indicated, our business momentum is accelerating.
With that as a backdrop, I want to take just a few moments to review some of the strategies we've initiated and are pursuing in earnest.
The management team supported by our Board continues to focus on around of parallel strategies of growth and diversification, both portions of the strategy, could and likely will be realized by a combination of organic and our inorganic actions.
We're looking to maintain flexibility and optionality in terms of timing and capital allocation.
The organic components of this growth strategy are focused on both program expansions and extensions, where appropriate and new campus locations as needed.
The inorganic components of this growth strategy, which is primarily composed of potential M&A activity could include both tuck-in acquisitions, which give us access to new location, as well as more transformative steps.
Both organic and inorganic actions are very much alive and receiving regular attention from the management team and the Board.
It's our plan to make some announcements on this front in the coming months.
Diversification, another important component of our strategy and also continues in both organic and inorganic ways.
And as you heard, we continue to be active on this front.
Efforts to address student financing, overall affordability and reliance on title for funding are in the planning stages.
Business model transformation opportunities such as those born of implementing our new and more flexible and efficient blended learning model around the horizon.
And not unlike our growth strategies, acquisitions are also a potential component of this effort.
Growth and diversification are the cornerstones of our path forward, yet it's also important to underscore that there are multiple levers at our disposal to become even more efficient and strengthen the Company as we grow.
One such example is, that our efforts to rationalize our existing real estate footprint and optimize our real estate strategy remains in the forefront of our team's attention.
Troy will provide more details, but it should not be underestimated how these efforts can and will strengthen the financial foundation of the future.
In connection with this implementation of strategic plans I've just outlined, we're reviewing our cash needs and potential usages.
As part of this exercise, we're evaluating in collaboration with the UTI Board of Directors, the opportunity to replace our stock repurchase plan, which was initially set at $25 million and had approximately $10 million of authorization remaining.
If we believe circumstances are favorable for repurchases, a concept, which we have been asked about in the past, and we are still able to invest in our attractive roster of higher ROI growth and diversification initiatives, our new plan would give us the needed flexibility to act.
We will provide you with additional information if and when that purchase plan is put into place.
Before I hand the call over to Troy, I want to briefly speak to the idea or view out there bordering on consensus in some parts of the investment community that a Democratic administration is automatically and universally back for our institution and the industry we are part of, the profit education.
Most notably is the notion that in order to qualify for federal funding institutions such as ours, will need to first prove that they are worthy of federal support.
As I outlined today in the form of metrics, examples and outcomes, at UTI, we've held ourselves to a high standard in delivering for our students and industry partners for 50 years.
Our business model is built on one key tenant, when our student succeed, we succeed.
Regardless of whether we have a Republican or Democratic presidential administration or Congress, we're optimistic about the future and the path for UTI.
We believe both political parties and administrations are big supporters of the tight and value of education and credentials we provide for students.
The need for our service is mission critical to keeping America moving, especially during the country's economic recovery.
We saw some benefits from the Trump administration and we're hearing about plans including increasing Pell grants and rebuilding infrastructure that could turn into benefits from the Biden administration.
As Jerome outlined, we are very pleased with the progress we made during the quarter and with our operating results for the quarter and the fiscal year, given the many challenges presented by COVID-19.
Starting with student metrics.
We started 5,772 new students in the fourth quarter, which increased 1.1% year-over-year when adjusting for the extra start that occurred in the 2019 fiscal fourth quarter and was down 10.3% year-over-year including it.
New students scheduled to start increased 6.9% year-over-year for the fiscal fourth quarter, excluding the prior year extra start.
We saw a significant positive shift in the momentum of new student starts earlier in the quarter to later in the quarter.
We're looking at start dates from August 31 through the end of September, when over 3,200 new students started the program.
We saw a 14.8% year-over-year increase and exceeded our pre-COVID expectation by almost 7%.
New students scheduled to start for this period increased almost 20% year-over-year and exceeded our pre-COVID expectations by almost 15%.
That momentum has continued into the first quarter of fiscal 2021, with thus far through our most recent start we have seen strong double-digit year-over-year growth in new student starts.
And we are currently seeing the same year-over-year strength and the pacing of new students scheduled to start for the first and second quarters.
For fiscal year 2020, we started to 11,283 new students.
While this was down 2.4% as compared to fiscal 2019, I'll point out that we started two-thirds of these students during the pandemic directly into our new blended learning model.
Additionally, we saw growth in three of the four quarters of the fiscal year -- above last nine most recent quarters.
In the fourth quarter we saw improved show rate performance versus the third quarter, with the show rate down 360 basis points year-over-year versus down 400 basis points from the prior quarter.
Similar to starts, we saw markedly better results from the August 31 start date through September with the year-over-year show rate down only 180 basis points for that period.
So far in the first quarter of fiscal 2021, the overall show rate for our most recent start has improved 140 basis points versus the same prior-year pre-COVID period.
For fiscal 2020, show rate was down 220 basis points, with the decline all due to COVID impact in the third and fourth quarters.
We attribute the impact primarily to the fact that roughly 50% of our students relocate to attend our programs, but this increases to 55% to 60% in the fourth quarter, when we start more than half our students for the year, most of them from the high school channel.
Throughout the third and fourth quarters, we have worked extensively with our admissions and campus teams and our students and their families to address any COVID-related concerns they may have.
We are seeing the benefits of those efforts through the improved show rates over the past few months.
As far as student progression through the curriculum, we are incredibly proud of the progress our team and our students have made since our last earnings call.
During the fourth quarter, we graduated approximately 1,900 students and as of the completion of the most recent course rotation, the percentage of students fully current and not be in makeup labs was 78% versus 40% at the time of our last earnings call.
The percentage of students who were exclusively participating online decreased to 3% versus 13% at the time of our last earnings call.
This progress allowed us to recognize approximately $8 million of the $11 million revenue deferral from last quarter.
However, the net deferral as of the end of the quarter stood at approximately $6 million and reflects additional deferrals during the quarter based upon the varying stages of progression for students who are still at makeup lessons.
We have also seen measurable improvement and stabilization and the number of students lease of assets or LOAs.
As of the end of the quarter, the total number of students on LOA was approximately 700 or 5% total students and are at a consistent level currently.
This compares to approximately 12% at the end of the June quarter and 9% at the time of our last earnings call.
Given the dynamics of COVID, we will likely remain around 5% to 6% of total students in the near term, which is a few points above pre-COVID levels.
Average students for the quarter were 11,251, an increase of 2.9% versus the same period last year.
Total end of period active students was 12,524, a 1.3% increase versus the comparable period.
Ending the year positive on these metrics is a testament to the resiliency of the UTI team and the incredible progress they have made working with our students since COVID initially impacted our campus operations in late March.
Turning to the financials for the quarter and full-year.
Revenues for the fourth quarter decreased 12.9% year-over-year to $76.3 million and increased approximately $22 million or 40% sequentially versus the third quarter.
The year-over-year change was primarily driven by the patient student progress in completing in-person labs due to disruptions from the pandemic, which drove the decrease in the average revenue per student of approximately 15%, inclusive of the revenue deferral.
Sequentially, we saw an approximately 13% increase in the average revenue per student.
Based upon the current trajectory of students completely makeup labs, we expect to see measurable quarterly improvement in the net revenue deferral in a revenue per student throughout fiscal 2021.
For the full year, revenues decreased 9.3% to $300.8 million, also primarily driven by the revenue deferral, the overall pace of student progress in completing in-person labs, as well as lower average students due primarily to the COVID-related LOAs in the third quarter.
We prudently controlled costs throughout the quarter, with operating expenses for the quarter decreasing 14.7% versus the prior year to $70.2 million.
The decrease fan both education services costs as well as SG&A.
It was attributable to lower headcount and related compensation and benefit expenses along with lower occupancy, depreciation and travel expenses.
Operating expenses for the fiscal year were $304.6 million and decreased 10.2% versus the prior year.
Productivity improvements and proactive cost actions have been a key part of our operating model the past several years, and we continue to identify and execute on efficiency opportunities throughout our cost structure, while improving and investing in the overall student experience.
Operating income for the quarter was $6.2 million compared to an operating loss of $5.4 million in the prior year quarter.
Net income for the quarter was $6.5 million, an 18% increase versus the prior-year period.
For fiscal year 2020, net income was $8 million compared to a net loss of $7.9 million in 2019.
As previously noted, our full-year net income includes a $10.7 million tax benefit resulting from the application of revised net operating loss carryback rules from the CARES Act.
Basic and fully diluted earnings per share were $0.10 and $0.09 for the fourth quarter, respectively, and both were $0.05 for the full year.
Total shares outstanding as of the end of the quarter were 32,647,000, slightly higher than the prior quarter.
Adjusted EBITDA was $9.7 million for the quarter as compared to $10.4 million in the prior-year period.
For fiscal year 2020, adjusted EBITDA was $14 million compared to $17 million for fiscal year 2019.
For the year-over-year comparison, recall that we implemented the new lease standard in fiscal 2020 and did not adjust prior year results.
Taking this into account, full-year adjusted EBITDA increased by approximately $2 million year-over-year on a comparable basis.
This is despite $31 million of lower revenue and is a very strong outcome, considering all that transpired in fiscal 2020.
Note our adjustments for fiscal 2020 reflect costs associated with the Norwood campus closure and with our CEO transition, while in fiscal 2019 they reflect costs associated with Norwood and a consultant termination fee.
Our balance sheet strengthened further in the quarter with available liquidity of $114.9 million as of September 30, which includes $76.8 million of unrestricted cash and cash equivalents and $38.1 million of short-term held to maturity securities.
This is a $23 million quarter-over-quarter increase, which is consistent with the increase in liquidity we generated in the fourth quarter of fiscal 2019.
This is a notable outcome considering the challenging operating environment during the quarter.
For the fiscal year, operating cash flow was $11 million, while adjusted free cash flow was $4.3 million, including $9.3 million of capex.
We estimate that cash flow was negatively impacted by $10 million to $15 million for the year due to the timing of tighter fund flows tied to COVID related delays and student progression through the curriculum.
You can see this impact and increase in our tuition receivables versus this time last year, most of which we expect we realized in fiscal 2021.
We believe that our strong balance sheet and ability to generate free cash flow provides us with a solid foundation to execute on our growth strategy as we enter into fiscal 2021.
We are actively working on number of strategic initiatives that will create value for our business, our students and our shareholders, and that we plan to share more details on in the months ahead.
I'll also provide a brief update on our use of the CARES Act per funds.
During the quarter, we completed disbursing the $16.6 million of emergency student funds.
We also allocated $600,000 of the institutional funds for emergency grants to students.
For the remaining institutional funds, we utilized $9.1 million of these funds in the fourth quarter.
Of this amount, $5.7 million was for our student laptop PC program.
The remainder was for technology and curriculum investments, health and safety on our campuses and costs associated with additional lab sessions to allow for social distancing.
We have approximately 900,000 in institutional funds remaining.
Now, let me touch on our real estate footprint optimization efforts.
To recap the actions completed in fiscal 2020, we completed our Exton campus rightsizing of 71,000 square feet in the first quarter and our home office relocation in 16,000 foot reduction in June.
We gave back the remaining 152,000 square feet for the Norwood campus after closing it in July, and we signed a new lease for our Sacramento campus in September, which will reduce that campus by 128,000 square feet at the end of calendar 2021.
Combined these actions reduce our annual occupancy cost by over $8 million, with all that Sacramento captured in our Q4 run rate.
We are actively negotiating with landlords in other campuses for similar actions.
We will share more details when the negotiations are finalized.
Our total lease facility portfolio currently stands at 1.85 million square feet.
We are also exploring owning versus leasing certain campus facilities, given the strength of our balance sheet, the potential opportunities in the commercial real estate market.
Another topic to touch on is the 8-K filed in September regarding the distribution of the preferred shares held by Coliseum Holdings to certain affiliated and non-affiliated entities.
We view the distribution as very much in support of our strategic objectives and as overall important step that would further bolstering UTI's capital structure.
We appreciate the efforts Coliseum went through to initiate and implement the distribution, as well as their overall support of the Company and focus on long-term value creation for all shareholders.
The net effect of this distribution was to reduce Coliseum's direct and indirect holdings to 24.9% of total UTI outstanding shares on an as-converted basis.
This ownership threshold is important to the Company, at any action involving 25% or more of the Company's total outstanding shares would require a change in control review by the Department of Education.
This type of review could take as long as six to nine months and could delay any future organic or inorganic strategic actions we may be pursuing.
The shares held by Coliseum and their affiliates are currently limited by a 9.9% voting and conversion cap which can be lifted through further actions by then, and the Company.
We have communicated with a few of the larger preferred shareholders, while we can't sue [Phonetic] for them or them for their attention at any specific point in time, we understand that they are supportive of the Company and our long-term growth strategy, thus and tend to be long-term holders.
Lastly, for the terms governing the preferred shares, the Company has the option to require to conversion of any or all outstanding preferred shares, if the volume weighted average price of the Company's common stock equals or exceeds $8.33 for 20 consecutive trading days.
This price could change over time based upon certain adjustments.
Looking forward, given our business model, we already have considerable visibility into fiscal 2021 and we feel very positive about the outlook based upon what we are seeing right now.
Students we have currently generate a significant portion of the fiscal year revenue.
New student enrollments and starts are pacing very strongly so far for the year, and we have visibility into and control of the key components of our cost structure, as well as planned investments and productivity improvements.
However, the potential for ongoing impacts from the pandemic cannot be fully determined to quantify.
Impacts could be on new student enrollments, show rates, LOAs, withdrawals, and overall student progression through the curriculum, all of which could negatively impact revenue.
Regardless, we would expect to manage costs to limit potential impacts to profitability and cash flow, as we did through the actions we took just for 2020.
Additionally, with our blended learning model fully functioning and the enhancements we have planned, we have the ability pivot rapidly in the event of any future campus disruptions, which is a capability we did not possess back in March when the pandemic struck.
With that backdrop, I will now provide our guidance for fiscal 2021.
For both new student starts and revenue, we expect year-over-year growth of 10% to 15%.
For net income, we expect a range of $14 million to $19 million.
For adjusted EBITDA, we expect a range of $30 million to $35 million.
For adjusted free cash flow, we expect a range of $20 million to $25 million, which assumes capex of $15 million to $20 million, approximately two-thirds of the planned capex support high ROI investments, including the two welding programs we are launching in fiscal 2021, enhancements to our online curriculum and our campus optimization efforts.
The remaining amount represents a consistent level of annual maintenance capex and new projects that were deferred from fiscal 2020.
From a timing perspective, we expect starts to be higher year-over-year in every quarter, reflecting the momentum we have referenced with growth in Q1 and Q3 being more pronounced.
We expect revenue to be down a few points year-over-year in the first half of the year as we made continued progress on the lab makeup progress and up measurably in the back half of the year, particularly in Q3.
Profit will also be down versus the prior year in the first half, with the growth in the back half of the year.
Cash flow should follow more normal pattern, neutral to modest cash generation in the first half, cash usage in the third quarter and a significant cash generation in the fourth quarter.
To the extent any strategic actions, we now have an impact of fiscal 2021, we will update this guidance accordingly.
We will also continue monitoring the situation very closely and we'll update you if it causes any material change in our expectations.
Despite this financial uncertainty, with the visibility we have into the business and the confidence we have in our operating model, we feel it is appropriate to provide guidance for the investment community as an understanding of where we see the business heading over the upcoming fiscal year.
To summarize, the outlook for our business is growing, as we are seeing significant growing interest in our highly valued programs across the country.
We're making key investments in our core value proposition, our programs, industry relationships and talent.
We're continuing to engage our prospective students via new pathways and methods and they are responding.
We're continuing to innovate our educational delivery model in ways that support us today, but also opened new opportunities for the future.
We're adapting every day to changes occurring in our market, political and business environment and have demonstrated our ability to operate effectively even when faced unprecedented challenges.
We are proud that the innovations and improvements that we have made and will continue to make, have made a stronger UTI today and a better UTI positioned for the future.
Our business remains resilient and we continue to make meaningful improvements.
Our financial position is strong and clearly superior to many in our industry.
Finally, the academic and employment proposition we offer is more valuable than ever to our students, potential employers and industry partners. | compname reports q4 earnings per share of $0.09.
q4 revenue $76.3 million versus refinitiv ibes estimate of $85.5 million.
universal technical institute - expects double-digit growth in new student starts, revenue, adjusted ebitda, net income, and adjusted free cash flow in 2021.
qtrly earnings per share $0.09. | 1 |
We are again presenting results from multiple locations, so please bear with us if we encounter any technical difficulties.
As you have seen from today's announcement, we had an outstanding quarter.
Stronger player demand drove improved momentum across all our main activities in Q1.
This translated into 25% revenue growth from the prior-year period and a 6% increase from Q1 '19.
Lottery reached the record levels with the same-store sales up over 30%, including double-digit gains across games and regions.
Growth accelerated for our digital and betting activities where revenues nearly doubled in Q1.
We continue to monitor costs as the top line recovers and we are making excellent progress on structural cost reductions with the OPtiMa program, which Max will discuss later.
You can see these in the over 70% increase in EBITDA and 44% EBITDA margin for the first quarter.
It was an outstanding performance and among the highest levels ever achieved.
With such strong Q1 results and an expectation of progressive recovery for land-based gaming as we move through the year, we believe we can return to pre-pandemic revenue, profit, and leverage levels this year.
This swift recovery from the impact of the pandemic is due to the unique and resilient nature of our business model across products and regions.
I'd like to spend some time on Q1's lottery performance.
The 32% same-store sales increase was fueled by 52% growth in Italy and 28% in North America and the rest of the world.
Even without the benefit of stronger multi-jurisdiction jackpot activity, same-store sales for North America and the rest of the world were up over 20%.
Compared to 2019, global same-store sales were up 24%.
The sustained strength in lottery same-store sales for the last three quarters confirms a complete recovery from the pandemic.
This is supported by the highest segment revenue and profit levels we have ever achieved.
And the momentum continues.
Global same-store sales are trending up over 20% for the Q2-to-date period compared to the second quarter of 2019.
In the U.S., higher disposable income, which includes the benefit of government stimulus, is another factor.
But lottery has always maintained a steady growth profile.
This is because it is a content-driven business.
The games have high entertainment value with broad player appeal.
A consistent stream of new games offers fresh opportunities for player engagement.
Throughout the pandemic, the lottery has become a valued and routine activity in the new normal.
We expected that to continue.
According to our research, many intend to play lottery at higher levels than they did before COVID.
This is an encouraging sign.
Innovation is another important contributor.
In the draw-based arena, add-on and progressive jackpot games are fueling double-digit growth in the U.S., while the 10eLotto Extra is an important driver in Italy.
Instant ticket sales are benefiting from higher average ticket prices, as well as player interest in the second chance and the free ticket games.
It is reasonable to expect sales to moderate from current levels as other entertainment options become more widely available, especially in Italy.
We believe we will see a return to more normal steady increases after we cycle through the pandemic-related peaks and valley over the next several quarters.
Our expectation is that when the restriction of the pandemic will be largely over to see some stickiness to the recent increased play levels, particularly in North America, and the market will resume a more normal growth rate, mid-single digits in the U.S., but starting from a higher individual consumption.
The recovery for our global gaming segment is progressing well in the U.S., which accounts for about 70% of the segment revenue.
U.S. casinos are open for business as the pace of vaccination is driving confidence among players and operators This has led to a substantial improvement in slot GGR since January, not only in the regional U.S. markets where most of our business is conducted but also in Las Vegas.
Core players ever returned and new players, mostly younger, are entering the market as other entertainment options are limited.
This is translating into a swift recovery in our business.
Even as more units are powered up is on active U.S. units were up high single digits sequentially.
New multilevel progressive such as Dragon Lights, Gong Xi Fa Cai, along with the Wheel of Fortune franchise, are driving these stronger results.
We also had good unit sales in the quarter, fueled by a 40% increase in the U.S. and Canada units, including double-digit growth in replacement, which were not far from Q1 '19 levels.
The resilience speaks to the diversity in our customer mix across regional, tribal, and commercial casinos, as well as the VLTs.
Regal Riches and the Lion Dance were among the top-selling core video titles, while Wild Life Extreme and the Big City 5s were the best realty titles.
We expect continued progressive improvement throughout the year across all aspects of our global gaming segment.
It is clear from our meetings over the last few months that the digital and betting is of great interest to you.
It is for us, too, as IGT plays an important role in the iGaming, sports betting, and iLottery ecosystems.
During Q1, GGR across the portfolio was two to three times the prior-year levels.
Most of that growth came from an expanding player base in existing markets.
There are no signs of the digital trend cannibalization in the land-based business.
Digital and betting revenue nearly doubled in Q1, posting the strongest quarterly increase in the last year.
We expect the business to maintain a strong double-digit growth profile for the next several years through a combination of organic growth including the contribution from new jurisdictions.
We are investing to support this growth and maintain leadership positions in all three verticals.
In iGaming, we are expanding our content portfolio through a combination of internally developed games and those developed with third-party studios.
There is an additional opportunity for IGT to act as a distributor of third-party content.
And this is an emerging area of opportunity for us.
All these should result in IGT having 20%, 30% share of the North American iGaming market.
Outside North America, there is also an opportunity to penetrate emerging international markets such as Germany, Greece, and the Netherlands.
We intend to maintain a leading role in the iLottery industry, leveraging the longest standing relationship we have with the world's leading lottery today into our commitment to investing in three main objectives: first, expand the portfolio of games; second, to enhance our platform capabilities; and third, by increasing the marketing and other activities to support players acquisition and retention for our customers.
As we look out over the next three to five years, we see the potential for the number of U.S. jurisdictions authorizing the iLottery to double from current levels.
Today, our presence in the U.S. sports betting markets powers 16 states representing over 40 sportsbooks.
IGT's land-based sports betting platform is the most widely used in the country.
We see the greatest opportunity for us in offering turnkey sports betting solutions to commercial and tribal casino operators.
Since the launch of our in-house trading team last summer, we have made good progress assigning customers including Maverick Gaming, Snoqualmie, and Emerald Queen, among others.
We have many more deals in the pipeline.
There are 17 states where legislation is spending this year and four more where legislation has been passed but sports betting is not yet operational.
We are proactively securing a partnership in jurisdictions where regulatory approval is spending, ensuring our customer is with the launch as markets go live.
Our first-quarter results marked a strong start to the year and illustrate the compelling foundation IGT can build on over the next several years.
This is especially true for our global lotteries segment where record sales and profits confirm the high entertainment value and broader player appeal of the games, bolstering our favorable long-term growth outlook.
The faster recovery in our land-based U.S. gaming activities is accentuated by accelerating the momentum for the right growth of digital and betting businesses.
Stronger revenue trends are further enhanced by significant structural cost reductions that improve our outlook for profit margins and cash flows.
With the proceeds of the recent sale of certain Italy B2C gaming businesses that will be used for debt reduction, our leverage profile should be significantly improved by yearend.
The financial performance exhibited in the first quarter of 2021 displays the strength of the IGT portfolio with our lottery business running at a fast pace both on a core basis and supported by exceptional jackpot activity in the early part of the period.
Our gaming unit is on an accelerated path to recovery with a strong contribution from our OPtiMa program as well as sustained robust growth in our digital platform verticals.
These trends brought a performance of over $1 billion in revenue and $450 million in adjusted EBITDA.
Our profitability showcases the dynamic margin leverage of our lottery business as well as disciplined cost-saving actions throughout the company.
We achieved roughly one-third of this year's over 200 million OPtiMa savings target during Q1, mainly through product simplification and margin improvement efforts.
As giving volume gradually improved throughout the year, we expect to see an increase in benefit from our operational excellence initiatives.
Compared to the prior year, we saw the expected reoccurrence of certain normal running expenses in the first quarter, primarily employee-related costs.
Continued healthy cash conversion and capex discipline drove over 200 million in free cash flow, which is high for a first-quarter performance.
Interesting to note, we return to profitability and net income level this quarter, generating $0.38 per share.
Turning to our lottery segment on Slide 13.
Revenue increase over 40% to 749 million.
Global same-store sales rose over 30% on broad-based growth across instant tickets, drawer-based games, multi-state jackpots, and iLottery.
Same-store sales grew double-digit in January and February where there were no prior real impacts from the pandemic, highlighting the strong underlying play of demand.
In fact, the comparison to Q1 2019 in terms of the top line is showing an astounding 20 percent-plus growth.
Part of the same-store sales growth includes roughly 20 million in revenue from higher multi-state jackpot activity and outside of same-store sales, lottery service revenue includes approximately 60 million in performance-driven incentive accruals from our U.S. lottery management agreements.
There's 80 million in total in Q1, benefits flow through almost entirely to profit.
Product sales, which are naturally lumpy and represent about 5% of annual lottery revenue, were down 10 million on large software license sales in the prior year, partly offset by an increase in instant ticket printing revenue.
The margin leverage from lotteries largely fixed cost structure is particularly evident this quarter as our revenue growth translated into incremental margins of over 80%.
And we also had the benefit of the 80 million in Q1 revenue items indicated before.
Operating income more than doubled from the prior-year period to 337 million with adjusted EBITDA growing 74% to 447 million.
So all in all, an excellent performance by a vibrant and pandemic-resilient lottery business.
Turning to global gaming, the revenue of 266 million was down 14% over the prior year.
We continue to see sequential improvement in this business with higher revenue and adjusted EBITDA and lower operating loss.
Compared to the fourth quarter, KPIs are improving and the contribution from digital and betting continues to accelerate with revenue growing over 80% from the prior year.
Sequentially, the global installed base was stable.
Over 75% of our U.S. casino installed base was active and service revenues close to prior levels due to higher productivity on the active machines.
In North America, yields on active units increased double-digit compared to the previous-year period.
We sold just over 4,400 units globally in the quarter, up 20% over the prior year, and up 2% sequentially.
Unit shipments were driven by VLT replacement sales in the U.S. and Canada and the casino opening of Resorts World Las Vegas and Hard Rock Indiana.
Overall, product sales are down due to a multi-year strategic agreement booked in Q1 last year and AWP upgrades in the prior year as well.
Operating loss and adjusted EBITDA reflect a lower base of revenue, partially offset by the benefit of cost savings actions.
Margin leverage improved in the quarter as expenses have come down.
On Slide 15, you can see that the recovery of top-line trends and diligent cost-savings initiatives are driving strong cash flow in the quarter.
Cash from operations was 251 million despite the concentration of interest payments in the first quarter.
Free cash flow was 204 million, and you can see the direct impact on net debt and leverage, which was down at full-term versus yearend 2020.
We now expect leverage to return to pre-COVID levels by the end of this year, highlighting the unique resilience of the IGT business.
On the next slide, we can see our debt maturities.
In the last year, we have made significant improvements to our capital structure as we pay down debt, extending maturities, and reduce interest costs.
Each of our most recent debt transactions in euros and dollars was at the lowest coupon rate in company history.
Since our last earnings call, there have been two additional improvements.
First, in late March, we successfully refinance approximately 1 billion notes due in 2022 with a combination of new notes and bank debt and extended maturity date to 2026.
Second, the 630-plus-million euro in net proceeds from the sale of the Italy gaming business will contribute to the full redemption of our euro-denominated 2023 note through the exercise of the make-whole call.
As you can see, these two changes meaningfully reduce our net near-term debt maturities and will allow us to save, going forward, about 60 million in annual interest cost with the full run rate of savings starting to materialize in Q3 this year.
In summary, our strong first-quarter performance was driven by a combination of global lottery growth, progressive recovery in U.S. gaming, and OPtiMa cost-savings initiatives.
We are on track to structurally reduce our cost structure by more than 200 million this year with each segment contributing according to plan.
We continue to convert adjusted EBITDA to cash flow at a healthy rate and the free cash flow we generate is used primarily to reduce debt, allowing us to reach pandemic levels of leverage by the end of the year.
Now I'd like to share our perspectives on the second quarter on Slide 18.
Quarter to date, global lottery same-store sales growth is over 20%, so our second-quarter revenue should be higher on a year-over-year basis, though we do not expect the $80 million in Q1 lottery revenue benefits related to jackpot activity and LMA contract incentive to recur.
We expect continuous sequential improvement in the gaming business in line with what we have seen in the last few quarters.
While second-quarter profitability will be lower sequentially, we expect second-quarter operating income and adjusted EBITDA will be higher than prior year, even without the benefit of the drastic temporary reductions in cost savings during the second quarter of 2020.
Depreciation and amortization should be relatively stable, and for the full year, let me reiterate that we expect all relevant key financial metrics to return in line with 2019 trends.
The meaningful progress on vaccination campaigns in our core markets and overall has convinced us that it is time to update the market on our long-term targets in line with sentiments echoed by several market participants we have interacted with recently.
I'm excited to announce we will be hosting an Investor Day later in the year where we can elaborate and update you on our strategic priorities, long-term financial targets, and capital allocation plans.
We will have many opportunities to connect before that including second-quarter earnings in early August, G2E in early October, and our normal conference and roadshow participation.
Then on November 9, we will report our third-quarter earnings, as well as hosted our Investor Day.
Hopefully, it will be in person in New York City.
So, please mark your calendars. | sees 2021 pro-forma (giving effect to n&b transaction) sales to be approximately $11.5 billion. | 0 |
These statements are based on currently available information and assumptions, and we undertake no duty to update this information, except as required by law.
These statements are also subject to a number of risks and uncertainties, including the numerous risks related to the cyber incident and the recently completed spinoff of the N-able business.
Copies are available from the SEC or on our Investor Relations website.
We completed the spin-off of the N-able business on July 19, 2021, and accordingly have included the results of the N-able business as discontinued operations for the current and historical periods.
Unless otherwise specified, when we refer to the financial measures, we will be referring to the non-GAAP financial measure.
We note also that because there was no impact of purchase accounting on revenue in the third quarter, our non-GAAP total revenue is equivalent to our GAAP total revenue in this period.
Going forward, we will begin to present certain financial measures on a GAAP basis only.
I hope you're doing well and staying safe.
As many of you know, we will hold our annual Analyst Day meeting on November 10, 2021.
During this virtual event, we look forward to then share our vision for SolarWinds and how we plan to retain, evolve, and grow to build an even more successful business.
As we move our discussion of financial and operational highlights for Q3, I've described our performance and continued progress.
I attribute the progress to the dedication of our Celerion, the relevance of our solutions to address our customer needs, and the commitment of our partners and customers to SolarWinds.
For the third quarter, we delivered revenue above the high end of the range of the outlook we provided with total revenue ending the quarter at $181.3 million.
Third quarter adjusted EBITDA was $75.3 million, representing an adjusted EBITDA margin of 42%, exceeding just the high end of our outlook.
As I outlined in the Q4 2020 earnings call, customer retention is a top priority in 2021, and we continue to make great progress toward this goal in Q3.
Our Q3 maintenance and annual rate of 88% was above the low to mid-80% renewal rate we noted we expected in 2021.
Customer retention remains a key priority.
And with our growing portfolio of offerings, we believe we have a great opportunity to continue to grow our LTV and net retention rates with our large customer base.
While we continue to be able to offer flexible pricing, purchasing options to our customers, we are increasing our focus on subscription bookings and we expect to continue to increase the mix of subscription in these upcoming quarters and years.
In Q3, our subscription revenue grew at a 20% year-over-year rate with subscription ARR growing 23% year over year.
Bart will provide more color on how this part of our business will trend in Q4 and beyond, given the skew that the SentryOne acquisition timing creates.
We have completed now the successful spin-off of the N-able business in July, and that has enabled us to plan and execute our stand-alone strategy, the details of which we look forward to sharing with you at Analyst Day.
Our global system integrator and enterprise motions are resulting in larger subscription deals.
Noteworthy here is that customers are investing in our entire solutions offering and taking advantage of our simplified packaging and the pricing.
We will also highlight our views on our [Inaudible] solutions potential to be a growth driver in the coming years through a comprehensive and differentiated approach to observability compared to the alternate.
Our product teams made significant progress in Q3, delivering these new elements within our solutions that are designed to drive additional value to our customers based on their evolving needs, including updates to our database and ITSM solutions as well as Secure by Design initiatives that impact our entire product portfolio.
We have also extended the breadth of our database monitoring portfolio's platform support, which now includes Google cloud extensions and added enhanced integration, including with Microsoft teams to our ITSM solutions.
Increasingly, our application, database, and ITSM offerings will become integral elements of SolarWinds' observability that -- as we create -- as we support customers of all sizes with their IT, Dev, and SecOps requirements.
We believe that this will help differentiate our offerings from all -- from those of the other vendors.
We are expanding our global partner engagement with events in various geographies.
The global partners, including GSIs, cloud service providers, and MSPs, are critical to expanding our GTM reach and to jointly deliver customer success.
Differentiated offerings with rich enablement, incentives, and a spirit of mutual accountability are the underpinnings of our partner strategy.
In September, we celebrated the Seventh Annual IT Professionals Day holiday, which was originally established by SolarWinds here in 2015.
IT Pro Day recognizes and celebrates all IT professionals and the contributions they make to their business every day.
As part of the celebration, we released findings from our IT Pro Day 2021 Survey, Bring It On, which then revealed IT [Inaudible] confidence and [Inaudible] in their roles.
We were also able to recognize four IT professionals nominated by their peers in our second annual IT Pro Day awards.
We also believe that IT professionals showed their true grit under challenging conditions this past year and deserve recognition and appreciation for their efforts, commitment, and resiliency.
We continue to attract excellent talent across all functions of our organization, and we are selectively adding our footprint in international regions, including most recently in South Korea and parts of our EMEA region.
I'll discuss our SolarWinds results on a stand-alone basis.
As most of you know, our spin of the N-able business happened earlier this quarter and was effective on July 19th.
Therefore, these results are reflected as discontinued operations in our third quarter financial results.
Also, a quick reminder that the guidance for the third quarter that I provided in August did not include any impact from N-able as the spin had been completed at that time.
Once again, our public filings will present N-able as discontinued operations in the third quarter as well as in prior periods for a much better comparability.
Our third quarter financial results reflect another quarter of improving execution while demonstrating the resiliency of our model.
That execution led to another quarter of better-than-expected financial results for the third quarter with total revenue ending at $181.3 million, above the high end of our total revenue outlook of about $176 million to $180 million.
For the third quarter of 2021, there was no impact of purchase accounting on revenue, so our non-GAAP total revenue is equivalent to our GAAP total revenue.
Total license and maintenance revenue was $149 million in the third quarter, which is a decrease of 6% from the prior year period.
The maintenance revenue was $120 million in the third quarter, which is up slightly from the prior year.
Our maintenance revenue has been impacted by a combination of year-over-year declines in license sales for the past eight quarters and a reduction in our renewal rate in 2021.
The trend of this lower license sales intensified with the COVID-19 pandemic in the first quarter of 2020 and because of the introduction of subscriptions of our licensed products in Q2 of 2020 as well as the SUNBURST incident in December of 2020 as we focus more for our efforts on longer-term customer success and retention rather than maximizing near-term sales.
Although maintenance renewal rates have remained lower than historical levels since SUNBURST, we are encouraged by the fact that they have improved throughout the year.
Our expectation at the start of the year was that maintenance renewal rates this would be in the low to mid-80s.
On a trailing 12-month basis, our maintenance renewal rate is 89%.
Working with our customers had been a top priority this year.
Also consistent with recent quarters, we want to provide the in-quarter renewal rate for the third quarter, which currently stands at approximately 88%, which again is above our expectations at the start of the year.
For the third quarter, license revenue was $29.2 million, which represents a decline of approximately 26% as compared to the third quarter of 2020.
On-premises subscription sales resulted in an approximately 11-percentage-point headwind to license revenue for the quarter.
The remainder of the decline in license revenue reflects the combination of an impact of that cyber incident and the continuing impact of the COVID-19 pandemic.
That said, our new license sales performance with commercial customers has improved sequentially each quarter during the year.
And while we have continued to sell to customers in the federal government and have had some key wins post-SUNBURST, new sales to customers in the federal space overall has been a challenge this year.
We have an incredibly committed federal team, who's now the primary focus has been on working with customers and maintaining the security and stability of their environment.
Moving to our subscription revenue.
Third quarter subscription revenue was $32.3 million, up the 20% year over year.
This increase is due to the additional subscription revenue from SentryOne products as well as increased sales of our on-premise subscriptions as part of our early efforts to shift more of our business to subscription.
Total ARR have reached approximately $624 million as of September 30, 2021, reflecting year-over-year growth of 9% and is up slightly from our ending Q2 2021 ARR balance of $621 million, which is the corrected amount included in our 8-K filing from earlier this month.
The growth in ARR is that primarily due to the incremental revenue of SentryOne, which we acquired late last year, and our efforts on sales of our products at on-premises subscription.
Our subscription ARR of $130.2 million increased 23% year over year and 9% sequentially from the second quarter.
So we finished the third quarter of 2021 with 786 customers that have spent more than $100,000 with us in the last 12 months, which is a 4% improvement over the previous year.
We are continuing our efforts will build larger relationships with our enterprise customers, which we will talk more about at our upcoming Analyst Day next month.
We delivered a solid quarter of our non-GAAP profitability.
Third quarter adjusted EBITDA was $75.3 million, representing an adjusted EBITDA margin of 42%, exceeding the high end of the outlook for the third quarter despite continuing to invest in our business.
Excluded from the adjusted EBITDA are onetime costs of approximately of the $2.9 million of cyber-related remediation, containment, investigation, and professional fees, net of insurance proceeds.
I do want to clarify that these cyber-related costs not included in adjusted EBITDA are onetime and nonrecurring.
They are separate and distinct from our Secure by Design initiatives, which are aimed at enhancing our IT security and supply chain process.
Costs related to our Secure by Design initiatives are and will remain part of the recurring cost structure as we go forward.
We expect onetime cyber-related cost to fluctuate in future quarters but to be less in future periods.
These onetime cyber costs are, however, difficult to predict.
They not only include the significant cost of the forensic investigation efforts we substantially in May but also costs associated with our ongoing litigation, government investigations, and any potential judgments or fines related and -- as well as related professional fees.
We expect our insurance coverage and offset a portion of these expenses and will be presented net of insurance proceeds.
Net leverage at September 30 was approximately 3.8 times our pro forma trailing 12-month adjusted EBITDA.
We retained the full amount of the $1.9 billion in term debt that the company had at present.
During the third quarter, we completed a two for one reverse stock split and declared a dividend of $1.50 per share on this post-split basis, which was paid in August.
In addition, N-able repaid $325 million of inter-company debt.
As a result of this repayment, our cash balance is $709 million at the end of the third quarter, bringing our net debt to approximately $1.2 billion.
Our plan is to keep that cash of our balance sheet for the foreseeable future.
We believe we have favorable terms on our debt, so we intend to maintain flexibility as it relates to our cash on balance sheet.
Our debt matures in February of 2024 and we expect to revisit our level of gross debt as we get closer to that date.
I will then now walk you through our outlook before turning it back over to Sudhakar for some final thoughts.
We are providing guidance for the fourth quarter of 2021 for total revenue, adjusted EBITDA, and earnings per share, and we will tell you what that means for a full year.
For the fourth quarter of 2021, we expect total revenue to be in the range of $180 million to $184 million, representing a year-over-year decline of negative 3% to negative 1%.
Adjusted EBITDA for the fourth quarter is expected to be approximately $72 million to $74 million, which also implies an approximately 40% adjusted EBITDA margin.
Non-GAAP fully diluted earnings per share is projected to be $0.25 to $0.26 per share, assuming an estimated 160.7 million fully diluted shares outstanding, which reflects the reverse stock split completed on July 30.
And finally, our outlook for the fourth quarter assumes a non-GAAP tax rate of 22%, and that we expect to pay approximately $8 million in cash taxes during the fourth quarter of 2021.
For the full year, we expect total revenue to be in the range of $712 million to $716 million, representing a year-over-year decline of negative 1% to flat with prior year.
So our adjusted EBITDA for the full year is expected to be approximately $297 million to $299 million, which implies an approximately 42% adjusted EBITDA margin for the year.
Non-GAAP fully diluted earnings per share is projected to be $1.14 to $1.15 per share, assuming an estimated 160.5 million fully diluted shares outstanding.
As you think about the components of revenue in the fourth quarter, it is important to remember that we acquired SentryOne last year in late October.
We expect our subscription revenue growth in the fourth quarter to be in the high single digits.
However, looking ahead to 2022 and beyond, we intend to continue to expand our subscription offerings while turning new subscription sales a much higher priority with our sales team.
Based on what we've seen year-to-date, we expect that maintenance renewal rates will be in the high 80s for the fourth quarter and anticipate continued progress throughout 2022.
And in the near term, we expect the maintenance revenue will continue to be relatively flat to slightly down compared to prior year periods.
So as we think about EBITDA margins for the rest of the year and into 2022, the costs associated with our Secure by Design initiatives, investments in transitioning our product portfolio to a greater subscription mix and our continued investments in our sales and marketing initiatives are factored into the margins in the short term.
We anticipate that accelerating margins again in the future, but believe that these investments are now necessary.
We will talk more about these initiatives at the Analyst Day on November 10.
Our team's competence, commitment, and attitude continues to be on display as we delivered a strong Q3 performance, exceeding outlook in both total revenue and adjusted EBITDA.
We are executing our mission to help customers accelerate their business transformation via simple, powerful, and secure solutions for multi-cloud environments.
In Q3, we introduced an early adopter program of SolarWinds' observability to select customers.
These customers currently under maintenance has the great opportunity to make an early move to subscribe to our offerings and begin a journey to multi-cloud with SolarWinds as a strategic partner.
By eliminating customer complexity and meeting them where they currently are, we believe we are uniquely positioned to protect investments while increasing our relevance to them over time.
We expect this motion to become a mainstream activity in our upcoming quarters and a significant contributor to our subscription and ARR.
In Q4, we have continued to execute on the initiatives that I outlined during our Q4 2020 earnings call, focusing on customer retention and demonstrating ongoing progress in subscription, license, and maintenance growth across geographies and sectors.
We hope to see you all on November 10. | sees fy non-gaap earnings per share $1.14 to $1.15.
sees q4 non-gaap earnings per share $0.25 to $0.26.
sees q4 revenue $180 million to $184 million.
sees fy revenue $712 million to $716 million.
q3 revenue fell 1.9 percent to $181.3 million. | 1 |
I'll start today with a review of guest cruise operations, along with a summary of our first quarter cash flows.
Then I'll provide an update on booking trends and finish up with adjusted EBITDA and net income expectations.
Turning to guest cruise operations.
During the first quarter 2022, we restarted 10 additional ships, resulting in 60% of our fleet capacity in guest cruise operations for the whole of the first quarter.
This was a substantial increase from 47% during the fourth quarter 2021.
As of today, 75% of our fleet capacity has resumed guest cruise operations.
Agility to continuously adapt to the ever changing landscape has been one of our greatest strengths during the pandemic.
In the first quarter, we continued to demonstrate this scale as we adjusted restart dates to optimize our guest cruise operations.
And we now expect each brand's full fleet to be back in guest cruise operations for its respective summer season where we historically generate the largest share of our operating income.
I am happy to report that just last week, we announced plans for our Australia restart, commencing at the end of May after the government advised that cruising would be permitted beginning in April.
For the first quarter, occupancy was 54% across the ships in service.
We never expected to achieve our historical 100-plus percent occupancies for the first quarter since many of these sailings were confirmed just a number of months before departure, which resulted in less than the normal booking lead time.
However, we had anticipated first quarter occupancy would exceed the 58% achieved in the fourth quarter of 2021.
We started the quarter with over 55% cabin occupancy booked for the first quarter and expected to improve upon that during the quarter.
However, during the first quarter 2022, as a result of the omicron variant, we experienced an impact on bookings for near-term sailings, including higher cancellations resulting from an increase in pretravel positive test results, challenges in the availability of timely pretravel tests and disruption than omicron caused on society during this time.
All of this inhibited our ability to build on our cabin occupancy book position for the first quarter 2022 during the first quarter, resulting in occupancy for the first quarter 2022 at 54% being lower than the 58% occupancy we achieved in the fourth quarter of 2021.
Despite all that, during the first quarter, we carried over one million guests, which was nearly a 20% increase from the fourth quarter 2021.
Once again, our brands executed extremely well with Net Promoter Scores continuing at elevated levels compared to pre-COVID scores.
Revenue per passenger day for the first quarter 2022 increased approximately 7.5% compared to a strong 2019 despite our lucrative world cruises and exotic voyages being shelved this year.
Our revenue management teams held on price when we experienced an impact on bookings for near-term sailings, optimizing our longer-term prospects for future revenue and pricing.
Once again, our onboard and other revenue per diems were up significantly in the first quarter 2022 versus the first quarter 2019, in part due to the bundled packages as well as onboard credits utilized by guests from cruises canceled during the pause.
We had great growth in onboard and other per diems on both sides of the Atlantic.
Increases in bar, casino, shops, spa and Internet led the way onboard.
Over the past 2.5 years, we have offered and our guests have chosen more and more bundled package options.
In the end, we will see the benefit of these bundled packages in onboard and other revenue.
As a result of these bundled packages, the line between passenger ticket and onboard revenue is blurred.
For accounting purposes, we allocate the total price paid by the guests between the two categories.
Therefore, the best way to judge our performance is by reference to our total cruise revenue metrics.
On the cost side, our adjusted cruise cost without fuel per available lower berth day, or ALBD as it is more commonly called, for the first quarter 2022 was up 25%.
I did say adjusted cruise costs and not net cruise costs, a term we had previously used.
The calculation of adjusted cruise costs and net cruise costs are the same.
The increase in adjusted cruise costs without fuel per ALBD is driven essentially by five things: first, the cost of a portion of the fleet being in pause status; second, restart related expenses; third, 15 ships being in dry dock during the quarter, which resulted in nearly double the number of dry dock days during the first quarter versus the first quarter 2019; fourth, the cost of maintaining enhanced health and safety protocols; and finally, inflation.
Remember, that because a portion of the fleet was in pause status during the first quarter and the higher number of dry dock days, we spread costs over less ALBDs.
This will again result in a doubling of the dry dock days during the quarter compared to 2019, which will impact adjusted cruise cost without fuel per ALBD during the second quarter.
We anticipate that many of these costs and expenses driving adjusted cruise costs without fuel per ALBD higher will end during 2022 and will not reoccur in 2023.
As a result of all of the above, we expect to see a significant improvement in adjusted cruise costs, excluding fuel per ALBD, from the first half of 2022 to the second half of 2022 with a low double-digit increase expected for the full year 2022 compared to 2019.
Next, I'll provide a summary of our first quarter cash flows.
We ended the first quarter 2022 with $7.2 billion in liquidity versus $9.4 million at the end of the fourth quarter.
Looking forward, we believe we remain well positioned given our liquidity.
The change in liquidity during the quarter was driven essentially by four things: first, an improved negative adjusted EBITDA of $1 billion due to our ongoing resumption of guest cruise operations despite the impact of the omicron variant.
We had thought adjusted EBITDA was going to improve more.
But as I said before, the omicron variant inhibited our ability to grow occupancy during the quarter, which limited the improvement in adjusted EBITDA.
Second, our investment of $400 million in capital expenditures net of export credits.
Third, $500 million of debt principal payments.
And fourth, $400 million of interest expense during the quarter.
Now let's look at booking trends.
Since the middle of January, we have seen an improving trend in booking volumes for future sailings.
Recent weekly booking volumes have been higher than at any point since the restart of guest cruise operations.
During the first quarter, we increased our booked occupancy position for the second half of 2022, albeit not at the same pace as a typical wave season due to the omicron variant.
As a result, the cumulative advanced book position for the second half of 2022 is at the lower end of the historical range.
However, we believe we are well situated with our current second half 2022 book position given the recent improvement in booking volumes, coupled with closer in booking patterns and our expectation for an extended wave season.
We continue to expect that occupancy will build throughout 2022 and return to historical levels in 2023.
And importantly, I am happy to report that prices on these bookings for the second half of 2022 continue to be higher with or without future cruise credits, or more commonly called FCCs, normalized for bundled packages as compared to 2019 sailings.
Our cumulative advanced book position for the first half of 2023 continues to be at the higher end of the historical range, also at higher prices with or without FCCs normalized for bundled packages as compared to 2019 sailings.
This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison as that was a high watermark for historical yields.
I will finish up with our adjusted EBITDA and net income expectations.
We all know that booking trends are a leading indicator of the health of our business.
With improved recent booking trends leading the way, driving customer deposits higher, positive adjusted EBITDA is clearly within our sights.
Over the next few months, we expect ship level cash contribution to grow as more ships return to service and as we build on our occupancy percentages.
However, as I've already said, adjusted EBITDA over the first half of 2022 has been or will be impacted by the restart-related spending and dry dock expenses as 39 ships, over 40% of our fleet, will have been in dry dock during the first half of fiscal 2022.
Given all these factors combined, we expect monthly adjusted EBITDA to continue to improve and turn consistently positive at the beginning of our summer season.
We continue to expect a net loss for the second quarter of 2022 on both a U.S. GAAP and adjusted basis.
However, we expect the profit for the third quarter of 2022.
For the full year, we do expect a net loss.
Looking to brighter days ahead in 2023, with the full fleet back in service all year, 8% more capacity than 2019 and improved fleet profile with nearly a quarter of our capacity consisting of newly delivered ships, continuing momentum on our outstanding Net Promoter Scores and occupancy returning to historical levels, we are looking forward to providing memorable vacation experiences to nearly 14 million guests and generating potentially greater adjusted EBITDA than 2019. | compname reports q3 earnings per share $0.79.
q3 adjusted earnings per share $2.03.
q3 earnings per share $0.79.
sees q4 adjusted earnings per share $1.50 to $1.55.
sees fy adjusted earnings per share $7.50 to $7.55. | 0 |
We have posted to www.
I hope you're staying safe and healthy.
We are pleased to kick off today's call by reporting that we've rounded the corner into positive growth.
We had extremely strong results top and bottom line and continue to make very good progress on several of our strategic initiatives.
Organic growth for the second quarter was a positive 24.4%.
This growth was broad based across our agencies, geographies, disciplines, and client sectors.
We experienced a significant increase in spend from existing clients as the effects of the pandemic subsided and we benefited from strong new business wins.
EBIT was $568 million in the quarter, an increase of 67% versus the second quarter of 2020.
Q2 2021 included a gain of $50.5 million from the sale of ICON International in early June.
In Q2 2020, EBIT included $278 million of charges related to the repositioning actions.
Excluding gains and charges, EBIT margin was 14.5% in the quarter compared to 12.2% in Q2 2020.
Phil will provide further details on expected impact of the sale of ICON on our results for the balance of the year.
As we stated on our last call, we view 2019 as a reasonable proxy for our ongoing margin expectations.
Excluding the sale of ICON, our six months 2021 EBIT margin was 14% which is in line with our EBIT margin of 13.9% for the first six months of 2019.
Net income was $348 million in the second quarter, an increase of 75% from the second quarter of 2020 and earnings per share was $1.60 per share, an increase of 74%.
The net impact on the gain on the sale of ICON, which was offset by an interest expense charge related to the early retirement of debt increased earnings per share in Q2 2021 by $0.14 per share.
Our leaders took difficult and effective actions over the past year and a half.
At the same time, they remained laser-focused on the health of their teams, servicing our clients, winning new business, and managing their cost structures.
Our ability to navigate in this environment and come out the other side with such strong results is a testament to their commitment as well as the dedication and tireless effort of our people around the world.
Turning now to our performance by geography.
Every region had double-digit growth in the quarter.
The U.S. was up just shy of 20% in the quarter.
All U.S. disciplines had double-digit growth except for healthcare, which was up in the low-single digits.
It was the one discipline that grew in Q2 of 2020.
Other North America was up 37.1%, the U.K. was up 23.8% with all disciplines in double-digits.
Overall growth in the Euro and non-Euro region was 34.5%.
In Asia Pacific, we had 27.9% increase with all major countries experiencing double-digit growth.
Our events business in China had another quarter of strong performance.
Latin America was up 20.8% and the Middle East and Africa increased 42.8%.
By discipline, all areas were up year-over-year as follows: Advertising and media 29.8%; CRM Precision Marketing, 25%; CRM Commerce and Brand Consultancy 15.2%; CRM Experiential 53%; CRM Execution and Support 22.7%; PR 15.1% and Healthcare 4.5%.
Looking forward, we expect to continue to see positive organic growth as client spend increases albeit at a slower pace than we experienced in Q2.
Our management teams are continuing to align costs with our revenues as markets reopen around the world.
Many of our companies are hiring staff to service an increasing client spend and the new business wins and we are seeing some pressure on our staff costs, particularly in the U.S. as the labor markets remain tight.
We are also beginning to see a return of travel and certain other addressable spend as government restrictions have eased.
Based on our use of technology during the pandemic, we are developing practices, particularly with respect to travel that should allow us to continue to retain some of the benefits we achieved in addressable spend.
We expect that the increase in addressable spend in the second half of the year will be mitigated in part by the benefits we will achieve from a hybrid and agile workforce.
Turning to our cash flow, we again performed very strongly.
For the first half of the year, we generated approximately $800 million in free cash flow.
As we indicated last quarter, in addition to our dividend increase, in May, our Board approved the reinstatement of our share repurchase program.
In the second quarter, we repurchased $102 million in shares.
We took further actions to reduce our debt during the quarter.
In late April, we issued $800 million of senior notes due in 2031.
The proceeds from this issuance together with cash on hand were used to repay $1.25 billion of senior notes due in 2022.
As a result of these actions, our balance sheet and credit ratings remain very strong.
While we are very optimistic about our future prospects, we remain vigilant and are maintaining flexibility in our planning as conditions can quickly change.
As we recently experienced in markets like Brazil, India, and Japan, the pandemic remains a significant health risk.
Overall, we are extremely pleased with our performance this quarter and proud of how we've navigated through the pandemic.
Our results reflect Omnicom's ability to adapt and respond to changes in the market and deliver through down economic cycles.
Let me now turn to the progress on our strategic and operational initiatives.
As I mentioned in early June, we completed the sale of ICON International, our specialty media business.
The divestiture was part of our continuing realignment of portfolio of businesses and is consistent with our plan to dispose of companies that are no longer aligned with our long-term strategies and investment priorities.
With the closing of this transaction, we are substantially complete with disposals.
We expect our primary focus moving forward will be on pursuing accretive acquisitions in the areas of precision marketing, market [Phonetic] and digital transformation, commerce, media and healthcare.
We have ramped up our M&A efforts in these areas and are pleased with the opportunities we are seeing.
We remain disciplined with respect to our strategic approach and valuation parameters.
Operationally, Omnicom continues to successfully deliver to our clients a comprehensive suite of marketing and communication services supported by technology and analytic capabilities around the world.
The leaders of our practice area agencies and global clients have used this formula to strengthen our relationships and grow with existing clients as well as pursue new business.
Importantly, our organization allows our leadership teams to quickly mobilize our assets to deliver strategic solutions for our clients from across the group.
Whether their need is for integrated services across regions or more bespoke individualized solutions in specific countries, we can simplify and organize our services in a manner that meets our clients' needs.
For example, we have a long history of providing integrated services to some of the world's largest brands such as Apple, AT&T, Nissan, and State Farm and we continue to be successful in winning new business.
A good example of this is our win with Philips who named Omnicom as their global integrated service partner for creative, media and communications.
Over months long and highly competitive pitch, we were able to demonstrate the strength of our agencies and the delivery model that connects creativity, culture, and technology to position Philips as a leader in the changing health industry.
Another example of our integrated creative, media and communications offerings is our recent win of the baby wipes brand WaterWipes.
We also serve clients and consistently win new business across dedicated service areas and geographies.
For example, some of the wins this quarter in addition to the ones mentioned above were BBDO being named global lead strategic and creative agency partner for the Facebook App; Discover naming team TBWA its brand creative agency of record; JetBlue hiring Adam & Eve as its new global creative partner; Red Bull awarding PHD in its media business in North America; BBDO being awarded Audi creative duties and social media communications in Singapore; and PHD winning Audi media business in China; and Virgin Atlantic selecting Lucky Generals as its lead creative agency.
Our comprehensive suite of services and our ability to simplify how we bring them to our clients will continue to drive our success.
In the second half, we expect to see an increase in new business activity across industry sectors including CPG, luxury, healthcare, retail and automotive.
I'm confident that our exceptional talent, range of services, and our ability to organize our ability to organize our offerings to meet the needs of potential clients will allow us to capture more than our fair share of new business.
Our constant innovation and service delivery has also resulted in highly regarded industry awards.
At Cannes Lions Live 2021, our agencies were recognized for their excellence in both the creative and media disciplines.
Omnicom's global creative networks BBDO, DDB, and TBWA placed in the Top 10 of the network over the festival competition taking the highly coveted title, AMV BBDO was named Agency of the Festival.
Omnicom media agencies, PHD and OMD earned first and second place respectively in the Media Network of the Festivals competition and overall, more than 160 Omnicom agencies from 45 countries won more than 180 Lions.
This impressive showing at Cannes Lions is just one example of how our agencies excel.
They received a number of other industry awards, which include FleishmanHillard being named Campaign Global PR Agency of the Year and TBWA APAC winning Digital Network of the Year.
Goodby Silverstein & Partners making Ad Age's A-List and TBWA being named as an Agency Standout.
DDB Worldwide winning 2021 Network of the Year at the 100th anniversary of the ADC Awards hosted by The One Club and DDB Germany being named Agency of the Year.
These awards are a direct reflection of our relentless pursuit of creative excellence.
Our best-in-class talent is what defines Omnicom and makes us an award-winning company.
With this in mind, we are constantly looking to invest in our people and create opportunities across the enterprise including at the C-Suite level and throughout our senior leadership.
A recent addition to our practice area leadership is Chris Foster, who was appointed CEO of Omnicom's Public Relations Group.
Chris will oversee our entire PR portfolio focusing on talent, innovation, and cross-agency collaboration to drive growth.
I'm confident that his track record of leading global growth initiatives, counseling executive level clients, and driving business development will lead to continued success of OPRG.
John Doolittle has been elevated as new Chairman of OPRG.
Another key leadership position we recently created is focused on our environmental sustainability initiatives.
Last week, we appointed Karen van Bergen as Chief Environmental Sustainability Officer.
Karen will be responsible for overseeing our climate change initiatives and processes which includes setting measurable goals, policies, and partnerships that will reduce our carbon footprint.
This new position will be in addition to Karen's current role as EVP and Dean of Omnicom University.
Environmental sustainability is an area where we are doubling down on our efforts.
We established goals five years ago to lessen the impact of our operations on the environment and we are now looking to drive even more progress.
We are currently establishing new goals and commitments to reduce the carbon emissions produced by our operations and increase the amount of electricity we derive from renewable sources.
In addition to these internal goals, Omnicom has joined numerous industry initiatives that will serve as catalysts for change.
For example, several of our U.K. agencies have joined Ad Net Zero, the industry's initiative to achieve real net zero carbon emissions from the development, production, and media placement of advertising by the end of 2030 and we are a founding member of Change the Brief Alliance, which calls for the agencies and marketers to harness the power of their advertising to promote sustainable consumer choices and behaviors.
Karen is just the right leader for driving our initiatives in this critical area given her long tenure with Omnicom and excellent previous experience working on environmental initiatives at multinational corporations.
I have no doubt we will continue to raise the bar on our global operations in our work with organizations and clients to reduce our impact on the environment.
Another critical area we have intensified our efforts over the past 12 months is DE&I.
We have doubled the number of DE&I leaders throughout Omnicom over this time and we have established specific KPIs to measure our progress.
The KPIs are focused on hiring, advancement, promotion, retention, training, and employee resource groups.
This is a key step to ensuring DE&I is embedded across the leadership agenda with a full commitment and accountability of our network and practice area CEOs.
For Omnicom, DE&I starts at the top with our Board of Directors.
Currently, our Board is the most diverse in the S&P 500 with six women and four African American members including our Lead Independent Director.
We're also pleased that three of our 12 network and practice area CEOs are people of color or female.
While it is still too early to measure our progress, I'm pleased to report that a preliminary review of our employee diversity in the United States shows a meaningful increase in the number of diverse employees as of June 30th, 2021 compared to the end of 2020.
I look forward to a lot more progress being made in the months ahead.
Continuing to focus on our people, we are pleased many of them have returned to the office as government restrictions are reduced or eliminated.
We are encouraging our people to begin to make plans to return to offices as conditions improve in their local markets.
Overall, we believe a return to an office-centric culture will enable us to invent, collaborate, and learn together most effectively.
In turn, it will allow us to best serve our clients.
The return to office will be grounded in safety and flexibility and local leaders will determine what combination of office and remote work is most effective for their teams.
I personally look forward to reengaging in-person with our people and our clients over the coming weeks and months.
As John discussed in his remarks, while the impact of the pandemic continues to be felt across the globe, that impact has moderated significantly as evidenced by our return to growth in Q2.
We expect our return to growth will continue in the second half.
However, as long as COVID-19 remains a public health threat, some uncertainty regarding economic conditions will continue, which could impact our clients' spending plans and the performance of our businesses may vary by geography and discipline.
Organic growth for the quarter was 24.4% or $682 million, which represents a significant increase compared to Q2 of 2020 which reflected the onset of the pandemic when revenue declined by 23% or $855 million.
In addition, in early June, we completed the disposition of ICON, our specialty media business, which resulted in a pre-tax gain of $50.5 million.
The sale of ICON was consistent with our strategic plan and investment priorities and the disposition is not expected to have a material impact on our ongoing operating income for 2021.
Flipping to Slide 4 for a summary of our revenue performance for the second quarter.
In addition to our organic revenue growth of 24.4% for the quarter, the impact of foreign exchange rates increased our revenue by 5.4% in the quarter, higher than we anticipated entering the quarter as the dollar continued to weaken against most of our larger currencies compared to the prior year.
The impact on revenue from acquisitions, net of dispositions decreased revenue by 2.2% primarily related to the sale of ICON.
As a result, our reported revenue in the second quarter increased 27.5% to $3.57 billion from the $2.8 billion we reported for Q2 of 2020.
I'll return to discuss the details of the changes in revenue in a few minute.
Turning back to Slide 1, our reported operating profit for the quarter increased to $568 million including the $50.5 million gain on the sale of ICON.
As you remember, our Q2 2020 results included a $278 million COVID-19 repositioning charge, which included severance actions, real estate lease impairments and terminations and related fixed asset charges as well as a loss on the disposition of several small non-core underperforming agencies.
Our operating margin for the quarter was 15.9%, up significantly from Q2 2020 even after excluding the gain on the sale of ICON in the current period and adding back the repositioning charge recorded in Q2 of 2020.
We also continued to see operating margin improvement year-over-year resulting from the proactive management of our discretionary addressable spend cost categories including a reduction in travel and related costs as well as reductions in certain costs of operating our offices given the continued remote work environment as well as benefits from some of the repositioning actions taken back in the second quarter of 2020.
Our reported EBITDA for the quarter was $590 million and EBITDA margin was 16.5%.
Excluding the $50.5 million gain on the ICON disposition, EBITDA margin for Q2 2021 was 15.1%.
EBITDA margin in Q2 of 2020 after adding back the $278 million repositioning charge, was 12.9%.
We've also included a supplemental slide on Page 15 that shows the 2021 amounts presented in constant dollars to exclude the effects of the year-on-year FX changes.
As we've discussed previously, we have and will continue to actively manage our costs to ensure they are aligned with our current revenues.
We also continue to evaluate ways to improve efficiency throughout the organization focusing on real estate portfolio management, back office services, procurement, and IT services.
As for the details, our salary and service costs are variable and fluctuate with revenue.
They increased by about $300 million versus Q2 of 2020 or $220 million on a constant dollar basis driven by the increase in our overall business activity.
We would also note that the Q2 2020 salary and service cost amounts were reduced by reimbursements received from government programs of $49.2 million.
Third-party service costs increased by $275 million or $242 million on a constant dollar basis.
These costs include expenses incurred with third-party vendors when we act as a principal when performing services for our clients.
Occupancy and other costs, which are not directly linked to changes in revenue, increased by $4 million.
Excluding the impact of FX, these costs declined by $10 million in the quarter as we continued our efforts to reduce infrastructure costs and we benefited from a decrease in general office expenses as the majority of our staff continue to work remotely in Q2.
SG&A expenses increased by $21 million or $18 million on a constant dollar basis, again related to the return to more normal activities in the quarter.
And finally, depreciation and amortization declined by $3.6 million.
Net interest expense in the second quarter of 2021 increased $26.3 million period-over-period to $73.5 million.
Because of our solid working capital and cash flow performance during the pandemic period, in Q2 we determined we no longer needed the liquidity insurance we added in early April 2020 when we issued $600 million in debt and added a $400 million 364-day revolving credit facility.
In April 2021, the credit facility expired unused.
In May, we issued $800 million of 2.6% senior notes due 2031.
In June, the proceeds from the issuance of the 2.6% notes plus cash on hand were used to redeem early all of our outstanding $1.25 billion 3.625% notes that were due in May of 2022.
Gross interest expense in the second quarter of 2021 increased $26.6 million resulting from the loss we recognized on the early redemption of all the outstanding $1.2 billion of 3.625% 2022 senior notes.
Additionally, the impact of this refinancing activity reduced our leverage ratio to 2.2 times at June 30th, 2021 and is expected to result in lower interest expense on our debt in the second half of approximately $6 million as compared to the prior year.
Interest income in the second quarter of 2021 was relatively flat.
Our effective tax rate for the second quarter was 24.9%, down a bit from the effective tax rate we estimated for 2021 of between 26.5% to 27% primarily due to nominal taxes recorded on the book gain on sale.
Earnings from our affiliates was marginally negative for the quarter while the allocation of earnings to minority shareholders of certain of our agencies increased to $23.4 million.
As a result, we reported net income for the second quarter was $348.2 million.
While we restarted our share repurchase program during the second quarter, our diluted share count for the quarter increased slightly versus Q2 of last year to 217.1 million shares resulting from the year-over-year increase in our share price and the increase in common stock equivalents included in our diluted share count.
As a result, our diluted earnings per share for the second quarter was $1.60 versus the loss of $0.11 per share we reported in Q2 of 2020.
The gain on the sale of ICON and the loss on the early redemption of the 2022 senior notes resulted in a net increase of $31 million to net income or $0.14 to EPS.
As we previously discussed, the prior year period included the net impact of the repositioning charges which reduced last year's second quarter net income and earnings per share by $223.1 million and a $1.03 respectively.
On Slide 2 for your reference, we provide the summary P&L, EPS, and other information for the year-to-date period.
Now returning to the details of the changes in our revenue performance on Slide 4, our reported revenue for the second quarter was $3.57 billion, up $771 million or 27.5% from Q2 of 2020.
Turning to the FX impact, on a year-over-year basis, the impact of foreign exchange rates increased our reported U.S. dollar revenue by 5.4% or $150.8 million, which was above the 3.5% to 4% increase that we estimated entering the quarter.
The strengthening of foreign currencies against the dollar was widespread.
It included most of our largest major foreign currencies.
In the quarter, the largest FX increases were driven by the strengthening of the euro, the British pound, the Chinese yuan, and the Australian dollar.
In the quarter, the U.S. dollar only strengthened against the Japanese yen and the Russian ruble.
In light of the weakening of the U.S. dollar compared to 2020, assuming FX rates continue where they currently stand, our estimate is that FX could increase our reported revenues by approximately 1.5% for the third quarter and 1% for the fourth quarter resulting in a full year projected increase of approximately 2.5%.
The impacts of our acquisition and disposition activities over the past 12 months primarily reflecting the ICON disposition as well as the recent acquisitions of Archbow and Areteans, during the second quarter of 2021 resulted in a net decrease in revenue of $62 million in the quarter or 2.2%.
Based on transactions that have been completed through June 30th of 2021, our estimate is the net impact of our acquisition and disposition activity for the balance of the year will decrease revenue by between 6% to 7% for the third and fourth quarters resulting in a full year reduction of approximately 4%.
While we will continue our process of evaluating our portfolio of businesses as part of our strategic planning, as John has said with regard to dispositions, we are substantially complete.
Our organic growth of $682 million or 24.4% in the second quarter reflects strong performance across all of our major geographic markets and across all of our service disciplines.
Turning to our mix of business by discipline on Page 5, for the second quarter, the split was 56% for advertising and 44% for marketing services.
As for the organic change by discipline, advertising was up nearly 30% primarily on the growth of our media businesses reflecting a strong recovery of activity within the media space.
Our global and national advertising agencies achieved strong growth this quarter although the pace of growth by agency remains somewhat mixed.
CRM Precision Marketing increased 25%.
Through the strength of their service offerings, the agencies within the discipline have delivered solid revenue performance throughout the pandemic and they continue to perform well.
CRM Commerce and Brand Consulting was up 15.2% but the performance within this discipline was mixed as our shopper marketing agencies cycled through the effects of recent client losses.
While organic revenue for CRM Experiential was up over 50%, it should be noted that events were virtually shut down as lockdowns took effect in March and April of 2020.
While government restrictions on events have been eased recently in certain markets, these businesses still face challenges regarding when they will return to pre-pandemic levels.
CRM Execution & Support was up 22.7% reflecting a recovery in client spend compared to Q2 of 2020 in our field marketing and merchandising and point-of-sale businesses while our non-for-profit businesses continue to lag.
PR was up 15.1% coming off pandemic lows in 2020.
And finally, our Healthcare discipline was up 4.5% organically.
Healthcare was the only one of our service disciplines that had positive organic growth in Q2 of 2020.
The performance of these agencies remained solid across the Group.
Now turning to the details of our regional mix of businesses on Page 6.
You can see the quarterly split was 51.5% in the U.S.; 3.3% for the rest of North America; 10.6% in the U.K.; 18.6% for the rest of Europe; 12.5% for Asia Pacific; 2% for Latin America; and 1% [Phonetic] for the Middle East and Africa.
In reviewing the details of our performance by region on Page 7, organic revenue in the second quarter in the U.S. was up nearly 20% or $316 million.
Our advertising discipline was positive for the quarter.
Our media agencies excelled in the quarter as did our CRM Precision Marketing agencies and our PR agencies and our Commerce and Brand Consulting category rebounded to growth in the quarter while our Healthcare agencies are flat versus last year when organic growth was 3.7% in the quarter.
Our other CRM domestic disciplines, Experiential and Execution & Support also performed well organically versus Q2 of 2020.
We expect it will take a bit longer for them to return to 2019 revenue levels as social distancing restrictions and pandemic concerns subside.
Outside the U.S., our other North American agencies are up 37% driven by the strength of our media and precision marketing agencies in Canada.
Our U.K. agencies were up 23.8% organically led by the performance of our CRM Precision Marketing, Advertising, and Healthcare agencies.
The rest of Europe was up 34.5% organically.
In the Eurozone, among our major markets, France, Germany, Italy and The Netherlands were up greater than 30% organically while Spain was up in the mid-single digits.
Outside the Eurozone, organic growth was up around 35% during the quarter.
Organic revenue performance in Asia Pacific for the quarter was up 27.9% with our performance from our agencies in Australia, Greater China, India, and New Zealand leading the way.
Latin America was up 20.8% organically in the quarter with our agencies in Mexico and Colombia growing more than 20% and Brazil was up almost 17%.
And lastly, the Middle East and Africa was up over 40% for the quarter.
On Slide 8, we present our revenue by industry information on a year-to-date basis.
We've seen an improvement in performance across most industries with the overall mix of revenue by industry remaining relatively stable.
The travel and entertainment sector was boosted in Q2 of 2021 by increased activity related spend by clients in the entertainment category, which mitigated continued reduced spend levels for many of our travel and lodging clients.
Turning to our cash flow performance.
On Slide 9, you can see that the first six months of the year, we generated nearly $800 million of free cash flow excluding changes in working capital, up over $70 million versus the first half of last year.
As for our primary uses of cash on Slide 10, dividends paid to our common shareholders were $292 million, up about $10 million when compared to last year due to the $0.05 per share increase in the quarterly payments effective with the dividend payment we made in April.
Dividends paid to our non-controlling interest shareholders totaled $39 million.
Capital expenditures in the first half of 2021 were $23 million.
Acquisitions, which include our recently completed transactions as well as earnout payments, totaled $36 million and stock repurchases were $95 million, net of the proceeds from our stock plans reflecting the resumption of our share repurchases during the second quarter of this year.
As a result of our continuing efforts to prudently manage the use of our cash, we were able to generate $311 million of free cash flow during the first half of the year.
Regarding our capital structure at the end of the quarter as detailed on Slide 11, our total debt is $5.31 billion, down about $410 million since this time last year and down just over $500 million compared to year-end 2020.
Both changes reflecting the early retirement in Q2 of 2021 of $1.25 billion of 3.65% senior notes which were due in 2022 partially replaced with the issuance of $800 million of 2.6% 10-year notes due in 2031.
In addition to the net reduction in debt of $450 million from the refinancing, the only other meaningful change was the net balance for the LTM period, was an increase of approximately $65 million resulting from the FX impact of converting our EUR1 billion denominated borrowings into U.S. dollars at the balance sheet date.
Our net debt position as of June 30th was $922 million, up about $710 million from last year-end, but down $1.5 billion when compared to where we stood 12 months ago.
The increase in net debt since year-end was a result of the typical uses of working capital that occur over the first half of the year totaling just under $1.1 billion which was partially offset by the $311 million we generated in free cash flow in the first half of the year.
Over the past 12 months, the improvement in net debt is primarily due to our positive free cash flow of $790 million, positive changes in operating capital of $525 million, and the impact of FX on our cash and debt balances which decreased our net debt position by $154 million.
As for our debt ratios, as a result of our overall operating improvement versus Q2 of 2020 and our recent refinancing activity, we've reduced our total debt to EBITDA ratio to 2.2 times and our net debt to EBITDA ratio to 0.4 times.
And finally, moving to our historical returns on Page 12, the last 12 months our return on invested capital ratio was 25.9% while our return on equity was 46.8%, both significantly better than our returns from 12 months ago. | q1 earnings per share $1.33.
q1 revenue rose 0.6 percent to $3.427 billion.
expect to achieve positive organic revenue growth beginning in q2 of this year and for full year 2021.
negative effects of covid-19 pandemic began to have a significant impact on our businesses late in q1 of 2020.
operating margin for q1 of 2021 increased to 13.6% versus 12.3% for q1 of 2020. | 0 |
Joining me are Bill McDermott, our president and chief executive officer; and Gina Mastantuono, our chief financial officer.
During today's call, we will review our first-quarter 2021 financial results and discuss our financial guidance for the second quarter of 2021 and full-year 2021.
The guidance we will provide today is based on our assumptions as to the macroeconomic environment in which we will be operating.
Those assumptions are based on the facts we know today.
Many of these assumptions relate to matters that are beyond our control and changing rapidly, including but not limited to the time frames for and severity of social distancing and other mitigation requirements; the continued impacts of COVID-19 on customers' purchasing decisions; and the length of our sales cycle, particularly for customers in certain industries.
We'd also like to point out that the company presents non-GAAP measures in addition to and not as a substitute for financial measures calculated in accordance with GAAP.
All financial figures we will discuss today are non-GAAP, except for revenues, net income, remaining performance obligations or RPO, and current RPO or cRPO.
A replay of today's call will also be posted on the website.
I hope everyone remains healthy and safe and you and your loved ones are benefiting from broader vaccine availability.
ServiceNow remains grateful to be in such a strong position to help support our families, communities, and customers.
We started 2021 with another outstanding quarter, delivering a perfect balance of growth and profitability.
Our team is executing, maintaining a swift pace toward our path to $10 billion in revenue and beyond.
In Q1, we grew subscription revenue 30% year over year, exceeding the high end of our guidance.
We delivered strong profitability with operating margin over 27%.
And we increased free cash flow margin 7 points year over year to 46%.
Our significant Q1 beat across the board represents the passion our culture has for innovating and our relentless focus on the customer.
We are ideally positioned to deliver what our customers need.
In the past year, the transformation of work has accelerated the adoption of digital products, services, and experiences.
As a result, digital investments are at an all-time high and will total more than $7.8 trillion by 2024, according to IDC.
ServiceNow is the strategic authority for digital transformation across the enterprise.
We have expanded the boundaries from IT to employee, customer, and now creator workflows for citizen developers.
The digital economy is firing on all cylinders and so are we.
Our culture was born for this moment.
Our team of 14,000 colleagues are exponential thinkers.
This is how we continuously bring innovation to everything we do.
In just the past 18 months, we have more than doubled the features and functionality of our platform for our customers.
We're at the epicenter of the workflow revolution.
Our purpose has never been more relevant.
We are making the world of work, work better for people.
We are helping our customers dream big and to build their digital bridge to the future.
Xerox, for example, is working with ServiceNow to transform the services industry.
Leveraging our field service management, their technicians will use machine learning to proactively solve customer problems.
They're using virtual and augmented reality tools to resolve their customers' issues via desktop, mobile, and smart glass devices.
In this bold new world, it's as if their agents are there in person.
Digital transformation is about creating great employee and customer experiences.
In an increasingly distributed, hybrid workforce, companies need to create frictionless experiences that make it easy for employees to get work done.
This requires seamless cross-enterprise workflows linking systems, silos, departments, and processes.
Only the Now Platform can do this with native integrations: the platform of platforms, the power of one, one data model, one architecture, one enterprise solution to workflow every business challenge.
This is what ServiceNow delivers.
We are the only ones doing what we do the way we do it.
Strong demand for ServiceNow is evident in our results, high growth organically driven at mass scale while aggressively investing in future growth and delivering significant profitability, an amazing business model, and a true testament to the power of the Now Platform.
Our teams keep innovating.
We're proud that Quebec, our latest platform release, delivered 1,700 new customer capabilities; breakthrough innovations like predictive AI operations, AI search, and virtual agents that enhance every experience, to name a few.
ServiceNow is helping customers move to the cloud and invent new business models.
The past year has demonstrated that giving people the right productivity tools is critical to success, especially in distributed work environments.
It's why organizations like Adobe, Deutsche Telekom, Logitech, City of Los Angeles, and Discover are using the Now Platform.
Discover, in fact, is fully utilizing the Now Platform's ease of upgrade, participating in the early adopter program for our Quebec release.
Now Discover is able to focus on timely availability and adoption of new functionality.
The Now Platform is the gold standard for time to value.
By the end of 2021, Forrester Research predicts that 75% of development shops will use low-code platforms.
With Quebec, we are delivering new low-code tools that move app development beyond the borders of the engineering organization and into the hands of citizen developers, employees without software expertise who need to quickly create workflow applications.
We're seeing strong response.
The National Cancer Institute at the U.S. Department of Health and Human Services is a great example.
NCI has established a digital service center around ServiceNow's low-code app engine platform.
In just 10 days, NCI leveraged ServiceNow to build a new application for an online portal to collect and track specimens from COVID-19 patients.
ServiceNow's low-code app is helping NCI staff support the global research community in understanding how genetic factors contribute to the severity of COVID-19 cases.
We also introduced process and workforce optimization capabilities in our new enterprise SKUs.
This brings even more intelligence to our customers, allowing them to be more agile.
We're putting new AI capabilities in the hands of our customers so they can enhance productivity while spending more time on human creativity.
With our recent acquisition of Intellibot, ServiceNow will have an unmatched intelligent workflow automation solution with RPA, AI, machine learning, and process mining native to the Now Platform.
You'll hear more about this from our chief product and engineering officer, CJ Desai, at our upcoming investor day.
Now, let's look more closely at Q1 performance highlights across our portfolio.
Our better together solutions continue to drive more multiproduct deals.
Our core IT workflows remain strong.
ITSM was in 12 of our top 20 deals.
Our AI and ML capabilities embedded with our pro SKU continue to resonate with customers.
ITOM had a strong quarter and was in 13 of the top 20 deals.
EMEA was especially strong.
We're hitting a new gear with CEO engagement.
We're seeing more demand across industries, including financial services, as EU banking regulations require companies to have full visibility into their assets while also managing risk.
HSBC, for example, chose ServiceNow in a multiyear partnership as their workflow partner of choice to help them digitize at scale.
Supporting HSBC's employees, ServiceNow will deliver the technologies needed to simplify their architectural landscape.
This creates efficiencies, better controls, and compliance.
Australia and New Zealand Banking Group also chose the ServiceNow platform to consolidate, simplify its IT systems and streamline operations to improve the employee experience.
The Now Platform gives them the advantage of a fully integrated view of technology and risk.
We continue to see strength in our customer workflows.
Our investments in the telco vertical are gaining traction daily and it's materializing in wins across the globe.
Lumen Technologies, a leading telecommunications company, is transforming its customer care and assurance function with ServiceNow customer workflows.
They will use the Now Platform to deliver best-in-class customer experiences across their networking, cloud, and security solutions.
Telia, a leading multinational telecommunications company, selected ServiceNow to transform service operations, connecting network operations, employees, and customers around the world.
Creator workflows, our platform business, was in 19 of our top 20 deals.
Three of our top 10 app engine wins came from APJ, where we are seeing increased awareness of ServiceNow and is continuing to drive demand.
A large global manufacturing company in Japan is planning to use our app engine to automate manual processes, take out costs and risks associated with migrating on-premise applications to the cloud.
This will be a movement in Japan.
In the U.S., the Now Platform is at the heart of the city of Los Angeles' digital transformation, helping to provide reliable access to essential services for its 4 million citizens.
The city is expanding its use of digital technology to provide immediate-access services, which enables citizens to get the assistance they deserve.
Employee workflows were included in eight of our top 20 deals.
Zalando is a leading online platform for fashion and lifestyle connecting customers, brands, and partners.
As part of their HR transformation, they will implement a central employee services portal using ServiceNow's employee workflows.
Zalando sees this as a critical component in supporting their growth and improving their employee experiences.
Employee and workplace safety are top of mind for our customers.
We are the only company with a complete suite of applications to meet these critical needs.
Since the start of the pandemic, ServiceNow has been at the forefront of solving unprecedented challenges.
We saw the need early and acted quickly, first, with our Emergency Response apps; then our Safe Workplace apps; and now with Vaccine Administration Management.
We leverage the speed and agility of the Now Platform and the incredible talent of our product team to innovate fast, deliver market-leading solutions to support our customers, and help keep them safe.
You see organizations are trapped in the last mile of vaccine management, as they lack the processes and infrastructure needed to vaccinate people quickly.
This is the workflow challenge of our time.
To address these challenges, organizations are using the Now Platform as their vaccine management command center.
Our workflows are connecting organizations' existing technology infrastructure to help orchestrate the critical elements of the vaccine management process, including distributing, administering, and monitoring vaccines.
The Minnesota Children's hospital implemented our Vaccine Administration Management in five days so they could stay focused on their No.
1 priority, caring for children.
The hospital is using ServiceNow virtual assistant to answer questions and schedule patient vaccinations.
They are leveraging inventory tracking and scheduling to ensure appointments, staffing levels, and vaccines are all in sync.
Germany's largest state, North Rhine-Westphalia, is using ServiceNow to support vaccinations for millions of people.
Within two hours of the portal going live, 120,000 people have registered and received an appointment.
ServiceNow ended Q1 working with over 100 organizations and governments globally to help vaccinate people at scale.
We are supporting the delivery and management of millions of vaccines globally.
We will continue to do more.
The workflow revolution is all about helping people.
We are humbled to be helping so many people around the world manage this workflow challenge.
In summary, we had a great start to the year with strong momentum.
I'm so proud of what our team has accomplished over the past year and what they continue to achieve.
From the beginning of this pandemic, we have focused on taking care of our people and taking care of our customers.
That's why we're so grateful to be named to the Fortune 100 "best places to work" list for the first time.
And we're proud to have increased our position on the Fortune's Best Workplaces in Technology list by more than 10 points.
Our culture demonstrates time and again how we've powered through all weather conditions.
Our engineering pride is unmatched, our innovation relentless and our customer focus tireless.
We have a very, very robust pipeline substantially greater than anything we've seen before.
We have all the learnings of digital customer relationship management.
Our strong go-to-market organization is operating in high gear.
Our customer services and partner ecosystem is accelerating time to value.
Our business is ever resilient, our opportunities never greater.
We continue to work with some of the world's greatest brands, including BMW, Bristol Myers Squibb, FIS, Subway, Standard & Poor's.
We're honored to be their digital transformation partner.
And we're also excited to highlight even more customers at our upcoming Knowledge21 experience in May, which will be our biggest customer event ever.
And we look forward to seeing all of you at our upcoming investor day.
This ServiceNow machine is firing on all cylinders.
We're not slowing down.
We are well on our way to $10 billion and beyond, and we are striving with all we have to be the defining enterprise software company of the 21st century.
Gina, over to you.
Q1 was a great start to the year.
On the heels of a tremendous Q4, the team continued to execute well and delivered another strong quarter of outperformance.
We exceeded the high end of our subscription revenue, subscription billings, and cRPO guidance; and those top-line beats carried through to a very robust operating margin and strong free cash flow.
Q1 subscription revenues were $1.293 billion, representing 30% year-over-year growth inclusive of a 4-point tailwind from FX.
Remaining performance obligations or RPO ended the quarter at approximately $8.8 billion, representing 34% year-over-year growth, putting us well on our way toward our $10 billion revenue target.
Current RPO was approximately $4.4 billion, representing 33% year-over-year growth and a 100 basis points beat versus our guidance.
Notably, we delivered that beat with 100 basis points less of an FX tailwind.
Due to the weaker euro, currency contributed 4 points instead of our original outlook for a 5-point tailwind.
Q1 subscription billings were $1.365 billion, representing 29% year-over-year growth and a $50 million beat versus the high end of our guidance.
FX and duration were a 4-point tailwind year over year.
As Bill mentioned, we saw particular strength in EMEA as investments made in 2020 are gaining traction.
In Q1, the region closed one of its largest deals ever, helping to drive very strong year-over-year net new ACV growth.
We're also seeing improving trends in APJ, where we landed two of the top three platform deals in the quarter.
We continue to see the secular tailwinds driven by the intersection of digital transformation, cloud computing, and business model innovation.
Every C-suite leader wants to create great experiences for their employees and their customers, and ServiceNow is delivering.
The Now Platform offers the speed, flexibility, and innovation companies need.
The sustained strength of our top-line growth is the result of consistent execution from across the organization as we address these opportunities, from our engineers who continue to drive leading-edge innovation, to the sales and customer success teams who partner with our customers to ensure we're delivering value and everyone else in between that help to deliver great experiences.
It's been a tremendous team effort.
Our renewal rates remained strong at 97%, as the Now Platform remains a mission-critical part of our customers' operations.
We closed 37 deals greater than $1 million ACV in the quarter, including seven net new customers.
Our focus on selling comprehensive solutions instead of point products continue to drive more multi-product deals as 17 of our top 20 deals included three or more products.
We now have 1,146 customers paying us over $1 million in ACV, up 23% year over year.
And the number of customers paying us $5 million or more in ACV grew over 50% year over year.
Operating margin was 27%, up 300 basis points year over year, driven by our strong top-line outperformance and the timing of some spend that will shift into Q2.
Our free cash flow margin was 46%, up 700 basis points year over year, driven by strong collections and lower T&E.
Together, these results show the power of our business model and our ability to drive a balance of growth and profitability.
Before I move to guidance, I want to give a brief update on the macro trends we're seeing in our business.
The industries highly affected by COVID that we outlined early last year, which represent about 20% of our business, remained resilient in Q1.
We closed several seven-figure deals in these verticals, and renewal rates were ahead of the company average.
However, we did continue to see some headwinds in severely impacted industries such as airlines.
Regardless of the industry, in an increasingly distributed and hybrid workforce, companies need to create consistent and frictionless experiences that make it easy for employees to get work done.
Digital investments are at an all-time high and are expected to continue growing, as companies must reinvest themselves for the new economy.
ServiceNow is the strategic authority in digital transformation, and we're committed to helping our customers succeed in that journey.
These strong secular tailwinds, paired with the strength and agility of the Now Platform, positions us well for 2021 and beyond.
Pipeline generation has remained robust globally even ahead of our Knowledge 2021 event, which is a big driver, particularly for the Americas.
It is helping to drive the net new ACV acceleration in our business this year.
Enterprises around the world are recognizing the strength of our one architecture model; and its ability to deliver great, scalable experiences with speed and efficiency.
Now, let's turn to guidance.
For Q2, we expect subscription revenues between $1.29 billion and $1.295 billion, representing 27% to 28% year-over-year growth, including a 300-basis-point FX tailwind.
We expect cRPO growth of 30% year over year, including a 250-basis-point FX tailwind.
We expect subscription billings between $1.25 billion and $1.255 billion, representing 23% year-over-year growth.
Growth includes a net tailwind from FX and duration of 300 basis points.
We expect an operating margin of 21.5%, which includes $15 million of sales and marketing spend that shifted out of Q1 and into Q2; and 202 million diluted weighted outstanding shares for the quarter.
For the full-year 2021, we're raising our top-line growth guidance on a constant-currency basis.
We are increasing the midpoint of our previous subscription revenue expectations by $32 million based on the strong trends we saw in Q1.
However, a weaker euro resulted in a $59 million headwind to our growth.
Taken together, we expect subscription revenues between $5.455 billion and $5.47 billion, representing 27% to 28% year-over-year growth.
This includes a 200-basis-points FX tailwind.
Similarly, we're increasing the midpoint of our previous subscription billings expectation by $50 million on a constant-currency basis.
However, the weaker euro resulted in a $68 million headwind to our growth.
Taken together, we expect subscription billings between $6.19 billion and $6.205 billion, representing 24% to 25% year-over-year growth.
This includes a net tailwind from FX and duration of 150 basis points.
In terms of quarterly seasonality, we're continuing to see a shift of Q2 and Q3 subscription billings into Q4.
We now expect about 21% of our total subscription billings to be in Q3 and 37% to be in Q4.
We continue to expect subscription gross margins of 85% and an operating margin of 23.5%.
Finally, we expect free cash flow margin of 30% and 202 million diluted weighted outstanding shares for the year.
In addition to making work, work better for people, we're also committed to making the world work better as well.
This week, we unveiled our first-ever global impact report.
At our investor day, I'm excited to be able to share ServiceNow's global impact strategy with you.
In conclusion, ServiceNow is leading this "once in a generation" opportunity to make work, work better for people.
We are focused, disciplined, and committed to helping our customers succeed.
We have the platform businesses need, and we're the workflow standard for enterprise transformation.
Customers are using the Now Platform to create new workflows for new value chains to improve experiences across siloed systems and functions to reduce friction in people's daily lives, and it's showing in our financial results.
I'm very excited about the future in front of us.
ServiceNow's greatest strength is its people, and you all continue to make us ServiceNow strong.
Bill and I couldn't be prouder of this team.
And with that, I'll open it up to Q&A. | national oilwell varco q4 2020 revenues of $1.33 billion.
q4 2020 revenues of $1.33 billion, a decrease of four percent compared to q3 of 2020.
completion & production solutions generated revenues of $546 million in q4 of 2020.
qtrly new orders booked improved 27 percent sequentially to $215 million.
new rig technologies orders booked during quarter totaled $190 million.
as of december 31, 2020, company had total debt of $1.83 billion. | 0 |
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 $1.06 a share compared with $0.67 in the prior year's quarter and $0.94 sequentially.
Revenue was a record $154.3 million for the quarter compared with $111.4 million in the prior year's quarter and $144.4 million sequentially.
The increase in revenue from the second quarter was primarily attributable to higher average assets under management across all three investment vehicles and one additional day in the quarter, partially offset by a sequential decline in performance fees from certain institutional accounts.
Our implied effective fee rate was 57.5 basis points in the third quarter compared with 58 basis points in the second quarter.
Excluding performance fees, our third quarter implied effective fee rate would have been 57.3 basis points compared with 57 basis points in the second quarter.
Operating income was a record $70.4 million in the third quarter compared with $44.2 million in the prior year's quarter and $62.6 million sequentially; and our operating margin increased to a record 45.6% from 43.4% last quarter.
Expenses increased 2.6% compared with the second quarter, primarily due to higher compensation and benefits, distribution and service fees and G&A.
The compensation to revenue ratio, which included a cumulative adjustment to lower the incentive compensation accrual was 33.19% for the third quarter and is now 34.5% for the trailing nine months.
The increase in expenses related to distribution and service fees was primarily due to higher average assets under management in U.S. open-end funds, partially offset by a favorable change in share class mix.
And the increase in G&A was primarily due to higher travel and entertainment expenses as well as costs attributable to preparation for a new closed-end fund that combines public and private real estate with preferred and debt securities.
Our effective tax rate, which was 25.93% for the quarter, included a cumulative adjustment to bring the rate to 26.5% for the trailing nine months.
The reduction in the effective tax rate from the second 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 $241 million at quarter-end compared with $185.6 million last quarter and we continued to be debt free.
Total assets under management were $97.3 billion at September 30, an increase of $1 billion or 1% from June 30.
The increase was due to net inflows of $1.3 billion and market appreciation of $469 million, partially offset by distributions of $718 million.
This marks our ninth straight quarter of net inflows.
Advisory accounts, which ended the quarter with $22.8 billion of assets under management had net outflows of $311 million during the quarter.
We recorded $1.1 billion of inflows, the majority of which were from existing accounts.
Offsetting these inflows were $1 billion of outflows from an unexpected account termination after a client decided to eliminate its allocation to multi-start real assets as well as $300 million of client rebalancings.
This account termination is unrelated to the one noted on previous calls.
Bob Steers will provide an update on our institutional pipeline of awarded unfunded mandates.
Japan Subadvisory had net outflows of $52 million during the quarter, compared with net outflows of $272 million during the second quarter.
Distributions from these portfolios totaled $295 million compared with $309 million last quarter.
Subadvisory, excluding Japan, had net outflows of $253 million, primarily from a client that decided to convert its global listed infrastructure portfolio to passive.
Open-end funds, which ended the quarter with a record $45.6 billion of assets under management had net inflows of $2 billion during the quarter.
Net inflows were primarily into U.S. real estate and preferred funds.
Distributions totaled $276 million, $225 million of which was reinvested.
Let me briefly discuss a few items to consider for the fourth quarter.
With respect to compensation, we continue to refine our estimates as we approach year-end.
Given our double-digit year-over-year growth in assets under management, revenue and operating income, driven by our leading organic growth and strong investment performance, we reduced the compensation to revenue ratio from the previous quarter's guidance of 35.25% by 75 basis points to 34.5%.
All things being equal, we expect our compensation to revenue ratio for the fourth quarter to remain at 34.5%.
We now project that our G&A will increase by about 9% from the $42.6 million we recorded in 2020.
And finally, we expect that our effective tax rate will remain at approximately 26.5%.
Today, I will review our investment performance, discuss the macro environment and its impact on our asset classes and talk about certain key priorities for our investment department.
The third quarter felt like a transitory phase in the markets with the S&P 500 up 0.6% and low dispersion across sub-sector performance.
The markets are evaluating several important macro shifts, including stabilization of virus trends after the variant scares, deceleration in the economic recovery, potential for a transition from monetary easing to tightening and gridlock in Washington DC regarding stimulus and potential tax increases.
The one trend that continued to gain traction was the likelihood that inflation will be more persistent.
Reflecting that, commodities reached a seven-year high and were up 7% in the quarter, one of the top-performing asset classes.
The commodities rally has been broad-based with spot prices positive year-to-date for 80% of commodities.
Looking at our performance scorecard, in the third quarter and for the last 12 months, eight of nine core strategies outperformed their benchmarks.
International real estate, which is global ex-U.S. was the one strategy that underperformed for both time periods.
Measured by AUM, 79% of our portfolios are outperforming benchmarks on a one-year basis compared with 99% last quarter.
On a three and five-year basis, 100% of AUM is outperforming.
The one-year figure declined primarily due to global real estate, where our batting average declined from 99% last quarter to 25% in Q3.
Our core global real estate accounts are outperforming year-to-date.
So if we at least break even in the fourth quarter, our figures will improve next quarter.
We believe the macro environment is favorable for most of our strategies in terms of both fundamentals and investor demand.
We expect above trend economic expansion and more persistent inflation.
If the pandemic continues to subside and the recovery broadens, some of the most negatively affected sub-sectors in real estate and infrastructure should continue to recover and help sustain the fundamental recovery.
In terms of investor demand, the need for income is acute as is the need for equity-like returns with diversification.
Adding inflation to the picture should increase demand for more of our strategies.
As we said last quarter, our reading of the factors contributing to inflation supports a phase of higher for longer inflation.
U.S. real estate returned 0.2% in the quarter and we outperformed in all of our sub strategies.
Year-to-date, U.S. real estate is up 21.6%, outperforming the S&P 500's 15.9%.
The powerful recovery in real estate security prices has been driven by a return of overall demand and increased market need for effective inflation hedges and the ongoing search for income.
So far in 2021, $13 billion has flowed into REIT, mutual funds and ETFs, the largest inflow since 2014.
We continue to see increased adoption of listed REITs by institutional investors as a core component of their real estate allocations.
Investors better understand and can tolerate short-term volatility, knowing that over the long-term, REITs are highly correlated to the fundamentals of their underlying real estate.
And the long-term record of listed REITs compared with core private real estate is undeniably compelling.
REITs have outperformed by nearly 400 basis points annually for over 40 years, while providing liquidity.
These dynamics are powerful in terms of potential flows as REIT allocations get right-sized higher based on merit.
Global real estate returned negative 0.7% in the quarter.
While our core strategies outperformed slightly, our international strategy underperformed, primarily due to the Asia sleeve of our portfolios.
Global listed infrastructure returned negative 0.25% in the quarter and we outperformed in all of our sub-strategies.
The downward trajectory of the virus spread and return of travel and global commerce has made marine ports and airports some of the best performing sectors in the quarter.
The big news for infrastructure was what didn't happen that being passage of infrastructure legislation in Washington, DC.
The longer the process takes, the more it underscores the need for infrastructure capital investment and generates interest in the asset class.
Institutionally, infrastructure as an asset class is understood and accepted, and we see strong search activity.
The dry powder amassed by private equity infrastructure managers reached a record $300 billion and provides fuel for our investment thesis that private equity capital will find its way into the listed markets to buy companies and assets with the latest example being the announced privatization of Sydney airport.
In terms of the wealth channel, we need to continue to educate on how infrastructure best fits into allocation strategies.
Notwithstanding that, we've seen strong inflows into our open-end infrastructure fund in part based on the headlines related to significant infrastructure spending.
Preferred securities returned 0.6% for our core strategy and 0.2% for our low duration strategy.
We outperformed in both.
Preferreds continue to look attractive in the fixed income world with yields of 4.8% for investment-grade preferreds in our core strategy and 4.2% for our low duration strategy.
For context, corporate bonds yield 2.25%, municipals yield 1.75% and high-yield yields 4.75%.
Our portfolios are positioned defensively relative to interest rates and we continue to guide incremental allocations to our low duration strategy, which by design has a duration of less than three years and is the only one of its kind.
The benchmark for our multi-strategy real assets portfolio returned 1% in the quarter and we outperformed.
As a reminder, this strategy combines real estate, infrastructure, commodities, resource equities, gold and short duration credit with an asset allocation overlay.
Over the past year, the real assets portfolio returned 32.5% compared with the S&P 500 at 30%.
This strategy is designed to provide protection from unexpected inflation and produce equity-like returns with a low correlation to financial assets.
Somewhat surprisingly, we haven't seen a significant increase in demand for this portfolio, but with a long history of head fakes on inflation, it simply may be early and the demand for this strategy may follow rather than lead inflation.
We continue to expand our investment department, including the addition of a Portfolio Manager and Head of Multi-Asset Solutions, who will join us next month to oversee asset allocation, strategy research and macroeconomic research.
This is a strategic role that will expand our real assets and real estate solution investment capabilities and enable us to engage with clients at a higher level.
We've made tremendous progress preparing strategies for our private real estate business, including a strategy with a capital appreciation objective.
We have commenced the investment process and are evaluating acquisition opportunities.
In addition, for our closed-end real estate funds, we will pursue an income strategy to capitalize on mispriced property sectors.
This will expand our investment universe for our closed-end funds and supplement these funds' primary focus on listed real estate with higher income generation and rifle shot opportunities in the private market.
These are examples of our broader vision using both listed and private real estate to broaden our opportunity sets and provide investors with optimized allocations to real estate by tilting portfolios to where the best values are.
Looking into 2022, we will be developing other vehicles for the wealth channel and we expect to add a real estate strategist to further enhance our asset allocation and advisory capabilities.
Meantime, commercial real estate has a positive outlook with fundamentals strong or recovering, compelling income generation, and particularly in this environment, attractive inflation sensitivity.
Finally, we're looking forward to the next phase of our return to office plan whereby everyone will be in the office three days a week beginning next week.
While we have performed well working remotely as our operations and investment performance attest, we want to get back to in-person interaction, debate and decision-making on the investment team and across the firm.
The creativity, innovation and cross-team collaboration our business requires is best done in person.
Current indicators point to the general containment of the pandemic, thereby allowing us to return safely as we transition to being together once again as a team while having the best of both worlds with some work model flexibility.
As you heard from Matt and Joe, we had a very strong quarter.
Continued excellent investment performance across the board, record AUM, revenues, earnings and profit margins.
For the first time in several years, we benefited from strong, absolute and relative market returns.
We believe this is significant because fundamentals indicate that this is the beginning of a new trend, not the end.
An inside joke here at Cohen & Steers is how often I use the metaphor of how important it is to skate to where the puck will be and not stare at where it is now.
Where the puck is now is only useful in helping to see where it's going.
Broad-based, demand-driven inflation will persist and is most definitely not transient, but the bond market, like most investor portfolios is where the puck was.
The latest inflation measures have all moved broadly higher.
September CPI increased 5.4% year-over-year and the core CPI was also up 4%.
In a surprise announcement, the Social Security Administration last week disclosed that future payments will be increased by 5.9%, the largest such increase in over 40 years.
Consumer spending surged 11.9% in the second quarter and 13.9% in the month of September.
But the real story beyond these surging spot indicators is the steady increase of the more persistent and heavily weighted components of these inflation measures.
Rent is a key category as it makes up over 30% of CPI.
Tenant rent jumped 0.5% in September which was the biggest monthly increase in 20 years.
Owners' equivalent rent, which is the accepted measure of what homeowners would pay if they had to rent their homes rose 0.4%, the most since 2006.
Lastly, as these persistent measures of inflation continue to rise, it can cause expectations to become self-fulfilling.
According to the New York Fed, consumers' median inflation expectations for the next three years is 4.2%.
So where the puck is today isn't bad as we saw this quarter, but to get to where the puck is going, will require investors to reposition their portfolios to hedge against or even benefit from the shift to a more enduring inflationary environment.
All real asset classes and especially infrastructure and real estate have historically provided investors with the solutions that they'll be looking for.
At the risk of being repetitive and with the benefit of strong, absolute and relative returns from our real asset strategies, we achieved record AUM of $97.3 billion and over $100 billion intra-quarter; record open-end fund AUM of $45.6 billion and $1.3 billion of net inflows in the quarter.
As has been the case, recently, the wealth channel led the way with $2 billion of net inflows, representing 18% organic growth and our third best quarter on record.
Both the BD and RIA verticals were strong and DCIO fund flows were positive for the 13th straight quarter.
From a product standpoint, we saw strength in preferred security strategies, which generated net inflows of $1.1 billion, and in real estate which had net inflows of $755 million.
Looking forward, as inflation and interest rates move higher, we anticipate that flows into our low duration infrastructure and multi-strategy real asset portfolios will all benefit.
In addition, we have filed with the SEC to launch a closed-end fund offering in the first quarter of next year that will combine public and private real estate in one actively managed listed portfolio.
In the advisory channel, due to a planned design change, we had an unexpected $1 billion termination of a high performing multi-strategy real asset portfolio, which resulted in $311 million of net outflows in the quarter.
Gross inflows remained strong, totaling $1.1 billion with U.S. real estate accounting for over two-thirds of that amount.
The pipeline of awarded but unfunded mandates is at $900 million and we recorded $550 million of mandates, which were both won and funded in the quarter, our second best result on record.
Japan Subadvisory net outflows were $52 million pre-distributions and totaled $347 million, including distributions.
All things being equal, we are optimistic that flows, especially for our U.S. real estate portfolios, may shortly begin to improve.
First, the portfolios are performing extremely well, especially after currency adjustments.
Second, we are approaching the 12-month mark for the last distribution cut, which typically coincides with flows turning positive.
Lastly, the end of COVID restrictions -- with the end of COVID restrictions in Japan, our teams have been asked to resume a significant number of in-person sales seminars.
Subadvisory ex-Japan had net outflows of $253 million as well, primarily driven by the termination of an offshore global listed infrastructure portfolio and modest outflows elsewhere.
We did bring on a new $83 million global real estate mandate in the quarter.
We believe that the next several years will witness a generational shift in the economy and capital markets.
Higher growth rates sustained by unprecedented monetary and fiscal stimuli have produced demand-driven supply/demand imbalances resulting in asset price inflation, which is becoming self-fulfilling.
Real estate values and rents, labor costs and commodity prices are rising with no current end in sight.
Many investors have never experienced this set of economic variables.
We believe that as investors begin to extrapolate these trends, allocations to real assets, especially infrastructure and real estate will substantially increase.
Our traditional range of products is well positioned to capture this shift.
In addition, we recently commenced the marketing process for our private real estate strategies that we discussed last quarter.
And as I've said, we hope to launch our first public-private real estate closed-end fund this February.
Given the favorable outlook for real assets, we are committed to adding new capabilities and products that will provide the solutions that investors need when they ultimately see where the puck is going. | cohen & steers inc - qtrly diluted earnings per share of $1.05; $1.06, as adjusted. | 1 |
technologies.com under the link, Investor Relations.
With the ongoing challenges from COVID, we continue to see great efforts and contributions from everyone across the Company, and for that, I'm very appreciative.
Since the beginning of the pandemic, our primary goals remain the same, provide a safe working environment and protect the health of our employees and today we continue to encourage our staff to get fully vaccinated for the benefit of everyone.
There were a few challenges in the third quarter, but overall, the Company continues to perform well.
Cash generation year-to-date has been excellent.
We have teams focused on the working capital initiatives around the Company and there is still room for improvements as we move forward.
This will be a long-term value creation tool for ESCO.
Our previous cost reduction actions, along with our enhanced focus on operational efficiency will benefit ESCO going forward as our end markets continue moving toward a more normalized level of activity and I'm confident that our disciplined approach to operating the business will result in continued success as we move into fiscal 2022.
While Chris will provide the financial details, I'll offer some top level commentary to set the tone.
While our year-to-date A&D sales continue to be lower than prior year due to COVID's impacts on commercial aerospace, our portfolio diversity allowed us to mitigate this headwind as our year-to-date consolidated adjusted EBITDA margins are only down slightly compared to prior year-to-date margins.
This performance was driven by solid contribution from our other operating units as a result of a favorable sales mix and meaningful cost reductions across the Company.
From a segment level, there are several positives to report.
Within A&D, we're seeing signs of recovery in the commercial aerospace as passenger boardings continue to increase and more airlines are adding idle aircraft back in the service.
Sales from our commercial aerospace customers were still down in the third quarter as a recovery in the sectors have been a bit slower than we anticipated.
US domestic travel has picked up but it's still slightly below 2019 levels.
Those of you who've been to an airport lately are probably surprised, but this is what the TSA statistics show.
It's important to understand that the business travel remains soft and air travel in Europe and overall international travel are still well below 2019 levels.
The good news is that we're starting to see order activity increase in the third quarter and our overall A&D segment orders increased by more than 40% compared to last year's third quarter.
Additionally, our navy and space businesses remain strong and well-funded and our outlook for near-term growth opportunities continue to materialize in both of these areas.
Our test business continues to be steady.
We have a good order input on a global basis and we're actively managing material inflation and transportation issues as they arise.
We expect test outlook to remain positive driven by the strength of the served markets, including 5G, medical and automotive.
Our USG business continues to outperform from a profitability perspective with year-to-date adjusted EBIT margins of 19.4% compared to 15.1% last year.
The renewables business and energy has performed well in 2021, while the orders from billables utility customers have been a bit soft.
We did see sales growth from delve over approximately 8% in the quarter, we have not yet seen demand return to pre-pandemic levels.
We feel great about the long-term outlook for the USG business and are very excited about the announcements today regarding closing two acquisitions.
Our agreement to acquire Altanova had been announced back in May, and we were able to get the deal closed in July 29.
This business brings exciting new product offerings to our USG business and also significantly increases our global footprint.
Additionally, we announced today the purchase of Phenix Technologies.
This is also an exciting business, it further enhances a product offering of our USG Group and provides greater access to the commercial and industrial markets.
We've had initial meetings with the teams for both of these businesses.
I'm very encouraged by the quality of the people and their enthusiasm to join ESCO.
We are confident these will be strong additions to ESCO and USG's portfolio that will drive future sales and earnings growth.
So overall, the fundamentals of our portfolio remain strong.
The second half sales outlook is a bit behind initial projections but orders have started to increase and we feel good about the growth outlook for 2022 and beyond.
I'll start by briefly touching on a few comparative highlights.
Sales in the third quarter grew by 5% with A&D up 1.8%, USG up 12% and Test growing 4.6%.
This has been the first quarter in 2021 where we saw sales growth from all three segments.
Adjusted EBIT margins were 12.7% in the quarter compared to 14.2% in the prior year quarter.
The margin decline was driven primarily by the operational efficiencies and inventory write-offs at Westland.
In the quarter we did become aware of some issues at Westland.
They've experienced several challenges related to new product development programs, which led to increased production cost and product quality issues.
No bad product were sent or billed to customers, but we did have charges recorded in the quarter of $2.1 million and year-to-date charges of $4.4 million.
The first and second quarter charges represent corrections to our previously reported financials and going forward, our 2021 year-to-date numbers will be updated to reflect these amounts.
We have started work immediately to get the production issues fixed into address cost issues within the business.
There are strong synergies between Westland and our Global subsidiary and we have already begun the work to bring these businesses together under one leadership structure.
We have a strong outlook for this business and are committed to driving significant improvements as we move forward.
Adjusted earnings per share came in at $0.67 per share in the quarter below prior year $0.76 per share.
Adjusted pre-tax dollars were down 2.5% compared to prior year Q3 and we had an exceptionally low tax rate in prior year Q3 which further reduced EPS.
Segment highlights in the quarter are as follows, A&D did see a return to sales growth in the quarter.
The Navy business grew by over 20%, which more than offset declines in the commercial aerospace sales of approximately 10%.
While the commercial aerospace sales were down, we did see the rate of decline improve and we are seeing signs that the business is beginning to rebound.
Margins for A&D were down driven by the issues at Westland.
USG saw growth of 12% in the quarter.
The renewables business was very strong.
The Utility business did grow in Q3, but it is not return to pre-pandemic levels adjusted EBIT margins were 18.3% in Q3 compared to 14.8% in the prior year Q3.
The strong improvement is driven by leverage on the sales growth and benefits from prior cost reduction activities.
The test business grew 4.6% in the quarter, continued steady performance from this group, margins were down in the quarter due to mix and timing issues.
Year-to-date, operating cash flows of over 40%.
We continue to see great results from our focus on driving balance sheet improvements, the teams across the Company continue to work multiple strategies for operating capital improvement and the results are very good.
Some programs driving this performance include negotiating performance-based payments, in our A&D and test segments, this has had a significant impact as it oftentimes results in new orders being cash-positive throughout the life of the contract.
Other efforts include adjusting safety stock levels and extending payment terms.
Year-to-date, our adjusted EBITDA was nearly $91 million with a 17.8% margin compared to 18% in the 2020 year-to-date.
Over the past year, we took several cost reduction actions across the Company that have allowed us to hold margins during this down sales environment.
Examples here include closure and consolidation of facilities, the move of manufacturing content to our Mexico facility and ongoing make/buy [Phonetic] programs.
Amortization of intangibles and interest expense decreased while tax expense as a percent of pre-tax income increased in Q3 and year-to-date as we had several tax strategies implemented last year which benefited the 2020 competitive rates.
Orders were a good story in Q3 as entered orders were strong.
We booked $203.8 million of new business in the quarter ended with a backlog of $539 million and a book to bill of 112%.
This represents 29% growth compared to prior year Q3, strength in orders came from all three segments with A&D orders increasing 44%, USG increasing 10% and Test increasing 28%.
As we continue navigating through what we hope is the near end of COVID, our number 1 focus remains the same increasing and maximizing our liquidity to position us for future M&A growth and increased investment in new products and solutions.
We have a strong balance sheet today and are excited about the recent acquisitions that Vic mentioned earlier.
We still have ample capacity for further acquisitions and we obviously continue to invest in the core business to enhance our organic growth profile.
Our significant cash generation this year is a testament to this focus on liquidity.
We have delivered free cash flow conversion at 118% of net earnings for the first nine months.
As mentioned above, we have clear momentum in our working capital initiatives.
I did want to talk for a minute about the Q4 guidance.
In the release we did provide Q4 guidance.
This is the first quarter that has included guidance since COVID began.
The guidance for Q4 is a range of $0.73 to $0.78 per share.
The sales levels in Q4 are key issue as we think about the guidance and this range is predicated on a sales level in the range of $190 million to $200 million.
In the last three months, we have reduced the Q4 sales outlook for the commercial aerospace businesses and also for the utility businesses.
The commercial aerospace backlogs are beginning to build that we see those more drivers for 2022 as opposed to Q4.
For the utility space, we are seeing some growth compared to prior year, but not to the levels we had previously anticipated.
The long-term outlook for both of these markets continues to be positive and we feel good about our positioning as we look toward 2022.
We also want to be clear that this outlook excludes any impact from the acquisitions that were announced today.
We will have sales and earnings impacts from those transactions, but they are not yet quantified and are therefore not included in the guidance that is provided.
Since I touched on quite a few of my thoughts earlier in my commentary, I'll just offer a few more comments before we move into Q&A.
As Chris mentioned, we are a little softer than planned here in the back half of the year for the commercial aerospace and Doble's utility market.
This doesn't change our long-term commitment to these markets.
We feel great about our end market exposure and our diverse portfolio allows us to manage through periods like this.
Outside these markets, we see a lot of growth opportunities in A&D for the military, aerospace, navy and space end markets.
Investments in renewable energy market continue to drive very strong performance for our NRG business and test business seeing a lot of opportunities for telecom, automotive, and medical markets.
We just finished up a Board meeting in Boston last week and during those meetings, we took the time to visit the Doble and Globe operations.
We had a great set of meetings and really exciting interactions with the teams at the operating units.
At Doble, we did a full update of the USG segment.
The team has made great progress updating the product line across the business from renewable focus products at NRG to the new F8 launch Doble.
It's great to see the innovation happen inside that business as our customers start spending again and will be ready to support.
This also provided a chance to update our Board on Phenix and Altanova acquisitions.
So you could first hand see the excitement around these transactions.
After visiting the Doble headquarters, we took the Board to visit the Globe facility.
This was another great visit.
The team at Globe has done an exceptional job driving tremendous growth with the Navy Surface hull treatment product line.
The team has worked very hard to master a difficult manufacturing process.
They really roll and it's fun to see a winning team in action.
We had full couple of days in Boston and accomplishing all of this, but it was time well spent.
So with that, and I think we're ready for some Q&A. | q2 adjusted earnings per share $0.59 excluding items.
continues to see tangible signs of recovery that point to a solid outlook for back half of year.
esco technologies - second half of 2021 is expected to compare favorably to second half of 2020 given anticipated elements of recovery. | 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 Brian Dickman, our Chief Financial Officer.
I will lead off today's call by providing an overview of our performance for the third quarter of 2021 and highlight the company's investment and capital markets activities.
And then I'll pass the call to Mark and Brian to discuss our portfolio and financial results in more detail.
The net result of our well-positioned in-place portfolio and the continued execution of our active and accretive investment program was a 5.8% increase in total revenues, a 13.2% increase in adjusted funds from operations, and a 6.4% increase in AFFO per share.
The company benefited from the stability of its portfolio of convenience and automotive retail assets, which continued to perform well, meaning that we had another quarter of full rent collections, including all amounts owed to us as a result of our 2020 COVID-related rent deferments.
The success of our investment strategies year-to-date has been a key contributor to our earnings growth.
We invested $61.1 million in 25 properties during the quarter, and another $8.8 million just after quarter-end, bringing our year-to-date total investment activity to more than $144 million.
This accelerated pace of investment activity was highlighted by our ability to bring new high-quality tenants into our portfolio, including Flash Market with sites located across the Southeastern U.S. and Splash Carwash, whose footprint spans the Northeast.
We also continue to successfully execute on our multiple investment strategies, which include [Indecipherable] leasebacks, accretive acquisitions of net leased properties, and development funding for new industry assets.
In addition, rent commenced on three redevelopment projects during the quarter including our second and third projects, with 7-Eleven for remodeled C&G locations in the Baltimore and Dallas-Fort Worth MSAs, bringing our completed projects to 22 since the inception of our redevelopment program.
We also announced yesterday that we successfully amended and extended our $300 million credit agreement, which now will mature in October 2021.
The improved terms of our facility further validate the company's platform and strong performance over the last several years.
When combined with our active ATM program, which we've used to raise more than $50 million this year, and our strong balance sheet, we continue to have access to capital and the right credit profile to support our growth objectives.
Given our performance year-to-date, I am pleased that our Board approved an increase of 5.1% in our recurring quarterly dividend to $0.41 per share.
This represents the eighth 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.
Furthermore, we are again pleased that our year-to-date accretive investment activity has positioned the company to raise its 2021 AFFO per share guidance.
I want to reiterate our commitment to effectively executing on both new investment activity and the active asset management of our portfolio.
Our teams continue to work diligently to source and underwrite new opportunities to invest across our target asset classes including convenience stores, car washes, automotive-related retail properties in strong metropolitan markets across the country as well as to unlock embedded value through selective redevelopments.
We believe our success year-to-date demonstrates our ability to source opportunities that align with our investment strategies, and that will continue to drive additional shareholder value.
As of the end of the third quarter, our portfolio includes 1,011 net lease properties, five active redevelopment sites, and five vacant properties.
Our weighted average lease term was approximately 8.8 years, and our overall occupancy, excluding active redevelopments, remains constant at 99.5%.
Our portfolio spans 36 states across the country plus Washington, D.C., and our annualized base rents, 63% of which come from the top 50 MSAs in the U.S., continue to be well covered by our trailing 12-month tenant rent coverage ratio of 2.6 times.
In terms of our investment activities, we had a highly successful quarter in which we invested $61.1 million in 25 properties.
Subsequent to the quarter-end, we acquired two additional properties for $8.8 million, bringing our year-to-date investment activity to $144.5 million across 82 properties.
We completed two transactions in the convenience and gas sector during the quarter.
The first was a 15 property sale-leaseback with Flash Market, a subsidiary of Transit Energy Group.
In this transaction, we invested $35.1 million to acquire the properties, which are located throughout the Southeast United States with a concentration around the Raleigh-Durham, North Carolina MSA.
Properties acquired have an average store size of 3,600 square feet and an average property size of 1.7 acres.
In addition, 53% of the properties have sub-tenancies with either quick-serve restaurants or auto service operators.
We also completed our first development funding project with Refuel in the Charleston, South Carolina MSA.
Our total investment in the project was $4.5 million, including our final investment of $1.1 million during the third quarter.
As per the terms of our development funding transactions, we acquired the property upon completion of development in conjunction with our final funding payment and simultaneously entered into a long-term triple net lease.
In the carwash sector, we completed three transactions in the quarter.
We acquired two newly constructed properties from WhiteWater Express carwash in Michigan for $7 million.
These properties were added to our existing unitary lease with WhiteWater.
We also acquired two additional properties for an aggregate purchase price of $8 million, which are leased to Go Car Wash in San Antonio, Texas, and Las Vegas, Nevada MSAs.
Additionally, we acquired our first property with Splash car wash, which is located in New Haven, Connecticut MSA.
Our purchase price was $4 million for the property.
In the auto service sector, we acquired our first Mavis Tire property.
We invested $4.6 million to acquire the properties in the Chicago, Illinois MSA.
Getty also advanced $1.2 million of development funding from three new industry convenience stores with Refuel in the Charleston, South Carolina MSA, bringing the total amount funded by Getty for these projects to $8.9 million at quarter-end.
As part of this transaction, we will accrue interest on our investment during the construction phase of the project, and we will expect to acquire the properties via sale-leaseback transaction upon completion and final funding.
The weighted average initial lease term of our completed transactions for the quarter was 14.6 years, and our aggregate initial cash yield on our third quarter acquisitions was 6.7%.
Subsequent to quarter-end, we acquired two properties in the Boyington, Vermont MSA from Splash Carwash.
Purchase price was $8.8 million, and the cap rate was consistent with our year-to-date acquisition activity.
We ended the quarter with a strong investment pipeline and remain highly committed to continuing to grow our portfolio of convenience and automotive retail real estate, and we expect to pursue that growth through continued sourcing of direct sale-leaseback, acquisitions of net lease properties, and development funding for new-to-industry assets.
Moving to our redevelopment platform.
During the quarter, we invested approximately $331,000 in both completed projects and sites, which remain in our pipeline.
In addition, rent commenced on three redevelopment projects during the quarter, including two 7-Eleven convenience stores and one property leased to BJ's Wholesale Club, which is adjacent to one of our newly constructed superstores.
In aggregate, we invested $0.5 million in these three projects and generate a return on investment capital of 43%.
At quarter-end, we had eight signed leases or letters of intent, which includes five active projects and three projects at properties, which are currently subject to triple net leases and have not yet been recaptured from the current tenants.
The company expects rent to commence at two additional development sites during the fourth quarter of 2021.
In total, we have invested approximately $1.9 million in eight redevelopment projects in our pipeline and estimate that these projects will require a total investment by Getty of $7.4 million.
We project these redevelopments will generate incremental returns to the company in excess of where we can invest these funds in the acquisition market today.
Turning to our asset management activities for the quarter.
We sold one property during the quarter, realizing $2.3 million in gross proceeds, and exited five lease properties.
We expect the total net impact of these activities will have de minimis impact on our financial results.
As we look ahead, we will continue to selectively dispose the properties that we determine are no longer competitive in their current format or do not have compelling redevelopment potential.
Let me start with a recap of earnings.
AFFO, which we believe best reflects the company's core operating performance, was $0.50 per share for the third quarter, representing a year-over-year increase of 6.4%.
FFO was $0.48 per share for the quarter.
Our total revenues were $40.1 million, representing a year-over-year increase of 5.8%.
Rental income, which excludes tenant reimbursements and interest on notes and mortgages receivables was 7.5% to $34.3 million.
Strong acquisition activity over the last 12 months and recurring rent escalators in our leases were the primary drivers of the increase, with additional contribution from rent commencements at completed redevelopment projects.
On the expense side, G&A costs increased in the quarter, primarily due to employee-related expenses, including noncash and stock-based compensation.
Property costs decreased marginally due to reductions in real estate tax expense and environmental expenses, which are highly variable due to a number of estimates and non-cash adjustments, increased in the quarter due to certain legal fees and changes in net remediation costs and estimates.
We turn to the balance sheet and our capital markets activities.
We ended the quarter with $567.5 million of total debt outstanding, including $525 million of long-term fixed-rate unsecured notes and $42.5 million outstanding on our $300 million revolving credit facility.
Our weighted average borrowing cost was 4% and the weighted average maturity of our debt was 6.3 years.
In addition, our total debt to total market capitalization was 29%.
Our total debt to total asset value was 37%, and our net debt-to-EBITDA was 5.1 times.
Each of these leverage metrics are calculated according to the definitions in our loan agreements.
As Chris mentioned, yesterday, we announced the amendment and extension of our $300 million revolving credit facility, which is now set to mature in October 2025, with two 6-month extensions, where we have the option to extend to October 2026.
In addition to extending the term, we were able to reduce the interest rate by 20 to 50 basis points, depending on where we are in the leverage-based pricing grid, and amend certain covenant provisions to align with those generally applicable to investment-grade rated REITs.
We also amended each of our outstanding unsecured notes to conform to the new credit facility covenant provisions.
All in all, this is a good transaction for Getty.
We reduced our cost of capital, improved some terms, and importantly, demonstrated the continued support of our bank group and unsecured noteholders.
With the credit facility extended, our nearest debt maturity is now the $75 million of senior unsecured notes that come due in June of 2023.
Moving to ATM activity.
We continue to be selective with our equity issuance during the quarter, raising $19.8 million at an average price of $31.12 per share.
Year-to-date, we raised a total of $50.1 million through the ATM.
We think about our future capital needs more broadly, we remain committed to maintaining a strong credit profile with meaningful liquidity and access to capital, low-to-moderate leverage, and a well-laddered and flexible balance sheet.
With respect to our environmental liability, we ended the quarter at $47.8 million, which was a decrease of approximately $300,000 from the end of 2020.
For the quarter, net environmental remediation spending was approximately $1.3 million.
And finally, as a result of our investment in capital markets activities in the first nine months of the year, we are raising our 2021 AFFO per share guidance to a range of $1.93 to $1.94 from our previous range of $1.89 to $1.91.
Our guidance includes transaction activity completed year-to-date but does not otherwise assume potential acquisitions or capital markets activities for the remainder of 2021.
Factors which may impact our guidance include variability with respect to certain operating costs and our expectation that we will remain active in pursuing acquisitions and redevelopments, which could result in additional expenses, including certain property demolition costs and transaction costs for deals that are ultimately not completed. | q3 adjusted ffo per share $0.50.
q3 ffo per share $0.48.
increasing its 2021 affo guidance to a range of $1.93 to $1.94 per diluted share. | 1 |
What we will say today is based on the current plans and expectations of Comfort Systems USA.
Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
Joining me on the call today are Brian Lane, President and Chief Executive Officer; Trent McKenna, Chief Operating Officer; and Bill George, Chief Financial Officer.
Brian will open our remarks.
We are happy to report a fantastic third quarter.
We earned $1.27 per share on revenue of $834 million.
Same-store revenue grew by 9% compared to the third quarter of 2020, as work and bookings are returning as COVID challenges decrease.
Our backlog was over $1.9 billion this quarter, which is a $270 million same-store increase over this time last year.
Our free cash flow continues to be strong, and yesterday we increased our dividend by 8%.
Our essential workforce continues to perform at an outstanding level, and we are grateful for their strength and perseverance during these challenging times.
During the third quarter, we closed our acquisition of Amteck, which focuses on electrical projects and service in Kentucky, Tennessee and the Carolinas.
Amteck brings an exceptional set of capabilities and relationships and a strong reputation in industrial markets, such as food processing.
We are thrilled to have them as part of Comfort Systems USA.
I'll turn this over to Bill to review our financial performance.
This will be pretty brief.
Revenue for the third quarter of 2021 was $834 million, an increase of $120 million or 17% compared to last year; same-store revenue increased by a strong 9%, with the remaining increase resulting from our acquisitions of TEC and Amteck.
Gross profit this quarter was $159 million, a $12 million improvement compared to a year ago while gross profit percentage was 19.1% this quarter compared to 20.6% for the third quarter of 2020.
Our gross profit percentage related to our Mechanical segment was strong at 20.1% and margins in the Electrical segment have increased significantly compared to last year.
SG&A expense for the quarter was $95 million or 11.4% of revenue compared to $91 million or 12.7% of revenue for the third quarter in 2020.
On a same-store basis, SG&A was down approximately $2 million, primarily due to tax consulting fees that we incurred in the prior year.
Our year-to-date 2021 tax rate was in the expected range at 24.1%.
Net income for the third quarter of 2021 was $46 million or $1.27 per share.
This compares to net income for the third quarter of 2020 of $50 million or $1.36 per share, as last year included a $0.17 benefit that resulted when we settled tax audits from past years.
Excluding that discrete item from last year, our earnings per share increased by 7% compared to the record level of a year ago.
For our third quarter, EBITDA was up significantly to $82 million, an increase of 15% over the prior year.
And through nine months, our EBITDA is $188 million.
Free cash flow in the first nine months was $139 million, as compared to $199 million in 2020.
The COVID-induced work slowdown and some temporary tax benefit created unprecedented cash flow last year.
Our cash flow this year is robust through nine months and we expect continued good cash flow, although we are likely to continue to deploying some net working capital to start new projects in many places.
In addition, we will be paying the federal government an extra $16 million of payroll taxes next quarter that were deferred under the CARES Act in 2020.
Ongoing strong cash flow has allowed us to reduce our debt faster than expected, while still actively repurchasing our stock.
Since the beginning of the year, we have repurchased 346,000 shares which is almost 1% of our outstanding shares at an average price of $73.69.
Since we began our repurchase program in 2007, we have bought back over 9.6 million shares at an average price of less than $22.
Brian mentioned that we closed the acquisition of Amteck.
Amteck is reported in our Electrical segment and it is expected to contribute annualized revenues of approximately $175 million to $200 million and earnings before interest taxes, depreciation and amortization of $14 million to $17 million.
However, because of the amortization expense related to intangibles, the acquisition is not expected to contribute to earnings per share for the next few quarters.
That's all I have on financial Brian.
I am going to spend a few minutes discussing our backlog and markets.
I will also comment on our outlook for the remainder of 2021 and full year 2022.
Backlog at the end of the third quarter of 2021 was $1.94 billion.
Our sequential same-store backlog was up slightly, which is great by the end of the third quarter due to the heavy backlog burn this time of the year.
Year-over-year our backlog is up by over $500 million or 36%.
Same-store backlog increased by 19%, a broad base increase.
We believe that the impact on activity levels related to COVID-19 have now stabilized and we expect to continue seeing good trends in work availability in the coming quarters.
Industrial customers were 43% of total revenue in the first nine months of 2021.
We think this sector which includes technology, life sciences and food processing will remain strong for us, as Industrial is heavily represented in new backlog as well as in our recent acquisitions.
Institutional markets, which include education healthcare and government are strong and represented 33% of our revenue.
The commercial sector is also doing well but without changing mix it is now a smaller part of our business at about 24% of revenue.
Year-to-date, construction was 77% of our revenue with 46% from construction projects for new buildings and 31% from construction projects in existing buildings.
Service was very strong this quarter and our increasing service revenue was 23% of our year-to-date revenue with service projects providing 9% of revenue and pure service including hourly work providing 14% of revenue.
Year-to-date service revenue was up by 11%.
And with our continuing strong margins our service earnings were up by a similar amount.
Service has rebounded as buildings are open and profitable small project activity is back.
Overall, service continues to be a great source of profit for us.
Our backlog is at record levels.
Project development and planning activities with our customers are continuing.
We are paying more for materials but so far our teams have coped successfully with challenges in material availability and cost.
We are closely monitoring material shortages and costs and are taking steps to add additional protections on new work.
Vaccine mandates by certain customers have post challenges in our ability to pursue certain work.
All the staff are maintained scheduling on work that is subject to such mandates.
So far we have been able to meet our customers' requirements.
However, the Occupational Safety and Health Administration, OSHA is drafting an emergency regulation on vaccinations and it is impossible to predict the scope, timing and impact of the new regulation on us, or our industry or on the US economy.
The underlying trends in customer demand and opportunities are very positive.
And so despite challenges, we continue to anticipate solid earnings and cash flow for the remainder of 2021 and we feel that we have good prospects for 2022.
Over the last few years, we completed a series of transformative acquisitions that have built upon our unbroken history of profitability and cash flow to increase our scale, deepen our exposure to complex markets, including industrial, technology and pharma and expand our recurring service revenue.
Each investment has strengthened and expanded our unmatched nationwide community of skilled workers.
We are also experiencing increasing benefits from our substantial and ongoing investments in training, productivity and technology.
These acquisitions and other investments have laid the foundation for the current strong results and gives us confidence as we move forward.
Above all, we are mindful of the ongoing challenges that our employees across the United States continue to confront and we are deeply grateful for their perseverance.
We are committed to providing our workers and thus our customers with unmatched resources, opportunities and support. | compname reports q3 earnings per share $1.27.
q3 earnings per share $1.27.
backlog as of september 30, 2021 was $1.94 billion. | 1 |
Additional information on these factors can be found in the company's SEC filings.
And, now, I will hand the communications to Gerrard.
I'm pleased to join you today to discuss the transformation of our business model, our competitive differentiation and our solid start to 2021.
I'll begin on Slide 3 by recapping our investment thesis and our key financial metrics for 2021, which we are reaffirming today.
We are continuing to make solid progress in transforming our business model to generate strong returns on invested capital, significant free cash flow growth, and leverage our competitive differentiation to grow the top line.
In the first quarter, we delivered 4% revenue growth underpinned by market share gains in ATMs and self-checkout solutions.
I'll provide additional color about key market trends in just a minute, but I'll simply say that our growth in Q1 gives us the confidence to reiterate our 2021 revenue outlook of $4 billion to $4.1 billion.
Our return on invested capital continues to improve.
To date, the main contributor has been our DN Now work streams, which includes services modernization, G&A efficiencies from enhancing our digital and cloud-enabled capabilities and selling a higher mix of self-checkout devices and DN Series ATMs. The company is off to a good start in Q1, and we're tracking to our previously disclosed plan of $160 million of gross savings this year.
Transformation restructuring payments are also tracking to plan and our prior comments on this topic and we'll conclude this year.
The combination of enhanced profitability and lower restructuring payments is driving a strong increase in free cash flow.
Our outlook for 2021 is a range of $140 million to $170 million or approximately 30% of our adjusted EBITDA.
The company's operating rigor is driving our transformation and value creation.
While we have been tested during the global pandemic, we continue to demonstrate tremendous result with our ability to execute during this challenging time and we will continue to leverage this operating rigor going forward.
Slide 4 summarizes how our competitive differentiation is playing out in the marketplace and in our first quarter results.
Our retail business is benefiting from accelerating self-checkout demand, as well as mild growth in our point of sale business.
These trends drove retail revenue growth of 11% in the quarter, excluding the impact of divestitures and currency.
We expect growth will continue as retailers improve the end-to-end experience and reduce operating costs.
We're growing faster than the market, because customers value our high degree of modularity, increased availability and our open architecture.
During the quarter, we secured a multi-year agreement with the French retail group, Les Mousquetaires, to transform the checkout experience at nearly 2,000 stores with next generation point-of-sale and self-checkout products, our AllConnect Data Engine and dynamic self-service software.
In the United States, we booked our initial order for DN Series EASY self-checkout units with a high profile convenience store retailer, operating in airports and other tourist destinations.
Beyond the value of winning new self-checkout hardware deals, we're also benefiting from higher services attach rates that increase our recurring revenue.
Moving now over to the banking business.
We're seeing growing evidence of market share gains due to the advanced features and functionality of our next generation DN Series ATMs. In the United States, we're seeing gains among larger financial institutions, including an initial order to deliver DN Series cash recycling ATMs and maintenance services at a top 10 U.S. financial institution, which previously bought hardware from others.
With this wining [Phonetic], we received DN Series orders from five of the top 10 U.S. banks and we see opportunities to add to our success.
In Latin America, we're seeing DN Series orders from customers in Mexico, Colombia, Peru and Honduras, including a contract with Banco Nacional de Mexico, or Banamex, to deliver approximately 1,200 DN Series ATMs, Vynamic software licenses and maintenance services.
A number of customers have indicated that DN Series is not only a hardware upgrade, there is a critical element for automating, digitizing and enhancing the self-service channels.
For example, DN Series is facilitating higher service levels due to strong engineering and the AllConnect Data Engine, which leverages Internet of Things and machine learning to enable a data-driven service model.
For legacy ATMs, we're seeing service cost reductions of approximately 20%.
For customers that upgrading from legacy ATMs to DN Series, the potential performance improvements from ACDE can be even more significant.
We increased the number of machines connected to ACDE by 10% sequentially during the first quarter.
As we connect more devices to AllConnect Data Engine, we expect the operational efficiencies will add to our service margins and contribute to our target range of 32% to 33%.
Additionally, DN Series also supports advanced, self-service capabilities through enhancements we're making to our dynamic offering.
Our Video-as-a-Service offering is seeing solid demand.
Furthermore, our software team has created a single stack environment to facilitate quicker implementations and more frequent updates of new capabilities such as cardless transactions, cash recycling and video teller access.
We see opportunities to continue to grow our software business.
And, as previously disclosed, we're making investments in our dynamic payment suites and are seeing heightened interest from early adopters for our cloud native solution, although the sales cycle is expected to be longer than our typical software sale.
We're also hearing from more customers about their efficiency agendas and we're responding with pre-configured managed services, which support advanced capabilities and drive higher service levels.
The number of managed services opportunities has increased in the past quarter across retail and banking customers.
Beyond our growing pipeline, our managed services success in the quarter included a five-year contract to be the sole source supplier for maintenance, monitoring and help desk services for more than 4,000 self-service terminals and in a top five bank in the United Kingdom.
Secondly, an extended managed services contract with increased scope at the largest private sector bank in India.
And, thirdly, a three-year managed services contract extension covering more than 3,500 self-service terminals with HSBC, the largest bank in Hong Kong.
Our financial results represent a very solid start to 2021.
Adjusted EBITDA of $100 million was the highest first quarter in the company's history and while Jeff will discuss the details, I'm especially pleased that our operating profit growth of 25% and adjusted EBITDA growth of 12% significantly outpaced our top line growth of 4%.
This demonstrates strong operating leverage in our business model.
Next on the call, Jeff Rutherford, who will take you through a more detailed discussion of our financials and our financial outlook for 2021.
Our first quarter revenue growth and positive operating leverage demonstrates our transformed business model, which creating value for our stakeholders.
Slide 5 contains the first quarter P&L metrics for the past two years, providing a useful perspective of our transformed business model.
Total first quarter revenue of $944 million reflects foreign currency benefits of $34 million versus the prior-year period, partially offset by $23 million headwind from divested businesses.
Adjusted for foreign currency and divestitures, revenue increased 2.4% led by product growth of 11%, software growth of 7%, and a services decline of 4%.
We generated $273 million of non-GAAP gross profit in the quarter, an increase of $19 million or 7% versus the prior year period, reflecting higher revenue and improving margins from our DN Now achievements.
Gross margin increased 110 basis points to 29%.
We've expanded gross margins across all three segments, led by strong gains in software and services of approximately 590 basis points and 220 basis points, respectively.
Product gross margins declined 200 basis points, due primarily to non-recurring benefits in the prior year period and a slightly less favorable customer mix.
Operating profit increased $16 million or 25% versus the prior quarter, while operating margins gained 150 basis points to 8.4%.
SG&A expense was flat versus the prior year quarter, allowing the gross profit from incremental revenue to flow through to operating profit.
R&D expense was $3 million higher year-over-year, due to planned growth investment.
We delivered adjusted EBITDA of $100 million in the quarter, which increased $11 million or 12% over the prior year.
The next three slides contain financial highlights for our segment.
On Slide 6, Eurasia Banking revenue of $328 million, increased 5% versus the prior year period excluding the foreign currency benefit of $21 million and a $20 million impact from divestitures.
Growth was driven by higher product volumes as the team converted our backlog, which has been building for several quarters.
Segment gross profit increased $7 million year-over-year with contributions from all three business lines.
Foreign currency benefits of $8 million were partially offset by interim cost benefits from the prior year.
Gross margin expanded 60 basis points year-over-year led by software and services improvements, while product margins declined due to a less favorable customer mix.
Moving to Slide 7, Americas Banking revenue of $312 million declined 7% versus the prior year, excluding a $6 million foreign currency headwind and a $2 million divestiture headwind.
We experienced lower product volumes and installation activities in U.S. regional accounts and in Mexico versus the prior year period, although we see order growth picking up.
As Gerrard mentioned, our national account business is showing strength in both orders and revenue due to a customer acceptance of DN Series.
The software business delivered strong double-digit growth in the quarter, due to the revenue recognition of a large contract.
Segment gross profit of $97 million was down $7 million year-over-year due to lower volume and modest currency and divestiture headwinds.
Gross margin expansion of 100 basis points to 31.3% was driven by benefits from DN Now initiatives.
On Slide 8, retail revenue of $304 million increased 11% year-over-year after adjusting for $19 million foreign currency tailwind and the divestiture headwind of $1 million.
During the quarter, we experienced continued strength from self-checkout solutions as well as mild growth from point-of-sale products.
Software growth was driven by a large project in Europe.
When compared to the prior year period, retail gross profit increased 32% and $79 million, due primarily to revenue growth.
Gross margin expanded 260 basis points, demonstrating that our team is doing a great job delivering positive operating leverage, revenue growth, a more favorable mix of self-checkout solutions and continued execution of DN Now initiatives.
On Slide 9, we summarize our free cash flow performance and update our leverage and debt maturity schedules.
Free cash flow use of $70 million in the quarter was up slightly compared with the prior year quarter and was in line with our internal plan.
Versus the prior year, free cash flow was impacted by higher interest payments related to the timing of our secured note payments and higher cash used for inventory.
The combination of our growing product backlog coupled with longer lead times for electronic components and a weaker U.S. dollars resulting in higher cash requirements for inventory.
We are working closely with our suppliers to manage these challenges, however, just like other technology companies, these dynamics will remain on our watchlist.
Cash from receivables and payables improved slightly versus the prior year.
On an unlevered basis, free cash flow use improved from $30 million to $10 million year-over-year due to higher profits and lower restructuring events.
For modeling purposes, investors should expect our cash interest payments to be approximately $30 million in the second and fourth quarters and approximately $60 million in the third quarter of 2021.
When compared with year-end, the company's cash balance reflects seasonal cash use for us approximately $30 million used to pay down a portion of the revolving credit facility.
The company ended the quarter with $573 million of total liquidity, including $260 million of cash and short-term investments.
At the end of the quarter, the company's leverage ratio of 4.4 times was unchanged versus year-end and down one-tenth of the term from the year ago period.
On the right side of this slide, we update our gross debt levels as of March 31st.
Note that we have no material debt maturities until November of 2023.
We remain committed to strengthening our credit profile and we'll continue to evaluate opportunities to refinance that on more favorable terms.
Slide 10 contains our 2021 outlook, which we are reaffirming today.
We expect to generate revenue of $4 billion to $4.1 billion, which equates to 3% to 5% annual growth.
Our adjusted EBITDA range is $480 million to $500 million for the year, or 6% to 10% growth as we benefit from topline growth and operating leverage.
As most of you are aware, our second quarter results for 2020 included significant non-recurring benefits to our services' gross profit margins and operating expense.
We do not expect these benefits to recur during the second quarter of 2021.
Operating expense for the second quarter is expected to be in line with the first quarter or approximately $194 million, although it could be slightly higher if the euro continues its strength against the U.S. dollar.
Based on these factors, we expect adjusted EBITDA for the second quarter to be similar to our first quarter results.
Moving on to cash flow.
We continue to expect $140 million to $170 million of positive cash flow for 2021, including up to $50 million for DN Now restructuring payments.
Our outlook reflects a material improvement in the company's EBITDA, to free cash flow conversion rate from 12% in 2020 to approximately 30% in 2021. | q4 adjusted earnings per share $0.45 excluding items.
q4 net income $0.27 per gaap diluted share. | 0 |
During our call today, unless otherwise stated, we're comparing results to the same period in 2020.
Future dividend payments and share repurchases remain subject to the discretion of Altria's board.
Altria reports its financial results in accordance with U.S. generally accepted accounting principles.
Today's call will contain various operating results on both a reported and adjusted basis.
Adjusted results exclude special items that affect comparisons with reported results.
Finally, all references in today's remarks to tobacco consumers or consumers within a specific tobacco category or segment, refer to existing adult tobacco consumers 21 years of age or older.
We're off to a strong start to the year and believe our businesses are on track to deliver against their full-year plans.
Against a challenging comparison, our tobacco businesses performed well in the first quarter and we continue to make progress advancing our noncombustible product portfolio.
We now have full global ownership of on!
oral nicotine pouches as we recently closed transactions to acquire the remaining 20% global interest.
We are excited about the opportunity we have with on!
to convert smokers and we have talented teams supporting the global plans for the brand.
Before discussing our first-quarter results in more detail, we would like to honor the memory of Tom Farrell, our late chairman of the board.
Tom served 13 distinguished years on our board, offered valuable insights and guidance during his tenure, and was a true visionary.
We will miss his leadership, contributions, and friendship.
The board will appoint a new chair at its meeting following our Annual Shareholders Meeting in May.
Let's now turn to our first-quarter results.
Our first-quarter adjusted diluted earnings per share declined 1.8%, primarily driven by unfavorable timing of interest expense and a higher adjusted income tax rate.
In the smokeable products segment, we continue to execute our strategy of maximizing profitability in combustibles while appropriately balancing investments in Marlboro, with funding the growth of noncombustible products.
Segment adjusted OCI margins expanded and Marlboro continued its retail share momentum from the back half of 2020.
For volumes, reported smokeable segment domestic cigarette volume declined 12% in the first quarter, reflecting year-over-year trade inventory movements, one fewer shipping day and other factors.
When adjusted for these factors, cigarette volume declined by an estimated 3.5%.
We believe that in the first quarter of 2020, wholesalers built inventories by approximately 900 million units, driven in part by COVID-19 dynamics, compared with a depletion of approximately 300 million units in the first quarter of 2021.
At the industry level, we estimate that first-quarter adjusted domestic cigarette volume declined 2%.
Looking at smoker retail dynamics, we estimated that total cigarette trips in the first quarter remained below pre-pandemic levels.
Also, estimated expenditures per trip remained elevated when compared to pre-pandemic levels and were steady sequentially.
We are continuing to monitor the impacts from external factors on tobacco consumer purchasing patterns and behavior.
In March, the federal government passed a third stimulus package.
An increasing number of people became vaccinated and consumability improved sharply.
We're keeping a close eye on the tobacco consumer and we will continue to provide our insights on the underlying factors as the year progresses.
Moving to our noncombustible products.
We are pleased to now have full ownership of on!
oral nicotine pouches globally.
We completed transactions in December and April to acquire the remaining 20% of the global on!
business for approximately $250 million.
When we made the initial 80% acquisition in 2019, the oral nicotine pouch category in the U.S. was rapidly growing off of a small base.
Subsequently, oral nicotine pouch growth has exceeded our original estimates.
In the first quarter of 2021, we estimate that retail share for all nicotine pouches was approximately 13% of the total oral tobacco category, double its share in the year ago period.
We expect continued growth from the oral nicotine pouch products and estimate that category volume in the U.S. will grow at a compounded annual growth rate of approximately 25% over the next five years.
Since 2019, Helix, supported by the enterprise, significantly increased on!
manufacturing capacity, broadened retail distribution, grew tobacco consumer awareness, and followed PMTAs for the entire product portfolio.
Helix achieved an annualized manufacturing capacity of 50 million cans by the end of last year, and as of the end of the first quarter, on!
was sold in approximately 93,000 stores.
In the U.S. market, on!
In the first quarter, on!
share of the total oral tobacco category grew significantly to 1.7%.
On a 12-month moving basis, in-store selling and providing point-of-sale data, on!
retail share was 3.1%, an increase of seven-tenth from the 2020 full-year share.
Going forward, we intend to report on!
share of the total U.S. oral tobacco category as Helix expects to be in stores covering 90% of the industry's oral tobacco volume by midyear.
Our primary focus continues to be on increasing on!
growth in the U.S. Internationally, we see potential to strengthen on!
in the Swedish market.
We also see longer-term prospects in Europe to expand on!
and gain consumer feedback on potential noncombustible products for the U.S. To explore these additional opportunities, we have expanded the international on!
presents a compelling noncombustible alternative for smokers and we look forward to supporting their conversion journey.
We estimate that total category volume increased 24% versus the year ago period.
As a reminder, in Q1 2020, the FDA restricted the sales of all flavored e-vapor products among pod systems with the exception of tobacco and menthol.
Sequentially, we estimate that the category volume increased 7% as competitive marketplace activity continued.
As a result of these dynamics, JUUL's first-quarter retail share of the total e-vapor category decreased to 33%.
We continue to believe that a responsible e-vapor category, consisting solely of FDA authorized products can play an important role in tobacco hard reduction.
As for our JUUL investment, the FTC trial is now scheduled for June of this year and we remain committed to vigorously defending our investment.
In heated tobacco, PM USA is continuing to expand IQOS and Marlboro HeatSticks.
Beginning this month, HeatSticks are available in retail stores statewide across Georgia, Virginia, North Carolina, and South Carolina.
Marlboro HeatSticks retail volume and share continued to grow in the first quarter.
In Atlanta stores with distribution, Marlboro HeatSticks retail share of the cigarette category was 1.1%, an increase of two-tenth sequentially and in Charlotte, HeatSticks retail share was 1%, an increase of three-tenth sequentially.
Last month, PM USA began selling the IQOS 3 device, which offers a longer battery life and faster recharging, as compared to the 2.4 version.
The new device is being offered through device and HeatSticks bundles and through the lending program, which has been effective at generating trial and driving purchase.
We're encouraged to see that many consumers are upgrading their 2.4 devices, representing approximately 25% of all IQOS 3 device sales in the first quarter.
Along with geographic expansion, PM USA is increasing the use of its digital platforms like Marlboro.com and getiqos.com to engage with smokers and communicate the benefits of IQOS, including the MRTP claim on the IQOS 2.4 system.
For Marlboro.com, IQOS content is now available nationwide.
Smokers can sign up to receive communications and be notified when IQOS is available in their area.
PM USA is also using its Marlboro's Rewards program to drive IQOS awareness and value delivery.
Smokers can earn Marlboro rewards points by learning about IQOS and can also redeem their points for discounts on the IQOS device.
cigarette volume by year end.
We are making progress in driving awareness and availability of on!
and IQOS while investing in future innovative noncombustible products and we continue to acquire more tobacco consumer insights to inform our strategies to actively transition smokers to our noncombustible portfolio.
Our smokeable products segment continues to support our vision, generating significant cash that can be invested in noncombustible products and return to shareholders.
Turning to our financial outlook.
We reaffirm our 2021 guidance to deliver adjusted diluted earnings per share in a range of $4.49 to $4.62.
This range represents an adjusted diluted earnings per share growth rate of 3% to 6% from a $4.36 base in 2020.
The guidance includes continued investments to support the transition of adult smokers to a noncombustible future.
We will continue to monitor various factors that could impact our guidance.
Our employees continue to drive the success of our businesses.
They've risen to the challenge together to deliver results and are supporting each other and their communities.
Over the past years, the challenges associated with the pandemic have been compounded by the continued social injustice and in equities that black and brown Americans still face every day.
And the Asian American community is hurting as violent and hateful attacks on Asians skyrocketed.
We condemn any form of hatred and discrimination against any person.
Through our Asian, black, and brown employees, we will continue to stand with you and we stand for you.
We recently released our report on supporting our people and communities, which details the many ways we're making progress, enhancing our culture and positively impacting our communities.
It is part of a series of corporate responsibility progress reports that we are issuing this year, and it is available on altria.com.
Moving to our results.
Our tobacco businesses continue to perform well in the first quarter.
The smokeable products segment delivered over $2.3 billion in adjusted OCI and expanded adjusted OCI margins by 2.2 percentage points to 57.5%.
PM USA's revenue growth management framework supported the segment's strong net price realization of 8% for the quarter.
We continue to be pleased with Marlboro's performance and category leadership.
In the first quarter, Marlboro's retail share was 43.1%, an increase of four-tenth versus prior year.
We believe that Marlboro is continuing to benefit from smoker preferences for familiar products during disruptive times and is lapping the year ago comparison quarter where we observed the older consumers coming back to cigarettes from e-vapor.
In the first quarter, Marlboro's price gap to the lowest effective price cigarette increased to 37%, primarily driven by heavy competitive promotional activity in the branded discount segment.
Despite this activity, branded discount share declined by four-tenth in the first quarter as deep discount gained share.
The total discount segment retail share was 25.3%, an increase of one-tenth versus the year ago period.
In cigars, Black & Mild continued its long-standing leadership in the profitable tipped cigar segment.
Middleton's reported cigar shipment volume increased over 11% in the first quarter.
Oral tobacco products segment, adjusted OCI grew by 3.1%, and adjusted OCI margins declined by 0.9 percentage points to 72.1%.
Adjusted OCI results were driven primarily by higher pricing, partially offset by higher investments behind on!
Total reported Oral Tobacco Products segment volume increased 0.6%, driven by on!
When adjusted for trade inventory movements, calendar differences and other factors, segment volume increased by an estimated 0.5%.
First-quarter retail share for the oral tobacco products segment was 48.1%, down 2.3 percentage points due to the continued growth of oral nicotine pouches.
Copenhagen continue to be the leading MST brand and on!
gained traction in the oral nicotine pouches.
Michelle's first-quarter adjusted OCI increased approximately 46% to $19 million, driven primarily by higher pricing and lower costs.
And in beer, we recorded $190 million of adjusted equity earnings in the first quarter, which was unchanged from the year-ago period and represents Altria's share of API fourth-quarter 2020 results.
Moving to our equity investment in Cronos.
We recorded an adjusted loss of $27 million representing Altria's share of Cronos' fourth-quarter 2020 results.
We continue to support our investment in Cronos by advocating for a federally legal, regulated, and responsible U.S. cannabis market.
We joined the recently launched Coalition for Cannabis Policy, Education, and Regulation.
This coalition is comprised of members across diverse industries and public policy experts who plan to inform the development of comprehensive cannabis policy that prevents underage use, advance of science, creates quality and safety standards and addresses social inequity.
And finally, on capital allocation, we paid approximately $1.6 billion in dividends and repurchased approximately 6.9 million shares, totaling $325 million in the first quarter.
We have approximately $1.7 billion remaining under the currently authorized $2 billion share buyback program, which we expect to complete by June 30, 2022.
Our balance sheet remains strong and as of the end of the first quarter, our debt-to-EBITDA ratio was 2.5 times.
In the first quarter, we executed a series of transactions to take advantage of favorable market conditions to adjust our debt maturity profile and extend the weighted average maturity of our debt.
We issued new long-term notes totaling $5.5 billion and repurchased over $5 billion in outstanding long-term notes.
In May, we expect to retire $1.5 billion of notes coming due with available cash.
We've also posted our usual quarterly metrics, which include pricing, inventory and other items.
Let's open the question-and-answer period.
Operator, do we have any questions? | q2 adjusted earnings per share $0.43.
q2 sales fell 8 percent to $461.4 million.
sees fiscal 2021 year-over-year sales down 7 to 12 percent.
sees fiscal 2021 adjusted ebitda of $155 million to $165 million.
expect some cost increases in second half of our fiscal year. | 0 |
Today, we'll update you on the company's third quarter results.
Our third quarter results exceeded our expectations as net sales rose 9% over the prior year to approximately $2.8 billion.
Our adjusted earnings per share was $3.95 per share.
All of our businesses performed well, managing through a changing environment in a period COVID directly and indirectly impacted many economies, creating supply chain difficulties that disrupted production as well as leading the government lockdowns in Australia, New Zealand and Malaysia that halted manufacturing and retail.
Despite these and other headwinds, our third quarter sales trends continued in most regions, with Europe's results reflecting more normal summer seasonality.
Home sales were robust across most geographies and consumers continued remodeling investments at a strong pace.
Year-over-year, the commercial sector showed improvement though at a slower rate as COVID concerns delayed the timing of some projects.
Our strategy is to enhance organizational flexibility, reduce product and operational complexity and align pricing with cost improved our results in the period.
We continue to implement lean processes and reduce complexity in manufacturing and logistics.
We're managing our investments in SG&A to support new products that will expand our future revenues and margins.
Even with greater external constraints, we ran most of our operations at high levels and we successfully managed many interruptions across the enterprise.
Rather than improving as we expected, the availability of labor, materials and transportation became more challenging, resulting in higher costs in the period.
Tight chemical supplies, in particular, reduced the output of our LVT, carpet, laminate and board panels.
While we are presently seeing COVID cases declining in most of the regions, many of our operations experienced increased absenteeism during the period, affecting our efficiencies in production.
For the near term, we do not see any significant changes in these external pressures.
Due to supply shortages, government regulations and political issues, natural gas costs in Europe are presently about 4 times as high than they were earlier in the year.
This has a temporary challenge to our European businesses as higher costs are reflected in gas, electricity and other materials.
Though our inventories increased during the period, mostly due to higher material costs and transportation delays on customer orders, our service levels remained below historical norms.
Most of our businesses are carrying significant order backlogs, and we plan to run our operations at high levels during the fourth quarter to improve our service and efficiencies.
Currently, some of our fastest-growing products are being limited by material and capacity constraints.
We have initiated additional investments to increase our production of those and increase our sales and service.
Completion of those projects is being extended due to longer lead times on building materials and equipment.
Our results have improved significantly during 2021 and we generated over $1.9 billion of EBITDA for the trailing 12 months.
Given this in our current valuations, our Board increased our stock purchase program by an additional $500 million.
Since the end of the second quarter, we bought approximately $250 million of our stock at an average price of $193 per share.
With our current low leverage, we have the capital to pursue additional investments and acquisitions to expand our sales and profitability.
Jim will now review our third quarter financials.
Sales for the quarter exceeded $2.8 billion and 9.4% increase as reported and 8.7% on a constant basis.
All segments showed growth, primarily due to price and mix actions as volume was generally constrained by supply, labor, transportation and COVID disruptions.
Gross margin, as reported, was 29.7% or 29.8% excluding charges, increasing from 28.3% last year.
The year-over-year increase was driven primarily by improved price and mix, which offset the increasing rate of inflation.
In addition, gains in productivity, less year-over-year downtime and favorable FX improved our margins.
The actual detailed amounts of these items will be included in the MD&A section of our 10-Q, which will be filed after the call.
SG&A as reported was 16.9% and flat versus prior year, excluding charges.
Increased SG&A dollars versus prior year as a result of costs that were curtailed due to the COVID-19 pandemic, higher sales, increased inflation, new product development and price and mix.
Operating margin as reported was 12.8%.
Restructuring charges were approximately $1 million, and we have reached our original savings goal exceeding $100 million in annual savings.
We continue, though, to pursue other initiatives to lower our costs.
Operating margins, excluding charges, were also 12.8%, improving from 11.5% in the prior year or 130 basis points.
The increase was driven by improved price and mix, offsetting increasing inflation as well as gains in productivity, favorable FX and greater year-over-year manufacturing uptime, improving our results.
We were partially offset by impact of constrained volume and increased cost in product development.
Interest expense was $15 million in the quarter, flat versus prior year.
Our non-GAAP tax rate was 21.4% versus 16.9% in the prior year, and we still expect the full year rate to be between 21.5% and 22.5%.
Earnings per share as reported were $3.93, and excluding charges were 3.95% -- $3.95, excuse me, increasing by 21% versus prior year.
Now turning to the segments.
Global ceramic sales came in just under $1 billion, a 9.6% increase as reported or approximately 9.1% on a constant basis, led by strengthening price and mix across our geographic regions.
Brazil, Mexico and the U.S. countertop business saw the strongest volume gains while other products performed well against a difficult year-over-year Q3 comparison, which had an abnormal seasonality.
Operating margin excluding charges was 11.9%, up 160 basis points versus prior year due to the favorable price/mix offsetting increasing inflation, which improved -- with improved productivity and limited year-over-year shutdowns strengthening our results, partially offset by increased costs in new product development.
Flooring North America sales just exceeded $1 billion, a 6.9% increase as reported.
The sales growth was driven by price and mix actions to offset rising costs as our sales volumes were impacted by supply, transportation and labor constraints.
Operating margin excluding charges was 11.4%.
That's an increase of 320 basis points versus prior year.
The improvement was driven by positive price and mix offsetting the increasing inflation and volume constraints.
In addition, productivity gains and less temporary shutdowns favorably impacted our results.
In Flooring Rest of the World, sales exceeded $760 million, a 12.7% as reported increase or 10.5% on a constant basis, driven again by price and mix actions while volumes here were constrained by material disruptions, especially in LVT, a return to a normal summer seasonality and COVID restrictions, which caused lockdowns in Australia, New Zealand and Malaysia.
Operating margin, excluding charges, was 17.4%.
This is a decrease versus prior year as a result of the return to a normal summer holiday, along with material constraints and COVID lockdowns which increased our costs and lower productivity, volume and increased the temporary shutdown.
Improved price and mix, which offset the increase in inflation and favorable FX benefited our results.
Corporate and eliminations were $11 million, and I would expect that to be $45 million for the full year.
Taking a look at the balance sheet.
Cash for the quarter exceeded $1.1 billion with free cash flow of $351 million in the quarter and over $720 million in third quarter year-to-date.
Receivables were just shy of $1.9 billion with a DSO of just under 57 days.
Inventories were just over $2.2 billion, an increase of approximately $374 million or 20% from the prior year.
That's an increase of about 16% if you compare to the year-end balance.
Inventory days just under 107 days compared to our low point last year at just under 100 days and 103 days at the year-end.
Property, plant and equipment exceeded $4.4 billion with capex for the quarter at $148 million, in line with our D&A.
Full year capex is currently projected to be $650 million, with D&A projected at $586 million.
Looking at the current debt.
One note on October 19, the company redeemed at par their January 2022 EUR500 million 2% senior notes plus unpaid interest, utilizing cash on hand.
The balance sheet overall and cash flow remained very strong with gross debt as of the end of Q3 of $2.3 billion and leverage at 0.6 times to adjusted EBITDA.
For the period, our Flooring Rest of World segment sales increased 12.7% as reported and 10.5% on a constant basis.
Operating margins were 17.4% as a result of pricing and mix improvements, offset by inflation and a return to more normal seasonality in the period.
During the quarter, sales were strong across our product categories and geographies outside those affected by government lockdowns.
Overall, raw material supplies continue to impact our operations, with LVT production affected the most during the quarter.
We expect that material, energy and transportation inflation will continue and chemical costs that rely on gas will accelerate in upcoming periods.
During the period, COVID shutdowns in Malaysia, Australia and New Zealand interrupted our production and sales.
These restrictions have now been lifted, and we are ramping up production to meet demand.
Our laminate collections continue to have strong sales growth with consumers embracing our proprietary waterproof products for their performance and realistic visuals.
Our new premium laminate introductions feature unique services that replicate handcrafted wood floors.
Our sales volume increased during the period, though our margins were pressured by higher-than-anticipated raw material and transportation inflation.
We added new capacity in Europe to meet demand, and we are initiating other projects to support further sales growth.
In Russia and Brazil, our laminate businesses are growing as we expand distribution with our leading collections.
As anticipated, our LVT sales were lower during the period, given material shortages and lower production that reduced our output.
We minimized the impact by improving our product mix and raising prices to pass through inflation.
Sales of our higher-value rigid LVT collections with patented water-type joint outperformed and benefited our mix.
We anticipate improved material availability in the fourth quarter to support higher LVT production levels and improve our service.
We have announced additional price increases as our energy and material costs continue to rise.
Our sheet vinyl production and sales were impacted by tight material supply and transportation bottlenecks and outbound shipments.
Our Russian sheet vinyl business performed well with sales growing as our distribution expanded.
Our wood plant in Malaysia resumed full operations in September after 12 weeks of government lockdowns due to COVID.
Sales of our wood products will be down in both the third and fourth quarters as our inventories have been depleted.
We have acquired a European wood veneer plant to improve supply, yields and cost of our wood flooring.
We're introducing waterproof wood collections with our patented Wet Protect Technology in our markets after its successful launch in the U.S. Production stops in Australia and New Zealand reduced our sales and margins, and we are scaling up our operations to meet demand as the markets reopen.
Our new premium collections, enhanced merchandising and consumer advertising will benefit our business as the markets return to normal.
We are increasing pricing to offset inflation and transportation costs.
Sales of our European insulation panels grew in the period as we implemented another price increase to offset rising material inflation.
Our income improved with disruptions in manufacturing due to tight material supplies.
We acquired an insulation manufacturer in Ireland and have begun integrating their operations with our existing business.
During the third quarter, our panels business grew and margins expanded as we increased our price mix and pricing.
We're introducing a new decorative range to enhance our participation in specified markets.
We have added new press that will increase our capacity and add more differentiated features to our products.
Our ongoing pricing actions offset rapidly rising material prices, and we will increase prices further in response to inflation.
In the fourth quarter, we will complete the acquisition of an MDF manufacturer in France to expand our capacity in Western Europe.
The company is a pioneer in bio-based resins, which will enhance our sustainability position.
In the third quarter period, our Flooring North America segment sales increased 6.9% and operating margins were 11.3% as reported as a result of productivity, pricing and mix improvements, partially offset by inflation.
Flooring North America had strong results given the material, transportation and labor constraints impacting our sales and production during the period.
Supplies of most oil-related chemicals were restricted, creating unscheduled production stops that lowered our sales and raised our costs.
We implemented additional price increases across most product categories as inflationary pressures intensified.
We continue to streamline our product portfolio and reduce operational complexity, benefiting our efficiencies and quality.
In residential carpet, limited material and labor availability are affecting our production and manufacturing costs.
We continue to increase prices to recover continued inflation.
Volume and efficiencies are being negatively impacted by low inventories, shorter runs and labor challenges.
We are replacing older assets with more efficient equipment, which is improving our labor productivity.
We have an elevated backlog, and we plan to run our operations at high levels in the fourth quarter to improve service and replenish inventories.
We are enhancing our sales and mix as consumers upgrade their homes with our premium SmartStrand and luxury nylon collections.
Commercial sales improved in the period, though the rate of growth has slowed as COVID cases increased.
The government, education and healthcare sectors outpaced office, retail and hospitality channels which are recovering more slowly.
Our hard surface sales are growing as we expand our offering and increase specifications in commercial projects.
We are investing in more efficient assets to improve cost, enhance styling and reduce labor requirements.
Our laminate and wood business continues to grow, though our sales were restricted by our capacities.
Our new laminate line should be operational by the end of this year to expand our sales and provide more advanced features.
Chemical shortages limited our laminate production in the period as we responded by reengineering our formulations to maximize our output.
We are reducing complexities to simplify our operations and improve our efficiencies and production.
Our new high-performance UltraWood collections are increasing our mix in wood and the productivity of our new plant is improving as volume increases.
Our LVT sales increased in the period, even with material supplies limiting production and shipping days in our sourced products.
We have improved our mix with enhanced features and lowered our costs by streamlining our processes.
Our plant has increased throughput and yields despite disruptions from a lack of material supply.
To support future growth, we are expanding our LVT operations adding approximately $160 million of production, with the initial phase beginning at the end of this year.
We are also increasing our sheet vinyl plant's production to satisfy expanding sales of our collections.
In the quarter, our Global Ceramic segment sales increased 9.6% as reported and 9.1% on a constant basis.
Operating margins were 11.9% as a result of higher volume, productivity, pricing and mix improvements, partially offset by inflation.
Our U.S. Ceramic business grew during the period with the residential sector remaining strong and commercial continuing to show improvement.
Our margins improved in the quarter as we implemented price increases to offset higher transportation and raw material costs, enhanced our mix and increased output from our plants.
Additional pricing actions are being taken to offset continuing inflation.
We are reducing our manufacturing costs by reengineering our products, utilizing alternative materials and enhancing our logistics strategies.
We are introducing higher-value products with new printing technologies, textured finishes and polished services to provide alternatives to premium imported tile.
We are growing our studio direct program that focuses on high-end remodeling and exterior collections that sell-through outdoor specialists and home centers.
Our quartz countertop sales continue to grow substantially as our production recovered during the period.
Our countertop mix is improving as sales of our higher-end visuals grow at a faster rate.
Our Mexican and Brazilian ceramic businesses are growing as we increased prices to offset inflation in both countries.
We are refining our product offering, improving our efficiencies and increasing our output.
We have expanded our participation in residential projects and commercial sales.
We are increasing the number of retailers that exclusively sell our products.
We are investing in new manufacturing assets in both countries to expand our production and enhance our product offering.
Sales in our European ceramic business remained strong as vacation schedules return to normal.
Increases in price, mix and productivity enhanced our results, though they were more than offset by rising inflation.
Our new products with enhanced visuals, unique shapes and large slabs increased our average selling price and improved our mix.
We are upgrading production lines to further enhance our styling and improve our efficiencies.
In the period, natural gas and electricity prices in Europe rose to unprecedented levels due to anticipated shortages.
Our margins will be negatively impacted until our prices align with energy cost in the future.
Sales and margins increased in our Russian ceramic business as enhanced mix and increased prices offset higher inflation.
Lower inventories and capacity limitations impacted our sales volume in the period, and we will continue to manage our mix until new capacity is operational.
Due to an equipment delay, our production expansion will not be ready until the third quarter of next year.
Our sanitary ware sales are growing significantly as we expand production and operate -- and our operations.
Throughout 2021, Mohawk has delivered exceptional results with higher sales growth, margin expansion and robust cash generation.
For the fourth quarter, we anticipate that industry seasonality will be more typical unlike last year when demand was unusually high.
In the period, we'll run our operations at high levels to support our sales, improve our service and increase our inventory.
Our sales in some categories are being limited by our manufacturing capacities, and we're increasing investments to expand the production of these growing categories.
We are continuing to implement additional price increases and manage staffing, supply and transportation constraints across the business.
We're maintaining aggressive cost management, leveraging technology and enhancing our strategies across the enterprise.
In Ceramic Europe, record gas prices are increasing the net cost by approximately $25 million in the fourth quarter, and it will take some time for the industry to adjust to the higher cost.
In addition, our fourth quarter calendar has 6% fewer days than the prior year.
Given these factors, we anticipate our fourth quarter adjusted earnings per share to be $2.80 to $2.90, excluding any restructuring charges.
Despite temporary challenges from inflation and material availability, our long-term outlook remains optimistic with new home construction and residential remodeling projected to remain robust, and the commercial sector improving as businesses invest and grow.
Next year, our sales should grow with capacity expansions and new innovative product introductions.
Our strategies to optimize our results continue to evolve with the economic and supply chain conditions.
Our balance sheet is the strongest in history and it supports increased internal investments and strategic acquisitions. | compname posts q3 adj earnings per share $3.26.
q3 earnings per share $3.26 excluding items.
q3 earnings per share $2.87.
q3 sales $2.6 billion versus refinitiv ibes estimate of $2.49 billion.
sees q4 earnings per share $2.75 to $2.87.
audit committee completed internal investigation into allegations of wrong doing.
cooperating fully with the ongoing governmental investigations.
audit committee concluded the allegations are without merit. | 0 |
These types of statements are subject to various known and unknown risks, uncertainties, assumptions, and other factors including those described in MFA's annual report on Form 10-K for the year ended December 31, 2020, and other reports that it may file from time to time with the Securities and Exchange Commission.
As we sit here today to talk about the first quarter of 2021, it's impossible not to recall where we were a year ago, and the difference between the two time periods could not be more stark.
A tenacious defensive stance is now a spirited and determined offense.
Today, we are reporting strong financial results, continued execution of a strategic plan that we implemented early last fall and a new exciting initiative that we announced today.
With vaccinations becoming more prevalent and the gradual easing of restrictions beginning to occur, we have reason to be optimistic about an eventual return to some semblance of ordinary.
While it is undoubtedly months away, we are cherishing brief snippets of limited normalcy, and it's great to see our colleagues at work in person rather than on video calls as we have for the last year.
A strong economic outlook, additional fiscal stimulus, and the expectation of more government spending pushed loan rates higher in the first quarter of 2021.
10-year treasuries backed up 83 basis points to 1.74 at the end of Q1, which by the way, is where they were in late January of 2020, and the curve steepened with two 10s widening by about 80 basis points to 158 basis points at March 31.
Short rates remain firmly anchored at very low levels, with twos only 4 basis points wider during the quarter.
Interestingly, although 10-year rates at 170 are back to levels seen in late 2019 and early 2020, two-year rates in the low to mid-teens have barely changed in the last year.
But twos were at 160 back in late 2019.
So clearly, the market anticipates some inflationary pressure in the future but sees fed policy as anchoring short rates at or around current levels for 2021 and 2022.
Agency origination crowded out nonconforming production for much of 2020.
But even with a modest increase in agency eligible mortgage rates, we've seen an increase in production from non-QM and business purpose loans in 2021.
With short rates at particularly low levels and credit spreads tight, suffice to say there are no cheap assets out there.
However, these same market conditions have pushed yields on issued securities to very low levels.
So while it is a difficult period for assets, it's an extremely attractive one for liabilities.
And MFA has taken advantage of this opportunity to lock in low cost, term, nonrecourse debt, which will substantially reduce interest expense in the future.
In addition, a strong housing market, together with our ability to actively manage residential mortgage credit assets has also been reflected in our financial results as we achieved better-than-expected results on credit-sensitive assets, resulting in reversals of prior credit reserves and sales of OREO properties at attractive levels.
Please turn to Page 4.
We reported GAAP earnings of $0.17 per share in the first quarter.
These results were driven by continued price appreciation of loans held at fair value and by further improvement in credit leading to credit loss reserve reversals.
GAAP book value was $4.63, up 2% from December 31s, and economic book value was $5.09, up 3.5% from December 31st.
GAAP economic return for the quarter was 3.6%, but economic book value economic return was up 5% for the quarter.
We repurchased 10.8 million common shares at an average purchase price of $4.14 or 80% of economic book value from March 1st through April 30th.
Our leverage declined slightly over the quarter to 1.6:1, and we paid a $0.075 dividend to shareholders on April 30.
Please turn to Page 5.
Our efforts to lower interest expenses through securitizations had visible impact on our first-quarter earnings as interest expense declined by 27% from the fourth quarter of 2020.
And the securitizations executed in Q1 had limited impact on the full quarter because they were closed in early February and late March.
Net interest income for the first quarter increased by $4 million versus the previous quarter and by $13 million versus Q3 of 2020 after adjusting for a large interest income contribution of $8 million from the payoff of a single non-agency bond with a very low amortized cost during the first quarter.
Please turn to Page 6.
Again, continuing the theme of aggressively taking advantage of available market opportunities, we have executed three additional securitizations on nearly $1 billion of UPB at attractive levels.
As you can see on this page, AAA yields on bonds sold on the INB-1 deal was 83 basis points and 112 basis points on the non-QM One deal with the blended cost of debt for both deals in the low 1s.
The NPL deal that closed in March replaces securitizations sold in 2018 at a blended cost of debt that's over 150 basis points cheaper than that -- they replaced.
Please turn to Page 7.
Robust increases in housing prices and strengthening credit fundamentals provide obvious tailwinds for MFA's mortgage credit exposure.
Home price increases in the last year are the largest, in some cases, in 20 years, and housing supply is at extremely low levels.
So this trend is not likely to abate soon.
We liquidated 177 OREO properties in the first quarter, generating $50 million in proceeds and $2.2 million in gains.
These strong housing fundamentals also support the performance of our nonperforming loans as we see more full payoffs and better prices on liquidated properties.
Finally, for borrowers, still negatively impacted by COVID, we can offer modifications and/or repayment plans to allow them to stay in their homes, restore their status to current, and keep the equity in their homes.
Please turn to Page 8.
Under our share repurchase program, we instituted a 10b5-1 plan in March that permits share repurchases at any time.
Previous to instituting a 10b5-1 plan, we were permitted to purchase shares only during open window periods.
And because our 10-K is filed later in the quarter than our 10-Qs, our open window period after our fourth quarter earnings call would have been very short.
And again, from early March through April 30th, we repurchased 10.8 million shares at an average price of $4.14.
Please turn to Page 9.
We illustrate our investment portfolio and summarize our asset-backed financing on this slide.
The investment portfolio has not changed materially since December 31.
We did purchase $253 million of loans in the first quarter.
And just to review, loans held at carrying value on our balance sheet are represented in three slices of this pie chart.
The purple section PCD or purchased credit deteriorated loans that's accounting speak for reperforming loans and other loans included in this purple slice are seasoned performing loans.
The gray slice business purpose loans, which are fixed and flip, and single-family rental loans and the red section, which is Non-QM loans.
On the financing side, you can see that 68% of our asset-based financing is non mark-to-market with the Non-QM securitization that we closed in April, it's now over 70%.
Please turn to Page 10.
This transaction will significantly enhance our ability to deploy capital in the business purpose space, and we believe that our capital base will fortify Lima One's already strong market presence.
We expect that this transaction will be accretive to MFA's earnings by $0.08 to $0.12 per year.
MFA currently owns a 43% equity stake in Lima One, and we have purchased over $1 billion of business purpose loans from Lima One since 2017.
We acquired our initial strategic minority ownership interest in Lima One in 2018, and our partnership with Lima One has grown over the years since.
This acquisition includes the Lima One operating platform as well as their $1 billion servicing book.
In reviewing our results this quarter, I guess I could say what a difference a year makes, but this simply doesn't do it justice.
A year ago, I had the unpleasant task of talking through a myriad of negative numbers on this slide, including realized and unrealized losses on securities and loans, impairment charges, CECL reserves, and other large and unusual items.
This quarter I am very pleased to be able to provide a much more positive report.
Much of the noise reported in our net income over the past several quarters, resulting from volatile changes in asset prices and cash flow estimates, driven by uncertainty related to the longer-term effects of COVID-19 have dissipated and hopefully are largely behind us.
While not fully reflecting MFA's normalized earnings for the short to medium term, I believe that Q1 results do provide a clearer picture of what the key drivers of our earnings will be for the next several quarters.
Specifically, our earnings will be driven by net interest income and gains on loans held at fair value.
This is -- there is also some potential for further adjustments to decrease CECL reserves if unemployment rates and home prices stabilize or continue to improve.
But absent any significant future macroeconomic shocks in the near term, I would anticipate that CECL reserve changes going forward will be primarily driven by net increases or decreases in our portfolio of carrying value loans.
Additionally, in anticipation of the successful completion of the acquisition of Lima One, starting in Q2, we plan to elect fair value accounting on all future whole loan purchases.
This should facilitate appropriate reporting of the economics of Lima One origination and servicing activities while still properly capturing the performance of loans originated and held on MFA's balance sheet.
Note that this accounting will only apply prospectively.
We are not able to retrospectively apply fair value accounting to loans that we currently report at carrying value.
So for the intermediate term until the majority of this portfolio of loans runs off, we expect to continue to report both GAAP and economic book value measures.
Turning now to the detail of our Q1 2021 results.
Net income to common shareholders was $77.3 million or $0.17 per share.
The key items impacting our results are as follows: net interest income of $31.8 million was $12.4 million higher sequentially.
This included approximately $8 million of accretion on a non-agency bond that we hold a significant discount par that was redeemed during the quarter.
It should be noted that gains of this nature are expected to occur somewhat less frequently going forward as our remaining portfolio of securities that we hold at a discount to par continues to run off.
One other point to highlight is the impact of the successful execution of securitization and other debt refinancing activity on our cost of financing.
As Craig noted, interest expense this quarter fell 27% sequentially and our overall cost of funds fell to 2.92% from 3.63% in Q4 2020.
We reduced our overall CECL allowance on our carrying value loans to $63.2 million, reflecting lower estimates of future unemployment and higher home price appreciation in our credit loss modeling as well as lower loan balances.
This reversal and other net adjustments to our CECL reserves positively impacted net income for the quarter by $22.8 million.
After the initial significant increase in CECL reserves taken in Q1 2020, when uncertainty related to COVID-19 economic impacts were at their highest, we have reduced our CECL reserves by more than $80 million in the subsequent four quarters.
Actual charge-off experience continues to remain very modest, with approximately $1.2 million of net charge-offs taken in the first quarter.
Once again, our loans held at fair value performed strongly this quarter.
Net gains of $49.8 million were recorded.
This overall gain is unchanged from the prior quarter.
And its components, which include $32.1 million of market value increases and $17.7 million of interest payments, liquidation gains and other cash income were also essentially unchanged quarter over quarter.
Finally, our operating and other expenses were $22.5 million for the quarter.
This is much closer to our expected normal run rate, but was elevated primarily due to costs related to replacing warehouse financing with securitization.
I will point out that following the confirmation of the Lima One acquisition, our overall G&A cost as a ratio of our stockholders' equity will rise.
We will endeavor to provide some additional color on the potential impacts on a future earnings call.
Turning to Page 12.
Housing has performed exceedingly well throughout the pandemic, and prices have accelerated in recent months.
The Zillow median home value was up 10.6% in March from a year ago.
Demographic trends, historically low rates and a severe lack of supply have all contributed to the rising prices.
The unemployment rate continues to recover from a peak of almost 15% down to 6% as the economy reopens.
With the vaccination rollout under way, the pace of reopening should pick up in the coming months, lowering the unemployment rate further.
All these factors, combined with monetary and fiscal support, have played a part in keeping mortgage credit performance strong and bode well for continued credit performance.
Turning to Page 13.
Non-QM origination volume increased over the quarter as rates offered to borrowers have been dropping.
We purchased over $200 million over the first quarter, which is more than double our acquisitions from the prior quarter.
Prepayment speeds remained elevated over the quarter as mortgage rates for Non-QM loans have come down in recent months.
The three-month average CPR for the portfolio remains around 30%.
We closed on another minority investment in an originator over the quarter, raising the number of Non-QM originators we have invested into three.
We believe the strategy of aligning our interest with select origination partners will allow us to effectively grow our portfolio over time while ensuring loan quality.
We executed on an additional securitization at the beginning of April, bringing a total amount of collateral securitized to approximately $1.75 billion.
These securitizations have lowered our financing costs and at the same time have provided additional stability to our borrowings.
Securitization, combined with non mark-to-market term facility has resulted in over 80% of our non-QM portfolio financed with non mark-to-market leverage.
We expect to continue to be a programmatic issuer of securitizations as it is currently the most efficient form of financing for our portfolio.
Turning to Page 14.
The significant percentage of our borrowers in the non-QM portfolio have been impacted by the pandemic.
Many of our borrowers are owners of small businesses, that were affected by shutdowns across the nation.
We instituted a deferral program at the onset of the pandemic in an effort to help our borrowers manage through the crisis.
Through our servicers, we granted almost 32% of the portfolio of temporary payment relief, which we believe helped put our borrowers in a better position for long-term payment performance.
Subsequent to June, we reverted to a forbearance program instead of a deferral as the economy opened up.
The forbearance program instituted are largely now determined by state guidelines.
For clarity, a deferral program tax on the payments missed to the maturity of the loan as a balloon payment.
Forbearance requires the payments missed to be repaid at the conclusion of the forbearance period.
If those amounts are unable to be paid in one-month sum, we allow for the borrower to spread the amounts over an extended period of time.
Over the first quarter, we saw a stable 60-plus delinquency rate as compared to the fourth quarter of 7.9%.
In addition, over 25% of those delinquent loans made a payment in March.
Many delinquent borrowers are in repayment plans, which will cause them to cure their delinquency status over the next six to 12 months.
As the economy -- as the economic recovery continues, the portfolio's credit performance should continue to improve.
Our strategy of targeting lower LTV loans should mitigate losses under a scenario with elevated delinquencies.
In many cases, borrowers, which no longer have the ability to afford their debt service, will sell their home in order to get the return of their equity.
Turning to Page 15.
Our RPL portfolio of $1 billion has been impacted by the pandemic but continues to perform well.
80% of our portfolio remains less than 60 days delinquent.
And although the percentage of the portfolio is 60 days delinquent and status is 20%, a quarter of those borrowers continue to make payments.
Prepaid fees in the first quarter continued to rise to a one-month CPR of 20 as mortgage rates continue to be historically low and more borrowers gain equity with the increase in home prices.
And while 30% of our RPL borrowers were impacted by COVID, we have worked with our servicers to provide assistance to borrowers and have seen improvement in delinquency levels over the quarter.
Turning to Page 16.
Our asset management team continues to drive performance of our NPL portfolio.
The team has worked in concert with our servicing partners to maximize outcomes on our portfolio.
This slide shows the outcomes for loans that were purchased prior to the year ended 2019, therefore, owned for more than one year.
37% of loans that were delinquent at purchase are now either performing or paid in full.
46% are either liquidated or REO to be liquidated.
Our REO sale -- our REO properties have continued at an accelerated pace at advantageous prices, selling 52% more properties over the last 12 months as compared to the year prior, and 17% are still on nonperforming status.
Modifications have been effective as almost three-fourths are either performing or is paid in full.
And we are pleased with these results as they continue to outperform our assumptions at the time of purchase.
Turning to Page 17.
First of all, I would like to say that we are very excited about the acquisition of Lima One.
The acquisition enhances our position as a long-term capital provider on the business purpose lending space, which we believe continues to benefit from positive fundamental and structural trends and offers one of the most attractive options to deploy capital in the residential mortgage credit space.
We have worked closely with Lima One since 2017, first as a loan buyer and later as an equity investor, and have seen firsthand the quality of their loan origination and servicing operations.
From our extensive experience in the BPL space, we know that Lima is one of the best operators in the space and look forward to collaborate with Lima's talented management team.
Lima One is a leading nation and originator of business purpose loans with a strong brand recognition in the BPL borrower community with over 50% of loan origination coming from repeat borrowers.
Their product offerings are diverse, serving the needs of short and long-term strategies within the BPL space.
They have an established track record of originating fix and flip and new construction loans, longer-term rental loans, and small balance multifamily value-add and bridge loans.
Lima has originated over $3 billion since inception and has shown that they can reliably originate over $1 billion annually.
We believe that by combining MFA's firm capital and capital markets expertise with Lima's capabilities, we can create a differentiated platform capable of providing best-in-class financing options to investors with a clear path to grow well beyond $1 billion in annual volume.
This acquisition will provide MFA with a reliable access to high-quality, high-yielding assets that are difficult to source in the marketplace.
We believe based on current market conditions, that loans originated by Lima and retained on MFA's balance sheet will provide mid-teens ROE with appropriate leverage, either in the form of warehouse financing or MFA sponsored securitizations.
Now we'll turn to portfolio activities in the quarter.
We continued to experience large principal pay downs in our fix and flip portfolio in the first quarter.
The strong housing market with home prices rising more than 10% annually has allowed many of our borrowers to successfully complete their projects and sell quickly into a strong market.
This combined with the seasoned nature of our portfolio, currently at a weighted average loan rates of 20 months, led to us receiving $144 million of principal payments in the quarter.
We expect this trend to continue in 2021.
MFA's fix and flip portfolio declined $117 million to $464 million UPB at the end of the first quarter.
Principal paydowns were $144 million, which is equivalent to a quarterly pay down rate of 69 CPR on an annualized basis.
We advanced about $12 million of rehab draws and converted $5 million to REO.
We purchased $20 million UPB of fix and flip loans in the first quarter.
Purchase activity has picked up in the second quarter as we have committed to acquire over $30 million so far in the second quarter and expect purchase volume to pick up meaningfully with the acquisition of Lima One.
The average yield on the portfolio was 4.93%, and all of our fix and flip financing is non mark-to-market debt with the remaining term of 15 months.
60-plus day delinquency declined $13 million to $149 million at the end of the first quarter.
And so far, in the second quarter, we continue to see positive delinquency trends.
Fix and flip loan loss reserves continued to trend down in the first quarter, declining by $4.7 million, primarily due to improved economic expectations and the strong housing market.
Turning to Page 18.
Seriously delinquent fix and flip loans decreased $13 million in the quarter to $149 million at the end of the first quarter.
In the quarter, we saw $18 million of loans payoff in full, $5 million cured to current or 30-day delinquent pay status, $5 million converted to REO while $15 million became new 60-plus delinquent.
As mentioned previously, we've continued to see positive delinquency spends in the second quarter.
Approximately half of the seriously delinquent loans are either completed projects or bridge loans where limited or no work is expected to be done, meaning these properties should be in generally salable conditions.
In addition, approximately 13% of the seriously delinquent loans are already listed for sale, potentially shortening with time until resolution.
When loans pay off in full from serious delinquency, we often collect default interest, extension fees and other fees of payoff.
For loans, where there is a meaningful equity in the property, these can add up.
Since inception, we've collected approximately $3.7 million in these types of fees across our fix and flip portfolio.
The housing market continues to be extremely strong with record low mortgage rates and low levels of inventories supporting annual home price appreciation in excess of 10%.
In addition, we continue to see unemployment declining and overall economic activity improving across the country.
We believe that the efforts of our experienced asset management team, combined with the recent strong economic trends, can lead to acceptable outcomes on our delinquent loans.
Turning to Page 19.
Our single-family rental loan portfolio continues to exhibit very strong performance.
Due to strong prepayment section and solid credit profile, the portfolio yield has remained steady in the mid-5% range post COVID and was 5.61% in the first quarter.
That number does not include prepayment penalties, which are a feature of almost all of our rental loans and are recorded in other income.
And including those, the single-family rental portfolio yield was 6.33% in the first quarter.
After temporarily increasing the fourth-quarter prepayments trended back down to the historical low mid teens range with the first quarter three-month prepayment rate at 12 CPR.
60-plus day delinquencies were relatively unchanged in the quarter in the mid- to high 5% area.
We acquired $20 million of rental loans in the first quarter.
Second quarter is off to a strong start with us committing to purchase over $35 million so far in the second quarter.
We expect purchase activity to continue to accelerate with the acquisition of Lima One.
We closed our first securitization, consisting solely of business purpose rental loans in the first quarter.
Approximately $218 million for loans were securitized.
We sold approximately 91% of the bonds at a weighted average coupon of 106 basis points.
This transaction lowered the funding rate of the underlying assets by over 150 basis points and increased the percentage of SFR financing that's non mark-to-market to 75% at the end of the first quarter.
Lima One originated rental loans that represented about two-thirds of the collateral in our inaugural rental securitization.
We believe that MFA's experience in the capital markets can provide meaningful funding advantages to Lima's origination activities and will significantly improve Lima's competitiveness in the BPL space.
We are pleased with the results of the first quarter of 2021 and even more excited about the future at MFA.
We are continuing to execute our strategic plan to lower and trim out borrowing costs, and we're beginning to see the results of this activity in our income statement.
The strength of the housing industry has obvious positive implications for our mortgage credit investments.
We have repurchased nearly 25 million shares of our common stock at levels that are accretive to book value and earnings.
And today's announcement of our acquisition of Lima One is an important initiative that will enhance our ability to deploy future capital in the BPL sector and grow our future earnings power. | compname announces q1 earnings per share of $0.17.
q1 gaap earnings per share $0.17.
gaap book value at march 31, 2021 was $4.63 per common share.
qtrly net interest income $31.8 million versus $61.7 million. | 1 |
With me on the call today is Jeff Powell, our President and Chief Executive Officer.
Before we begin, let me read our Safe Harbor statement.
These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles.
Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session.
Since our last earnings call, the world has continued to be impacted by the COVID pandemic, which has led to an economic crisis in nearly every region of the world.
Most countries continue to deal with this pandemic and depressed economic activity.
I'll begin with a few comments about our operations and how the pandemic has continued to affect our business.
Like most other industrial companies, we have been affected in many ways by the pandemic.
The effect of COVID made the second quarter one of the more challenging quarters in the history of our company.
Our global workforce has adapted to a new way of work and performed exceptionally well under extremely challenging circumstances.
I'm very proud of our talented and dedicated employees around the world for the work they've done and continue to do to serve our customers and each other.
We are fully operational at all of our manufacturing facilities and continue to work under enhanced safety protocols designed to safeguard our workplaces and protect the health and safety of our employees.
These precautionary measures have served us well and allowed us to continue operating in every region of the world.
While some regions around the world are starting to reopen, it will take some time to see this increased economic activity reflected in new orders.
The early signs of the recovery are still fragile and could be appended by new surges in the virus.
Having said that, we believe we are well positioned to navigate through the pandemic and uncertainties in the economic environment.
Our balance sheet remains healthy and our liquidity position is solid.
Robust cash flows have always been a strength of Kadant, and we believe this will continue as economies begin to reopen around the world.
Performance in the second quarter was impacted by our customers' request to delay projects and postpone service work and curtail production.
Our cash flow from operations and our free cash flow were both strong.
Cash flow of $22 million was down 3% compared to Q2 of 2019, while free cash flow increased 2% to $21 million.
Our parts and consumables revenue made up 64% of total revenue comparable to the period -- to the prior year period.
This relative stability in our parts and consumables business is reflected in our strong cash flows and our focus on growing this area continues to be a key strategic initiative.
Overall, most of our customers are operating and adjusting to the new level of demand in the current environment.
After the initial surge in packaging and tissue demand early in the second quarter, these markets have returned to levels more indicative of the general economic environment.
The one sector that seems to be performing better than expected is wood, and specifically lumber.
I'll provide additional comments on that later in my remarks.
Also during the second quarter, we put into place various tough contingent measures and implemented selective reductions in our workforce via early retirement offers, furloughs and lay-offs at certain divisions.
While never something we look forward to, these adjustments were necessary to ensure our staffing levels reflect to the business environment.
We continue to assess the situation at each of our businesses and take actions where appropriate.
Before leaving this slide, I wanted to comment on our recent acquisition of Cogent Industrial Technologies announced yesterday.
This acquisition is an exciting addition to the Kadant family.
We believe this new platform greatly expands our ability to deliver automation and plantwide technology solutions to process industries.
It also allows us to play a bigger role in our customers' digital ecosystem by offering integration solutions across multiple processes, products and systems for enhanced productivity and increased operational agility.
Next, I'd like to review our performance in our three operating segments.
As shown on Slide 7, our Flow Control segment faced a challenging market environment with industrial production down across most sectors.
This was especially evident in non-critical infrastructure industries where manufacturers were forced to shut down operations, and those that did continue to operate, were doing so at much lower operating rates.
Capital project activity at most industrial companies was particularly impacted during the quarter.
While demand for our aftermarket parts was solid and made up 72% of total revenue in the quarter, customer delays in capital project execution, postponed service work and the inability of our employees to engage face-to-face with customers and prospects due to the pandemic negatively affected both our bookings and revenue performance.
Looking ahead to the third quarter, we expect Q3 to show some improvement, while we expect capital project orders to remain subdued.
Our Industrial Processing segment was also impacted by the global lockdown in Q2.
However, we are seeing encouraging signs in some of our market sectors, and particularly, in wood products.
Revenue in this segment declined 14% to $66 million year-over-year, but was up slightly compared to Q1 of this year.
This decline was largely due to a significant slowdown in capital projects, following two exceptional years of capital project activity.
Parts and consumables revenue, on the other hand, was solid and made up 62% of total revenue in the second quarter.
Encouragingly, U.S. housing starts in June were up 17% sequentially to $1.2 million, which followed a boost in May housing starts, up 14% compared to April.
The increase in housing construction coupled with homeowners forced to remain at home during the widespread shutdowns in April and May led to strong demand for lumber and other wood products.
As a result, lumber of prices for July delivery increased 8% above pre-pandemic high and demand is providing support for higher price levels.
This in turn has benefited our customers producing wood products.
We are experiencing an increase in capital project activity and expect capital bookings to strengthen as the second half of 2020 unfolds.
Turning now to our Material Handling segment.
We had solid results in the second quarter, due in part, to a healthy backlog.
This operating segment experienced depressed levels of bookings due to most customers being unable to receive visitors and others being shut down due to government-mandated closures associated with the pandemic.
Demand for our fiber-based products was in bright spot in the second quarter as homeowners used more lawn and garden products.
Adjusted EBITDA increased 8% to $6 million and our adjusted EBITDA margin was nearly 18% in the second quarter as a result of solid execution and product mix.
As in our other segments, we are seeing increasing capital project activity.
Looking beyond 2020, we continue to believe this segment has upside potential in its aggregates in market if there is increased infrastructure spending.
While the last several months have proven to be challenging with many unknowns, we remain confident in our ability to manage through these unprecedented times.
As we look ahead to the second half of 2020, the uncertainty in evolving environment limit our visibility to accurately forecast the timing of orders and the speed of economic recovery.
Therefore, we will not be providing guidance at this time.
We expect Q3 to be the weakest quarter of the year and are looking for some improvement in Q4 as we navigate through what we hope is the bottom of this pandemic-induced recession.
I'd like to pass the call over to Mike now for a review of our Q2 financial performance.
I'll start with some key financial metrics from our second quarter.
Slide 12 is a summary of some of the key financial metrics that I'll comment on over the next few slides.
Our GAAP diluted earnings per share was $1 in the second quarter, down 30% compared to $1.42 in the second quarter of 2019.
Our GAAP diluted earnings per share in the second quarter includes $0.03 of restructuring costs and $0.03 of acquisition costs associated with our acquisition of Cogent, which was completed in June.
In addition, our second quarter results include pre-tax income of $2.1 million or $0.14 net of tax attributable to government-sponsored employee retention programs related to the pandemic.
These programs were received by many of our subsidiaries around the world and enabled us to retain employees as we work our way back toward normal operating conditions.
Consolidated gross margins were 43.5% in the second quarter of 2020, up 150 basis points compared to 42% in the second quarter of 2019.
Approximately 80 basis points of the increase was due to the receipt of government-sponsored employee retention programs related to the pandemic and the remainder was due to the negative effect from the amortization of acquired profit in inventory that was included in the results for the second quarter of 2019.
Parts and consumables revenue, as a percentage of revenue, remained fairly consistent with the prior year at 64% in the second quarter of 2020 compared to 63% last year.
SG&A expenses were $45.1 million or 29.5% of revenue in the second quarter of 2020 compared to $48.5 million or 27.4% of revenue in the second quarter of 2019.
The $3.4 million decrease in SG&A expense included $1.1 million decrease from a favorable foreign currency translation effect and a $0.8 million benefit from government-sponsored employee retention programs.
The remainder of the decrease was essentially due to reduced travel-related costs.
Adjusted EBITDA decreased to $26.6 million or 17.4% of revenue compared to $32.7 million or 18.5% of revenue in the second quarter 2019 due to declines in profitability at our Flow Control segment, and to a lesser extent, our Industrial Processing segment.
Operating cash flows were $22 million in the second quarter 2020, which included a modest positive impact of $0.3 million from working capital compared to operating cash flows of $22.6 million in the second quarter of 2019.
We had several notable non-operating uses of cash in the second quarter of 2020.
We paid down debt by $13.8 million, paid $6.8 million for the acquisition of Cogent, paid a $2.8 million dividend on our common stock, and paid $0.9 million for capital expenditures.
Free cash flow increased significantly on a sequential basis to $21.1 million compared to $3.5 million in the first quarter of 2020 as our first quarter typically is the weakest of the year.
In addition, the second quarter of 2020 free cash flow was $0.5 million higher than the second quarter of 2019.
Let me turn next to our earnings per share results for the quarter.
In the second quarter of 2020, GAAP diluted earnings per share was $1 and our adjusted diluted earnings per share was $1.06.
The $0.06 difference was due to $0.03 of acquisition expenses and $0.03 of restructuring costs.
In comparison, the second quarter of 2019, both our GAAP and adjusted duty diluted earnings per share was $1.42.
We had $0.10 of acquisition-related expenses, which were fully offset by a discrete tax benefit.
As shown in the chart, the decrease of $0.36 in adjusted diluted earnings per share in the second quarter 2020 compared to the second quarter of 2019 consists of the following; $0.71 due to lower revenues and $0.08 due to a higher effective tax rate.
These decreases were partially offset by $0.24 due to lower operating costs, $0.11 due to lower interest expense, and $0.08 due to higher gross margin percentages.
Collectively included in all the categories I just mentioned, was an unfavorable foreign currency translation effect of $0.05 in the second quarter of 2020 compared to the second quarter of last year due to the strengthening of the U.S. dollar.
Looking at our liquidity metrics on Slide 15.
Our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, was 128 at the end of the second quarter of 2020 compared to 117 at the end of the second quarter of 2019.
This increase was driven by higher number of days in inventory.
Working capital as a percentage of revenue was 14.8% in the second quarter of 2020 compared to 14.2% in the first quarter of 2020 and 15.4% in the second quarter of 2019.
Our net debt, that is debt less cash, decreased $11.1 million or 5% to $222 million at the end of the second quarter of 2020 compared to $233 million at the end of the first quarter of 2020.
We repaid $13.8 million of debt in the second quarter and have repaid $16.4 million of debt in the first six months of 2020.
After quarter end, we repaid our real estate loan, which had a remaining principal balance of $18.9 million by borrowing from our revolving credit facility.
This effectively swapped debt with an annual interest rate of 4.45% under the real estate loan for a revolver debt currently at 1.68%, which at current interest rates, would reduce interest expense by over $500,000 on an annual basis.
Our leverage ratio, calculated in accordance with our credit facility, decreased to 2.01 at the end of the second quarter 2020 compared to 2.03 at the end of 2019.
After repaying the real estate loan in July, we currently have over $130 million of borrowing capacity available under our revolving credit facility, which matures in December of 2023, and have access to an additional $150 million of uncommitted borrowing capacity under this agreement.
We also have access to $115 million of uncommitted borrowing capacity through the issuance of senior promissory notes under our note purchase agreement.
We do not have any mandatory principal payments on debt facilities until 2023.
We believe that our cash on hand, operating cash flows and access to available credit provide us with sufficient liquidity to meet our capital requirements and continue to navigate through this challenging environment.
Regarding guidance, the current environment has certainly made forecasting quite difficult.
While we have noticed an increase in inquiries related to capital projects, we have also experienced and continue to experience delays in anticipated bookings due to a reduction in capital expenditures and project delays by our customers.
In addition, we expect continued customer-requested delays related to certain capital projects in our backlog.
Given the current uncertainty, we will not be providing guidance for the third quarter or the full year 2020.
We will reevaluate providing guidance next quarter.
While we are not providing guidance, I would like to provide a few directional comments on our outlook for the year.
We anticipate the third quarter will likely be our weakest quarter of the year.
And as a result, sequential revenue could decrease approximately 5% to 9%.
Our revenue for the year could decrease roughly 11% to 14% compared to 2019.
Few other directional notes.
We anticipate that we will remain eligible for some government-sponsored employee retention programs in various locations.
However, as the year progresses, we expect these programs will diminish as our businesses return to more traditional operating levels.
During the second quarter, we recognized $0.5 million in restructuring costs related to reduction of employees across our businesses.
We expect these restructuring activities will reduce our cost structure by approximately $3.7 million annually.
We may incur additional restructuring costs in future periods as we continue to monitor the impact of the pandemic and the resulting global economic downturn on our businesses.
On a positive note, we now expect net interest expense for 2020 to be under $8 million compared to our last earnings call estimate of $9 million to $9.5 million.
Given the lack of visibility into what the future holds across our end markets and geographies, it's difficult to provide firm guidance at the moment.
However, we've given these directional comments to help provide insight into our current business environment as well as our belief that our healthy balance sheet, strong cash flows and recurring revenue streams, will help our business navigate through the current business cycle.
That concludes my review of the financials. | q4 revenue rose 1.9 percent to $3.6 billion.
jacobs engineering - expect double-digit adjusted ebitda and adjusted earnings per share growth in fiscal year 2022 and beyond.
qtrly earnings per share from continuing operations was $0.34.
expects fiscal 2022 adjusted ebitda of $1,370 million to $1,450 million and adjusted earnings per share of $6.85 to $7.45. | 0 |
They can be accessed at ir.
Following our prepared comments, we will open up the call for our 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, 2020.
The extent of these impacts, including the duration, scope, and severity, is highly uncertain and cannot be predicted with confidence at this time.
We will also be referencing non-GAAP financial measures during the call.
I'm going to start with an overview and update on the ransomware attack that we reported on Monday.
We're following strict protocols laid out by industry-standard incident response directives.
Because of this, we're being careful not to share certain details around the incident at this time.
However, following is information that I can share with you today.
On Saturday, January 23, our systems identified what we've quickly determined was a ransomware attack.
We immediately implemented our business continuity processes and initiated our response containment protocols.
These processes have been supported by cybersecurity experts, and these include Dell SecureWorks, a global instant response leader.
These actions included taking preventative measures, including shutting down certain systems out of an abundance of caution.
We've been in active communication with law enforcement.
While our incident response is still ongoing, we currently have no evidence that our customers' or teammates' data has been compromised.
In addition to our containment, recovery, and remediation efforts, we've taken steps to supplement the existing security monitoring, scanning, and antivirus protocols already in place.
We're committed to completing a full forensics investigation, and we're taking all appropriate actions in response to our findings.
WestRock maintains a broad set of insurance coverages that provide protection for the business operations and assets of the company.
Throughout this entire incident, we've been in constant communication with our customers to share with them the impact on their business.
We've been very appreciative of their understanding and support as we work through this challenging situation.
Our teammates and third-party experts have literally been working day and night to respond to this attack and safely restore our systems.
Our response is varied by operating the location.
Most of our mills and converting locations have continued to produce and deliver.
In locations where we've had systems issues, we have been and are using alternative and, in many cases, manual methods to process and ship orders, and this has limited our shipments.
The full restoration of the administrative processes of our business will take time, and we're implementing workarounds, including manual processes.
We're doing all that we can throughout our company to respond to our customers' needs.
We're only five days into this, and we're in the middle of our response.
What I've shared with you represents the information that we can share at this point given where we're at in the stage of our response.
We'll provide additional detail on the impact of the attack at the appropriate time.
Now, let's turn to the quarter.
WestRock remains very well-positioned for long-term success, as demonstrated by our strong results in the quarter.
Our markets continue to be shaped by changing customer habits and preferences that are driving increased demand for sustainable fiber-based packaging.
These trends fit well with our strategy of increasing our participation in high value-added packaging solutions and away from sales of lower-margin commodity paper products.
Our overall packaging volumes increased by 5% in the first fiscal quarter, including e-commerce volume growth of 23% on a per-day basis.
North American corrugated box shipments increased more than 11% per day in December and over 8% for the quarter.
Consumer shipments of packaging were also very strong, up 2.4% year over year.
We executed our strategic projects during the quarter, despite immense challenges that the pandemic has presented for large construction projects.
Our teams that are completing the projects at our Florence and Tres Barras mills have made tremendous progress.
We successfully started up our 710,000-ton paper machine at Florence that has replaced three older obsolete paper machines.
We successfully completed a major outage at our Tres Barras mill during the quarter, and this sets us up to complete our major expansion project in the spring.
Our company generates strong free cash flow over the long term.
This quarter's cash flow was exceptional.
We generated $562 million of adjusted free cash flow in the quarter.
We used the vast majority of this cash flow to reduce our net funded debt by $489 million.
Our net leverage ratio declined sequentially from 3.03 times to 2.86 times.
We expect that fiscal '21 will be the sixth consecutive year of strong free cash flow.
We have increasing line of sight toward returning to our targeted leverage ratio of 2.25 to 2.5 times.
All of this performance is being delivered in very challenging circumstances by the incredibly resilient WestRock team.
We recognized each one of our teammates in the quarter with a one-time payment that accumulated to a total of $22 million.
Sales of $4.4 billion, adjusted segment EBITDA of $670 million, and adjusted earnings per share of $0.61 per share in the quarter were all in line with the prior-year quarter.
Our packaging business has proven to be resilient throughout the pandemic.
Packaging volumes measured in tons were 5% higher compared to the prior year.
Offsetting this were declines in shipments of export containerboard, especially SBS and pulp, that totaled 470,000 tons.
This was a decline of approximately 180,000 tons or 27% lower than last year.
The increase in sales of higher value-added packaging more than offset lower corrugated pricing from previously published index reductions.
RISI has published higher prices in multiple grades during the fiscal -- first fiscal quarter.
This includes containerboard, specialty kraft, CNK, and CRB that we expect will benefit our results during the balance of the fiscal year.
Cost inflation was driven primarily by higher OCC prices and ongoing wage and healthcare cost increases and was offset by continued productivity gains and KapStone synergies.
Our free cash flow was unusually strong in the first fiscal quarter, and this was aided by WestRock's pandemic action plan.
We remain focused on increasing our share of higher value-added packaging and reducing our dependence on sales of paper to less attractive markets.
We made progress during the quarter.
73% of our sales were packaging sales, an increase of 5% or approximately 100,000 tons compared to last year.
The growth in packaging was driven by higher e-commerce demand, strong industrial shipments, including our Victory distribution channel, as well as growth across our food, beverage, beauty, and healthcare markets, with customers further utilizing our innovative solutions.
Shipments of paper declined by 10% or 180,000 tons compared to last year.
This included a reduction of 125,000 tons in shipments of export containerboard.
Higher box demand in North America required us to shift production to serve higher-value integrated box and domestic containerboard customers.
In Consumer, we had similar demand trends.
Strong volumes in our domestic food and beverage packaging and paperboard business led to a production shift to those higher-value markets.
The pricing environment has improved and record a RISI published pricing increases across several of our major grades, including a $50 per ton North American containerboard price increase in November and a $40 per ton unbleached kraft price increase in December.
We're in the process of implementing these published price increases in our business.
Our integrated mill converting distribution and machinery capabilities provide us the platform to provide our customers with value-added packaging solutions.
We placed more than 100 machinery solutions in the quarter, bringing our total machinery replacements to more than 4,150.
Customer demand for machinery solutions continues to grow, as they seek ways to improve their productivity and navigate the challenges caused by the pandemic.
For instance, a number of large retailers are implementing our Pak On Demand and Box On Demand systems to grow their ship-from-store business.
Our vision is to be the premier partner and unrivaled provider of sustainable winning solutions for our customers.
Sustainable fiber-based packaging is a key component of the circular economy.
We're partnering with our customers to help them achieve their sustainability goals.
We've collaborated with The Home Depot to develop custom packaging for plants and horticulture products.
This example highlights our ability to solve our customers' critical challenges and enhance their ability to participate in the e-commerce channel.
We've collaborated with Kraft Heinz to launch the new Heinz eco-friendly sleeve multipack in the United Kingdom.
By replacing plastic with fully recyclable fiber-based packaging, Kraft Heinz will remove over 500 tons of plastic from supermarket shelves and reduce their CO2 footprint by 18%.
This innovative project has incorporated the carton design, paperboard science, and machinery capabilities of the WestRock Enterprise team.
For Titan Farms, Enterprise team has developed attractive folding carton containers for peaches that provide both ventilation and product protection.
We're replacing plastic clamshells with fiber-based packaging and helping our customers meet their sustainability goals.
And for General Motors, we supplied them with a complete portfolio of packaging to rebrand their ACDelco product line, including very valuable counterfeit protection.
This is an enterprise win that leverages our digital platform capability to bring our customers' connected packaging solutions.
The pandemic has brought many challenges and forced business to operate differently and through different channels.
We're well-positioned to support our customers with the packaging and supply chain solutions that help them succeed in their markets.
Corrugated Packaging segment delivered adjusted EBITDA of $458 million in the first quarter.
Corrugated box demand was strong across most end markets, highlighted by e-commerce year-over-year growth of 23%, as well as strength in beverage, industrial, and distribution through our Victory Packaging business.
Higher box demand has allowed us to shift our containerboard shipments away from lower-margin export markets to serve our higher-value box and domestic customers.
Our export shipments fell by 125,000 tons compared to the prior year, and our integration rate increased to 80% in the quarter.
Offsetting this favorable business mix was the continued flow-through of the total of $40 per ton of containerboard index price declines that occurred in late 2019 and early 2020, as well as the $36 per ton increase in recycled fiber cost as compared to last year.
We've been implementing the $50 per ton containerboard index price increase that PPW published in November.
Our mill system operated well, with no economic downtime taken in the quarter.
We completed the KapStone acquisition just over two years ago and have achieved our target of $200 million in annual run-rate synergies.
This includes our reconfiguration of the North Charleston mill.
When we acquired KapStone, we saw that we would be able to improve their operations and fill out the geographic footprint of our North American corrugated mill and box plant system to better serve our customers.
This has worked well.
Victory Packaging, our distribution business, has worked out better than we anticipated due to our ability to integrate supply chain solutions into our service offerings.
This has been even more important during the pandemic.
In Brazil, mill outage reduced total mill production by approximately 48,000 tons.
The production, sales, and earnings decline was a direct result of the outage as market conditions remained strong in the region.
The Consumer Packaging segment's adjusted EBITDA in the first quarter was $234 million, so a $50 million increase from the prior year.
Adjusted segment EBITDA margins increased by 270 basis points to 14.7% compared to the prior year.
Strong demand across our core food, beverage, and healthcare packaging end markets drove 2.4% higher converting shipments and $18 million higher EBITDA by shifting shipments away from lower-margin SBS and pulp markets.
Our mill and converting system ran well in the quarter.
Cost reductions and efficiency improvements contributed $40 million of productivity and operational improvements in the quarter.
While SBS demand in the foodservice and commercial print markets was lower compared to the prior year, we saw a sequential improvement in both markets compared to our fiscal 2020 fourth quarter.
We took 39,000 tons of economic downtime primarily in the first two months of the quarter.
This compares to 87,000 tons in our fiscal 2020 fourth quarter.
As we noted previously, we restarted our idled paper machine at Covington in the quarter due to increased demand.
Backlogs increased in the quarter to between four and six weeks across all of our consumer grades, including SBS, and inventories remained steady.
We're developing alternatives to capture more value from our current assets, and we made significant progress during the quarter.
In addition to running containerboard at the Evadale mill, we're qualifying CNK from Evadale to serve our customers' growing CNK needs while reducing SBS production.
We're still in the process of trialing the board with our customers, as well as working through the engineering needed to ramp up production.
So we're in our fiscal second quarter.
We see strong demand across our core packaging markets.
We're implementing the PPW paperboard price increases that were published during our fiscal first quarter.
Turning to Slide 10.
The pandemic action plan has been an important component of our ability to pay down debt.
Over the past three quarters, the plan has contributed an additional $600 million in cash.
We are on track to achieve our goal of approximately $1 billion in additional cash available for debt reduction through the end of calendar year 2021.
We started the year with a strong first quarter.
Going forward, we see opportunities to grow earnings given the strong demand for paper-based packaging, along with implementing the previously published price increases and recognizing the benefits of our strategic capital projects.
We have a strong track record of generating free cash flow.
Each of the past five years, we have generated more than $1 billion of adjusted free cash flow, and we have generated over $1.6 billion of adjusted free cash flow during the past 12 months.
With our ability to generate strong free cash flow, we have a road map to return our net leverage ratio to the targeted range of 2.25 to 2.5 times.
And as Steve mentioned, we continue to work on remediation and recovery from the ransomware attack.
We will provide additional detail on the financial impact of the attack and provide an outlook for the quarter and the year at the appropriate time.
Turning to Slide 12.
We've been very clear about our near-term focus on paying down debt, investing in our business, and returning capital to our stockholders through our dividend.
Over the past 12 months, we've reduced our adjusted net debt by more than $1.3 billion, and our net leverage ratio has improved from 3.01 times to 2.86 times.
Capital investment plans remain unchanged, and we still expect fiscal 2021 capital investments of $800 million to $900 million.
Our Florence paper machine started up this past quarter, and we expect the Tres Barras project to be completed during the spring and begin ramping up in the second half of the fiscal year.
These strategic investments, combined with our KapStone synergy realization, will contribute approximately $125 million of EBITDA in fiscal year '21 and a similar amount in fiscal year '22.
Longer term, we expect normal capital investment levels will be between $900 million and $1 billion.
Our cash flows are resilient.
We will continue to pay a competitive and growing dividend, and we also expect the potential for M&A opportunities that help us grow our packaging business and our integration rate.
WestRock continues to operate from a position of financial strength and is supported by our significant cash flow generation.
We have minimal near-term debt maturities and approximately $3.4 billion of liquidity, and a road map to return our leverage to our targeted range of 2.25 to 2.5 times.
While the ransomware attack on WestRock is receiving our immediate attention and urgent response, I remain very optimistic about WestRock for the long term.
WestRock provides sustainable fiber-based packaging.
It's a market that's benefited from recent trends in consumer preferences and buying behavior that we expect to continue in our favor.
We're remarkably well-positioned to meet our customers' needs.
We see strong supply and demand conditions in almost every major grade, as well as strong demand for our converting and machinery solutions.
Export markets are tightening.
The need for packaging to serve the stay-at-home economy, as well as sustainable fiber-based packaging to replace plastic is growing.
The investments that we've made on our box plant system, our mill system, and our capabilities are benefiting our results and will continue to do so as we bring our strategic projects online over the next year.
We're generating very attractive free cash flows that, over the near term, will be used to reduce debt and our leverage ratio and, longer term, will be used to return capital to our stockholders and grow our business.
All of our success is due to the incredibly resilient WestRock team that has dealt with and is dealing with changing market conditions, COVID-19, and our ransomware attack.
Our resilience gives me confidence in our ability to succeed and to create value for our customers, communities, and stockholders.
James, we're ready for Q&A.
As a reminder to our audience to give everybody a chance for a question, please limit your question to one with a follow up as needed.
Also, we're not able to give any further information on ransomware attack.
We'll get to as many questions as time allows.
Operator, can 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. | 1 |
I hope you are all doing well and staying safe.
Obviously, there are many aspects of 2020 that we, along with many of you, are happy to turn the page on as we focus on a safer and healthier 2021.
In summary, we were pleased with our fourth quarter results, which demonstrated the continued stability and resiliency of our utility water end market.
As anticipated, flow instrumentation sales were less worse sequentially but still down year-over-year.
We delivered gross margin improvement, continued cash flow generation and earnings per share growth, albeit with a number of moving parts that Bob will walk through in more detail.
I'm extremely pleased with our ability to complete two meaningful acquisitions over the past several months that are strategic growth drivers for Badger Meter.
Earlier this month, we acquired Analytical Technologies, Inc, or ATi, combined with s::can, which we purchased in November 2020, we now have a great foundation in which to build a real-time, on-demand water quality monitoring offering to customers in both utility water and industrial markets.
I'll talk about the water quality offering in more detail later on the call, as well as the current environment and what we see looking out into 2021 and beyond.
As you can see on Slide 4, total sales for the fourth quarter were $112.3 million compared to $107.6 million in the same period last year, an increase of 4%.
This reflects the activity stabilization we experienced in the third quarter, which has essentially continued despite the resurgence of COVID-19 cases and various regional restrictions.
In utility water, overall sales increased 8% against a difficult comparison in Q4 last year, which was also up 8% over 2018.
The acquisition of s::can completed in November 2020 contributed approximately 3 points of the current quarter's revenue growth, with core organic revenues in utility water up 5% year-over-year.
On an organic basis, this quarter's sales were the second highest in history, second only to the third quarter of 2020, which of course included a sizable chunk of pandemic-induced backlog catch-up as we discussed at the time.
Positive revenue mix trends continued with further adoption of smart metering solutions, including increased ORION Cellular radio sales and BEACON software-as-a-service revenue, along with ultrasonic meter penetration.
We also ultrasonic meter penetration.
We also had the benefit of strategic pricing initiatives, which I'll discuss shortly.
As anticipated, flow instrumentation sales were sequentially less worse, down 10% year-over-year compared to the 18% decline experienced in Q3 2020, although activity levels continue to reflect the broadly challenged markets and applications served globally.
Operating profit as a percent of sales was 15.1%, a modest 10-basis-point decline from the prior year's 15.2% with a number of moving parts at the gross profit and SEA line that I will dissect in more detail.
Gross margin for the quarter was 39.2%, up 100 basis points year-over-year.
Margins benefited from higher sales volumes, strategic pricing actions and positive sales mix as previously discussed.
These favorable gross margin drivers were offset by a discrete network sunset provision recorded in the quarter as well as the natural post-acquisition drag to gross margins caused by amortization of the inventory fair value step-up recorded for the acquisition of s::can.
I'm going to spend a bit of extra time today on three of these items, price cost, the acquisition impact to margins and the discrete network sunset provision, to help walk you through the impact in the quarter and thereafter as applicable.
Starting with price cost.
As I'm sure you've seen copper prices, which are a proxy for our recycled brass input costs, have increased significantly.
Currently averaging around $3.60 per pound, this represents over a 30% increase year-over-year.
We've reminded investors that while meaningful, the impact of recycled brass on our cost structure has been moderating over time as we sell more software and radios versus primarily meters in the past.
I will also remind you that we have and continue to offer polymer, mechanical and ultrasonic meters as part of our choice matters go-to-market philosophy.
To give you some level of sensitivity, if copper prices stay in this range for the entire year, it could be a potential cost headwind of about $4 million to $5 million year-over-year.
The other side of that price -- cost equation is price.
And as we have done with working capital and operating metrics like SQDC, safety, quality, delivery and cost, we have designed more robust processes and metrics to actively manage strategic pricing for the evolving and valued solutions that we offer to customers.
In doing so, we have proactively implemented a number of strategic pricing actions that resulted in positive net benefit from price in the fourth quarter, in advance of the lagging headwind from input cost increases, principally copper.
It would be our expectation that we are largely able to offset commodity inflation with price during the year with perhaps some minor manageable lag effects.
The second topic is acquisitions and their impact to margins.
In the fourth quarter, s::can results were included for two months.
So these two months, as expected, totaled approximately $2.5 million in revenues.
We recorded the typical amortization of inventory fair value step-up and acquired intangible assets, which all told, resulted in a modest loss in Q4 2020 for the short stub period.
As we look to 2021, the combination of s::can and ATi, with total acquired revenue of approximately $37 million, we expect to be earnings per share accretive.
The first quarter of 2021 will include the remaining s::can, plus a full quarter of ATi inventory step-up amortization, but we expect normalized profitability in the remaining quarters.
Ken will discuss the longer-term opportunities for these acquisitions in his remarks.
Finally, turning to the non-recurring discrete network sunset provision.
This relates to the sunsetting of the CDMA cellular network for the early adopters of our original cellular radio offering.
This sunset is a carrier event that is part of the natural evolution of technology and impacts a variety of IoT devices across an array of industries.
As the innovator in cellular radios for water metering applications and as a company focused on customer care, Badger Meter provided protections for such circumstances.
Until recently, firm's sunsetting plans by the carriers were not in place.
Now that these plans appear more firm, we have taken this provision, which reduced gross margins in the quarter by approximately 300 basis points to cover future radio upgrades for these early cellular customers.
To be crystal clear, there is no defect in the radio itself.
The logical question then follows.
Will this continue to be an ongoing challenge with cellular radios?
The short answer is no.
The CDMA network was already well established when Badger Meter introduced its first cellular radio.
These first networks had been in service nearly 20 years at that point.
Subsequently, we have moved ahead of the technology curve, as demonstrated by the launch of ORION LTM [Phonetic] in 2019 and our continued innovation around cellular radio technologies.
These technologies will be supported by multiple generations of cellular networks.
Turning to SEA expenses.
The fourth quarter's spend of $27.1 million increased $2.3 million from the prior year.
This includes the addition of s::can for two months, including the resulting intangible asset amortization.
More broadly, higher personnel costs were partially offset by lower travel, trade show and other pandemic-impacted expenses.
Including both s::can and ATi in 2021, we expect ongoing SEA as a percent of sales to average in the 25% to 26% range.
The income tax provision in the fourth quarter of 2020 was 22.6%, slightly lower than the prior year's 24.3% rate.
With the additions of s::can and ATi, we don't expect a significant change in our normalized tax rate in 2021, absent any new statutory US tax code changes.
In summary, earnings per share was $0.45 in the fourth quarter of 2020, an increase of 7% from the prior year's earnings per share of $0.42.
Working capital as a percent of sales was 26%, with about 1% of that associated with the addition of s::can.
On an organic basis, primary working capital as a percent of sales declined about 200 basis points year-over-year.
Our full-year free cash flow of $80.5 million was 10% higher than the prior year's $73.2 million and represents approximately 163% conversion of net earnings.
Our cash flow focus will not abate and we anticipate free cash flow conversion to exceed 100% in 2021.
However, I would caution we do not expect to see the conversion at the robust levels of the past two years, given the structural change in working capital already achieved.
We ended the year with approximately $72 million of cash on the balance sheet after taking into account the s::can acquisition.
In early January, we deployed $44 million net of cash acquired for ATi, remaining in a net cash positive position.
Along with the continued full access to our untapped $125 million credit facility, we have ample financial flexibility to continue executing on our capital allocation priorities.
Turning to Slide 5, I'd like to highlight the two transactions we completed since our last earnings call and how we believe they bring significant value to the Badger Meter portfolio.
s::can acquired in November of 2020 and Analytical Technology, Inc, or ATi, acquired just a few weeks ago are both pioneers in providing real-time water quality monitoring solutions.
This is differentiated from traditional water quality testing because these solutions capture real-time data through sensors and systems that do not rely on labs, reagents or other consumables resulting in lower capital and operating cost for customers.
Just as water quality -- just as water utility billing moved from manual reads to advanced metering infrastructure or AMI, we believe water quality monitoring will evolve from lab sample testing to online real-time collection, monitoring and reporting.
Adding real-time water quality parameters to Badger Meter's core flow measurement, pressure and temperature sensing capabilities as to the scope of actionable data for utilities to improve operating efficiency and for industrial customers to monitor both process and discharge water.
We see multiple avenues for growth synergies by bringing together these two acquisitions into Badger Meter.
For example, from a water quality sensor standpoint, with this combination, we have a full product offering of both electrochemical and optical sensors.
From a geographic standpoint, where ATi is strong in the US and UK, s::can has an installed base in 50 countries.
From a scale and coverage standpoint, leveraging customer relationships, inside sales, rep networks and distributors will create a greater ability to cross-sell throughout the water ecosystem, including water utilities, wastewater treatment and industrial water applications.
There is no question it will take time and investment in order to realize these long-term growth synergies.
We need to advance our communications to capture quantity plus quality data parameters, online real-time VR industry-leading ORION Cellular radios.
We will need to augment BEACON and EyeOnWater to store, integrate, analyze and visualize information, providing a holistic view of the water network.
This is no small undertaking but one that we are organized to execute.
In the near-term, it is business as usual for the two acquired businesses.
The combined acquired annual sales of approximately $37 million with EBITDA margins in the mid-teens will be earnings per share accretive to our results.
Now turning to our outlook on Slide 6.
While we were all hoping that turning the calendar 2021 would also turn the page on COVID-19, that is obviously not the case.
Despite the continued uncertainty, we remain fully prepared to manage safely in support of our customers in the essential water sector, as we did throughout much of 2020.
There has been no significant change in customer tone regarding utility budgets with spending on critical and necessary activities, which includes metering solutions required for billing and reducing non-revenue water.
As we have stated, our large and diverse customer base will have different needs, circumstances and priorities.
But as a whole, utility water bid tenders and awards are largely continuing with their normal processes with limited extended timelines or deferrals.
While we don't provide guidance, Bob will walk through the detail on a few of the items that will impact us in 2021, including price/cost, SEA levels and the expected impact of recent acquisition activity.
Obviously, we had some significant quarterly swings on the top-line throughout 2020, so the growth rates that are uneven in normal circumstances will be more so during 2021.
We will continue to drive cash flow, which is the fuel to invest in and grow our business.
This includes both organic and acquisition-driven growth with a focus on additional product and software offerings serving water-related markets and applications.
For example, expanding functionality of our EyeOnWater software app that helps drive consumer engagement.
Finally, we will continue to advance a variety of priorities on the ESG front, including relentlessly focusing on employee safety, reducing greenhouse gas emissions, fostering our culture of inclusion and of course promoting water conservation and quality.
Despite the unprecedented backdrop of a health and economic crisis, we have delivered utility water revenue growth, SaaS revenue as a percent of sales growth to now 5%, strong EBITDA margin expansion, robust working capital management and cash flow and successful execution of two accretive acquisitions.
It's a true testament to the criticality of the water industry and the exceptional Badger Meter team. | q4 sales $112.3 million versus refinitiv ibes estimate of $109.2 million.
q4 earnings per share $0.45. | 1 |
Revenue and adjusted EBITDA in Q2 increased 17.5% and 23%, respectively, over the prior year period, primarily as a result of continued improvement in solid waste pricing volume growth and strength in recovered commodity values.
These trends drove year-to-date adjusted EBITDA margin expansion of 110 basis points and adjusted free cash flow of over $585 million, up 18.5% year-over-year, and given expected continuing momentum and margin expansion from these trends position us to raise our full year outlook for revenue, adjusted EBITDA, adjusted EBITDA margin and adjusted free cash flow.
2021 also has the potential to be another outsized year of acquisition activity.
Year-to-date, we have signed or closed 14 acquisitions with total annualized revenue of approximately $115 million, including $75 million of franchise operations in California, Nevada and Oregon expected to close later this year.
We continue to see record amounts of seller interest driving elevated acquisition dialogue, and as communicated throughout the year, expect closings related to most of this activity to be more weighted to the second half of the year, which will provide further upside to our increased outlook for the year and strong rollover growth into 2022.
On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow.
Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations.
Other companies may calculate these non-GAAP measures differently.
In the second quarter, solid waste price plus volume growth of 11.4% exceeded our expectations by almost 150 basis points, primarily as a result of higher-than-expected volumes as the recovery trends that began in Q1 continued throughout the quarter, with landfill tons and roll-off pulls returning to levels about in line with or above prepandemic levels.
Total price of 4.9%, up 70 basis points sequentially, was above our outlook on higher core pricing of 4.7%, once again reflecting the strength of pricing retention we noted in Q1, plus about 20 basis points in fuel and material surcharges.
Our Q2 pricing ranged from 2.6% in our mostly exclusive Western region to a range of about 4.5% to 7% in our more competitive regions.
Looking ahead, we are positioned for higher sequential pricing growth during the second half of the year as a result of incremental price increases we have already put in place to offset certain cost pressures.
Reported volume growth of 6.5% in Q2 reflected sequential improvement of approximately 1,000 basis points from Q1 and was led by those regions where markets were hardest hit during the pandemic including the Northeast U.S. and Canada.
All regions showed sequential improvement from Q1 and all reported positive volumes in Q2.
Volumes range from about 4% in our Central region, where comparisons to the prior year were tougher as many markets were relatively less impacted by the COVID-19 pandemic, to almost 10.5% in Canada, one of our most impacted regions where the volume recovery have been remarkably strong, arguably outpacing the reopening activity particularly when considering that many restrictions in Canada extended through Q2 of this year.
Also noteworthy is our Western region, where volumes led our other regions going into the pandemic and continue to be the strongest in the U.S. at about 8.5% in Q2.
Looking at year-over-year results in the second quarter on a same-store basis, all lines of business increased by double digits Commercial collection revenue was up 16% year-over-year.
Roll-off pulls increased by over 11% year-over-year, led by Canada, up almost 20% and back to above pre-COVID-19 levels.
In the U.S., pulls were up about 10%, and all regions showed year-over-year improvement, most notably in our more impacted markets, including in the Northeast.
Landfill tons were up 17% year-over-year on MSW tons up 11%, C&D tons up 20% and special waste tons up 33%.
As a result, landfill tons have returned to above pre-pandemic levels in all of our regions, except the Eastern region, which was slightly below prior levels as a result of the delayed reopening activity in markets in the Northeast.
Looking more closely at results.
As noted, all waste types were up double-digit percentages year-over-year.
However, the outsized amount of special waste activity was particularly noteworthy as Q2 activity propelled tons back to 13% above pre-pandemic levels with all regions up year-over-year, perhaps due to a little pull forward from Q3.
Looking at Q2 revenues from recovery commodities, that is recycled commodities, landfill gas and renewable energy credits, or RINs.
Excluding acquisitions, collectively, they were up about 95% year-over-year resulting in a combined margin tailwind of about 130 basis points, 90 basis points of which was from recycling and 40 basis points from landfill gas and RINs.
Recycling revenue increases were driven by both higher commodity values, including old corrugated containers or OCC, up 25%; and plastics and metals, both up over 100%.
Higher volumes also contributed year-over-year, again, reflecting the pandemic impact.
Prices for OCC averaged about $135 per ton in Q2 and our RIN pricing averaged about $2.72.
And finally, on to E&P waste activity.
We reported $31.2 million of E&P waste revenue in the second quarter, up 26% sequentially from Q1, reflecting increased activity across multiple basins.
Looking at acquisition activity.
As noted earlier, we've already signed or closed 14 acquisitions with annualized revenue of approximately $115 million, approaching what we would consider an average amount of activity for the full year.
These transactions include multiple West Coast franchise markets, which are core to our strategy and provide unique opportunities to expand our exclusive contract portfolio.
Moreover, our pipeline still reflects record levels of seller interest driving the potential for outsized activity in 2021, primarily given tax-related considerations.
That said, we continue to be selective and disciplined in our approach to acquisitions as we recognize the importance of value creation for our shareholders as well as market selection and asset positioning.
Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the second quarter and our increased outlook for the year and to provide a detailed outlook for Q3.
I will then wrap up before heading into Q&A.
In the second quarter, revenue was $1.534 billion, about $44 million above our outlook due primarily to higher-than-expected solid waste growth and recovered commodity values.
Revenue on a reported basis was up $228 million or 17.5% year-over-year, including acquisitions completed since the year ago period which contributed about $47.6 million of revenue in the quarter or about $44.1 million net of divestitures.
Commodity-driven impacts account for about 100 basis points of margin expansion, net of a 30 basis point impact from higher fuel on diesel rates up almost 20% year-over-year.
Ex fuel solid waste collection transfer and disposal margins expanded by 50 basis points as we more than offset a 60 basis points increase in incentive compensation costs, 50 basis points from higher medical and 50 basis points from increased discretionary expenses.
And finally, acquisitions completed since the year ago period accounted for about 10 basis points of margin dilution.
Regarding discretionary expenses, we've begun the process of returning to a more normalized operating environment, including in-person training, meetings and other activities we consider integral to sustaining our culture and expanding our bench strength ahead of future growth.
Given the challenging labor environment, we have also proactively implemented supplemental wage adjustments in many markets as we anticipate or combat labor constraints.
These purposeful wage and discretionary cost additions, along with higher incentives, medical and other costs resulting from more typical activity levels, largely replaced last year's COVID-19-related frontline support costs, the majority of which did not repeat this year.
As noted earlier, we've already implemented incremental price increases to address these higher costs, resulting in full year 2021 price of approximately 5%, up from 4% in our original outlook.
We delivered adjusted free cash flow up 18.5% year-over-year through Q2 at $585 million or 20% of revenue, putting us on track to achieve our revised adjusted free cash flow outlook of approximately $1 billion.
I will now review our outlook for the third quarter 2021 and our updated outlook for the full year.
Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our safe harbor statement and filings we've made with the SEC and the Securities Commissions or similar regulatory authorities in Canada.
We encourage investors to review these factors carefully.
Our outlook assumes no significant change in underlying economic trends, including as a result of or related to impacts from the COVID-19 pandemic or the delta variant of the coronavirus.
It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction-related items during the period.
Looking first at Q3.
Revenue in Q3 is estimated to be approximately $1.56 billion.
We expect solid waste price plus volume growth of about 7% in Q3 with pricing of about 5%.
Recovered commodity values and E&P waste revenue are expected to remain in line with current levels, with RINs generally in line with Q2 levels and OCC trending slightly higher.
Adjusted EBITDA in Q3 is estimated to be approximately $495 million or 31.7% of revenue, up 60 basis points year-over-year and up sequentially from Q2.
Depreciation and amortization expense for the third quarter is estimated to be about 13.3% of revenue, including amortization of intangibles of about $33.8 million or a rounded $0.10 per diluted share net of taxes.
Interest expense, net of interest income, is estimated at approximately $40 million.
And finally, our effective tax rate in Q3 is estimated to be about 21.5%, subject to some variability.
Revenue for 2021 is now estimated to be approximately $5.975 billion or $175 million above our initial outlook, with the primary drivers being an additional 150 basis points of solid waste price plus volume growth and higher recovered commodity values as compared to our initial outlook, plus $25 million from acquisitions completed year-to-date.
Adjusted EBITDA for the full year is now estimated to be approximately $1.875 billion or about 31.4% of revenue and up about $75 million over our initial outlook.
Moreover, full year adjusted EBITDA margin guidance is 40 basis points above our initial outlook, up 90 basis points year-over-year.
At 31.4%, our adjusted EBITDA margin outlook reflects continued year-over-year margin expansion in the second half of 2021 in spite of wage and inflationary pressures and tougher year-over-year comparisons.
Adjusted free cash flow in 2021 is now expected to be approximately $1 billion or over 53% of EBITDA and up $15 million from our initial outlook despite capex up $50 million from our original outlook.
Last week, we closed our new $2.5 billion credit facility, which increased borrowing capacity by almost $300 million, reduced borrowing spreads and enhanced flexibility for continued growth.
Our balance sheet strength, together with this increased capacity, positions us for potential above-average acquisition activity and an increasing return of capital to shareholders.
We have already returned over $400 million to shareholders in 2021 through share repurchases and dividends.
And we are in the process of renewing our normal course issuer bid, authorizing the repurchase of up to 5% of our outstanding shares per annum.
We will continue to approach share repurchases opportunistically and anticipate announcing another double-digit percentage per share increase in our cash dividend in October.
Again, broad-based strength continues to drive results ahead of expectations as we benefit from reopening activity in a supportive macro environment, including tailwinds from recovered commodity values.
We've once again demonstrated the importance of being selective about markets and intentional about driving results.
Quality of revenue and comparative price retention across markets matter.
We're extremely pleased to be in a position to raise our outlook for the full year.
We are set up for continuing margin expansion through the second half of 2021 as proactive unbudgeted price increases offset wage and inflationary pressures.
We are on track for adjusted free cash flow of approximately $1 billion and adjusted EBITDA margins back above pre-COVID-19 levels.
Finally, we expect to announce another double-digit percentage increase in our regular quarterly cash dividend in October and remain well positioned for potential significant increase in acquisition outlays to drive further growth in 2021 and beyond.
We appreciate your time today. | compname posts q4 adjusted earnings per share $1.22.
q4 adjusted earnings per share $1.22. | 0 |
Gary Norcross, our ChaInvestor Relationsman and Chief Executive Officer, will discuss our operating performance and review our strategy to continue accelerating revenue growth and maximizing shareholder value.
Woody Woodall, our Chief Financial Officer, will then review our financial results and provide updated forward guidance.
Bruce Lowthers, President of FIS, will also be joining the call for the Q&A portion.
Turning to Slide 3.
Also throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, adjusted net earnings per share and free cash flow.
These are important financial performance measures for the company but are not financial measures as defined by GAAP.
We achieved very strong start to the year, exceeding our expectations across the board in the fInvestor Relationsst quarter.
As shown on Slide 5, we realized accelerating revenue growth, exceptionally strong new sales and significantly expanded margins across all our operating segments.
Our Worldpay revenue synergies are also accelerating through increased cross-selling as well as ramping volumes on prior synergistic sales.
As a result, we are increasing our 2021 and 2022 revenue synergy targets to $600 million and $700 million, respectively.
During the quarter, we leveraged our continually strong free cash flow to begin buying back stock, fund our increased dividend and make strategic investments in intriguing new companies that are accelerating new capabilities and pushing the boundaries of financial technology.
I'm also pleased to share that we divested our remaining minority position in Capco in April, netting a very positive return for our shareholders in over $350 million in proceeds for our remaining stake.
These exceptional results demonstrate the strength of our business model, the success of our client-centric focus and our disciplined capital allocation strategy.
Given that focus, we consistently invest in platform and solution innovation in the areas of greatest demand.
As a result, FIS is the most modern scale provider in market with a unique suite of solutions that enable our clients to transform theInvestor Relations envInvestor Relationsonments, grow theInvestor Relations businesses and engage with theInvestor Relations customers in dynamic new ways.
We are quickly becoming one of only eight companies in the S&P 500 with revenues approaching $14 billion, growing more than 7% with an already high and expanding mid-40s EBITDA margins.
We believe there is no one in our industry better positioned.
With our strong start to the year, we expect accelerating organic revenue growth and strong earnings throughout 2021, giving us the confidence to raise our full year guidance.
Turning to Slide 6.
In banking, new sales grew 17% year-over-year, reflecting a 24% CAGR since the fInvestor Relationsst quarter of 2019 as our investments in new solutions continue to yield impressive results not only in our traditional business but in emerging areas as well.
For example, Green Dot, the world's largest prepaid debit card company with over $58 billion in annual volume, chose to expand our relationship this quarter to now include one of our B2B solutions to support theInvestor Relations commercial customers as well as our online chat and social media solution for customer care to serve theInvestor Relations mobile digital bank.
In addition, we are helping large financial institutions to upgrade theInvestor Relations legacy technology by moving to our next-generation cloud-based solutions.
BMO Harris selected the modern banking platform this quarter, making them our 11th large win.
And I'm pleased to share that 40% of our earlier wins are already live due to our software's elegant and modular design.
This rapid onboarding continues to give us confidence in our accelerated revenue growth outlook for the remainder of the year.
BMO chose to partner with us because of our open cloud-native and scalable platform, which will help them modernize the services they provide to theInvestor Relations customers, speed new products to market and increase theInvestor Relations operational efficiency.
Vietnam's largest bank, BIDV, also chose FIS to upgrade theInvestor Relations core banking software to harness the power of our global reach and world-class scale.
With this win, we are now the core processor of Vietnam's two largest banks.
As we think about continuing to increase our growth, we have several new solutions in our banking segment that we've launched recently and more in the pipeline to be released later this year.
To highlight a few examples, PaymentsOne is the newest and most modern card issuing platform in the market, delivering an agile and frictionless payments experience across all card types on one unified platform.
We spent the past year migrating more than 1,000 of our issuing clients to this platform and have also seen strong demand from new clients where we've already installed more than 300 new financial institutions since the launch of this solution.
RealNet is another innovative new solution being launched, which enables account-to-account transactions over real-time payment networks across the globe.
This cloud-native SaaS platform will function as a network of networks, allowing our clients to seamlessly leverage multiple payment types to transact effortlessly around the world and cross borders in real time.
RealNet is proof of our strategy to support the global movement of money across the entInvestor Relationse financial ecosystem for our clients in banking, merchant and capital markets.
We've also launched an industry-fInvestor Relationsst cryptobanking solution, which we created in partnership with NYDIG.
Traditionally, consumers and corporations had to go outside of theInvestor Relations existing banking relationships to acquInvestor Relationse Bitcoin.
Once an FIS core banking client enables this capability, theInvestor Relations customers will be able to view and transact theInvestor Relations Bitcoin holdings alongside theInvestor Relations traditional accounts in a single view.
Our new solution taps into the advanced functionality of Digital One to provide consumers with a user-friendly in-app experience.
It will also allow our banking clients to grow theInvestor Relations businesses through a new source of income by providing Bitcoin services through a seamless, easy-to-use digital experience.
Each of these new launches reflect the power of our technology innovation and deep domain expertise.
Turning to Merchant on Slide 7.
We revamped our go-to-market strategy, significantly improving new sales results as evidenced by our exceptional 76% growth.
Our new sales success doesn't just reflect easy comps.
New sales were up 39% over the fInvestor Relationsst quarter of 2019, translating to an 18% CAGR over the past two years.
We continue to successfully expand our financial institution partner program to serve SMBs.
As an example, we formed an exclusive merchant referral partnership with CIT Bank this quarter.
In this strategic takeaway, we will cross-sell merchant processing to CIT's over 45,000 customers, expanding on an already successful relationship with our banking segment.
We also continue to expand our leading ISV partner network, adding 20 new ISVs in the U.K. this quarter as well as several more in the U.S. and Canada that span a diverse range of verticals from retail, hospitality, salons and spas to event ticketing, education, property management and many others.
As we look at large enterprise and leading global brands, we are the provider of choice due to our unique omnichannel capabilities, expansive global reach and best-in-class authorization rates.
As an example, we won 80 new global e-commerce clients this quarter, more than doubling our new sales from last year.
To keep pace with the demand, we are investing to grow our sales force by over 300 more professionals this year.
We also won a diverse set of marquee clients such as Intercontinental Exchange; BetBull, a premier online sports betting company; and The Nature Conservancy, a preeminent global conservation organization.
We continue to consistently win share in travel and aInvestor Relationslines, including Norwegian Cruise Lines this quarter, and expect leading companies like this to accelerate rapidly as the industry recovers.
As we think about newly formed high-growth sectors, FIS is the leading acquInvestor Relationser for cryptocurrency, with revenue from this vertical growing by 5 times over last year.
OKCoin, a leading cryptocurrency exchange, selected FIS this quarter to help them grow theInvestor Relations business.
We serve five of the top 10 digital asset exchanges and brokerages globally, including innovators like Coinbase and BitPay.
The results of our investment in new and modernized merchant technology is certainly showing in our sales success throughout our various merchant verticals.
During the quarter, we successfully completed the final client migrations to our next-generation acquInvestor Relationsing platform, also known as NAP, which enables us to offer a more agile experience and modular offering while still providing tailored solutions for our clients.
We processed over 1.8 billion transactions on NAP during the fInvestor Relationsst quarter and continue to expect accelerating growth now that we are aggressively selling in market.
In addition to our new fully launched acquInvestor Relationsing platform, we have seen tremendous success with the launch of our new gateway.
Through our new simple APIs, merchants can go live on our platform faster while still benefiting from our full global breadth and sophisticated solutions.
Our new APIs provide a seamless, easy-to-integrate single point of access for our clients, and transactions are ramping exponentially, ending the fInvestor Relationsst quarter at more than four million transactions per day.
This represents more scale than all but two of our largest e-com competitors in less than two years post launch.
All of this shows that FIS is increasingly differentiated by our ability to bring innovation at scale that is enterprise ready from day one in a way that few can claim or offer today.
In addition to leveraging our innovative portfolio of technology assets, our clients are also relying on us to support theInvestor Relations expansion into new geographic markets.
This quarter, we expanded our services into South Africa, Nigeria and Malaysia, and we plan to bring online several more countries later this year.
Since the combination with Worldpay, FIS has now brought acquInvestor Relationsing to nine new countries.
Turning to Slide 8.
In Capital Markets, we have made remarkable progress since acquInvestor Relationsing SunGard in 2015.
We completely changed the revenue growth profile from persistent declines to accelerating top line growth.
And I'm pleased to say that we are now consistently growing faster than our peers.
We simultaneously improved margins and moved the business to over 70% reoccurring revenue.
During the fInvestor Relationsst quarter, average deal size increased 36% with new logos representing 30% of new sales, clearly showing that we are winning share.
New sales of our SaaS-based reoccurring revenue solutions are also very strong, increasing by 57% this quarter.
For example, our differentiated solutions and deep treasury expertise are motivating the leading corporate, like GlaxoSmithKline, to select FIS to power theInvestor Relations treasury management systems.
In addition, our comprehensive suite of solutions, strong track record and speed of implementations is very attractive to emerging fintechs like Acorns and Robinhood.
These two fintechs are utilizing our solutions to further drive financial inclusion.
As another example, Futu is a next-generation online broker-dealer who selected FIS this quarter to help power theInvestor Relations growth in securities, finance and trading.
Securian Financial is a great example of a diversified financial services company who partnered with us this quarter to deliver a leading cloud-based risk modeling and management platform.
They selected FIS because they needed a partner who could support theInvestor Relations growth and scale, while at the same time being nimble enough to help them quickly respond to changing regulatory requInvestor Relationsements.
The consistent execution of our strategy is driving our success.
Ongoing investments in new solutions, advanced technology and expanding distribution are generating strong new sales and competitive takeaways while accelerating revenue growth across all our operating segments.
Our relentless focus on achieving efficiency and scalability through automation and integration continues to enhance our profitability and margin profile.
Lastly, we see our exceptional free cash flow generation as a competitive advantage.
It allows us to consistently invest for growth and to generate superior shareholder returns through return of capital and M&A.
In summary, our strategy is continuous transformation, pivoting to growth while simultaneously driving efficiency and scale through the strategic allocation of capital.
Starting on Slide 11, I will begin with our fInvestor Relationsst quarter results, which exceeded our expectations across all metrics to generate an adjusted earnings per share of $1.30 per share.
On a consolidated basis, revenue increased 5% in the quarter to $3.2 billion, driven by better-than-expected performances in each of our operating segments.
Adjusted EBITDA margins expanded by 10 basis points to 41%.
Strong contribution margins and synergy achievement within each of our segments more than offset increased corporate expenses from unwinding last year's COVID-related cost actions.
We continue to make excellent progress on synergies exiting the quarter at $300 million in run rate revenue synergies, an increase of 50% over the fourth quarter's $200 million, accelerating revenue synergy attainment driven primarily by ongoing traction and ramping volumes within our bank referral and ISV partner channels as well as cross-sell wins related to our new solutions and geographic expansion.
Given our progress to date and robust pipeline, we're increasing our revenue synergy target for 2021 by 50% or $200 million to $600 million; and for 2022 by $150 million to $700 million.
Our achievement of cost synergies has also been very successful.
We have doubled our initial cost synergy target of $400 million, exiting the quarter with more than $800 million in total cost synergies.
This includes approximately $425 million in operating expense synergies.
Our backlog increased mid-single digits again this quarter as strong new sales more than offset our recognition of revenue in the quarter.
Turning to Slide 12 to review our segment GAAP and organic results.
As a reminder, the only difference between GAAP and organic revenue growth for our operating segments this quarter is the impact of currency.
Our Banking segment accelerated to 7% on a GAAP basis or 6% organically, up from 5% growth last quarter.
These strong results were driven primarily by ramping revenues from our recent large bank wins, recurring revenue and issuer growth.
Our issuing business grew 10% in the quarter, driven primarily by revenue growth from PaymentsOne, increased network volumes and economic stimulus.
We expect both of these tailwinds to continue, driving accelerated growth into the second quarter in support of our outlook for mid- to high-single-digit organic revenue growth for the full year.
Capital Markets increased 5% in the quarter or 3% organically, reflecting strong sales execution and growing recurring revenue.
The Capital Markets team is driving a fast start program for the beginning of 2021 and appears to be trending toward the higher end of our low to mid-single-digit organic growth outlook for the year.
In Merchant, we saw a nice rebound, with growth of 3% in the quarter or 1% organically, accelerating 10 points sequentially as compared to the fourth quarter.
Merchant's fInvestor Relationsst quarter performance was driven primarily by strength in North America and e-commerce, including significantly ramping volumes on our new acquInvestor Relationsing platform.
COVID impacts on travel and aInvestor Relationslines as well as continued lockdowns in the U.K. drove a 5-point headwind in the fInvestor Relationsst quarter.
Slide 13 shows the significant ramp in volumes and revenue that the Merchant business generated throughout the quarter.
Importantly, as volumes rebounded, yields grew significantly.
We ultimately exited the quarter generating approximately 70% revenue growth during the last week of March, including five percentage points of positive yield contribution.
We expect this positive revenue yield tailwind to continue to expand in the second quarter and continue throughout the remainder of the year.
Based on March exit rates and second quarter comparisons, we expect merchant organic revenue growth of 30% to 35% in the second quarter.
The expanding investments we are making in merchant technology platforms and global sales execution will yield long-term benefits for our clients and significant new wins for our business.
As Gary highlighted, we are very pleased with the execution of our segments.
With accelerating revenue growth and strong new sales, each of them are winning market share.
Turning to Slide 14.
We returned approximately $650 million to shareholders in the quarter through our increased dividend and share repurchases.
Starting in March, we bought back approximately 2.8 million shares at an average price of $143 per share.
Beyond this return of capital, we also successfully refinanced a portion of our higher interest rate bonds, which extended our average duration by a year and lower expected interest expense for the year by about $60 million to approximately $230 million.
Total debt decreased to $19.4 million -- $19.4 billion for a leverage ratio of 3.6 times exiting the quarter, and we remain on track to end the year below 3 times leverage.
Turning to Slide 15.
I'm pleased to be able to raise our full year guidance so early in the year based on our strong fInvestor Relationsst quarter results and second quarter outlook.
For the second quarter, we expect organic revenue growth to continue to accelerate to a range of 13% to 14%, consistent with revenue of $3.365 billion to $3.39 billion.
As a result of the high contribution margins in our business, we expect adjusted EBITDA margin to expand by more than 400 basis points to approximately 44%.
This will result in adjusted earnings per share of $1.52 to $1.55 per share.
For the full year, we now anticipate revenue of $13.65 billion to $13.75 billion or an increase of $100 million at the midpoint as compared to our prior guidance driven primarily by accelerating revenue synergies.
We continue to expect to generate adjusted EBITDA margins of approximately 45%, equating to an EBITDA range of $6.075 billion to $6.175 billion.
With our improved outlook, successful refinancing and share repurchase to date, we are increasing our adjusted earnings per share guidance to $6.35 to $6.55 per share, representing year-over-year growth of 16% to 20% and an increase of $0.15 at the midpoint above our prior guidance.
By all measures, this was a great quarter for FIS.
The investments we're making in driving strong new sales -- are driving strong new sales and accelerating our revenue growth profile.
As a result, we remain confident in meeting or exceeding our increased outlook for 2021. | q1 adjusted earnings per share $1.30.
q1 revenue rose 5 percent to $3.223 billion. | 1 |
Before turning the call over to Ron, I'd like to make a few comments about forward-statements.
Dan Malone, our CFO, will begin our call with a review of our financial results for the fourth quarter and the year-end 2020, and I will then provide a few more comments on these results.
The key takeaways from our fourth quarter and full year 2020 results are: fourth quarter sales were down 3.8%, record full year sales were up 4% with the help of acquisitions, but down 11% without.
Fourth quarter net income and earnings per share were down 16% from the prior fourth quarter on a GAAP basis and down about 6% on an adjusted basis.
Full year net income and earnings per share were down 10% from prior year on a GAAP basis, but increased more than 2% year-over-year on an adjusted basis.
Full year adjusted EBITDA was up 11.6% from the prior year and essentially flat to the third quarter trailing 12-month result with adjusted EBITDA margins expanding by nearly 100 basis points over prior year.
Record full year operating cash flow of $184.3 million was up 108% over prior year, and fourth quarter operating cash flow exceeded an unusually strong operating cash flow performance in the prior year quarter.
Outstanding debt was reduced by $158.6 million in 2020, and our debt net of cash position improved by $166.5 million during the year.
Record backlog of $354.1 million was up 35.6% over the prior year-end.
Fourth quarter 2020 net sales of $288.6 million or 3.8% lower than the prior year quarter.
While we saw a strong rise in order rates and backlog, the COVID-19 pandemic continued to negatively impact our manufacturing efficiencies and inbound supply chain during the quarter.
Also the timing of these new orders and the fact that strong customer demand hasn't been consistent across all of our business segments has limited the immediate top line impact.
Full year 2020 net sales of $1.16 billion were a Company record and 4% higher than the prior year with the contribution of the Morbark and Dutch Power acquisitions.
Without these acquisitions, organic sales were down 11% from prior year.
Net income for the fourth quarter was $8 million or $0.68 per diluted share compared to prior year fourth quarter net income of $9.6 million or $0.81 per diluted share.
Excluding the Morbark inventory step-up expense, severance cost related to a plant closure, one-time acquisition transaction cost and acquisition-related amortization expense, adjusted fourth quarter 2020 net income was $13 million or $1.10 per diluted share compared to $13.8 million or $1.18 per diluted share in the prior year quarter.
Net income for full year 2020 was $56.6 million or $4.78 per diluted share compared to net income of $62.9 million or $5.33 per diluted share for the prior year.
Excluding the full year impact of the adjustments I just mentioned in the quarter comparison, adjusted full year net income was $70.3 million or $5.94 per diluted share compared to $68.4 million or $5.80 per diluted share in the prior year.
Industrial Division fourth quarter 2020 net sales of $202.7 million represented an 8.9% decrease from the prior year quarter due to the pandemic-related impact on customer demand and disruptions to our supply chain and operations.
While this division ended the year with higher backlog than the previous year-end, the surge in orders that created this favorable comparison is largely concentrated in forestry and tree care products.
Other business units, notably those serving the municipal government sector, finished the year with order backlog below pre-pandemic levels.
Agricultural Division fourth quarter 2020 sales were $85.9 million, up 10.5% from the prior year fourth quarter.
During the quarter, we continued to see strong organic growth across this division.
The immediate top line benefit of the surge in customer demand was constrained by the negative impact of the pandemic on inbound supply chain and manufacturing efficiencies, as previously mentioned.
Full year 2020 adjusted EBITDA was $145.2 million, up $15.1 million or about 11.6% over the prior year and was essentially flat to the third quarter trailing 12-month results.
Our adjusted 2020 EBITDA as a percentage of net sales improved by nearly 100 basis points over prior year.
Higher Morbark margins, favorable product mix, the benefits realized from facility consolidations and other cost containment measures more than offset the negative impact -- the negative pandemic impact previously mentioned.
During 2020, we generated $184.3 million of operating cash flow compared to $88.8 million in the prior year, an increase of 108%.
Strong operating cash flows continued during the most recent quarter, as we exceeded an unusually strong operating cash generation in the prior year fourth quarter and we further delevered our balance sheet.
We ended the fourth quarter with a record $354.1 million in order backlog, an increase of over 35% since the prior year-end.
During the fourth quarter, we saw an acceleration of customer demand, particularly for our forestry and agricultural products, while demand has grown overall for the Company and all of our units have seen improvements in customer demand since the pandemic impacted the second quarter.
Order rates for some of our businesses are still below pre-pandemic levels.
To recap our fourth quarter and full year 2020 results, fourth quarter sales down 3.8%; record full year sales, up 4%, but down 11% without acquisitions; fourth quarter net income and earnings per share down 16% on a GAAP basis and down 6.8% on an adjusted basis; full year adjusted EBITDA up 11.6% from prior year and essentially flat to the third quarter trailing 12-month result with adjusted EBITDA margins expanding by nearly 100 basis points over prior year; record full year operating cash flow, up 108% over prior year with favorable comparisons continuing in the fourth quarter; full year debt reduction of almost $159 million and debt net of cash improvement over $166 million; and record backlog, up more than 35% over the prior year-end.
We're particularly pleased to see that the momentum, which we have -- which has been building for the last several quarters, really since the slowness in the -- the end of this -- in the second quarter and -- but it's built in the third, continued into fourth and with strong bookings and a record backlog at the end of the year, and I'm pleased that this trend has continued even into the first quarter of 2021 with our backlog continuing to grow even further, and now it's over $400 million.
However, there were also issues related to the pandemic that impacted our operations in the fourth quarter.
These included sporadic cases of COVID that, while not large and not at a lot of locations, were -- always had a follow-on effect that like you could have one person that went home sick and then suddenly we close down the whole department for several days while we clean it and get things better and ready to make sure everybody else in there is OK.
We've always had [Phonetic] a couple of things like that.
We are also experiencing more supply chain issues, but again can be small.
You cannot ship a product as you have -- are missing a [Indecipherable] O-ring, but that's the kind of ripple effect these can have.
All of this together caused shipments in the fourth quarter to be a little below our expectations, but still good.
And margins were even better, particularly when adjusted for the non-cash charges that were above average in the fourth quarter for 2020.
The two major non-cash charges were the inventory step-up charge related to the acquisition of Morbark and the reorganization reserve related to the proposed plant consolidation we've announced in the Netherlands.
We are not finished with the inventory step-up charges at Morbark, which affected us every quarter since we bought them.
But as of the end of the fourth quarter, all goals are now finished and should not be affecting our results going forward.
And the plant consolidation in Europe, we're actually -- even though we took a charge in the fourth quarter, it's actually -- the timing was a little bad because that actually, within the next year, will have a projected payback of less than one year on that investment -- on that the plant consolidation.
So, it's a very positive move in the long term, even though it impacted the fourth quarter results.
But net of these two items, net income from the quarter was just below the previous year's -- adjusted net income was just below the previous year's adjusted net income, despite soft sales and less organic sales and certainly the ongoing COVID issues.
So, all in all, we're pleased.
On top of this, we were extremely pleased with our efforts in the fourth quarter and throughout 2020 in controlling cost and managing our assets, which, as Dan pointed out, resulted in very strong levels of cash generation, record EBITDA and reductions in outstanding debt, ensuring the Company's solid financial stability despite the certainly challenging economic environment, which we are all operating.
In addition, we are pleased that even with the limitations imposed on us during most of the year 2020 that certainly restricted our travel and caused many of our office personnel to have to work remotely for some periods of time, we were able to complete many of our operational developments that we already had planned for the year.
These include most of the integration initiatives related to the 2019 acquisitions of Morbark and Dutch Power.
We also completed the construction of a new manufacturing plant for our Super Products unit in Wisconsin that allowed us to consolidate three facilities into one modern efficient facility, and we were able to complete that project totally in 2020.
And there was continuous progress on a range of other product development and operational improvement initiatives ongoing throughout the year.
So, actually, we really made a lot of progress in a very challenging year.
Alamo Group's Industrial Division performed well in both the fourth quarter of 2020 and for the full year, even though for us, they probably had the most market challenges due to COVID.
The biggest end user of their products are governmental entities, most of which struggled with budgetary issues during the year and are still being impacted today.
Yet while organically, our sales were off, they still held up well due to the stable nature of demand for our types of products that continued to be used through the year for infrastructure maintenance.
And we're pleased bookings, which were very soft in the second quarter and gradually and steadily increased each quarter since then, have continued this trend as we moved into 2021.
As Dan pointed out, some of it's a little spotty.
Some units are doing better than other units.
But certainly in total, they're up.
And it's interesting like -- say like Morbark, one of our new units, they were probably hurt the most early on COVID, and yet, they have come back the most -- the strongest, as things have continued to build back up.
So, it had been a little spotty but in total, as I said, it continues to be good and strong.
Certainly, our Agricultural Division has held up even better and actually showed a small increase in sales for the year and margins did even better.
We were -- I think the ag sector in general was helped by increased subsidies to farmers during the year, and actually we started -- COVID [Phonetic] period started with fairly low levels of dealer inventories going into the year 2020 due to the weak agricultural industry of the last several years.
So as a result, at the end of the year, as I said, we have record backlogs.
Dealer inventories are still fairly on the low end, so there's still more upside potential there.
But we're also seeing improved commodity prices in the ag industry.
So, the outlook for further growth in this division is very positive as we move into 2021.
In fact, we believe the positive trends we are seeing in both of our divisions bode well for Alamo Group's outlook for 2021, though the pandemic and its repercussions, as well as all the impacts it has had on the global economy are still far from over.
For us specifically, ongoing COVID infections are spotty, but certainly are still causing challenges.
Supply chain issues are affecting us and many -- almost everybody in our industry.
Everything from truck chassis, tractors and all are out -- the lead times on them have nearly doubled for many of our key inputs.
Certainly, even the adverse weather conditions of the last several weeks, especially in Texas, not only were a couple of our plants closed for couple days, but we saw like one major supplier that -- they said they were closed four days, and so now they are two weeks later than their plan.
So, that's causing some issues.
And we're also seeing a few inflationary pressures too in this which -- I think with our reactions to that, that will -- most of that will flow through fairly quickly.
But in the short term, it can have some effect on our -- all of our operations.
So, all these issues together will certainly dampen our first quarter performance, but we actually feel quite good about the year 2021 in total.
There is positive momentum in our markets.
There is stable demand for our types of products, which continue to be used daily in maintenance and operations and are wearing out on a regular basis.
In addition, contributions from recent acquisitions, ongoing operational improvement initiatives, as I've said, such as the plant consolidation initiatives we've taken on, altogether make the outlook for the full year of 2021 very bright for Alamo Group.
And we certainly hope that the greater availability of the new COVID vaccines will start to take -- have a impact on the pandemic and will begin to abate and we can all return to a little bit more conditions.
But regardless, we actually feel quite good about the outlook for Alamo for 2021. | q3 adjusted earnings per share $1.59.
q3 sales rose 16 percent to $338.3 million.
qtrly backlog of $645.1 million, up 154% compared to prior year q3.
alamo group - expect to continue to experience headwinds associated with cost inflation, supply chain disruptions and skilled labor shortages in q4. | 0 |
As always, we appreciate your interest in Central Pacific Financial Corp.
The state of Hawaii, as well as our company, continues to manage well through the COVID-19 pandemic.
While the state of Hawaii experienced an uptick in infections in the late summer, which led to a second government mandated shutdown, the infection rate has recently dropped with the latest seven-day average number of infection and positivity rate of 54 and 2.2%, respectively as of October 26.
After several delays to initial targeted days, the state of Hawaii reopened out-of-state tourism on October 15 for visitors that provide evidence of a negative COVID-19 test.
This is a key step in the process of Hawaii's economic recovery.
In the first week after reopening, we've been pleasantly surprised by the daily air arrival numbers, which have been in the 5,000 to 8,000 range per day compared to less than 2000 per day since March and 30,000 per day pre-pandemic.
Additionally, on October 22, Oahu made progress by moving the Tier 2 of its recovery plan as it met the requirement of having the seven-day average COVID cases at less than 100 and positivity rate of less than 5%.
Tier 2 allows Oahu to further reopen certain parts of the economy.
At Central Pacific, we continue to push forward with our key RISE2020 strategy, while at the same time prudently managing through the pandemic.
In August, we launched our new online and mobile banking platforms, which includes many industry-leading features and functionality.
The new digital platforms have been very well received by the market with an Apple mobile app rating of 4.8 out of 5.
Additionally, we continue to replace our entire ATM network and full function machines and implemented this quarter an ATM Hawaii Time cut-off for same-day ATM deposit processing, the latest cut-off time of all banks in the state.
The revitalization of our building headquarters is progressing well and is on track for an opening date in January 2021.
We continue to thoroughly review and regularly monitor our loan portfolio to appropriately manage the credit risk in the pandemic environment.
During the third quarter, our total balance of loans on payment deferral decreased by nearly 50% as a significant portion resumed payment.
At the end of the quarter, our loans on deferral was down to only 6% of total loans, excluding PPP loans.
Last week, we announced that we successfully completed a $55 million private placement subordinated note offering.
We believe this will also -- excuse me, we believe this will allow the bank to continue to support our customers and community, while also providing future capital flexibility.
Our pandemic preparedness plan continues to be in place and we have not had any disruption in our business and we have 28 branches open to fully serve our customers.
Four more branches remain temporarily closed due to the pandemic.
During the third quarter, we consolidated three in-supermarket branches into our larger neighboring branches as the end market branches were too small to allow for adequate social distance.
We are on track for consolidating the fourth previously disclosed branch in the fourth quarter.
Much of our back office teams continue to work flexible remote schedules and all employees are required to complete a daily online health questionnaire prior to starting each workday.
We believe the actions taken will continue to enable us to provide a safe environment for both our employees and customers.
The CPB Foundation continues to be active in helping the community with relevant and timely program.
Third quarter, our foundation was one of the two presenting sponsors of the Made in Hawaii festival, featuring more than 200 Hawaii small businesses and 10,000 products.
The festival, previously held at our local Honolulu arena, pivoted quickly to become an online marketplace this year, attracting over 100,000 unique visitors over the three-day launch weekend, contrast to the 60,000 attendees for the festival in person that recorded in earlier years.
The online festival enables struggling small businesses to sell their Hawaii-made products year round to a wide base of local, national and international shoppers, bringing in much needed revenue during the current challenging environment, and is a good step forward to economic diversification through exporting.
We are glad that our foundation was able to provide support toward this successful initiative.
In the third quarter, we were able to grow our loan portfolio by $27 million despite the tough operating environment.
Growth was broad-based, including residential mortgage, home equity, commercial mortgage and construction loans.
Growth in these loan categories was partially offset by declines in our consumer and C&I loan portfolio.
Driven by a record low interest rate environment, our residential lending team continue to outperform with record levels of production, resulting in $4.3 million in mortgage banking income for the quarter with more than double the income from the same quarter a year ago.
During Q3, our bankers continue to engage our business customers that we assisted through the Paycheck Protection Program.
Most importantly, we continue to advocate for the broader business community impacted by COVID-19.
We recently launched our PPP forgiveness portal and have begun the process of assisting our customers applying for forgiveness from the FDA.
As expected, as businesses spent their PPP funding, we saw a quarter-over-quarter decline in our core deposit balances of $109 million.
Despite that, our core deposit balances remain up over $650 million year-to-date.
Additionally, our cost of total deposits declined by 7 basis points to 13 basis points.
Providing best-in-class digital technology remains a key priority for us.
In Q3, we launched our new consumer mobile platform and are nearly complete with the rollout of our new ATM fee, as Paul mentioned earlier.
We are seeing strong adoption and utilization of both digital channels.
Our ATM deposit volume has substantially increased from a year earlier due primarily to the enhanced deposit functionality now available through our ATMs, and deposit volume has also increased for our new consumer mobile platform from a year earlier.
As we move into the fourth quarter, our bankers will continue to remain vigilant, given the tough operating environment but laser focused to support our customers by exploring and engaging new opportunities to expand our customer base during this unprecedented time.
At September 30, the loan portfolio totaled $5.03 billion with 54% consumer and 46% commercial.
During the quarter, we continued monitoring the loan portfolio and provided support to our customers as they navigated through the uncertainty in the marketplace.
We assisted our customers in providing a second loan payment deferral if needed, and we were pleased to see a significant number of borrowers resume their monthly payment.
At quarter end, the total balance of loans on payment deferrals declined to $291 million or 6.5% of our total loan portfolio, excluding PPP balances.
Our redeferral rate was 31% and was primarily driven by consumer, small business and residential loans.
These loans were initially granted a three-months deferral followed by a second three-months deferrals.
While a significant number of customers have returned to making loan payments, we expect some consumer customers will require a loan payment modifications due to the continued elevated unemployment rate.
In the commercial and commercial real estate loan portfolio, we provided loan payment deferral for $133 million in total loan balances.
The two highest exposures by industry is real estate and rental and leasing, totaling $47 million or 1% of the total loan portfolio, excluding PPP balances, and foodservice totaling $46 million or 1% of the total loan portfolio, excluding PPP balances.
The majority of the loans in the real estate category are supported by low loan-to-value ratios and in the foodservice category are supported by owner with good liquidity and access to capital.
We expect some of our borrowers will need a loan modification at the end of their second loan payment deferral, which will be evaluated on a case-by-case basis.
Loan payment deferral for our high-risk industries totaled $66 million or 1.5% of the total loan portfolio, excluding PPP balances.
Additional details on our loan payment deferrals can be found on Slides 20 and 21.
During the quarter, criticized loans increased by $34 million sequential quarter to $197 million or 4.4% of the total loan portfolio, excluding PPP balances.
Special mentioned loans increased by $33 million to $149 million or 3.3% of the total loan portfolio, excluding PPP balances.
And classified loans increased by $1.5 million to $48 million or 1.1% of the total loan portfolio, excluding PPP balances.
Loan downgrades were the result of our continued assessment of borrower risk, based on the borrower's near-term strategy and outlook, management strength and actions they've taken, overall financial condition, and external funding and [Technical Issues].
Approximately 12% of special mentioned balances and 5% of classified balances also received PPP loans.
Additional details on loans rated special mention and classified can be found on Slide 22 and 23.
Overall, we continue to believe our proactive and disciplined approach to credit and our diversified loan portfolio will allow us to remain strong through these unprecedented times.
Net income for the third quarter of 2020 was $6.9 million or $0.24 per diluted share.
Return on average assets in the third quarter was 0.42% and return on average equity was 4.99%.
Our earnings continue to be impacted by higher provision for credit loss expense due to the current COVID-19 pandemic.
Importantly, the third quarter increase in our provision was largely driven by the economic forecasts and not an increase in actual loan losses.
Additionally, our pre-tax, pre-provision earnings for the third quarter was $23.7 million, which increased slightly from the prior quarter.
Net interest income for the third quarter was $49.1 million, which remained relatively flat on a sequential quarter basis.
Net interest income included $3.4 million in PPP net interest income and net loan fees.
The net interest margin decreased to 3.19% in the third quarter compared to 3.26% in the prior quarter.
The decrease was due to lower yielding PPP loans, as well as the lower interest rate environment.
The net interest margin normalized for PPP was 3.26% in the third quarter compared to 3.31% in the prior quarter.
Third quarter other operating income totaled $11.6 million compared to $10.7 million in the prior quarter.
The increase was primarily due to higher mortgage banking income of $0.8 million.
Additionally, in the current quarter, we reinstated certain service charges that were temporarily suspended due to the pandemic.
This resulted in an increase in service charges on deposit accounts and other service charges and fees.
Other operating expense for the third quarter was $37.0 million which was an increase of $0.5 million compared to the prior quarter.
The increase was driven by increases in several expense line items and also included branch consolidation costs of $0.3 million related to the three in-store branch closures, previously noted.
Net charge-offs in the third quarter totaled $1.3 million compared to net charge-offs of $2.9 million in the prior quarter.
The charge-offs primarily came from the consumer loan portfolio and the C&I portfolio.
At September 30, our allowance for credit losses was $80.5 million or 1.79% of outstanding loans, excluding PPP loans.
This compares to 1.50% as of the prior quarter end.
The efficiency ratio remained relatively steady at 60.9% in the third quarter compared to 60.8% in the prior quarter.
The effective tax rate increased to 24.3% in the third quarter due to lower tax-exempt bank-owned life insurance income.
Going forward, we expect the effective tax rate to continue to be in the 24% to 26% range.
Our liquidity and capital position remains strong and we continue to perform robust stress testing.
The recently completed subordinated note offering strengthens our capital ratios, which further allows us to support our customers and the communities during the pandemic, and positions the company well for the future.
The subordinated notes are considered Tier 2 capital and is anticipated to increase our CPF total risk-based capital ratio by approximately 120 basis points.
Our Board declared a quarterly cash dividend of $0.23 per share, which will be payable on December 15 to shareholders of record at the close of business on November 30th.
In summary, Central Pacific continues to make positive forward progress on our strategies, while at the same time manage well through the COVID-19 pandemic.
We have a solid financial credit, liquidity and capital position that enable us to weather the storm.
As the economic recovery gradually begins, we remain committed to providing support to our employees, customers and the community.
At this time, we will be happy to address any questions you may have. | compname reports q3 earnings per share $0.24.
q3 earnings per share $0.24. | 1 |
On the call, we have Raghu Raghuram, Chief Executive Officer; and Zane Rowe, Executive Vice President and Chief Financial Officer.
Actual results may differ materially as a result of various risk factors described in the 10-Ks, 10-Qs and 8-Ks VMware files with the SEC.
In addition, during today's call, we will discuss certain non-GAAP financial measures.
These non-GAAP financial measures, which are used as measures of VMware's performance, should be considered in addition to, not as a substitute for or in isolation from GAAP measures.
Our non-GAAP measures exclude the effect on our GAAP results of stock-based compensation, employer payroll tax and employee stock transactions, amortization of acquired intangible assets, realignment charges, acquisition, disposition, certain litigation matters and other items, as well as discrete items impacting our GAAP tax rate.
Our fourth quarter fiscal 2022 quiet period begins at the close of business, Thursday, January 13, 2022.
I am pleased with the continued strong performance in Q3 fiscal year 2022 with revenue of $3.2 billion and non-GAAP earnings of $1.72 per diluted share.
Earlier this month, we successfully completed our spin-off from Dell Technologies.
As a stand-alone Company, we have more strategic and financial flexibility to deliver on our multi-cloud strategy.
We are also able to partner even more deeply with all the cloud and on-premise infrastructure companies to create a better foundation that drives results for our customers.
Customers continue to choose VMware as their trusted digital foundation to accelerate their innovation, and we continue to expand and advance our portfolio to meet their needs in these three ways: one, deliver a cloud-native app platform for building modern applications in a public cloud-first world; two, migrate enterprise applications to a cloud-agnostic infrastructure; and three, build out the secure edge to optimize across our workspace and edge-native applications.
These three focus areas are built on a horizontal set of offerings across networking, security and management.
It's clear that multi-cloud will be the model for digital business for the next 20 years and in this vibrant dynamic marketplace, the pace of innovation is relentless.
VMware is at the center of it.
In the modern app space, we recently provided the Department of Education for one of America's largest cities with application resiliency as part of their business continuity project.
Leveraging VMware Tanzu, the customer now has improved ability to respond to ever-changing needs of students, their families and faculty while protecting student information and creating an environment to accelerate their innovation and automation.
One of our new beta offerings in the space is the Tanzu Application Platform, which will make it easier and simpler for developers to drive productivity and velocity in a more secure fashion on any cloud.
Our Tanzu portfolio is now one of the most comprehensive in the industry for both Kubernetes operations and developer experience.
We also recently unveiled Tanzu Community Edition, a freely available, easy-to-manage Kubernetes platform for learners and users, and Tanzu Mission Control Starter, a multi-cloud, multi-cluster Kubernetes management solution available as a SaaS service.
We are pleased to share some customer stories in support of our VMware Cloud services across the hyperscalers.
PennyMac, a leading financial services firm is leveraging VMware Horizon on VMware Cloud on AWS to provide loan officers and call center agents a more secure work-from-anywhere virtual desktop in a fully automated and scalable cloud environment.
We also worked with the University of Miami, who looked to the Azure VMware solution to support their VMware workloads on their preferred public cloud provider.
Recently, we announced new advancements for VMware Cloud, the industry's first and only cloud-agnostic computing infrastructure.
Newly unveiled Project Arctic will bring the power of cloud to customers running VMware vSphere on-premises.
It will enable cloud-based management for hundreds of thousands of vSphere customers and vSphere deployments around the world.
Customers will be able to benefit from life cycle management, cloud disaster recovery and cloud burst capabilities as an extension of their vSphere deployments.
We will bring Project Arctic to market next year as the next step in making our portfolio available in a subscription and SaaS form factor.
We also announced VMware Sovereign Cloud initiative, where we are partnering across our VMware Cloud providers to deliver cloud services on a sovereign digital infrastructure to customers in regulated industries.
Lastly, we introduced a tech preview of an exciting new management technology, Project Ensemble.
It is designed to manage apps across multiple public clouds, bringing together a comprehensive set of costs, security, automation and performance capabilities for the public cloud environment.
VMware was once again ranked number one in the September 2021 IDC report titled Worldwide Cloud System and Service Management Software Market Shares, 2020: Growth Continues for the Top Vendors.
In the area of Edge, we recently helped an international wholesaler with 800 stores across 30 countries to refresh its decade-old in-store platform.
The VMware Edge Compute Stack is now serving as a single platform for both the customers existing and modern applications, offering a right-sized resilient solution that is providing ROI for their business.
As a continued commitment to helping our customers at the Edge, we recently introduced VMware Edge, a product portfolio that will enable organizations to run, manage and better secure edge-native applications across multiple clouds anywhere.
Together, VMware Cloud, Tanzu, VMware Edge and Anywhere Workspace offer our customers a solution for all of their applications across their multi-cloud environment.
In the security space, VMware is delivering solutions built specifically for threats customers face today.
We use the power of software, combined with a scaled-out distributed architecture, zero trust design principles and a cloud delivery model for better security that's easier to use.
We are excited about our continuing innovation in SASE, Secure Access Services Edge, especially as many businesses are now working as a distributed workforce.
We also announced the industry's first elastic application security edge, which enables the networking and security infrastructure at the data center or cloud edge to flex and adjust as app traffic changes.
In the third quarter, VMware was positioned as a leader in The Forrester New Wave: Zero Trust Network Access Q3 2021.
On the telco front, Vodafone recently selected VMware to deliver a single platform to automate and orchestrate all workloads running on its core networks across Europe, starting with 5G stand-alone.
This recent work builds on Vodafone's previous selection of VMware Telco Cloud Infrastructure as its network functions virtualization platform.
In the third quarter, VMware received additional recognition from leading industry analyst firms, once again being named as a leader in the August 2021 Gartner Magic Quadrant for Unified Endpoint Management Tools.
Additionally, VMware was once again named a leader in the September 2021 Gartner Magic Quadrant for WAN Edge Infrastructure.
Our innovation engine is thriving as we bought many of these new offerings, features, beta programs and partnerships to the forefront during VMworld 2021, which attracted approximately 116,000 registrants.
We look forward to hosting VMworld China and VMworld Japan in the coming weeks.
Our environmental, social and governance agenda continues to be very important to us and core to our culture.
VMware received recognition for our ESG leadership by being included in the Dow Jones Sustainability Indices, one of the world's leading ESG benchmarks for the second consecutive year.
In summary, we strive to serve our customers in three unique ways: by being the trusted foundation for their most critical business operations; by offering a best-of-breed, innovative portfolio of best-in-class solutions to fulfill their multi-cloud vision; and by having a broad set of strategic partnerships required to unlock the full potential of multi-cloud.
We are pleased with our Q3 financial performance, which exceeded our initial expectations and is a continuation of the good performance we've seen all year.
We saw solid demand in the quarter and continued to execute on our multi-cloud strategy.
Total revenue for Q3 was $3.2 billion.
Combined subscription and SaaS and license revenue grew 16% year-over-year totaling $1.5 billion, ahead of our guidance.
Subscription and SaaS revenue of $820 million was up 21% year-over-year, in line with our expectations, representing 26% of total revenue for the quarter.
Subscription and SaaS ARR was $3.3 billion, up 25% year-over-year in Q3.
Our largest contributors to subscription and SaaS were VCPP, Tanzu, EUC, Carbon Black and VMware Cloud on AWS, which saw strong double-digit year-over-year growth in revenue and ARR.
License revenue in Q3 grew 11% year-over-year to $710 million.
The strength we saw was due to good execution in the quarter and our broad installed base of customers that see us as the trusted ally for their mission-critical workloads.
Our strategy is resonating with our customers who are confident that their investments can be leveraged over the longer-term in multi-cloud environments.
Our non-GAAP operating income for the quarter of $935 million was driven by our revenue performance and lower-than-expected growth in expenses.
Non-GAAP operating margin for the quarter was 29.3% with non-GAAP earnings per share of $1.72 on a share count of 422 million diluted shares.
We ended the quarter with $10.2 billion in unearned revenue and $12.5 billion in cash, cash equivalents and short-term investments, which includes proceeds from our $6 billion bond issuance.
The bond issuance proceeds together with $4 billion of additional borrowings from term loan commitments, as well as other available cash on hand was used to fund a special dividend of $11.5 billion.
The special dividend was paid on November 1 to all stockholders of record on October 29 in conjunction with our spin-off from Dell Technologies.
Q3 cash flow from operations was $1,090 million and free cash flow was $984 million.
RPO was $11.1 billion, up 9% year-over-year, and current RPO was $6.2 billion, up 11% year-over-year.
Total backlog was $124 million, substantially all of which consisted of orders received on the last three days of the quarter that were not shipped and orders held due to our export control process.
License backlog at quarter end was $34 million.
We are pleased with the overall bookings performance in Q3 as we continue to scale our subscription and SaaS offerings.
We saw strong year-over-year product bookings growth in major product categories.
Core SDDC product bookings increased over 20% year-over-year.
Compute was up low-double digits, and Cloud Management was up strong double digits year-over-year.
Both of these were helped by our multi-cloud subscription and SaaS offerings.
We saw momentum in VMware Cloud, which includes hyperscalers such as Amazon, Microsoft, Google and Oracle.
We also continue to drive innovation in new product offerings across our Carbon Black Cloud and Tanzu platforms.
NSX increased in the low double digits versus Q3 last year, and vSAN grew in the high-teens year-over-year.
EUC product bookings, as well as sub and SaaS ACV bookings were up in the strong double digits year-over-year.
In Q3, we repurchased approximately 1 million shares in the open market at an average price of $150 per share.
In early October, our Board of Directors authorized up to $2 billion of stock repurchases through FY'24, which replaced the relatively small balance remaining on our prior authorization.
As a part of our capital allocation framework, we plan to use our cash generation and balance sheet to invest in growing our business both organically and inorganically, paying down debt and returning excess capital to shareholders through share repurchases.
In addition, we are committed to maintaining an investment-grade credit profile and rating.
Turning to guidance for fiscal 2022.
We're increasing our expectation for total revenue to $12,830 million, a growth rate of approximately 9% year-over-year.
We expect the combination of subscription and SaaS and license revenue to total $6,305 million, an increase of approximately 12% year-over-year.
Approximately 50.5% of this amount is expected to be subscription and SaaS.
We are increasing guidance for non-GAAP operating margin for the full-year to 30% and non-GAAP earnings per share to $7.19 on a diluted share count of 422 million shares.
We're also increasing our cash flow from operations guidance to $4.1 billion and increasing free cash flow expectations to $3.7 billion.
This reflects our performance in Q3 combined with our outlook for FY'22.
For Q4, we expect total revenue of $3,510 million or a growth rate of approximately 7% year-over-year.
We expect $1,875 million from subscription and SaaS and license revenue in Q4 or an increase of nearly 9% year-over-year with approximately $860 million from subscription and SaaS, reflecting the current pace of adoption of our subscription and SaaS offerings.
We expect non-GAAP operating margin to be 30.4% for Q4 with non-GAAP earnings per share of $1.96 on a diluted share count of 422 million shares.
We typically provide some color on our upcoming fiscal year at this time.
We are driving innovation across the portfolio, scaling our subscription and SaaS offerings and progressively making our products available as subscription and SaaS.
Consistent with the outlook framework we presented at the Financial Analyst Meeting last month, we currently expect total FY'23 revenue to grow in the high-single digits while we continue to build out our subscription and SaaS portfolio.
We are planning on growing our sub and SaaS revenue to nearly 30% of total revenue with our FY'23 exiting ARR growth rate exceeding FY'22's.
We expect non-GAAP operating margin of approximately 28%, which is similar to our initial outlook for FY'22, reflecting continued investments in subscription and SaaS and the resumption of more normalized level of T&E as we support our customers.
In closing, we are pleased with the progress we are making on our multi-cloud strategy as reflected in our performance this quarter and in our outlook for FY'22 and FY'23.
As a stand-alone Company, we are well positioned to enable our customers' multi-cloud journey and become the multi-cloud leader.
Before we begin the Q&A, I'll ask you to limit yourselves to one question consisting of one part so we can get to as many people as possible.
Operator, let's get started. | q2 non-gaap earnings per share $1.75.
q2 revenue $3.14 billion versus refinitiv ibes estimate of $3.1 billion.
remains on track for planned spin-off from dell technologies inc. in early november 2021. | 0 |
Such risk factors are set forth in the company's SEC filings.
We appreciate you joining us to discuss our 2021 third quarter results.
I'm very pleased to start off by saying that our industry and our company continue to make significant progress in recovering from the effects of the pandemic.
We're highly encouraged by the continuing positive trends with increasing consumer demand for the cinematic theatrical experience and growing momentum at the box office.
This favorable progress was demonstrated in our third quarter's 61% growth in worldwide attendance since last quarter in 2Q '21.
Importantly, that growth in attendance flowed through to our bottom line results in the third quarter, which included positive adjusted EBITDA of $44 million.
Our 3Q results marked a significant milestone for Cinemark as it represents our first quarter since the pandemic began with positive total company adjusted EBITDA.
Furthermore, every month in 3Q delivered positive EBITDA, which tangibly underscores our company's resurgence.
Strength in the domestic box office was a key driver of our third quarter performance, as the North America industry delivered $1.4 billion of gross proceeds on a larger volume of more sizable commercial releases.
Top hits in the quarter included Shang-Chi and the Legend of the Ten Rings, Black Widow, Jungle Cruise, Free Guy, Space Jam and the carryover from 2Q's highly successful release of Fast and Furious Nine.
And consistent with last quarter, I'm thrilled to report that Cinemark once again over-indexed the North America industry box office performance relative to 3Q '19 with a substantial outperformance of 700 basis points.
This outperformance helped us capture an approximate 15% market share of North America box office, which significantly exceeded our historic average of just under 13%.
Our 15% market share achievement is particularly meaningful this quarter as the vast majority of theaters in the U.S. and Canada had reopened.
During our last several calls, we talked about four key factors that impact theatrical exhibition recovery, all of which continue to experience noteworthy progress.
First, is the status of the virus.
Driven by vaccine penetration to date as well as impacts from the virus beginning to subside, COVID rates have plunged 73% since the Delta variant peaked in September.
Vaccination rates continue to rise across the U.S., especially with the recent approval of inoculation for children five and older.
Moreover, vaccination rates are also rapidly progressing throughout Latin America.
The second factor is government restrictions, which have largely gone away in the U.S. at this juncture and continue to reduce in Latin America.
Third is consumer sentiment.
While the Delta variant threw us a curve ball during the third quarter and caused a meaningful dip in consumer comfort regarding visiting theaters, that sentiment has since recovered to 77% of U.S. moviegoers expressing comfort and going to the theater in the current environment.
This level of positive response is in line with the peak levels of sentiment we witnessed in early July of 78%.
And the final key factor of the theatrical exhibition recovery is the consistent flow of new film content with broad consumer appeal, which clearly is now underway.
Of course, these recovery factors not only apply to the U.S., but are also applicable on a global basis.
And while the domestic market is further along in its rebound cycle, we're also seeing positive trends in Latin America.
Currently, 100% of our theaters have reopened across the region, and even though certain capacity and operating hour restrictions persist in Central and South America, consumer demand to return to the theaters is very strong.
There is no question that theatrical exhibition is meaningfully recovering around the world, and Cinemark is extremely well positioned to benefit during this comeback on account of the many operational advancements we made during the pandemic as well as our ongoing efforts to maximize attendance and drive new ancillary revenue opportunities.
Some examples include improved operating efficiencies, enhanced marketing programs and capabilities and our recently implemented online food and beverage platform, new alternative content possibilities and ongoing impact of our premium amenities.
In terms of operational efficiencies, we have made some significant strides over the course of the pandemic.
For instance, we're optimizing operating hours and showtime schedules through utilization of enhanced data management analytics.
We have simplified and streamlined numerous theater practices, such as ticket issuance, inventory procedures and ushering routines to be leaner and more efficient.
And we've refined the degree of staffing that is required to operate our theaters, including enhanced planning and management controls.
We also continue to significantly advance our digital and social marketing capabilities, utilizing proven best practices from retail, travel and technology industries.
Examples include leveraging iterative A/B testing to identify and scale winning concepts, simplifying consumer touch points to drive a more frictionless experience and applying advanced analytics against our highly valuable customer database to drive improved targeting accuracy and contextually relevant messaging.
These actions and capabilities are focused on increasing moviegoing frequency and overall consumer spend, and we believe they will be highly valuable in navigating the competitive landscape ahead and maintaining our increased market share.
In tandem with our digital and social marketing actions, we continue to leverage our unique industry-leading transaction-based subscription program, Movie Club, to drive attendance.
During the third quarter, we completed billing reactivation on all Movie Club accounts that were proactively paused for the past 1.5 years during the pandemic.
In doing so, we have been extremely pleased by the minimal amount of churn we've experienced, which represented only a modest 6% dip in our pre-pandemic membership base that was largely driven by credit cards that expired during that timeframe.
This dip was better than expected due to our member-first approach, and we're already seeing new net positive Movie Club additions as we actively work to reattain those expired members as well as attract new ones.
We've also continued to further enhance Movie Club and recently introduced Movie Club Platinum, an earned premium tier that provides our most frequent moviegoers with even bigger incentives.
We expect this heightened tier will serve to further increase loyalty of our most active customers as well as stimulate incremental transactions.
Since we announced the launch of Movie Club Platinum just over a month ago, 64% of Movie Club members familiar with the program stated that they have been incentivized to achieve Platinum status this year.
Another foray into simplifying and enhancing our customer experience while driving ancillary revenues is Snacks In A Tap, our recently launched online food and beverage ordering platform.
This platform enables guests to skip the line and have their concessions ready for pickup upon arrival or delivered to their seats for a nominal fee.
The added convenience and time savings provided by Snacks In A Tap have been extremely well received by our moviegoers, and we look forward to continuing to grow the program's awareness and utilization in the months ahead.
We're also continuing our reintroduction of select expanded food and beverage options as a more consistent release cadence of stronger film content takes hold and moviegoer attendance increases.
Another exciting new business venture that we announced last week is our heightened focus on gaming initiatives, including our plan to hire a new Vice President to forge strategic relationships and pursue content and licensing agreements in the gaming realm.
Gaming is the latest evolution in our ongoing focus to secure alternative content, further utilizing our auditoriums to supplement Hollywood film content, and we have seen several promising indicators with regards to consumer interest in both spectator and participatory gaming events.
Additionally, we're continuing to explore other alternative content offerings and have seen similar positive results from events such as professional wrestling with AEW and WWE, boxing with Triller Fight Club, movie premiers, special live Q&A sessions with talent and concerts, all in addition to ongoing events provided by Fathom entertainment.
We're also continuing to reap benefits from investments we've made in premium amenities that enrich the moviegoing experience, which movie fans continue to seek out, including reclining seats with approximately 65% of our entire domestic circuit featuring country loungers, the highest recliner penetration among the major theater operators.
Premium large-format auditoriums led by our XD, our proprietary brand, which ranks number one in the world, which delivered 12% of our box office in the third quarter alone on only 4% of our screens and an increase in D-Box motion seats, which are synchronized with the on-screen action.
And finally, Cinionic laser projectors.
In line with our previously announced partnership, we are featuring laser projections crystal clear picture in all of our new build theaters and continue to upgrade our existing theaters with laser technology, which lasts longer and operates more efficiently.
We're happy to share that in addition to other locations across the U.S., we have completely converted all of our Dallas-Fort Worth theaters and screens, our home city, delivering consistently bright, colorful and sharp images on laser.
Speaking of new theaters, strategic new-builds are a cornerstone of our strategy, and we are thrilled to have opened six new theaters and 67 screens already this year, all of which were committed to prior to the onset of COVID.
These new-build theaters are all in high-growth areas with significant opportunities to capture moviegoing attendance.
While it's still early days, we're highly encouraged by the results to date.
We have opened three locations in the U.S., Kirkland, Washington, just outside of Seattle; Jacksonville, Florida; Waco, Texas; and three in Latin America, Guatemala, Chile and Peru.
We also have one more theater open -- to open later this year in Roseville, California, just outside of Sacramento.
Based on everything I've just shared, I hope it's clear that we are pleased with our performance trend in the third quarter and the advancements we made to continue to make our business more vibrant through business development.
While we're cognizant, there's still a long road ahead.
Over the course of the coming months, we continue to expect an ongoing ramp-up of box office and overall financial results.
The fourth quarter has already started out strong as October delivered our best monthly box office results since the onset of COVID.
Notably, our cash generation during the month of October was significant enough to more than cover all of our variable and all of our fixed costs.
Looking ahead, upcoming film content for the balance of the year includes highly anticipated blockbusters appealing to families and adults alike, such as Eternals, which opened with previews last night to outstanding results.
Ghostbusters: Afterlife, Encanto, House of Gucci, West Side Story, Spider-Man: No Way Home, Matrix: Resurrection and Sing two to highlight just a few.
And the slate next year looks absolutely tremendous with broad range of highly promising films for all moviegoing audiences.
Importantly, these films were made to be experienced in a cinematic out-of-home entertainment environment that only a movie theater can provide.
We're also optimistic about the future of exclusive theatrical windows as it's such a meaningful contributor to the overall media landscape.
As we've witnessed with the positive box office results generated most recently, I have been a significant proponent of the longevity of the theatrical exhibition industry, and especially for Cinemark, as the company is uniquely positioned and poised for long-term success.
As previously announced, this is my last earnings call as CEO of Cinemark before I hand over the reins to Sean at the end of this year.
It has been an honor serving as CEO and leading the incredible people of Cinemark the past 6.5 years.
It has been tremendous getting to know so many of you over the years, and we appreciate your ongoing support.
I, along with the rest of the Board, are highly confident in Sean and his ability to lead Cinemark going forward.
His operational background and strategic mindset along with his keen eye for efficiencies and business opportunities will be especially advantageous as Cinemark continues to emerge from the effects of the pandemic.
I look forward to watching the company thrive under his direction as I continue in a strategic capacity through my position on the Board.
You've been a tremendous leader for our company and our industry over the past 6.5 years.
And to say you'll be missed from our day-to-day operations is clearly an understatement.
On a related note, three weeks ago, we announced Melissa Thomas will be joining Cinemark as our next CFO.
Melissa was most recently the CFO for Groupon and has a strong and impressive leadership and financial background.
We believe she will be a great cultural fit for Cinemark and an excellent complement to our leadership team and finance organization.
Melissa will officially start this coming Monday, November 8, and we look forward to formally introducing her in the near future.
As Mark already highlighted, the resurgence of theatrical moviegoing is in full swing, and Cinemark delivered another quarter of meaningful financial improvement.
During 3Q, our average monthly cash burn reduced to approximately $11 million after normalizing for working capital timing.
This rate was in line with the expectation of a $10 million to $15 million monthly cash burn that we communicated on our last earnings call.
As of today's current operating environment, we have now flipped to modestly positive average monthly cash flow, and we expect this rate will continue to improve as our industry further rebounds.
At the end of the third quarter, we had a global cash balance of $543 million.
As of October 31, that balance had increased to approximately $595 million, driven by the strong box office results of Venom: Let There Be Carnage, No Time To Die, Halloween Kills and Dune as well as working capital timing associated with corresponding film rental payments.
Based on our current and improving cash flow position, we continue to believe we have ample liquidity and will not require any additional financing.
That said, multiple financing opportunities still remain available to us, including drawing on our $100 million revolving credit line, tapping incremental term loan borrowing capacity within our credit facility, executing sale-leaseback arrangements on unencumbered properties we own and issuing equity.
Also, as we described last quarter, following our recent refinancing transactions, our revolver maturity now sits at November of 2024 and all other significant debt maturities extend through March of 2025 and beyond.
Turning now to our third quarter results.
Furthermore, as we have indicated in previous quarters since the onset of the pandemic, our traditional metrics continue to be somewhat distorted in the current environment.
Considering our theaters were only beginning to reopen with limited new film content in the third quarter of 2020, we will compare our most recent quarter's results to 2Q '21 and 3Q '19 in select instances.
During the course of the third quarter, we continued to further expand operating hours in response to increasing consumer demand for a growing volume of new commercial film releases.
Compared to second quarter, our third quarter domestic operating hours expanded by nearly 40%, although still remained approximately 25% below 3Q '19.
Expanded hours and increased moviegoing led to quarter-over-quarter domestic attendance growth of 42.4% to 21.5 million patrons.
Domestic admissions revenues were $195.3 million with an average ticket price of $9.08.
Our average ticket price increased 14.1% versus 3Q '19, primarily as a result of price increases and ticket type mix largely on account of fewer matinee and weekday showtimes.
Domestic concessions revenues were $142.6 million and yielded another all-time high food and beverage per cap of $6.63.
Our third quarter per cap was roughly flat with 2Q accrued 27% compared to 3Q '19 as pent-up moviegoing demand continues to drive a heightened indulgence in food and beverage consumption across our core concession categories and operating hours remain concentrated in timeframes that are more conducive to concession purchases.
Our third quarter results also benefited from ongoing strategic promotions and pricing initiatives, the reintroduction of various enhanced food offerings and recognition of previously deferred revenues associated with the issuance of loyalty points.
Domestic other revenues also continued to rebound during the quarter and grew 28.3% to $37.6 million, driven by volume-related increases in screen ads, transaction fees and promotional income.
Altogether, third quarter total domestic revenues were $375.5 million, with positive adjusted EBITDA of $44.8 million.
Internationally, we also continue to see material recovery in Latin American box office and operating results during the third quarter.
Driven by expanded theater openings and increased availability of new film -- new commercial film content, our third quarter international attendance grew 128% versus 2Q '21 to 9.2 million patrons, which generated $30.2 million of admissions revenues and $21.6 million in concession revenues.
Total international revenues were $59.3 million and yielded adjusted EBITDA that was just shy of breaking even for the quarter.
Globally, film rental and advertising expenses were 51.9% of admissions revenues, which increased 200 basis points compared to 2Q '21.
This increase was expected and resulted from a higher concentration of larger, more successful new film releases.
That said, compared to the third quarter of 2019, our film rental rate was still down 420 basis points, predominantly due to reduced film grosses as skew lower on our film rental scales.
Concession costs were 17.2% of concessions revenues and were in line with both our second quarter results and pre-COVID averages.
Third quarter global salaries and wages were $67.6 million and increased 34.1% versus 2Q '21.
This increase was driven by additional theater reopenings, extended operating hours to accommodate growing consumer demand and the reintroduction of select enhanced food and beverage options that require more labor.
Facility lease expenses were $68.8 million, and while largely fixed, experienced a modest uptick from the second quarter due to a slight increase in percentage rent in common area maintenance as volumes increased.
Worldwide utilities and other expenses were $81.8 million and increased 33.7% quarter-over-quarter, driven by variable costs that grew in line with volume, such as credit card fees, janitorial expenses and commissions paid to third-party ticket sellers.
Utility expenses also increased as we expanded operating hours while other costs within this category, such as property taxes and property and liability insurance remained predominantly fixed.
Finally, G&A for the quarter was $38.6 million and remained considerably lower than pre-pandemic levels as a result of the restructuring actions we pursued in the second quarter of 2020 and our ongoing efforts to minimize nonessential operating expenditures.
Collectively, our worldwide adjusted EBITDA for the third quarter was positive $44.3 million.
As Mark previously described, this result represents a significant milestone for our company as it was our first quarter of positive total company adjusted EBITDA since the onset of the pandemic and our second consecutive quarter of material adjusted EBITDA recovery.
Our net loss also materially improved in 3Q to $77.8 million, reducing by $64.7 million quarter-over-quarter.
We'd like to congratulate our studio partners on the success their films achieved in the quarter, and we like to commend our hard-working teams on their relentless execution and drive to deliver these results.
Capital expenditures during the quarter were $24.4 million, of which $13.6 million was associated with new-build projects that had been committed prior to the COVID-19 pandemic and $10.8 million was driven by investments and maintenance in our existing theaters.
Our consistent investment in proactively maintaining and enhancing our theaters over the years has enabled us to scale back capital expenditures in the near term without hindering our asset quality or guest satisfaction.
As such, we continue to anticipate spending a highly reduced level of capex in 2021 relative to pre-pandemic ranges, which we previously estimated at approximately $100 million.
However, due to varied supply chain constraints that have started impacting the delivery timing of certain equipment and supplies, we now anticipate capex may come in slightly below $100 million for the full year.
That said, we do not expect these delays will have any adverse impact on our daily operations.
In closing, we are thrilled with the positive momentum we continue to experience regarding the rebound of theatrical exhibition and our company's financial results, and we are optimistic about the robust release calendar that lies ahead in the fourth quarter and beyond as well as further improvements in consumer moviegoing enthusiasm as the pandemic subsides.
We are proud of the advancements our team has already made to set up Cinemark for success in a post-pandemic environment, and we look forward to the impact our strategic initiatives will continue to have on further enhancing the cinematic entertainment experience we provide our guests and delivering long-term shareholder value. | expect a continued ramp-up in box office performance over course of coming months. | 1 |
Looking at our third quarter performance, we are pleased to report another solid result, and we remain proud of our planned execution across all of our business service lines.
Revenue grew 4.9% to $583.7 million compared to $556.5 million for the same quarter in 2019.
Net income rose to $79.6 million or $0.24 per diluted share compared to $44.1 million or $0.13 per diluted share for the third quarter of last year.
Eddie will review the GAAP and non-GAAP results shortly as there were meaningful adjustments impacting our financials.
Revenues for the first nine months of the year were $1.62 billion, an increase of 7.6% compared to $1.51 billion for the same period last year.
Net income for the first nine months increased to $198.2 million or $0.60 per diluted share compared to $152.6 million or $0.47 per diluted share for the comparable period last year.
Again, Eddie will review these and our 9-month non-GAAP results in a few minutes.
Turning to our business lines results.
Residential pest control grew 10.5% during the quarter, reflecting the resiliency of this service and its strong demand.
As anticipated, our commercial operation revenue was down year-over-year as commercial pest control continues to be negatively impacted by the COVID-19 virus and its related economic toll.
However, some businesses reopened during the quarter.
And for some of these customers, their economic conditions improved.
We've continued to narrow the revenue shortfall gap each month since April.
Overall, we were pleased with the steady progress we've achieved under those circumstances.
John will provide greater detail on these and our other operational results shortly.
Overall, our people and business continues to perform well in what remains a complex environment.
We have an unwavering commitment to keep our employees and customers safe.
Our team's continued dedication in serving our customers has been outstanding.
They are truly our greatest asset, and we're grateful for their efforts.
Further, our commitment to safe practices involved our employees and customers as well.
We continue to benefit from the high regard, trust and confidence that our customers have in us.
John Wilson, who many of you know through his involvement on our earnings conference calls and investor meetings, was promoted to the company's Vice Chairman.
John joined the company in 1996 and has been an integral part in developing and executing Rollins strategic initiatives over the years.
This promotion is truly a testament to his leadership, work ethic and talent.
Additionally, Jerry Gahlhoff was promoted to Rollins' President and COO.
Since many of you may not be too familiar with Jerry's background, I'd like to take a minute and highlight a few of his many accomplishments.
Jerry started his career in the pets control industry in 1991 and came to Rollins in the HomeTeam acquisition in 2008.
He has successfully managed several areas of the company and has been instrumental in guiding meaningful growth and profitability in these businesses.
He most recently led what we refer to as the Rollins specialty brands team, which includes HomeTeam Pest Defense, Clark Pest control, Northwest Exterminating, Western Pest, Waltham Pest and OPC Services as well as our very important Rollins human resources department and training department.
A seasoned executive and well-respected industry leader, Jerry has a comprehensive understanding of our organization, business and is extremely well suited for the COO position.
Another little-known fact is that Jerry came from an Orkin household as his dad was a 26-year employee.
We're fortunate to have John and Jerry assume a greater role in our company, its direction in its future.
We look forward to their continued contributions.
I am excited and grateful for the opportunity to be here.
I wanted to start by providing some context to the current environment.
While the coronavirus remains prevalent in many areas, we feel positive about our financial performance this quarter and how we are executing as a company to meet the needs of our residential and commercial customers, both in the U.S. and abroad.
Our residential business remains solid.
Our call centers are busy, and we are pleased with our results from this service line.
We are also encouraged yet, at the same time, cautiously optimistic about the positive trends we have been seeing on the commercial side of our business.
As Gary noted, our third quarter commercial results were down year-over-year.
However, the operating environment steadily improved as the third quarter progressed, and we continue to see month-to-month improvements as more businesses reopened and the trust that our brands have built over time have enabled our technicians to provide service when and where needed.
Still, we are, by no way, thinking that this pandemic is over.
We remain diligent considering the current operating environment.
And with many experts projecting that another wave is possible, there remain many uncertainties.
We are executing against our plan and continue to proactively navigate the best path forward.
For example, out of concern for the health of our employees as well as our customers, stringent safety practices are ongoing and remain a top priority.
To keep our technicians safe, we continue to adhere to the advanced health and safety protocols as recommended by the CDC.
By providing a full complement of personal protective equipment for our customer-facing employees, we are continuing to build trust with our customers, while also demonstrating it is safe to do business with us.
We are also working with our customers to create a safer environment for where they live and work.
As we have discussed, Orkin and many of our other brands are now offering a commercial and residential disinfection service, which is effective in quickly and thoroughly eliminating a wide variety of serious pathogens.
While it is still early, we are pleased with the very positive reception this new service line has been receiving from existing as well as new customers.
During the third quarter, we steadily grew this new offering.
Additionally, investors have asked us about the business impact of the devastating wildfires out West as well as the recent tropical storms and hurricanes that have made landfall in the U.S. While our hearts go out to those that have been adversely affected by these natural disasters, up to now, we have not had any significant business disruption.
I would also like to take a minute to provide an update on our wildlife brands, who have experienced strong double-digit growth year-to-date.
For those of you who aren't too familiar with this business segment, the services we provide include live trapping and removal of wildlife, exclusion of wildlife from residences and other buildings and the repair and remediation of damages caused by wildlife.
There is not a more urgent call for help than that customer who has a wild animal loose in their home or business.
Although a small part of our total business, we have firmly established our position as the leading wildlife control provider in North America, and looking ahead, we believe that this is real opportunity to continue to grow this business.
Lastly, I wanted to circle back to the promotion of Jerry to President and Chief Operating Officer.
Not only does he have a strong foundation in the pest business, he does have a degree in entomology after all, he is that rarest of individuals who knows both bugs and the bug business inside out.
He works very hard at improving himself each day.
And I've watched him over the last 13 years improve every operation he has touched.
I am excited to have Jerry in this new role.
I believe that every reference that could be made regarding how long the last quarter has been has already been used, so I'm going to spare my attempt.
Your words of reflection and support were truly appreciated.
In 2016, we had our first-ever Investor Day in New York City, and our team had a chance to get to know many of you on that day.
The primary reason for holding that event was to share the depth and breadth of our management -- of our senior management team.
I've had discussions with many of you over the years about the eventual passing of the baton, and the elevation of Gary, John and Jerry show this in action.
Each of them have been well prepared for years to take their perspective and vision to lead Rollins for years to come.
We're fortunate as an organization.
And as investors, I believe that you will be pleased with what the future holds.
The obstacles that impacted Q2 began to subside, and our operations and nonoperations groups have made tremendous adjustments to the new life that we are all leading.
Today, I'll share some details on our Q3 actual results and some additional insight to what we know today that will impact the future.
For the quarter, our residential pest control and termite service lines showed growth and key to the quarter included: improvements in commercial revenue growth rates compared to the second quarter; impairment charges related to our personal protective equipment, also known as PP&E and the successful continued cost management implemented to drive margin improvements year-over-year.
As Gary referenced, I will be reporting both GAAP and non-GAAP financials that were impacted by vesting of shares this year and the impact of the pension plan moving off of our Rollins books in Q3 of 2019.
Looking at the numbers, the third quarter revenues of $583.7 million was an increase of 4.9% over the prior year's third quarter revenue of $556.5 million.
Our GAAP income before income taxes was $108.9 million or 136% above 2019.
Net income was $79.6 million, up 80.6% compared to 2019.
Our GAAP earnings per share were $0.24 per diluted share.
On a non-GAAP basis, our income before taxes was $115.6 million this year compared to $96 million last year, a 20.4% increase.
Our 2020 income before taxes was impacted by $6.7 million for the vesting of our late Chairman's Rollins shares.
Additionally, 2019 was reduced by $49.9 million for our divesting of the pension plan off of our Rollins books.
Both the vesting of shares and pension divesting were noncash items.
Our non-GAAP net income was $86.3 million this year compared to $70.6 million in Q3 of 2019, a 22.1% increase.
Looking at the first nine months revenue of $1.625 billion, that was an increase of 7.6% over the prior year's third quarter revenue of $1.509 billion.
Our GAAP income before income taxes was $267.8 million or 41.6% above 2019.
Net income was $198.2 million, up 29.9% compared to 2019.
Our GAAP earnings per share were $0.60 per diluted share.
Our non-GAAP financials, taking the share vesting and pension plan into consideration, were income before taxes of $274.5 million, up 14.8% and net income was $204.9 million this year compared to $179.2 million in 2019, a 14.4% increase.
Our non-GAAP earnings per share for the nine months were $0.63 compared to $0.55, which is a 14.5% increase.
As we stated on our Q1 and Q2 calls, we began aggressively purchasing personal protective equipment in March and April.
While these were costly, they were critical to keeping our operations running safely.
As the cost of these materials have moved lower from the peak, we took a $2 million onetime charge to revalue our inventory.
With pricing moving lower, we anticipate spending $1 million per quarter, down from the $2 million that we shared on previous calls.
At this time, we would anticipate having this additional expense through Q2 of 2021.
Let's take a look through the Rollins revenue by service lines for the third quarter.
Our total revenue increased 4.9%.
That included 1.4% from acquisitions and the remaining 3.5% was from pricing, which was a small portion of that, but mostly from organic and new customer growth.
In total, residential pest control, which made up 47% of our revenue, was up 10.5%; commercial, ex-fumigation pest control, which made up 34% of our revenue, was down 1.9%; and termite and ancillary services, which made up approximately 18% of our revenue, was up 6.2%.
Again, total revenue less acquisitions was up 3.5% and from that, residential was up 9%; commercial, ex-fumigation, decreased 3.7%; and termite and ancillary grew by 5.9%.
Our residential business continues to perform well.
And the business on the commercial side has seen steady improvement each month since April.
While we continue to manage our costs appropriately, it's difficult to know how the revenue levels will look as we move through the pandemic with restrictions continuing to change throughout the world.
In total, gross margin increased to 52.8% from 51.7% in the prior year's quarter.
The quarter was positively impacted by lower service and administrative salary expenses as well as lower fuel expense and continued improvements from our routing and scheduling efficiencies.
Additionally, materials and supplies were up, as I referenced, related to the inventory revaluation of our personal protective equipment.
Depreciation and amortization expenses for the quarter increased $714,000 to $22.4 million, an increase of 3.3%.
Depreciation increased $1 million due to acquisitions, vehicles acquired and equipment purchases, while amortization of intangible assets decreased $286,000 due to the full amortization of customer contracts from several acquisitions, including HomeTeam and tuck-ins related to Orkin.
Sales, general and administrative expenses for the third quarter increased $838,000 or 0.5% to $168 million or 28.8% of revenues, down from 30% last year.
The quarter produced savings in salaries and benefits, lower fuel and bad debt through better collection efforts.
As for our cash position for the 9-month period ended September 30, 2020, we spent $79.9 million on acquisitions compared to $431.2 million in the same period last year, which included the acquisition of Clark Pest Control.
We paid $91.7 million on dividends and had $17.7 million of capital expenditures, which was slightly lower compared to 2019.
We ended the period with $95.4 million in cash, of which $62.9 million is held by our foreign subsidiaries.
Before I close, I would like to give an update on one of our sustainability initiatives, particularly as it relates to our local communities.
Through corporate and brand initiatives, such as our Rollins United and Northwest Good Deeds Teams, Rollins employees across all brands are strongly encouraged to volunteer within our local communities.
In 2021, our employee volunteer goals include: community cleanup efforts, trafficking education awareness, literacy programs and support of the united way, to name a few.
Rollins is committed to giving back to our communities through a strong philanthropic vision.
Please go to rollins.com under the Investor Relations tab to view the full 2020 sustainability report.
Yesterday, the Board of Directors approved a large regular cash dividend of $0.08 per share plus a special dividend of $0.13 that will be paid on December 20, 2020, to stockholders of record at the close of business November 10, 2020.
In addition, they also announced a 3-for-2 stock split that will take effect December 10, 2020, for stockholders of record at the close of business on November 10, 2020. | compname reports q2 earnings per share of $0.20.
q2 revenue $638.2 million versus refinitiv ibes estimate of $613.9 million.
q2 earnings per share $0.20. | 0 |
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. | compname announces q4 loss per share of $0.33.
q4 adjusted loss per share $0.14 excluding items.
q4 loss per share $0.33. | 0 |
Please keep in mind that our actual results could differ materially from these expectations.
All of these documents are available on our website at brunswick.com.
Our businesses had another outstanding quarter.
We closed the first half of 2021 by delivering record results as a result of continuing strong retail demand, outstanding operational performance and success in mitigating material supply and labor challenges.
All of our businesses delivered exceptional growth during the quarter.
Our Propulsion business continued to realize strong outward market share gains, leveraging the strongest product lineup in the industry.
Our Parts and Accessories businesses continued to benefit from robust aftermarket demand, driven by elevated boating participation.
And our Boat business posted its second consecutive quarter of double-digit adjusted operating margins despite significant supply chain, transportation and labor challenges.
Robust retail demand for our products in the first half of the year has driven field inventory levels to the lowest level in decades at approximately nine weeks on hand.
And we are progressing our efforts to efficiently increase capacity across several of our facilities to satisfy orders from our global customer base and begin to replenish the pipeline.
As many of you know, we've also had a busy few months on the M&A front.
At the end of the quarter, our Advanced Systems Group significantly expanded its product and brand portfolio by announcing the signing of a definitive agreement to purchase Navico, an industry leader in marine electronics.
In addition, we announced in early July that Freedom has expanded into Spain through the acquisition of Fanautic Club.
I'll touch on both these exciting transactions later in our discussion.
Given the unique demand and inventory environment, together with continued strong boat usage through the prime season, which drives P&A sales, we have improved visibility on our ability to deliver against an extremely favorable outlook for the remainder of 2021.
And consequently, we have increased our 2021 guidance.
Before we discuss the results for the quarter, I wanted to share with you some updated demographic insights through the first half of 2021 and comparisons with the favorable trends we experienced in 2020 versus 2019 in the industry.
I'm happy to report that we are not seeing any change in the significant metrics we shared with you during our first quarter earnings call in April.
Brunswick's average boat buyer age continues to be two years younger than the industry average.
Additionally, Brunswick's first-time boat buyers continue to be younger than our overall boat buyer demographic and three years younger than the industry.
First-time boat buyers are trending more female than they did in 2020, and Brunswick over-indexes to the industry by approximately 800 basis points.
In Freedom Boat Club, the average Freedom member continues to be almost three years younger than our typical boat buying customer and female Freedom members make up approximately 35% of our member base.
We continue to outperform the industry in attracting younger and more diverse first-time boat buyers, positioning us for very strong growth in years to come.
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 share with you some awards that Brunswick received during the second quarter that provide more strategic proof points.
Brunswick received 6, 2021 boating industry top product awards, including for the Mercury Marine V12 600-horsepower Verado and the Sea Ray 370 Sundancer Outboard we highlighted recently, but also for our Bayliner Element M15 entry-level boat, BEP's Smart Battery Hub, Attwood's Sahara Mk2 automatic bilge pump, and MotorGuide's Xi3 Kayak Trolling Motor.
Brunswick has also been recognized by Forbes for the second year in a row as one of the best employers for women and ranked second overall in the engineering and manufacturing category.
The winners were chosen based on a survey of 50,000 US employees working for companies employing at least 1,000 people in their US operations and only 300 companies made the final list from the thousands of companies that were considered for the honor.
Finally, Brunswick recently had three employees and a Freedom Boat Club franchisee, Bev Rosella, honored with a Women Making Waves Award from Boating Industry Magazine.
We are very proud of these women leaders.
As you know, equal opportunity, inclusion and diversity are cornerstones of our culture.
I'll now provide some second 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 the higher horsepower categories, where we have focused higher levels of investment in recent years.
For the first half of the year, Mercury has gained share in each horsepower category over 75-horsepower, with outsized gains in nodes in excess of 200-horsepower.
I'm also pleased to announce that we began shipping the new 600-horsepower V-12 Verado engine in late June, and as anticipated, demand has been extremely strong.
We're essentially sold out of the V-12 production slots for the remainder of 2021.
And we estimate that just during the back half of 2021, we will sell more outboard engines in this above 500-horsepower class that was sold in the entire prior history of the outboard industry.
Given the surging demand in the current environment and new product launches planned in the coming years, Mercury is accelerating additional capacity investments at its primary manufacturing center in Fond du Lac, Wisconsin, in order to maximize its ability to serve the market and capture further share.
Our Parts and Accessories businesses experienced significant topline and earnings growth and significantly overdrove expectations in the quarter due to outstanding execution, robust aftermarket demand driven by elevated boating participation and favorable weather conditions in many areas.
The Advanced Systems Group, which has a larger OEM component to its business and also serves certain non-marine segments, benefited from prior year comparisons as a result of Q2 2020 customer COVID-related plant shutdowns.
As a result, ASG realized significant growth across all product categories and delivered strong operating margins that were accretive to the overall segment.
Finally, as I mentioned earlier, in late June, our Advanced Systems Group strengthened its product and brand portfolio and significantly expanded its scale and capabilities by announcing the signing of a definitive agreement to purchase Navico.
This action will further accelerate our ACES strategy and will enhance our ability to provide complete innovative digital solutions to our consumers and comprehensive integrated systems offerings to our OEM customers.
We believe this transaction will close in the second half of 2021.
Our Boat segment had another outstanding quarter, posting its second consecutive quarter of double-digit adjusted operating margins despite significant supply chain uncertainty, while delivering output consistent with our production plans for the year.
We ended the second quarter with historically low pipeline inventory levels due to consistent strong retail demand for our products.
Given the continued robust retail demand and our dealers' continued desire to take all available product, our 2021 production slots are now sold out for the calendar year, with five brands completely sold out through the 2022 model year.
In fact, the sum of our wholesale orders for 2022 model year product is already roughly equal to our projected 2021 full year wholesale Boat Group revenue.
We continue to hire additional new production employees at most facilities to maintain production consistent with our stated plan.
We remain on track with our plans to ramp up and staff the Palm Coast facility and expand our operations at Reynosa and Portugal.
Additionally, we've identified capital-efficient investment options to further raise capacity to approximately 50,000 annual production units by 2023, should this volume of product be required.
Freedom Boat Club also continues to exceed our expectations, growing both organically and through acquisition with a young and diverse customer base.
With the recently announced acquisition of Fanautic Club and expansion into Spain, Freedom now has 314 locations and 44,000 memberships networkwide, and is closing in on 4,000 votes in the overall Freedom fleet, with an increasing percentage of Brunswick product.
The outstanding operational and financial performance I've 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, have performed extremely well.
Winter storms in late first quarter and resulting power outages in Central and Southern United States disrupted the supply of oil-based resin and foam products throughout the second quarter, while tight semiconductor supply, raw material shortages and transportation disruption and resulting cost increases continued to present challenges, which we are actively managing.
As a result, our businesses have implemented price increases that are higher than normal, but we believe are generally at the lower end of those implemented across the industry.
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 enabled us to mitigate these challenges and keep our production plans on track for 2021.
Finally, labor conditions remained 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'd like to review the sales performance of our business by region on a constant currency basis, excluding acquisitions.
As expected, all regions posted significant sales growth in the quarter versus both, 2020 and 2019.
Domestic sales grew 55%, with international sales up 49%, versus prior year.
We are seeing strong performance across all international regions, with Asia Pacific still growing despite an extremely strong comparison in 2020.
We continue to experience robust demand around the globe, especially for propulsion products.
And we'll be working through backlogs in certain product categories through the remainder of 2021 and into 2022.
This table provides more color on the recent performance of the U.S. marine retail market, comparing the first half of 2021 to same periods in 2020 and 2019.
As is usual for this time of year, there's significant noise in the month-to-month SSI data, but the positive market trends continue.
All boat categories reported retail gains in the first half of 2021 and continuing the momentum from 2020.
Despite more difficult year-over-year comparisons in May and June, the main powerboat segments are still up 17% in the first half of 2021 versus 2020 and up 13% versus 2019.
Brunswick's year-to-date unit retail performance is generally in line with market growth rates with strength in outboard boat categories.
Outboard engine unit registrations were up 5% in the first half of 2021, when compared with the same time period in 2020.
With Mercury's first half growth more than doubling the market growth rate, resulting in significant market share gains, as I discussed earlier.
As we enter the second half of the year, U.S. lead generation, dealer sentiment and other leading indicators all remain very positive.
Approximately 40% of the boats leaving our manufacturing facilities are retail sold, which is approximately three times historical averages.
In addition, five of our brands, including Whaler, have all model year 2022 production slots already sold.
All these factors give us high confidence in the continuing retail strength as we complete the 2021 selling season and move into 2022.
I'm pleased to share with you the results from another fantastic quarter.
To provide perspective in the slides that follow, we have included comparisons in certain places to both the second quarters of 2020 and 2019 in order to highlight the outstanding performance in each of our businesses over the past few years.
When compared with 2020, second quarter net sales were up 57%, while operating earnings on an as-adjusted basis increased by 126%.
Adjusted operating margins were 17.1% and adjusted earnings per share was $2.52, once again setting new all-time highs for any quarter for which we have available records.
Sales and earnings in each segment benefited from strong global demand for marine products, with earnings also positively impacted by favorable factory absorption from increased production and favorable changes in foreign currency exchange rates, partially offset by higher variable compensation costs and increased spending in sales and marketing and ACES and other growth initiatives.
Finally, we had free cash flow of $268 million in the second quarter, with a free cash flow conversion of 135%.
First half comparisons are equally as favorable.
Net sales through the first half of 2021 were up 53% when compared with the first half of 2020, and operating margins of 17% or a 520 basis point improvement from 2020.
This resulted in first half earnings per share of $4.76 and a very robust operating leverage of 27%.
Turning to our segments, revenue in the Propulsion business increased 64% versus the second quarter of 2020 as each product category experienced strong demand and market share gains.
Consistent with the theme from the first quarter, boat manufacturers continue to ramp up production in the second quarter and our increased capacity enabled continued elevated sales to the independent OEM and international channels.
Sales growth was also strong across all product categories when compared to the second quarter of 2019.
Operating margins and operating earnings were up significantly in the quarter, benefiting from the factors positively affecting all of our businesses.
In our Parts and Accessories segment, revenues increased 42% and adjusted operating earnings were 46% up versus the second quarter of 2020, due to strong sales growth across all product categories.
Adjusted operating margins of 23.2% were 60 basis points better than prior year quarter, with significant sales increases driving the robust increase in adjusted operating earnings.
Sales growth was also very strong across all product categories when compared to the second quarter of 2019.
This aftermarket-driven annuity-based business continues to benefit 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 increased demand from both builders as they continue to increase production.
As anticipated, our Boat segment results benefited the most when compared with the second quarter of 2020 due to last year's COVID-related plant shutdowns and production ramp-up.
Sales were up 80% and operating margins were 10.5% for the quarter, the second straight quarter this segment has delivered double-digit margins.
Each brand had strong operational performance, executed their aggressive production plan and contributed to the overall segment's success in the quarter.
When compared to the second quarter of 2019, sales were up 22%, and operating margins were up 160 basis points, further illustrating the foundational improvements that have been made in this business.
Operating earnings were also positively impacted by the increased sales and the lower retail discount levels versus 2020.
Freedom Boat Club, which is included in business acceleration, contributed approximately 3% of the segment's revenue and a margin profile that continues to be accretive to the segment.
Turning to pipelines, our boat production continues to ramp consistent with our plans to produce approximately 38,000 units during the year.
Despite producing almost 10,000 units in the quarter, which is up 5% from the first quarter, retail outsold wholesale replenishment by more than 7,000 units, bringing dealer inventories to an all-time low of approximately 7,400 units.
Our boat brands ended June with under 10 weeks of boats on hand, measured on a trailing 12-month basis, with units in the field lower by 50% versus same time last year.
Given our view that the industry retail market will be up high single-digit percent for the year, we believe that retail will outpace our production targets resulting in our year-end weeks on hand to be lower than year-end 2020 by several weeks.
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.
2021 is shaping up to be another year of robust earnings and shareholder returns, with pronounced margin increases and substantial free cash flow generation resulting from our outstanding operating performance in a healthy marine market.
Given the enhanced clarity on our ability to drive growth in upcoming periods, we are providing the following updated guidance for full year 2021.
Without including the potential benefits from the Navico acquisition, we anticipate the US marine industry retail unit demand to grow high single-digit percent versus 2020; net sales of between $5.65 billion and $5.75 billion; adjusted operating margin growth between 150 and 180 basis points; operating expenses as a percent of sales to remain lower than 2020; free cash flow in excess of $450 million; and adjusted diluted earnings per share of approximately $8.
We're also providing directional guidance regarding the third quarter, where we anticipate revenue growth of mid-teens percent and earnings per share growth of high single-digit percent.
Note that we believe that the Navico transaction, once closed, will be earnings neutral to 2021 as we anticipate Navico's post-closing earnings to offset the incremental interest incurred as a result of the deal.
Next, I'd like to provide some perspective on our 2021 performance against 2020 and 2019 by looking at first half and second half results.
The revenue cadence for 2021 will look more like 2019 and 2018 than it did in 2020.
The first half of every year has additional production days as the second half includes model changeover and holiday shutdowns.
However, first half of 2020 was materially impacted by the COVID-related plant shutdowns.
This resulted in the first half of 2021 comparing very favorably to 2020 in all of our businesses due to higher production volumes, with additional earnings tailwinds from improved absorption, favorable foreign currency comparisons and favorable changes in customer mix in our Propulsion business.
These factors far outweighed the headwinds from supply chain challenges, inflationary pressures and higher variable compensation expenses experienced during the first six months of this year.
Our first half performance this year also exceeded 2019 in every metric.
As we head into the second half of 2021, we will face more difficult comps to 2020 as the company recorded record-high earnings per share over the same period last year, and we will continue to be challenged with supply chain constraints and increasing input and freight costs.
Although, we are taking price increases across our businesses, we also anticipate moderated sales mix with propulsion sales trending more toward core OEM customers, more typical seasonality in the P&A business and a higher percentage of overall growth in the Boat business; increased spending on ACEs and other growth initiatives; smaller benefits from currency and absorption; and a higher tariff impact.
However, despite more challenging second half comparisons, this continues to be a growth story.
We anticipate expanding top-line in the second half by double-digit percent versus the second half of 2020, which will be more than 40% greater than 2019 with higher earnings as well.
I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of the year.
The only meaningful update relates to our effective tax rate for the year.
Due to some fantastic branch restructuring work by our tax team and business units, we now believe our effective tax rate for 2021 will be approximately 22%, which is slightly lower than our estimate from our April call.
Similarly, and putting aside the financing related to the Navico transaction, our capital strategy assumptions have not materially changed.
In the past few weeks, however, we have taken several steps to strengthen our overall liquidity and shareholder return profile.
We extended and expanded our revolving credit agreement, which is now in effect through July of 2026, which now provides for $500 million of borrowing capacity, an increase of $100 million.
In addition, our Board of Directors increased our share repurchase authorization earlier this month, and we now have over $400 million approved for repurchases, which we plan to systematically deploy consistent with our capital strategy.
These moves follow our substantial 24% dividend increase approved in April as we continue to balance desired increases in shareholder return and investment in growth initiatives.
We now anticipate spending $270 million to $300 million on capital expenditures in the year to support and in some cases, accelerate growth initiatives throughout our organization.
This slightly increased planned spending is primarily related to the Mercury capacity expansion that Dave discussed earlier.
At our April call, we felt that 2021 was setting up to be an outstanding year for all of our businesses.
And the combination of continued robust retail demand during the first half of the year 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 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.
And we've also recently taken the decision to accelerate the introduction of incremental capacity.
Our Parts and Accessories segment remains focused on optimizing its global operating model, to leverage its distribution and position of strength in areas of battery technology, digital systems and connected products in support of our ACES strategy.
We look forward to closing the Navico deal and beginning thoughtful integration into the ASG business.
We will continue to focus M&A activity in parts and Accessories, as we look for opportunities to further build out our technology and systems portfolio.
The Boat segment will build on its first half successes, by continuing to focus on operational excellence, improving operating margins, launching new products, executing capacity expansion plans and refilling pipelines, in the very robust retail environment.
In addition to the Navico and Freedom Boat Club transactions, and the start of shipments of the V-12 600-horsepower outboard, which I've already discussed, proof points in the quarter included, the launch of the My Whaler and Sea Ray+ apps for Apple and Android users, which advances the ACES Connectivity strategy by improving the boat ownership experience, reducing friction across the entire ownership journey.
The initial reception of these products is extremely promising, with more than 2,000 accounts created in the first few weeks and a star rating of 4.9 out of five.
And the launch of the Heyday H22 Wake boat, a new leading-edge, wake-surf model, signaling a doubling down on this fast-growing brand appealing to a younger demographic.
This model is already sold out through mid-2022.
We're tracking well against all our Next Wave strategic goals, including the electrification initiatives outlined in May.
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. | 0 |
Both are now available on the Investors section of our website, americanassetstrust.com.
We are making great progress on all fronts as we focus our efforts on our rebound from COVID-19's impact, by enhancing and amenitizing existing properties, acquiring new accretive properties like Eastgate Office Park in Bellevue, which the team will talk about more in a bit, retaining and adding new customers to our portfolio, furthering our development of La Jolla Commons of which we recently bottomed out our excavation and otherwise remain on time and on budget and of course, growing our earnings and net asset value for our stockholders.
We have been through hard time before, and each time we have emerged stronger, which remains our expectations in mind now.
I want to mention that the Board of Directors has approved the quarterly dividend of $0.30 per share for the third quarter, an increase of $0.02 per share or 7% from the second quarter, which is, we believe, is supported by our increased collection efforts in the second quarter, improving traffic in Waikiki at our Embassy Suites and our expectation for operations to continue trending favorably in the near term.
I'm also pleased to announce that the Board has appointed Adam Wyll, to the position of President in addition to his Chief Operating Officer role and title.
As many of you know, Adam is a valuable and hard-working member of our executive team.
And this title describes the breadth of responsibilities and leadership that he has successfully taken on, prior to and during the pandemic.
As well as the confidence, our board and myself and our management team has in him to manage, in partnership with our excellent executive team, the day-to-day operations of AAT.
I personally am blessed with excellent health, and this company is very important to me.
I intend to continue my role as chairman and CEO for the foreseeable future.
However, it is very important to our board, myself and shareholders that you know this company will always remain in very capable hands and that we are fortunate to have such a great management team and group of associates at AAT, all of whom work together as we continue on as a best in classes, class REIT.
I very much appreciate the kind words and leadership opportunities, none of which would have been possible without your mentorship, not to mention the daily collaboration with such an incredible management team and top-notch team members and colleagues.
We continue to feel bullish about our portfolio, particularly with government restrictions lifted in all of our mainland markets in Hawaii, having lightened its reopening restrictions considerably.
And we are seeing firsthand consumer behavior reverting to pre-pandemic levels with packed parking lots and tons of shoppers at all our retail properties.
We're already seeing many of our retailers with gross sales above pre-pandemic levels in our restaurants recovering, which is obviously very encouraging.
Our collections have continued to improve each quarter with a collection rate north of 96% for the second quarter.
Furthermore, we had approximately $850,000 of deferred rent due from tenants in Q2 based on COVID-19 related lease modifications.
And we have collected approximately 94% of those deferred amounts, further validating our strategy of supporting our struggling retailers through the government-mandated closures.
Remaining collection challenges at this point are primarily with a handful of local retailers at our Waikiki Beach Walk property.
But with Hawaii tourism back in large numbers, we think we'll have an opportunity to rebound, to be viable long term, even more so once Asian countries relax their travel restrictions to Hawaii later this year or early next.
Additionally, we are seeing positive activity engagement with new retailers, including mid box retailers.
About half of our over 250,000 square feet of vacant retail space or in lease negotiations or LOI stage, deals that we believe we have a good likelihood of being finalized.
And the vast majority of our retailers are renewing their leases at flat to modest rent increases.
On the multifamily front, with new management in place at Hassalo, we are currently 99% leased and asking rents are trending up almost 20% since December 2020.
The multifamily collections have been more challenging in Portland due to eviction protection still in place through the next month or so.
But we are doing everything we can to stay on top of that, which include government rental assistance programs that we expect meaningful disbursements from soon.
In San Diego, our multifamily properties are currently 97% leased, and we have leased approximately 90% of the 133 master lease units that expired less than two months ago and expect the remaining to be leased over the next few weeks.
Asking rents at our multifamily properties are trending up as well in San Diego, almost 10% since December 2020.
Last night, we reported second quarter 2021 FFO per share of $0.51 and second quarter '21 net income attributable to common stockholders per share of $0.15.
Let me share with you several data points that support my belief.
First, as Ernest previously mentioned, the Board has approved an increase in the dividend to its pre-COVID amount of $0.30 per share based on the continued improvement in our collections as expected, but the overriding factor was the strong results we are seeing at the Embassy Suites Hotel in Waikiki beginning in mid-June and increasing into July with a strong pent-up demand.
Q2 paid occupancy was 67%, and the month of June by itself reached approximately 83%.
The average daily rate was $274 for Q2 and approximately $316 for the month of June.
RevPAR or revenue per available room was $184 for Q2 and approximately $262 for the month of June.
It is definitely heading in the right direction.
Effective July 8, all travellers entering into Hawaii who are vaccinated in the U.S. can skip quarantine without getting a pre-travel COVID test by uploading proof of their vaccination to the state of Hawaii safe travel website.
The Oahu is still under tier five of its reopening plan until Hawaii's total population is 70% fully vaccinated, which should occur in the next month or two.
Bars and restaurants in Oahu can be at 100% capacity as long as all customers show their vaccination card or a negative COVID test on entry.
The Japanese wholesale market had accounted for approximately 35% to 40% of our customer base pre-COVID.
Japan is currently just 9% fully vaccinated.
Though with its current pace of over one million vaccines a day, Japan is expected to be completing vaccinations by this November and to start issuing vaccine passports in the next 30 days, in anticipation of opening up international travel.
In the meantime, there is a pent-up demand from U.S. West and Canada that is expected to keep the hotel occupied and on track with this recovery.
Secondly, looking at our consolidated statement of operations for the three months ended June 30th, our total revenue increased approximately $7.8 million over Q1, which is approximately at 9.3% increase.
Approximately 37% of that was the outperformance of the Embassy Suites Hotel as California and Hawaii began to open up travel.
Additionally, our operating income increased approximately $6.3 million over Q1 '21, which is approximately an increase of 31%.
Third, same-store cash NOI overall was strong at 23% year-over-year.
With office consistently strong before, during and post COVID and retail showing strong signs of recovery.
Multifamily was down primarily as a result of Pacific Ridge Apartments at 71% leased at the end of Q2 due to the recurring seasonality of students leaving in May, including the expiration of the USD master lease and new students leasing over the summer before school starts in late August.
Generally, approximately 60% of our 533 units at Pacific Ridge are leased by students, with the USD campus right across the street.
As of this week, we are approximately 90% leased at Pacific Ridge with approximately 150 students moving in over the next several weeks in August.
Hassalo on Eighth in the Lloyd District of Oregon is a 657 multifamily campus.
At the end of Q1, occupancy was approximately 84% due to the lingering impact of COVID and political challenges in the prior months.
As of Q2, we have increased the occupancy to approximately 95%.
But in doing so, we had to adjust the rent and increase concessions.
Pacific Ridge and Hassalo on Eighth are the two factors that impacted our multifamily same-store this quarter.
As Adam mentioned, asking rates have been trending favorably on our multifamily properties recently, which we expect to provide meaningful growth going forward.
Note that our same-store cash NOI does not include our mixed-use sector, which will return with Q3 and Q4 2021 after completing the renovation of the Embassy Suites Hotel during COVID.
And fourth, as previously disclosed, we acquired Eastgate Office Park on July 7th, comprised of approximately 280,000 square foot multi-tenant office campus, in the premier I-90 corridor submarket of Bellevue, Washington, one of the top-performing markets in the nation, the Eastside market is anchored by leading tech, life science, biotech and telecommunication companies.
The four-building Eastgate Park is currently greater than 95% leased to a diversified tenant base with in-place contractual lease rates that we believe are 10% to 15% below prevailing market rates for the submarket.
Additionally, Eastgate Park recently obtained municipal approval for rezoning, increasing the floor area ratio from 0.5 to 1.0, which will allow for additional development opportunities.
The purchase price of approximately $125 million was paid with cash on the balance sheet.
The going-in cap rate was approximately 6% with an unlevered IRR north of 7%.
We believe this transaction will be accretive to FFO by approximately $0.05 for the remainder of 2021 and $0.10 for the entire year of 2022.
These four items are the data points that are pointing to the beginning of AAT's recovery story starting to unfold.
One last point of interest is that on page 16 of the supplemental, total cash net operating income, which is a non-GAAP supplemental earnings measure, which the company considers meaningful in measuring its operating performance is shown for the three months, ended June 30, at approximately $58.7 million.
If you use this as a run rate going forward, it would be approximately $234 million, which would exceed 2019 pre-COVID cash NOI of approximately $212 million.
A reconciliation of total cash NOI to net income is included in the glossary of terms in the supplemental.
At the end of the second quarter, we had liquidity of approximately $718 million, comprised of $368 million in cash and cash equivalents and $350 million of availability on our line of credit.
Our leverage, which we measure in terms of net debt-to-EBITDA was 6.0 times.
Our focus is to maintain our net debt-to-EBITDA at 5.5 times or below.
Our interest coverage and fixed charge coverage ratio ended the quarter at 3.7 times.
As far as guidance goes, we are in the middle of budget season now for 2022.
We hope to begin issuing formal guidance again for 2022 on our Q3 '21 earnings call.
At the end of the second quarter, excluding One Beach, which is under redevelopment, our office portfolio stood at approximately 93% leased with less than 1% expiring through the end of 2021.
Our top 10 office tenants represented 51% of our total office-based rent.
Given the quality of our assets and the strength of the markets in which they are located with technology and life science as the key market drivers, our office portfolio is poised to capitalize on improving dynamics, especially in Bellevue and San Diego.
Q2 portfolio stats by region were as follows, our San Francisco and Portland office portfolios were stable at 100% and 96% leased, respectively.
City Center Bellevue was 93% leased, net of a new amenity space under development, and San Diego is 91% leased, net of new amenity spaces being added to Torrey Reserve.
We had continued success in Q2 preserving pre-COVID rental rates with, 13 comparable new and renewal leases, totalling approximately 50,000 rentable square feet, with an over 9% increased over prior rent on a cash basis, and almost 15% increase on a straight-line basis.
The weighted average lease term on these leases was 3.6 years, with just over $7 per rentable square foot in TIs and incentives.
We experienced a modest small tenant attrition during the quarter due to COVID, resulting in a net loss of approximately 16,000 rentable square feet or less than 0.5 point of occupancy, none of which was lost to a competitor.
Our outlook moving forward is one of positive net absorption with 200 proposal activity picking up significantly.
At this point in time, we are seeing smaller tenants willing to commit to longer-term leases at favorable rental rates.
Even more exciting is the push to return to the office in the emerging large tenant activity and competition for quality larger blocks of space in select markets, including San Diego and Bellevue, of which we have current availability and active prospects.
Our continued strategic investments in our current portfolio will position us to capture more than our fair share of net absorption as the markets improve.
The renovation of two buildings at Torrey Reserve is near completion.
We have aggregated large blocks of space to meet demand and take advantage of pricing power, and we have active large deals and negotiations on both buildings.
The final phase of the renovation will include a new state of the art fitness complex and conference center, both serving the entire 14 building Torrey Reserve Campus.
Construction is in full swing on the redevelopment of One Beach Street in San Francisco, delivering in the first half of 2022, and construction is nearly complete on the redevelopment of 710 Oregon Square in the Lloyd Submarket of Portland.
One Beach will grow to over 103,000 square feet and 710 Organ Square will add another 32,000 square feet to the office portfolio.
As Ernest mentioned, construction is well underway on Tower three at La Jolla Commons with expected completion in Q2, Q3 of 2023, and we are encouraged by the emerging large tenant activity and competition for quality large blocks of space and UTC.
Finally, leasing activity is robust for our upcoming availabilities at Eastgate Office Park in Suburban Bellevue, even prior to executing the exciting renovation plans under development to take this special property to the next level of quality and customer experience.
In summary, our office portfolio is on offense as we move forward into the rest of 2021 and beyond. | compname reports q2 ffo per share $0.51.
q2 ffo per share $0.51. | 1 |
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. | compname reports q3 earnings per share $0.70.
q3 earnings per share $0.70. | 0 |
Our consolidated earnings for the second quarter of 2020 were $0.26 per diluted share, compared to $0.38 for the second quarter of 2019.
For year-to-date, consolidated earnings were $0.98 per diluted share for 2020, compared to $2.14 last year.
Now, I'll turn the discussion over to Dennis.
We hope everyone is staying safe and healthy during these uncertain times.
It's hard to believe that we've been managing through the COVID-19 pandemic for five months now.
And every day, I continue to be inspired by how our employees continue to rally on all fronts to respond to the crisis.
I couldn't be more proud of how we're staying vigilant and adapting across the organization to the new policies and procedures that can quickly change in the states where we serve.
I appreciate their patience, their persistence and professionalism, as we all navigate through these unchartered waters to seek out our new normal, all while still providing the energy that is so essential to our customers.
As always, our top priority is to preserve the health and safety of our customers, our employees, contractors and our communities.
As the regional economies across the areas we serve move forward with fits and start, we're doing our best to support those customers, who we know are struggling.
You may have seen recently the Avista Foundation provided more than $500,000 to support 37 different organizations throughout our service area.
And so far in 2020, our foundation has provided more than $1.5 million to help those in need.
Although the majority of our employees are still working from home, it hasn't impacted our ability to complete important work across our business.
Wildfires continue to be an important topic for our industry and our company, especially this time of year.
Before the wildfire season arrived, we enhanced our 10-year wildfire resiliency plan to expand our current safeguards for preventing, mitigating and reducing the impact of wildfires to help minimize the possibility of wildfires and the related service disruptions.
Our team spent the last year developing our plan through a series of internal workshops, industry research and engagement with state and local fire agencies.
The plan has certain key areas that include grid hardening, vegetation management, situational awareness, operations and emergency response and worker and public safety.
In total, we expect to spend approximately $330 million implementing the plan components over the life of the 10-year plan.
We're also excited for construction to be completed on the Catalyst Building and the Scott Morris Center for Energy Innovation.
We can hardly wait for the buildings to open next month and when they do, Scott Morris' vision to create the five smartest blocks in the world will become a reality.
Avista will be able to continue to innovate and test new ideas about how to share energy in a shared economy model.
And what we learn could not only shape how the grid of the future will operate, but also could provide a transformative new model for the entire utility industry.
Last year, we established a goal to serve our customers with a 100% clean electricity by 2045 and a 100% carbon-neutral resources by 2027.
Consistent with our goal and our 2020 Integrated Resource Plan, we are seeking proposals from renewable energy project developers, who are capable of constructing, owning and operating up to 120 average megawatts.
Our intent is to secure the output from the renewable generation resources, including energy, capacity and associated environmental attributes.
This will allow us to offset market purchases and fossil fuel thermal generation, which is a key step to achieving our goals.
With respect to results, our second quarter consolidated earnings were in line with expectations and we are on track to meet our 2020 earnings guidance at Avista Utilities, AEL&P and our other businesses.
As such, we are confirming our 2020 consolidated earnings guidance, a range of $1.75 to $1.95 per diluted share.
And finally, one last point.
Our Senior Vice President, Chief Legal Counsel, and Corporate Secretary, Marian Durkin, just retired on August 1.
During her tenure, Marian defined our business needs and -- to build our legal department from the ground up to the robust team that it is today.
As the focus and scrutiny on compliance has grown across many different industries, Marian also centralized the company's compliance efforts and has taken our compliance department to a new level.
Also, under Marian's leadership, earlier this year, Avista was named as one of Ethisphere's World's Most Ethical Companies.
I have big news for you.
I'm very excited about that.
The Blackhawks, because of the pandemic, made the playoffs and we're currently 1-1 with Edmonton with a game tonight.
So, those on the East Coast, it's a 10:30 game, but I'd like you to stay up and route for my Blackhawks.
For the second quarter of 2020, Avista Utilities contributed $0.26 per diluted share, compared to $0.32 in 2019.
Compared to the second quarter of 2019, our earnings decreased due to lower electric utility margin and from higher power supply costs and decreased loads related to COVID-19, which was partially offset by rate relief and customer growth.
We also had lower operating expenses in the second quarter of 2020.
The Energy Recovery Mechanism in Washington was a small benefit in this year of $0.4 million, compared to a much larger benefit in 2019 of $6 million.
For the year-to-date, we recognized a pre-tax benefit of $5.6 million in 2020, compared to $3.5 million in 2019, all with respect to the ERM.
With respect to the COVID-19 impacts on our results, we recorded an incremental $3.3 million of bad debt expense for the year-to-date and we expect the incremental amount to be $5.7 million for the full-year, including the first quarter as -- first half, as compared to our original forecast.
In July, the Idaho Commission issued an order that allows us to defer certain costs, net of any decreased costs and other benefits related to COVID-19.
During the second quarter, we deferred $1.1 million of bad debt expense associated with this order.
Compared to normal, in the second quarter there was a -- our loads, there was a decrease of approximately 6% on overall electric loads, which consisted of approximately 10% decrease in commercial and a 14% decrease in Industrial, which was partially offset by about 4% increase in our residential loads.
These loads decreased earnings by about $0.03 in the second quarter and we expect to have continued lower loads throughout most of the year, with a gradual recovery toward the end of the year.
We expect to be able to mostly offset the lower utility margin through our cost management activities, and this is reflected in our consolidated guidance.
We do expect a gradual economic recovery, but prolonged high unemployment that will depress load and customer growth into 2021.
We have decoupling and other regulatory mechanisms, which help mitigate the impact of these load changes on our -- the impact on our revenues for residential and certain commercial customers.
Over 90% of our utility revenue is covered by regulatory mechanisms.
During the second quarter, we began experiencing some supply chain delays due to the effects of the COVID-19 pandemic, with delays ranging from a couple of weeks to up to six weeks in some cases.
However, we do not expect this to have a significant impact on our planned projects and we continue to be committed to investing the necessary capital in our utility infrastructure and expect our spending in 2020 to be still be about $405 million.
With respect to liquidity, at June 30, we had $160 million of available liquidity under our $400 million line of credit and we had $100 million in cash from our term loan.
In the second quarter, we extended our line of credit agreement a year to April 2022.
We expect to issue this year approximately $165 million of long-term debt and up to $70 million of equity, and that includes $24 million that we've issued through June.
As Dennis mentioned earlier, we are confirming our 2020 guidance, with a consolidated range of $1.75 to $1.95.
We're expecting that COVID-19 impacts at Avista Utilities of increased operating expenses include bad debt expense, reduced industrial loads and increased interest will be mostly offset by expected tax benefits from the CARES Act and other efforts to identify cost reduction opportunities that we have implemented.
We have filed for deferred accounting treatment in each of our jurisdictions.
And as I said earlier, in Idaho, the Idaho Commission issued an order that allows us to defer certain costs related to COVID-19, net of any decreased costs and other benefits.
The Idaho Commission will determine the appropriateness and prudency of any deferred expenses when we seek recovery.
We continue to expect -- to experience regulatory lag until 2023, we filed the general rate case in Oregon in March of 2020 and continue to anticipate filing in Washington and Idaho in the fourth quarter of this year.
We expect our long-term earnings growth after 2023 to be 4% to 6%.
Now, with the specifics on the ranges for each segment.
We expect Avista Utilities to contribute in the range of $1.77 to $1.89 per diluted share.
The midpoint of our range does not include any expense or benefit under the ERM and our current expectation is that we will be in a benefit of a 90/10 sharing band, which is expected to add $0.06 per diluted share.
Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures and hydroelectric generation for the remainder of the year and we have implemented the cost reduction measures to help mitigate the impacts of costs related to COVID-19.
For 2020, we expect AEL&P to contribute in the range of $0.07 to $0.11 per share and our outlook for AEL&P assumes, among other variables, normal precipitation and hydroelectric generation for the remainder of the year.
And we continue to expect our other businesses to have a loss of between $0.09 and $0.05 per diluted share.
Our guidance generally includes only normal operating conditions and does not include any unusual items; such as settlement transactions or acquisitions and dispositions until the effects are known and certain.
We cannot predict the duration or severity of the COVID-19 global pandemic.
And the longer and more severe economic restrictions and business disruption, the greater the impact on our operations, results of operations, financial condition and cash flows. | compname reports q1 earnings per share $0.98.
q1 earnings per share $0.98.
confirming 2021, 2022, and 2023 earnings guidance. | 0 |
Speaking on the call today will be Tom Meissner, Chairman, President and Chief Executive Officer; and Bob Hevert, Senior Vice President, Chief Financial Officer and Treasurer.
Moving to Slide 2.
Statements made on the call should be considered together with cautionary statements in other information contained in our most recent Annual Report on Form 10-K and other documents we have filed with or furnished to the Securities and Exchange Commission.
The accompanying supplemental information more fully describes these non-GAAP financial measures and includes a reconciliation to the nearest GAAP financial measures.
The company believes these non-GAAP financial measures are useful in evaluating its performance.
I'm going to begin on Slide 4 today.
So, today we're pleased to announce net income of $2.7 million or $0.18 per share for the second quarter of 2021.
For the first half of 2021, net income was $21.6 million or $1.44 per share.
This represents an increase of $0.21 per share over the same six-months period of 2020 and reflects higher Electric and Gas adjusted gross margins.
Next, I'd like to quickly review a few high level themes.
First, we reiterate our long-term guidance of 5% to 7% growth in earnings per share with 2021 earnings expected to be somewhat above the higher end of the range relative to 2020.
Second, the company recently announced a goal of achieving net zero emissions by 2050.
This announcement is a major step for the company and reflects our commitment to environmental stewardship and corporate responsibility.
Finally, I would also like to note the filing of another strategic rate case in New Hampshire for our gas utility, Northern Utilities.
Combined, the pending rate applications for Unitil Energy Systems and Northern Utilities request a nearly $20 million increase in base distribution revenues.
Bob will discuss the details of these filings later in the call.
Moving to Slide 5.
As I noted earlier, on June 21, we announced our goal to reduce companywide direct greenhouse gas emissions by at least 50% by 2030 relative to 2019 levels and to achieve net zero emissions by 2050.
These goals are part of our overall commitment to environmental stewardship, sustainability and corporate responsibility.
As I've said before, our vision is to transform the way people meet their evolving energy needs to create a clean and sustainable future.
We will continue to work with customers, policy makers and industry leaders to reduce emissions from the energy supply delivered to our customers.
With that, I'll now pass it over to Bob, who will provide further detail on our financial results.
I will begin on Slide 6.
As Tom noted today, we announced second quarter earnings per share of $0.18.
This represents a year-over-year decrease of $0.4 million or $0.03 per share.
On a year-to-date basis, net income increased by $3.3 million or $0.21 per share compared to 2020.
Strong year-over-year earnings growth primarily is the result of higher Electric and Gas adjusted gross margins, partially offset by higher operating expenses.
As Tom mentioned, we expect full year 2021 earnings to be ahead of our 5% to 7% long-term earnings per share growth range relative to 2020 earnings of $2.15 per share.
Turning to Slide 7.
For the six months ended June 30, 2021, Electric adjusted gross margin was $48 million, an increase of $2.5 million or 5.5% relative to 2020.
The increase in Electric adjusted gross margin reflects higher residential unit sales of 2.8% and higher commercial and industrial unit sales of 3.1%.
Customers increased 0.8% over the first half of 2020.
The higher sales volumes reflect customer growth and improving economic conditions.
As noted on Slide 8, for the six months ended June 30, 2021, Gas adjusted gross margin was $72.8 million, an increase of $7.5 million or 11.5% compared to 2020.
The increase in Gas adjusted gross margin reflects higher rates of $5.1 million and the combined net effect of $2.4 million from the net favorable effect of customer growth, colder winter weather and warmer spring weather.
The first half of 2021 was 2.1% colder year-over-year, contributing to higher natural gas therm sales of 4.2%.
Higher sales also reflect 1,200 additional customers served compared to the same period in 2020.
Moving on to Slide 9.
We provide an earnings bridge comparing 2021 results to 2020 for the quarter.
As noted earlier, 2021 adjusted gross margin increased $10 million as a result of higher rates and higher unit sales.
Operating and maintenance expenses increased $2 million.
The current year increase is attributable to higher utility operating costs, higher labor costs and higher professional fees.
In the second quarter of 2020, the company realized a benefit from lower labor costs related to the COVID pandemic.
As the economies in our service area recover, we have seen that trend reverse, primarily in the area of healthcare.
The increase in operating expenses also includes an increase of $0.4 million or roughly $0.02 per share related to a recent decision by the New Hampshire Public Utilities Commission's not to authorize the creation of a regulatory asset for incremental bad debt related to the COVID pandemic.
Instead the order states these costs will be addressed in each utilities' next rate case.
Unitil is in a unique position in that we have pending both Electric and Gas rate cases in New Hampshire through which we will seek recovery of those costs.
Depreciation and amortization increased by $2.7 million, reflecting higher levels of utility plant in service.
Taxes, other than income taxes, decreased by $0.2 million, primarily due to lower payroll taxes, partially offset by higher local property taxes on higher utility plant in service.
Interest expense increased by $0.9 million, reflecting interest on higher long-term debt balances, partially offset by lower rates on lower levels of short-term borrowings.
Other expense decreased by $0.5 million, largely due to lower retirement benefit and other costs.
Lastly, income taxes increased by $1.8 million as a result of higher pre-tax earnings.
Turning now to Slide 10.
The Unitil Energy rate case, which I've discussed on previous calls, is progressing as expected with temporary rates of $4.5 million becoming effective on June 1.
Yesterday, we filed a multi-year rate plan in New Hampshire for our gas utility, Northern Utilities.
In that case, we proposed a $7.8 million rate base increase with a $3.2 million temporary rate increase.
You may recall that in New Hampshire, it is typical to collect a portion of the revenue deficiency through temporary rates prior to receiving a final order.
We anticipate temporary rates for Unitil -- excuse me, for Northern Utilities to become effective in the third quarter of 2021.
Temporary rates are reconciled to the final rate case award and the difference is collected or refunded usually over a one-year period.
Our filing also includes a full revenue per customer decoupling proposal and a multi-year rate plan to recover certain capital expenses made in 2021, 2022 and 2023.
We anticipate that these rate case filings in New Hampshire will support the return on equity at Unitil Energy Systems and Northern Utilities.
Wrapping up with Slide 11.
With the first half of 2021 behind us, we're pleased with what the company has accomplished.
At this time, we believe our investment plan for 2021 is on track and our regulatory initiatives are proceeding on schedule.
We look forward to providing further updates on our next call. | unitil - q2 earnings per share $0.18.
q2 earnings per share $0.18. | 1 |
Today we will be reviewing our third quarter 2021 financial results and providing investors with an update on our full-year outlook.
Further information can be found on our SEC filings.
Actual future results may differ materially from those expressed in our statements today due to various uncertainties.
Starting on slide three, I'm pleased to announce that we achieved constant currency net sales growth of 2.9% with increases in all key product categories despite continuing global supply chain challenges.
Revenue growth was led by solid performance in Europe and Asia-Pacific and North America realized growth in mobility & seating and respiratory products appeared with strong new order intake, we continue to experience higher than typical backlog levels across all product categories compared to pre-pandemic levels, which is expected to drive sequential sales growth in the fourth quarter.
As always, we're working diligently to maximize our throughput and improve our service levels to better support our customers' needs.
Turning to gross profit, we've benefited from sales growth and favorable sales mix with higher gross profit on lower percentage of sales.
Gross margin was impacted by previously disclosed changes to input costs ahead of offsetting price adjustments.
We view these challenges as transitory and during the quarter we undertook actions to address them which I'll discuss more in detail in the next slide.
To support existing levels of demand and expected sales growth, free cash flow usage increased as a result of greater investment in working capital, specifically inventory, which Kathy will discuss later.
Overall, our third quarter sales results were in line with expectations with solid revenue growth year-over-year in all major product categories.
Turning to slide four, we expect to finish the year on a strong note, while we anticipate global supply chain challenges to persist in the near-term, the disruptions are generally more predictable, and the actions we've taken should mitigate some of the remaining uncertainty.
In addition, our customers continue to demonstrate strong demand for our products even though access to healthcare has not fully rebounded from pre-pandemic levels.
As mentioned previously, we're taking action to mitigate the supply chain challenges which impacted sales and gross margins.
For example, we expanded our network of freight providers for more timely shipments, we found ways to improve staffing levels to increase throughput, and we have further increased inventory to mitigate supply chain uncertainties.
In addition, we continue to adjust price and freight charges were applicable to offset the substantially higher material and logistics costs we continue to experience.
Well still early in the fourth quarter, we're seeing positive signs that our actions should be effective.
As we work through these near-term challenges, we're also marching forward with the next phase of our IT modernization Initiative in North America.
I'm pleased to share that the program took a big step forward following the launch of our new e-commerce platform, which has features to enhance the customers experience and to improve the ease of doing business with Invacare.
In 2022, we expect to launch the next phase in North America, which will focus on driving operational efficiencies, lowering costs and improving working capital management.
Turning to sales, demand remains strong and we continue to see solid order rates in all regions and product categories.
As we grow revenue, our order backlog has also continued to increase.
In the third quarter, product availability in our targeted inventory strategy were key factors in driving strong sales growth in both Europe and Asia-Pacific.
Specific material shortages, limited some of lifestyle product availability in North America balancing overall results.
All things taken together, we expect fourth quarter will improve in all key metrics with sequential constant currency net sales growth, driving substantially higher profitability and free cash flow.
We believe the progress we have made sets us up for a strong finish to the year and continued improvement in 2022.
Turning to slide six, reported net sales increased 5.8% and constant currency net sales increased 2.9% in line with our quarterly guidance, and driven by growth in all key product categories, sales growth was the result of continued strong order intake, and the conversion of a portion of the excess backlog from the second quarter of 2021.
Gross profit increased $300,000 and benefited from net sales growth and favorable sales mix.
However, gross profit as a percentage of sales declined 140 basis points.
As previously discussed, gross margin continued to be impacted by global supply chain related challenges and labor shortages resulting in elevated manufacturing costs for the quarter.
We expect many actions we have undertaken to mitigate these higher costs to become effective and benefit margins in the fourth quarter of '21.
Constant currency SG&A expense decreased primarily related to lower employee related costs, including stock compensation expense.
To drive profitability, we continue to align commercial expenses with net sales growth and monitor all discretionary spending.
Operating loss excluding the goodwill impairment charge was $3.8 million, an improvement of $900,000 from the third quarter of 2020.
This improvement was driven by sales growth and lower restructuring costs.
In the third quarter of '21, the company recorded a one-time non-cash charge related to an impairment for Goodwill of $28.6 million.
The company's reporting units for Goodwill assessment North America HMV, and the Institutional Products Group merged into one reporting unit as a result of changes to the operating structure of the North America business and the implementation of a new enterprise resource planning system at the end of the quarter.
This change was considered a triggering event and required the company to perform an interim goodwill impairment test.
Adjusted EBITDA was $18.1 million, an increase of $8.3 million primarily attributable to $10.1 million of CARES Act benefit, and net sales growth partially offset by higher supply chain costs.
Excluding the CARES Act benefits, adjusted EBITDA for the third quarter was $8 million.
Note that the CARES Act benefit was and is not considered in the company's full-year 2021 guidance for adjusted EBITDA.
Free cash flow usage for the quarter reflects an investment in working capital, including $10.1 million of additional inventory as compared to the second quarter of '21.
As previously disclosed, the company increased inventory levels to mitigate supply chain disruptions and to prepare for expected sequential sales growth in the fourth quarter.
We anticipate that inventory levels and accounts receivable will remain elevated at year-end and convert to cash over the next few quarters.
Turning to slide seven, reported net sales in all key product lines improved despite supply chain challenges, which continued to limit the conversion of orders to revenue.
We continue to see strong demand in all product categories and in all regions, which resulted in excess order backlog that was higher than typical compared to pre-pandemic levels and similar to the end of the second quarter.
We're working diligently to reduce the excess backlog and return our service levels back to more normal lead times.
On a consolidated basis, constant currency net sales of Lifestyle products grew 5.2% driven by exceptionally strong sales of manual wheelchairs and hygiene products in Europe.
Mobility & seating products also achieved constant currency net sales growth in North America and Asia Pacific.
In addition, we continue to see elevated demand for respiratory products globally related to the pandemic.
Turning to slide eight, Europe constant currency net sales increased 4.5% driven by more than 17% growth in lifestyle products as a result of heightened demand for products that were readily available, demonstrating the importance of our targeted inventory strategy.
While respiratory demand remained strong, fulfilling that demand has been hindered by the availability of components to complete orders.
Gross profit increased $3.2 million, and gross margin increased 20 basis points driven by net sales growth and favorable product mix partially offset by higher freight costs and supply chain disruptions.
As Matt mentioned, we have taken actions to mitigate the impact of these additional costs and expect to see benefits starting in the fourth quarter.
Operating income benefited from SG&A leverage and increased by $2 million, driven by higher gross profit from revenue growth.
Turning to slide nine, North America constant currency net sales decreased slightly, a 7% increase in mobility & seating and an over 6% increase in respiratory products was more than offset by lower sales of lifestyle products.
Higher sales of mobility & seating products was driven by power wheelchairs and power add-on products.
The lifestyle product category was impacted by supply chain issues limiting the availability of materials and components in particular for bed.
In addition, access to institutional and government customers' remains limited compared to pre-pandemic level.
That said, overall, we continue to see increased customer interest in all products and strong order intake.
Gross profits declined by $2.8 million and gross margin declined 80 basis points due to unfavorable operating variances as a result of supply chain challenges, partially offset by favorable product mix.
Operating loss of $1.5 million was impacted by reduced gross profit and higher SG&A expense, the latter of which came primarily as a result of spending supporting revenue growth.
As noted the goodwill impairment charge previously discussed is not included in the operating results for North America.
Turning to slide 10, constant currency net sales in the Asia Pacific region increased 17%, driven by significantly higher sales of respiratory products, and an over 15% increase in mobility & seating products.
Sales rebounded in the Asia Pacific region as a result of receiving products delayed from the second quarter, which had been impacted by global shipping issues.
Operating loss improved by $2.2 million, driven primarily by lower corporate SG&A expense, including reduced stock compensation expense.
This was partially offset by lower profitability in the Asia Pacific region impacted by higher material and freight costs as well as higher SG&A expense.
Moving to slide 11, as of September 30, 2021, the company had total debt of $318 million, excluding financing and operating lease obligations, and $74 million of cash on the balance sheet.
Lower cash balances are primarily related to higher levels of working capital, which we anticipate will remain elevated through the end of the year.
As part of the company's strategy to mitigate supply chain challenges and to prepare for expected sales growth, the company added $10.1 million of incremental inventory in the quarter, which is expected to convert to cash over the next few quarters.
In the third quarter of 2021, the company received forgiveness of its CARES Act that obligation of $10.1 million of principal and accrued interest.
Turning to slide 12, we are reaffirming our full-year guidance for 2021 consisting of constant currency net sales growth in the range of minus 1% to positive 2%.
Adjusted EBITDA in the range of $30 million to $37 million, and free cash flow usage in the range of $10 million to $20 million.
As previously mentioned, full-year adjusted EBITDA guidance does not include the CARES Act benefit recognized in the third quarter.
For the fourth quarter, the company anticipates sequential improvement and constant currency net sales growth driven by continued strong order intake and the conversion of a portion of its elevated backlog into revenues.
We expect the actions we have taken to support sales growth and manage near-term supply chain challenges will drive sales growth, favorable sales mix and expand gross margin.
As a result, adjusted EBITDA and free cash flow are expected to improve materially.
Turning to slide 13.
We're pleased that our third quarter results reflect constant currency net sales growth.
We anticipate the actions we have taken will enable us to finish the year on a strong note and instill confidence that we will achieve our full-year guidance.
Looking further ahead, I'm confident that the durable benefits from our recent actions and our capable team will allow us to drive sustainable profitable growth in 2022 and beyond.
We'll now take questions. | full year 2021 financial guidance reaffirmed. | 1 |
Just after the close of regular trading, Edwards released fourth quarter 2021 financial results.
These statements include, but aren't limited to: financial guidance and expectations for longer-term growth opportunities; regulatory approvals; clinical trials; litigation; reimbursement; competitive matters; and foreign currency fluctuations.
Finally, a quick reminder that when using the terms underlying and adjusted, management is referring to non-GAAP financial measures.
Otherwise, they are referring to GAAP results.
We're proud of our performance in 2021.
Although hospitals continue to be impacted by COVID, it was a year of significant milestones and investment for Edwards and our teams were relentless.
In TAVR, we made important strides in executing our long-term strategy.
In particular, we invested in increasing awareness, pursued further therapy expansion and advance new technologies.
We completed enrollment of the EARLY-TAVR trial, an important pivotal study studying the treatment of severe aortic stenosis patients before their symptoms develop.
Separately, we initiated enrollment in our PROGRESS trial for moderate AS patients, and we received FDA approval for our ALLIANCE pivotal trial to start our next-generation TAVR technology, SAPIEN X4.
In TMTT, we achieved our significant 2021 milestones as we continue to make meaningful progress on advancing our three key value drivers: a portfolio of pioneering therapies for patients; positive pivotal trial results to support approvals and adoption; and favorable real-world clinical outcomes.
We are pleased to have treated over 3,000 patients in 2021 with our differentiated portfolio of TMTT therapies, gaining valuable learnings through both our clinical and commercial experiences.
Each of our platforms demonstrated promising outcomes and clinical performance.
I'm also pleased to announce that we completed enrollment of our CLASP IID pivotal trial in 2021, an important milestone that keeps us on track for U.S. approval late this year.
In Surgical Structural Heart, we extended our leadership position through the adoption of our premium technologies.
We also implemented valuable additions to our smart monitoring advancements in critical care.
Most importantly, in 2021, even more patients benefited from Edwards' life-saving technologies than ever before.
I'm also proud to say that throughout the year, our employees remain dedicated to keeping our commitments to patients and to one another.
Despite the ongoing pandemic that fueled global challenges, our employees found innovative ways to support hospital procedures and to ensure our ability to supply our life-saving therapies was not impacted.
And through their efforts, we were able to get our technologies into the hands of our trusted partners around the world so they could serve their patients.
Now I'd like to cover several 2021 financial highlights before I get into the quarterly details.
In 2021, we are pleased to achieve all of our key financial expectations.
Underlying sales increased 18% to $5.2 billion, driven by balanced organic sales growth in each region.
We achieved 19% growth in adjusted earnings per share, while also increasing R&D, 19%.
The significant increase in R&D and infrastructure investments this year helped strengthen our long-term outlook.
And as you heard at our investor conference last month, we are as convinced as ever about the tremendous opportunity we have to enhance patients' lives and bring significant value to the healthcare system.
Turning to our financial results.
Fourth quarter sales of $1.3 billion increased 13% on a constant currency basis versus the year ago period.
Growth was driven by our portfolio of innovative technologies, although at the lower end of our October expectations due to the pronounced impact of Omicron on hospital resources in December, especially in the U.S. Full year 2021 global TAVR sales of $3.4 billion increased 18% on an underlying basis versus the prior year.
Despite intermittent challenges associated with the pandemic throughout the year, sales were in line with our original guidance of 3.2 to 3.6 billion and were driven by increased awareness of the benefits of TAVR therapy with our SAPIEN platform.
In the fourth quarter, our global TAVR sales were $872 million, an increase of 13% on an underlying basis, with impressive strength outside the U.S.
We estimate global TAVR procedure growth was comparable with our growth.
And globally, average selling prices were stable as we maintained our disciplined pricing strategy.
In the U.S., our TAVR sales grew 10% year over year in the fourth quarter, and we estimate that our share of procedures was stable.
As previously mentioned, the Omicron variant had a noticeable impact on hospital resources in December as cases were postponed or limited in a number of hospitals.
Growth in the U.S. was highest in small- to mid-volume centers, which are helping provide access to a broader population of aortic stenosis patients.
Outside the U.S., in the fourth quarter, our sales grew approximately 20% year over year on an underlying basis, and we estimate total TAVR procedure growth was comparable.
We continue to be encouraged by the strong international adoption of TAVR broadly in all regions.
In Europe, Edwards' growth was in the mid-teens, and we estimate that our competitive position was stable.
Growth was broad-based across the region.
It's worth noting that a recent cost-effectiveness study demonstrated that TAVR with SAPIEN 3 was economically dominant when compared to surgical aortic valve replacement in treating French patients with severe symptomatic aortic stenosis who are at low surgical mortality -- who are at low risk of surgical mortality.
We're also encouraged by the recently published guidelines from the European Association of Cardiothoracic Surgery, which now definitively recommend TAVR for patients over 75.
We believe both of these developments represents an important long-term opportunity to bring TAVR therapy to even more patients in need.
Sales growth in Japan was also strong, where therapy adoption is still relatively low.
Several important milestones were achieved in Q4.
For the first time, the number of TAVR procedures performed in Japan was comparable with the surgical aortic valve replacements.
Furthermore, in each prefecture in Japan, there is now at least one hospital offering SAPIEN.
Following the recent reimbursement approval for the treatment of patients at low surgical risk, we remain focused on expanding the availability of TAVR therapy throughout the country.
Longer term, we see excellent opportunities for continued OUS growth as we believe global adoption of TAVR therapy remains quite low.
In addition to our geographic expansion of our TAVR therapies, we remain focused on indication expansion.
In Q4, we completed enrollment of our EARLY-TAVR pivotal trial, which is focused on the treatment of asymptomatic AS patients.
Separately, we initiated enrollment in PROGRESS, an important pivotal trial for moderate aortic stenosis to determine the optimal time to treat patients who have this progressive disease.
We believe that some patients may benefit from earlier treatment before they have symptoms or before their AS becomes severe, rather than risking irreversible damage to their heart as the disease progresses.
We also took steps to advance our innovative product portfolio.
In Q4, we received FDA approval for our ALLIANCE pivotal trial to study our next-generation TAVR device, SAPIEN X4.
Additionally, in Q4, we received FDA approval to use SAPIEN 3 with our Alterra adaptive pre-stent for congenital heart patients.
This should result in a quality of life improvement and a reduction in the number of procedures that these younger patients will require over their lifetime.
In summary, despite a slower-than-expected start to the year, we continue to anticipate 2022 underlying TAVR sales growth of 12 to 15%, consistent with the range we shared at our December investor conference.
Our outlook assumes COVID-related challenges early in 2022, turning to more normalized growth environment as headwinds from Omicron subside and hospital resource constraints stabilize.
We remain confident in this large global opportunity will double to $10 billion by 2028, which implies a compounded annual growth rate in the low double-digit range.
As I mentioned, in the fourth quarter, we completed enrollment of our CLASP IID pivotal trial, and we remain on track to present data in the second half of 2022.
This important milestone keeps us on track for U.S. approval late this year of PASCAL for patients with degenerative mitral regurgitation.
We also continue to expect European approval of our next-generation PASCAL Precision System later this year.
At the PCR London Valves conference in Q4, PASCAL 30-day outcomes from our MiCLASP post-market approval study of more than 250 patients in Europe were presented.
The data highlighted safe and effective MR reduction in a post-market setting.
We also progressed on the enrollment of our CLASP IIF pivotal trial for patients with functional mitral disease.
In mitral replacement, we continue to expand our experience with both our transcatheter mitral replacement therapies through the ENCIRCLE pivotal trial for SAPIEN M3 and the MISCEND study for EVOQUE Eos.
Early experience with these sub-French transfemoral therapies increase our confidence in both platforms.
Turning to transcatheter tricuspid therapies, results from the TRISCEND study were presented at the Annual TCT Conference in November and demonstrated that early patient outcomes with the EVOQUE tricuspid were favorable and sustained at six months.
We are encouraged by the procedural success rates and also the significant TR reduction and sustained improvements in quality of life measures experienced by these patients.
We continue to make meaningful progress in enrolling our two tricuspid pivotal trials the tri cusp -- the TRISCEND II pivotal trial for the EVOQUE system and the CLASP IITR pivotal trial with PASCAL in patients with symptomatic severe tricuspid regurgitation.
We anticipate a late 2022 approval of EVOQUE tricuspid in Europe and remain committed to providing solutions for these patients that have very poor prognosis and few treatment options today.
Turning to the sales performance of TMTT.
Fourth quarter revenue of $25 million grew sequentially from the third quarter as we saw increased adoption of the PASCAL system despite the negative COVID impact in December.
Full year 2021 global sales more than doubled to $86 million.
As we continue to expand the availability of PASCAL to more centers in Europe, we are pleased with the excellent outcomes for patients supported by our high-touch model.
We look forward to continuing our progress toward advancing our vision to transform the lives of patients with mitral and tricuspid valve disease in 2022 with the milestones that we outlined in our recent investor conference.
Despite the COVID impact so far this year, we continue to expect TMTT sales of 140 to $170 million for 2022.
We estimate the global TMTT opportunity will grow to approximately $5 billion by 2028, and we remain committed to bringing our groundbreaking portfolio of therapies to patients with these life-threatening diseases.
We are confident our portfolio strategy positions us well for leadership.
In Surgical Structural Heart, full year global sales were $889 million, up 15% on an underlying basis versus the prior year.
Fourth quarter 2021 global sales of $221 million increased 9% on an underlying basis over the prior year.
Although we saw that hospital staffing shortages continued to worsen throughout the quarter, especially in the U.S., life-saving surgical therapies continue to be prioritized over elective procedures.
We're excited about the continued global adoption of INSPIRIS RESILIA aortic surgical valve, the KONECT RESILIA aortic tissue valve conduit and our MITRIS RESILIA valve.
We remain encouraged by the growing evidence that supports Edwards RESILIA tissue valves, including two studies being presented at the Society of Thoracic Surgeons Conference this weekend.
The COMMENCE study demonstrates excellent hemodynamics of this tissue technology across all aortic valve sizes at five years, while a European economic value study shows a cost reduction with the use of INSPIRIS versus mechanical valves.
In summary, we continue to expect that our full year 2022 underlying sales growth will be in the mid-single-digit range for Surgical Structural Heart, driven by adoption of our premium technologies and procedure growth.
Even as TAVR adoption expands, we're excited about our ability to provide innovative surgical treatment options for patients, extend our global leadership, and be the partner of choice for cardiac surgeons.
Turning to Critical Care.
Full year global sales of $835 million increased 14% on an underlying basis versus the prior year.
2021 growth was driven by balanced contributions from all product lines led by HemoSphere sales as capital spending resumed.
Our TruWave disposable pressure monitoring devices used in the ICU also remained in high demand due to the elevated COVID hospitalizations in both the U.S. and Europe.
Fourth quarter Critical Care sales of $212 million increased 8% on an underlying basis, driven by strong demand for HemoSphere.
Demand for our broad portfolio of smart recovery sensors also remained robust in the fourth quarter, including ClearSight, our noninvasive finger cuff, which achieved sustained performance at or above pre-COVID levels.
As discussed at our recent investor conference, the integration of a full range of technologies creates a unique offering of enhanced recovery tools and predictive analytics capabilities to further strengthen our leadership in hemodynamic monitoring.
In summary, we continue to expect mid-single-digit underlying sales growth for 2022, and we remain excited about our pipeline of innovative critical care products.
Today, I'll provide a wrap-up of 2021, including detailed results from the fourth quarter, as well as provide an update on guidance for the first quarter and full year of this year.
Sales in the fourth quarter increased 12.6% on an underlying basis.
Adjusted earnings per share was $0.51, and GAAP earnings per share was $0.53.
Our fourth quarter sales were negatively impacted by the wave of COVID that began late in the quarter, especially in the U.S. Earnings per share in the quarter was below our expectations as it was impacted by weaker-than-expected sales and we accelerated certain spending into the fourth quarter of 2021 that we had planned to incur during 2022, including preparation for TMTT product launches.
For the full year 2021, we are pleased with our performance as sales increased 18% on an underlying basis to $5.2 billion and adjusted earnings per share grew 19% to $2.22.
I'll now cover the details of our results and then discuss guidance for 2022.
For the fourth quarter, our adjusted gross profit margin was 76.8%, compared to 75.3% in the same period last year.
This increase was primarily driven by a favorable impact from foreign exchange.
We continue to expect our full year 2022 adjusted gross profit margin to be between 78 and 79%.
This year, our rate should be lifted by a favorable impact from foreign exchange and an improved product mix, partially offset by investments in our manufacturing capacity.
Selling, general and administrative expenses in the fourth quarter were $424 million or 31.9% of sales, compared to $339 million in the prior year.
This increase was driven by the resumption of medical congresses and commercial activities compared to the COVID impacted prior year, as well as the addition of personnel in preparation for new product launches.
We continue to expect full year 2022 SG&A as a percent of sales, excluding special items, to be between 28 and 30%.
Research and development expenses in the quarter grew 19% to $233 million or 17.5% of sales.
This increase was primarily the result of continued investments in our transcatheter innovations, including increased TMTT clinical trial activity.
For the full year 2022, we continue to expect R&D as a percentage of sales to be in the 17 to 18% range as we invest in developing new technologies and generating evidence to support TAVR and TMTT growth.
During the fourth quarter, we recorded an $18 million net reduction in the fair value of our contingent consideration liabilities, which benefited earnings per share by $0.03.
This gain was excluded from the adjusted earnings per share of $0.51 I mentioned earlier.
This reduction reflects an accounting adjustment associated with reduced expectations of making a future milestone payment for a previous acquisition.
Our reported tax rate this quarter was 10.9% or 12.7%, excluding the impact of special items.
This rate included an approximate 3 percentage point benefit from the accounting for stock-based compensation.
Our full year 2021 tax rate, excluding special items, was 12.6%.
We continue to expect our full year rate in 2022 to be between 11 and 15%, which includes an estimated benefit of 3 percentage points from stock-based compensation accounting.
Foreign exchange rates decreased fourth quarter reported sales by approximately 1% or $10 million compared to the prior year.
At current rates, we now expect an approximate $100 million negative impact or about 2% to full year 2022 sales as compared to 2021.
Foreign exchange rates positively impacted our fourth quarter gross profit margin by 140 basis points compared to the prior year.
Free cash flow for the fourth quarter was $284 million, defined as cash flow from operating activities of $374 million, less capital spending of $90 million.
Full year 2021 free cash flow was $1.4 billion, up from $734 million in 2020.
We continue to expect full year 2022 free cash flow to be between 1.2 and $1.5 billion.
In 2022, we expect our cash flow will be reduced by approximately $200 million due to a change in tax regulations involving the timing of the deductions for research and development expenses.
Turning to the balance sheet.
We have a strong balance sheet, with approximately $1.5 billion in cash, cash equivalents, and short-term investments at the end of the year.
Consistent with our practice of opportunistically repurchasing shares, we purchased approximately $100 million during the fourth quarter.
We still have remaining share repurchase authorization of $1.1 billion.
Average shares outstanding during the fourth quarter were $632 million, relatively consistent with the prior quarter.
We continue to expect average diluted shares outstanding for 2022 to be between 630 and $635 million.
Before turning the call back over to Mike, I'll finish with financial guidance for 2022.
Despite a slow start to the year associated with Omicron's impact on hospital resources, we are planning for conditions to gradually improve and therefore, are maintaining all of our previous sales guidance ranges for 2022.
For total Edwards, we continue to expect sales to grow at a low double-digit rate to 5.5 billion to $6 billion.
For TAVR, we expect sales of 3.7 to $4 billion.
And for TMTT, we expect sales of 140 to $170 million.
We expect Surgical Structural Heart sales of 870 to $950 million and Critical Care sales of 820 to $900 million.
For full year 2022, we continue to expect adjusted earnings per share of $2.50 to $2.65.
For the first quarter of 2022, we project total sales to be between 1.27 and $1.35 billion and adjusted earnings per share of $0.54 to $0.62.
And with that, I'll pass it back to Mike.
So in conclusion, we're proud of the significant progress we made in 2021, advancing new transformational therapies and delivering strong financial performance.
We expect continued growth and progress in 2022.
We are enthusiastic about the continued expansion of catheter-based therapies for the many structural heart patients still in need, which positions us well long-term success.
As the global population ages and cardiovascular disease remains the No.
1 largest health burden, we believe the opportunity to serve our patients will nearly double between now and 2028.
We are confident that our patient-focused innovation strategy can transform care and bring value to patients and the healthcare system. | compname says qtrly sales grew 15% to $1.3 billion.
qtrly sales grew 15% to $1.3 billion; underlying sales grew 14%.
q3 earnings per share was $0.54.
full year 2021 sales, earnings per share guidance range unchanged.
qtrly tavr sales of $858 million, up 15% on a reported basis.
tavr sales negatively impacted in last two months of q3 due to significant impact covid had on hospital resources. | 0 |
We have in the room today, Nick DeIuliis, our President and Chief Executive Officer; Don Rush, our Chief Financial Officer; Chad Griffith, our Chief Operating Officer; and Yemi Akinkugbe, our Chief Excellence Officer.
Today, we will be discussing our first quarter results.
And then we will open the call up for Q&A.
Then we're going to go over to Don Rush, our Chief Financial Officer, to talk about the financials, and then Yemi will wrap things up to talk about some thoughts on ESG that we've got.
But starting now on Slide two.
There's one main theme that I think is important to highlight, and the theme there is steady execution.
First quarter was another example of steady execution, and it's illustrated by us generating $101 million in free cash flow.
This is the fifth consecutive quarter that the company generated significant free cash flow.
Similar to last quarter, we used some of that free cash flow to pay down debt.
That helped build further liquidity.
And we use some of the free cash flow to buy back our shares in the open market at attractive pricing.
So for the quarter, we repurchased 1.5 million shares at an average price of $12.26 per share at a total cost of $18 million.
We still have ample capacity of around $240 million under our existing stock repurchase program, which, as a reminder, that's not subject to an expiration date.
Also in the quarter, we upped our free cash flow guidance by $25 million to $450 million.
That's $2.04 per share compared to the previous guidance of $1.93 per share.
Our steady performance drives our confidence in continuing to execute upon our seven year free cash flow plan, and we continue to expect will generate over $3 billion over those seven years.
Again, this is done by steady execution each and every day.
Our long-term plan is largely derisked through our hedging program that supports us a simple operational program that consists of one rig and one frac group.
We've worked hard to get the company to where we are today, and our focus is going to remain on successfully executing that plan.
I want to jump over now to Slide three.
This is a slide that we have shown for the past few quarters now, but I think that it's a really powerful one.
Our competition for investor capital is not so much among just our Appalachian peers, but more so across the broader market.
And as you can see by three of the main financial metrics that we track, CNX streams incredibly well across various metrics and indices.
We believe that these things matter most to generalist investors, along with what has become a much simpler differentiated story.
CNX is a differentiated company due to the structural cost advantage we enjoy compared to our peers, mainly because we own our midstream infrastructure.
And this moat provides us with superior margins that drive significant free cash flow, which, in turn, puts us in a unique position to flexibly allocate capital across the full spectrum of shareholder value creation opportunities.
While our near-term focus is to continue to reduce debt and opportunistically acquire shares, we continually evaluate all our alternatives that we've got.
So last, in that regard, with respect to the often asked about potential M&A activity, our view remains consistent from last time we spoke.
Our two key screening metrics or the ability to deliver long-term free cash flow per share accretion and having good risk-adjusted returns.
The strength of our company affords us the ability to be patient on this front to ensure that we avoid M&A missteps that too often permanently can destroy shareholder value.
With that, now, I'm going to turn things over to Chad.
I'm going to start on Slide four, which highlights some of the key metrics that make CNX an incredibly attractive investment today, particularly relative to our peers.
For us, it begins in the upper right quadrant where we illustrate our peer-leading production cash costs.
While our Q1 result of $0.66 is up roughly $0.05 quarter-over-quarter, we're still more than $0.11 better than our next closest competitor.
It's also worth noting that, that $0.05 increase was driven predominantly by some reworking of our FT book, which allowed us to eliminate some unused FT and exchanges for some FT that is better matched up with our production locations.
As Don will go into more details momentarily, our low production cash costs allow us to generate more operating cash flow per Mcfe at a given gas price relative to our peers.
And this operating margin creates -- this operating margin advantage creates many other advantages for CNX.
First, we'll generate more EBITDA per Mcfe, which means we need less daily production to achieve the same level of EBITDA compared to our peers.
This allows us to maintain that level of EBITDA, but less maintenance drilling, thereby consuming fewer of our acres each year.
The operating margin advantage also enhances each well's return on capital, which means a greater subset of our net acres are in the money.
So fewer well each year from a broader amount of net acres means that we'll be able to sustain this formula for decades to come.
By the way, the lower number of new wells required to maintain our EBITDA means that less of that EBITDA is consumed by maintenance capital expenditures.
That is how we generate, on average, $500 million per year of free cash flow over the next six years at strip pricing.
Wrapping up this slide, you can see that we continue to trade at very attractive free cash flow yield on our equity, while continuing to pay down debt and returning capital to shareholders.
Slide five is another illustration of our cost structure when you look at it on a fully burdened basis.
That means that this cost illustration includes every cash cost that exists in our business.
We expect cost to continue to improve, primarily driven by a reduction in the other expense bucket, which consists primarily of interest coming down and additional unused FT rolling off.
We are expecting around $10 million of unused firm transportation to roll off in 2021, a modest amount next year in 2022 and then another $20 million rolling off across -- through 2023 through 2025.
These are simply contractual agreements that are expiring.
So with these changes, and assuming all future free cash flow goes toward debt repayments, we would expect fully burden cost to decrease to around $0.90 per Mcfe and then lower in years beyond 2021.
Before handing it over to Don, I wanted to spend a couple of minutes on our operations, the gas markets and provide a hedge book update.
During the quarter, we turned in line five Marcellus wells, and we're in the process of drilling out another 13 that will be turned in line within the next two weeks.
Those 18 wells had an average lateral length of just over 13,000 feet and has an average all-in cost of less than $650 per foot per lateral foot.
Also during the quarter, we brought online two Southwest PA Utica wells, the Majorsville 12 wells.
Deep Utica have continued to come down with the all-in capital cost for these two wells averaging $1,420 per lateral foot.
Production from these wells are being managed as part of our blending program, but we're very encouraged by the data we're seeing.
As we've really discussed, we only have four additional SWPA Utica wells in our long-term plan through 2026, but based on what we're seeing so far at Majorsville 12, we're excited about the deep Utica's potential as either a growth driver if gas prices improve or as a continuation of our business plan for years and into the future.
As for our CPA Utica region, as a reminder, we continue to expect about a pad a year through the end of the 2026 plan.
This continues to be an area that we are very excited about.
Shifting to the gas markets, we saw weakening in the near-term NYMEX and weakening to the curve of in-basin markets.
As a gas producer, we're always rooting for stronger prices.
But fortunately, our cost structure and hedge book make higher prices a luxury for CNX, instead of a necessity as it is for many of our peers.
The way we see it, there are four fundamental drivers of gas price that need to be in our favor to actually see higher gas prices.
One, moderate production levels; two, lower storage levels; three, higher weather-related demand; and four, sustained levels of LNG exports.
If all four hit, expect gas prices to surge.
But despite our optimism and others' dire needs, it's becoming less likely each year that all four of those factors line up in favor of strong gas prices.
As an example, just last year, everyone was expecting all four factors to line up in 2021, and the forward curve surge, but a mild winter, lack of strong winter storage draw and growing drilling and completion activity have weighed on 2021 pricing.
The difficulty in having all four factors line up in favor of strong gas prices is why we will continue to focus on being the low-cost producer and protecting our revenue line through our programmatic hedging program.
That's why we do not rely on full commodity cases to make projections or investment decisions.
Insead, our free cash flow projections and investment decisions are based on the forward stroke.
Speaking of our hedging program, during Q1, we added 136 Bcf of NYMEX hedges, 15.5 Bcf of index hedges and 61.3 Bcf of basis hedges.
For 2021, we are now approximately 94% hedged on gas based on the midpoint of our guidance range and after backing out 6% to liquids.
That 94% includes both NYMEX and basis hedges or fully covered volumes, which are hedged at $2.48 per Mcf.
It is a true realized price that we will receive in the year.
We are also now fully hedged on in-basin basis through 2024.
We will continue to programmatically hedge our volumes before we spend capital by locking in significant economics, which are supported by our best-in-class cost advantage.
Q1 was the fifth consecutive quarter of generating significant free cash flow and consistent execution of our plan.
Our confidence in future execution supports a $25 million increase in our 2021 free cash flow guidance and our continued expectation to generate over $3 billion across our long-term plan.
Slide seven is a new slide that highlights our superior conversion of production volumes into free cash flow.
The top chart highlights that CNX is able to convert production volumes into EBITDA more efficiently than our peers as a result of our low-cost structure generating higher margins.
The bottom chart further highlights the superior conversion cycle through a reinvestment rate metric, which is simply capital divided by operating cash flow.
As you can see, CNX has an incredibly low reinvestment rate, which supports our expectation to generate average annual free cash flow of $500 million across our long-term plan.
Our profitability profile allows us to generate an outsized free cash flow per Mcfe of gas and per dollar of capital spending.
Also, this low reinvestment rate demonstrates the company's commitment to generating cash used toward investor-friendly purposes, which include balance sheet enhancement and returning capital to shareholders.
Slide eight highlights our balance sheet strength.
We have no bond maturities due until 2026, so we have a substantial runway ahead of us that provides significant flexibility.
In the quarter, we reduced net debt by approximately $70 million.
And after the close of the quarter, we completed our semiannual bank redetermination process to reaffirm our existing borrowing base.
Lastly, as you can see on the slide, our public debt continues to trade in the 4% to 5% range.
Now let's touch on guidance that is highlighted on Slide nine.
There are a couple of updates on this slide.
The first is the pricing update, which is simply a mark-to-market on what NYMEX and Basis are doing for cal 2021 as of April seven compared to our last update, which was as of January 7, 2021.
We also increased our NGL realization expectations by $5 per barrel as a result of the increase in expected NGL realizations.
As we have already highlighted, we are increasing free cash flow for the year by $25 million.
Lastly, there are a few other guidance related items to highlight that are not captured on this slide that I would like to address in advance of questions.
We expect production volumes to be generally consistent each quarter throughout the rest of the year, with a very slight decrease expected in the second quarter.
As for capital cadence, we expect capital to have a bit more variation.
Specifically, we expect our first half capital to be more than our second half capital, so Q2 should be near Q1 and Q3 and Q4 a bit less.
As we have said previously, quarterly capex cutoffs are difficult to predict since a pad going a bit faster or a bit slower can change the period numbers materially without changing our long-term plan and forecast at all.
I'm Yemi Akinkugbe, the Chief Excellence Officer here at CNX.
A few of you may be wondering what exactly this role entail.
The short answer is I oversee and manage all operational and corporate support function withing the company.
The longer answer is what I want to speak about in more detail today.
We've been focused on the underlying tenets of ESG and its benefit with generation.
This is an effect or a means we only talk about to ponder up to certain interest for short-term end.
Instead, the concept was part of our fabric long before the current management team joined the company, and it will be part of our fabric long after it's gone.
With that backdrop, let's talk for a minute where we have been and where we are heading on this front.
A lot of you when it comes to ESG is simple and can really be summed up in three words: tangible; impactful; local.
We've been the first mover across the board, and I just want to highlight a few of our significant accomplishments over the years.
First, we proactively reduced Scope one and two CO2 emissions over 90% since 2011, something that a few, if any, of any public company had claimed.
Two, we were the early adopters and innovators of commercial-scaled coalbed methane capture in the 1980s.
This resulted in historical mitigation of cumulatively over 700 Bcf of methane emission that would have otherwise been vented into the atmosphere.
Annually, we capture nearly as much methane from this operation than the nation's largest waste management company does from its landfill.
That ingenuity and leadership on a key tenet of ESG is what ultimately birth this company we see today.
Three, we were the first to fully deploy an all-electric frac spread in the Appalachian Basin.
This improved our emission footprint, increased our efficiency and support our best-in-class operational cost performance.
The elimination of diesel fuel in this operation is equivalent to taking 23,000 passenger vehicles off the road for a year.
We recycled 98% of produced fluid in our core operation.
This prevented unnecessary water withdrawal and eliminates the need for disposal.
Our unique pipeline network decreases the need for water trucking, which have the dual benefit of reducing community impact of trucking, while reducing overall air quality emissions.
These achievements are important and impactful, but ESG is not just about proven track record.
To us, it's about what we are doing now and how we'll continue to push the envelope through intangible, impactful and local accomplishments.
Committing to target or goals decades into the future without a concrete path to accomplish them and without accountability for those words, in our opinion, is the epitome of flawed corporate governance.
These are the strategies that have allowed CNX to thrive for over 150 years and will continue to drive our success.
Let me introduce a few of our efforts this year.
We introduced methane-related KPIs into our executive compensation program.
We've committed to make substantial multi-year community investment of $30 million over the next six years to widen the path of the middle class in our local community, while growing the local talent pipeline.
We've redoubled our efforts to spend local and hire locally.
100% of our new hires will be from our area of operation, and we will maintain at least 90% local contract workforce.
We committed 6% of our contract spend to local, diverse and businesses in 2021 and dedicated 40% of the total CNX small business spend to companies within the Tri-State area.
We adopted a task force on climate-related financial disclosure, or TCFD framework and a FASB standard for both our E&P and midstream operation.
In addition, the transparency and the financial sustainability of our business is second to none.
One year into our seven year free cash flow generation plan, we have a low-risk balance sheet driven by the most efficient, lowest cost operation in the basin.
This leads to independence from equity and debt market when pursuing value creation.
Finally, while you will hear more about this in the weeks and months ahead, I want to take the opportunity to announce that CNX is developing an innovative proprietary solution in combination with a few commercial solutions that allows us to significantly minimize from a blowdown and pneumatic devices, which make up about 50% of our emission source.
The blowdown solution under development will also allow us to recirculate methane, which will otherwise be admitted into the atmosphere back into the gathering system.
This is yet another leadership step for a company that continues to lead and deliver tangible impactful ESG performance that is reducing risk and creating sustainable value for our shareholders.
Tangible, impactful, local ESG is our brand of ESG.
We don't follow the herd.
We chart our own course and do what we know is right and impactful over the long term for employees, our communities and our shareholders. | qtrly average daily production 1,562.5 mmcfe versus 1,476.5 mmcfe.
2021e fcf guidance increased to approximately $450 million. | 1 |
We appreciate your patience while we work through some of the technical issues.
As you know, there's a new process and procedure for calling into these calls, and the vendor and the operator were working through that.
So, again, we appreciate you being patient during the delay.
A copy of the release has also been included in an 8-K submitted to the SEC.
Fiscal 2021 started off strong as demand and business activity in the first quarter remain stable at the top with some underlying variability by state and end market.
Organic sales grew 3%.
And recall that we communicated to you in May that customers bought approximately $20 million of product in the fourth quarter of fiscal 2020 due to pre-buying in our construction end markets and favorable weather conditions in our agricultural end market.
Absent this dynamic, first quarter organic sales would have increased 8% and non-residential would have been flat year-over-year.
Domestically, we had strong performance in key growth states like the Carolinas, Florida, the Southeast and Utah, and we were able to offset sales in states that reduced construction activity due to the COVID pandemic early in the quarter.
As a whole, we benefited from our national presence, as well as our geographic and end market exposure, including the increased exposure of the Infiltrator and ADS' focused homebuilder programs provide to the residential end market and our strong presence in the agricultural market.
We had another strong quarter in the domestic agriculture business, where sales grew 36%.
This growth was primarily driven by actions previously taken to increase our focus on performance in this end market, as well as positive underlying demand in this market and what was a strong spring selling season.
A lot of good work is being done in the sales and operations initiatives we defined as part of the renewed focus on agriculture at ADS, and the fall season is shaping up favorably.
International net sales decreased 9% in the quarter.
Sales in our Canada business did well, but it was not enough to offset weakness in Mexico in our exports business.
We have recently hired a new Senior Vice President of our International segment, Tom Waun.
Tom comes to ADS after a successful career at Emerson, and we are excited to have him as a member of our team.
Tom has decades-long experience in executive management, strategy and sales, and I look forward to working with Tom to improve the performance of our International segment.
Infiltrator once again exceeded revenue expectations with sales growth accelerating as we progressed through the first quarter.
Infiltrator sales increased across their product portfolio with a strong underlying demand in the residential and repair-remodel end markets.
Roy and his team believe, and I agree, that the favorable trends for single-family housing brought on by the pandemic are quite favorable for Infiltrator, so we are making additional capital and resource investments there.
As we get into the second quarter, demand looks very similar to what we experienced in the first quarter.
Our order book, project tracking, book-to-bill ratio and backlog are all positive, and we feel good about the first half of our fiscal 2021.
We expect the normal seasonal patterns to apply to the business, which only sharpens our focus for this first half of the year.
As mentioned previously, our national presence, distribution model and end market exposure enable us to capitalize on growth and activity across the US.
As you can see on the chart on the screen, our residential end market exposure has increased to 38% of domestic sales, our second largest domestic end market behind non-residential.
We view this as favorable, given current market trends and the uncertainty in the non-residential market.
The residential market should benefit from single-family housing undersupply and potential future suburban trends as people look to spread out in the aftermath of the COVID pandemic.
This dynamic should also benefit horizontal, non-residential and infrastructure development as developers look to support the increase in single-family homes and communities.
I think in the first quarter with the residential portions of ADS and, of course, Infiltrator growing to double digits, the success of our renewed focus on the agriculture market and the uptick in the sales to the retail segment, driven by the DIY and stay-at-home project activity, demonstrated to us the power of this end market diversity and we've initiated several programs to increase success across these markets so we can be prepared for changes in demand across our business.
From a profitability standpoint, we achieved record adjusted EBITDA in the first quarter.
Organic adjusted EBITDA margin increased 830 basis points, driven by favorable material costs, lower manufacturing and transportation costs driven by our operational initiatives, contributions from the proactive cost mitigation steps announced in March and leverage from the growth in pipe and allied products.
Infiltrator also has record profitability in the quarter due to favorable material costs, the contributions from the synergy programs and continued execution of their proven business model.
The synergy programs are right on track to achieve the run rate synergies we've previously communicated.
Similar to my comment earlier on the second quarter revenue, the second quarter profitability trends continue in much the same way as the first quarter at both ADS and Infiltrator.
We are making good progress on our operational improvement initiatives within our manufacturing and distribution network.
Material pricing remains favorable to the prior year, though the comparison will become more difficult as the year progresses.
We will continue to watch our spending very closely as we deal with many of the same issues that other companies are dealing with.
Reopening is presenting challenges, including recruiting and retaining production workers, absenteeism, and all of these challenges we have to deal with on a daily basis.
We've had roughly 80% of the salaried workforce, including sales, pretty much working from home since late March.
So there are a lot of issues you would expect that we're dealing with daily.
We have made adjustments and proven to ourselves that we know how to run the business in these conditions, and that's what we'll to focus on as we manage through this period of unique circumstances.
There's no doubt that uncertainties exist for future demand.
We will be focused on disciplined execution and doing the basics well as we move forward through fiscal 2021 and build on the strong start at both ADS and Infiltrator.
On Slide 6, we present our first quarter fiscal 2021 financial performance.
Net sales increased 23%, with 3% organic growth plus the contribution of Infiltrator.
Within ADS, domestic sales increased 4%, driven by sales growth in both the agriculture and construction end markets.
Importantly, sales increased 4% in both pipes and allied products.
Construction sales accelerated at the end of the quarter as states with more stringent restrictions for the pandemic began to open back up.
From a profitability standpoint, our adjusted EBITDA increased $79 million, or 99% compared to the prior year.
Our organic adjusted EBITDA increased $38 million, 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, as well as lower input costs, given our market-leading position, breadth of products and services, geographic and end market diversity, as well as our national relationships.
These attributes or modes make us the premier partner and leader in the industry and led to the margin expansion and financial performance in the quarter.
Infiltrator contributed an additional $42 million to adjusted EBITDA and has many of the same benefits as ADS in this market environment.
Infiltrator achieved a record adjusted EBITDA margin this quarter and is in a very good position to grow as a result of the underlying demand in the residential market, as well as their material conversion strategy.
Moving to free cash flow on Slide 7.
We more than doubled our free cash flow in the quarter, increasing from $53 million in the first quarter of fiscal 2020 to $124 million in fiscal 2021.
The very strong free cash flow results were driven by the strong sales growth and profitability we achieved in the quarter, as well as execution on our working capital initiatives.
Our working capital as a percent of sales decreased to about 21% as compared to about 25% last year.
Finally, on Slide 8, we present our current capital structure.
Our trailing 12-month pro forma leverage ratio is now 1.9 times below our target range of 2 times to 3 times levered we've previously communicated and well ahead of our original target to achieve a leverage ratio of less than 3 times by the end of this calendar year.
This performance was achieved as a result of our working capital initiatives, as well as the strong profitability performance we demonstrated both in fiscal 2020, as well as in this quarter.
We ended the quarter in a very favorable liquidity position, with $235 million in cash on June 30, 2020 and $289 million available under our revolving credit facility, bringing our total liquidity to $524 million.
It is also important to note that we have no significant debt maturities until 2026.
Further, we paid down the remaining $50 million balance on our revolving credit facility this past Friday, bringing that balance to zero as of today.
Our capital deployment priorities remain to invest in our business with a focus on safety, capacity expansion, productivity and efficiency improvements, as well as our innovation initiatives.
In addition, we will continue to assess bolt-on acquisition opportunities through our discipline process, staying close to our core and focusing on adding products to our water management solutions package.
Lastly, due to the uncertain market environment, we are not providing guidance on the call today.
Operator, please open the lines. | not issuing financial guidance at this time. | 1 |
Hosting the call, today are Doron Blachar, Chief Executive Officer; Assi Ginzburg, Chief Financial Officer; Smadar Lavi, Vice President of Corporate Finance and Investor Relations.
Actual results may differ materially from those projected as a result of certain risks and uncertainties.
For a discussion of such risks and uncertainties, please see Risk Factors as described in Ormat Technologies annual report on Form 10-K and quarterly reports on Form 10-Q that are filed with the SEC.
In addition, during the call, the company will present non-GAAP financial measures, such as adjusted EBITDA.
Because these measures are not calculated in accordance with GAAP, they should not be considered in isolation from the financial statements prepared in accordance with GAAP.
Doron, the call is yours.
During the third quarter, we completed several strategic initiatives that support our long term position, including a sizable geothermal acquisition in Nevada, new resource adequacy contract for our Energy Storage segment, a joint venture for exploration in Indonesia and several new product wins, providing further evidence that the COVID related disruption in our product segment is abating.
This development support our long-term goals and further our efforts to expand our generation capabilities toward our goal to achieve a run rate of $500 million in annual EBITDA toward the end of 2022.
Looking at the third quarter, our results were negatively impacted by operational challenges at three plants.
We are making progress to resolve these challenges and expect them to gradually recover by the first half of 2022.
Even with these challenges and the ongoing slowness in our product segment, we reported continued growth of more than 15.4% in the electricity segment, leading to revenue that was essentially flat year-over-year.
This enabled us to deliver over $100 million in adjusted EBITDA for the quarter.
We continue to view 2021 as a buildup year.
The strategic acquisition of two operating plants and an underutilized transmission line in Nevada is an example of this buildup.
The new long-term resource adequacy agreement with PG&E for our Pomona-2 project is another example as other product segment wins in Nicaragua and Indonesia, which boosted our product segment backlog.
With a portfolio of over 1.1 GW of generation, a rebounding product segment and a growing energy storage offering.
We are well positioned to maintain our industry leadership and deliver consistent profitable growth.
As we look into 2022, we anticipate increased growth as we put the short-term challenges behind us and reap the benefits of the hard work of the last year.
Let me start my review of our financial highlights on slide five.
Total revenues for the third quarter were $158.8 billion, essentially flat year-over-year, reflecting the contribution of the Terra-Gen acquisition, offset by lower year-over-year product sales.
Third quarter 2021 consolidated gross profit was $63.1 million, resulting in a gross margin of 39.8%, up from the gross margin of 34% in the third quarter of 2020.
Gross margin including $15.5 million of BI income compared to $2.6 million in the third quarter last year.
We delivered net income attributed to the companys stockholders of $14.9 million or $0.26 per diluted share in the quarter compared to $15.7 million or $0.31 per share in the same quarter last year, representing a decrease of 5% and 16.1%, respectively, mainly as a result of a lower operating income, driven mainly by a $9 million increase in the G&A expenses.
Adjusted net income attributed to the company stockholder was $17.8 million or $0.32 per diluted share in the quarter compared to $0.31 per share in the same quarter last year.
Net income attributed to the company stockholder was adjusted to exclude the transaction cost of $3.7 million pre-tax and $2.9 million after-tax related to the Terra-Gen Geothermal acquisition.
Our effective tax rate for the third quarter was 9.2%, which is lower than the 38.8% effective tax rate from the third quarter of 2020, mainly due to the movement in the valuation allowances for each quarter.
We still expect the annual effective tax rate to stand approximately between 30% to 34% for the full year 2021.
That assuming no material one-time impact or no impact from changing of lows.
This will result in an overall higher tax rate in the fourth quarter of 2021.
Adjusted EBITDA decreased 5.1% to $101.6 million in the third quarter compared to $107.1 million in the third quarter last year.
Id note that compared to second quarter 2021, adjusted EBITDA increased 20.2%.
The lower year-over-year adjusted EBITDA was due to a combination of approximately $4.6 million, lower business interruption income and approximately $4.7 million of higher G&A costs, mainly related to the special committee legal costs.
I would like to note that we do not expect to incur significant costs on these issues in the remainder of 2021.
Moving to slide six.
Breaking the revenues down, electricity segment revenues increased 15.4% to $142.7 million, supported by contribution from new added capacity to our McGinness Hills Complex, Punas resumed operation and the contribution of the recently acquired plants in Nevada.
This new added generation was partially offset by lower generation in Olkaria and Bouillante power plant due to a lower resource performance that caused a capacity reduction.
And surface leak in one of the broader injection wells, which also reduced generation.
We made progress in resolving these challenges and expect to gradually recover from them by the first half of 2022.
In the product segment, revenue declined 64.5% to $101 billion to $10.5 billion, representing 6.6% of total revenues in the third quarter.
The decline year-over-year is expected to continue throughout 2021 due to the lower backlog at the beginning of the year.
Energy Storage segment revenues remained flat year-over-year at $5.7 million in the third quarter.
This quarter, we had an increase in the revenue from our storage operating facility of 26%.
That was offset by approximately 67% reduction in demand response revenue as we expect to diminish over the next few quarters.
Lets move to slide seven.
Gross margin for the electricity segment for the quarter increased year-over-year to 42.8%.
This was the result of $15.8 million in business interruption insurance, of which $15.5 million was included in the cost of revenues for the electricity segment, partially offset by higher costs related to the repair and the recovery of Olkaria, Brawley and Bouillante power plants.
Excluding the impact of the business interruption in Q3 2021 and Q3 2020, gross profit increased 2.8% compared to the same time last year.
In the product segment, gross margin was 12.8% in the quarter compared to 18.9% in the same quarter last year.
The Energy Storage segment reported gross margin of 12.2% compared to gross margin of 25.6% in the third quarter last year.
The decrease was primarily due to the reduction in demand response and associated profit.
Electricity segment generated 96% of Ormats total adjusted EBITDA in the third quarter.
The product segment generated 2% of the and the Storage segment reported adjusted EBITDA of $2 million, which represents 2% of the total adjusted EBITDA.
Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide.
On slide nine, our net debt as of September 30 was $1.5 billion.
Cash, cash equivalents, marketable security at fair value and restricted cash and cash equivalents as of September 30, 2021, was approximately $402 million compared to $537 million as of December 31, 2020.
Marketable securities were at fair value of $46 million.
slide nine breaks down the use of cash for the nine months and illustrated our ability to reinvest in the business, service debts and return capital to our shareholders, all from cash and cash dividends, all from cash generated by our operations and our strong liquidity profile.
Our total debt as of September 30th was $1.9 billion, net of deferred financing costs, and its payment schedule is presented on slide 32 in the appendix.
The average cost of debt for the company reduced to 4.4% compared to 4.9% last quarter.
During the third quarter, we raised $275 million of new corporate debt to support the Terra-Gen asset acquisition and capex needs.
On November 3, 2021, the Company Board of Directors declared approved and authorized payment of quarterly dividends of $0.12 per share pursuant to the companys dividend policy.
The dividend will be paid on December 3, 2021, to shareholders of record as of close of Business Day on November 17, 2021.
That concludes my financial overview.
Turning to slide 12 for a look at our operating portfolio.
During Q3 of 2021, our power generation in our power plants increased by approximately 13.8% compared to last year.
We benefited from the incremental contribution of the recently expanded McGinness Hills and the generation from Puna that is operating now at a stable level of 26 megawatts.
In addition, we had the contribution of the Dixie Valley and Beowawe plants acquired from Terra-Gen, with a total net annual generating capacity of approximately 67.5 megawatts.
These contributions were partially offset by the lower performance of our Olkaria and Bouillante power plant.
As noted on slide 13, Puna resumed operation in November 2020.
We stabilized Puna generation to approximately 26 megawatts as we continue reservoir study and improvement of existing wells to maximize the long-term performance of the power plant.
We have continued discussions with HELCO and PUC about our new PPA and continue selling electricity under our existing PPA, which is in effect until 2027.
Turning to slide 14.
Let me discuss some of the challenges we experienced this quarter in a few of our property assets, and I will start with a known one in Kenya.
Our revenue in the Olkaria complex was down year-over-year as a result of a reduction in the performance of the resource, which has resulted in an approximate reduction of 25 megawatts.
This reduction in capacity and associated repair costs reduced our quarterly gross margin by approximately $3.6 million compared to last year.
We are taking a few actions to restore the complex generating capacity.
We reduced one of the wells that we plan to connect to the power plant by the end of the quarter.
We are upgrading the equipment that will enable us to generate more capacity, utilizing the same resource.
And we continue with our planned drilling campaign, which includes drilling and redrilling of wells.
We are very optimistic that following these actions, we will see an increase in the production through the first half of 2022.
In the Bouillante power plant in Guadeloupe, we experienced limited injection availability due to scaling that we expect to resolve by cleaning the well.
We finished cleaning the well, and we are waiting to get the permit to restore capacity in the coming days.
In the Brawley complex, we had a leak in one of the injection wells and a pump failure in one of the production wells that caused the reduction of the generating capacity to three megawatts since the second quarter.
We are working to restore production and expect a full recovery by year-end.
The lower performance of the Olkaria, Bouillante and Brawley power plants are reflected in our annual guidance.
We continue to monitor the recommendations of the task force created by the President of Kenya related to the review of all independent power producers PPAs.
Based on a review done by the task force and the report issued by the task force of the President in September 29, Ormats rates in Kenya are significantly lower than many IPPs, as you can see in the chart that shows energy rates of other IPPs compared to Ormats rates.
In the task force report, they indicate that Ken-Gen geothermal average tariff, including steam cost, is $8.05 per kilowatt hour, which is not significantly lower than our rate.
Having said that, we believe that Ormat rate cannot be compared to Canadian tariffs as it is a government-owned company that receives financial benefits, grants and preferred financing terms that we are not qualified for.
We remain committed to providing clean, renewable base load energy to Kenya and continue to work with KPLC for many years to come.
Turning to slide 16.
In July, we closed the accretive acquisition of the Terra-Gen assets.
As a reminder, this acquisition added a total net generating capacity of approximately 67.5 megawatts to our portfolio, along with the greenfield development asset adjacent to Dixie Valley and an underutilized transmission line, capable of handling between 300 to 400 megawatts on a 230 KV electricity connecting Dixie Valley in Nevada to California.
With this acquisition, we now own 10 operating plants in Nevada, generating a total of 443 megawatts, which is roughly equivalent to approximately 7% of Nevadas overall generated energy.
We are currently working to increase the capacity of the acquired Dixie Valley in 2022 by adding Ormats acquisition.
Turning to slide 17 for an update on our backlog.
Our results for the product segment continued to be impacted by the lower backlog at the beginning of the year, we continue to see encouraging signs of recovery.
We have seen clear signs of improvement in this business, including an expansion of our backlog, reinforcing our confidence that this is a short term phenomenon.
We signed a few new contracts during the quarter, including a new contract with Salak energy geothermal to supply products to a new 14 megawatt Salak geothermal power plant in Indonesia.
And another contract to supply equipment to a project in Nicaragua.
As of November 3, 2021, our product segment backlog increased for the third quarter in a row to approximately $67 million compared to $56 million in early August this year, giving us a good start for this segment in 2022.
Moving to slide 18.
The Energy Storage segment continues to become a more important part of our consolidated results.
This quarter, we see an increase in our storage facilities contribution.
And as Assi, indicated, they were up 26%.
The increase was offset by diminished contribution of the demand response activity inherited from the Viridity acquisition.
Moving to slide 19 for an update on legislation.
The global support for renewable energy by government continues as can be seen in the Glasgow Climate Change conference.
In the U.S., the negotiations between the White House and Congress have made substantial progress over the past weeks.
Last Thursday, the House released a draft bill that will serve as the basis for the final negotiation.
Although not final, the new bill suggests extending the PTC and ITC until the end of 2026 for geothermal, and it includes storage to be eligible for ITC.
The bill draft also allows taxpayers to elect the option to receive the tax credits in cash.
The commitment of the government to renewable energy is also reflected in the inclusion of credit plans beyond 2026.
We believe that assuming the bill will pass, this enhanced flexibility and long-term clarity will encourage and accelerate the use of renewable energy, and we expect to be in the forefront of this growth in geothermal and in the energy storage as well as in energy storage and solar.
Moving to slide 21 and 22.
As we have communicated, 2021 will be a significant buildup year, comprised mainly of geothermal project.
The buildup supports our robust growth plan, which is expected to increase our total portfolio by almost 50% by the end of 2023.
One of the main challenges in our efforts to achieve our gross growth is obtaining permits on the time frame, we were used to before COVID.
The delays we experienced in obtaining the permits results in delays in the commissioning of our future projects.
Although we have delays within 2021 to 2023, we are still aiming to add an additional 240 to 260 megawatts by year-end 2023, in addition to the 83 megawatts we added since the beginning of 2021.
In our rapidly energy storage portfolio, we plan to enhance our growth and to increase our portfolio by 200 megawatts to 300 megawatts by year-end 2022.
Achieving this growth target is expected to help us reach an annual run rate of more than $500 million in adjusted EBITDA toward the end of 2022, that we expect to continue to grow as we move forward with our plans in 2023 and beyond.
slide 23 displays 14 projects underway that comprise the majority of our 2023 growth goals.
While we are experiencing significant delays in the permitting process, we still expect to be on track to meet our growth targets for the end of 2023.
Moving to slide 24 and 25.
The second layer of our growth plan comes from the Energy Storage segment.
slide 24 demonstrates the energy storage facilities that have started construction.
The other projects included in our growth plans are in different stages of development, and their release will require site control and execution of an interconnection agreement, obviously, all subject to economic justification.
The storage facilities listed in this slide are expected to generate in todays pricing, approximately $15 million annually, with EBITDA margins of 50% to 60% approximately.
Since the majority of the revenues are merchant based, we may see volatility in revenues once they will be in operations.
As you can see on slide 25, our energy storage pipeline stands at 2.1 gigawatt and currently include 30 named potential projects, mainly in California, Texas and New Jersey.
Moving to slide 26.
The significant growth in both our electricity and storage segments will require robust capital investment over the next couple of years.
To fund this growth, we have over $780 million of cash and available lines of credit.
Our total expected capital for the remainder of 2021 includes approximately $177 million for capital expenditures, as detailed in slide 33 in the appendixes.
Overall, Ormat is well positioned with excellent liquidity and ample access to additional capital to fund future initiatives.
Before I move to the guidance, I would like to update you on some ESG initiatives.
We are moving to strengthen our ESG commitment.
We build our approach and policy on four significant valuable issues as water management, taxation, suppliers and procurement policies and political communication.
The purpose of the move was to reflect in the most up-to-date and accurate way, our approach envision and courses of action on these issues.
Im also happy to update that we are planning to publish our corporate sustainability report in the next few weeks.
We expect total revenues between 652 and $675 million, with electricity segment revenues between 585 and $595 million.
We expect product segment revenues between 40 and $50 million.
Guidance for energy storage revenues are expected to be between 27 and $30 million.
We expect adjusted EBITDA to be between 400 and $410 million.
We expect annual adjusted EBITDA attributable to minority interest to be approximately $31 million.
Adjusted EBITDA guidance for 2021 includes the $15.8 million insurance proceeds received in the third quarter. | sees fy 2020 adjusted earnings per share $1.90 to $2.00.
continues to believe that it remains positioned to deliver double-digit earnings growth in 2021. | 0 |
It's a pleasure to be with you today.
2020 was an exceptional year for Employers and that we achieved record levels for the number of policies in force, stockholders' equity, statutory surplus and book value per share.
We also generated more submissions, quotes and binds than at any time in the history of the Company.
We accomplished these feats during a pandemic while working from home and supporting agents' small businesses and their injured workers.
Our fourth quarter and full-year results were very strong, especially considering the challenging macroeconomic environment.
Our record number of policies in force at year-end demonstrates that our policyholders are enduring the pandemic with reduced payrolls, which directly impact workers' compensation premium.
We remain optimistic that as more vaccines are delivered and state restrictions are lifted, we will be able to begin replacing the premium we lost in 2020.
In support of this anticipated recovery, we have continued to pursue in advance the significant investments we have made in delivering a superior customer experience for our agents and insureds.
As expected the challenging pandemic environment confirmed that ease of doing business is the critical element in producing and servicing small account business.
Prior to the COVID-19 pandemic, we experienced strong new business opportunities, as evidenced by record levels of submissions, quotes and binds.
But the levels began to decrease as the pandemic progressed, particularly in certain states.
Later in the year as many businesses began to reopen and resume more fulsome operations, we began to experience year-over-year increases in new business submissions and new policies bound in nearly all of the states in which we operate with the notable exception of California.
Unfortunately, even with the increase in new business policies that we experienced outside of California in 2020, our new business premium has fallen driven primarily by significant declines in payrolls and declines in the number of policies with annual premiums greater than $25,000.
In regard to losses, we experienced a significant decline in the frequency of compensable indemnity claims in 2020 despite government mandates and legislative changes related to the COVID-19 pandemic, including the presumption of COVID-19 compensability for all or certain occupational groups in many states.
We experienced this decline in nearly all states including California.
As a result, we reduced our current accident year loss and LAE ratio to 64.3% during the fourth quarter from the 65.5% maintained throughout the prior 21 months.
We also reduced our prior accident year loss and LAE reserves by nearly $40 million during the quarter which related to nearly every prior accident year.
Our underwriting expenses for the quarter and the year were each down and we have recently taken actions that will further reduce our underwriting expenses in 2021.
Our plan is to achieve our targeted expense ratios as quickly as possible despite the meaningful reductions in earned premium we're currently experiencing.
My primary goal as the new CEO will be to fully capitalize on the post COVID economic lift on the horizon, while continuing to maintain discipline both in terms of our underwriting and/or underwriting expenses.
With that Mike will now provide a further discussion of our financial results, Steve will then discuss some of the current trends and then Doug will provide his closing remarks.
For the year, we delivered a 7.6% return on adjusted equity and increased our book value per share, including the deferred gain by more than 15%.
These results are impressive in just about any operating environment and particularly during a pandemic.
Our fourth quarter results contributed nicely to these financial successes in 2020.
Our in-force policy count ended the year at an all-time high.
We experienced reductions in our current accident year loss and LAE and underwriting expense ratios.
And we recognized a significant amount of favorable prior-year loss reserve development, all despite the significant declines we experienced in our premiums written and earned.
Our net premiums earned were $152 million, a decrease of 11% year-over-year.
Since premiums earned are primarily a function of the amount and the timing of the associated premiums written, I'll let Steve describe that increase in his remarks.
Our loss and loss adjustment expenses were $48 million, a decrease of 51% year-over-year due to the current and prior-year favorable loss reserve development that Kathy spoke to previously as well as the decrease in earned premiums.
Commission expenses were $19 million for the quarter, a decrease of 7% year-over-year.
The decrease was largely the result of a decrease in earned premium, partially offset by a higher concentration of alternative distribution business, which is subject to a higher commission rate.
Underwriting and general administrative expenses were $43 million for the quarter, a decrease of 15% year-over-year.
The decrease was largely the result of reductions in employee benefit costs, professional fees and travel expenses.
From a segment reporting perspective, our Employers segment had underwriting income of $45 million for the quarter versus $8 million a year ago and its combined ratios were 70% and 96% respectively.
Our Cerity segment had an underwriting loss of $5 million for the quarter, consistent with its underwriting loss of a year ago.
Net investment income was $18 million for the quarter, down 20%.
The decrease was primarily due to lower bond yields.
At quarter-end, our fixed maturities had a duration of 3.2 and an average credit quality of A+ and our equity securities and other investments represented 8% of the total investment portfolio.
We were favorably impacted by $5 million of after-tax unrealized gains from fixed maturity securities, which are reflected on our balance sheet and $15 million of net after-tax unrealized gains from equity securities and other investments, which are reflected on our income statement.
These net unrealized investment gains contributed to our nearly 6% increase in our book value per share including the deferred gain this quarter.
During the quarter, we repurchased $17 million of our common stock at an average price of $32.50 per share and we have repurchased an additional $10 million of our common stock thus far in 2021 at an average price per share of $32.19.
Our remaining share repurchase authority currently stands at $19 million.
Yesterday, the Board of Directors declared a first quarter 2021 dividend of $0.25 per share, which is payable on March 17th to stockholders of record as of March 3rd.
Net written premiums for the year of $575 million were down $117 million or 16.9% from the prior year.
The primary drivers for this decrease are new business written and final audit pick-up.
With respect to the decrease in final audit pick-up, we continue to see the impact of declining payrolls due to the pandemic and resulting shutdowns as discussed on previous calls.
New business premium decreased 33.3% despite increases in submissions, quotes and bound policies.
Submissions were up 3.7% year-over-year, quotes were up 7.4% and bound policies were at 0.2% growth.
On a year-over-year basis, our in-force policy count increased by 4.8%.
A recent workers' compensation industry report that was released with information from the Valen Data Consortium reflected decreased new business opportunity trends.
New business submissions were down 10% from the comparable periods in 2019 and were down as much as 23% in some industries.
The authors of the report suggested that the owners of these businesses were likely preoccupied with other matters and did not take time to shop for insurance.
Despite our increase in submissions over the prior year, this is in line with some of our observations and feedback from our distribution partners relative to the pandemic's impact starting in the second quarter of 2020.
We continue to experience high unit retention rates.
However, renewal premium for the year decreased 3.6%.
The decrease in renewal premium was driven primarily by decreased payroll related to the pandemic and continuing -- or continued declining rates in the majority of states in which we do business.
In addition, we non-renewed some middle market accounts that underperformed our profitability expectations.
I will be retiring in March.
So this will be my last earnings call.
It's been my pleasure to lead Employers for over 27 years and I believe that the Company is in the strongest financial position in its 108-year history.
I will soon be handing control of the Company over to Kathy whose background and experience are ideal to move Employers forward into the future.
I am very excited for Kathy and her team and for the future of the Company.
In closing, I want to express my gratitude to all of you for giving me the opportunity to be the CEO of this remarkable organization.
I'm very proud of what we've achieved and it's been a privilege to serve you. | employers holdings declares qtrly cash dividend of $0.25 per share.
compname reports fourth quarter 2020 and year end financial results; declares quarterly cash dividend of $0.25 per share.
qtrly net premiums earned of $151.5 million, down 11% year-over-year. | 1 |
Along those lines, recall two adjustments during 2020, including a non-cash charge in the first quarter of 2020 related to the sale of 703 locomotives for $385 million and a $99 million impairment charge in the third quarter of 2020 related to an equity method investment.
We will speak to full-year comparisons, excluding those charges from 2020.
A full transcript and downloads will be posted after the call.
It is now my pleasure to introduce Norfolk Southern's chairman and CEO, Jim Squires.
I'm pleased to be joined by Alan Shaw, president; Cindy Sanborn, chief operating officer; Ed Elkins, chief marketing officer; and Mark George, chief financial officer.
2021 serves as the pinnacle of the plan and is marked by the achievement of our 60% full year operating ratio and record productivity levels across our operation.
Through a multiyear effort, we delivered on our commitments, overcoming significant headwinds associated with first freight recession and then a global pandemic over the course of our plan.
In the past three years, we've produced industry-leading total shareholder return.
We've grown earnings per share by 27%, reduced our operating ratio by 530 basis points and returned nearly $10 billion back to our shareholders in the form of share repurchases and dividends.
We met and exceeded our goals, albeit with a very different formula than originally anticipated given the volume headwinds, demonstrating our ability to adapt and innovate and our dedication to deliver upon our commitments.
I'm so proud to be a part of this team and humbled to service its leader.
We're poised to build upon our momentum and write a new record book.
The company is in rock solid position, and we have the right team to guide our next chapter of success.
It's my pleasure now to turn the discussion over to Alan for a detailed look at the fourth quarter and full year results.
As Jim noted, 2021 represents a combination of our multiyear plan, and I'm pleased to share with you the progress we made in the fourth quarter.
As you see from our results on Slide 5.
Revenue growth of 11% outpaced our expense increase of 8%, producing an 18% improvement in earnings per share and a fourth-quarter record operating ratio of 60.4%.
For the full year, revenues improved 14%, which more than offset the 6% increase in operating expenses.
We delivered the hallmark 60% operating ratio for the full year, an improvement of 430 basis points over the adjusted full year 2020 results and our sixth consecutive year of improvement.
We are excited to share more details of our results, and you'll hear from both Cindy and Ed about work to iterate on the next phase of our Thoroughbred operating plan that will serve as the framework for our continued progress on service, productivity, and growth.
I'll first turn to Cindy for a review of our operations.
During the fourth quarter, headwinds from the tight labor market created acute operational challenges across several parts of our network.
While working to overcome the workforce planning hurdles, we remain focused on leveraging productivity initiatives to move freight for our customers.
These efforts did bear fruit, but our service quality was significantly below where we needed it to be.
I'm going to discuss with you today the strategic approach we are taking to change this.
Turning to Slide 7.
Pronounced changes in business mix were evidenced by the unit volume decline of 4% while GTMs were up 1%.
Productivity gains were key to handling volumes in the quarter as the transportation workforce contracted by 8%.
The reduction in crew starts of 4%, growth in train weight of 10%, and growth in train length of 8% were critical elements of this productivity formula as well.
Where active locomotive count increased by 5% as the network slowed, we kept focus on efficiently deploying those locomotives on the larger trains, which helped drive the 3% improvement in fuel efficiency.
As I mentioned a few moments ago, you can see the degradation of network fluidity on Slide 8.
We regained a modest amount of ground over the holidays and as we're entering the first quarter, our improvements have been sporadic as COVID-related absences have more than doubled from where they were in December.
Let me be clear, our top priority is to drive the service improvements our customers expect and need and we will get there.
We are working very hard to leverage and increased hiring pipeline as well as productivity initiatives to drive our performance.
Next, I'll provide more details on the hiring process on Slide 9.
We've made significant progress in ramping up resources to improve the pace of hiring while pursuing productivity.
And as shown on the slide, we are pulling five key levers to do so, including: number one, incorporating additional recruiting and training resources to increase hiring.
Employees from across the company have volunteered to provide support in our principal training facility and it's all hands-on deck; number two, streamlining the hiring and onboarding process.
We've trimmed weeks from the process of first identifying a candidate to have them on board; three, increasing trainee pay and offering incentives such as signing, retention, and referral bonuses; four, lengthening and combining trains.
We've made solid progress in this regard; and finally, five, we're using a variety of techniques to optimize our existing crews, including realigning crew districts and making crew bases more fungible.
Our people are getting creative and rising to the challenge, and resource additions are bearing fruit as we've onboarded over 3x more conductor trainees in January than any month in 2021.
These trainees will promote throughout the second quarter, which is when we expect to start improving train and engine service staffing levels.
We do expect to see some relief in critical crew bases during Q1 as trainees that started in 2021 became promoted, though we are still experiencing high levels of attrition in those same areas.
On average, we expect the number of certified train and engine employees in 2022 to approximate that of 2021 and are expecting GTMs per employee to increase.
So when looking at the year as a whole, our plan is to leverage productivity gains to absorb volume growth while getting the workforce rebalanced to drive improvements in service quality.
Let's unpack the productivity discussion a little more on Slide 10.
We've improved average train weight and length 21% and 20%, respectively, since mid-2019 when TOP21 was launched.
This has been a key to our success and will continue to be so going forward.
Larger trains reduce labor intensity, improve locomotive productivity, improve fuel efficiency and provide our customers with a platform for growth.
We have efforts in the pipeline to continue this trend: first, on the infrastructure front, in 2021, we launched work on 9 siding extensions, one of which was quickly completed and in service by the fourth quarter.
Most of the others will be completed throughout 2022; second, our very capital efficient and high-performing DC to AC locomotive modernization program is ongoing.
As a reminder, this is a dual-purpose program to rebuild engines at the end of their life while converting them to the latest and greatest technology.
In 2021, we improved our fleet composition to nearly 60% AC power and 65% of our road fleet is capable of distributed power.
Both of these aid with running larger trains; lastly, our operating plan and growth initiatives must be well aligned to add capacity to existing trains, which brings me to Slide 11.
In 2022, we have already kicked off the next generation of our PSR-based operating plan, which we are calling TOP SPG.
While you may be familiar with an SS legacy of Thoroughbred Operating Plans, or TOP, the next-generation SPG represents a new era of service, productivity, and growth, three equally important facets of our new operating plan.
We are embarking on this next era because we have significant improvements that need to be made in each of these areas, service, productivity, and growth to reach our full potential.
We are taking a ground-up approach to the development of the plan in order to explore what is possible when we remove historical constraints and take a fresh look at our business.
We are leveraging lessons learned from the first three years of PSR operations under TOP21 and using a rich data set to execute in a customer-centric collaborative process.
We look forward to keeping you updated as this initiative unfolds throughout the year.
Now beginning on Slide 13.
I will highlight our results for the fourth quarter.
Total revenue improved 11% year over year to $2.9 billion as strong demand and favorable price conditions more than offset the 4% volume decline in the fourth quarter.
Volume was impacted by the continuation of the extraordinary global supply chain disruptions and slower network velocity.
Pricing and strength across all markets contributed to the 15% increase in revenue per unit, and we reached record revenue per unit less fuel across all of our markets.
This demonstrates our ongoing commitment to execute our yield-up strategy and drive value for both our customers and our shareholders.
Within merchandise, volume growth in the fourth quarter was led by our chemicals franchise as rising economic activity drove demand for chemical products, particularly for crude oil and natural gas liquids.
Gains in our metals business also contributed to growth with volume in these markets up 6% year over year on sustained high demand from the strengthening manufacturing sector.
Partially offsetting merchandise growth was a decline in automotive shipments, which were down 9% year over year due to slower velocity coupled with strong comps in the fourth quarter of 2020 when the industry was boosted by pent-up demand.
Merchandise revenue per unit increased 6% year over year, driving total revenue growth of 8% to $1.7 billion for the quarter.
Revenue per unit less fuel for this market reached a record level in the fourth quarter.
We've demonstrated year-over-year growth in this metric for 26 of the last 27 quarters, which further demonstrates our ability to drive sustainable revenue growth.
Our intermodal franchise continued to face pressure from supply chain volatility, resulting in a volume decline of 7% year over year.
Strong consumer demand and elevated imports stress these supply chains and exceeded drayage capacity and equipment availability.
This negatively affected both our domestic and our international markets.
But despite these headwinds, we achieved record intermodal revenue in the quarter, up 14% year over year, and that was driven by increased fuel revenue, storage revenue, and price gains.
Revenue per unit less fuel grew for the 20th consecutive quarter.
Now turning to coal.
Revenue increased 21% year over year in the fourth quarter, which was driven by price gains and higher demand in a tightly supplied market.
Coal revenue per unit reached near-record levels and increased 16% year over year.
Our export markets continue to benefit from high seaborne coal prices, which increased the competitiveness of U.S. coals in the global market.
Shipments of domestic met and coke were particularly strong this quarter on higher demand to support steel production.
Full year 2021 revenue grew 14% to $11.1 billion on 5% volume growth.
All of our markets posted gains, reflecting strong demand for our product coming out of the pandemic, tempered by supply chain pressures experienced throughout the year.
Revenue growth was strongest in our merchandise franchise, where all lines of business, but particularly metals and construction, benefited from higher demand and favorable price conditions associated with the economic recovery.
Intermodal growth was driven by elevated consumer activity and tight truck capacity.
Total revenue increased on higher seaborne coal prices and growth in steel production activity.
We reached record levels of both revenue per unit and revenue per unit less fuel.
Both metrics were up year over year due to price gains, storage charges, and higher fuel revenue in the case of total revenue per unit.
And as markets have evolved, we've leveraged favorable conditions to drive improvement for our bottom line.
Now let's look ahead to our outlook for 2022 on Slide 15.
We're optimistic that our business will continue to grow despite the ongoing uncertainty in the economy.
We're increasingly confident that supply chain conditions, including rail network velocity will improve as the year progresses.
Overall, the demand environment for our service is strong.
We're committed to working with our customers and channel partners to develop sustainable solutions to maximize our opportunities ahead.
We remain focused on our ability to deliver value for our customers and leverage market conditions throughout 2022.
As Cindy explained, both our hiring plan and the development and implementation of TOP SPG will deliver increased fluidity, efficiency, and network capacity as the year progresses and our volume pattern will follow that same sequential improvement trend.
This will allow our customers to provide additional value to their customers for their product and build a strong platform for future growth.
Market conditions for our merchandise franchise are expected to be favorable with several customers announcing expansions in the new year that will create opportunities.
In addition, industrial production is projected to grow 4% in 2022, which will drive demand for most of our markets, particularly for our steel markets.
Residential construction spending is forecasted to grow more than 6% this year, following the sharp increase in 2021, supporting continued gains in several of our industrial markets.
U.S. light vehicle production is expected to reach 10.3 million units this year, which is approaching pre-pandemic levels of 2019.
This recovery will have a positive impact on both our automotive and our metals volumes in 2022.
Demand for our intermodal market is expected to remain favorable despite continued headwinds associated with supply chain congestion impacting our ability to capture new opportunities.
These headwinds are expected to ease in the second half of the year, creating a more favorable environment for growth.
And furthermore, a robust consumer economy, elongated inventory replenishment cycles, and a tight truck market support our growth plan.
Durable goods consumption is expected to improve 3% and that's on top of the near-record 19% growth in 2021.
This also bodes well for our intermodal franchise.
Our outlook for coal is more guarded as some of the drivers of 2021 growth show signs of easing in 2022 despite some potential opportunities in the near term.
Seaborne prices remain high.
However, they have begun to decline, leading subdued optimism going into the new year.
Expected increases in global production will likely contribute to downward pressure on these seaborne coal prices and lower the demand for export coal.
In the utility markets, while there's been strength associated with higher natural gas prices, that upside will be determined by coal supply as production levels remain high.
The pandemic has pushed manufacturers to redesign their supply chains in favor of certainty of supply and locating inventory closer to customers.
Our best-in-class industrial development team is at the forefront of these efforts, and they launched an innovative solution to drive value for our customers and support development in the communities that we serve.
NSites is a comprehensive search tool for rail-served industrial sites and transload facilities on our network.
It allows users to create customized search parameters to quickly identify industrial sites that meet their unique needs.
And more importantly, this portal makes it easier to do business with NS and helps our customers make informed long-term investment decisions that will promote economic activity and create jobs.
We're excited to provide this product to our customers and help them expand their business on Norfolk Southern.
Overall, we are grateful for our strong customer partnerships, and we look forward to growing our business in 2022 with a continued emphasis on improving our service and driving value for our customers and for our shareholders.
Starting with Slide 18.
As Ed noted, revenue was up 11% despite a 4% volume decline.
This more than offset an 8% increase in operating expense, which led to 140 basis points of operating ratio improvement to a fourth-quarter record of 60.4%.
Improvements in RPU, coupled with strong productivity led to a record Q4 operating income with growth of 15% or $145 million.
And we set another record for free cash flow, up 30% or $642 million for the full year.
Moving to a drill-down of operating expenses on Slide 19.
While operating expense grew $134 million or 8%, it is up less than 3% or $44 million, apart from fuel cost increases.
The $90 million headwind for fuel is driven almost entirely by price.
You'll see purchase services and rents of $46 million with the majority of the year-over-year increase driven by the same drivers we talked about on the Q3 call, higher expenses associated with Conrail, higher technology spend associated with our technology strategy, higher drayage expense associated with more hourly drivers used to alleviate terminal congestion primarily in Chicago, and we continue to see inflationary pressure on lift expenses going forward as it relates to contractor labor availability.
Moving on to compensation and benefits.
It is up 2%, but you'll note the $33 million in savings from 6% lower headcount and that more than offset increases in pay rates and overtime.
Meanwhile, incentive compensation comparisons in the quarter are a headwind of $24 million.
Materials claims and other expenses were all down year over year.
Turning now to Slide 20.
Taking a look at the rest of the P&L below op income, you will see that other income of $21 million is unfavorable year over year by $22 million, due in part to lower net returns from company-owned life insurance, but also fewer gains on the dispositions of nonoperating properties.
Our effective tax rate in the quarter was in our expected range at 23% and similar to last year.
Net income increased 13%, while earnings per share grew by 18%, supported by 3.3 million shares we repurchased in the quarter.
Turning to full-year highlights on Slide 21.
As a reminder, these highlights are compared to adjusted results for 2020, which excludes both the noncash charge for locomotive rationalization in 1Q and the impairment charge in 3Q.
Increased demand across all markets and strong results through yield-up resulted in 14% year-over-year revenue improvement.
Expenses increased at less than half that rate, up 6% compared to 2020 as we continued our operational transformation while responding to market changes.
We produced record operating income of over $4.4 billion, up 28% or $961 million versus the adjusted 2020 results.
That is 430 basis points of year-over-year improvement in line with the guidance we provided.
Rounding out the results, net income increased 27%, while diluted earnings per share increased 31%, augmented by our strong share repurchase program, enabled a record-free cash flow that we will wrap with on Slide 22.
Free cash flow is a record $2.8 billion for 2021, up 30% year over year and we reported a strong 93% free cash flow conversion for the year.
Property additions were about $100 million lower than our $1.6 billion guidance due to timing issues related to the continued supply chain disruptions.
This shortfall in 2021 will carry over into 2022.
The sharply higher profitability in the company in '21 allowed for an over $2 billion increase in shareholder distributions for the year.
We had two dividend increases in 2021 and more than doubled our share repurchase spend.
And I'll point out, we just increased our dividend again by $0.15 or 14% rolled in 2022.
Turning to Slide 24.
I will wrap up with our 2022 expectations.
As you heard from Ed, based on our assessment of economic indicators, we expect markets related to manufacturing and consumer activity to drive growth.
We expect total revenue to deliver upper single-digit growth with merchandise and intermodal both increasing solidly and coal, resuming its long-term secular decline.
We will develop and leverage our new TOP SPG operating plan to accelerate our service recovery and drive additional efficiency into the organization in support of Norfolk Southern's and our customers' growth.
You'll hear a lot more about TOP SPG at our upcoming second quarter Investor Day.
From an operating ratio perspective, we expect the first half of this year to look similar to the back half of 2021, with robust demand and service improvement driving stronger performance in the second half of this year.
With this positive momentum in revenue, productivity, and efficiency and based on our current expense projections, we expect to achieve greater than 50 basis points of OR improvement in 2022 and we won't stop there.
In addition, we expect a dividend payout ratio range of 35% to 40% and capital expenditures in the range of $1.8 billion to $1.9 billion.
We anticipate using remaining cash flow and financial leverage to repurchase shares.
As you've heard from Cindy, Ed, and Mark, we are optimistic about service, productivity, and growth in the year ahead, and we'll advance productivity initiatives to attract business to Norfolk Southern more profitably than ever.
We are committed to further efficiency improvements to create long-term sustained value for our customers and shareholders.
We'll now open the line for Q&A. | compname reports q2 earnings per share of $3.28.
q2 earnings per share $3.28.
qtrly railway operating revenues of $2.8 billion increased 34%.
qtrly railway operating ratio was 58.3%, an all-time record. | 0 |
We begin in fiscal 2022 by delivering solid first quarter results in what remains a very dynamic operating environment.
We achieved 6.8% top-line net sales growth for the quarter over a strong first quarter comparison last year.
Our team's intensely managed the supply chain and our manufacturing operations, working to achieve the best possible outcomes.
We actively manage production in partnership with our suppliers and aligned our manufacturing schedules based on material availability.
The supply chain challenges, along with the surge of the Omicron variant impacted our volume and mix within the quarter.
However, as the quarter progressed, we did start to see some improvements in manufacturing efficiencies.
We do expect the current supply chain dynamics to resolve over time and are beginning to see some signs of improvement.
On our last earnings call, we communicated profitability expectations for Q1 in reference to sequential improvements over Q4 of last year.
As a reminder, in Q1 of last year, we experienced an acceleration of demand without the current magnitude of inflationary pressures and product availability constraints.
With that in mind, we performed in line with our expectations by delivering sequential improvement in gross margin this quarter over Q4 of last year.
Our team executed well operationally achieving productivity benefits and increased net price realization.
Importantly, demand for our innovative products has remained robust across our businesses.
We have strengthened our market leadership by remaining steadfast in our commitment to serving our customers well.
I now like to highlight some key advances in two major areas of strategic priority.
First, we continue to bring our technology advancements to market to accelerate profitable growth over the long term.
We introduced new products in each of our key technology areas of battery-electric, smart, connected, and autonomous solutions.
Starting with batteries, we have a growing suite of electric products for both residential and professional customers.
These products are carefully designed to meet the promise of our brands by offering superior performance and durability supported by an extensive customer care network.
The latest edition is our new all-electric Ultra Buggy for material handling in our special construction business, which was unveiled at the world of the concrete show in January.
The Ultra Buggy delivers eight hours of continuous run time by leveraging the same hyper cell battery system as our Revolution series commercial-grade mowers.
Along with our e-Dingo compact utility loader, the Ultra Buggy also provides a zero-emission solution for indoor construction and renovation applications.
Speaking of the Revolution series, initial reservations for these new battery-powered commercial-grade stand-on and zero-turn riding mowers have exceeded our expectations.
The revolution product line brings together the best of both worlds with the productivity, durability, and expansion to support network to customers expect from us, along with the next-generation benefits of zero emissions, noise reduction, and all-day runtime on a single charge.
Moving to smart solutions, we just launched our new Workman UTX line of commercial-grade utility vehicles.
These all-season vehicles have a broad range of applications across our markets and feature a proprietary ground speed governing system.
This patented system allows for the perfect amounts of power for any job, no matter the desired speed.
This feature also enables lower fuel consumption and noise levels.
The UTX line was designed with versatility and durability in mind.
It offers 2,000 pounds of towing capacity, 25% more cargo capacity than the competition, and leverages our broad product offerings with an integrated BOSS snowplow amount.
Another advancement in smart solutions that drive productivity and help with skilled labor challenges is our new ProCore 648s.
This machine is the gold standard for the green generation.
It features an innovative electronic drive control, which can maintain more consistent hole spacing on sloping terrain and allows for increased speed on turnarounds.
This machine can also minimize turf disruption, reducing the need to make manual repairs.
In the area of autonomous, we have showcased several prototypes over the past few years and have invested in technology-accelerating acquisitions.
We intend to be a market leader in providing autonomous solutions, as evidenced by the introduction of our first autonomous fairway mower at the recent GCSAA golf industry show.
This product addresses the issue of labor shortages for our golf course customers while enabling increased productivity and more consistent results.
As technology evolves, we intend to leverage our battery, smart connected, and autonomous product offerings across our broad portfolio.
We are excited about the positive reactions to our new and innovative applications as we further advance our technology leadership.
The second strategic area I'd like to highlight is our effective capital allocation.
We continue to prudently deploy capital this quarter with the acquisition of the Intimidator Group in January.
This acquisition positions us to be an even stronger player in the large and rapidly growing zero trends mower market enhancing customer reach and geographic strength.
We're excited about the addition of a complementary line of Spartan mowers, which are known for their exceptional performance, features, durability, and distinctive styling.
The acquisition also provides us with a larger footprint to further leverage our technology investments as well as procurement and manufacturing efficiencies.
We are confident the combined efforts of our teams will enhance our long-term growth by providing unparalleled products, technologies, and services to our customers.
We made great strides in advancing key strategic areas this quarter, our entire organization continued to demonstrate creativity, perseverance, and sound judgment as we navigated the challenges and opportunities in the current global environment.
As a result, we continue to build our business for sustainable and profitable long-term growth and drove value for all stakeholders.
As Rick said, we delivered solid results in the first quarter and drove sequential gross margin improvement over Q4 of last year in what continues to be an extremely dynamic operating environment.
We grew overall consolidated net sales to $932.7 million, an increase of 6.8% compared to the first quarter of last year.
Reported and adjusted earnings per share were about $0.66 per diluted share, down from $1.02 and $0.85, respectively in the first quarter a year ago.
Professional segment net sales for the quarter were up 3.5% to $672.9 million.
This increase was driven by net price realization partially offset by lower volume in certain key product categories, due to product availability constraints.
Professional segment earnings for the first quarter were $93.3 million and one expressed as a percent of net sales 13.9%.
This was down from 18% in the first quarter last year.
The year-over-year decrease was primarily due to higher material, freight, and manufacturing costs, partially offset by net price realization.
Residential segment net sales for the first quarter were $255.4 million, up 17.3% over last year.
The growth was primarily driven by increased net price realization and higher shipments of our zero-turn riding and walk power mowers.
Residential segment earnings for the quarter were $31.8 million, and when expressed as a percent of net sales 12.4%.
This was down from 14.7% in the first quarter last year.
The year-over-year decrease was primarily driven by higher material and freight costs partially offset by increased net price realization and productivity improvements.
Turning to our operating results.
We reported a gross margin of 32.2% for the quarter, compared to 36.1% in the same period last year.
The year-over-year decrease was primarily due to higher material and freight costs, partially offset by an increased net price realization.
As expected, we did see a sequential improvement compared to the fourth quarter of fiscal 2021.
We intend to restore and improve margins over the long term and continue to adjust pricing to market conditions and drive productivity and synergy benefits.
SG&A expense as a percent of net sales for the quarter was 22.4%, compared to 19.9% in the same period last year.
This increase was primarily driven by the favorable impact of a one-time legal settlement in the prior year that did not reoccur, as well as increased investment in research, engineering, and marketing.
Operating earnings as a percent of net sales for the first quarter were 9.8%, compared to 16.2% in the same period last year.
Adjusted operating earnings as a percent of net sales for the quarter were 9.9%, compared to 14.2% in the same period a year ago.
Interest expense for the quarter was $7 million down slightly from the same period last year.
This was due to lower average debt levels and decreased interest rates.
The reported adjusted effective tax rates for the first quarter were 20.2% and 20.9%, respectively, compared to 18.1% and 21.5% in the same period a year ago.
Turning to our balance sheet and cash flows.
Accounts receivable were $366 million, up 19% from a year ago, primarily driven by higher sales and customer mix.
Inventory was $832 million, up 23% compared to last year.
This increase was due to higher work in process and parts.
Accounts payable increased 30% from last year to $474 million.
This was primarily driven by higher purchase activity and inflation.
Free cash flow in the quarter was a $102 million use of cash.
This was driven by additional working capital needs to support higher material and service parts levels, given the current supply chain environment.
We continue to follow a disciplined approach to capital allocation demonstrated by our actions in the quarter and fueled by our strong balance sheet.
Our priorities remain the same and include making strategic investments in our business to support long-term growth, both organically and through acquisitions, returning cash to shareholders through dividends, and share repurchases, and maintaining a levered school to support financial flexibility.
These priorities are highlighted by our actions including our plan to deploy $150 million to $175 million in capital expenditures this year to fund capacity, productivity, and new product investments.
In our acquisition of Intimidator Group in January, our return of $106 million to shareholders this quarter was 75 million in share repurchases and 31 million in regular dividends.
Our gross leverage to EBITDA target remains the same in the range of 1 to 2 times.
We are benefiting from strong demand momentum across our diverse portfolio of businesses.
In the current global operating environment, our biggest challenge remains meeting this heightened demand.
Based on our current visibility, the progress we are making on margin recovery, and the recent acquisition of Intimidator Group, we are updating our full year fiscal 2022 guidance.
This guidance also considers the current geopolitical events which continue to develop.
We will monitor the situation very closely and take appropriate actions.
We now expect net sales growth in the range of 12% to 14%, which reflects the partial year addition of the Intimidator Group, pro-rata over the remaining three quarters.
Along with the continued expectation for 8% to 10% growth for the remainder of our business.
The acquired business is reported under the professional segment, and as a result, we expect professional net sales growth at the upper end of the 12% to 14% range for the full year.
For the second quarter, we anticipate total company as well as professional and residential segment net sales growth to be moderately below our full year expectations.
We continue to expect our quarterly sales cadence to be driven more by our ability to produce than historical demand patterns.
This is expected to result in less seasonal variation than typical between the quarters this year.
Looking at profitability for the full year, we now expect similar overall adjusted operating earnings as a percent of net sales compared to fiscal 2021 for the total company.
And in the professional and residential segments.
This reflects the operational improvements we are realizing as well as our acquisition.
With the addition of Intimidator at a lower initial gross margin relative to our company average, we now expect gross margin in Q2 to be similar to Q1 but improve in the second half of the year compared to the first half of the year.
For the full year, we expect the gross margin to be similar to slightly below fiscal 2021 driven by the acquisition.
In light of the recent geopolitical events, we are holding our full year-adjusted diluted earnings per share guidance in the range of $3.90 to $4.10.
Our adjusted diluted earnings per share guidance excludes the benefit of the excess tax deduction for stock compensation, as well as one-time acquisition-related costs.
For the second quarter, we expect our adjusted diluted earnings per share to approach the record results we achieved in Q2 of fiscal 2021.
Additionally, for the full year with the acquisition included, we now expect interest expense to be about $35 million.
Depreciation and amortization to be about $120 million and free cash flow conversion in the range of 80% to 90% of reported net earnings.
We continue to estimate an adjusted effective tax rate of about 21%.
We remain well-positioned to capitalize on this period of profitable growth as we continue to execute on our long-term strategic priorities.
Our entire team remains sharply focused on serving our customers as we are committed to building our business for long-term sustainability and profitability.
The foundation for our future success is our world-class innovation capabilities and enterprisewide operational excellence.
The combination of which we believe will drive sales momentum and margin expansion going forward and create value for all stakeholders.
As we head into the remainder of fiscal 2022 demand remains strong across the markets we serve, the ongoing replacement cycles for our products provide a steady foundation and we are keeping an eye on the following areas, consumer and business confidence, together with inflation, geopolitical developments, and COVID-19 variants, customer prioritization of investments to maintain and improve outdoor environments, regulations, on reduced emissions, and customer preference for sustainable products, the continuation of strong momentum in golf markets and government support and funding of infrastructure projects, including the $1 trillion US infrastructure legislation.
Our innovative products and best-in-class distribution networks position us well to capitalize on current and future demand trends in the growing markets we serve.
I would now like, sure, a few comments on our golf market.
We continue to see courses in their healthiest financial positions in years.
Around the world, golf participation engagement remains on the rise.
In the Us golf rounds played were up 5.5% in 2021.
On top of a 13.9% increase in 2020.
We're also seeing an improvement in supply and demand balance and even saw an increase in the number of municipal and private courses in the US during 2021.
As the market leader in turf and irrigation solutions and the only provider of both, we have distinct competitive advantages in the space.
This was evident last month at the GCSAA golf industry show in San Diego.
The traffic in our booth reflected strong interest in our array of innovative new products.
It was a great experience to be at the show again after the pandemic-driven hiatus spend time with so many of our customers.
Not far from the golf show was Super Bowl 56 SoFi Stadium in Inglewood, California.
Our teams and equipment have a long and storied history of helping Super Bowl groundskeepers maintain pristine field conditions, and this year was no exception.
Before and after the game, our Workman GTX and UTX vehicles were used to help the SOFi grounds crew move field preparation materials.
In addition, our GTX vehicles and real master products were instrumental in preparing the Bengals UCLA practice fields.
Our commitment to innovation has served us well.
Our strength in this area, combined with our deep customer relationships, effective capital deployment, superior distribution, and customer care networks has driven consistent financial performance.
We believe these strengths will continue to generate tremendous value and position us to deliver compelling growth and shareholder returns for the long term.
As always, our extended team is the key to the Toro Company's long-term success. | compname reports q1 earnings per share $1.02.
q1 adjusted earnings per share $0.85.
q1 earnings per share $1.02.
q1 sales $873 million versus refinitiv ibes estimate of $848.9 million.
sees fy sales up 6 to 8 percent.
sees fy fiscal 2021 adjusted earnings per share in range of $3.35 to $3.45 per diluted share. | 0 |
Although, we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.
Well, first and foremost, all of us at Brandywine sincerely hope that you and yours continue to be safe, healthy and engaged, and while we remain optimistic about the accelerating vaccine deployment and the path to recovery, the pandemic still continues to disrupt all of our lives and every business, and unfortunately duration of the recovery cycle still remains a bit unclear.
Our portfolio remains about 15% to 20% occupied, which is comparable to our occupancy levels as of our October call.
And as noted in the SIP, most of the jurisdictions where we have properties still have significant return to work restrictions in place.
Additional details on our COVID-19 approach are outlined on pages 1 to 5 of our Supplemental Package.
During our comments today, we'll briefly review fourth quarter results, discuss our '21 business plan and provide color on our recent transactions and developments, Tom will then provide a brief review of 2020, discuss our '21 guidance, and update you on our strong liquidity position.
After that, certainly, Tom, Dan, George and I are available for any questions.
We closed 2020 on a very strong note.
Many of our revised '20 business plan objectives were achieved despite the protracted nature of the recovery.
We exceeded our speculative revenue target by $400,000, executed lease volumes increased quarter-over-quarter, and our pipeline increased by 229,000 square feet.
For the fourth quarter, we posted strong rental rate mark-to-market of almost 19% on a GAAP basis, and 11% on a cash basis.
For the full year '20, our mark-to-market was a very strong 17.5% on a GAAP basis, and 9.3% on a cash basis.
In addition, we had 59,000 square feet of positive absorption during the quarter, which included 33,000 square feet of tenant expansions with no tenant contractions.
Our full year 2020 same-store number did come in below our revised business plan, primarily due to the JV sales activity that we'll discuss, several COVID-related occupancy delays, and parking revenues that were well below our original forecast due to the slower return to the workplace.
Our tenant cash collection efforts continue to be among the best in the quarter, in the sector rather, and we have collected over 98% of fourth quarter billings, and our January collection rate continues to track very well with 98.5% of office rents collected as of yesterday.
Our capital costs for '20 were better than our targeted range due to very good success in generating short-term lease extensions with minimal capital outlay.
Tenant retention came in at 52%, slightly above our full year forecast, and our core occupancy and lease targets were below our ranges simply due to pandemic-related delays and targeted move-ins, and lease executions and negotiations sliding into early '21.
We did post FFO of $0.36 per share, which was in line with most consensus estimates.
A general update on COVID-19 impact is first, consistent with all applicable state and local CDC guidelines, we do remain in a doors open, lights on condition in all of our buildings.
As we noted, the set most large employers have yet to return to the workplace for a variety of factors, primarily public policy mandates, employer liability concerns, mass transit, virtual schooling and safety concerns.
However, we're seeing more small and mid-sized companies beginning to return more employees to their various workspaces.
Portfolio stability remains top of mind, and our progress on several key factors can be found on pages 1 to 3 of the SIP.
We do continue to stay in touch with our tenants to understand their concerns and their transition plans.
A key priority of ours has been to work with those tenants whose spaces role in the next two years.
Those efforts have resulted in 79 active tenant renewal discussions, totaling about 750,000 square feet and to date have resulted in 62 tenants, aggregating 500,000 square feet actually executing leases.
These leases had an average term of 30 months with a roughly 4% cash mark-to-market and 4% capital ratio.
An important point to note is that this early renewal activity, when we exclude the large known roll-outs at 2340 Dulles and the retirement of 905 Broadmoor, we've reduced our remaining '21 rollover to just 4.2%.
So looking at '21.
We are providing 2021 earnings guidance, frankly not an easy call, given the overall economic and pandemic picture.
However, our early renewal efforts, expense control programs, near term visibility into our forward pipeline, and the recently executed transactions, we think have established a solid operating plan with a clear pathway to execution.
That plan is based on a gradual return to work environment beginning in the second quarter through the balance of the year.
So our approach was to be conservative, but as transparent as possible to frame at a defined operating plan with all key metrics quantified, and present the '21 earning guidance range as a platform to build from.
And with the '21 plan set, we do remain focused on revenue and earnings growth, whether that be through accelerated leasing, margin improving cost controls, we're working with institutional partners to seek investments in capital structures where we can create value.
The '21 plan is really headlined by two key operating metrics that we think demonstrate excellent growth potential.
Our cash mark-to-market range is between 8% and 10%, and our GAAP mark-to-market range is between 14% and 16%.
For 2021, we do expect all of our regions will post positive mark-to-market results on both the cash and GAAP basis.
We do have several larger blocks of space to fill, particularly at Barton Skyway in Austin, 1676 International in Tysons, and several others.
But looking forward, achieving our leasing objectives on those spaces can be significant revenue boosters, and our '21 plan only has about $1 million of revenue coming in from those larger spaces.
Our GAAP same-store NOI growth of 0 to 2% and our cash same-store of 3% to 5% is primarily driven by Austin up about 8%, Pennsylvania suburbs close to 5% increase, and Philadelphia around 2%.
Our Metro D.C. region will continue to be negative, while the 1676 International Drive continues through its reabsorption phase.
With that renovation now complete, our overall leasing activity has really accelerated, and our pipeline is up significantly to about 600,000 square feet this quarter versus around 370,000 square feet last quarter.
And also, we will be retiring 905 Broadmoor permanently as part of our Broadmoor master plan development.
Other key operating highlights.
Spec revenue will range between $18 million and $22 million.
We have $14.7 million achieved or 74% achieved at this point.
This is the first time we're providing a spec revenue range versus $1 target, but given the lack of real forward visibility on the acceleration of leasing, we felt that it was warranted.
Occupancy levels, we think, will be between 91% and 93% at year-end and with leasing percentages being between 92% and 94%.
Capital will run about 11% of revenues, which is below our 2020 target range and we are forecasting a debt-to-EBITDA being between 6.3 and 6.5 times, and Tom will certainly talk about that.
Our leasing pipeline has picked up.
It stands at 1.3 million square feet, including about 88,000 square feet in advanced stages of negotiations and as I mentioned before that pipeline is up about 230,000 square feet.
Interestingly too knowing that physical tours have yet to fully return for a variety of pandemic-related reasons, we have launched a virtual tour platform for all of our availabilities and to date, we're generating close to 300 tours per month with over 500,000 square feet being inspected.
So we think that is early harbinger of tenants beginning to really look at their office space requirements going forward.
From a liquidity standpoint, we're in great shape.
We anticipate having $562 million on our line of credit available year-end.
We have no unsecured bond maturities until 2023, and with the recent secured mortgage payoffs, we have a fully unencumbered wholly owned asset base.
The dividend remains extremely well covered with a 53% FFO and 68% CAD payout ratio.
Now, looking at our investment and development opportunities.
During the fourth quarter, we completed several investment transactions.
We did execute a joint venture with an institutional partner on 12 properties totaling 1.1 million square feet.
These properties are located in suburban Philadelphia and Rockville, Maryland.
The portfolio has added $193 million.
We retained a 20% ownership stake.
In addition to the $121 million first mortgage finance we put in place, we also elected to provide seller financing in the form of a $20 million preferred equity position that has a 9% current pay.
As a result of that, we did receive about $156 million of net cash proceeds and with all of our -- as with all of our ventures, we will generate an attractive fee stream by retaining property and asset management as well as leasing and construction management services.
On our previous calls, we had highlighted that we had about $250 million of remaining non-core assets in our wholly owned pool.
This portfolio had been our primary target and leaves us with very few assets that are not considered core holdings.
This partnership, similar to others we have done, did create a different capital structure that more than doubles our return on invested equity from a mid-single digit return to mid-teen return on our remaining invested capital and also avoids about a $20 million of direct capital investment by Brandywine.
It's interesting as well too, with this transaction, we now have over 80% of our revenue stream coming in from submarkets that are ranked A+ or A++ by Green Street's recent office Market Snapshot.
We had also made a preferred investment in 90% of lease to building portfolio, totaling 550,000 square feet in Austin, near the airport.
That preferred investment totaled $50 million, also has a 9% current pay, excellent cash coverage and a several year term, and this was similar to the type of transaction we did a number of years ago at Commerce Square here in Philadelphia.
This investment increases our revenue contribution from Austin toward our 25% goal and will enable us to take advantage of the market knowledge and position we have to create a structured well covered financial instrument.
Our partner will have a 45% preferred interest in the joint venture with Brandywine holding the remaining 55% equity interest.
The project will be built with 7% blended yield that will consist of 326 apartment units, a 100,000 square foot -- feet of life science and 100,000 square feet of innovative office along with underground parking and 9,000 square feet of street level retail.
We do have an active pipeline totaling over 300,000 square feet for the life science and office space component of this project and based on this level of interest, we do plan a construction start in March of '21.
We are currently sourcing construction loan financing and plan to have a loan in place for the next 90 days at a targeted 55% to 60% loan-to-cost, and given the front-loading of the equity commitment of about $115 million assuming a 60% loan-to-cost construction financing.
The first funding of the construction loan wouldn't occur until April of '22.
Our share of the equity will be about $63 million of which about $35 million is already invested.
And looking at our production assets, they all remain ready to go subject to pre-leasing.
As we've noted every quarter, each of these projects can be completed within four to six quarters and cost between $40 million to $70 million.
The pipeline on those production assets is around 450,000 square feet and we are continuing actively our marketing efforts along those lines to hopefully get some pre-leasing done there as the market recovers.
And looking at the two existing development projects, 405 Colorado is on track for a Q1 '21 completion.
We have a pipeline that has built since our last call that approaches 360,000 square feet, including 53,000 square feet in advanced discussions.
To be conservative, given the pace of the recovery in the market, we have extended the stabilization until Q1 '22.
We've increased our cost by approximately $6 million, primarily due to additional TI and leasing commissions, a bit longer absorption schedule, which has resulted in our targeted yield being reduced to 8%.
3000 Market construction is under way on this building, which will be fully occupied by Q4.
The building is fully leased for 12 years and will deliver a develop yield of 9.6%.
The commencement date did slide one quarter due to COVID-related construction delay, but we have increased our yield on the project by 110 basis points due to some design scope modifications and success on the buyout.
Couple other quick comments on Schuylkill Yards and Broadmoor.
We do continue our strong life science push at Schuylkill Yards.
The overall master plan is about 3 million square feet, it can be life science space, so we can really build on the work we've done at 3000 Market, The Bulletin Building, and now Schuylkill Yards West.
Plans for 3151, which is our 500,000 square foot life science dedicated building is well under way.
We do have a leasing pipeline of over 500,000 square feet for that project and the goal would be to start that later this year, assuming if pre-leasing market conditions permit.
We have started constructing to convert several floors within Cira Centre to life science use and that program is moving along per our plan.
In Broadmoor, we are advancing Blocks A and F, which is a total of 350,000 square feet of office and 870 apartments.
Block A had $164 million, 350,000 square foot office as part of that phase, along with 341 multi-family units at a cost of $116 million.
We are heavily engaged in joint venture partnership selection process.
That process is going very well with discussions well under way with several parties and we hope to be able to start the residential component of Block A by the third quarter of '21.
Tom will now provide an overview of our financial results.
Our fourth quarter net income totaled $18.9 million or $0.11 per diluted share and our FFO totaled $61.4 million or $0.36 per diluted share.
Some general observations regarding the fourth quarter results.
They were generally in line with a couple of exceptions.
Portfolio operating income fell about $75.5 million and exceeded our $74 million previous estimate, primarily due to lower operating costs benefited by lower tenant physical occupancy.
Termination and other income totaled $1.6 million or $3 million below our third quarter guidance.
The results were negatively impacted by several one-time transactions that we anticipated occurring in the fourth quarter, that are now anticipated to close in the first half of 2021.
FFO contribution from unconsolidated joint ventures totaled $6.3 million or $1.2 million below our third quarter guidance number primarily due to some co-working tenant write-offs, and that was slightly offset by the JV announced at the end of the year.
Our cash and GAAP same-store results came at 126[Phonetic] basis points lower, again due to lower parking revenue and some tenant leasing slides, all of which have commenced.
Our fourth quarter fixed charge and interest coverage ratios were 3.8 and 4.1 respectively.
Both metrics improved as compared to the third quarter.
Our fourth quarter annualized net debt-to-EBITDA decreased to 6.3 at the lower end of our 6.3 to 6.5 range.
The ratio is benefited from improved operating income and higher than expected year-end cash balances due to our recent fourth quarter transactions.
Two additional points on cash collections.
Our overall collection rate continues to be very strong above 38 -- 98%.
Additionally, our fourth deferred billings were less than $100,000.
So our core collection rate would essentially remain unchanged for those deferrals and our write-offs in the fourth quarter on the wholly owned portfolio were minimal.
For cash same-store is outlined on Page 1 of our Supplemental.
Looking at '21 guidance.
At the midpoint, net income will be $0.37 per diluted share and FFO will be $1.37 per diluted share and that includes roughly $0.04 of dilution related to the fourth quarter transactions we announced.
Our '21 range was built with the following general assumptions.
Portfolio operating income, our property level GAAP income will be roughly $285 million or a decrease of about $30 million compared to 2021 due to the following items.
2340 Dulles Corner and the retirement of 905 Broadmoor will generate about $10 million reduction from '20 to '21.
The Mid-Atlantic portfolio JV results in another $17 million decrease.
The full year effect of Commerce Square results in a $19 million decrease, those are partially offset by the full year effect of one Drexel park and Bellet Building being about $4 million, the 2021 completions of 405 Colorado and 3000 Market for about $3 million and about $3 million increase in our same-store portfolio GAAP NOI.
FFO contribution from our unconsolidated joint ventures will total $20 million to $25 million.
That increase is primarily due to the full year effect of Commerce Square as well as the transaction with the Mid-Atlantic portfolio.
G&A will be between $31 million and $32 million.
Investments, there is no new property acquisition or sales activity in our guidance.
Interest expense will decrease to approximately $67 million to $68 million, that's primarily due to the payoff of our two remaining mortgages as higher interest rates.
Capitalized interest will approximate $4 million as we complete the 405 Colorado building but also commence Schuylkill Yards West.
Investment income will increase to $6.5 million, primarily due to the new structured finance investment in -- at Austin, Texas.
Land sales and tax provision will net to about $2 million as we anticipate selling some non-core land parcels.
Termination and other income totaling $7.5 million, which is above the 2020 amount primarily due to one-time items, and again, were being moved from the fourth quarter of 2020 into the first half of '21.
Net management leasing and development fees will be $16 million, which is just above our 2020 actual due to the full year effect of Commerce Square and the JV for the Mid-Atlantic properties.
In addition, we anticipate that we will get some development fees from Schuylkill Yards West once we commence operation there with the development.
No anticipated ATM or share buyback activity.
Looking close -- more closely at the first quarter, we anticipate portfolio of property NOI totaling about $70 million and will be about -- sequentially about $5.5 million lower primarily due to 2340 Dulles as well as the Mid-Atlantic JV.
FFO contribution from our unconsolidated joint ventures will be $6.5 million.
G&A for the first quarter will increase from $6.3 million to $8 million.
Other sequential increases consistent with prior years and primarily timing of compensation expense recognition.
Interest expense will approximate $16 million, capitalized interest will be roughly $1.5 million, termination and other income, we continue to anticipate that to be $4 million with some of those transactions moving to '21.
Net management fee and development fee income will be $4.5 million with investment income being $1.6 million.
We expect some land gains potentially in the first quarter of about $0.5 million.
Our capital plan is very straightforward and totals to $350 million.
Our 2020 CAD ratio is between 75% and 81%, the main contributors to the lower coverage ratio is going to be the property level NOI reductions, as well as anticipated lease up in upcoming -- with the upcoming rollovers.
Using that as a guide, our uses in 2021 will be $145 million of development and redevelopment.
That does include the additional cash that is going to be necessary to complete our equity contribution into Schuylkill Yards West, $130 million of common dividends, $35 million of revenue maintain and $40 million of revenue creating capex.
The primary sources will be $185 million of cash flow after interest payments, $99 million use of the line, $46 million of using the cash on hand and roughly $20 million in proceeds from land in other sales.
Based on the capital plan outlined, our line of credit balance will be 5 -- roughly $500 million.
We have projected that our net debt-to-EBITDA range of 6.3 to 6.5 with the main variable being timing and scope of our development activities.
In addition, our net debt-to-GAV will approximate 14%.
In addition, we anticipate our fixed charge ratio and -- to be 3.7 and our interest coverage ratio to be 3.9.
So a couple of key takeaways.
Our portfolio and operations are really in solid shape.
We have excellent visibility into our tenant base, all signs at this point is evidenced by the numbers we've presented, our markets seem to be holding up fairly well.
Our leasing pipeline continues to increase as tenants think about their workplace return.
Look, safety and health, both in design and execution, are really and rapidly becoming tenants' top priorities and we do believe that new development and/or trophy-class stock as well as its extensive capital maintenance programs we had in place over the years will really benefit from that trend.
The private equity and debt markets are extremely competitive and strong operating platforms like Brandywine are gaining, I think, significant traction for project-level investments as certainly is evidenced by our recent activity.
I think our recent investment activity further improved our liquidity and created additional frameworks for growth for our shareholders.
And our partnership with Schuylkill Yards West I think really reinforces the increasing attractiveness of the emerging life science sector in Philadelphia and I really think, does create an excellent catalyst to accelerate the overall pace of the Schuylkill Yards development.
So we'll end where we started, which is that we wish you were all doing well and your families are safe.
We do ask in the interest of time you limit yourself to one question and a follow-up. | brandywine realty trust - qtrly net income allocated to common shareholders; $18.9 million, or $0.11 per diluted share.
brandywine realty trust - qtrly funds from operations (ffo) of $61.4 million, or $0.36 per diluted share. | 1 |
These statements are subject to change due to new information or future events.
In a successful third quarter of 2021, Assured Guaranty's new business production generated $96 million of PVP.
This is our second highest result for a third quarter in the last decade.
At the nine months mark, our year-to-date PVP totaled $263 million, which puts us on pace with last year's outstanding production.
The business was well distributed across our U.S. public finance, international infrastructure and global structured finance markets for both the third quarter and nine months.
In terms of shareholder value as of September 30, 2021 on a per share basis, shareholders' equity, adjusted operating shareholder's equity and adjusted book value all reached record highs of $88.42, $82.89 and $122.50 respectively.
Year-to-date Assured Guaranty is earned $197 million of adjusted operating income, about the same as in last year's first three quarters notwithstanding a $138 million after-tax loss on debt extinguishment.
This accelerated recognition of an expense resulted from the voluntary early redemption of certain senior notes.
These redemptions and the issuance of lower coupon debt will reduce next year's debt service by $5.2 million.
Rob will provide more detail on the debt issuance later.
During the third quarter total municipal bond issuance was strong with $121 billion of new par issued, the second highest third quarter volume in a dozen years.
For the first three quarters, new par issue of $343 billion exceeded that of the comparable period in 2020 which was a record year.
Insurance penetration continued its upward trend, reaching 8.5% for both the third quarter and nine months, the highest level for a third quarter in any nine month period in more than a decade.
This was achieved even though the interest rate environment remained challenging, although benchmark yields moved a bit higher during the quarter, they remain low by historical standards and credit spreads compressed to the tightest levels in a decade.
In this environment, Assured Guaranty continue to lead the municipal bond insurance industry with the third quarter market share of almost two-thirds of the insured par sold in the primary market as we guarantee 270 transactions for a total of $6.7 billion in insured par.
At the nine month mark, we would guarantee more than 60% of insured new issue par sold this year.
The $17.9 billion we insured in the primary market was 90% higher than in the first nine months of 2020 and 88% more than in the first nine months of the most recent pre-pandemic year 2019.
It was in fact our highest primary market insured par for the first nine months in a decade.
We have continued to benefit from institutional investors preference for Assured Guaranty's insurance on larger transactions.
During the third quarter, we insured 17 transactions with $100 million or more in insured par, which brings our total year-to-date transaction count in this category to 38 just one deal short of the number we insured in all of 2020.
Also in the third quarter, we continue to add value on AA credits ensuring $836 million of par on 27 deals, that each has at least one rating in AA category from either S&P or Moody's.
The 83 municipal issues we insured in this category through September of this year aggregated to more than $3 billion of insured par compared with $2 billion in the first nine months of last year.
It was public finance usually generates a large percentage of our PVP each quarter and it's $55 million of third quarter PVP is no exception.
But we have a uniquely diversified approach to producing new business.
Our international infrastructure business has been a reliable contributor to our production in every quarter for more than five years.
It produced $17 million of PVP in the third quarter of 2021.
One significant transaction was a GBP113 million student accommodation issued by the University of Essex.
We have a substantial pipeline of high and medium probability transactions for the rest of this year and the first half of next.
In the transaction inquiries we are receiving our increasingly diverse.
Over the longer term, we believe infrastructure will continue to be a significant international market for us.
In the U.K. alone, the government has put out a paper anticipating as much as GBP650 billion of public and private infrastructure spending over the next 10 years.
In Global Structured Finance, third quarter PVP was very strong $24 million bringing the year-to-date total to $35 million.
We closed on a large insurance securitization in the third quarter and our CLO activity has been accelerating.
We guaranteed two euro denominated CLOs in the quarter, our guarantees of CLOs attract new investors, which might otherwise be discouraged by the higher capital requirements on uninsured CLOs, and we are seeing more opportunities to help investors reduce the capital consumed by both existing structured finance exposures and new investments.
Overall, the quality of our insured portfolio continue to improve as a below investment grade portion of our insured portfolio declined by $300 million during the quarter as within sight of falling below 3% of net par exposure.
Puerto Rico issues account for almost half of our below investment grade net par outstanding, and there have been important positive developments in the efforts to complete debt restructurings under PROMESA.
Negotiated agreements with these restructurings apply to 95% of our par exposures to Puerto Rico entities with the balance of our exposures remaining current on debt service payments.
The large end was broken on October 28 when the oversight Board agreed that the recently passed Commonwealth Legislation intended to authorize issuance and new exchange securities as part of the Commonwealth restructuring met the Board's condition and a revised plan of adjustment could move forward to the confirmation hearing, which is scheduled to start in November 8th, three days from now.
Meanwhile, the Commonwealth revenues have exceeded expectations and billions more have been received or are expected from Federal Coronavirus Relief and Disaster Relief allocations.
And the other may benefit further from pending federal physical infrastructure bill and build back better reconciliation bill.
On our last call, I mentioned SPs affirmation in July were AA stable outlook.
Financial strength ratings decides to our insurance subsidiaries.
This has been followed in October by KBRA's affirmation of a AA plus rating of AGM, Assured Guaranty U.K. and Paris Assured Guaranty Europe.
Importantly it also upgraded AGC to AA plus based on AGC's strength and capital position relative the KBRA's conservative stress loss modeling along with separate analysis of AGC's Puerto Rico, RBS and certain other exposures.
KBRA also noted AGC's decreased insurance leverage, the substantial de-risking of its insured portfolio and the positive movement toward resolution of Puerto Rico's Title 3 process.
All the ratings have stable outlooks, by the way the Puerto Rico settlement agreements were also deemed credit positive by Moody's in its credit opinion about AGM published in July.
On the asset management side of our business, we have been participating in a very active CLO market.
We increased fee earning CLO assets during the third quarter largely by launching one CLO which brought the number of CLOs we issued during the first nine months to four.
These new CLOs were responsible for a $1.7 billion of the one -- of the $3.8 billion increase in fee earning CLO assets since the year began.
The remaining $2.1 billion of the increase resulted primarily from selling CLO equity previously held in AssuredIM Funds and converting AUM from non-fee earning to fee earnings during the year.
We have shared virtually all of the CLO equity held by AssuredIM legacy funds and 96% of our CLO AUM is fee earning now.
We expect the CLO market to remain strong through year-end.
We reset or refinance three CLOs in the United States this quarter, adding up to the total of four CLOs in the U.S. and three CLOs in Europe that were reset or refinanced for the year through third quarter.
For these transactions are managed on a sub-advisory basis.
After the third quarter end, in October we closed a new CLOs in the United States.
In addition, we currently have two open CLO warehouses, one in the U.S. and one in Europe, we are planning to open one additional CLO warehouse in the U.S. before the end of the year.
Those CLOs and ongoing AssuredIM Funds overall have performed well.
I look forward to a successful finish for Assured Guaranty this year.
Our track record proves that our company is built to stand severe disruption in the financial markets.
And our recent results strongly suggest that a great number of investors appreciate the resilience of our business model, understand our value proposition and recognize our financial strength.
Those investments will be a source of our success for years to come as we continue to protect our policyholders and create value for our clients and shareholders.
This quarter, we continue to make great progress on our capital management strategies.
After issuing $500 million of 10-year senior notes at a rate of 3.15% in May, I'm pleased to report that AGUS Holdings issued another $400 million of 30-year senior notes in August at an attractive rate of 3.6%.
Most of the proceeds of these debt offerings were used to redeem $600 million of long-dated debt obligations, and the remaining proceeds were designated for general corporate purposes including share repurchases.
The redemptions included $430 million of debt we assumed in 2009 as part of the FSAH acquisition with coupons ranging from 5.6% to 6.9% and remaining terms of approximately eight years, as well as $170 million of AGUS 5% senior notes due in 2024.
These debt refinancings had several benefits to the company.
First, we reduced the average coupon on redeemed debt from 5.89% to 3.35% which will result in a $5.2 million annual savings until the next debt maturity date.
We expect continual annual interest savings after that.
So the amount of such savings will depend on the interest rate environment and the refinancing decisions we make at the time.
Second, we reduced our 2024 debt refinancing need from $500 million to $330 million.
And lastly, the debt proceeds, we borrowed in excess of those used for redemptions will provide flexibility to execute other strategic priorities including share repurchases without significantly affecting our leverage or interest coverage ratios.
These debt redemptions resulted in a pre-tax loss on debt extinguishment of $175 million or $138 million on an after-tax basis, consisting of two components.
First, $176 million acceleration of unamortized fair value adjustments that were originally recorded in 2009 as part of the FSAH acquisition, and second, a $19 million make whole payment to debt holders of the redeemed AGUS 5% senior notes.
It is important to note that $156 million of the $175 million loss was a non-cash expense.
The amortization of these purchase adjustments had been slowly amortizing into interest expense since 2009 and we're scheduled to continue to amortize into interest expense for another eight years.
The redemption of this debt merely accelerated the timing of that expense.
Despite this charge, our third quarter 2021 adjusted operating income was $34 million or $0.45 per share.
The loss on debt extinguishment reduced adjusted operating income by $1.87 per share.
In the Insurance segment however, adjusted operating income was significantly higher at $214 million for the third quarter 2021 up from $81 million in the third quarter of 2020.
The increase is primarily due to favorable loss development, which was a benefit of $94 million in the third quarter of 2021.
The largest component of the economic benefit was attributable to a $65 million benefit in U.S. RMBS exposures that was mainly related to a benefit from a higher recoveries and second lien charged-off loans in deferred first lien principal balances.
In addition, there was a $31 million benefit on public finance transactions due to mainly the refinement of the mechanics of certain terms of the Puerto Rico support agreements.
The economic development attributable to changes in discount rates across all transactions was not significant in the third quarter of 2021.
Other components of the Insurance segment also performed well in third quarter 2021.
The investment portfolio generated total income of $102 million, an increase from $95 million in third quarter 2020.
The increase was mainly due to the performance of the alternative investment portfolio including AssuredIM funds which collectively generated $33 million in the third quarter of 2021 compared with $20 million in the third quarter of 2020.
Since the establishment of AssuredIM, the insurance subsidiaries have invested $380 million in AssuredIM Funds which now have a net asset value of $465 million and have produce inception to-date return of almost 20%.
As a reminder, equity in earnings of investees is a function of mark-to-market movements attributable to the short IM funds and other alternative investments.
It is more volatile than the net investment income on the fixed maturity portfolio and will fluctuate from period-to-period.
Our fixed maturity and short-term investments account for the largest portion of the portfolio generating net investment income of $69 million in third quarter 2021 compared with $75 million in third quarter 2020.
The decrease in net investment income was primarily due to lower average balances in the loss mitigation investment portfolio.
As we shift fixed maturity assets into alternative investments, net investment income from fixed maturity securities may decline.
However, over the long term, we are targeting enhanced returns on the alternative investment portfolio of over 10%, which exceeds the projected returns on the fixed maturity portfolio.
In terms of premiums, scheduled net earned premiums were consistent relative to third quarter 2020.
And accelerations due to refundings and terminations were $15 million in third quarter 2021 compared with $18 million in the third quarter of 2020.
In the Asset Management segment, we have continued to make great progress in advancing our strategic goals.
This quarter, we increased fee earnings CLO AUM with the issuance of $598 million in new CLOs.
We continue to liquidate assets and wind down funds and now have less than $1 billion of legacy AUM in those funds.
And using a short IM's investment management expertise, we have expanded investment strategies in the insurance segment.
To-date, we have recorded strong mark-to-month results on the fund established by short IM.
In the Asset Management segment, adjusted operating loss was $7 million in the third quarter 2021 compared to an adjusted operating loss of $12 million in the third quarter of 2020.
However, asset management revenues increased 38% in third quarter 2021 compared with third quarter 2020 due mainly to the increase in CLO fee earning AUM and the recovery of previously deferred CLO fees in 2021.
The COVID-19 pandemic and downgrade in loan markets had triggered overcollateralization provisions in CLOs in the second and third quarters of 2020, resulting in the deferral of CLO management fees.
However, as of September 30, 2021, none of the short IM CLOs were triggering over collateralization provisions, and therefore, none of the short IM CLO fees were being deferred.
Fees from opportunity funds were also up as AUM increased to $1.6 billion as of September 30, 2021 from $1 million as of September 30, 2020.
Fees from the wind-down funds decreased as distributions to investors continued, and as of September 30, 2021, the AUM of the wind-down funds was $809 million compared with $2.3 billion as of September 30, 2020.
The corporate division typically consists mainly of interest expense on U.S. holding company's debt and corporate operating expenses.
This quarter, it also includes a debt extinguishment charge, which brought third quarter corporate results to a net loss of $169 million.
In third quarter 2021, the effective tax rate was a benefit of 57% and compared with the benefit of 33% in the third quarter of 2020.
The overall effective tax rate on adjusted operating income fluctuates from period to period based on the proportion of income in different tax jurisdictions.
The loss on extinguishment of debt in the third quarter 2021 reduced income in the U.S. compared to other jurisdictions, resulting in the low rate for the quarter, while third quarter 2020 benefited from the release of a reserve for uncertain tax positions.
Turning back to our ongoing capital management strategies.
We repurchased 2.9 million shares for $140 million in third quarter of 2021 at an average price of $47.76 per share.
This brings year-to-date repurchases to $305 million as of September 30, 2021.
The continued success of this program helped to drive our per share book value metrics to record highs.
Subsequent to the quarter close, we repurchased an additional 1.5 million shares for $77 million.
Since the beginning of our repurchase program in January 2013, we have returned $4 billion to shareholders under this program, resulting in a 67% reduction in total shares outstanding.
The cumulative effect of these repurchases was a benefit of over $33 in adjusted operating shareholders' equity per share and $58 in adjusted book value per share, which helped drive these metrics to new record highs of more than $82 in adjusted operating shareholders' equity per share and $122 in adjusted book value per share.
From a liquidity standpoint, the holding companies currently have cash and investments of approximately $272 million, of which $86 million resides in AGL.
These funds are available for liquidity needs or for use in the pursuit of our strategic initiatives to expand our business or repurchase shares to manage our capital.
As of today, we have $220 million of remaining share repurchase authorization. | q3 adjusted operating earnings per share $0.58. | 0 |
Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties.
We encourage you to read the risks described in the company's public filings and reports, which are available on SEC or the company's corporate website.
Now, I would like to turn the conference over to Karen Colonias, Simpson's President and Chief Executive Officer.
I'm pleased to discuss our results with you today.
I'll begin with a high level summary of our third quarter results and we'll then turn to a more detailed discussion on our key performance drivers and initiatives.
Brian will then walk you through our financials and updated business outlook in greater detail.
We delivered strong third quarter results with our sales increasing 17.5% year-over-year to $364.3 million on significantly higher volume.
Compared to the second quarter of 2020, our sales increased 11.7%.
Further, we achieved a considerable improvement in our gross profit margin to 47.6% from 44.4% in the prior year quarter, primarily related to lower material and labor costs.
The strength in our gross profit margin combined with our efforts in expense management and reduced cost from travel and other restrictions, as a result of the COVID-19 helped drive a 49.8% year-over-year increase in our income from operations to $91.3 million and strong earnings of $1.54 per diluted share.
At Simpson, we value our employees' health, safety and well-being as our top priority and strive for continuous improvement to ensure our company remains a safe and rewarding place to work.
Our diligence including strict adherence to protocol to help minimize the spread of COVID-19 has enabled us to continue operating our business with minimal disruptions from the pandemic.
We are prepared to play a key role in the rebuilding efforts with our mission of helping people build safer, stronger structures.
Getting back to our results.
The substantial increase in sales volume we experienced in the third quarter was primarily related to ongoing momentum in the repair and remodel space, which includes both our home center and co-op customers.
We continued to benefit from a shift in consumer behavior toward home renovations as people are spending more and more time in their homes and outdoor living spaces, as a result of the COVID-19 pandemic.
We estimate sales from the home center channel, where we see much of our repair and remodel business, improved 125% over the prior year period.
As disclosed in our previous call, we are extremely happy to have Lowe's return as a home center customer in the second quarter, during which time we began shipping our products into their locations.
We continued to make progress on our product rollout during the third quarter.
As of the end of September, all Lowe's stores had been set with our industry-leading connectors, as the exclusive supplier.
In addition, both our mechanical anchor and fastener product solutions were set in 987 stores among other competing manufacturers.
By the end of October, we expect our product set to be nearly completed in all 1,737 Lowe's stores.
In addition, while the Home Depot continues to carry our connector line, most of our mechanical anchor and fastener products are being phased out of the Home Depot locations throughout the remainder of this year.
As a reminder, our mechanical anchor and fastener products were in some, but not all Home Depot locations.
Our sales were further supported by strong US housing starts in 2020.
In the third quarter of 2020, housing starts grew 11.4% versus the comparable period last year and grew 29.9% versus the second quarter of 2020.
Notably, in the West and South, where we provide a meaningful amount of content into homes, third quarter starts grew 7.6% and 14.1% respectively year-over-year.
Turning now to Europe.
We saw our sales recover nicely with our facilities now operating at full capacity following government shutdowns in the United Kingdom and France due to the COVID-19 in late March.
While much of the improvement in Europe was related to the benefit of foreign currency translations, sales still improved both year-over-year and quarter-over-quarter on slightly higher volume.
As part of our strategy to continue to grow our market share in Europe, subsequent to quarter end we acquired a small connector manufacturer based in the United Kingdom with a complementary product line.
The acquisition closed early in October and the acquired company's operations will be absorbed into our existing business.
Overall, we expect this acquisition to benefit our market position in the region moving forward.
I'd now like to shift our focus to our software strategy.
As previously discussed, we believe that the investments we made over the years in software have enhanced our technological capabilities to remain competitive in the wood construction space by providing our customers with complete end-to-end product and software solutions.
We estimate over 40% of our core wood connector sales are to customers with software needs and believe this figure will increase over time.
To further our expertise in this area, we completed the purchase of a small software application for builders during the third quarter of 2020.
Similar to our acquisition of LotSpec in 2018, which was a suite of software applications designed to optimize efficiency and productivity for homebuilders, this application expands our software choices for builders to help minimize costs and best align with their business needs.
By expanding our technology offering to provide our customers with more tailored and innovative software solutions, we believe we will strengthen our value proposition.
Next, I'll return to an update on our SAP implementation, which continued to progress despite travel limitations related to the COVID-19.
Some of the benefits we've enjoyed so far include better forecasting tool to aid with working capital management and particular inventory management.
Earlier this year, we successfully transitioned all of our US based sales organization over to SAP.
Immediately following the third quarter, we also completed two more locations, including our UK branch, which is now live.
That said, given the duration and severity of the pandemic remains highly fluid and uncertainty, we are unable to accurately predict how COVID-19 will continue to impact international travel, on-site meeting, and training requirements to complete the rollout in our remaining location.
As such, we currently anticipate a companywide completion goal in 2022 versus near the end of 2021, though we will continue to monitor and update our time line should circumstances change.
Now I'd like to briefly touch on our capital allocation strategy.
As business continues to generate strong cash flow, we remain focused on appropriately balancing our growth and stockholder return priorities while also paying down debt.
While our focus for the majority of the year has been on cash preservation to ensure our working capital needs during the pandemic could be met in the near term.
Over the past seven months, we have been very grateful to be able to operate as a supplier to other essential businesses with only minimal disruptions to the COVID-19.
As such, we are continuing to support our growth strategy in identifying M&A opportunities that would complement our existing product offering, manufacturing footprint or strengthen our software capabilities.
We were also very pleased to declare our quarterly dividend as we have done consistently since 2004.
As previously announced, Mike will be joining Simpson at the end of November after spending over 22 years in numerous leadership positions at Henkel, a global chemical and consumer goods company.
We are excited to have Mike on board and he will be instrumental in helping us uncover new ways to remain innovative and seek opportunities for future growth.
Mike replaces our former COO, Ricardo Arevalo, who retired in February of 2020 after 20 years of service to Simpson Strong-Tie.
While the search to find the right candidate took longer than anticipated, I could not be more pleased with our choice.
In summary, we executed an excellent third quarter with strong financial performance across the board, despite broader macroeconomic challenges that continue to plague our economy.
The durability of our business model has continued to support us through this challenging time as a result of key elements, including our strong brand recognition and trusted reputation in the industry, our industry-leading high quality and tested product solution, our superior customer service standards, our disciplined capital allocation strategy, a strong balance sheet and liquidity position, which enables financial flexibility and most importantly our passionate and dedicated employees.
Looking ahead, we believe the solid demand trends we experienced in third quarter of 2020 will continue through the duration of the year, aside from the seasonality we typically experienced during the fourth quarter, due to holiday-related closures and winter conditions.
I'm pleased to discuss our third quarter financial results with you today.
Now turning to our results.
As Karen highlighted, our consolidated sales were strong, increasing 17.5% to $364.3 million.
Within the North America segment, sales increased 19% to $316.9 million, primarily due to the return of a home center customer and increased repair and remodel activity, as well as from other sales distributor channels, which experienced increased new housing starts and repair and remodel activity.
In Europe, sales increased 6% to $44.8 million, primarily due to higher sales volumes.
Europe sales benefited by approximately $2.1 million of positive foreign currency translations resulting from some Europe currencies strengthening against the United States dollar.
In local currencies, Europe net sales still increased.
Wood Construction products represented 85% of total sales compared to 84% and concrete construction products represented 15% of total sales compared to 16%.
Gross profit increased by 25.9% to $173.2 million, which resulted in a strong gross margin of 47.6%.
Gross margin increased by 320 basis points, primarily due to lower material and to a lesser extent reduced labor costs, which were partially offset by higher warehouse and shipping costs.
As we continue to purchase steel to support heightened demand levels, we would expect our consolidated gross margin to normalize back down to a more appropriate run rate, which I will discuss in greater detail in our outlook shortly.
On a segment basis, our gross margin in North America improved to 48.9% compared to 45.6%, while in Europe our gross margin decreased to 37.9% compared to 38.4%.
From a product perspective, our third quarter gross margin on wood products was 48% compared to 44.4% in the prior year quarter and was 42.1% for concrete products compared to 41.6% in the prior year quarter.
Now turning to our third quarter costs and operating expenses.
Our strong third quarter performance and improved expectations for the full-year 2020 resulted in higher performance based compensation within our total operating expenses.
Research and development and engineering expenses increased 2.6% to $12.3 million, primarily due to cash profit sharing and personnel costs, partly offset by lower capitalized software development costs.
Selling expenses increased 6.2% to $29.4 million, due to increases in cash profit sharing, sales commissions, personnel costs, and stock-based compensation, which were partially offset by lower travel, fuel and entertainment expenses and advertising expense.
On a segment basis, selling expenses in North America were up 7.3% and in Europe they increased 1%.
General and administrative expenses increased 8.7% to $40.3 million primarily due to increases in cash profit sharing, stock-based compensation, depreciation and amortization and insurance, partly offset by lower travel associated expenses.
On a segment level, general and administrative expenses in North America increased 5.6%, in Europe G&A, slightly decreased.
Total operating expenses were $82 million, an increase of $5.3 million or approximately 6.9%.
As a percentage of sales, total operating expenses were 22.5%, an improvement of 220 basis points compared to 24.7%.
Our solid topline performance combined with our strong gross margin and diligent management of costs and operating expenses, helped drive a 49.8% increase in consolidated income from operations to $91.3 million compared to $61 million.
In North America, income from operations increased 53.7% to $87.4 million, due to our strong sales and the strength of our gross profit margin.
In Europe, income from operations increased 12.8% to $6.1 million primarily due to increased gross profit.
On a consolidated basis, our operating income margin of 25.1% increased by approximately 540 basis points.
Our effective tax rate remained flat at 26.2%.
Accordingly, net income totaled $67.1 million or $1.54 per fully diluted share compared to $43.7 million or $0.97 per fully diluted share.
Now turning to our balance sheet and cash flow.
Our balance sheet remained healthy with ample liquidity to operate our day-to-day operations.
At September 30, cash and cash equivalents totaled $311.5 million, a slight decrease of $4 million compared to the balance at June 30, after paying down $75 million on our revolving credit facility during the quarter.
As a reminder, we drew down $150 million on a revolving line of credit during the first quarter of 2020 as a precautionary measure in order to preserve financial flexibility given the uncertainty of the length and impact of the COVID-19 pandemic.
As of September 30, approximately $225 million remained available for borrowing.
Our inventory position of $260.1 million at September 30, slightly decreased by $5.3 million from our balance at June 30, as we strived to maintain inventory levels to service the increased construction activity we typically see in the summer and fall months, along with the unprecedented demand we've experienced through the pandemic.
We continue to be focused on improving our inventory balance through diligent management, and purchasing practices, to ensure maximum efficiency, while maintaining our high levels of customer service and on-time delivery standards.
We generated strong cash flow from operations of $86.8 million for the third quarter of 2020, a decrease of $8.9 million or 9.3%.
During the third quarter, we used approximately $6.8 million for capital expenditures, which included a minimal amount for our ongoing SAP implementation project.
In regards to stockholder returns, we paid $10 million in dividends during the third quarter.
And on October 23, our Board of Directors declared a quarterly cash dividend of $0.23 per share, which will be payable on January 28, 2021 to stockholders of record as of January 7, 2021.
As a reminder on our second quarter earnings call in late July we reinstated our fiscal 2020 outlook based on improved visibility on the progression of pandemic related restrictions and the impact of those restrictions on our operations.
Today we are updating our outlook to reflect an additional quarter of strong financial results as well as the latest business trends and conditions as of today October 26.
As such, our current outlook for the full fiscal year ending December 31, 2020 is as follows.
Net sales are estimated to increase in the range of 9% to 10% compared to the full-year ended December 31, 2019.
Gross margin is estimated to be in the range of approximately 45% to 46%.
Operating expenses as a percentage of net sales are estimated to be in the range of 25% to 26.5% and the effective tax rate is estimated to be in the range of 24.5% to 26%, including both federal and state income taxes.
I would like to note that there continues to be a high level of macroeconomic uncertainty resulting from the COVID-19 pandemic.
The potential economic impact related to COVID-19 on our operations, raw material costs, consumers suppliers and vendors, may have a material adverse impact on our 2020 financial outlook should conditions materially change from the current environment.
I would expect gross margins and operating margins to pull back as we exit 2020, as we anticipate costs directly related to customer engagement and investments in growth to increase.
In closing, despite the ongoing macroeconomic challenges in the marketplace stemming from the pandemic, we were thrilled with our third quarter financial results and operating performance.
We believe our industry-leading position geographic reach and diverse product offerings combined with our strong balance sheet and liquidity position, give us confidence in our ability to continue executing against our strategic, operational, and financial initiatives. | compname says q3 sales $364.3 million.
q3 earnings per share $1.54.
q3 sales $364.3 million versus refinitiv ibes estimate of $316.4 million.
updating full year 2020 financial guidance on improved demand outlook. | 1 |
Today's call will also include non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.
Third quarter net income of $34.1 million produced core earnings per share of $0.36, accompanied by core return on assets of 1.43% and core pre-tax pre-provision ROA of 1.79%.
This was a very good quarter for First Commonwealth with solid profitability, growth in credit metrics.
Other headlines for the quarter include first, excluding PPP loan payoffs, we're pleased with loan growth of 8.2% or $132.3 million in the third quarter with ongoing strength in indirect lending, home equity lending, commercial lending and mortgage lending.
Our growth is broad-based between commercial and retail lending disciplines and has become increasingly granular over the years.
As an aside, our loan growth over the first -- over the last two quarters has not yet benefited from higher line of credit utilization.
Second, the loan growth and improved margin enabled a $2.4 million quarter-over-quarter increase in net interest income to $70.9 million.
Jim will have more color on the net interest margin.
Third, non-interest income or fees grew $1.2 million quarter-over-quarter to $27.2 million on the strength of improvement in SBA and mortgage gain on sale income as well as higher wealth management income.
Importantly, our card-related interchange business generated $7.1 million in fee income.
Our regional business model has been a strong contributor to fee income growth with better teamwork and collaboration enabling us to deliver a broader set of solutions for our clients.
Fourth, our efficiency ratio increased to 55.27% as core non-interest expense rose some $3.7 million, primarily due to higher personnel expense, including higher incentive accruals based upon increased production, higher wages, particularly in entry level positions driven by inflationary pressure, higher hospitalization expense and then the hiring of the management team of the equipment finance division.
It is increasingly clear that we are not immune to expense headwinds in the current environment.
Fifth and importantly on the credit side, we guided last quarter to stronger credit metrics in the second half of the year in 2021.
That's exactly what is happening.
The third quarter represented our lowest loan charge-offs in nine quarters, a decrease in specific reserves for troubled credits coupled with general improvement in economic conditions led to a provision of just $330,000 down from $5.4 million in the second quarter.
Our reserves now represent 1.3% of total loans, excluding PPP and a 247% of non-performing loans.
The level of non-performing loans improved significantly from $52.8 million in the second quarter to just $38.1 million in the third quarter or 56 basis points of total loans.
Similarly, non-performing assets of $39 million at quarter end now stand at 41 basis points of total assets.
Subsequent to quarter end in early October a $6.9 million troubled credit was resolved and will be reflected in Q4 results.
Other notable third quarter items follow.
First Commonwealth earned the number one SBA lender ranking in Pittsburgh for the fiscal year ending September 30, 2021.
This is a significant accomplishment and reflective of both the talent in the SBA lending team coupled with the partnership enabled by the regional business model alluded to earlier.
In the third quarter, we continued to transform our technology to include the selection of a new loan origination system, as well as introducing several new cash management solutions or TM Solutions for our business clients.
We continue to be pleased with our adoption of our new mobile banking app, which is growing at an annualized rate of 18%.
As we work through our three year strategic plan, I would share three of our six areas of focus that might be most relevant to investors.
First, this accelerates the growth trajectory of our company, and we'll do this primarily through organic, broad-based loan growth across both our commercial and consumer loans.
Second, continue to increase digital relevance to drive customer satisfaction, ease of use and brand identity, primarily through the continued investment in customer-facing technology.
And third, anticipate and offset expense pressure to maintain operating leverage over a multi-year horizon.
I say this because we realize that building new businesses like equipment finance from the ground up will negatively impact operating leverage at first, but can have a powerful impact on operating leverage in the long run.
Regarding growth, we've received many good questions about our equipment finance efforts, so let me provide an update on our progress.
As you recall, we did a lift out from our large -- from a larger bank in June of a Philadelphia team with a 20-year track record of performance.
As we enter the business we expect the funds small ticket loans and leases on equipment on a nationwide basis.
The group's primary experience has been with essential used commercial equipment diversified across industries and equipment type.
The manufacturing, construction and professional service industries represent more than half of their originations by industry.
Primary equipment types included utility trucks, highway trucks, machine tools, trailers and manufacturing and packaging equipment.
A good example of a piece of essential use equipment would be a machine tool like a lathe that a small business needs to run its business.
We expect the average ticket size to be about $80,000 and an average term of 60 months.
Based on the historical performance of this team, we expect yields in the mid-5% range and spreads in the mid-4% range with charge-offs typically ranging from 55 basis points to 75 basis points.
If all goes according to plan, we believe that we can generate some $200 million to $250 million of equipment finance assets on our books by the end of 2022 before really hitting our stride in '23 and '24.
As Mike already mentioned, we were pleased with our financial performance this quarter.
Hopefully I can provide you with a little more detail on our net interest margin fee income and expenses.
The GAAP net interest margin expanded by 6 basis points this quarter to 3.33%.
Net expansion was driven by strong organic loan growth of just over 8% annualized.
The NIM expansion wasn't impacted by PPP.
Total PPP income in the third quarter was $5.7 million, up by only $200,000 from last quarter.
As of September 30, we had $152 million of PPP remaining on the books with $6.3 million in fee income that remains to be recognized.
We expect that most of the remaining PPP balances will be forgiven in the fourth quarter, which should help the GAAP NIM.
The core NIM which we calculate to exclude the effects of PPP and excess cash fell from 3.20% last quarter to 3.16% this quarter because we purchased $134 million of securities in the quarter.
Had we not purchased the securities and just let the money sit in cash, we would have excluded that cash from the core NIM calculation based on the way we calculate it and the core NIM would have dropped by only 1 basis point to 3.19%.
We think that the core NIM has bottomed out and should drift upwards from here as we redeploy excess cash into loans.
Our cost of deposits in the third quarter was down to only 6 basis points.
I'm pleased to report that our last remaining tranche of high cost deposits totaling $52 million at a cost of 1.65% repriced on October 13 subsequent to quarter end.
That alone will save us nearly $1 million a year in interest expense at about a point of NIM.
We will reap the benefit of that starting in the fourth quarter.
With that behind us, we're down to about $400 million in time deposits remaining at a cost of 36 basis points, three quarters of which will mature by the end of 2022.
So while some deposit repricing opportunity remains we are very far along in repricing our entire deposit book leaving us very well-positioned if rates rise.
With that in mind, we've taken a hard look at the deposit beta assumptions in our interest rate and risk sensitivity calculations.
In light of unprecedented levels of liquidity, we are revising our interest rate risk assumptions to reflect the ability to lag deposit rate increases for the first two 25 basis point rate hikes.
The result will be what we believe to be a more accurate picture of our asset sensitivity in the current environment.
You'll see this in our IRR tables once we published our 10-Q but to give you a preview a 100 basis point parallel shock will show an increase in the first year net interest income of over 5%.
That's roughly double the previous level of sensitivity so we wanted to explain the reason for the change.
Even without a rate hike however the NIM story in 2022 will be driven by the redeployment of excess cash and loans especially since we believe that deposit balances will remain relatively stable throughout 2022 and any loan growth above cash levels can be funded by cash flow from the securities portfolio.
This effectively rotates lower earning assets into higher earning ones.
This asset rotation should benefit NIM in 2022 even if rates don't rise and then if rates do rise our asset sensitivity will kick in and expand the margin even further.
Turning now to fee income; fee income of $27.2 million in the quarter remains a bright spot and seems to be one aspect of our company that is consistently underappreciated.
There's been talk of slowdown in mortgage all year but our mortgage gain on sale income actually increased by $400,000 over the last quarter.
SBA is another fee income engine that continues to gain momentum now that PPP is mostly behind us with SBA gear and sale income up by $700,000 from last quarter to $2.4 million.
Card related interchange income continues at new record levels for us of approximately $7 million a quarter, and deposit service charges after the off pace for much of the pandemic due to heightened cash levels and customer accounts have returned to more normalized levels.
Turning to non-interest expense, last quarter, our guidance was $53 million to $54 million, and we came in at $55 million for the reasons Mike described.
Like many of our peers, we are experiencing expense pressures mostly related to people costs like salaries and benefits.
While there are some normal variability and costs quarter-to-quarter, it's difficult to see NIE falling from current levels.
Fortunately, the pace of our loan growth gives us confidence that our revenue can outpace expense growth.
Finally, we repurchased 997,517 shares of stock during the third quarter at an average price of $13.35.
While we ended the quarter with approximately $10.3 million remaining of our $25 million share repurchase authorization we are also pleased to announce that our board authorized an additional $25 million share repurchase authorization yesterday.
We increased the authorization so that we could have repurchase authority available to redeploy expected excess capital generation in the fourth quarter and into next year.
And with that, we'll take any questions you may have. | compname announces q3 earnings per share of $0.36.
compname announces third quarter 2021 earnings; declares quarterly dividend and authorization of a $25 million share repurchase program.
q3 earnings per share $0.36.
corp - qtrly net interest income (fte) of $70.9 million increased $2.4 million from previous quarter. | 1 |
But first, I'll review the Safe Harbor disclosure.
I have joining me on the call today Stuart Rose, Executive Chairman of the Board; and Zafar Rizvi, Chief Executive Officer.
REX is very pleased to report on our strong third quarter results.
We now have just one reportable segment of ethanol and by-products.
Sales for the quarter increased by 63% as we experienced higher pricing for ethanol, distiller grains and corn oil.
Ethanol sales for the quarter were based upon 69 million gallons this year versus 74.6 million last year.
The reduced gallons were primarily due to limited corn supply at the beginning of the quarter which abated once the current year corn harvest began.
We reported gross profit of $25.2 million from continuing operations versus a gross profit of $18.9 million in the prior year.
For the current year quarter improved selling prices were offset somewhat by higher corn and natural gas pricing.
Ethanol pricing improved by 76%, dried distiller grain improved by 43% and corn oil pricing improved by 146% for this year's quarter over the prior year quarter.
Corn cost increased by 97% and natural gas pricing increased by 119% for this year's quarter compared to the prior year.
SG&A increased for the third quarter to $6.3 million from $4.3 million in the prior year.
This primarily represents increased incentive compensation based upon higher earnings in the current year and increased railcar lease costs.
We had income of $349,000 from our unconsolidated equity investment in this year's third quarter versus income of $1.2 million in the prior year.
Interest and other income decreased to approximately $35,000 versus $537,000 in the prior year, primarily reflecting the lower interest rate environment.
As mentioned above, since refined coal operation is now classified as discontinued operations, its results and historical results now reflected on one line on the income statement including the tax benefits from this business.
We reported $2 million of net income reportable to REX shareholders from discontinued operations for the third quarter.
This also resulted in us reporting a tax provision of $4.3 million for the third quarter of this year versus a provision of $5 million in the prior year from our continuing operations.
These factors led to net income attributable to REX shareholders from continuing operations of $13.3 million for this year's third quarter versus $9 million in the prior year, a 47% improvement.
Our net income per share from continuing operations attributable to REX shareholders was $2.23 for this year versus a $1.47 in the prior year.
Total net income per share, attributable to REX shareholders, including the discontinued operations was $2.56 for the quarter versus a $1.44 in the prior year.
Doug, is Stuart there still?
Zafar, why don't you go ahead?
Sorry, I'm on, I'm on.
Going forward, we are currently running in a significantly higher rate of earnings per share in the quarter that we currently reported.
Crush spreads have risen greatly even with higher input prices of corn and natural gas.
Zafar Rizvi will discuss this later in his section.
Refined coal operations as Doug ended in the middle of November.
After tax, it was profitable all the way up to the end.
Tax credits that -- we have not used that yet, we'll carry forward for up to 20 years, will help our cash flow significantly over in the next few years, assuming we continue to make good earnings.
The sequestration project is moving forward.
Carbon sequestration, Zafar Rizvi again will discuss that in his section.
Cash balance right now has risen to $219 million, up significantly from year-end of $108.7 million.
We currently, based on current operations, we again expect that to rise over the next -- over the next couple of -- over this quarter.
We bought back almost 67,000 shares in the quarter, we're working on our carbon capture project which Zafar again will talk about.
We continue to look for top quality ethanol plants, we tried, but we've not been as imminent at this time, we know nothing that's top quality that is up for sale at a price, we would consider buying it for.
We are open to considering other alternative energy projects and carbon capture opportunities.
So we'll see what happens in those areas.
Again, our cash balance as you can see on the balance sheet, $219 million.
Zafar will now discuss the operations.
As I mentioned in our previous quarterly call, the operating environment in 2021 improved in the first and second quarter.
We saw a decline in the crush margin in the beginning of the third quarter due to several factors.
But then the operating environment has begun to change.
An early harvest resulted in an increase in the availability of the corn -- favorable ethanol and corn oil prices helped to increase the crush margin due to the availability of corn.
We were able to increase the production at our plants, which is resulted in a very profitable quarter as Doug and Stuart mentioned earlier.
We continue to see favorable trend as Stuart just mentioned in crush margin, which could result into another profitable quarter.
Both of our majority-owned plants currently are producing at near capacity, are the logistic problems continue to be very challenging and are beginning to get worse due to the slowdown of the railroad and the availability of DDG containers and trucks.
We expect this trend may continue into the first quarter of next year or maybe longer which could adversely affect production and net income.
Let me give you a little bit of progress of our carbon sequestration project.
As you know, we are working with the University of Illinois to drill carbon sequestration well.
We have received a permit from the Illinois Department of Natural Resources to drill a test well, the site for the drilling has been prepared.
Rigs and other materials and equipment have arrived at the site.
We expect drilling will start today.
We hope to convert the test well into Class VI in the monitoring well.
The first stage of preparing the Class VI permit application has been using.
Existing information and US EPA has been notified.
The completion of the application process will continue -- will continue as we began to receive more information after the test well is completed in January 2022.
It will require another several weeks of testing, extensive modeling and computer stimulation to predict the behavior of the CO2, when it is injected, it is a very slow process.
This stimulation model will determine how much CO2 can be injected at the location, at what rate and it is eventual distribution in the subsurface area.
2D seismic processing has just finished and currently, preliminary [Phonetic] reports looks good at the proposed site.
The process [Indecipherable] testing has started, permitting fertility [Phonetic] usually takes more time than 2Ds as there is more land involved.
The fertility require us to enter in the fields and run linear grids across the property after receiving permission from the landlord -- landowners.
Our FEED study of the capture of CO2 and the design of the facilities are underway.
The design of the capture CO2 facility is expected to be completed soon.
As I have mentioned in the previous calls, this project is still at a very preliminary stage, and we cannot predict yet that we will be successful.
In summary, we are pleased to announce once again a very profitable quarter and progress with our carbon sequestration project.
I'll get back -- I'll give the floor back to Stuart Rose for additional comments.
In conclusion, we had a very, very good quarter as we both mentioned.
We're in the midst of an even better quarter, a significantly better quarter as crush spreads have risen.
We have continued to outperform the industry.
Significantly, we have good plants, good locations and as Zafar mentioned, we believe we have the best people in the industry and much capable people in the industry.
That's really what sets us apart from what the average plan is currently doing.
I'll now leave the floor open to questions. | compname reports q3 earnings per share of $2.56.
compname reports fiscal 2021 third quarter net income per share attributable to rex common shareholders increase of 78% to $2.56.
q3 earnings per share $2.56. | 1 |
This is Mike Yates, vice president and chief accounting officer for IDEX Corporation.
The format for our call today is as follows.
We will begin with Eric providing an overview of the state of IDEX's businesses, including a recap of our recent performance and how we are viewing 2021.
Eric will then provide an update on a few initiatives that we believe are key to IDEX's culture before moving into a review of our order performance and providing our 2021 outlook for our end markets.
Bill will then discuss our fourth-quarter and full-year 2020 financial results.
And we'll conclude with an outlook for the first-quarter and full-year 2021.
It's been a year full of challenge and change with the numerous safety protocols and disruptions in the marketplace.
In that environment, our people continue to shine.
Because of the protocols we have in place, the disruptions in our operations have been limited.
The COVID trends across Europe, North America, and India have been troubling, and we continue to follow those developments closely and remain steadfast in providing a safe place for our employees to work.
We continue to deliver solutions for our customers during a challenging year, focusing on the critical innovation we need to support our long-term strategy, as well as producing new products to help the fight against the pandemic.
Bill will walk through the details shortly, with customer focus, strong execution and our ability to react quickly to unpredictable events helped us deliver a relatively strong performance in 2020, a true testament to our resiliency.
Liquidity was a primary focus of our management strategy as the pandemic hit, and I'm happy to say that we were able to drive record free cash flow this year.
As we address the challenges in front of us, we see a path to bullishness for 2021.
We have seen a steady recovery in our end markets, which we will detail in a few slides.
The diversity and quality of our businesses continues to serve us well, ensuring that we can weather any storm and quickly capitalize when market conditions improve.
While the pandemic still presents many challenges to solve, we are starting to see a focus pivot back to core commercial endeavors as we and our customers prepare for a world healed from the ravages of COVID-19.
Our businesses remain focused on operating safely, and we are prepared to leverage our supply chains and react to increased demands.
A year like 2020 truly test the culture of a company.
Are you rooted in strong values that people really live and believe?
If so, you'll be better prepared to survive and even thrive.
IDEX is that kind of company, and it served us well in a year none of us could have ever predicted.
I'm proud of the culture we have built at IDEX.
It is admired by many, but we can strengthen it still.
We leverage our culture and mission to bind together a uniquely decentralized and diverse company, and our commitment to work even harder to support diversity, equity and inclusion is tied directly to this important aspect of IDEX differentiation.
Our resiliency, agility, and fundamental ability to execute have IDEX exceptionally well-positioned to play off as aggressively as we move forward.
We are actively investing to support our best organic growth bets, and we have ramped up our capital spending to support very exciting initiatives.
The M&A markets are moving again, and we are expanding our capabilities to execute on strategic acquisitions.
In January, we announced an agreement to acquire Abel Pumps and expect that deal to close in the first quarter.
We actively seek to deploy additional capital to acquire IDEX-like businesses, as well as make some calculated bets in new technologies to bolster our growth potential to further strengthen our portfolio and enhance our return to shareholders.
Moving to Slide 7.
As I just mentioned, the strength of IDEX comes from the IDEX difference, a teachable methodology where great teams working together in a superior culture, focused on the critical things that matter with a natural orientation toward the most important needs of their customers.
Our culture is a significant focus and one of my key leadership priorities.
To that end, we are making ongoing improvements based on feedback we received from our employees every day.
Last month, the IDEX Foundation, which was created to positively impact the communities in which we live and work, took a significant step forward as part of these efforts.
IDEX committed $6 million to boost sponsored activities across the company.
The foundation formerly added equity and opportunity as a lasting and fully funded part of its mission, creating opportunities for underserved, disadvantaged people of color in our communities.
This donation allows the foundation to more than double its annual giving.
In addition to initiatives focused on equity and opportunity, we will continue the great work our people have been doing in our communities like building homes for the homeless, renovating community centers, and supporting schools and learning opportunities for young people.
This month, we will host more than a dozen facilitative employee focus groups around the world.
The feedback from our employees will help shape our path forward in diversity equity inclusion.
Developing a formal framework and goals for our DE&I program is something we have all deployed at the senior leadership level making it a top priority.
As part of that commitment, I intend to have a Senior DE&I leader in place reporting directly to me later this year.
We will continue to grow and advance our culture as a key element of differentiation.
You have my commitment on that.
Turning now to our commercial results on Slide 8.
Broad rebound in order rates we discussed in the third quarter continued as our fourth-quarter organic orders were up 7% compared to the prior year.
We entered the quarter with optimism based on the strength of the third-quarter improvement, and that continued into the fourth quarter.
Excluding timing on large OEM blanket orders year over year, our monthly order rates improved throughout the quarter.
FMT organic orders for the fourth quarter were up 3%, driven by project orders in our water businesses, continued strength in agriculture, and recovery in industrial day rate businesses.
HST organic orders were up 6% in the fourth quarter, driven by new product initiatives in life sciences and the recovery in auto and semicon continuing to boost our Sealing Solutions businesses.
Finally, Fire & Safety/Diversified organic orders were up 15% in the quarter.
Dispensing saw significant improvement as retailers began to release pent-up demand for equipment refreshes BAND-IT after a strong bounce back in the third quarter, continued to improve based on auto market strength.
And Fire & Safety saw growth in several product lines.
A year ago, as we entered 2020, we talked about the general industrial slowdown that we were seeing and what a flat to down 2% to 5% world looked like for IDEX.
We have proactively taken strategic actions to address these factors.
We then faced the onset of the pandemic, and we responded to it with purpose.
As we close out 2020 and look forward, we are optimistic that our units and markets are quickly on a path to pre-COVID levels.
The actions that we took in 2019 and 2020 have left us well-positioned as we move into 2021.
Turning to Slide 9.
We provide our current outlook for primary end markets.
In our Fluid & Metering Technology segment, industrial day rates continue to tick up in the fourth quarter, further solidifying the optimism that we discussed last quarter.
We see this increase driven largely by opex needs of our customers.
We continue to see large capital projects remain on hold.
We anticipate that broader signs of economic stability and higher degrees of certainty on COVID recovery timing is required before capital projects begin to move again.
But the investment discussions are happening.
Our Water business has continued to show resiliency, and we are closely monitoring the toll that 2020 will take on municipal budgets in 2021 and beyond.
The strength in agriculture that we've called out for the previous two quarters has continued, and we expect it to grow in 2021.
Energy markets continue to remain challenged with markets still down compared to 2019 levels.
Stabilization of these businesses is largely dependent on increases in fuel prices, driving new capital investments in oil and gas.
Turning to the Health and Science Technologies segment.
We were able to drive approximately $30 million of revenue in 2020 and expect to generate about the same amount in 2021 related to these initiatives.
While some of this revenue is one-time in nature, we believe the technologies and applications we have developed here will generate recurring opportunities in 2022 and beyond.
So relative to our $25 million to $100 million of opportunities we highlighted, we'll achieve about $60 million.
AI improved during the fourth quarter and looks to be on the rebound in 2021.
In life sciences, we saw an offset by continued weakness in IVD/BIO as lab capacity is still largely focused on COVID response, putting on hold other projects and initiatives.
The strength in semicon that we mentioned last quarter has continued.
In addition, our ceilings business has benefited from a rebound in automotive.
We see continued recovery in 2021 for the auto market, particularly driven by strength in European car sales in China and India.
Food and pharma has also remained a bright spot as our businesses continue to benefit from growth in MPT projects and Microfluidics business.
Moving to the Fire & Safety/Diversified segment.
We saw continued improvement in most of our markets.
The largest driver was the significant improvement in the dispensing market as large retailers increase demand for equipment refreshes, combined with order strength in the Asia dispensing markets.
As mentioned previously, the pace of the auto recovery continues to exceed expectations, springing on our BAND-IT business.
Fire & Rescue businesses continued to see strong order performance and we believe that we are seeing a recovery in the OEM businesses, driving through some of the delays in backlog concerns we referenced last quarter.
As with all our municipal businesses, we continue to closely monitor the impact on budgets to see if there are any lagging effects from COVID response spending.
As I highlighted in my previous remarks, we are optimistic about the market recovery we are seeing across most of our markets.
And we need to be prepared for potential interruptions, particularly in the first half of 2021.
Our teams have shown the ability to address these short-term shocks proactively.
And the strategic actions we have taken across our businesses has us well-positioned to be able to ride the positive momentum we're seeing as we exit the issue of the pandemic.
I'll start with our consolidated financial results on Slide 11.
Q4 orders of $679 million were up 10% overall and up 7% organically.
Organic orders increased across each of our segments with drivers highlighted by Eric in his previous comments.
For the year, orders were down 3% overall and down 4% organically, with strong organic order recovery in the fourth quarter partially offsetting the 18% organic order decline we saw in the second quarter at the height of the pandemic.
Fourth-quarter sales of $615 million were up 2% overall, but down 1% organically.
Our industrial and energy markets led the decline but did have positive organic growth of around 60% of our reporting units, led by strong performance in our ceilings, MPT, and dispensing businesses.
Full-year sales of $2.4 billion were down 6% overall and down 9% organically, driven by the impact of COVID, industrial market softness, and challenges in oil and gas.
Q4 gross margins contracted 20 basis points to 43.8%, driven by a decline in volume and unfavorable sales mix, partially offset by price capture.
For the full year, gross margins contracted 140 basis points.
Excluding the impact of the FMD inventory step-up, adjusted gross margins contracted 130 basis points to 43.9%, driven by volume declines in sales mix, offset by our continued ability to capture price and drive operational productivity.
Fourth-quarter operating margin was 22.6%, up 50 basis points compared to prior year.
Full-year operating margin was 22.1%, down 110 basis points compared to the prior year.
Adjusted operating margin was 23.4% for the fourth quarter, up 10 basis points compared to prior year and 22.8% for the year, down 140 basis points compared to 2019.
I'll discuss the drivers of operating income on the following slide.
Our Q4 effective tax rate was 22.2%, which was higher than the prior-year ETR of 20.6% due to the revaluation of foreign deferred income tax balances driven by changes in foreign tax rates.
Fourth-quarter adjusted net income was $105 million, resulting in an earnings per share of $1.37, up $0.04 or 3% over prior-year adjusted EPS.
Full-year adjusted net income was $397 million, resulting in adjusted earnings per share of $5.19, down $0.61 or 11% compared to prior year.
Finally, free cash flow for the quarter was $149 million, up 9% compared to prior year and was 142% of adjusted net income.
For the year, free cash flow was $518 million, a record for IDEX, up 9% versus last year and 131% of adjusted net income, driven by strong working capital performance.
Moving on to Slide 12.
We're going to review our full-year adjusted operating income.
As Eric mentioned, we faced unprecedented challenges in 2020, but the structural and discretionary actions we took were critical to lessen the volume impact on our income and margins.
Using a similar framework as we have for the previous two quarters, we wanted to walk through the components of our full-year adjusted operating income.
Adjusted operating income declined $66 million for the year.
With organic sales down around $247 million, we would have expected a negative impact in operating income of $148 million at roughly 60% contribution margin rate.
The $148 million was offset by $58 million of executed operational actions, $23 million from the impact of restructuring actions combined with $35 million of discretionary cost control items, and $10 million of price, net productivity, and negative business mix.
Finally, we had $7 million of reduced variable compensation for the year.
This yielded a better-than-expected flow-through of 34%.
Again, organic flow-through is based on taking reported sales and op income, less the impact of FX and acquisitions, which was roughly $77 million on the top line and $7 million of profit.
Overall, our team's focused on quickly managing the crisis at hand and effectively managing costs to mitigate revenue declines and has IDEX well-positioned to leverage the recovery we expect in 2021.
Moving on to guidance.
I'm on Slide 13.
Based on current order rates and expected market recoveries, we see an accelerating 2021 and expect organic revenue for the year to be up 6% to 8%.
This translates to an earnings per share impact of roughly $0.75 to $0.95, depending on our top-line results.
We expect our productivity initiatives to more than offset inflation, providing $0.04 of benefits.
The structural cost actions we have taken are expected to provide $0.12 of earnings per share benefit in the year.
As we move past the pandemic, we will aggressively invest in both organic and inorganic opportunities.
As business recovers, we will loosen discretionary cost controls as appropriate.
As mentioned previously, we expect approximately two-thirds of the discretionary cost to return over time.
Additionally, we will be making investments to enhance our ability to execute and integrate M&A opportunities as we view this as a critical time to enhance our capabilities, as well as continue to fund our targeted organic growth initiatives.
These discretionary add-backs and strategic investments will provide approximately $0.19 to $0.26 of pressure in our 2021 guidance.
Next, we anticipate $0.08 to $0.11 headwind from variable compensation as we reset our incentive comp for the year.
Finally, FMD has one-quarter of inorganic results, which we expect to provide $3 million of revenue but provide $0.03 of earnings per share pressure.
The structural actions we have made to improve FMD's profit profile based on the situation in the energy market will get FMD back to positive op profit in the second quarter.
Now, let's take a look at a couple of nonoperational items.
First, we expect an $0.18 headwind from tax, primarily related to discrete benefits we realized in 2020, associated with equity vesting and option exercising.
Second, we expect a 2% tailwind from FX, providing $0.13 of earnings per share benefit.
So in summary, we are projecting organic revenue growth of 6% to 8% for the year, and earnings per share expectations are in the range of $5.65 to $5.95, a 9% to 15% increase over 2020.
Moving to Slide 14.
Let me provide some additional details regarding our 2021 guidance for both the first quarter and full year.
In Q1, we are projecting earnings per share to range from $1.38 to $1.42 with organic revenue growth of 2% to 4% and operating margins of approximately 23.5%.
The Q1 effective tax rate is expected to be approximately 23%.
We expect a 3% top-line benefit from the impact of FX, and corporate costs in the first quarter are expected to be around $18 million.
Turning to some additional details for the full-year guidance.
Again, we're projecting full-year earnings per share in the range of $5.65 to $5.95 with full-year organic revenue to be up 6% to 8%, with operating margins between 23.5% to 24.5%.
We expect FX to provide a 2% benefit to top-line results.
The full-year effective tax rate is expected to be around 23%.
Capital expenditures are anticipated to be around $55 million.
And free cash flow is expected to be between 115% to 120% of net income.
Corporate costs are expected to be approximately $70 million for the year.
Finally, our earnings guidance excludes any associated cost or earnings with future acquisitions or restructuring charges.
Abel Pump is not included in these estimates, and we will revise guidance once that deal is closed.
With that, I'll throw it back to Eric for some final thoughts.
We have proven the resilience of our businesses and clearly demonstrated the impact of the IDEX difference in our operating model.
While we are not completely out of the woods, this is a time for optimism.
And I believe that our businesses are well-positioned to focus on the critical priorities that will accelerate our growth on the other side of the pandemic. | q4 adjusted earnings per share $1.37 excluding items.
sees q1 earnings per share $1.38 to $1.42.
orders of $678.6 million were up 10 percent compared with prior year period.
qtrly sales of $614.8 million were up 2 percent compared with prior year period.
full year 2021 earnings per share is projected to be $5.65 to $5.95.
sees q1 earnings per share of $1.38 to $1.42.
projecting 6 to 8 percent organic sales growth for full year 2021.
projecting 2 to 4 percent organic sales increase in q1. | 1 |
Our conference call this evening will be limited to one hour.
For those who would like to participate in the question-and-answer session, we ask to please respect the request to limit you to one question.
I'm pleased to introduce David Simon.
Our cash flow increased to nearly $3 billion year to date, consistent with pre-pandemic levels.
We recorded increased leasing volumes, occupancy gains, shopper traffic, and retail sales.
Demand for our space from a broad spectrum of tenants is strong and growing and our various platform investments continue to outperform.
Third quarter highlights from funds from operation starts with $1.18 billion or $3.13 per share.
Included in the third quarter results were a noncash after-tax gain of $0.30 per share from the contribution of our interest in the Forever 21 and Brooks Brothers licensing ventures for additional equity ownership in Authentic Brands Group.
We now own approximately 11% of ABG and a loss on extinguishment of debt of $0.08 per share from the redemption of the $1.65 billion of senior notes.
Our domestic operations had another excellent quarter.
Our international operations have improved.
However, the quarter was below our budget by roughly $0.03 per share, primarily due to various COVID restrictions.
Domestic property NOI increased 24.5% year over year for the quarter and 8.8% year to date.
These growth rates do not include any contribution from the TRG portfolio or lease settlement income.
And if you did include TRG and international properties, our portfolio NOI increased 34.3% for the quarter and 18.7% year to date.
Occupancy was 92.8%, which was an increase of 100 basis points compared to the second quarter.
Average base rent was $53.91.
However, that excludes percentage rent.
For the first nine months, we signed 3,500 leases for 12.8 million square feet, which was nearly 3 million square feet or approximately 800 more deals compared to the first nine months of 2019.
Mall sales for the third quarter were up 11% compared to third quarter 2019, up 43% year over year.
Our sales are over 2019 peak levels.
These results are impressive, in particular, given the lack of international tourism, which we believe will start to increase after the restrictions on international travel are lifted beginning next week.
Our company's focus, as you know, is cash flow growth, which will allow us to fund our growth opportunities and increase our dividend.
We would encourage the analytic community to focus on our cash flow and its growth because there are many levers that contribute to it beyond what is contained in one or two operating metrics.
A simple case-in-point, our mathematical open and close spread has declined yet our cash flow has significantly increased.
Leasing spreads are calculated at a poignant time.
We have studied the leasing spread metric across the various retail real estate companies and highlight the following: Spreads are significantly impacted by tenant mix.
Our leasing spreads include all openings and closings, and it's not the same space measure.
However, we believe many other companies use only the subset for their calculation.
We do not include variable lease income in our spread calculation, others do.
And there's no consistency in approach.
We intend to spend the next several months working to achieve uniformity on this metric, much like we did for sales reporting, although the shopping center sector still does not disclose any sales productivity for its retailers.
Let's keep in mind that all of these metrics we need to put in perspective, and we encourage you to take this opportunity to refocus on the importance of cash flow.
We opened our fifth premium outlet in Korea and our 10th in Japan is under construction.
Our redevelopment activity is accelerating.
Northgate Station opened, Seattle Kraken Community Iceplex, and we have many developments ongoing at Fifths, King of Prussia, Southdale, and many others.
Our share of net cost of development projects is now approaching $1 billion.
Our retail investment platforms are performing very well, including SPARC, Penney, and ABG.
SPARC outperformed their budgets on sales, gross margins, and EBITDA and we're very pleased with the JCPenney results.
The Penney's team has stabilized the business, improved financial results, and we've added private and exclusive national brands to it.
Our liquidity position is at $1.5 billion, and there's no outstanding balance on their line of credit.
And we're very excited to announce -- and in fact, his first day is today, Marc Rosen.
He's joined the company as the CEO.
He's got a terrific background; great leader and we look very forward to working with him as he builds on the momentum Penney has established this year.
Penney's success is an excellent example of how to better understand our company.
We appointed Stanley Shashoua as the interim CEO for nearly a year ago and look at the results.
Much like the variety of our investments, no other company in our industry has the capability to put an executive in an interim role and produce these results.
This is a testament not only to Stanley but to the Simon culture.
TRG is operating above our underwriting, posted also impressive results for cash flow growth, occupancy gains in retail sales, which were 16% higher.
As you know, we amended and extended our $3.5 billion revolving credit facility.
We refinanced a number of mortgages, and our liquidity stands at $8 billion including $6.9 billion available on our credit facility, the rest in our share of cash.
We paid a dividend of $1.50 in September.
That was a 7.1% increase sequentially and 15.4% year over year.
Today, we announced our fourth quarter dividend of $1.65 per share in cash, which is an increase of 10% sequentially and 27% year over year.
Dividend will be paid December 31.
Now we raised our guidance from $10.70 to $10.80 last quarter to $11.55 to $11.65 per share.
This is 85% increase on the midpoint.
That's 27% to 28% growth compared to 2020 results and basically $2 higher than our initial budget this year.
And let me just conclude by saying the following.
Even though our stock has posted impressive year-to-date returns, we strongly believe it is still undervalued.
Our current multiple of 13 times is approximately three turns lower than our historical average and screens very cheap compared to the REIT sector at 24 times and in many cases, even close to 30.
We have unequivocally proven with our results year to date that we've overcome the arbitrary shutdown of our business due to the pandemic and our cash flow has bounced back dramatically, which many have doubted.
We have growth levers beyond our real estate assets that are unique attributes of our company.
We have proven to be astute investors.
We have unique business models and diversity of income streams.
Our balance sheet is industry-leading and as strong as it's ever been.
Our dividend yield is 4.7% and growing, well covered, higher than the S&P yield of 1.9% and the REIT average of 2.9%, and we have the potential to perform very well in an inflationary cycle. | sees fy ffo per share $11.55 to $11.65.
once again increasing full-year 2021 guidance and raising our quarterly dividend.
qtrly ffo was $1.176 billion, or $3.13 per diluted share, versus $723.2 million, or $2.05 per diluted share, in prior year period. | 1 |
Before we get started, I want to let you know that we have slides to accompany our discussion.
Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures are posted on our website, as well.
Turning to Slide 3, you'll see the agenda for today's call.
I'll start with some highlights of our 2020 accomplishments and a look into 2021 before handing over to John, who will go into more detail on our outstanding performance and outlook.
Let's start with an overview of the year, turning to Slide 4.
When we started the transformation, we had a specific plan for turning the Company into the highly functioning successful organization we all knew it could be.
The team has embraced the process, driving operational performance, optimizing our portfolio, and strengthening our financial discipline.
And they did it during one of the most challenging environments in recent history.
As we go through the results for the year, you'll see the power of the new Bunge.
One significant change we made was transforming our operating model to improve visibility, and speed to act.
As a result, the commercial and industrial teams are better coordinated, helping us to maximize our assets.
In 2020, outside of Argentina, we processed record volumes in soy and soft seed crush.
Our commercial teams ensured our plants had the supplies they needed, and our industrial teams reduced unplanned downtime at the facilities, by more than 30% year-over-year in soy, and approximately 20% year-over-year in soft seeds.
This improved capacity utilization, brought immediate financial benefits without a significant additional use of capital.
This is just one example of how this more global approach has improved our network efficiency.
We were also better able to capitalize on market and customer opportunities, as they arose throughout the year.
As COVID lockdowns changed consumer eating habits, we quickly adjusted our production to help some of the world's leading brands continued to keep their products on the store shelves.
We also worked closely with our food service customers, as they continued to adapt to the changing demand patterns.
Agility is also critical, as we continue to look at how our vital work can be done more sustainably.
We're proud to be an industry leader in protecting the environment in areas where we operate.
We are a leading supplier of certified deforestation-free soy from Brazil.
And as we work to reduce greenhouse gas emissions in our operations, we're converting more facilities over to wind and solar power.
For instance, our corn and soybean processing plants in Kansas run on wind today, and we recently announced a deal to use renewable energy at our Fort Worth, Texas packaging facility.
As we look at our assets, we've now announced all of the significant portfolio optimization actions we originally identified.
With these major changes behind us, we can now shift our focus to continuous improvement in growth opportunities.
In the immediate future, we know that COVID will still be with us.
We continue to remain focused on our top priority of protecting our team, their families and communities.
Our global and regional COVID crisis teams continue to meet regularly to make sure our operations have the resources and tools needed to keep our employees safe, so we can continue to serve our customers.
Now, let's turn to our results on Slide 5.
With our strong team and unmatched platform, we've created a resilient model for moving forward.
This quarter and the full-year really highlighted the earnings power of that platform, benefited from improving trends throughout the year, and we're able to move quickly to capture the opportunities they've presented themselves in markets around the world.
During the year, we saw demand-led markets with higher volumes, volatility and prices.
And with our platform and operating model, including our industry-leading risk management, we captured upside well above our earnings baseline.
In the fourth quarter, agribusiness benefited from a better-than-expected market environment, with particularly strong results in our North American operations, driven by higher oilseed crush and elevation margins.
In edible oils, we realized exceptional margins in our Brazilian consumer business, and also benefited from increasing demand from biodiesel in South America, and renewable diesel in the US.
We continued to innovate to deliver solutions that benefit our customers on both ends of the supply chain, consumers and farmers.
A great example of this is Karibon, a Shea-based substitute for cocoa butter, we launched in the fourth quarter; a sustainably sourced ingredient that also benefits the communities in Africa, where we sourced Shea.
2020 also demonstrated the power of our approach to risk management.
There will always be volatility in this industry.
But our approach to risk management allows us to capture the upside of that volatility, and protecting its most of the downside.
While we won't always manage it perfectly, this approach is what makes our model unique and powerful.
The strength will be critical, as we look ahead into 2021.
Many of the conditions that helped drive our success in 2020 remain in place today, but we don't have clear visibility into the second half of the year.
And while we don't expect all of the conditions that existed in 2020 to repeat in 2021, we do expect to deliver adjusted earnings per share of at least $6 per share.
Our team will be closely watching the key factors that could impact our forecast, including changes in demand, crop production, and a post-COVID recovery.
And with that, I'll hand the call over to John to walk through the financial results in detail, and we'll then close with some additional thoughts on 2021.
Let's turn to the earning highlights in Slide 6.
Our reported fourth quarter earnings per share were $3.74, compared to a loss of $0.48 in the fourth quarter of 2019.
Adjusted earnings per share was $3.05 in the fourth quarter versus $1.69 in the prior year.
Our reported results included a net gain of $0.59, primarily related to our previously announced sale of our Brazilian margarine and mayonnaise assets, as well as the impact of an indirect tax credit related to the favorable resolution of a tax claim.
For the full-year, 2020 rates per share was $7.71 versus a loss of $9.34 in 2019.
Adjusted full-year earnings per share was $8.30 versus $4.76 in the prior year.
Adjusted core segment earnings before interest and taxes, or EBIT was $637 million in the quarter versus adjusted EBIT of $467 million in the prior year, driven by strong performances in our agribusiness and edible oil segments.
Agribusiness closed out an excellent year with a very strong fourth quarter.
Higher oilseeds results were primarily driven by soft seed processing, where earnings were higher in all regions, driven by robust veg oil demand and record capacity utilization.
Soy processing results were in line with the prior year.
These improvements in our North American and Asian operations were offset by South America and Europe.
In Grains, higher results were primarily driven by our North American operations, which benefited from strong export demand and exceptional execution of logistics.
Results also benefited from favorable risk management and optimization in our global trading and distribution business.
In South America, earnings decreased largely due to lower origination volumes, as farmers have accelerated sales earlier in the year, in response to the spike in local prices.
Edible oils finished up and turned out to be an excellent year, with very strong results of $113 million, up $38 million compared to last year, primarily driven by higher margins in our consumer business in Brazil, as a result of tight supply and strong demand.
Higher results in North America were largely due to increased demand for renewable diesel sector, and higher contributions with our key customers.
Results were also higher in Asia, driven by lower costs.
Earnings declined in Europe due to lower margins.
In Milling, lower results in the quarter were driven by North America, which was impacted by lower volumes and margins, as well as the loss of earnings from our rice milling operation, which was sold during the quarter.
Results in South America were in line with last year, as higher volumes were offset by lower margins.
Fertilizer also had a strong quarter, with results of $32 million, similar to 2019 finishing off a very strong year.
Total adjusted EBIT for corporate and other for the quarter was comprised of a negative $81 million from corporate, and $2 million from other.
This compares to a negative $95 million from corporate and negative $60 million from other for the prior year.
The decrease in corporate expenses during the quarter was primarily related to the timing of performance-based compensation accruals in the prior year.
The increase in other reflects the prior-year impact of our Beyond Meat investment.
Results for our 50/50 joint venture with BP benefited from higher year-over-year average ethanol prices in local currency, as well as improved industrial efficiency.
Earnings in the fourth quarter of last year benefited from lower depreciation due to our Brazilian Sugar and Bioenergy operations being classified as held for sale.
For the quarter and year ended December 31, 2020, income tax expense was $97 million and $248 million respectively, compared to $16 million and $86 million respectively for the prior year.
The increase in income tax expense during 2020 was primarily due to higher pre-tax income.
Adjusting for notable items, the effective tax rate for the year was just under 70%.
The effective tax rate was lower than our prior forecast, primarily due to earnings mix.
Net interest expense of $66 million were slightly higher than our prior forecast, due to increased short-term borrowings to support higher commodity prices and volumes.
Here you can see our positive earnings trend adjusted for notable items and some timing differences over the past four years, reflecting the execution of our strategy to drive operational performance, optimize our portfolio, and strengthen financial discipline.
Slide 8 compares our full-year 2020 adjusted SG&A to the prior year.
We achieved underlying addressable SG&A savings of $50 million toward our savings target of $50 million to $60 million established at our June Business Update.
While we are pleased with our progress, we recognize a portion of the savings was accelerated due to COVID-19 related restrictions, such as reduced travel.
However, we are confident we will return to pre-pandemic levels, as we have all learned to operate differently, and we will continue our focus on further streamlining the business.
The net increase of $90 million in the specified items reflects a significant increase in performance-based compensation accruals due to our improved financial performance this year, slightly offset by other items such as inflation and the impact of foreign currency fluctuations.
Moving to Slide 9, for the full-year 2020, our cash generation, excluding notable items and mark-to-market timing differences, were strong with approximately $1.9 billion of adjusted funds from operations.
The cash flow generation enabled us to comfortably fund our cash obligations over the year, and apply retained cash of $1.1 billion to reduce debt.
Slide 10 summarizes our capital allocation of adjusted funds from operations.
After allocating $254 million to sustaining capex, to include maintenance environmental health and safety, and $34 million to preferred dividends, we had approximately $1.6 billion of discretionary cash flow available.
Of this amount, we paid $282 million in common dividends to shareholders, invested $111 million in growth and productivity capex, and bought back $100 million of our stock.
As shown previously, the remaining cash flow of approximately $1.1 billion was used to strengthen our balance sheet in support of our credit rating objective of BBB/Baa2.
Moving on to Slide 11, a $1.1 billion of retained cash flow offset a portion of our $3.1 billion of cash outflow of this year for working capital.
As a result, net debt rose by $2.2 billion over the course of the year.
The growth in working capital, primarily reflects an increase in readily marketable inventories, resulting from higher commodity prices and our deliberate decision to increase volumes to optimize earnings potential.
As the slide shows, our availability under committed credit lines remained largely unchanged, leaving us with ample liquidity as we enter 2021.
As you can see on Slide 12, at the end of the fourth quarter, only 9% of our net debt was used to fund uses other than readily marketable inventories.
This compares to 17% last year.
For 2020, adjusted ROIC was 15.9% or 9.3 percentage points over our RMI-adjusted weighted average cost of capital of 6.6%, and up from 9.7% in 2019.
ROIC was 12.2% or 6.2 percentage points over our weighted average cost of capital of 6%, and well above our stated target of 9%.
The widening spread between these return metrics reflects how we have been effectively using merchandising RMI, as a tool to generate incremental profit.
As a reminder, we have adjusted these return metrics to exclude the impact of changes in foreign exchange rates on book equity as of year-end 2018.
We believe this provides a clear picture of our economic performance from the management actions we've taken over the past two years.
Moving to Slide 14.
Here you can see our cash flow yield trend, which emphasizes cash generation measured against our cost of equity of 7%.
For the year ending December 31, 2020, we produced a cash flow yield of nearly 26%, up from 13.4% at year-end 2019.
As Greg mentioned in his remarks, taking into account the current margin environment and forward curves, we expect full-year 2021 adjusted earnings per share of at least $6 per share.
In Agribusiness, full-year results are expected to be down from 2020, primarily driven by lower contributions from oilseed processing and origination primarily in Brazil.
While we are not forecasting the same unique environment or magnitude of opportunities that we captured during 2020, we do see some potential upside to our outlook, resulting from strong demand and tight commodity supplies.
In Edible Oils, full-year results are expected to be comparable to last year.
Higher results in the North American business, driven by a recovery in food service and increased renewable diesel demand are expected to be offset by lower results in our consumer business in Brazil.
In Milling, full-year results are expected to be in line with last year.
In Fertilizer, full-year results are expected to be down from a strong prior-year.
In Non-Core, full-year results in our Sugar and Bioenergy Joint Venture are expected to be a positive contributor, driven by improved sugar and Brazilian ethanol prices.
Additionally, the Company expects the following for 2021.
An adjusted annual effective tax rate in the range of 20% to 22%, net interest expense in the range of $230 million to $240 million, capital expenditures in the range of $425 million to $475 million, and depreciation and amortization of approximately $415 million.
With that, I'll turn things back over to Greg for some closing comments.
Before turning to Q&A, I want to offer a few closing thoughts.
We set ambitious goals for Bunge's transformation, and we can see the results from the changes we've made.
Now that we've completed the majority of the actions we originally laid out, we're able to focus on continuous improvement in growing the business across the cycle, as we move forward.
As we did in 2020, we're going to be leveraging our platform and the operating model we've put in place, and look for the opportunities ahead of us, as we work effectively to capture the upside and minimize the downside.
Looking over the longer term, we remain excited about the structural shift we're seeing in the consumer demand for food, feed and fuel.
In particular, we're focusing on four primary areas of growth; oilseed processing and origination, renewable feedstock for biofuels, plant protein ingredients and plant lipid ingredients, which is our specialty fats and oils.
And with our global platform, culture of innovation, and oilseed leadership, we believe we're in a unique position to benefit from those trends.
The leadership team and I are incredibly proud of the entire Bunge team's continued focus on execution.
And while 2021 will surely present different challenges and opportunities, I'm confident we have the right platform, and I look forward to continuing to work together to maximize Bunge's full potential. | compname posts q4 earnings per share $3.74.
q4 gaap earnings per share $3.74.
favorable market environment continuing into 2021 overview.
to date, the company has not seen a significant disruption in its supply chain.
in agribusiness, full-year results are expected to be down from 2020.
in milling, full-year results are expected to be in line with last year.
in non-core, full-year results in sugar and bioenergy joint venture are expected to be a positive contributor.
in edible oils, full-year results are expected to be comparable to last year.
qtrly earnings per share $3.05 on an adjusted basis excluding certain gains and charges and mark-to-market timing differences. | 1 |
It is one that has brought significant change and sacrifices.
From navigating the pandemic and resulting short-term cost-saving initiatives earlier this year to changes in leadership, the Waters team has responded with drive, determination, and an indomitable spirit.
I am impressed by and grateful for our team's resilience and commitment to our customers and to each other.
During today's call, I will provide a brief overview of our 4th quarter and full-year operating results as well as an update on the, on the stabilization that we have seen in the LC market and a few factors influencing our thinking for 2021.
Mike will then review our financial results in detail and provide comments on our first quarter and full-year financial outlook.
Briefly reviewing our operating results for the 4th quarter, revenue grew 10% as reported, 7% on a constant currency basis and adjusted, adjusted earnings per share grew 14%.
For the full year, revenue declined 2% and adjusted earnings per share was up 1%.
The strong finish to the end of a challenging year was driven by the pharmaceutical market improvement, capital spending recovery in the second half of the year, strong -- strong execution and early contributions from our near-term growth initiatives.
Looking more closely at our top line results, first from a customer perspective.
Our largest market category pharma was the primary growth driver in the quarter with 15% growth.
Our industrial market grew 5% while academia and government declined 15%.
On a constant currency basis, sales in Asia were up 12% with China, up 19%.
Meanwhile, sales in the Americas grew 3% for the US growing 4% and European sales grew at 6%.
From a product perspective, our Waters branded products and services grew approximately 8% while TA declined by around 1% on a constant currency basis.
While still navigating the global pandemic, we are seeing clear signs of improving customer activity, positive growth trends in our recurring revenues, and an evidence of stabilization in LC instrument demand.
Services grew 10% while consumables business grew approximately 14% driven largely by global pharma strength, including sales of our recently launched PREMIER Columns, which performed exceedingly well in the first quarter on the market.
LC Instruments grew most -- grew across most of our major geographies with high single-digit growth.
This improvement in capital equipment purchasing reflects the combination of the return of some of the planned capital spending that was delayed from the first half of the year, a normal pharma year end budget flush, and early contributions from our LC replacement initiatives.
Following last June's release of the Arc HPLC System in the core HPLC market with a particular focus on the small molecule development and QA-QC space, we look forward to the continued expansion of our liquid chromatography portfolio.
On February 10, we will launch ACQUITY PREMIER, a next generation UPLC system that offers customers an extraordinary breakthrough in efficiency, sensitivity, and overall capability.
This new system will benefit both large and small molecule discovery and development as well as biomedical research.
This new system has even more profound benefits when paired with our ACQUITY PREMIER Columns, which I mentioned earlier and were launched in the 4th quarter.
The combined solution will alleviate non-specific binding absorption losses and provide a significant leap forward with enhanced reproducibility, reduced passivation, and an increased confidence in analytical results.
After a very strong 3rd quarter, mass spec sales were about flat in Q4.
As you know, the mass spec business can be lumpy, which we saw with biomedical research.
There was also a general softness in clinical diagnostics as budgets were diverted to COVID-19 testing.
Notably, however, mass spec sales to pharma customers grew double-digits, driven by the strong double-digit growth of both BioAccord and the QDA.
Finally, to TA, revenues declined low single digits, which was -- which was much improved from earlier in the year.
We saw the core thermal business start to pick up driven by market improvement in Asia.
In particular, life sciences including pharma and medical devices grew double-digits.
Combined these, comprised approximately 10% to 15% of TA's total revenues.
However, this was not enough to offset declines from TA's industrial customers.
Looking now, at our geographies, all major regions grew.
The Americas grew low single digits, Europe grew mid-single digits, and Asia grew double-digits.
In the US, the growth was driven by pharma, which was partially offset by declines in material science, environmental, academic, and government.
Though Latin America continued to decline, it improved meaningfully relative to earlier in the year.
Europe also experienced strong pharma performance, partially offset by material science, food, and academic and government.
In both US and Europe, pharma growth was broad-based including strength in big pharma, large molecule customers, genetics, and contract labs.
China had an impressive quarter with strong double-digit growth driven by continuing acceleration in pharma as well as strong environmental growth.
The pharma growth was driven by both small and large molecule customers including particularly strong growth at contract labs.
India also continued to grow double-digits.
In summary, overall in the 4th quarter, we saw further relative strength in the market and benefited from strong year end spending trends.
Now for the year, our pharmaceutical market category achieved 1% growth with the US, Europe, and India all seeing positive growth.
Industrial declined 3% for the full year and academic and government declined 16%.
Notably, our pharma market category grew 10% in the second half compared to the first half decline of 8% owed in part to strength in small molecules, the industry recovered from lock-downs.
Industrial also grew in the second half at 4% while academic and government declined 12% compared to the first half declines of 10% and 22% respectively.
Geographically for the year, Asia sales were down 4% with China -- China sales down 8%.
Sales in Americas were down 4%; for the US, down 2%.
Europe sales were up 2%.
Notably, all our major geographies grew in the second half of the year with the US up 4% and Europe up 6% following first half declines of 9% and 3% respectively.
China market grew in the second half, up 11%, reversing much of its sharp 31% decline in the first half of the year.
Now, I would like to share some of the progress we've made in our transformation program, as several of the initiatives we're putting interaction are starting to contribute to growth.
First, I would talk about our instrument replacement initiative, then our progress in contract lab expansion followed by e-commerce and lastly, I'll give you a BioAccord update.
First, as it relates to our instrument replacement initiative, which is the most advanced initiative under way, we delivered our first quarterly LC Instrument revenue growth in two years and our LC Instrument win-loss was the highest it has been in three years.
Initial customer feedback has been very positive on the Arc HPLC as well.
Second, as part of our contract lab expansion initiatives, we have made important progress in targeting this high growth customer group.
We have contacted a number of customers globally, particularly in China and have strengthened our value proposition with expanded alternative revenue and service offerings, which have -- which have been well received by the segment.
It is still early days, but we're pleased with the progress we're making.
Third, our e-commerce initiative is still in the early stages, but waters.com traffic is up double digits, driven by search engine optimization and paid search.
While there isn't a one-to-one relationship between traffic and revenue, increased traffic is an important first step in driving revenue growth through the e-commerce channel.
In tandem with our e-commerce actions, we've also enhanced our e-procurement platform on which we have expanded our coverage of customers leveraging this channel.
This supported strong e-procurement growth indicating that it's now easier to work with Waters.
Fourth, driving launch excellence.
BioAccord sales exceeded expectations in the quarter as our market development efforts and our specialty sales model have started to take effect, particularly in the US and Europe.
Many customers are increasingly adopting BioAccord for manufacturing and several have placed follow-on orders.
Once we get BioAccord applications on an enterprise software platform, we believe we will be, we will be seeing more follow-on orders.
More importantly, customer activity continues to be encouraging, which makes us optimistic about 2021.
Lastly, I'd like to highlight our efforts to help mitigate the public health crisis.
In addition to the significant efforts by our innovation response team, we are encouraged to see Waters consumable specked in on QA-QC methods for COVID vaccines and therapeutics.
We're also seeing an uptick in COVID driven demand for our instruments and consumables.
This peaked in the 4th quarter were COVID revenues contributed an estimated 1 to 2 percentage points to the growth, driven by those pharmaceutical customers developing COVID vaccines and therapeutics who saw meaningfully higher growth than manufacturers that don't have COVID-related programs.
In summary, as a wrap up to 2020, we've done a great job at keeping our employees safe and our operations running.
Our teams have focused not only on getting products out the door, but we have also assisted our customers engaged in COVID-related efforts.
Meanwhile, our base business is showing signs of recovery, and our transformation is well under way.
Turning to 2021, while the business environment remains uncertain, we look forward to building on the 4th quarter momentum.
Mike will provide further details on our outlook for 2021, which is based on three key factors.
One, we're assuming a gradual improvement in customer activity led by the pharma market.
Two, we expect all major geographies to perform better than they did in 2020, led by growth in China.
Lastly, our near-term growth initiatives are expected to continue to ramp up, led by our LC replacement initiative, which we expect to increasingly contribute to performance.
In the 4th quarter, we recorded net sales of $787 million, an increase of approximately 7% in constant currency.
Currency translation increased sales growth by approximately 3% resulting in sales growth of 10% as reported.
For the full year, sales declined about 2% in constant currency and as reported.
Looking at product line growth, our reoccurring revenue, which represents the combination of precision chemistry products and service revenue increased by 11% in the quarter while instrument sales increased 4%.
For the full year, reoccurring revenue grew 3% while instrument sales declined 9%.
Chemistry revenue were up 14% in the quarter, driven by strong pharma growth.
On the service side of our business, revenues were up 10%, as customers continue to reopen labs, catch up on performance maintenance in professional services, and repair visits.
As we noted last quarter, recurring sales were impacted by two additional calendar days in the quarter, which resulted in a slight increase in service revenue sales.
Looking ahead, there are five additional calendar days in the first quarter and six fewer calendar days in the 4th quarter of 2021 compared to 2020.
Breaking 4th quarter product sales down further, sales related to Waters' branded products and services grew 8% while sales of TA-branded products and services declined 1%.
Combined LC and LCMs instrument sales were up 5% while TA system sales declined 4%.
Now, I'd like to comment on our 4th quarter and full year non-GAAP financial performance versus the prior year.
Gross margin for the quarter was 59.2%, an increase compared to the 58.2% in the 4th quarter of 2019, primarily due to the higher sales volume in FX.
On non -- on a full year basis, gross margin was 57.4% compared to 58% in the prior year on lower overall sales volumes in 2020.
Moving down the 4th quarter P&L, operating expenses increased by approximately 6% on a constant currency basis and 8% on a reported basis.
The increase was primarily attributed to variable expenses related to the strong sales performance.
For the year, operating expenses were 1% lower before currency translation and flat after.
In the quarter and for the full year, our effective operating tax rate was 14.9% and 14.8% respectively, an increase from last year at the comparable period included some favorable discrete items.
Net interest expense was $7 million for the quarter, a decrease of about 3 million, as anticipated on lower outstanding debt balances.
Our average share count came in at 62.5 million shares, a reduction of approximately 3% or about 2 million shares lower than in the 4th quarter of last year.
This is a result of shares repurchased through the end of the first quarter of 2020 subsequent to which we paused our share repurchase program.
Our non-GAAP earnings per fully diluted share for the 4th quarter increased 40% to $3.65 in comparison to the $3.20 last year.
On a GAAP basis, our earnings per fully diluted share increased to $3.49 compared to $3.12 last year.
For the full year, our non-GAAP earnings per fully diluted share were up 1% at $9.05 per share versus $8.99 last year.
On a GAAP basis, full year earnings per share were $8.36 versus $8.69 in 2019.
Turning to free cash flow, capital deployment in our balance sheet, I would like to summarize our 4th quarter results and activities.
We define free cash flow as cash from operations less capital expenditures and excluding special items.
In the 4th quarter of 2020, free cash flow grew 52% year-over-year to $240 million after funding $47 million of capital expenditures.
Excluded from free cash flow was $19 million related to the investment in our Taunton precision chemistry operation.
In the 4th quarter, this resulted in $0.30 of each dollar of sales converted into free cash flow.
For the full year in 2020, free cash flow generation was $726 million after funding $172 million of capital expenditures.
This represents a 26% increase and $0.31 per dollar of sales converted into free cash flow.
Excluded from free cash flow was $70 million related to our investment in our Taunton chemistry operations and a $38 million transition tax payment related to the 2017 US tax reform.
Our increased free cash flow is primarily a result of our cost actions -- cost saving actions and improvements in our cash conversion cycle.
In the 4th quarter, accounts receivables days sales outstanding came in at 70 days, down seven days compared to the 4th quarter of last year.
Inventories decreased by 16 million in comparison to the prior quarter -- prior year quarter, reflecting stronger revenue growth in revised production schedules.
Waters maintains a strong balance sheet, access to liquidity, and a well structured debt maturity profile.
We ended the quarter with cash and short-term investments of $443 million and debt of 1.4 billion on our balance sheet at the end of the quarter.
This resulted in a net debt position of $913 million and a net debt to EBITDA ratio of about 1.1 times at the end of the 4th quarter.
Our capital deployment priorities remain consistent and better growth, balance sheet strength and flexibility, and return of capital to shareholders.
We remain committed to deploying capital against these priorities.
As such, our Board of Directors has approved a two-year extension of our January 2019 share repurchase authorization that was set to expire last month.
As of today, we have 1.5 billion remains available credit program for share repurchases.
As we look forward to the year ahead, I'd like to provide some broader context on our thoughts for 2021.
The business environment remains uncertain, and we are assuming a gradual improvement in customer activity led by the pharma market.
We expect all major geographies to perform better than they did in 2020 led by growth in China.
Our outlook does not anticipate a return to lock down seen in 2020.
We had a 1% tailwind from COVID-related revenue in 2000, three-quarters of which was in the second half of the year.
We expect a similar revenue impact in 2021, including a 1% to 2% growth tailwind in Q1.
We anticipate the first-half growth tailwind will moderate through the remainder of the year.
Improved execution on our near-term growth initiatives contributed to our 4th quarter growth, but the quarter also benefited from capital spending that were delayed from the first half into the second half of the year, which we don't expect to continue in 2021.
The second half of 2021, we'll have to content with a challenging comp resulting from the revenue shift that took place in 2020.
These dynamics support full-year 2021 guidance for constant currency sales growth of 5% to 8%.
At current rates, the positive currency translation to 2021 sales growth is expected to be 1 to 2 percentage points.
Gross margin for the full year is expected to be in the range of 57, 5% to 58.9%.
Every year, we look to balance growth, investment, and profitability.
Accordingly, we expect 2021 operating margins of 28% to 29% based on a combination of growth investments, normalization of COVID-related cost actions, and disciplined expense controls.
Moving now below the operating income line, other key assumptions for full-year guidance are net interest expense of 35 million to 38 million, a full year tax rate of between 15% and 16%, which includes our new five-year tax agreement with Singapore that will expire in March 2026, a restart of our share repurchase program in 2021 that will result in an average diluted 2021 share count of 61 to 61.5 million shares outstanding.
Over the course of the year, we will evaluate share repurchase program and provide quarterly updates as appropriate.
Rolling all of this together and on a non-GAAP basis, full year 2021 earnings per fully diluted share are projected in the range of $9.32 to $9.57, which assumes a positive currency impact on full year earnings-per-share growth of approximately 3 percentage points.
Looking at the first quarter of 2021, we expect constant currency sales growth to be 7% to 10%.
At today's rate, currency translation is expected to increase first quarter sales growth by approximately 3 percentage points.
First quarter non-GAAP earnings per fully diluted share are estimated to be in the range of $1.50 to $1.60.
At current rates, the positive currency impact on first quarter earnings-per-share growth is expected to be approximately 15 percentage points.
In summary, we're pleased with our resilience in the second half of 2020 and the strong finish to the year, which is a true testament to the determination of this team.
Though the environment remains variable, pharma markets have shown resilience and our transformation program is already demonstrating results and contributing to growth.
Despite the challenging environment, the progress we've made as an organization over the last five months is nothing short of extraordinary.
I remain ever more confident in the team, our portfolio, and our market position.
There remains a lot of work to do, but we have a tremendous opportunity in front of us to turn the business around. | compname reports q4 non-gaap earnings per share of $3.65.
q4 non-gaap earnings per share $3.65.
q4 gaap earnings per share $3.49.
q4 sales $787 million versus refinitiv ibes estimate of $713.7 million.
sees q1 non-gaap earnings per share $1.50 to $1.60.
sees fy 2021 non-gaap earnings per share $9.32 to $9.57.
expects q1 2021 constant-currency sales growth in range of 7% to 10%.
currency translation is expected to increase full-year sales growth by one to two percentage points.
expects full-year 2021 constant-currency sales growth in range of 5% to 8%.
currency translation is expected to increase q1 sales growth by approximately three percentage points. | 1 |
Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q&A session.
Both the release and the slide deck include reconciliations of non-GAAP measures to their GAAP reported amounts.
So let me start by giving you the highlights of the quarter.
Strong revenue and earnings growth continued.
The net revenue up 29% and earnings per share up 48% versus a year ago, as always, on a non-GAAP currency-neutral basis.
On this same basis, Quarter 3 net revenues are now 11% above pre-COVID levels in 2019.
We're seeing continued strength in domestic spending and overall cross-border volumes are now back at 2019 levels, though there still remains significant room for growth in cross-border travel.
We're continuing to execute against our strategic priorities with good progress on the product and deal fronts this quarter.
And we're excited about our acquisition of CipherTrace in the crypto services area and our planned acquisition of Aiia in open banking.
So those are the highlights.
Looking at the broader economy, domestic spending levels continue to improve, even though economies are facing supply chain constraints, rising energy prices and some other inflationary pressures.
retail sales ex auto, ex gas were up 5% versus a year ago and 12% versus 2019, reflecting the return to in-person shopping and the ongoing e-commerce strength.
SpendingPulse also indicated that the overall European retail sales in Quarter 3 were up 5% and 6% versus 2019.
As it relates to COVID specifically, the outlook continues to get better with case numbers generally improving, new therapeutics in the pipeline, progress on vaccinations and businesses becoming more agile in the face of remaining restrictions.
and some easing of restrictions in Asia.
Now, turning to our business.
While the pandemic is not fully behind us, we're now in the growth phase in most markets domestically and in many markets in cross-border spending as well.
We will, therefore, turn the page and move beyond the four-phased framework that guided us through the last 19 months and focus on managing the business for the growth opportunities ahead of us.
Looking at Mastercard's spending trends.
Switched volumes improved quarter over quarter.
We saw particular strength in consumer and commercial credit.
Debit spend remains elevated, although it has moderated in recent weeks in part due to waning stimulus benefits.
In terms of how people are spending, card-present volumes continue to improve as people are getting out and shopping more while we are still seeing sustained strength in card-not-present spend.
So regardless of whether people want to shop online or in-person, our solutions support that choice and position us well to participate in both trends.
Now, let's take a look at cross-border.
Overall, cross-border returned to 2019 levels in August, driven by improvements in consumer and commercial travel, as well as the ongoing strength of cross-border card-not-present spending ex travel.
Our cross-border travel improved from 48% of 2019 levels in the second quarter to 72% this quarter with substantial upside potential still remaining as and when borders open.
Against this backdrop, we're investing in the growth of our business, including the enhancing end of our leading technology capabilities, like expanding our network edge to connect directly with our customers through the cloud, providing faster and easier access to our products and services.
And of course, we remain focused on our strategic priorities: number one, rolling out core products while driving the shift to digital; two, differentiating and diversifying with our services; and three, leveraging our multi-rail capabilities to offer choice across payment applications.
Now, let's take them one-by-one and turn to how we're growing our core products and driving the shift through digital: through Mastercard Installments, by winning core deals and by continuing our momentum in the fintech space.
First, let me tell you about our recently announced Mastercard Installments, our scalable, open loop, buy-now-pay-later solution.
Mastercard Installments is differentiated in that it enables banks, lenders, fintechs and wallets to seamlessly bring buy-now-pay-later solutions to consumers and merchants at scale and in a secure, tokenized manner.
With little to no integration for merchants, our solution avoids the need for lenders to engage merchants one-by-one to roll this out, enables them to deliver more payment options to more consumers faster.
Our solution brings choice at scale, delivered through the Mastercard network.
Our consumers will be able to access buy-now-pay-later offers through their bank's mobile banking app at the point of checkout and soon directly through Click to Pay.
The embedded power of Finicity will help lenders with credit positioning and enable consumers to easily choose different repayment options.
Mastercard Installments will power our core payments and enable us to provide additional value through services, such as data analytics, loyalty and fraud tools.
We've seen strong interest from players on all sides of the ecosystem and look forward to growing our partnerships in this area.
As always, we remain focused on continuing to grow share.
And we've won deals across the globe this quarter.
In the U.K., we're partnering with Chase as the preferred debit partner of their new digital retail bank.
In Canada, we've extended our exclusive co-brand with Costco Canada.
And in Brazil, we signed a deal with Autopass to issue more than 10 million cards to mass transit users in the Sao Paulo area, and along with that, open, contactless acceptance across their subway trains and city buses.
We're also building our leading position with fintechs and mobile money providers.
Here are a few recent examples.
PayPal has extended its PayPal Business Debit card into our four markets in Europe.
PayPal will also directly leverage Mastercard Send for domestic wallet cash-outs and P2P transactions in the U.S. We're partnering with Vodafone in Egypt across all of their mobile money use cases, including cash-outs, P2P and bill payments.
We expanded our strategic partnership with Yandex in Russia and we'll be their preferred international partner for all of their fintech initiatives.
banks and fintechs to get cards and financial products into the market, will leverage our digital-first Finicity, Mastercard Send and cybersecurity assets.
Now, shifting to services.
Our services support and differentiate our core products and have played a critical role in enabling many of the wins I just mentioned.
They, of course, also diversify our business.
We had many wins in this area this quarter.
Starting with the cybersecurity space.
Ethoca is helping multiple players, including AT&T and Mercado Libre, reduce charge-backs through collaboration, thereby creating purchase transparency.
Banco de Bogotá is using our artificial intelligence capabilities to improve consumer experiences, increase profitability and identify new opportunities.
And in Europe, the term is leveraging NuData's behavioral biometrics to help thousands of new banks authenticate online transactions.
The tourism agencies in Greece, Hungary and elsewhere are using services like tourism insights and managed services to gather greater visibility of trends and drive deeper insights to support their tourism campaigns.
In the UAE, HSBC is leveraging our test-and-learn capabilities to innovate, experiment and roll out new products for better customer engagement.
And we're having success in the loyalty space with our innovative digital solutions, driving wins with players like the global fitness chain, Barry's and First and Saudi National Bank.
Now, let's turn to the progress we've made in offering choice to consumers across payment applications with our multi-rail capabilities, including open banking, B2B and crypto.
In open banking, we're happy about our planned acquisition of Aiia.
Aiia is a leading European open banking player, whose platform expertise, strong API connectivity and payment capabilities complement our existing open banking assets.
We will combine Aiia's European footprint with Finicity's connectivity in the U.S. and our expansion into other markets like Australia.
This will allow us to extend each organization's best-in-class capabilities, such as credit decisioning, credit scoring, account information services and payment applications across markets.
We continue to make progress with our open banking product in Europe with players like Entercard, one of Scandinavia's leading credit card companies.
And in the U.S., Finicity is working with UGO to enable account opening verifications, along with future plans to expand into payments.
We're also adding new functionality to Track DBS and are partnering with Demica to launch a supply chain finance capability.
This functionality empowers payment agents to provide their business customers with access to affordable working capital directly through the Mastercard Track DBS platform.
And in the U.K., HSBC will be the first to issue a Mastercard Track Card to Account Transfer product, an innovative B2B payment solution that allows businesses to use their commercial card program to make payments to any supplier, even if that supplier does not accept card payments.
Again, a true multi-rail offering.
And finally, in the crypto space, we're making it easier for crypto players to connect to our network.
We signed up a number of new crypto wallet providers and exchanges this quarter, including Bit2Me, [Inaudible], Kanga by ZEN.COM, Coinmotion and CoinJar.
Our crypto program, which is based on [Inaudible] principles of engagement, allows consumers to easily buy crypto assets with their Mastercard, spend their crypto balances wherever Mastercard is accepted, cash out their proceeds with Mastercard Send and earn rewards in the form of crypto or even NFT.
We're also seeing a growing services opportunity in this space.
Earlier this month, we acquired CipherTrace, a security and fraud monitoring company with expertise, technologies and insights into more than 900 cryptocurrencies.
Our recently announced agreement with Bakkt will also add to our expanding crypto services portfolio.
So let me sum this up one more time.
We delivered strong revenue, earnings growth this quarter.
We are seeing continued strength in domestic spending in most markets.
And while overall cross-border volumes are back at 2019 levels, there remains significant room for growth in cross-border travel.
We're executing against our strategic priorities with good progress on the product and deal front, as you heard, we're doing all of that while carefully managing our expenses.
That's it for me.
Sachin, over to you.
So turning to Page 3, which shows our financial performance for the quarter on a currency-neutral basis, excluding special items and the impact of gains and losses on our equity investments.
Net revenue was up 29%, reflecting the continued execution of our strategy and the ongoing recovery in spending.
Acquisitions contributed 3 ppt to this growth.
Operating expenses increased 23%, including an 8 ppt increase from acquisitions.
Operating income was up 34% and net income was up 45%, both of which include a 1 ppt decrease related to acquisitions.
Further, net income growth was also positively impacted by 6 ppt due to the recognition of higher one-time discrete U.S. tax benefits versus a year ago.
EPS was up 48% year over year to $2.37, which includes $0.02 of dilution related to our recent acquisitions, offset by a $0.04 contribution from share repurchases.
During the quarter, we repurchased $1.6 billion worth of stock and an additional $361 million through October 25, 2021.
So now, let's turn to Page 4, where you can see the operational metrics for the third quarter.
Worldwide gross dollar volume or GDV increased by 20% year over year on a local-currency basis.
We are seeing continued strength in both debit and credit.
U.S. GDV increased by 20% with debit growth of 9% and credit growth of 36%.
Outside of the U.S., volume increased 20%, with debit growth of 23% and credit growth of 16%.
To put this in perspective, as a percentage of 2019 levels, GDV is at 121%, up 2 ppt sequentially, with credit at 111%, up 4 ppt sequentially, and debit at 131%, flat quarter over quarter.
Cross-border volume was up 52% globally for the quarter with intra-Europe cross-border volumes up 47% and other cross-border volumes up 60%, reflecting continued improvement and the lapping of the pandemic last year.
In the third quarter, cross-border volume was at 97% of 2019 levels with intra-Europe at 112% and other cross-border volume at 83% of 2019 levels.
Notably, cross-border volumes averaged at or above 100% of 2019 levels in the months of August and September.
Turning now to Page 5.
Switched transactions grew 25% year over year in Q3 and were at 131% of 2019 levels.
Card-not-present growth rates remained strong and card-present growth continue to improve.
Card-present growth was aided in part by increases in contactless penetration in several regions.
In Q3, contactless transactions represented 48% of in-person purchase transactions globally, up from 45% last quarter.
In addition, card growth was 8%.
Globally, there are 2.9 billion Mastercard and Maestro-branded cards issued.
The increase in net revenue of 29% was primarily driven by domestic and cross-border transaction and volume growth, as well as strong growth in services, partially offset by higher rebates and incentives.
As previously mentioned, acquisitions contributed approximately 3 ppt to net revenue growth.
Looking quickly at the individual revenue line items.
Domestic assessments were up 21% while worldwide GDV grew 20%.
Cross-border volume fees increased 59% while cross-border volumes increased 52%.
The 7 ppt difference is primarily due to favorable mix as higher-yielding ex intra-Europe cross-border volumes grew faster than intra-Europe cross-border volumes this quarter.
Transaction processing fees were up 26%, generally in line with switched transaction growth of 25%.
Other revenues were up 35%, including a 10 ppt contribution from acquisitions.
The remaining growth was mostly driven by our cyber and intelligence and data and services solutions.
Finally, rebates and incentives were up 34%, reflecting the strong growth in volume of transactions and new and renewed deal activity.
Moving on to Page 7.
You can see that on a currency-neutral basis, total operating expenses increased 23%, including an 8 ppt impact from acquisitions.
Excluding acquisitions, operating expenses grew 16%, primarily due to higher personnel costs as we invest in our strategic initiatives, including -- sorry, increased spending on advertising and marketing and increased data processing costs.
Turning to Page 8.
Let's discuss the specific metrics for the first three weeks of October.
We are seeing continued strength in growth rates across our operating metrics versus 2020, in part due to the lapping effects related to the pandemic that began last year.
To provide you better visibility into current spending levels, we are, once again, showing 2021 volumes and transactions as a percentage of the 2019 amounts, when we were not experiencing the impact of the pandemic.
So if you look at spending levels as a percentage of 2019 for switched volumes, through the first three weeks of October, the recent trends have continued with overall switched volumes at 134% of 2019 levels, up 3 ppt versus Q3.
The U.S. has held steady with some moderation in growth from earlier levels due to the roll-off of stimulus.
And outside the U.S., we have seen continued improvement.
Trends in switched transactions remain steady and are generally tracking the trends we are seeing in switched volumes.
In terms of cross-border, as I noted earlier, spending levels as a percentage of 2019 were back to pre-pandemic levels, starting in August.
That improving trend has continued through the first three weeks of October.
And we are now at 105% of 2019 levels.
This improvement is driven by increases in both travel and non-travel cross-border volumes.
As it relates to travel, we have seen it picking up in all regions, notably within and to Europe and recently into Canada as well.
Turning to Page 9.
I wanted to share our current thoughts looking forward.
First off, our deal momentum and service lines continue to position us well for growth and diversify our revenues.
And we continue to make strong progress against our strategic objectives.
Domestic spending levels remain healthy.
And we are encouraged by the recent resurgence in international travel.
We are optimistic about the announced relaxation of border restrictions in places like the U.S. and the U.K., given that we have seen travel pickup when borders have opened in the past.
Further, the airlines have recently reported increased travel bookings, including long-haul travel.
With this as context, assuming domestic and cross-border spending trends relative to 2019 continue to improve, we would expect Q4 net revenues to grow at a low 20s rate year over year on a currency-neutral basis, excluding acquisitions.
As a reminder, spending recovered progressively in 2020, so we will be facing a more difficult comp of approximately 7 ppt in the fourth quarter relative to the third quarter.
It is also important to point out that this is just one potential scenario as the level of uncertainty remains related to the pandemic and therefore the pace of recovery may not be linear.
In terms of operating expenses for the fourth quarter, we expect operating expenses to grow at the low end of low double digits versus a year ago on a currency-neutral basis, excluding acquisitions.
This reflects our disciplined approach to expense management while advancing our innovation agenda across payments, services and promising new adjacencies and continued investment in brand and product marketing.
With respect to acquisitions, we are pleased to now have closed on the CipherTrace transaction.
And we expect acquisitions will contribute about 2 to 3 ppt to revenue and 8 ppt to operating expense growth in Q4.
This reflects the integration of several acquisitions in the open banking, digital identity and real-time payment areas.
Other items to keep in mind.
Foreign exchange is expected to be about 0.5 ppt headwind to both net revenue and operating expenses in Q4.
On the other income and expense line, we are at an expense run rate of approximately $120 million per quarter, given the prevailing interest rates.
This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics.
And finally, we expect a tax rate of approximately 18% to 19% for the fourth quarter.
We look forward to discussing our future plans with you at that time. | compname posts q4 adjusted earnings per share $0.75 from continuing operations.
q4 adjusted earnings per share $0.75 from continuing operations.
anticipate 2021 adjusted earnings per share to range from $3.25 to $3.45 per share. | 0 |
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 diluted earnings per share of $0.95; $0.94, as adjusted.
quarter ending aum of $96.2 billion; average aum of $92.9 billion.
qtrly net inflows of $2.6 billion. | 1 |
I'm joined today by Chris Simon, our CEO; Stewart Strong, President of the Hospital Business Unit; and Bill Burke, our CFO.
Additionally, we provided a complete P&L, balance sheet, summary statement of cash flows, as well as reconciliations of our GAAP to non-GAAP adjusted results.
Before we get started, unless noted otherwise, all revenue growth rates discussed today are on an organic basis and exclude the impacts of currency fluctuation, strategic exits of product lines, acquisitions and divestitures.
Please note that these measures exclude certain charges and income items.
Please note that these measures exclude certain charges and income items.
Our improved third quarter results are evidence in the strength of our strategy and our progress transitioning to transformational growth.
We have a lot to discuss today.
Let me start by highlighting five key themes.
Revenue improved sequentially in all three business units as our markets are recovering from the pandemic.
Productivity from the Operational Excellence Program and cost management helped improve our profitability.
We are making meaningful progress with NexSys adoption.
Our innovation agenda continues to propel organic growth, and the Cardiva acquisition will help us diversify, grow, and create shareholder value.
Moving to our results.
Organic revenue was down 6% in the quarter and 12% [Technical Issues] as the impacts from the pandemic continue to affect our business.
Third quarter adjusted earnings per diluted share was $0.81, down 14% from the prior year quarter and down 28% year-to-date.
While our results were below our pre-pandemic fiscal 23rd [Phonetic] quarter, we did see a 14% sequential improvement in revenue driven by all three business units, and our adjusted earnings per diluted share was up 31% from second quarter.
Plasma revenue declined 13% in the third quarter and 26% year-to-date as the pandemic continued to have a pronounced effect on the U.S. source plasma donor pool.
Revenue declines were partially offset by a $6 million one-time safety stock order of plasma disposables.
Sequentially, North America collection volume improved 29% excluding the effect of the safety stock order.
To put this in perspective, we typically have a 3% to 5% seasonal increase in the third quarter.
Our customers have taken extensive donor safety measures and launched a myriad of promotional campaigns to encourage donations.
Heightened safety protocols and compelling financial incentives along with waning government stimulus contributed to 10 consecutive weeks of volume recovery.
NexSys platform adoption is progressing, and we are confident that it will supplant PCS2 as a standard for source plasma collection worldwide.
We are on track to upgrade all U.S. customers to our NexLynk DMS software by the end of the calendar year.
All major customers have agreed to adopt NexSys PCS devices somewhere in their network.
This bodes well for eventual broad-based implementation, because history shows that first-hand user experience leads to adoption.
Rollout will not be immediate as there is important planning and support work to be done and near-term, Haemonetics and our customers primary focus is on driving a robust recovery in collections.
Our innovation agenda continues to propel organic growth.
Persona's individualized donor-specific approach is expected to yield an incremental 9% to 12% of plasma per collection.
NexSys early adopters are validating the new nomograms impact on immunoglobulin levels and implementing logistics changes needed to support the new procedure, including accommodating our collection bottle, that is a third largest.
The real world data being collected will strengthen the NexSys offering and inform ongoing innovation in our proprietary collection technology, including safely advancing additional personalization and further yield enhancements.
Meanwhile, we continue to do everything we can to support our customers and we remain cautiously optimistic about the timing and pace of recovery.
The third quarter highlights the critical role that donor economics play in plasma collections.
Collection volumes weakened over the last few weeks, which we believe was driven by a donor response to the new government stimulus.
Nonetheless, our customers are ramping up to support end-market growth, and although forecasting remains difficult in this environment, once the pandemic subsides, we expect to see 8% to 10% collections growth over the long-term and the potential to grow in excess of that, as customers replenish their inventories.
Blood center revenue declined 1.4% in the third quarter and 2.6% year-to-date.
The business continues to outperform as our continuity and responsiveness enables us to supply blood bankers around the world seeking expanded safety stocks.
We also continue to support customers globally in collecting convalescent plasma.
We had strong capital sales both in the third quarter and year-to-date, as our apheresis devices continue to play an important role in helping to provide essential blood products to our customers.
We believe the increased installed base should provide longer-term benefits to our disposable sales.
Apheresis revenue was up 6% in the third quarter and 1.8% year-to-date.
Continued plasma growth and favorable order timing among distributors in both periods was partially offset by the impact of a previously disclosed customer loss of about $4 million in the quarter and $12 million year-to-date.
We did not see distributor stocking order reversals in the third quarter.
Whole blood revenue declined 19% in the quarter and 11% year-to-date, driven by lower-than-usual procedure volumes due to COVID-19, previously discontinued customer contracts, and overall declines in blood utilization rates.
Additionally, whole blood revenue in the third quarter was impacted by unfavorable order timing among distributors.
Our recent efforts to optimize this portfolio has allowed our team to focus on apheresis devices and disposable, which is driving performance.
Cardiva is a leader in vascular closure, an under-developed segment with significant potential.
VASCADE is a leading product with strong tailwinds and the Cardiva team is talented and highly motivated to deliver.
With focus and support, we can accelerate growth, especially in electrophysiology, where VASCADE MVP is uniquely positioned for use with cardiac ablation procedures.
This is a revenue deal.
But with added scale, there will also be increased operating leverage.
We avoid the G&A cost Cardiva would have incurred to operate as a public company.
We can use our infrastructure to support U.S. expansion and our international commercial organization can help to launch VASCADE outside the U.S. Together, we can improve our global reach and relevance.
Investments in sales and clinical reps, as well as clinical medical and health economics capabilities will benefit both portfolios in IC and EP.
Our TEG long-range plan is anchored in interventional cardiology with further opportunity in electrophysiology.
Haemonetics [Indecipherable] can learn from Cardiva.
And over time, there may be commercial and-or clinical calpoint [Phonetic] synergies.
We value diversification and growth.
Cardiva diversifies our product offerings in [Indecipherable] and vascular closure.
Attractive near adjacencies that can fuel accelerated growth.
Our focus has shifted to integration and execution is now our top priority.
Over to you, Steve.
I would like to reiterate my excitement about Cardiva.
The acquisition is on track to close this quarter.
Detailed integration planning is under way, and we are squarely focused on driving revenue growth.
We are supporting the Cardiva team's strategy in their commercial, product innovation and manufacturing plans, while working on G&A integration.
Now moving to our results.
Hospital revenue increased 5% in the third quarter and 1% year-to-date.
Our hospital business has seen continued sequential improvement over the course of the fiscal year and our third quarter growth was driven by our direct markets across the globe, and in particular, our top two markets, North America and China.
Hemostasis Management revenue was up 11% [11.3%] in the third quarter and 6% year-to-date, compared with the prior year, driven by strong sales of TEG disposables in the U.S. and capital sales in Europe.
The pandemic continued to partially offset the strength of this business, both in the quarter and year-to-date.
We are excited to share that the FDA has issued guidance on the use of viscoelastic testing in patients suspected of COVID-19 coagulopathy, and we are working to update our indication in line with the guidance.
The use of TEG analyzers for hypercoagulable patients has already been discussed in a number of scientific publications, and updated indications will give us the opportunity to be proactive in deploying this technology to help advance COVID-19 patient management.
In parallel, we're driving our go-to-market strategies.
We recently signed an agreement in China to manufacture locally designed and made viscoelastic testing analyzers, and locally manufactured reagents to expand our product offering to meet the unique needs of the Chinese market.
The product line will focus on automation, high-throughput, and easy customer interface as we build on market specific platform with further innovation in the pipeline.
Transfusion management was up 7% in the third quarter and 9% year-to-date, primarily driven by strong growth in BloodTrack through new accounts in several key geographies.
Our teams have implemented alternative methods to advance installations and utilization in customer environments where access continues to be restricted.
Cell salvage revenue declined 6% in the third quarter and 11% year-to-date, primarily driven by declines in disposable usage.
Sequentially, cell salvage revenue was up 1% in the third quarter as additional recovery in procedure volumes plateaued toward the end of the quarter.
The pandemic continues to validate the essential role our technologies play in assessing bleeding and thrombosis risks, autologous blood transfusions and effectively managing blood supply.
Recovery has been very encouraging, but we're cautious about the near-term forecast as procedure volumes have leveled-off over the past four weeks, driven by a global resurgence of COVID cases that may prolong the recovery.
We are confident in the hospital business unit's long-term value to our customers and their patients, and our significant opportunity for growth and expansion.
Chris has already discussed revenue.
So, I will start with adjusted gross margin, which was 51.4% in the third quarter, a decline of 70 basis points compared with the third quarter of the prior year.
Adjusted gross margin year-to-date was 50.4%, a decline of 160 basis points compared with the first nine months of the prior year.
The primary drivers of the declines in both the third quarter and year-to-date we're impacts from higher costs, including an inventory charge in the third quarter, cost per COVID-19 protective measures, and lower volume.
There was also some un-favorability due to product mix.
These downward effects on gross margin were partially offset by productivity savings realized from the ongoing strength in our operational excellence program, and lower depreciation expense as our PCS2 devices were mostly depreciated by the end of the prior fiscal year.
Additionally, the combination of our recent divestitures and our strategic exit of the liquid solution business resulted in a net negative impact on our third quarter, and about neutral impact on our year-to-date adjusted gross margin.
We continue to successfully execute an appropriate balance of cost control measures and investments without disrupting our growth objectives.
Adjusted operating expenses in the third quarter were $71 million, a decrease of $2.4 million or 3% [3.3%] compared with the third quarter of the prior year.
Adjusted operating expenses year-to-date were $201.1 million, a decrease of $19.1 million or 9% compared with the first nine months of the prior year.
Lower adjusted operating expenses, both in the third quarter and year-to-date were due to a combination of ongoing productivity savings related to our operational excellence program and cost containment measures implemented to help offset the negative effects of COVID-19.
Partially offsetting these savings were ongoing investments in key growth areas of the business.
As a result of the performance and adjusted gross margin and adjusted operating expenses, the third quarter adjusted operating income was $52.6 million, a decrease of $9 million or 15% [14.6%], and adjusted operating income year-to-date was $124.1 million, a decrease of $46.7 million or 27% compared with the same period in fiscal ' 20.
As our business continue to recover from the pandemic, we have seen significant progress in the sequential quarterly improvement of our adjusted operating margins throughout the fiscal year.
We continue to expect adjusted operating margins to improve to levels above fiscal '20 once the pandemic fully subsides.
Adjusted operating margin was 21.9% in the third quarter and 19.2% year-to-date, down 190 basis points and 350 basis points respectively compared with the same periods in fiscal ' 20.
For both periods, the lost leverage from revenue declines outpaced the impacts of cost mitigation efforts.
The adjusted income tax rate was 16% in the third quarter and 15% in the first nine months of the fiscal year, compared with 17% in the third quarter and 14% in the first nine months of the prior year.
Third quarter adjusted net income was $41.4 million, down $7.1 million or 15% [14.5%] and adjusted earnings per diluted share was $0.81, down 14% [13.8% ] when compared with the third quarter of fiscal ' 20.
Adjusted net income year-to-date with $96.8 million, down $39.1 million or 29%, and adjusted earnings per diluted share was $1.89, down 28% when compared with the prior year.
Our third quarter results are encouraging and show a significant recovery from the effects of the pandemic.
In the short-term, however, we continue to view the current environment as uncertain and we will not be providing guidance for the fourth quarter.
Our operational excellence program is delivering positive results and continues to drive improvements in adjusted gross margin and adjusted operating margin.
We remain committed to delivering $80 million to $90 million of savings by the end of fiscal '23 as part of this program, which is essential for our future growth.
The progress we have made has helped us to reduce the impacts from the pandemic.
We expect the majority of savings realized will drop through to adjusted operating income by the conclusion of the program with the return of the business back to historical levels.
Free cash flow before restructuring and turnaround costs was $99 million in the first nine months of fiscal '21, compared with $95 [$95.2 ] million in the prior year.
We have been able to offset the decline in earnings due to the impact of the pandemic on sales volumes, particularly in the plasma business through a combination of lower increases in inventory, lower capital expenditures, an improvement in accounts receivable, when compared with the prior year.
Although our free cash flow for inventory is lower than the same period of the prior year, the impact from lower sales volumes and plasma has resulted in a higher disposables inventory balance.
We continue to monitor our inventory levels and have seen a decrease in our disposable inventory sequentially.
Additional fluctuations in inventory may occur as we adjust our production to support customer demand and our operational excellence program initiatives.
Cash on hand at the end of the third quarter was $189 million, an increase of $52 [$51.7] million since the beginning of the fiscal year.
In addition to free cash flow, the third quarter ending cash balance increased $28 million from recent portfolio moves and decreased $73 million due to debt repayments, including a $60 million repayment of the revolving credit line that was outstanding at the end of fiscal ' 20.
The borrowing of $150 million under the revolving credit facility in the first quarter of this fiscal year was repaid during the third quarter, and has no effect on the cash increase in this fiscal year.
Our current debt structure includes a $700 million credit facility that does not mature until the first quarter of fiscal '24, with the majority of the principal payments weighted toward the end of the term.
At the end of the third quarter, total debt outstanding under the facility included $311 million term loan.
There were no borrowings outstanding under the existing $350 million revolving credit line at the end of the third quarter.
Following our announcement to acquire Cardiva Medical, we will execute additional term loan of $150 million and we'll finance the remaining $325 million balance using a combination of our cash on hand and our existing revolving credit line.
At the completion of this transaction, which is expected to occur during the fourth quarter, our EBITDA leverage ratio as calculated in accordance with the terms set forth in the company's existing credit agreement will increase from 1.3 at the end of our third quarter of fiscal '21 up to about 3.2.
Our capital allocation priorities are clear and remain unchanged as we continue to prioritize organic growth followed by inorganic opportunities and share repurchases.
Over the last fours years, we put a lot of emphasis on strengthening our portfolio in funding key organic growth initiatives.
These investments have enabled us to improve our growth trajectory and will continue to fuel growth.
We have also bought back a total of $435 million or $4.5 million of the company's shares outstanding.
And while we do not plan to make additional purchases under the current share repurchase authorization, we view share repurchases as an important driver of shareholder return.
M&A is also a critical pillar of our capital allocation and by acquiring Cardiva Medical, we are adding a high growth asset, which will help us sustain future revenue growth and provide attractive financial returns.
And now, I'd like to open the call for Q&A. | compname reports quarterly adj earnings per diluted share of $0.81.
qtrly adjusted earnings per diluted share $0.81. | 1 |
I'm Martin Jarosick, Vice President of Investor Relations.
These statements are not guarantees of future performance and will involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements.
More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website.
Now let me introduce Tony Will, our President and CEO.
These results reflect the drastically improving industry fundamentals that we experienced over the course of the year.
Nitrogen prices are at their highest levels in over a decade as strong demand and lower worldwide production have tightened the global supply demand balance considerably.
At the same time, energy spreads between North America and high-cost regions have widened dramatically, supporting margin expansion for our cost advantage network.
The CF team also continues to perform exceptionally well, navigating a couple of severe weather events in the U.S., our highest levels of turnaround and maintenance activity ever, and a challenging natural gas situation in the U.K. Most importantly, they did so safely.
Our recordable incident rate at the end of September was just 0.24 incidents per 200,000 labor hours, significantly better than industry averages.
These factors have driven substantial cash generation over the last year.
Our trailing 12-month net cash from operations was $1.7 billion and free cash flow was $1 billion.
As we look ahead, we're excited about the opportunities to build on this performance.
We have good visibility into the fourth quarter of 2021.
We have priced virtually all of our product shipments through the end of the year while also hedging our natural gas requirements.
While there is always some uncertainty about the volume of ammonia that will be applied in Q4, given the dependency on weather, we would expect full year 2021 adjusted EBITDA to land between $2.2 billion and $2.4 billion.
Further out, we believe nitrogen industry conditions will remain positive for an extended period.
As Bert will describe in a moment, we see very strong demand, constrained global supply and wide energy spreads between North America and Europe to persist for some time.
These factors support our ability to continue to generate significant free cash and to deploy that capital to create shareholder value.
Our priorities remain the same: invest in growth where opportunities offer returns above our cost of capital and return excess capital to shareholders through dividends and share repurchases.
We remain focused on disciplined investments and are excited about the two new projects supporting our clean energy growth platform.
Once completed, these projects will enable us to produce over one million tons of blue or carbon-free ammonia.
Chris will share more about our announcement yesterday in a moment.
We are also pleased to have achieved investment-grade credit ratings, which recognizes and underscores all of the work we have done to remove fixed costs in the business, reduce debt and highlights the positive industry fundamentals for a North American producer.
On the balance sheet, we are quickly closing in on our target of $3 billion of gross debt and expect to repay the remaining $500 million outstanding on our 2023 notes on or before their maturity.
However, that still leaves a substantial amount of excess free cash flow we expect to generate.
And as such, the Board has authorized a new $1.5 billion share repurchase program to facilitate the return of capital to shareholders.
Then Chris will follow to talk about our financial position and clean energy initiatives, before I return for some closing comments.
The last six to nine months have seen a dramatic tightening of the global nitrogen supply and demand balance.
High crop prices and increased economic activity continue to drive demand.
Meanwhile, lower global production and government actions have created a supply constrained global market.
The impact of this can be seen on Slides 11 and 12, where both our spot cost curve and 2022 cost curve are much higher and steeper than in recent years.
As you can see, the margin opportunities available to our network have expanded greatly due to a widened energy spread between North America and marginal production in Europe.
We expect strong global fertilizer demand to last into at least 2023.
As you can see on Slide 8, global stocks-to-use ratios for both grains and oilseeds are at their lowest levels in nearly a decade, supporting high crop prices.
These prices will support farm profitability in North America, even with higher input prices, incentivizing farmers to plant acres and maximize yield.
Based on our order book, we expect the fall ammonia application season will be the largest since 2012, demonstrating farmer commitment to planting corn and applying fertilizer.
We believe farmers around the world will make similar decisions, with import demand continuing to be led by India and Brazil.
We believe global supply will remain constrained in the near term, with relief unlikely to appear anytime soon.
We believe inventory in the channel is very low.
Global production has been lower in 2021 due to severe weather in North America, higher maintenance worldwide, and ongoing European shutdowns and curtailments.
Further, the Russian and Chinese governments are discouraging nitrogen fertilizer exports through the spring.
These factors suggest the potential for strong fertilizer demand to last beyond 2023 even as some regions are unable to secure enough product in this supply constrained environment, resulting in lower yields.
If this were to happen, demand would be deferred into future years as it would take more than two growing seasons to replenish global grain and oilseed stocks.
As we prepare for the spring application season, we continue to receive substantial interest for any product we offer into the marketplace.
We are building a solid order book for the first quarter of 2022 at the prices you see in the market today.
Similar to what we did for the fourth quarter, we are adding natural gas hedges as we make first quarter product commitments in order to lock in margin and protect against significant energy price spikes.
As a result, we believe we're in a strong position heading into 2022.
In this dynamic market, we remain focused on leveraging our manufacturing, distribution and logistics capabilities to serve our customers and look forward to the opportunities before us.
For the first nine months of 2021, the company reported net earnings attributable to common stockholders of $212 million or $0.98 per diluted share.
EBITDA was $984 million and adjusted EBITDA was approximately $1.5 billion.
Net earnings and EBITDA reflect the recognition of a noncash impairment charges related to our U.K. operations.
We continue to monitor market conditions for the U.K. assets, which accounted for two of our gross margin in 2020.
The Billingham complex is operating due to recently improved carbon dioxide contracts and industrial contracts that pass through natural gas costs.
Operations at Ince remain halted.
Free cash flow -- free cash generation remains strong.
The trailing 12 months net cash provided by operating activities was approximately $1.7 billion and free cash flow was $1 billion.
We believe we have a good opportunity in 2022 to build on these results based not only on our positive outlook, but also on increased production from our network.
In 2021, we completed a record level of maintenance activity that included turnarounds at seven of our 17 ammonia plants.
We will return to a more normal level of turnaround activity in 2022.
As a result, we expect to return to our typical high ammonia utilization rates, with gross ammonia production between 9.5 million and 10 million tons.
We expect to sell everything we produce and achieve sales volume between 19 million and 20 million tons in 2022.
As we sell these product volumes into a favorable market environment, we expect to continue to generate substantial free cash flow and create shareholder value.
As Tony said, our Board authorized the new $1.5 billion share repurchase program, which becomes effective January 1, 2022.
We continue to operate under our existing program, which has enabled us to acquire more than 11 million shares to be repurchased since 2019.
This program expires at the end of the year.
At the same time, we'll continue to evaluate clean energy initiatives to meet the demand for ammonia's clean energy capabilities that we expect to emerge in the second half of the decade.
This includes positioning our network for the production of blue and green ammonia to support the development of a market for low-carbon ammonia.
Constructing carbon dioxide dehydration and compression units at Donaldsonville and Yard of the City are a necessary step to enable blue ammonia production through carbon capture and sequestration.
These projects leverage our existing asset base and represented an efficient use of capital, with a return profile we expect to be above our cost of capital.
Once sequestration is initiated, we'll be able to produce more than one million tons of blue ammonia annually while reducing our carbon emissions in a meaningful way.
With our strong balance sheet, we also have the flexibility to evaluate additional opportunities in the years ahead.
We continue to collaborate with global leaders where we can provide value, including jointly exploring with Mitsui the development of blue ammonia projects in the United States.
With that, Tony will provide some closing remarks before we open the call to Q&A.
Their commitment and dedication continue to be the foundation of our success.
We are excited about what lies ahead for CF Industries.
In fact, I think the company is better positioned today than we have ever been in our history.
We are again an investment-grade credit issuer.
We have the fewest shares outstanding ever.
We expect the business to produce between $2.2 billion to $2.4 billion of adjusted EBITDA this year.
And as we look forward to next year, we should have significantly more tons to sell at overall average higher prices than this year.
So the business should generate all-time records for free cash flow per share.
We see demand for low-carbon ammonia developing that should provide a long-term growth platform for the company.
And with our investments in both green and blue ammonia production, we will be at the forefront of this exciting opportunity.
Taken together, we have never been in a better position to create value for shareholders. | compname reports nine month 2021 net earnings of $212 million, ebitda of $984 million, adjusted ebitda of $1,485 million.
cf industries holdings - management believes global nitrogen supply will remain constrained with production in key regions affected by high energy prices. | 1 |
These risks and uncertainties may cause actual company results to differ materially.
Today, we are very pleased to announce another strong quarter.
I'll begin by recognizing our Northrop Grumman employees for their continued focus on operational excellence.
Our results represents a successful execution of our strategy, the strength of our portfolio and the commitment of our team to deliver for our customers and shareholders.
As the global threat environment continues to rapidly evolve and other nations gain more complex and sophisticated capabilities, our customers need innovative and affordable solutions to be delivered with increasing speed and agility.
With the investments we've made in advanced technologies, combined with our talented workforce and adoption of digital transformation capabilities, Northrop Grumman is well-positioned to meet our customers' needs and continue to strengthen our position for the future.
This quarter, we once again delivered strong growth and operating performance.
Our sales increased by 3% to $9.2 billion.
Adjusting for the effects of our first-quarter divestiture of the IT services business, organic sales increased 10%.
While we do expect this growth rate to moderate in the second half of the year, we continue to have a robust pipeline of opportunities in 2021 and beyond.
Additionally, program execution across the portfolio was exceptional, which drove our segment operating margins to exceed 12%.
This follows on strong Q1 performance resulting in a year-to-date segment operating margin of 12.1%, and we continue to expect solid performance for the remainder of the year.
Earnings per share increased 7% this quarter and transaction-adjusted earnings per share has increased 16% year to date.
Transaction-adjusted free cash flow is also trending favorably and has increased 26% year to date.
As a result, we ended the quarter with just under $4 billion in cash on the balance sheet.
This provides us continued flexibility for capital deployment.
We completed the $2-billion accelerated share repurchase in Q2 and continue to expect to repurchase over $3 billion for the year.
Additionally, we increased our dividend by 8% in May.
We are executing a balanced capital deployment strategy, which includes investing in the solutions our customers need and also returning cash to investors.
Over the next couple of years, we continue to expect to return the majority of our free cash flow to shareholders through share repurchases and dividends.
In terms of budget updates from Washington, the Biden administration issued its budget request for fiscal-year 2022 in May.
And it reinforces the administration's statements around investing in capabilities to maintain U.S. national security advantages.
The request aligns well with the investments we've made at Northrop Grumman as we've positioned our portfolio for the future.
And while it's still relatively early in the budget process, we're pleased to see strong support for national security from the Congress, including a $25 billion increase to the president's budget request approved last week by the Senate Armed Services Committee.
Both the House Appropriations Committee and SASC have voiced strong support for many of our programs, including B-21, GBSD, Triton and F-35, to name a few.
We look forward to working with the Congress and the administration as they make progress on the fiscal-year 2022 budget.
NASA was also well-supported in the budget, with a 7% year-over-year increase in proposed funding.
NASA priorities include returning to the moon via the Artemis program, where we are a key supplier of critical technologies, including the Habitation and Logistics Outpost or HALO, and the solid rocket boosters for the Space Launch System, also known as SLS.
This provides meaningful opportunity for the company, and it demonstrates the diverse nature of our space business.
Turning to business highlights from the quarter.
I'll share a few examples that helped to demonstrate the strength of our portfolio and our technology leadership across key markets.
In partnership with the Air Force, the B-21 program remains on track, with two test aircraft in production today, and we continue to make solid progress toward first flight.
This program leverages the confluence of Northrop Grumman's long history in aircraft development and advanced low observability capabilities.
The Air Force recently published an artist rendering and a B-21 fact sheet that provides additional insights into the program.
The fact sheet highlights that the B-21 is being designed with open systems architecture to reduce integration risk and enable future modernization efforts to allow for the aircraft to evolve as the threat environment changes.
As we've discussed on many of these calls, Northrop Grumman is a leader in communications and networking solutions, providing the connective tissue for military platforms, sensors and systems that weren't designed to communicate with one another, passing information and data using secure, open systems similar to how we use the Internet and 5G in our day-to-day lives.
Our systems played an important role in the Northern Edge 2021 joint exercise, which was held in May, and showcased how we enable warfighters to easily communicate and securely share actionable information regardless of platform.
As part of the exercise, Northrop Grumman systems were validated on three separate platforms.
Our Freedom Pod was the part of a demonstration with the Air National Guard and our Freedom Radios were a key part of two demonstrations centered on advanced fifth-generation communication.
And as a reminder, the Freedom Radios equip both the F-35 and F-22.
We are also enabling joint all-domain command and control through our Integrated Air and Missile Defense Battle Command System or IBCS.
Army successfully engaged a cruise missile target in a highly contested electronic attack environment during the developmental flight test using Northrop Grumman's IBCS.
This latest flight test integrated the widest variety of sensors to date, including a Marine Corps G/ATOR radar, which is our GaN-based expeditionary radar that entered full-rate production last year, as well as F-35 and other ground sensors and interceptors.
This was the eighth successful flight test performed with the IBCS program.
And the program is on track for a competitive down-select of full-rate production later this year.
In addition, we are making great progress on the GBSD program.
In the second quarter, the team officially closed out the EMD baseline review with our Air Force customer, and we completed the integrated baseline review.
The IBR is a critical step in setting cost and scheduled baselines and is an important milestone for the program.
And earlier this month, we were awarded a contract to continue our support of the Minuteman III ground subsystems until their successful transition to the GBSD system.
So taking a step back, the examples that I just provided highlight our strong performance, technology leadership and broad portfolio and its tight connection to national security priority, from modernizing our strategic deterrents to breakthrough technologies that connect our forces.
Based on the strong results and performance of our company year to date and our latest outlook for the remainder of the year, we are increasing our 2021 revenue, segment OM rate and transaction-adjusted earnings per share guidance.
Additionally, after two years of book to bill over 1.3, we expect our book to bill for the full year to be close to one this year, with key booking opportunities in the second half of the year that include HALO, SLS, F-35 and several restricted programs, laying the foundation for continued growth.
We are very proud of our ESG record and the high marks we've received in many environmental and in social rankings.
We have built an organization with a robust governance structure, diverse and inclusive working environment, and an ongoing and evolving focus on responsible environment stewardship.
In May, we published our most recent sustainability report.
It provides transparency into the progress and actions we've taken in these areas and more.
To help ensure we adhere to these priorities every day, key components of our ESG goals are reflected in nonfinancial metrics that are incorporated into the leadership team's annual incentive compensation.
And just last week, we announced the appointment of a Chief Sustainability Officer, who will report to me and drive further enhancements to our ESG program.
Our second-quarter results and enhanced 2021 outlook demonstrate that our strong fundamental trends continue.
Over the long term, we are well-positioned to provide our customers innovative and affordable solutions to help address national security threats while driving profitable growth and value creation for our shareholders.
My comments begin with second-quarter highlights on Slide 3.
We delivered another quarter of excellent organic sales growth and outstanding segment operating margin rate and higher EPS.
Our year-to-date transaction-adjusted free cash flow increased 26%, and we continue to return cash to shareholders through our buyback program and our quarterly dividend, which we increased by 8% in Q2.
As a result of our outstanding first-half performance and enhanced outlook for the year, we're pleased to be raising our sales, segment operating margin rate and earnings per share guidance.
Slide 4 provides a bridge between second-quarter 2020 and second-quarter 2021 sales.
Normalizing for the IT services divestiture, which was a $585 million headwind in the second quarter of 2021, our organic sales increased 10% compared to last year.
Working days were the same in both periods.
Moving to Slide 5, which compares our earnings per share between Q2 of 2020 and Q2 2021, our earnings per share increased 7% to $6.42.
Operational performance contributed $0.60 of growth and lower unallocated corporate costs driven by state tax changes added another $0.22.
Our marketable securities performance was a modest earnings benefit in Q2.
But compared to the even more favorable equity markets experienced in the same quarter last year, it represented a year-over-year headwind of $0.18.
Lastly, we experienced a higher federal tax rate in the period due to a change in tax revenue recognition on certain contracts for years prior to the 2017 Tax Cuts and Jobs Act.
Next, I'll begin a review of sector results on Slide 6.
Aeronautics sales were roughly flat for the quarter and up 2% year to date.
Sales in both periods were higher in Manned Aircraft, principally due to higher volume on restricted programs and E-2D, partially offset by lower production activity on A350 and lower volume in Autonomous Systems.
At defense systems, sales decreased by 24% in the quarter and 21% year to date, and on an organic basis, sales were down roughly 3% in both periods.
Lower organic sales were driven by the completion of our Lake City activities, which represented a headwind of $120 million in the quarter and $260 million year to date.
This was partially offset by higher volume in both periods on GMLRS, as well as ramp-up on the Global Hawk Contractor Logistics Support program for the Republic of Korea.
Mission systems sales were up 6% in the second quarter and 8% year to date.
On an organic basis, MS delivered another double-digit sales increase in the quarter of almost 12%, and organic sales were higher in all four of its business units in both periods.
Turning to space systems, sales continue to grow at a robust rate, rising 34% in the second quarter and 32% year to date.
Sales in both of its business areas were higher in the quarter and year-to-date periods, reflecting continued ramp-up on GBSD and NGI, as well as higher volume on restricted programs, Artemis and Next Generation OPIR.
Moving to segment operating income and margin rate on Slide 7.
We had an outstanding operational quarter with segment margin rate at 12.2%.
Aeronautics' Q2 operating income decreased 3% due to a benefit of $21 million recognized in the second quarter of 2020 from the resolution of a government accounting matter.
Operating margin rate was consistent at 10.3% in Q2 and the year-to-date period.
At defense systems, operating income decreased by 18% in the quarter and 15% year to date, primarily due to the impact of the IT services divestiture.
Operating margin rate increased to 12.4% in the quarter and 11.8% year to date.
The increase in operating margin rate was largely driven by improved business performance and business mix in battle management and missile systems programs.
Operating income in Mission Systems rose 18% in the quarter and 15% year to date due to higher sales volume and improved performance.
Operating margin rate increased to 15.8% in the quarter and benefited from the favorable resolution of certain cost accounting matters, as well as changes in business mix, as a result of the IT services divestiture.
Year to date, operating margin rate increased to 15.5%.
Space systems operating income rose 44% in the quarter and 40% year to date, and operating margin rate was 11% in both periods.
Higher operating income is primarily a result of the higher sales volume, along with the timing of risk retirements contributing to higher net favorable earnings adjustments in both periods.
Now turning to sector guidance on Slide 8.
You'll note that we are now providing quantified ranges for sales and OM rates instead of the broader descriptions, such as low to mid or mid to high, given the improved visibility that we have as we pass the midpoint of this fiscal year.
We are increasing the sales outlooks of our defense, mission systems and space sectors, given the strong volume they each produced in the first half and solid outlooks for second-half performance.
We're slightly reducing sales guidance for aeronautics, reflecting the continued plateauing of several of our production programs after years of outsized growth.
For operating margin rate, we're increasing our guidance at defense, MS and space, and the margin rate at AS remains unchanged.
Moving to consolidated guidance on Slide 9.
We're raising our 2021 outlook for several key metrics.
For sales, we're increasing the midpoint of our guide by $500 million to a range of $35.8 billion to $36.2 billion.
This translates to full-year organic growth of over 4% and over 5% excluding the 2020 equipment sale at AS.
As you review our sales trends, keep in mind that the first half benefited from one month of the IT services business and had seven more working days than the second half will have.
We expect the company to have higher organic sales per working day in the second half of the year than the first.
We're also increasing both our segment operating margin rate and our overall operating margin rate ranges by 10 basis points to 11.6% to 11.8% and 15.5% to 15.7%, respectively.
Keep in mind that the gain from the IT services divestiture contributed approximately 5 points of our overall operating margin benefit.
We're proud of our profit performance in the first half and continue to expect strong results in the second half of the year.
First-half net favorable EAC adjustments were particularly strong with lower rates driving Q1 outperformance and program risk retirements contributing to Q2 strength.
For unallocated corporate expense, our updated guidance reflects a $30 million reduction associated with state tax changes.
And we now foresee an effective federal tax rate in the high 17% range, excluding the effects of the divestiture, which is an increase from our prior guidance.
We project a federal tax rate of approximately 22.5% on a GAAP basis.
Finally, we're raising our earnings per share guidance, which I'll highlight on Slide 11.
The increase in guidance is driven by $0.40 of segment operational improvement.
Lower unallocated corporate costs almost fully offset the headwind from the higher federal tax rate, leading to an increase in our transaction-adjusted earnings per share guidance of $0.35 at the midpoint.
Next, I'd like to take a moment to talk about cash.
Since our call in January, we've raised the midpoint of our sales guide by $700 million.
With those additional sales come additional working capital needs to fuel the growth.
But in light of our outstanding first-half cash flow performance, we project that we can absorb that additional working capital in our existing transaction-adjusted free cash flow guidance of $3 billion to $3.3 billion.
We believe this range reflects continued strength in cash conversion, balanced with prudent investments in key growth segments of our market.
I also wanted to provide more information on the projected impact on our 2022 CAS pension recoveries from the American Rescue Plan Act, which was passed this spring.
While asset returns and actuarial assumptions will continue to influence the final number, our current estimate is approximately $185 million of CAS recoveries in 2022, down $55 million from our January guide and down about $300 million from our expected 2021 level.
We continue to expect minimal required pension contributions over the next several years.
Regarding cash deployment, as Kathy mentioned, we completed our $2 billion accelerated share repurchase in the second quarter, retiring over six million shares at an average price of around $327 per share.
And we continue to target over $3 billion of total buybacks in 2021.
At the end of the second quarter, we had approximately $3.7 billion of remaining share repurchase authorization.
In conclusion, we're very pleased to have delivered another quarter of rapid growth, outstanding program performance, strong cash flow and accretive cash deployment.
And with that, Todd, I think we're ready to open up the call for Q&A.
Nicole, can you remind everyone how to get into the queue? | compname reports q1 earnings per share $13.43.
qtrly earnings per share $13.43; qtrly transaction-adjusted earnings per share $6.57.
raises 2021 sales guidance to $35.3 billion to $35.7 billion and transaction-adjusted earnings per share guidance to $24.00 to $24.50.
qtrly aeronautics systems sales $2.99 billion, up 5%.
qtrly total sales $9.16 billion, up 6%.
qtrly sales increased due to higher sales at space systems, mission systems and aeronautics systems.
q1 net awards totaled $8.9 billion and backlog was $79.3 billion. | 0 |
We had an excellent second quarter.
The team delivered on all four of our long-term operating priorities to drive shareholder value.
We grew through acquisitions, improved our productivity, all while raising our quality and maintaining our unique Gallagher culture.
For our combined Brokerage and Risk Management segments, we posted 17% growth in revenue, 8.6% organic growth, but it's over 10% when adjusted for timing, which Doug will spend some time on in a few minutes.
Net earnings margin expansion of 107 basis points, adjusted EBITDAC margin expansion of 30 basis points, and we completed eight new mergers in the quarter with more than $70 million of estimated annualized revenue.
Most importantly, our Gallagher culture continues to thrive.
Just a fantastic quarter on all measures.
Now before I discuss how each of our businesses performed in more detail, let me comment briefly about the termination of our agreement to purchase certain Willis Towers Watson brokerage operations.
We were excited about the opportunity.
I would have loved to complete the transaction.
There are a lot of great people at Willis, and they would have been a great addition to our team.
But here's the key point.
With or without this, we remain very well positioned to support our clients, compete for new ones and ultimately drive value for all of our stakeholders.
We're in the greatest business on earth, our culture is stronger than ever, and I'm excited about our future.
Back to our quarterly results, starting with our Brokerage segment.
Reported revenue growth was strong at 16%.
Of that, 6.8% was organic revenue growth, a little better than our June IR Day expectation and closer to 9% adjusted for timing.
Our net earnings margin moved higher by 53 basis points, and our adjusted EBITDAC margin expanded by 23 basis points, highlighting our continued expense discipline.
Another excellent quarter from the Brokerage team.
Let me walk you around the world and break down our organization by geography, starting with our PC operations.
First, our domestic retail operations were very strong with more than 8% organic.
New business was excellent, nicely above second quarter 2020 levels.
Risk Placement Services, our domestic wholesale operations, grew 12%.
This includes nearly 25% organic in open Brokerage and 6% organic in our MGA programs and binding businesses.
New business and retention were both better than 2020 levels.
Outside the U.S., our U.K. operations posted more than 9% organic.
Specialty was 10% and retail was excellent at 9%, bolstered by new business production.
Canada was up an outstanding 16%, fueled by rate and exposure growth on top of solid new business and retention.
And finally, Australia and New Zealand combined grew nearly 4%, benefiting from good new business and stable retention.
Moving to our employee benefit brokerage and consulting business.
Second quarter organic was up about 4%, which is also ahead of our June IR Day commentary and another sequential step-up over first quarter 2021 and the second half of 2020.
As business activity improves, we're seeing more favorable growth in our core health and welfare, fee-for-service and retirement consulting businesses, which is encouraging -- it's an encouraging sign for the second half of the year.
So when I combine PC at 9-plus percent and benefits around 4%, total Brokerage segment organic was pushing 9% but with timing reported 6.8%.
Either way, another really strong performance.
Next, I'd like to make a few comments on the PC market.
Global PC rates remain firm overall, and at the same time, we are seeing increased economic activity across our client base.
Customers are adding coverages and exposures to their existing policies, and monthly positive policy endorsements are trending higher than pre-pandemic levels.
And overall, second quarter renewal premium increases were similar with the first quarter.
Moving around the world.
U.S. retail was up about 8%, including double-digit increases in professional liability.
Canada was up 9%, driven by increases in professional liability and package.
New Zealand was flat and Australia up 6%.
Moving to the U.K., retail was up about 8%, with most classes of specialty business over 10%.
And finally, within RPS, wholesale open brokerage was up 12%, while our binding operations were up 4%.
So clearly, premiums are still increasing across nearly all geographies.
Looking forward, it feels that the current renewal environment will persist for some time.
Carriers that cut back capacity in some of the less profitable lines of business like property, professional liability, umbrella and cyber have yet to budge on terms or conditions or haven't reverted back to offering more limits or lower attachment points.
And elevated natural catastrophes, continued impacts of the pandemic, social inflation and low investment returns are all continuing to pressure rates.
And on top of this, the potential for increased claim frequency as economies recover and carriers are making a strong case, the rate increases are likely to persist for some time.
We, too, see the global PC environment remaining difficult for our clients, and that is likely to remain for the foreseeable future.
Moving to our benefits business.
Our customer base is returning toward pre-pandemic levels a little more slowly than headline-grabbing sectors like retail, leisure and hospitality.
So we are expecting even better organic in the second half.
Further, our HR consulting units are very well positioned to deliver solutions as clients and prospects pivot away from controlling costs to growing their businesses and attracting, motivating and retaining their workforce in 2021 and beyond.
So as I sit here today, I think second half Brokerage organic will be better than the first half and could take full year 2020 organic toward 8%.
That would be a terrific step-up from the 3.2% organic we reported in 2020.
Moving on to mergers and acquisitions.
We completed seven Brokerage and one Risk Management merger during the second quarter, representing over $70 million of estimated annualized revenues.
As I look at our tuck-in merger and acquisition pipeline, we have more than 40 term sheets signed or being prepared, representing around $300 million of annualized revenues.
Our platform continues to attract entrepreneurial owners looking to leverage our data, expertise, tools and market relationships to grow their businesses.
And we expect that our U.S. pipeline will grow in the second half of the year given the potential changes in capital gains taxes.
So 2021 is setting up to be another successful year for our merger strategy.
Next, I'd like to move to our Risk Management segment, Gallagher Bassett.
Second quarter organic growth was pushing 20%, better than our June IR Day expectations of mid-teens, and our adjusted EBITDAC margin exceeded 19%.
We benefited from a revenue lift related to our 2020 new business wins, increased new arising claims within core workers' compensation and an easier pandemic-era comparison.
Looking forward, the rebound in employment, economic activity and our solid new business should lead to third and fourth quarter organic nicely in double digits.
For the year, we expect organic to be just over 10% and our EBITDAC margin to remain above 19%.
So what an exciting time to be part of Gallagher.
And that's because of our 35,000-plus employees and our unique Gallagher culture.
It's our culture that keeps us together during the depths of the pandemic.
And as we open offices around the globe yet preserving the flexibility we mastered over the last 16 months, I'm hearing the excitement about being back together.
Ultimately, it's our employees that wake up every day and decide to do things the right way, the Gallagher way.
That's what makes us different.
It makes us special as a franchise.
It attracts the very best people and merger partners and ultimately clients.
I believe our culture has never been stronger.
So with two quarters in the books, 2021 is shaping up to be an excellent year.
As Pat said, an excellent quarter and first half of the year.
Today, I'll spend a little extra time on organic and then give you our current thinking on expenses and margins.
Then I'll walk you through some of the items on our CFO commentary document, and I'll finish up with some comments on cash, liquidity and capital management.
Headline all-in organic of 6.8%, excellent on its own, but as Pat said, really running closer to 9%.
There's two reasons for that.
First, recall that we had some favorable timing in our first quarter related to contingent commissions that caused a little unfavorable timing here in the second quarter.
Call that 70 basis points.
Second, also recall that we took our 606 revenue accounting adjustment in the first quarter of 2020.
We then adjusted that in the second quarter of 2020.
So that creates a more difficult compare this year second quarter.
Call that about 150 basis points.
These two items combined for about 220 basis points of a headwind here in the second quarter.
We don't expect similar headwinds in the second half.
Let's go to Page six to the Brokerage adjusted EBITDAC table.
You'll see that we expanded our EBITDAC margin by 23 basis points here in the second quarter.
Considering last year's second quarter was in the depth of the pandemic and our Brokerage segment saved $60 million in that quarter, to post any expansion at all this quarter is terrific work by the team.
It shows we are indeed holding a lot of our savings.
So the natural question is, when you levelize for the $60 million of pandemic savings last year's second quarter and about $15 million of costs that came back this second quarter, what was the underlying margin expansion?
Answer to that is about 125 basis points, which on 6.8% organic feels about right.
That $15 million mostly relates to higher utilization of our self-insurance medical plans, a modest tick-up in T&E expenses and incentive comp.
So we held $45 million of cost savings this quarter, and that's really terrific.
Looking forward, we continue to think we can hold a lot of our pandemic period savings, perhaps more than half.
But naturally, some of those costs will come back.
As of now, we think about $20 million of cost returned in the third quarter and $30 million return in the fourth quarter.
Both of those numbers are relative to last year's same quarters.
So again, the natural question might be, what organic do you need to post third and fourth quarter to overcome those expenses and still have margin expansion?
Math would say about 7%, which is really the real story.
Recall at the beginning of the year, after expanding margins 420 basis points in 2020, we were looking at just holding margins flat.
Now we're looking at a full year margin expansion story.
So even with the return of the expenses and again, let's say, assuming for illustration a full year organic of 7%, math would show another full point of margin expansion in 2021.
That would mean our cumulative 2-year margin expansion would be well over 500 basis points.
That really highlights the improvements in productivity that are now ingrained in how we do business and how we operate.
What a great story.
Let's move on to the Risk Management segment EBITDAC table on Page 7.
Adjusted EBITDAC margin of 19.7% in the quarter is fantastic.
And we continue to expect the team to deliver margins above 19% for the full year, showing that our Risk Management segment can also hold some of the pandemic-induced cost savings, meaning that the 2020 step-up in margin can be sustained in 2021.
Let's move now to Page four of the CFO commentary document that we posted on our website.
Comparing second quarter results in the blue section to our June IR Day estimate in the gray section, interest and banking is in line.
Accordingly, we are increasing our full year net earnings range to $75 million to $85 million on the back of the second quarter upside.
You'll also notice two non-GAAP adjustments.
One related to the costs associated with the terminated Willis Towers Watson acquisition, and the other is a onetime deferred tax revaluation charge related to the statutory increase in the U.K.'s 2023 corporate tax rate.
When you control for those two items, it shows that adjusted M&A and corporate lines were both pretty close to our June 17th estimates.
Looking ahead to the third quarter, and that's in the pinkish section, you'll see non-GAAP after-tax adjustment for $12 million to $14 million.
This charge is mostly related to redeeming $650 million of debt.
That's the 10-year senior notes we issued in mid-May.
This should also lead to lower third and fourth quarter adjusted interest and banking expense, savings maybe of $2 million to $3 million after tax each quarter.
If you turn now to Page five of the CFO commentary, go to the peach-colored section.
Just another reminder of what we've been discussing in these calls and during our IR Days for the last couple of years.
2021 is the last year our clean energy investments will show GAAP P&L earnings.
Rather, beginning in 2022, we will show substantial cash flows through our cash flow statement, call it $125 million to $150 million a year for, say, six to seven years.
I know I've highlighted this a lot, but I just want to make sure you consider this as you build your 2022 models and beyond.
So next, let's go to the balance sheet on Page 14, the top line cash.
At June 30, cash on hand was $3.2 billion, and we have no outstanding borrowings on our credit facility.
We'll use that first to redeem the $650 million of debt I just discussed.
And also today, we announced a $1.5 billion share repurchase program.
That would leave us with about $1 billion of cash.
Then add to that about $650 million of net cash generation in the second half.
That's after dividends, capex, interest, taxes, et cetera.
And we would also have another $600 million to $700 million of borrowing capacity.
Means we have upwards of $2.5 billion for M&A.
When I look at the pipeline and if a capital gains tax rate change gets momentum, I think we'll have plenty of opportunities to put that capital to work at really fair multiples.
Those are my comments, an excellent quarter, an excellent first half, a bright outlook for the second half and a really terrific cash position.
Back to you, Pat.
Laura, I think we can take some questions now. | arthur j gallagher authorized repurchase of up to $1.5 billion of common stock.
authorized repurchase of up to $1.5 billion of common stock under a new plan.
arthur j gallagher - if economic conditions continue to improve, may see favorable revenue benefits in brokerage, risk management segments in q3, q4.
arthur j gallagher - if economic conditions continue to improve, may see favorable revenue benefits in clean energy investments in q3, q4. | 1 |
On Slide 4 is our safe harbor statement.
These statements are based on our beliefs and assumptions, current expectations, estimates, and forecasts.
The company's future results are influenced by many factors beyond the control of the company.
During today's call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, and adjusted diluted EPS.
We will start on Slide 5.
Our team delivered an incredibly strong third quarter.
Our proven market-led strategy delivered double-digit growth across all three market units and geographies.
And excluding positive impact from sales related to the pandemic, we delivered double-digit growth in our base business with continued strong adoption of our high-value products, coupled with solid execution and leveraging our global operating model, it has led to robust margin expansion and earnings per share growth for the quarter.
Our Q3 performance was made possible by the commitment of the West team members across the globe.
We are in the business of helping our customers bring new medicines and treatments that improve the lives of patients.
I'm very proud and humble of how we live our purpose by producing billions of components and devices each quarter.
And we do so with the knowledge that each and every component we make is impacting patients' life.
We continue to fulfill our purpose by earning our customers' trust by leading with quality, service, and science.
Looking ahead, we are well-positioned with the right growth strategy.
Our committed order book remains robust.
We continue to capture the benefits of the globalization of our operating network and continued capital investments to support the increasing demand driven by the pandemic and attractive end markets.
With this substantial momentum, we are raising our sales and earnings per share guidance for the full year 2021.
And for the 29th consecutive year, we are increasing the company's dividend, Bernard will go into greater detail shortly.
Turning to Slide 6.
Our key drivers of growth in Q3 are being fueled by COVID-19 customers that are used in our stoppers and seals including the highest level of NovaPure and FluroTec.
Biologic customers that are shifting preference from FluroTec to our premium platform, NovaPure, to achieve the highest quality and tightest specifications for their newly approved biologic drugs.
And pharma and generic customers, there are increasing orders as their demand grows for non-COVID-19 vaccines and injectable drugs.
Shifting to our device portfolio and our long-standing partnership with Daikyo Seiko, we continue to see adoption and uptick of customer interest for new pipeline drugs with Crystal Zenith syringes, cartridges, and vials.
To meet this demand and stay ahead of the current growth trends for future approvals, we have continued to add manufacturing capacity for CZ.
Our teams have successfully validated additional lines for insert needle syringes and will begin producing commercial product by the end of the year.
All these products as well as other HVP components are contributing to our growing book of committed orders, which position us well for the remainder of the year and into 2022 and beyond.
Moving to Slide 7.
To date, we have been leveraging our global infrastructure and tapping into the agility of our own team to meet the increased customer orders.
As we highlighted in Q2, several phases of investment are proceeding and now being realized.
Since the onset of the pandemic, we have expanded capacity at 13 existing sites with 30 major facility modifications, dedicated over $300 million of capital, and added over 400 incremental pieces of equipment, all while keeping pace with a growing base demand and moving our operations to 24/7.
As our book of committed orders continues to surge, we will continue to make further strategic investments to meet demand.
Today, we're announcing a fourth phase of capacity expansion that will commence in 2022.
This will primarily focus on expanding NovaPure production at our HVP sites in the United States and Europe.
Shifting to the rapidly changing environment and the impact of COVID-19 on the global supply chain, no industry has been immune to this impact.
We're working with our partners to help overcome challenges that span from transportation and logistics to raw materials and securing labor, all leading to cost inflation and delays.
Turning to Slide 8.
I'm proud of the significant progress we have made on our ESG priorities.
These have been an integral part of our One West culture and our commitment to all our stakeholders and the communities where we work and live.
Over the past six years, we continue to raise the bar in all aspects of our ESG initiatives.
And we remain on track to publish by year end, a supplement to our 2020 corporate responsibility report incorporating the SASB and TSFD ESG standards.
Let's review the numbers in more detail.
We'll first look at Q3 2021 revenues and profits where we saw continued strong sales and earnings per share growth led by strong revenue performance in our biologics, generics, and pharma market units.
I will take you through the margin growth we saw in the quarter as well as some balance sheet takeaways.
And finally, we will provide an update to our 2021 guidance.
Our financial results are summarized on Slide 9 and the reconciliation of non-U.S. GAAP measures are described on Slides 17 to 21.
We recorded net sales of $706.5 million, representing organic sales growth of 27.9%.
And COVID-related net revenues are estimated to have been approximately $115 million in the quarter.
These net revenues include our assessment of components associated with vaccines, treatments, and diagnosis of COVID-19 patients, offset by lower sales to customers affected by lower volumes due to the pandemic.
Looking at Slide 10.
Proprietary Products sales grew organically by 35.7% in the quarter.
High-value products, which made up approximately 73% of proprietary product sales in the quarter grew double digits and had solid momentum across all of our market units in Q3.
Looking at the performance of the market units, the biologics market unit delivered strong double-digit growth.
We continue to work with many biotech and biopharma customers who are using West and Daikyo high-value product offerings.
The generics market unit also experienced double-digit growth led by sales of FluroTec and Westar components.
Our pharma market unit also saw strong double-digit growth with sales led by high-value products including Westar, FluroTec, and NovaPure components.
And contract manufacturing had low single-digit organic sales growth for the third quarter, led once again by sales of healthcare-related medical devices.
We continue to see improvement in gross profit.
We recorded $288.2 million in gross profit, 93.6 million or 48.1% above Q3 of last year.
And our gross profit margin of 14.8% was a 530 basis point expansion from the same period last year.
We saw improvement in adjusted operating profit with $182.8 million recorded this quarter, compared to 103.9 million in the same period last year for a 75.9% increase.
Our adjusted operating profit margin, 25.9%, was a 690 basis point increase from the same period last year.
Finally, adjusted diluted earnings per share grew 79% for Q3.
Excluding stock-based compensation tax benefit of $0.11 in Q3, earnings per share grew by approximately 72%.
Let's review the growth drivers in both revenue and profit.
On Slide 11, we show the contributions to sales growth in the quarter.
Volume and mix contributed $142.9 million or 26.1 percentage points of growth, including approximately 83 million of incremental volume driven by COVID-19-related net demand.
Sales price increases contributed 10.1 million or 1.8 percentage points of growth.
Looking at margin performance.
Slide 19 shows our consolidated gross profit margin of 40.8% for Q3 2021, up 35.5% in Q3 2020.
Proprietary products third quarter gross profit margin of 46.3% was 550 basis points above the margin achieved in the third quarter of 2020.
The key drivers for continued improvement in Proprietary Products gross profit margin were favorable mix of products sold, driven by growth in high-value products, production efficiencies, and sales price increases, partially offset by increased overhead costs, inclusive of compensation.
Contract manufacturing third quarter gross profit margin of 16.1% was 180 basis points below the margin achieved in the quarter of 2020.
The decrease in margin is largely attributed to a mix of products sold as well as timing of the pass-through of raw material price increases to customers.
Now let's look at our balance sheet takeaway and review how we've done in terms of generating more cash for the business.
On Slide 13, we have listed some key cash flow metrics.
Operating cash flow was $423.2 million for the third quarter of 2021, an increase of 99.4 million compared to the same period last year, a 30.7% increase.
Operating cash flow in the period was adversely impacted by our working capital increase as well as timing of tax payments.
Our third quarter 2021 year-to-date capital spending was $176.9 million, $60.2 million higher than the same period last year.
Working capital of approximately $1 billion at September 30th, 2021 increased by 169.4 million from December 31, 2020, primarily due to higher accounts receivable from our increased sales.
Our cash balance at September 30th of $688 million was $72.5 million higher than our December 2020 balance.
The increase in cash is primarily due to our strong operating results in the period, offset by our share repurchase program and higher capex.
Slide 4 provides a high-level summary.
Full year 2021 net sales are expected to be in a range of 2.8 billion and $2.81 billion, compared to our prior guidance range of 2.76 billion to $2.785 billion.
This guidance includes estimated net coal with incremental revenues of approximately $450 million.
There is an estimated benefit of $55 million based on current foreign exchange rates, compared to a prior estimated benefit of $80 million.
This $25 million reduction in FX tailwind has been absorbed into our guidance.
We expect organic sales growth to be approximately 28%, compared to a prior range of 24 to 25%.
We expect our full year 2021 reported diluted earnings per share guidance to be in a range of $8.40 to $8.50, compared to a prior range of $8.05 to $8.20.
This revised guidance includes a $0.35 earnings per share positive impact of tax benefits from stock-based compensation from the first nine months 2021.
Also, our capex guidance remains at 265 to $275 million for the year.
There are some key elements I want to bring your attention to as we review our guidance.
Estimated FX benefit on earnings per share has an impact of approximately $0.19 based on current foreign currency exchange rates compared to a prior estimated benefit of $0.27.
And our guidance excludes future tax benefits from stock-based compensation.
To summarize the key takeaways for the third quarter, strong top line growth in proprietary gross profit margin improvement, growth in operating profit margin, growth in adjusted diluted EPS, and growth in operating cash flow, delivering in line with our pillars of execute, innovate, and grow.
To summarize on Slide 15, the excellent financial performance reported today continues to reaffirm that our strategy is working.
Our market-led approach is delivering unique value to our customers.
Our global operations team is efficiently manufacturing and delivering products in this complex environment with a focus on service and quality.
And we're continuing to accelerate capital spending across our operations to meet current and anticipated future growth.
Most importantly, we have an incredible team working to make this all happen.
We are proud to serve as a valuable trusted partner for customers to support patient health and look forward to continue to play a critical role in delivering healthcare well into the future.
Amanda, we're ready to take questions. | sees fy sales $2.8 billion to $2.81 billion.
q3 sales rose 28.9 percent to $706.5 million.
raising full-year 2021 adjusted-diluted earnings per share guidance to a new range of $8.40 to $8.50. | 1 |
So hopefully many of you have had a chance to review that information.
On the call today you'll be hearing from Julie Schertell, our Chief Executive Officer and Paul DeSantis, our Chief Financial Officer.
Julie and Paul will discuss recent activities and financial results and comment on our outlook as we look ahead in 2021.
We'll finish up with a recap of key strategies and initiatives under way to drive long-term value.
Adjusted earnings of $0.87 per share in the fourth quarter equaled that of prior year.
In 2020, GAAP earnings were adjusted to exclude $6 million of expense or $0.28 per share and included a non-cash impairment of a small overseas investment.
2019 fourth quarter adjusted results excluded a net gain of $1.2 million or $0.05 per share, mostly related to a post retirement plan settlement.
Actual results could differ from these statements due to the risks outlined on our website and in our SEC filings.
With that, I'll turn things over to Julie.
The fourth quarter marked the end to an unprecedented and challenging year for everyone.
While there was no escaping the impact of the pandemic, I'm pleased with the actions we took to prioritize the health and safety of our employees, maintain substantial liquidity, aggressively reduce cost and drive demand recovery.
This was evidenced in our strong performance as we exited the year with both segments, again, delivering sequential improvement in quarterly revenues, operating income and margins.
In the fourth quarter, adjusted operating income of $21 million and corresponding earnings per share of $0.87 both equaled the prior year.
Performance was led by our Technical Products segment.
With the combination of a strong market demand, new product launches and efficient manufacturing, technical product sales increased an impressive 11% versus 2019 and adjusted operating income of $18 million reached the highest quarterly level in recent history.
Market demand in Fine Paper & Packaging, as expected, has a more extended recovery curve and we remain on track for this business to recover 90% of its pre-COVID quarterly run rate of $90 million this year.
Before we talk about 2021 later in the call, I'd be remiss if I didn't note some of the key accomplishments our teams achieved in 2020.
Most importantly, with new health and safety protocols put in place, we were able to protect our employees and avoid disruptions to our operations and to our customers.
We began to implement a Neenah operating system at our two largest facilities.
Utilizing Lean Principles, this system will improve safety, quality, customer delivery, and will reduce our cost structure with improved productivity and unlocked capacity.
We aggressively reduced costs and working capital, resulting in free cash flow of $75 million, one of our highest years ever.
We quickly developed and commercialized high performance media for face mask to support COVID relief efforts and meet our customer's needs.
We published a corporate sustainability report, highlighting the meaningful progress made over the past five years in reducing our carbon footprint, building a more diverse and inclusive workplace, and maintaining sound governance practices.
We successfully refinanced the senior notes that were due this year and replaced them with a more flexible term loan B, due in 2027.
We reinvigorated our innovation efforts and launched number of new products that will generate incremental revenue for years to come.
We maintained a disciplined and active M&A pipeline.
We strengthened our executive leadership team combining new leaders that bring fresh perspectives with existing personnel who have deep experience and know how.
And lastly, we updated our vision and strategy providing a clear direction and focus for our organization on key drivers that will add significant value and support expansion into our four targeted growth platforms.
With increased capabilities of our team and strategies and catalysts now in place, we're clearly entering 2021 with momentum and positioning ourselves well for future profitable growth.
I'll talk more about this later in the call, but will now turn things over to Paul to discuss fourth quarter financial results in more detail.
As you heard, both business segments delivered another sequential quarter of improved sales, profits and margins.
Versus the third quarter sales increased 8%; adjusted operating income was up by more than 30%; and adjusted earnings per share jumped almost 60%.
These results were led by our Technical Products segment, which now makes up almost 65% of our total revenue.
So let me start there.
Sales of $137 million in the quarter were up from quarter three, and more impressively, grew 11% versus last year.
The increase was driven primarily by volume growth and helped by currency translation as the stronger euro increased the top line by about $5 million.
These favorable results were partially offset by lower pricing in a few categories such as backings that have price adjusters tied to raw material input costs.
Our filtration business has continued to perform extremely well and fourth quarter revenues were up almost 30% to a record $66 million.
Transportation, filtration media sales grew strongly in Europe and the U.S. and sales of industrial filters increased by more than 20%.
Industrial filtration growth was led by gains in products used for evaporative cooling and other similar applications.
Quarterly revenues also included about $4 million for face mask media, which we began selling in 2020.
Outside of filtration, our Industrial Solutions business also performed well with almost 20% growth in backings, primarily due to increased tape revenue with new products introduced at some of our most strategic customers earlier in the year.
Segment adjusted operating income of $18 million was up from $10 million in the fourth quarter of 2019 and operating margins also increased from 8% to 13% of sales.
Higher income in 2020 resulted from increased sales and production volumes, lower input costs net of selling prices, reduced SG&A spending, and favorable currency translation.
Turning to Fine Paper & Packaging, net sales of $70 million increase from the prior quarter and, as expected, due to COVID, were below sales in the fourth quarter of 2019.
Volume was the largest reason for the shortfall with commercial print accounting for most of this due to reduced demand for print marketing and advertising.
Consumer revenues fell impacted by timing of back-to-school sales while premium packaging revenues increased, led by growth in labels and folding board.
Segment adjusted operating profit was just under $8 million, up 15% from the third quarter, but below prior year due to lower sales and production volumes and a less favorable mix.
These impacts were partially offset by reduced SG&A spending and modest benefits from lower input costs, net of selling prices.
As a reminder, we have a history of successfully managing costs and our asset footprint to generate attractive returns and good steady cash flows that we can invest in growth categories.
The commercial print market, while in secular decline, makes up less than half of the segment sales and our consumer and premium packaging businesses with their stronger growth characteristics efficiently utilized the same asset base.
With actions and plans under way, I am confident we're on the path to recover volume and restore a historical mid-teen operating margins.
Next, I'll cover a few corporate items.
Consolidated SG&A was $21.5 million, down almost $2 million from last year.
In 2020, we carefully managed spending, and expenses like travel were severely curtailed.
In 2021, with the resumption of more normalized spending, we expect quarterly SG&A of approximately $25 million with unallocated corporate costs of $5.5 million.
Interest expense was $3.1 million in the quarter, up from $2.8 million in 2019.
The increase was largely due to higher non-cash amortization expense related to refinancing our bonds, plus interest rate differentials on cash and debt as we build up a large cash balance in 2020.
Our income tax rate in the fourth quarter was 15% compared to 19% in the prior year.
This 2020 rate included the benefit from a provision of the CARES Act, which allowed us to increase the value of certain net operating losses and will generate a cash benefit in 2021.
On an ongoing annual basis, we expect our tax rate to be approximately 22%.
With $37 million of cash on hand and no borrowings against our revolver, year-end liquidity was over $175 million and remains in excellent shape.
Cash generated from operations in the fourth quarter was $13 million, and while down from the fourth quarter of 2019, it decreased for the right reasons.
In 2019, cash flows benefited from a drop in receivables as year-end sales tapered off due to typical seasonality.
This was not the case in the fourth quarter of 2020 as customer demand was still rebounding from the impacts of COVID earlier in the year.
In addition, as noted in our last call, we accelerated $6 million of retirement plan cash contributions into 2020.
In 2021, we expect to return to a more traditional level of cash flow with increased working capital as we grow sales while maintaining our efficiencies.
Fourth quarter capital spending was $7 million.
This included a project to increase coating capabilities at one of our plants to support growth in release liners.
For the full year, capital spending was only $19 million as we cut or deferred non-critical items.
In 2021, we expect to resume more normal spending to around $35 million.
I'll end with a few additional comments on our near-term outlook.
Demand for both business segments should continue to recover with general economic activity.
While we won't be back to Q1 2020 pre-COVID levels by the first quarter due to the slower recovery in Fine Paper and less of a seasonal bounce back in Technical Products, we expect to continue delivering modest sequential quarterly gains.
The second half of the year should reflect more normal seasonal patterns and will include costs for our annual maintenance downs in the third and fourth quarters.
With the weaker U.S. dollar, recovering global economies and short-term volatility in supply and demand factors, input prices for fibers, chemicals, and transportation costs have all begun to rise off of Q4 lows.
Since many of our fiber contracts have a one quarter lag to market, we'd expect to see the majority of the impact from fiber increases starting in the second quarter.
Our teams are aggressively working to mitigate these higher input costs with pricing and other actions.
We're confident that over time our pricing will successfully offset cost headwinds, though sometimes this may not happen in the same calendar year.
Input costs in 2021 could be more than $20 million higher than in 2020.
However, for the full year, we currently expect volume growth and benefits from our cost and pricing actions to offset this.
One positive outcome of the weaker U.S. dollar is translation of our European operating results.
With the euro currently over $1.20, it's more than $0.05 above the 2020 average.
Each $0.05 is worth about $10 million to annually of sales and a little less than $2 million of operating income or $0.10 per share.
Finally, I'd note that in 2021, our publishing business will be managed as part of Fine Paper & Packaging.
The change enables us to realize SG&A efficiencies since Fine Paper & Packaging has a similar path to market and customer overlap.
Publishing is a relatively small category with sales of less than $30 million and mid-single digit operating margins.
So, if you're building 2021 models, this business should be reclassed from Technical Products into Fine Paper & Packaging.
I'll wrap up as I've started, by saying our businesses delivered another quarter of improving revenues, profits and margins led by Technical Products and outstanding filtration performance.
While the economic environment still has its challenges, demand is recovering in both segments, and Neenah remains on a strong financial footing.
And as always, we remain committed to the financial principles we've been known for; maintaining a prudent balance sheet, disciplined capital deployment, and returning cash to shareholders through an attractive dividend.
Our recent results are demonstrating the success of our strategies and ultimately will make Neenah a faster growing, more profitable company.
Each of our businesses is on track or ahead of the top line recovery expectations we've communicated.
Technical Products exceeded pre-COVID levels in the most recent quarter, and Fine Paper & Packaging is tracking with its targeted pace of recovery.
Going forward, we'll drive profitable organic growth as we build on three core competencies; manufacturing excellence, customer intimacy, and a robust innovation process.
The Neenah operating system will deliver meaningful value and help us further excel, operationally, to support employees and customers with improved safety, quality, delivery and cost, and unlock latent capacity.
Customer intimacy has always been an ingredient of our success.
In Technical Products, our R&D teams work closely with customers to meet their demanding performance and qualification requirements.
In Fine Paper & Packaging, our design team collaborates with customers to develop premium products and sustainable solutions that support their brand equity and image.
Our work with customers often includes joint development efforts that draw on our innovation abilities and technical expertise.
I mentioned earlier how we continue to strengthen our teams and capabilities.
This includes the recent hire of an experienced Global Head of our innovation process reporting directly to me.
With this change, we've realigned our R&D teams to leverage their knowledge and skills across Neenah.
This will allow us to unlock even greater value with existing and new customers and expand into new markets.
While excited about the future, I'm also pleased with what our teams have done over the past year.
In Technical Products, in addition to successfully commercializing high performance face mask media, we've launched a high efficiency filter media for heavy duty trucks, created new filtration offerings for growing needs like evaporative cooling, provided a unique dissolving label, and extended our digital transfer technology to new end-use applications.
In Fine Paper & Packaging, we've launched new planners, journals, and teacher tools for the retail channel and initiated a number of new products that provide a sustainable and desirable alternative to plastic.
As I've mentioned, our focus is on expanding in our four growth platforms; filtration, specialty coatings, custom engineered materials and premium packaging.
Each of these platforms are growing, profitable and defensible and align with our manufacturing technologies, our paths to market and material science know how.
In addition, they benefit from macro trends like a desire for cleaner air, personal health, and environmentally friendly solutions.
These platform significantly increase our addressable market and will allow us to unlock synergies as we gain scale.
We plan to grow in these platforms organically and through M&A.
Our M&A pipeline has remained active and focused on a robust set of targets that are a strategic fit and meet our required returns.
As a result of our strong balance sheet, we're in great shape to act on attractive opportunities that arise.
Let me talk next about our initiatives under way to increase margins.
Our businesses have returned to double-digit margins in both segments and technical products ended the year with some of their best margins in recent history.
Further improvement will occur as we grow in our targeted markets supported by innovation efforts that result in higher value and margin accretive new products and offerings.
The Neenah Operating System will also be an important contributor with incremental value creation of over $20 million annually when fully implemented.
In our two pilot facilities, employees have embrace this new process, identifying projects and enthusiastically tackling opportunities.
I could not be more encouraged by the level of engagement, pride, and results we're achieving.
Neenah has always had a strong culture of continuous cost improvement and I believe that momentum we're seeing is contagious.
And our initiatives and success will accelerate as we implement the system in other facilities.
Through the combination of these efforts, we will increase our organic growth rate with both business segments delivering mid-teen operating margins.
However, this wouldn't be possible without the right people doing the right things the right way.
I'm fond of saying "Culture eats strategy for breakfast".
And we're fortunate at Neenah to have a culture that always makes safety the top priority, is results oriented with a strong bias for speed, and is collaborative and inclusive.
We've emerged from a challenging year with a strong financial position, clear roadmap to accelerate top line growth and specific catalyst to increase margins.
You're seeing the results of our strategies and actions and I'm excited about our future. | qtrly adjusted e.p.s. of $0.87. | 1 |
As always, we appreciate your interest in Central Pacific Financial Corp.
Let me start first with some positive updates on the Hawaii economic recovery.
Visitor arrivals from the U.S. Mainland to Hawaii have returned much quicker than anticipated, a good sign for economic recovery.
The daily arrival count have averaged about 30,000 per day since June, which is nearly at pre-pandemic level.
In early July, the state of Hawaii began allowing arriving passengers to skip pre-testing and quarantining with proof of full vaccination against COVID in the U.S. Although we are not immune to the spike caused by the Delta variant, Hawaii's COVID infection rates continue to be at very low level, with our infection rates currently at the lowest in the nation.
Nearly 60% of our state population is fully vaccinated as of July 21, 2021.
The state of Hawaii's unemployment rate declined to 7.7% in the month of June and is forecasted by the University of Hawaii Economic Research Organization to decline to 4.8% in 2022.
The housing market in Hawaii remains hot with the median single-family home price at $979,000 in the month of June.
Our financial results for the second quarter were very strong, with quarterly pre-tax income reaching a new record high.
With increased confidence in the Hawaii economic recovery and our continued solid asset quality, liquidity, and capital, we resumed share repurchases during the second quarter and continue to pay our quarterly cash dividend.
Against this backdrop, we are very optimistic about our future business profit.
Digital continues to be a key strategic priority for us.
Enhancements to our online and mobile banking platforms are being made on a continual basis.
Additionally, in the second quarter, we issued new contactless debit cards to all of our customers and increased mobile deposit adoption among our customer base.
Further, online chat is now available and online appointment schedule is coming soon to make banking easier and more convenient for our customers.
We continue to work diligently on our product and service development in the digital area.
First, I'd like to provide an update on the credit area.
We are pleased that our clients have weathered through the challenges of the pandemic.
Nearly all of the loans we granted, COVID-related payment deferrals have returned to pay status.
As of June 30, we have just $3.5 million in loans remaining on deferral, the majority of which are residential mortgages.
Additionally, our classified assets declined during the quarter to $42 million, and our nonperforming assets remain near historic lows at just nine basis points of assets.
I'd also like to share about a recent developments in the environmental, social, and governance or ESG area.
In the second quarter, we were pleased to publish our first annual 2020 ESG report.
We continue to develop our ESG reporting and look forward to providing further updates in the future.
CPB's legacy in helping the small business community is one of the pillars of our ESG program and remains a key priority for us.
Last week, we were pleased to announce the new program run by our CPB foundation call We, that is W-E By Rising Tide.
This program supports women entrepreneurs as we believe they are key to building a strong and resilient economy.
As part of this program, we selected our first cohort of 20 women entrepreneurs from seven different business sectors that will participate in a 10-week series of workshop on financial management, marketing, and leadership and receive free advertising and networking benefits.
Support of our employees is another color of our ESG program.
We believe that investing in our employees is critical to our success.
During the second quarter, we had our annual merit increases and we made a few key strategic new hires.
We also continue to prioritize the health and well-being of our employees and therefore, continue to allow flexible work schedule while developing our hybrid return-to-office plan.
Finally, we are pleased that the second and final phase of our Central Pacific Plaza revitalization was completed last month.
We expect smaller office projects to continue as we create collaborative, refreshed, and sustainable workplaces for our employees.
We also continue to refresh our branches and evaluate our branch network to meet the changing needs of our customers.
In the second quarter, our core loan portfolio decreased by $103 million or 2.3% sequential quarter, which was offset by PPP paydown of $163 million.
Year-over-year, our core loan portfolio increased by 3.7%.
The core loan growth was broad-based across all loan categories, except C&I, which as everyone knows, was because Customer segment most impacted by the pandemic and now in recovery.
Our residential mortgage production continues to be very strong, with total production in the second quarter of nearly $280 million and total net portfolio growth in residential mortgage and home equity of $48 million from the previous quarter.
We ramped up 2021 new PPP originations during the second quarter with over 4,600 loans totaling more than $321 million.
I am proud of our team for maintaining a leadership role in supporting our small business customers and the broader business community.
PPP forgiveness is also progressing well with 70% of the loans originated in 2020 already forgiven and paid down through June 30.
Assisting our customers with the forgiveness process has been a key priority for the bank as the local economy begins to recover and our business customers begin to pivot from surviving to thriving in.
During the second quarter, with confidence that the national economic recovery was gaining strength and the local economy was on its way to recovery, we resumed our consumer lending programs on the Mainland and in Hawaii.
During the quarter, we purchased an auto loan portfolio from one of our established partners and also restarted other consumer programs on an ongoing full basis for consumer direct and indirect loans on the Mainland and in Hawaii.
While it was a prudent process to span our consumer programs last year despite what we experienced in the economic downturn, both our Mainland and Hawaii consumer portfolios performed well, augmented by the support from federal stimulus programs.
With Hawaii's economic recovery expected to take traction, combined with our healthy loan pipeline, we anticipate strong loan growth for the second half of the year.
On the deposit front, we saw a strong inflow of deposits with total core deposits increasing by $279 million or about 5% sequential quarter growth.
On a year-over-year basis, total core deposits increased by $705 million or 13.8%.
Additionally, our average cost of total deposits outweigh the second quarter by just six basis points.
Finally, I want to mention that the Hawaii economy is recovering and consumer confidence is increasing.
We are seeing positive trends in transactional fee income recovery, including investment services fees.
Net income for the second quarter was $18.7 million or $0.66 per diluted share.
Return on average assets was 1.06% and return on average equity was 13.56%.
Net interest income for the second quarter was $52.1 million, which increased from the prior quarter, primarily due to greater recognition of PPP fee income due to higher forgiveness.
Net interest income included $7.9 million in PPP net interest income and net loan fees compared to $5.2 million in the prior quarter.
At June 30, unearned net PPP fees was $15.9 million.
Net interest margin decreased to 3.16% compared to 3.19% in the prior quarter.
The net interest margin normalized for PPP was 2.93% compared to 3.12% in the previous quarter.
The normalized NIM decrease was due to an acceleration of MBS premium amortization, excess balance sheet liquidity, and lower investment and loan yields.
Investment MBS premium amortization increased by $900,000 sequential quarter due to an acceleration of prepayments in the second quarter.
To mitigate the prepayment risk going forward, we executed a sovereign coupon MBS bond swap totaling $175 million.
We continue to deploy excess liquidity to the loan and investment portfolios to further support our net interest margin.
Second quarter other operating income remained relatively flat at $10.5 million.
During the quarter, there was a decrease in mortgage banking income, which was offset by higher service charges and fees and bank-owned life insurance income.
Other operating expense for the second quarter was $41.4 million compared to $37.8 million in the prior quarter, with much of the increase in the salaries and benefits line.
The current quarter increase in salaries and benefits was primarily due to $1.2 million in nonrecurring reductions in the prior quarter and $2.8 million in higher incentive compensation and commission accruals, strategic hires to drive forward performance, and annual merit increase.
The efficiency ratio increased to 66.2% in the second quarter due to higher other operating expenses.
We expect the efficiency ratio to moderate and improve over time as we drive positive operating leverage based on our strategic investments.
Net charge-offs in the second quarter totaled $0.8 million, with the majority of charge-offs coming from the consumer loan portfolio.
At June 30, our allowance for credit losses was $77.8 million or 1.68% of outstanding loans, excluding the PPP loans.
In the second quarter, we recorded a $3.4 million credit to the provision for credit losses due to improvements in the economic forecast and our known portfolio.
The effective tax rate was 23.9% in the second quarter and going forward, we expect the effective tax rate to be in the 24% to 26% range.
Our capital position remains strong and as Paul noted earlier, we resumed share repurchases this quarter with repurchases of 156,600 shares at a total cost of $4.3 million.
We've also repurchased an additional 78,000 shares of common stock month-to-date through July 20 at an average cost of $24.93.
Finally, our Board of Directors declared a quarterly cash dividend of $0.24 per share, which was consistent with the prior quarter.
In summary, Central Pacific has a solid financial credit, liquidity, and capital position, and we continue to make positive forward progress on our core business strategy.
Further, we remain committed to providing support to our employees, customers, and the community as we continue to progress through the economic recovery.
At this time, we'll be happy to address any questions you may have.
Back to you, Andrew. | compname reports increase in second quarter earnings to $18.7 million.
compname reports increase in second quarter earnings to $18.7 million.
q2 earnings per share $0.66.
net interest income for q2 of 2021 was $52.1 million. | 1 |
I'm Mark Chekanow, Director of Investor Relations at SWM.
Actual results may differ materially from the results suggested by these comments for a number of reasons, which are discussed in more detail in our Securities and Exchange Commission filings, including our annual report on Form 10-K and our quarterly reports on Form 10-Q.
In particular, the extent to which the COVID-19 pandemic continues to impact our business is uncertain and depends on numerous evolving factors which are difficult to predict, including the duration and scope of the pandemic and actions taken in response to it.
Unless stated otherwise, financial and operational metric comparisons are to the prior-year period and relate to continuing operations.
These continue to be interesting times around the world.
I've seen in news reports, COVID is moderating somewhat, but also not retreating as fully as everyone had hoped.
At the same time, dramatic demand increases have caused widespread supply disruptions with rapid and sometimes unprecedented price increases on many input costs, coupled with shortages of key raw materials.
In mid-2020, while many companies dealt with weak sales results and lengthy production outages from COVID-related stay-at-home orders, SWM's performance was quite strong, with several AMS markets proving resilient to COVID pressures and our Paper business exceeding expectations.
SWM's global teams were agile and our portfolio robust with good demand across many end markets, resulting in outstanding 2020 third quarter earnings.
We were expecting a similar story this year by building on an already strong portfolio, combined with the additional capabilities offered by our acquisition of Scapa in April.
We have high conviction that the fundamental story remains positive as demonstrated by the strong top line growth continuing in AMS. However, 2021 has seen global supply chains in disarray and rapid inflation and challenges accelerated throughout the third quarter, with higher input costs compounded by limited availability of some key raw materials and global shipping bottlenecks; these headwinds are clearly impacting our bottom line results.
While we continue to successfully implement price increases with the latest round becoming effective October 1, we have still been lagging in many cases, pressuring margins and resulting in us delivering adjusted earnings per share of $0.82 for the third quarter.
But we do see some early signs of moderation.
We expect these conditions to continue at least through the fourth quarter before our actions deliver better margin recovery.
Given our results to date and near-term view, we expect that our full year 2021 adjusted earnings per share will be below our original guidance for the full year, but do expect sequential improvements throughout 2022.
As you will see in the following commentary, our overall portfolio remains very good -- remains strong with very good demand, and we are confident that the actions we have and will continue to take will return us to the levels of profitability expected from our company.
As demonstrated by our agile teams last year, we are well positioned to continue to execute against our long-term strategic plans despite these shorter-term disruptions.
In AMS, overall sales nearly doubled, including the benefit of Scapa acquisition, with underlying organic sales increasing a strong 10% in the quarter.
Demand remains positive in several of our most strategic product lines, particularly in transportation and filtration end markets.
Transportation was up approximately 25%.
Fundamentals remain very strong and consumers are driving rapid growth for our high-value paint protection films.
As we noted in last quarter's call, that despite being the world's largest supplier of these base films, our sales could have been even higher if not for raw material scarcity.
Year-to-date, we have missed tens of millions of dollars in sales due to this midterm constraint.
To address this, we have expanded our supplier network and qualified additional suppliers' resins with our customers and secured additional supply for 2022.
Though still constrained, access to more raw materials should support our ability to deliver even greater than 10% growth next year on top of what will be already rapid growth in 2021.
We further expect our recent acquisitions to allow us to continue to innovate by expanding our offerings in this key product area, thereby executing against our stated strategy of offering our customers greater solutions to their needs.
We also continue to invest in capacity worldwide to capitalize on increasing consumer awareness and adoption of paint protection films and continued middle-class growth in many countries.
Filtration also grew approximately 25% in the quarter as the need for cleaner and purer continues to drive positive trends.
Water and process materials led the way.
Again, echoing comments from the second quarter call, our water customers continued to relay bullish outlooks to our commercial teams as they restock from depleted inventory levels, see increased activity at processing sites and convey positive outlooks for additional capacity coming online in emerging markets.
Process filtration also remained strong, albeit somewhat constrained by the semiconductor shortage, but we see continued momentum as chip makers work to fulfill unmet demand.
On the air filtration side, sales nearly matched third quarter of last year when our sales grew more than 60% on widespread COVID-driven HVAC system upgrades.
And we are encouraged that this business is maintaining such a high level of activity.
Notably though, our overall filtration sales have been impacted by labor challenges that constrained our growth.
We estimate the total impact to be in the range of $4 million to $5 million per quarter in lost sales, implying our total filtration business could have been up nearly 40% in the third quarter compared to last year.
Though there is limited visibility on when labor markets will reach equilibrium, we are taking multiple actions at various plants to address the issues in the meantime and are seeing increased interest in open positions.
These actions are a combination of increasing rate wages where needed to assure we are competitive; increasing our focus on supporting those currently in roles; and investing in automation to reduce our reliance on labor and improve efficiencies.
AMS' legacy healthcare business faced a tough year-on-year comparison as last year we benefited from the unprecedented demand in face mask materials.
Outside of that, we saw good gains in both consumer and higher-margin specialty wound care categories.
Regarding Scapa's performance, we are pleased that it is in line with our sales expectations.
Excluding currency fluctuations and GAAP accounting conversions, the overall business rebounded strongly versus 2020 and is nearing pre-COVID levels on the top line.
On the healthcare side, we are seeing good growth in consumer wellness products, whereas products more reliant on hospital foot traffic remain below pre-COVID levels.
In Industrial, we again saw a strong growth versus 2020.
Those sales are performing well.
Scapa is experiencing similar inflationary and supply chain pressures as the rest of our businesses.
Although we are disappointed that inflationary pressures, material sourcing challenges and labor availability negatively impacted the bottom line, top line performance for AMS has been strong.
Though we have successfully increased prices multiple times, these actions quite simply were not sufficient to keep pace with rapidly increasing raw material prices.
Customers are generally accepting these increases, and we will continue these actions as needed.
On a positive note, we do see early signs of resin pricing easing during the fourth quarter, and if that trend continues, should put us in an improved price cost position in 2022.
It is also important to note that while we have been addressing the above challenges, we have continued to drive our innovation process and invest in capacity and efficiency improvements across many of our segments.
These efforts will allow us to continue to position ourselves for continued growth.
Switching to Engineered Papers.
Quarterly top and bottom line results were softer than last year, though this was to be expected as last year's third quarter was the highest quarterly segment of operating profits we have achieved over the past 5 years.
While we were very happy with this performance last year as many businesses were suffering from weak demand, we knew that the inventory builds our customers took to handle the pandemic would reverse in time.
As you may recall, when we outlined our 2021 annual guidance, our expectation was to return to a more historical EP segment profit level given the large '22 benefit -- 2020 benefit of several large customers building LIP inventory to derisk their supply chains.
Unfortunately, while the decline in sales of 12% on a 10% volume decrease was generally anticipated, EP was not an exception to the inflationary pressures seen across global manufacturing.
Higher input costs for wood pulp, freight, and most recently, escalating energy and natural gas prices have far exceeded our expectations to date.
But just as with AMS, we have been actively raising prices to recoup higher wood pulp costs.
Due to the more standard contractual obligations, these increases lagged the pace of inflation, although we expect to catch up in the coming quarters.
We have also been able to negotiate additional volumes as a further offset to pricing constraints.
Just as with resin, we do believe we have seen peak pulp prices and expect modest near-term relief.
Importantly, we are not slowing our investments in innovation and finding ways to improve our cost structure.
Heat-not-Burn sales demonstrated continued momentum as our customers invest heavily in reduced-risk products.
Our hemp products are also going commercial, and we are in the process of finalizing our first meaningful commercial contract for hemp filler products to be used in non-tobacco, non-nicotine-based alternative smoking products.
This customer alone could become a multimillion-dollar customers within 2 years.
Our investments in hemp processing technologies and botanicals are beginning to bear fruit.
And like all new innovations, these product lines deliver an attractive margin profile.
I reiterate that despite grappling with the current supply chain headwinds and inflation, it is critical for our long-term outlook to continue to drive innovation and partner with current and potential new customers to drive growth in new product categories.
Regarding our cost structure, we have announced that we will be closing our Winkler site in Manitoba, Canada, at the end of the year.
This site primarily processed materials for our recently closed Spotswood, New Jersey site.
Though always a difficult decision to close facilities, we believe it was the prudent decision given the Spotswood shutdown.
Starting with AMS, third quarter sales increased 87% with organic growth at 10%.
As mentioned, sales could have been even higher if not for supply chain disruptions with some of our specialty resins, coupled with understaffing at some of our sites due to a tight labor market.
Directionally, it is possible AMS organic sales could have been up 20% without some of the constraints that we are dealing with.
We had excellent sales performance, particularly in transportation and filtration, each growing about 25% despite those limitations.
Adjusted operating profit increased 9%, reflecting the high organic sales growth and the incremental profits from Scapa.
However, significant inflationary costs, particularly with raw materials, along with supply chain issues pressured margins.
Segment adjusted operating margin contracted 750 basis points to 10.5%, in large part due to higher input costs.
Higher resin costs, mostly for polypropylene, had a negative effect on operating profits of approximately $5 million, net of the price increases that were effective in the period.
We recouped about half of the resin cost inflation, similar to the second quarter recovery ratio.
We've continued to raise prices and are actively engaged with our customers as we continue to catch up to a market that has seen rapidly escalating prices that reached record levels during the third quarter.
For context on the recent price escalation, during the second quarter, polypropylene prices increased to about $1.20 per pound, up 150% year-over-year.
Due to the 1 quarter lag from when we purchase, produce and sell, we felt that impact during our third quarter.
In the third quarter, prices continued to rise sharply to an average price of approximately $1.40 per pound, which will flow through the P&L during the fourth quarter.
We are, however, very encouraged to see some pullback in the polypropylene market in October.
And industry projections show continued softness of these record high levels during the fourth quarter and throughout next year.
Current projections call for pricing to reach under $1 by the second half of 2022.
While polypropylene is the single biggest variance driver, other factors such as higher costs for other materials and freight also contributed to margin contraction of the base business.
Regarding Scapa's profit contribution, the acquisition boosted AMS segment adjusted operating profits by over $9 million, similar to the second quarter.
However, as noted in our release, approximately $2.5 million of Scapa's SG&A costs were booked in our unallocated costs, not within AMS. So please be cognizant of that when assessing our segment financial results.
The transaction was slightly dilutive to adjusted earnings per share in the quarter, with elevated costs and supply chain disruptions causing the variance to our original expectations.
Outside of these external factors, we are pleased with how the business is performing and are confident in Scapa's progress with rebounding to pre-COVID sales and profit levels and our ability to deliver cost synergies in the near term and commercial synergies in the longer term.
Simply put, we expect to drive significantly improved results in 2022 and beyond as supply chain conditions normalize and our pricing catches up to the elevated raw materials environment.
For Engineered Papers, second quarter sales were down 12% on a 10% volume decline.
As Jeff detailed, we knew this would be a very challenging comparison to prior year, in large part due to a normalization of LIP volumes.
This carries an inherent negative mix impact on our profits as well, which was compounded by higher costs for wood pulp and other inputs.
Pulp costs alone were approximately a $3 million negative impact compared to last year, net of the price increases effective during the quarter.
While we've executed price increases to some customers, this business is more contract based, so our recovery rate has been less than half.
For context, the NBSK wood pulp index was up 40% to nearly $1,200 per ton in the second quarter compared to last year, which flowed through the P&L in the third quarter, and the third quarter index was up 60% to nearly $1,340 per ton, which will impact fourth quarter results.
The index appears to have peaked at this elevated level in recent months and industry projections are for some more modest relief in the coming quarters.
Regarding adjusted unallocated expenses, we saw an increase of $4 million during the quarter.
However, as noted, $2.5 million of the increase was Scapa's unallocated costs booked in our unallocated costs.
The remainder of the increase related to higher third-party consulting fees as well as higher IT expenses to support the growth of the business.
On a consolidated basis, sales for the quarter increased 37% to $384 million but decreased 1% on an organic basis.
Adjusted operating profit decreased 24% to $40 million.
Third quarter 2021 GAAP earnings per share was $0.38 versus $0.78.
The most material GAAP earnings per share items that are excluded from adjusted earnings per share were higher purchase accounting expenses of $0.29 per share compared to $0.15 last year due to the Scapa acquisition.
In addition, integration expenses were $0.08 per share.
Normalizing for those and other items, adjusted earnings per share was $0.82, down from last year's $1.16 per share.
To put some of the supply chain and cost headwinds into perspective, we estimate that cost inflation on resins and pulp alone that we did not recoup through price increases had an impact of over $0.20 per share on earnings per share in the quarter.
And the lost sales on transportation films alone was more than a $0.10 impact.
When combined with the other inflationary items like freight and energy and other constraints on growth, we could have very well seen adjusted earnings per share growth this quarter despite the difficult LIP comparisons we had anticipated.
To reiterate our comments from last quarter, these are our best directional estimates and indications, but they are clearly -- they clearly convey the magnitude of the financial impacts.
Though the costs and challenges are real, we see signs of relief on several of them, which should put us up for improving results as we move past the fourth quarter with comparisons getting easier throughout next year.
To recap, we have secured additional specialty resins for our transportation films business.
Our price increases will continue to catch up to input costs.
We see fourth quarter costs of resin and pulp easing, that are expected to be realized in 2022.
And we have visibility on cost and commercial synergies in Scapa for next year.
We are disappointed that this year's earnings will finish below our original expectations.
However, we firmly believe many of the challenges are temporary and are currently turning the corner.
With respect to the fourth quarter, we expect adjusted earnings per share to be down approximately 20% from $0.77 in the prior-year quarter, implying full year adjusted earnings per share could finish about 10% below the low end of our original guided range.
This reflects the high-cost raw materials purchased during the third quarter flowing through the P&L, continued lost sales due to material scarcity and some understaffing in our sites, with other key variables being joint venture results and final year tax rate.
We're still assessing next year's outlook, and we'll issue guidance in February.
But at this stage, we see strong operating profit growth in 2022.
This could mean potentially exiting 2022 on a run rate approaching $4 of adjusted EPS, assuming the current tax rate, which is generally consistent with our original 2021 guidance we issued before many of these challenges escalated.
Regarding cash flows, year-to-date operating cash flow was approximately $28 million, down from $108 million in the prior year.
Year-to-date adjusted operating profits were lower by $6 million.
We incurred $14 million of cash costs related fees and expenses in connection with the Scapa acquisition.
And we saw a $50 million increase in working capital outflows.
In addition to robust sales growth, which would naturally drive working capital outflows related to higher receivables, the inflationary environment is pushing our cash cost of inventories still on the balance sheet significantly higher.
This inventory factor alone accounts for approximately $30 million of higher cash outflows compared to last year.
Although sales growth and higher costs have impacted our typically strong second half cash flows, we would expect to resume more historically strong cash flow generation as working capital levels normalize during the fourth quarter and into 2022.
Net debt finished the second quarter just over $1.2 billion.
Net debt to adjusted EBITDA for the terms of our credit agreement was 4.8x at the end of the third quarter.
Despite leverage increasing, we remain comfortably below our 5.5 covenant level and have approximately $160 million in liquidity, consisting of our current cash balance of $73 million and $86 million of availability on our revolving credit facility.
In addition, we are in the process of closing the sale of assets related to discontinued operations, which is expected to be completed during the fourth quarter.
Now, back to Jeff.
As we close out 2021, we want to keep the ups and downs of the past 18 months in perspective.
Our global teams overcame many challenges and uncertainties last year to deliver strong operational and financial performance in 2020.
And while we are grappling with supply chain headwinds this year, though very different issues, these 2 will ultimately normalize.
We remain laser-focused on addressing those issues within our control, with price increases to offset higher costs, sourcing projects to combat raw material scarcity, and initiatives to improve staffing levels at our production sites to meet demand.
We are confident we can return to a run rate of $4 in earnings per share later in 2022 with the stage set for sustained growth in the years to follow.
Despite the all-hands-on-deck approach required to address current challenges, we have not lost sight of the strategic imperatives to position us for long-term growth.
These imperatives include innovation of new products, offering expanded solutions, realizing the synergies of our recent acquisitions and leveraging manufacturing 4.0 technology to improve operations.
And underscoring all those initiatives is a cultural foundation based on unwavering commitments to each other and our customers as we navigate these unprecedented times.
We are excited about our portfolio and the future growth it portends.
That concludes our remarks. | stanley black & decker q3 revenue up 11% to $4.3 bln.
q3 revenue rose 11 percent to $4.3 billion.
revising 2021 diluted gaap earnings per share guidance range to $10.20 - $10.45.
revising 2021 adjusted earnings per share to $10.90 - $11.10.
qtrly adjusted earnings per share $ 2.77. | 0 |
Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings.
Additionally, we'll be discussing certain non-GAAP financial measures.
A reconciliation of these items to U.S. GAAP can be found in the quarterly earnings section of our investor relations website.
Our results once again beat expectations this quarter, with comparable sales up 5% for the total company and 5.1% for the U.S. on top of over 28% growth last year.
on a two-year basis.
These results capped of outstanding financial results for fiscal 2021 with sales of $96.3 billion, up 6.9% on a comparable basis and earnings per share of $12.04, up 36% on an adjusted basis.
With these outstanding results, 100% of our stores earned a quarterly Winning Together profit-sharing bonus.
This $94 million payout is $24 million above the target payment level.
And in recognition for their hard work throughout the pandemic in 2021, we are awarding an incremental discretionary bonus of $265 million to our frontline associates.
Altogether, we rewarded our frontline associates with bonuses of over $350 million in the fourth quarter.
As Joe will discuss later in the call, financial support of our frontline associates is consistent with our commitment to being an employer of choice in the retail industry.
Our Total Home strategy continues to gain momentum, as we grow our share of wallet with both Pro and DIY as they increasingly rely on Lowe's as a one-stop solution for all their project needs.
In looking at our results this quarter, I'm particularly encouraged that our growth was broad based and balanced across product categories, across both DIY and Pro, both online and in-store.
In Pro, we delivered growth of 23% and 54% on a two-year basis.
And we are building on our momentum with the Pro with the launch of our new Pro loyalty program, MVPs Pro Rewards and Partnership Program.
We redesigned our loyalty program based on feedback from our Pro customers who expressed a desire for a business partnership rather than a series of stand-alone transactions.
Our data shows that Pros who leverage our loyalty and credit offering spend 300% more than Pros not engaged in these programs.
Our Pro business is off to a strong start this year, and we're excited about the national launch of our MVPs Pro loyalty program.
I look forward to providing updates on this critical initiative throughout the year.
Now turning to our DIY customer, where we delivered growth on top of exceptionally strong demand last year.
Later in the call, Bill will discuss how we continue to grow our DIY market share by elevating our private brands product assortments in our home decor category.
On Lowes.com, sales grew 11.5% on top of 121% growth in the fourth quarter of 2020, which represents a two-year comp of 147% and nearly 11% sales penetration.
Our intuitive online shopping experience and expanded on-trend assortments are resonating with our customers.
And while we're pleased that our online sales have more than doubled over the past two years, we still have tremendous growth opportunity in front of us.
And as part of our efforts to enhance our omnichannel experience, we are expanding our same-day and next-day fulfillment capabilities.
With that in mind, we're actively piloting several gig network solutions, including partnering with Instacart in several markets with same-day DIY home delivery.
And building on the success we gained in the Florida and Ohio Valley regions with our market delivery strategy, we completed the conversion of our third geographic area, the Carolina region, during the fourth quarter.
By way of reminder, in the market-based delivery model, big and bulky products flow from our supply chain directly to customers' homes.
This replaces the highly inefficient store delivery model where each store acts as its own distribution and transportation center for these products.
As we continue to expand our market-based delivery model, we're freeing up space in our 10,000 square foot store back rooms, which on average are considerably larger than our competition.
And we are testing out different options to drive both greater in-store fulfillment and expanded delivery alternatives for both Pro and DIY customers.
In a few minutes, Bill will discuss our continued investments in online as we create a best-in-class integrated omnichannel shopping experience.
During the quarter, operating margin expanded approximately 115 basis points, leading to diluted earnings per share of $1.78, which is a 34% increase as compared to adjusted diluted earnings per share in the prior year.
These results reflect our disciplined focus on driving operating leverage through our perpetual productivity improvement initiatives or PPI, as well as the ongoing benefits of our new pricing strategies.
Joe and Dave will discuss these initiatives in further detail later in the call.
The Canadian leadership team continues to drive productivity through proven technology and processes that have delivered great results in the U.S. Before I close, I'd like to share my perspective on the home improvement market, as well as our opportunity to continue to win share.
Our outlook for the home improvement industry remains strong, supported by a very healthy consumer balance sheet, especially for homeowners and continuing home price appreciation.
Persistent solid demand for homes despite an uptick in interest rates is also expected to support residential investment.
In fact, we're encouraged by the strengthening millennial household formation trends that will support home buying in the coming years.
Other trends remain favorable, including baby boomers' increasing preference to-age-in-place.
And with the extension of remote work for some employees, we're expecting a permanent step-up in repair and maintenance cycle.
are over 40 years old and will continue to require investments for upkeep and approximately two-thirds of Lowe's annual sales are generated from repair and maintenance activity.
Therefore, we're encouraged that the macro environment for home improvement remains very supportive.
As we close the year, we continue to give back to the communities where we operate, with total donations of $100 million in 2021 well over our pre-pandemic levels.
And we're pleased that our efforts to enhance our brand reputation while supporting our associates and driving long-term value for our shareholders and was recently recognized by Fortune Magazine as they named Lowe's the No.
1 most admired specialty retailer for the second year in a row.
This is the first time in our history that we received this recognition in back-to-back years.
In closing, I'd like to extend my heartfelt appreciation to our frontline associates.
As I travel the country every week visiting stores, I continue to be struck by their commitment to supporting our communities while providing excellent customer service.
In the fourth quarter, U.S. comparable sales increased 5.1% and 35.2% on a two-year basis.
We delivered positive comps in all three merchandising divisions in the quarter with growth across Pro and DIY customers.
Growth was well balanced with 12 of 15 merchandising departments comping positive and was broad-based on a two-year basis with all 15 departments up more than 18% in that time frame.
Beginning with our Home Decor merchandising division, flooring and appliances delivered the strongest comps in the quarter.
In flooring, vinyl flooring once again led the way as we continue to see consumer preference shifting toward this affordable and stylish solution.
Lowe's already offers a wide selection of vinyl flooring products, including several Pergo WetProtect options.
And this year, we look forward to extending our own trusted STAINMASTER brand with its high performance characteristics and lifetime stain-resistant warranty across a full range of flooring products, including laminate, tile and vinyl.
Within appliances, sales of ranges, cooktops, along with dishwashers were the strongest in the quarter.
As we continue to extend our private brand offering, we recently launched Origin 21 across several product categories in home decor.
This is our new modern brand designed for the trend-setting millennial consumer, while our ever popular Allen + Roth brand is tailored to the more traditional style.
Now, turning to our performance in hardlines.
The team delivered an exceptional holiday season.
Customers were active early and shopped often in our trim and tree category, which drove excellent sell-through in this holiday category.
Seasonal, outdoor living and lawn and garden delivered standout performances, as customers continue to enhance their outdoor living spaces with new grills, patio heaters, fire pits, as well as live goods for the yards and garden.
With the home serving as a center for entertainment, our customers are making the most of their homes, inside and out.
We continue to build on our No.
1 position in outdoor power equipment with further share gains in battery outdoor power equipment, as we drove over 37% growth in this area for the quarter and over 118% on a two-year basis.
Both DIY and Pro customers enjoy the convenience, reliability and the power of our innovative battery-powered products available in the EGO, Kobalt, CRAFTSMAN and Skill brands.
In this spring, we are thrilled to expand our exclusive lineup of EGO battery products with their new 52-inch zero-turn riding mower with features that include a fabricated deck and power to mow up to four acres on a single charge.
Also new for EGO is the industry's most powerful handheld battery-powered blower with power that will outperform the leading gas blower with 765 cubic feet per minute of blowing capacity.
These new products will complement our existing lineup and assortments from powerful brands, such as John Deere, Honda, Husqvarna, Aaron's and CRAFTSMAN.
This spring, we will launch our new Origin 21 patio collections, as well as our new style selection replacement cushions.
These cushions are made with 100% recycled plastic bottles and they are fade-resistant, UV-protected as well as easy to clean.
Now turning to the building products division.
Our comps were very strong driven by broad-based balanced growth across lumber, electrical, rough plumbing, millwork and building materials.
We are pleased with the continued momentum we are building with the Pro as we work to expand our brand and product offerings to meet their project needs.
New this year will be a full range of CertainTeed roofing, insulation and gypsum products.
As a leading manufacturer of building products for both residential and commercial construction, CertainTeed is an important strategic partner that we are proud to add to Lowe's as we continue to enhance our Pro offering in the building materials category.
We also continue to build out our Pro power tool program with the introduction of the new DEWALT power stack battery technology, which is the smallest and most energy-densed battery pack on the market.
These new products and new brands are strong additions to our Pro brand arsenal, which already includes other great brands like Bosch, Eaton, Estwing, FastenMaster, FLEX, GRK, ITW, LESCO, Little Giant, Lufkin, Mansfield, Marshalltown, Metabo, SharkBite, Simpson Strong-Tie, SPAX, Spyder and Werner.
As Marvin mentioned, we delivered sales growth of 11.5% in the quarter and 147% on a two-year basis in the fourth quarter.
We are focused on further enhancing our omnichannel capabilities in 2022 across three key areas: expanding our online assortment, enhancing the user experience and improving fulfillment.
First, we are expanding our Lowes.com assortment to meet our customers' design and lifestyle needs.
For example, within Lowe's Livable Home products, we will offer a range of products to help our customers adapt to their changing mobility needs.
At the same time, we will continue to enhance the user experience with continued upgrades to the visualization and configuration tools, like kitchen visualizer and measure your space.
Finally, as we continue to improve our fulfillment capabilities, our customers can now track their appliance delivery in real time, and we will soon be leveraging enhanced technology to further streamline the buy online, pick-up in store experience for our customers through an improved store execution process.
As we look ahead to spring, we are well positioned to capitalize on what we expect to be another strong spring season.
Consistent with our approach over the past year, we have worked hard to land our spring product early.
Through an expansion of our network of coastal holding facilities, we are better able to manage the flow of imported product enabling us to quickly flow product where needed as spring arrives across the country.
As one of the largest importers in the U.S., we continue to leverage our scale and carrier relationships to secure capacity and work to mitigate and manage the impact of cost increases across our supply chain.
Before I close, I'd like to extend my appreciation to our merchants and inventory and supply chain teams, along with our vendors for their hard work and continued support.
In recognition of their outstanding efforts, we awarded the discretionary year-end bonus of $6,000 for assistant store managers, $1,000 for department supervisors, $800 for full-time hourly associates and $400 for part-time hourly associates.
As Marvin mentioned, the combination of Winning Together and this discretionary year-end bonus will result in a payout of over $350 million for our frontline associates this quarter.
As someone who started his career in home improvement as an hourly associate, I understand how meaningful this type of financial recognition is for our hourly associates.
At Lowe's, our people are truly our most valuable asset.
When it comes to recruiting and retaining top talent, we strive to be an employer of choice.
From the moment that a candidate applies for a position at Lowe's, we are committed to creating a positive impression.
We have invested in leading technology that accelerates the hiring process, so that we are processing applications in a matter of minutes rather than the weeks that the manual process required as recently as last year.
We also continue to improve our onboarding process so that our new hires can quickly come up to speed, leveraging the technology and product knowledge that is readily available to them on their handheld mobile devices via the Lowe's University application.
As I mentioned on our last call, we are also leveraging our new Lowe's University in-store training labs to provide the ongoing training that our associates need to build their skills and confidence so they can continue to progress in their career.
Over the last three years, we have created valuable career opportunities for our associates with the incremental 10,000 department supervisor roles and 1,600 ASM positions that we have added.
Since 2018, we have also invested well over $2 billion in incremental wage and equity programs for our frontline associates to ensure that we continue to offer a strong competitive wage and benefit package to our associates.
I'm really pleased to report that our investments to position Lowe's as an employer of choice are paying off.
Heading into spring, we anticipate being even better positioned than last year from a hiring perspective.
And we are also confident that we will continue to drive productivity in our operations through our perpetual productivity improvement or PPI initiatives.
As a reminder, this is not a single win.
It is a series of improvements that are scaling across our stores over time.
In fact, we are working on over 20 different PPI initiatives in our store operations this year.
To highlight just a few key PPI initiatives, we have just launched a new store inventory management system, or SIMs across all of our stores.
This platform gives store associates real-time visibility to inventory in their store.
This includes inventory in the home bay location as well as product in the top stock and cap, off-shelf and back stock room.
This new system will eliminate the countless nonproductive hours associates have been spending looking for product.
I'm also excited about our continuing efforts to eliminate the ancient green screen technology with the launch of our simplified user interface to other selling stations throughout the store.
First introduced at our front-end registers, we are beginning to implement this new technology across the sales floor.
With this new platform, we are accelerating the associate training process and facilitating cross-training in other departments.
This new technology will free up our associates to focus on providing excellent customer service while reducing customer wait time.
While these two initiatives are just a few of the PPI deliverables planned for this year, we expect that these two initiatives alone will drive $100 million in productivity this year.
Looking forward, we will continue to leverage technology to reduce manual tasking for our associates while also enabling them to deliver better service to our Pro and DIY customers.
As Marvin indicated, the consumer backdrop remains favorable, as we are confident that home improvement demand will remain strong despite an uptick in interest rates.
Historically, when interest rates have risen against a strong economic backdrop, the home improvement sector has delivered solid growth.
During these periods, housing affordability was supported by growth in jobs and personal income, which offset the impact of higher borrowing costs.
Today, housing affordability remains above the pre-pandemic average.
The market is expecting moderately higher interest rates in the coming quarters.
But keep in mind, rates are increasing off historic lows.
Home equity has increased due to rising home prices and consumer savings are about $2.5 trillion higher than pre-pandemic levels, positioning consumers for continued residential investments.
Given all these factors, we are expecting another strong year of demand in the home improvement market.
Now, let me turn to capital allocation.
We remain committed to be best-in-class when it comes to our ability to create value for our shareholders through our strong capital allocation program.
In 2021, we generated $8 billion in free cash flow driven by outstanding operating results, and we returned $15.1 billion to our shareholders through both share repurchases and dividends.
During the fourth quarter, we paid $551 million in dividends and repurchased approximately 16 million shares for $4 billion.
This brought the total to $13.1 billion in share repurchases for the year, ahead of our expectations of $12 billion.
This reflected better-than-expected financial performance and our commitment to return excess cash to shareholders.
Capital expenditures were $597 million in the quarter and nearly $1.9 billion for the full year as we continue to invest in strategic initiatives to both drive growth and enhance returns across the business.
Our balance sheet remains very healthy.
Adjusted debt-to-EBITDAR stands at 1.98 times, well below our long-term leverage target of 2.75 times.
As I mentioned at our December 15 investor update, we are planning to return to our leverage target over the next two years, driven by our shareholder-focused capital allocation strategy.
With that, I'd like to turn to the income statement.
In the fourth quarter, we reported diluted earnings per share of $1.78, an increase of 34% compared to adjusted diluted earnings per share last year.
This increase reflected better-than-expected sales growth, improved gross margin rate and favorable SG&A leverage, driven by our productivity initiatives.
In the quarter, sales were $21.3 billion, reflecting a comparable sales increase of 5%.
Comparable average ticket increased 9.4% and with higher ticket sales in appliances, flooring and seasonal and outdoor living and 90 basis points of commodity inflation in both lumber and copper.
In the quarter, comp transaction count decreased 4.4%, but on a two-year basis, comp transactions increased 8.9%.
We continue to gain traction with our Total Home strategy as reflected in Pro growth of 23% and positive DIY comps on top of extremely strong DIY growth last year.
On Lowes.com, sales increased 11.5% in the quarter.
U.S. comp sales increased 5.1% in the fourth quarter and 35.2% on a two-year basis.
We saw acceleration in both our Pro and our DIY comp sales trends from our third quarter performance.
By month, our U.S. comparable sales were up 8.1% in November, up 7.4% in December and down 1.3% in January.
Recall that we cycled over government stimulus in late December and early January of last year.
comp growth on a two-year basis from 2019 to 2021, November sales increased 33.8%, December increased 37.4% and January increased 33.9%.
Gross margin was 32.9% of sales in the fourth quarter, up 115 basis points from last year.
Product margin rate increased 65 basis points, driven by our disciplined pricing and cost management strategies.
Improvements in both shrink and credit revenue benefited gross margin by 50 basis points and 25 basis points, respectively.
These benefits were partially offset by roughly 30 basis points of pressure related to higher transportation and importation costs, as well as the expansion of our supply chain network.
I'd like to spend just a moment addressing the recent increase in lumber prices.
We are confident that we have an effective strategy to carefully manage our inventory and rapidly adjust pricing.
Although we are planning for our lumber margins to be compressed when prices decline, we are confident in our outlook for gross margin rate to be up slightly in 2022.
We levered 15 basis points versus LY, driven by higher sales and our relentless focus on productivity.
This quarter, we incurred $50 million of COVID-related expenses as compared to $165 million of COVID-related expenses last year.
This reduction in these expenses generated 60 basis points of SG&A leverage.
Additionally, we incurred $150 million of expenses related to the U.S. stores reset in the fourth quarter of last year.
As we did not incur any material expenses related to this project in '21, this generated approximately 75 basis points of SG&A leverage versus LY.
These benefits were pressured by 100 basis points related to the discretionary year-end bonus of $215 million for our store-based frontline associates.
Operating profit was over $1.8 billion in the quarter, an increase of 21% versus LY.
Operating margin of 8.7% for the quarter increased 115 basis points over last year, largely driven by higher gross margin rate, as well as favorable SG&A leverage.
The effective tax rate was 25.3% in the quarter, which is in line with prior year.
At year-end, inventory was $17.6 billion, up $920 million from Q3 and in line with seasonal trends and consistent with our effort to land spring products earlier.
Driven by both improved operating performance and a disciplined capital allocation strategy, we delivered return on invested capital of 35% for the year, up 760 basis points from 2020.
Now, turning to our 2022 financial outlook.
We closed out 2021 ahead of the expectations that we presented at our December 15 investor update.
comparable sales trends are in line with our fourth quarter performance on a two-year basis.
And based on the continued momentum that we are seeing in Pro sales, as well as higher expectations for commodity inflation, we are raising our sales outlook for 2022 to a range of between $97 billion to $99 billion for the year, representing comparable sales of down 1% to up 1%.
Now, please keep in mind that our outlook assumes that lumber pricing will return to a more normalized level in the second half of the year.
We continue to expect Pro to outpace DIY in 2022.
Keep in mind that we are cycling over an estimated 300 basis points of stimulus in the first quarter.
Also, as a reminder, our 2022 sales outlook includes a 53rd week, which equates to approximately $1 billion to $1.5 billion in sales.
We now expect gross margin rate in 2022 to be up slightly as compared to the prior year.
With higher projected sales, improving gross margin outlook and continued execution of our PPI initiatives, we are raising our outlook for operating margin to a range of 12.8% to 13% from a prior range of 12.5% to 12.8% for the full year.
We are also raising our outlook for diluted earnings per share to a range of $13.10 to $13.60 from a prior range of $12.25 to $13.
In 2022, we continue to expect capital expenditures of approximately $2 billion and share repurchases of approximately $12 billion.
Finally, we are raising our outlook for return on invested capital to above 36% from our original outlook of approximately 35%.
In closing, we are off to a great start in 2022.
We have significant runway ahead of us to both grow our market share, expand operating margins and deliver meaningful long-term shareholder value. | q4 sales $21.3 billion versus $20.3 billion.
q4 earnings per share $1.78 excluding items.
q4 earnings per share $1.78.
raises fiscal 2022 outlook.
sees fy total sales of $97 billion to $99 billion, including 53rd week.
sees fy comparable sales expected to range from a decline of 1% to an increase of 1%.
sees fy capital expenditures of approximately $2 billion.
sees fy diluted earnings per share of $13.10 to $13.60. | 1 |
I'll now discuss the financial results.
We reported revenue of $212.1 million during the third quarter of 2020, compared to $238.5 million during the third quarter of 2019.
The decrease was primarily attributable to lower volume related to the COVID-19 pandemic.
More specifically, our two manufacturing facilities in the U.K. were shut down in compliance with government orders on March 25, 2020, and manufacturing operation at those manufacturing plants did not restart until mid to late May.
However, volume across all segments increased significantly in June, and net sales in July exceeded prior year on a consolidated basis.
We reported net income of $10.8 million or $0.33 per diluted share for the three months ended July 31, 2020, compared to $11.8 million or $0.36 per diluted share during the three months ended July 31, 2019.
On an adjusted basis, net income was $11.1 million or $0.34 per diluted share during the third quarter of 2020, compared to $13.7 million or $0.41 per diluted share during the third quarter of 2019.
The adjustments being made to earnings per share are for restructuring charges, impairment charges, certain executive severance charges, accelerated D&A, foreign currency transaction impacts and transaction and advisory fees.
On an adjusted basis, EBITDA for the quarter was $27.7 million, compared to $32.8 million during the same period of last year.
Moving on to cash flow and the balance sheet.
Cash provided by operating activities was $45.1 million for the three months ended July 31, 2020, which represents an increase of 50.8% compared to the three months ended July 31, 2019.
Cash provided by operating activities was $47.6 million for the nine months ended July 31, 2020, which represents an increase of 58.7% compared to the nine months ended July 31, 2019.
Free cash flow improved significantly during the third quarter to $40.7 million, which represents an increase of 57.1% compared to the third quarter of 2019.
Year-to-date 2020, free cash flow more than doubled to $26.9 million compared to the same period of 2019.
Our focus on managing working capital continues to provide benefit, but we realize most of the heavy lifting on this front has been accomplished.
Our balance sheet is healthy, our liquidity position is strong and getting stronger, and our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 1.1 times as of July 31, 2020, which is lower than where we exited fiscal 2019.
We will continue to focus on generating cash and paying down debt in the fourth quarter, which should allow us to exit fiscal 2020 with a leverage ratio of net debt to last 12 months adjusted EBITDA at or below one time.
We will continue to be opportunistic with respect to repurchasing our stock.
As previously disclosed, due to the uncertainty related to the ongoing pandemic, we withdrew full-year guidance and reduced our capex budget for fiscal 2020.
Having said that, the recovery has been more robust than expected on all fronts, and we are now comfortable providing the following full-year 2020 guidance: net sales of $832 million to $837 million, adjusted EBITDA of $97 million to $102 million, capex of approximately $25 million and free cash flow of approximately $50 million.
It is important to note that although free cash flow increased significantly in the third-quarter and year-to-date 2020 compared to 2019, much of that improvement came from systemic improvements to our management of working capital.
Looking ahead, it will be more challenging to continue this rate of improvement in working capital.
In addition, we expect that a higher pension contribution and an increase in cash tax payments will make fourth-quarter comps more challenging.
Overall, we are very pleased with the results we delivered in a quarter that again presented many unprecedented challenges.
As we began our third quarter, there were still many unknowns related to COVID-19 and its impact on our company and the worldwide economy.
were closed by government mandate through mid to late May.
In North America, we still have many employees on furloughed status for the first few weeks of the quarter.
Fortunately, those headwinds changed directions very quickly and demand rebounded swiftly as we entered June.
All facilities are now operating at pre-pandemic run rates and consolidated revenue in July actually exceeded prior year.
As discussed on prior earnings calls, our cost structure is highly variable and allowed us to anticipate this change and effectively meet a rapid run-up in demand.
I'll now spend a moment discussing results from each of our segments, beginning with the North American fenestration.
Revenue in this segment was $122.4 million, down 10.2% from prior-year third quarter.
This shortfall was primarily driven by the pandemic's negative impact on demand, especially during the month of May.
Adjusted EBITDA of $17.8 million was $4.8 million less than prior-year third quarter.
Volume-related impacts and higher overtime costs in June and July, combined with pandemic-related delays to the upgrade project in our vinyl extrusion business in North America, all negatively impacted the results.
We generated revenue of $38.3 million in our European fenestration segment, which was 13.7% less than prior year or down 12.9% after excluding the foreign exchange impact.
As mentioned earlier, our U.K. plants were shut down through mid to late May and effectively had very little revenue during that month.
However, volumes rebounded quickly and revenue in June and July was actually stronger than prior-year levels.
In Continental Europe, spacer volumes remained steady, with strong demand continuing in Germany, Austria, Switzerland and Scandinavia.
Despite low volume in May, this segment was able to realize adjusted EBITDA of $7.7 million in the quarter, which represents margin improvement of approximately 290 basis points over prior year.
This margin expansion was driven by favorable material costs, efficient ramp-up and productivity gains.
Our North American cabinet components segment reported revenue of $51.9 million, which was 11.5% less than prior year.
However, revenue was only down 7.5% if you adjust for the customer that exited the cabinet manufacturing business in late 2019.
We saw a significant increase in demand in June and July driven by opportunities created by supply chain disruptions in the cabinet component import markets.
Adjusted EBITDA for the segment was $3.1 million, down $1.7 million from prior-year third quarter.
It is important to note, though, that EBITDA was negatively impacted by a $1.7 million accrual for writing off the final amount of customer-specific inventory associated with a customer that exited the cabinet business.
Absent this write-off, we would have realized margin expansion of approximately 90 basis points in this segment as well.
Finally, unallocated corporate and SG&A costs were $1.4 million better than prior-year third quarter.
The primary drivers of this improvement were lower executive compensation costs and a favorable medical cost true-up for the quarter.
As Scott also mentioned in his commentary, we are focused on generating cash flow, and those efforts have allowed us to continue deleveraging our already strong balance sheet.
While the potential to benefit from a further improvement in working capital will be limited on a go-forward basis, the increased demand we are seeing provides us with confidence in our ability to maintain a healthy balance sheet, generate cash and opportunistically repurchase stock.
Market fundamentals and demand for our products, combined with our ongoing focus on operational efficiency gains, give us further confidence in our ability to meet the full-year 2020 guidance.
All that said, there's still much uncertainty for the mid to long term.
COVID-19 continues to be a problem around the world and the timing and successful distribution of a potential vaccine is questionable.
presidential election is right around the corner, and the result could have long-lasting economic and societal impacts regardless of who the winner is.
With these things in mind, we feel our current strategy of focusing on operational excellence, maintaining a healthy balance sheet, generating cash and opportunistically repurchasing shares remains our best near-term strategy.
We have demonstrated our ability to execute on this strategy, and we feel that our efforts have positioned us well to capitalize on opportunities when and if they arise.
And with that, operator, we are now ready to take questions. | quanex building products sees fy 2020 adj. ebitda of $97 mln - $102 mln.
sees fy 2020 sales $832 million to $837 million.
qtrly diluted earnings per share $0.33.
qtrly adjusted diluted earnings per share $0.34.
qtrly net sales $212.1 million versus $238.5 million.
sees full year 2020 adjusted ebitda of $97 million to $102 million.
quanex building products - volume across all segments increased significantly in june & net sales in july exceeded prior year on consolidated basis. | 1 |
Our exceptional performance this quarter, among the broader market recovery, demonstrates the strengths of our global platform, resilient business model and continued operational and strategic execution of our long-term plan.
Further, we continue to advance our sustainability agenda and development of our related market-leading product capability.
Our most recent responsible real estate survey reaffirm that reducing the environmental impact is a key priority across the industry for both real estate occupiers and investors.
We take pride in our 2020 JLL Global Sustainability Report, which highlights our latest initiatives including our commitment to net 0 carbon emissions by 2040 across all areas of operation, including client sites management globally as well as our need to be fully equipped to help clients in their own journey.
We changed the name of our Corporate Solutions Group to Work Dynamics to more clearly reflect that our technology-enabled and wide-ranging services help our clients enhance the productivity of their people as employees are increasingly empowered to make the decisions on how and where they work.
Our suite of solutions also benefits the performance of their portfolios and help them realize their sustainability and broader ESG goals.
I'd like to express my gratitude for our employees who continue to work diligently and provide outstanding service to our clients and community.
The pace of activity increased sharply throughout the first half of the year, leaving many of our teams over extended.
The tireless efforts and its ongoing challenges and uncertainties embody the strong culture of teamwork and collaboration at JLL.
Let me briefly touch on the future of office, subject being closely analyzed by our best-in-class research team.
While the actual long-lasting effects of the pandemic remain unclear, there are a couple of key points I would like to highlight.
The first is that the office will remain the center of the work ecosystem.
We believe that the pandemic has reinforced the important role that the office can play in fostering and cultivating each company's unique culture and innovation.
The second point is that employees are increasingly expecting, if not demanding, additional flexibility and the ability to choose where and how they work, leading to the doable presence of hybrid work.
These demands have also been coupled with health, wellness and safety becoming top of mind for employees.
As a result, employers are now increasingly evaluating holistic approaches to address these demands, which often require considerable investment into existing and new office space.
We imagine workspaces which serve to not only attract and retain employees but also enhance their sense of safety and well-being are becoming a new currency in the war for talent.
This leads me to conclude that the initial net impact on future space demand and footprints for investment-grade office buildings will be relatively minor.
We believe that the combination of growth from job creation, dedensification and the addition of collaboration space will broadly offset any anticipated reductions in workspace as companies continue to embrace hybrid work models.
Furthermore, we believe that given the world-class capabilities of our project management business, we are well positioned to benefit from accelerated demand for these services as we assist our clients as they embark upon these transformations.
The increasing complexity required to create these global integrated workplace transformation will in turn demand more technology across not only the operations of the building but the entire ecosystem.
We are encouraged that our significant investment in technology and our desire to provide client access to leading-edge technology results in a significant competitive advantage.
The power of data leading to better decision-making will allow JLL to be in the center of this ecosystem.
We continue to work diligently with our clients as a strategic advisor as they transition to the new post-pandemic normal and assist in the development of hybrid work models centered around employee satisfaction and productivity.
Turning to the market environment.
Transaction activity saw sharp recoveries across the world.
JLL's research reports that the tentative signs of improvement in global office leasing activity witnessed in the first quarter have solidified and continued throughout the second quarter.
Quarterly global leasing volumes were 44% higher than a year ago.
However, they are still 36% below Q2 2019.
Across all the three regions, quarterly leasing volumes are below where they were in 2019 with the U.S., the hardest hit at a 44% decline, while Europe and Asia Pacific recorded declines of 32% and 21%, respectively.
Our tenant pricing conditions persist in most markets.
We are seeing a noticeable stabilization and headline rates.
The recovery across capital markets broadened in the second quarter with global transaction volumes marking a 103% increase on the trough a year ago and a 2% increase from Q2 2019.
Each region posted significant year-on-year gains in transaction volumes with activity is particularly robust in markets with sectorial diversity and opportunities of scale.
Allocations to the real estate sector are strengthening as lender diversity and risk appetite trend toward pre-pandemic normalcy.
Assuming no major setback in the global fight against COVID-19, the positive trends recorded in the second quarter are anticipated to carry on in the second half, fueling continued recovery across the commercial real estate industry and global macro economy.
For that backdrop, I'm pleased to turn the attention toward our second quarter performance.
Our exceptional results reflect the continued momentum across our business that we have witnessed since the depths of the pandemic.
We delivered excellent second quarter top and bottom-line performance, standard operating margins and continue to execute on our long-term strategy.
Consolidated revenue rose 18% to $4.5 billion and fee revenue increased 41% to $1.8 billion in local currency.
Adjusted EBITDA of $332 million represented an increase of over 200% from the prior year, with adjusted EBITDA margin increasing to 18.5% from 8.3% in local currency, driven by the significant recovery of our transaction-based service lines, cost mitigation actions taken in 2020, realization of growth initiatives and select discrete items.
Adjusted net income totaled $220.1 million for the quarter and adjusted diluted earnings per share totaled $4.20.
Our transaction-based service lines recorded significant growth across all three regions.
Leasing benefited from strong demand in the industrial and life sciences sector while industrial and multifamily debt origination were key drivers for Capital Markets outperformance.
We recently passed the two-year anniversary of our acquisition of HFF and are pleased that the acquisition has delivered on both our strategic and financial ambitions despite the pandemic.
All of the key secular trends driving growth in our industry is increasing capital flows to real estate.
The addition of the HFF platform with its market-leading position in the U.S. allows us to not only become a top two player in the U.S. capital markets business but also cements the strengths of our global platform to forge greater ties with the world's largest investors.
I also would like to provide an update on the financial synergies we projected when the HFF acquisition transaction was announced in 2019.
A year ago, we achieved our first 12-month synergy target of $28 million despite unforeseen pandemic headwinds.
Having just passed the two-year anniversary of the acquisition, I'm pleased to say that we have achieved our target $50 million of synergies on a run rate basis, which we had originally predicted within a two- to three-year time frame.
The strong recovery in our transaction-based service lines were complemented by solid growth in our property and facility management and advisory consulting and other businesses.
The resilience of these service lines continues to benefit JLL throughout the course of this pandemic, and we are encouraged by the overall trends supporting their growth.
Over the course of the quarter, we continue to invest to drive future growth, focusing on investments that strengthen and differentiate our market leadership, positioning JLL for long-term growth.
For example, we announced the launch of sustainable operations for now the real estate industry's only end-to-end sustainability product offering developed to help companies configure, launch and manage portfoliowide sustainability programs.
During the quarter, we invested approximately $84 million in JLL Technologies investments, bringing the year-to-date amount to $109 million.
The continued investment through our JLL Technologies business furthers our strategic objectives to be an industry leader in technology innovation.
We also have resumed share repurchases returning approximately $100 million to shareholders through July.
Looking ahead, given the strong momentum in the business, successful integration of HFF and increased visibility into a post-COVID future, we're increasing our 2021 adjusted EBITDA margin target to 16% to 19%, up from 14% to 16% previously.
Our strong results reflect continued disciplined execution as well as the impact of our investments in strategic initiatives over the past several years.
We are encouraged by the broad recovery in our industry and business, particularly Capital Markets and Leasing, and the fact that fee revenue and profitability surpassed 2019 levels in certain service lines by region.
The recovery had exceeded our expectations to date, and we are optimistic about the second half of the year though significant uncertainty remains around the evolution of the pandemic and global economy.
Our balance sheet provides a strong footing to confidently execute our path forward and build upon our operating momentum.
Our overall real estate services fee revenue increased 43% in the second quarter with all regions generating double-digit growth, due in part to lapping COVID-impacted results from the prior year.
Of note, Capital Markets fee revenue increased 110%, inclusive of investment sales advisory up 105%; debt advisory up 157% and loan servicing revenue up 26%, reflecting the market recovery as well as the strength and breadth of our global platform.
Our leasing fee revenue grew 69% and was only down 3% from second quarter 2019.
The Real Estate Services adjusted EBITDA margin of 17.2% compares with 6.6% a year earlier.
The benefits from our cost reduction actions taken in 2020 and the strong execution and recovery within our transaction-based revenue streams were key drivers of our strong margin performance.
Approximately $16 million of noncash valuation increases to investments by JLL Technologies in early stage proptech companies and a $6 million multifamily loan loss reserve release contributed approximately 130 basis points to the Real Estate Services adjusted EBITDA margin.
It is important to note that second quarter margins clearly benefited from an expense base that is not yet fully normalized, particularly the variable components, such as T&E, but also fixed compensation costs.
In the near term, we intend to accelerate hiring for critical positions to execute on growth opportunities that we see ahead.
Turning to the Americas.
Fee revenue grew year-over-year across all service lines, most markedly in Capital Markets and Leasing.
Within Americas Capital Markets, fee revenue from U.S. investment advisory sales grew 146% and U.S. debt advisory increased 153%.
The U.S. Capital Markets service line witnessed a pronounced rebound with optimism broadening from high-growth areas such as Industrial to other segments of the market, including Retail, Office and Hotels.
Our multifamily debt origination and loan servicing businesses continue to demonstrate strong momentum, highlighted by 26% growth in our loan servicing fee revenue.
Our Americas Capital Markets pipeline has increased from the prior quarter.
Now to Americas Leasing.
Our growth meaningfully outperformed the market, driven by continued gains in the industrial sector as well as strength in Retail, Office and Life Sciences.
Transaction velocity has increased meaningfully, though average deal size has declined.
Our full year 2021 Americas leasing growth pipeline is up 38% from 2020 and 7% from 2019, supporting our optimism for continued strong growth in the second half of 2021, though the evolution of the pandemic will continue to be the critical factor in the recovery rate.
The Americas office sector remains below pre-pandemic levels, but we are encouraged by a multitude of factors indicating an improving market environment.
According to JLL Research, there was a 5% increase from the first quarter in net effective rents in Class A offices across major U.S. cities, bringing the rents to approximately 15% below pre-pandemic levels.
Also, average lease terms increased for the second consecutive quarter to 7.4 years from the fourth quarter 2020 trough of 6.7 years, though it remains below the full year 2019 average of 8.6 years.
Renewals as a percent of the transaction mix, however, remain about two times the historical average mix, at about 56% in the second quarter.
From a profitability standpoint for the quarter, the Americas adjusted EBITDA margin increased to 22.2% from 10.8%, driven primarily by strong growth in transactional businesses as well as the benefit from cost mitigation actions taken in 2020 and an unsustainably low headcount and cost base.
Noncash evaluation increases within our JLL Technologies investments and release of a portion of the multifamily loan loss reserve contributed approximately 180 basis points to the expansion.
In EMEA, fee revenues grew year-over-year across all service lines in much of the region, in part due to reducing pandemic headwinds.
Fee revenue within each of the EMEA capital markets Leasing and Valuation Advisory within the Advisory, Consulting and Other service line was ahead of 2019 levels as vaccinations and a return to the office trend has led to improved market sentiment.
EMEA leasing growth was broad-based across sectors, but most pronounced in Office and Industrial.
EMEA's second quarter profitability was the highest it has been in several years, driven by the higher fee revenue, particularly in the transactional businesses as well as the cost savings, especially in fixed compensation from actions taken over the past year.
Asia Pacific fee revenue growth accelerated to 26% from 12% in the first quarter as activity picked up across most service lines, most notably in Capital Markets and Leasing.
However, our performance was mixed across the region due to varying pandemic recoveries.
Asia Pacific Capital Markets fee revenue exceeded the 2019 level, and its particularly strong year-over-year growth was driven largely by several large transactions in Australia.
Asia Pacific leasing activity continues to pick up across most countries, but the pandemic resurgence is weighing on momentum across the region.
Asia Pacific Advisory and Consulting fee revenue materially exceeded the second quarter 2019 level, with strong growth driven largely by our Valuation Advisory service.
On a global basis, Property & Facility Management service line fee revenue growth was steady, much like it has been throughout the pandemic.
Growth of more annuity-like business is more than offsetting nonrecurring revenues from quick response tasks like supporting pop-up medical sites we saw in 2020.
Additionally, our U.K. mobile engineering business has benefited from some easing and lockdowns compared to the prior year quarter.
Corporate occupiers and investors seek our services not only for higher building management standards but also JLL's broad views regarding best practices in reopening the workplace.
Our global Work Dynamics business fee revenue growth improved to 8%, driven by sustained good growth in the Americas and EMEA starting to recover from the pandemic impact.
We are encouraged by the number of new client wins and contract expansions that are fueling the growth, which is further buoyed by the secular outsourcing trend.
Corporations are increasingly seeking our extensive knowledge and the breadth of our services, including sustainability, delivered seamlessly under our One JLL philosophy.
Fee revenue increased 10%, driven largely by advisory fee growth within its core open-end funds.
Incentive fees of $15 million were driven by strong performance in our public securities mandates.
We now anticipate full year 2021 incentive fees of approximately $45 million, with approximately $10 million coming in the third quarter.
LaSalle's assets under management grew approximately 6% from the prior quarter to $73 billion, driven by valuations and continued capital raising and investment.
LaSalle's $23 million of equity earnings primarily reflects noncash fair value increases across our co-investment portfolio, including our J-REIT.
Shifting now to an update on our balance sheet and capital allocation.
Our balance sheet remains strong, with reported leverage of 0.6 times and liquidity of $2.9 billion inclusive of cash on hand and undrawn credit facility capacity, providing us a solid foundation to execute on our strategic priorities.
We are continuously evaluating growth opportunities, both organic and inorganic, and plan to continue to invest in both LaSalle co-investments and in our JLL Technologies initiatives, which comprise two buckets: one, investments in early stage prop-tech companies that are transforming the real estate industry; and two, investments in technology companies that accompany strategic partnerships to drive revenue growth, such as our investment in rootstock earlier this year.
Overall, we have not completed any significant M&A year-to-date, but are constantly reviewing potential opportunities, holding to our underwriting standards and return thresholds comfortably above our cost of capital.
Importantly, we are committed to returning capital to shareholders while also investing in our business.
Through the end of July, we repurchased $100 million of stock year-to-date and have $500 million remaining on our authorization.
The repurchases to date are roughly equivalent to full year 2020 and more than double the annual dividends distributed in the years preceding 2020.
The level of capital return to shareholders in any particular year will be dependent on a variety of factors, including debt levels, investment opportunities and return expectations, among others.
As we move through the balance of 2021 and next year, we will evaluate the use of capital in the context of the current and anticipated opportunities and the broader economic environment.
We will continue to focus on maintaining flexibility to invest for growth, both organic and inorganic, while maintaining our investment-grade balance sheet and returning cash to shareholders.
Looking ahead to the second half of 2021, the market environment is quite dynamic, and we are mindful of tightening labor markets globally and an uneven recovery across markets and business lines.
Our improving underlying business fundamentals, strengthening pipelines, global diversified platform and added visibility on the macroeconomic recovery give us confidence that the momentum in the first half of the year is likely to continue.
As Christian mentioned, we are now targeting to operate within an adjusted EBITDA margin range of 16% to 19% for the full year 2021.
This is due to the strong momentum in the business and increased visibility into a post-COVID operating environment as well as the number of steps we've taken to strengthen our business and operate more efficiently over the past several years, including the successful integration of HFF and the cost reduction actions in 2020.
We do expect our cost base to increase in the second half of this year as we continue to invest in our strategic priorities and growth initiatives across business lines, such as our technology capabilities and people, which will drive long-term value.
While we maintain strong cost discipline, we continue to expect certain variable costs, such as T&E to gradually return.
I also reiterate the first half of 2021 included $89 million of equity earnings and $14 million of loan loss reserve releases.
Considering these factors, our earnings mix between the first half and the second half of the year will be different versus prior years, and that we will still expect the majority of our earnings to be generated in the second half of the year, but not to the same extent as in prior years.
We will target to run the company in the near term within the adjusted EBITDA margin range of 16% to 19%, and we will be undertaking a holistic analysis of our long-term financial targets, and we'll have more to share with you next year on this topic.
Christian, back to you.
While we continue to remain confident in our expectations of continued recovery as vaccine availability provides a line of sight to a post-pandemic future, we are mindful of the hurdles that could hamper a complete macroeconomic recovery.
Consumer and business confidence have seen a sharp recovery though uncertainty lingers regarding a return to pre-pandemic norms for behavior patterns.
Further, while inflation continues to be considered transitory for 2021, concerns about an extended inflationary environment, makes the earlier monetary policy tightening cycle.
In closing, the recovering growth outlook, the global scale of our platform, the increased value of our technology investments and continued assets from our outstanding colleagues around the world fuel our confidence in JLL's ongoing strong performance.
Operator, please explain the Q&A process. | q2 adjusted earnings per share $4.20.
qtrly consolidated revenue of $4.5 billion and fee revenue of $1.8 billion, increases of 18% and 41%, respectively. | 1 |
As always, I'm available by email or phone for any follow-up questions you may have.
Joining me for today's call are Roger Penske, our Chairman and CEO; Shelley Hulgrave, our Chief Financial Officer; and Tony Facioni, our Vice President and Corporate Controller.
We may also discuss certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization or EBITDA.
I direct you to our SEC filings, including our Form 10-K for additional discussion and factors that could cause results to differ materially.
I'm pleased to report all-time record third quarter results for PAG, in the best quarter in the history of the company.
Our total revenue increased 9% to $6.5 billion and income from continuing operations before taxes increased 53% to $476 million and income from continuing operations increased 44%, the $355 million and related earnings per share increased 45% to $4.46.
Although unit sales were impacted by supply shortages in both our retail automotive and commercial truck dealership operations, earnings growth was driven by a 39% increase in retail automotive, 135% increase in commercial trucks variable gross profit per unit retailed, also 4% increase in retail automotive service and parts gross profit and a 230 basis point reduction in SG&A to gross profit and $15 million in lower interest costs coupled with an increase in commercial truck dealership EBT of 106% and an 83% increase in earnings from Penske Transportation Solutions.
This demonstrated the continued strength of our investment and the benefit provided by our diversified business model.
Looking at our retail automotive operations on a same store basis for Q3 '21 versus Q3 '20, units declined 8%.
However, revenue increased 7%.
Gross profit increased 18% including 180 basis point increase in our gross margin.
Our variable gross profit increased 39%, to $5,769 per unit compared to $4,152 last year.
Looking at CarShop, we now operate 22 locations and expect to open one additional location by the end of the year.
We recently added locations in Leighton Buzzard and Wolverhampton in the UK and our Scottsdale location opened this week.
During the quarter, CarShop unit sales increased approximately 1% to 18,451 units, revenue improved 24% to $438 million and gross profit per unit increased 12% to $2,668.
Our current annualized run rate is approximately 70,000 to 75,000 units representing revenue of $1.6 billion and an EBT between $45 million and $50 million.
Turning to the retail commercial truck dealership businesses, our Premier Truck Group represented 11% of our total revenue in the third quarter.
Retail revenue increased approximately 26%, including a 6% on a same store basis.
On a same store basis, retail gross profit increased 40%, including a 10% increase in service and parts.
Earnings before taxe is increased 106% to $48 million and the return on sales was 6.7%.
The Class 8 commercial truck market remains very strong and during the third quarter, North American Class 8 net orders increased 28% and the backlog increased to 179% to 279,000 units, representing a 13-month supply.
Based on the current industry forecast, retail sales are expected to increase over the next two years and provide tailwinds to our commercial truck and truck leasing businesses.
Turning to Penske Transportation Solutions, we own 28.9% of PTS which provides us with equity income, cash distribution and cash tax savings.
PTS currently operates the fleet to over 350,000 vehicles.
For the nine months ended September 30th, PTS generated $8.2 billion in revenue and $949 million in income or a 12% return on sales.
In Q3, PTS generated $2.9 billion in revenue and income of $409 million or a 14% return on sales.
As a result, our equity earnings in Q3 increased 83% to $118 million.
Our full service leasing and contract sales were up 8%.
Our commercial rental revenue was up 51% and our utilization hit 88% with an additional 14,000 units on rent.
Our consumer rental is up 27% and our logistics revenue increased 27%.
Our gain on sale of used trucks is up 140%, as a strong freight environment and a supply shortage of new trucks is certainly driving a demand for used vehicles.
Looking at the PAG balance sheet and cash flow.
The balance sheet remains in great shape.
At September 30th, we have $119 million in cash and we ended the third quarter with over $2 billion in liquidity.
When looking at our capital allocation, we maintain a disciplined approach that focuses on opportunistic investments across both our retail automotive and commercial truck businesses, capital expenditures to support growth including our first half growth strategy, delivering a strong dividend to our shareholders, reducing that whenever possible and share repurchases.
In fact, year-to-date, we have repurchased 2.5 million shares representing approximately 3% of the total shares outstanding.
Year-to-date we generated $1.3 billion in cash flow from operation.
We invested $157 million in capital expenditures, including $18 million to acquire land for future CarShop expansion.
Net capex was $84 million.
At the end of September, our long-term debt was $1.4 billion.
We have repaid $922 million of long-term debt since the end of 2019.
In addition, we have either repaid or refinanced our senior subordinated debt to lower rates while lengthening the term to take advantage of current market conditions, which has contributed to a $34 million reduction in interest expense so far this year.
These initiatives have lowered our debt to total capitalization to 27%, compared to 37% at December 31st and 45.6% at the end of 2019.
Our leverage ratio fits at 0.9 times, an improvement from 2.9 times at the end of 2019.
At the end of September, our total inventory was $2.6 billion, retail, automotive, inventory is $2 billion, which is down $937 million from December last year.
We have a 19-day supply of new vehicles.
Our day's supply of premium is 22 and volume foreign is 9.
We expect the current supply challenges coupled with strong demand to keep our new vehicle supply at low but manageable levels.
Used vehicle inventory is in good shape with a 40-day supply.
Moving onto our digital initiatives.
We continue to grow, expand and enhance our digital footprint including the introduction of new tools and technologies to offer our customers a hybrid customer-driven shopping model.
Depending on their preferences, customers can purchase either fully online, in-store or any combination of the two.
We will also deliver vehicles directly to a location desired by our customers.
As part of our omnichannel customer experience, we strive to be a leader and online reputation including online customer reviews and star ratings on Google.
Looking at our other digital tools, we retailed 2,550 vehicles or 4.3% of our U.S. unit sales and 14% of our customers use preferred purchase and their buying journey.
Using the Sytner by-on tool in the UK, a customer reserve a car for 99 pounds, apply for financing, receive insta credit approval, obtain a guarantee price and pay online.
During the quarter, we sold 3,700 units using this platform.
When you combine all of our digital tools, including new technology available at CarShop, a customer may perform any part of the transaction online or may use these tools to shorten or visit to the dealership.
Looking at corporate development, in addition to the 220 million of year-to-date share repurchases, we completed acquisitions totaling $600 million in annualized revenue through September 30th.
In October, we acquired the remaining 51% of our Japanese-based joint venture of premium luxury automotive brands, which will add $250 million in consolidated annual revenue and we have another $300 million in annualized revenue of deals in our pipeline that we expect to close either in the fourth quarter or early in 2022.
We also opened up a new Porsche dealership in Washington D.C. earlier this year and we have three other open points under construction.
We increased our CarShop locations by five and expect to open one additional location by the end of the year, bringing our total to 23 locations.
We remain on track with CarShop to retail 150,000 in unit sales and generate $2.5 billion to $3 billion in total revenue and our $100 million of EBT by the end of 2023.
As we look across our diverse portfolio of businesses, we continue to target organic and acquisition growth, as well as further operating efficiencies to continue to grow and expand our businesses.
Before I close, I'd like to congratulate the 35 U.S. dealerships that were named by automotive news to the 100 best dealerships that work for listing.
We had more dealerships on the list than any other automotive retailer, including six of the top 10, 12 of the top 25 in the 2021 ranking.
Our Audi of charge stores ranked number one in the country.
Additionally, seven PAG dealerships were ranked in the top 10 nationally, including the top three places for their efforts to promote diversity, equity and inclusion.
We're honored by these accomplishments and are extremely proud of our team for their commitment to drive the passion and the efforts in working together to be one of the very best.
I'm also pleased to announce the Penske Automotive Group was ranked first in the listing of U.S. public dealerships teams in the 2021 automotive reputation report published by reputation.com.
In closing, our business remains strong and our record performance demonstrates the benefit of our diversification. | penske automotive group q1 earnings per share $4.46.
qtrly total revenue increased 8.8% to $6.5 billion.
qtrly total revenue increased 8.8% to $6.5 billion from $6.0 billion.
q1 earnings per share $4.46. | 1 |
Presenting today are Bryan DeBoer, President and CEO; Chris Holzshu, Executive Vice President and COO; and Tina Miller, Senior Vice President and CFO.
Today's discussions may include statements about future events, financial projections and expectations about the company's products, markets, and growth.
We disclose those risks and uncertainties we deem to be material in our filings with the Securities and Exchange Commission.
Our results discussed today include references to non-GAAP financial measures.
Earlier today, we reported the highest adjusted third-quarter earnings in company history at $11.21 per share, a 63% over last year's strong results.
Record revenues of $6.2 billion were primarily driven by successful navigation of the abnormal supply and demand environment and contributions from acquired businesses.
During the quarter, total revenue grew 70%, while total gross profit increased 83%.
On a same-store basis, used vehicles let our revenue growth up 40%, followed by a 22% increase in F&I income, a 7% increase in Service, Body and Parts revenues, and a relatively modest 3% decrease in new-vehicle revenues.
Additionally, same-store gross profit increased 23%.
Our operational teams executed our best-in-class used inventory procurement model to source and recondition a large volume of used vehicles in a highly cost-effective manner.
Our ability to reposition vehicles within our nationwide network and our Driveway procurement technology allowed for optimal inventory levels throughout the quarter.
On the new vehicle side, increased GPUs more than offset the decline in volume.
Chris will be providing additional details on our same-store sales, inventory levels, and operational highlights in a few moments.
Through our omnichannel strategy and expanding our network by acquiring new vehicle franchises, we have rapidly increased our size and scale, further growing our significant capital engine.
In the third quarter, we generated $530 million in adjusted EBITDA, greater than any full-year in our history before 2019, providing us additional capital to deploy toward network expansion and Driveway, while also accelerating our continued exploration into adjacencies.
The robust customer demand we saw in the third quarter was driven by high levels of household savings, government subsidies at lower interest rates, and increased equity in trade-ins.
Elevated demand in margins are likely to be sustainable into the next few quarters due to the continued strength from these drivers, coupled with tight new vehicle supply and accelerating miles driven as [Phonetic] consumers return to work and continue to travel using their vehicles.
As our industry transitions toward electrification and more convenient and empowered mobility solutions, LAD will anticipate and adapt to execute and proactively lead this change.
Our plan to reach $50 billion in revenue and exceed $50 in earnings per share by the year 2025 from here on referred to as our 2025 plan, was designed with these and other consumer trends in mind.
Lithia & Driveway full lifecycle offerings and adjacencies are evolving to respond to changing preferences.
Beyond the Lithia & Driveway channels, are complex, expansive, and difficult to replicate design that we have incrementally unveiled over the past 15 months, today includes green cars, the foremost educational marketplace for sustainable vehicles, a quickly growing FinTech Driveway Finance, growing fleet in leasing operations, and a Canadian presence to establish the seeds for international growth, longer term.
We look forward to continuing to share further elements of our design and how our digital solutions can be applied to similar mobility industries and further adjacencies to create a broad-based, highly diversified multi-sector disruptive company.
Our traditional Lithia business are now evolving their offerings, given our decentralized culture and belief that our stores know their local markets best, they operate as local brands with the autonomy to implement e-commerce solutions that meet their customers' needs.
When designing our omnichannel strategy, careful consideration was given to the existing end-to-end digital solutions that many of our Lithia stores' omnichannel offerings already utilized.
While continuing to grow these Lithia experiences, LAD established Driveway as a unique independent brand with dedicated leadership, engineering and marketing teams, developing proprietary software and a complete lifecycle of in-home experiences to attract incremental consumers to LAD.
This also provided consumer solutions that are broader and lower costs than any of our used-only e-commerce retail peers.
In conjunction with the acceleration of consumer demand for in-home retail experiences, we are seeing the massive benefits of having consumer optionality for both Driveway and Lithia in-store and online experiences.
Our initial design and early learnings from Driveway continue to guide and expand how our Lithia businesses interact with consumers.
While our attentions were turned to Driveway's completely incremental revenue growth, we've been remiss in sharing that our Lithia business continues to provide digital experiences through its 300-plus local, regional, and Lithia websites.
For the third quarter, these Lithia websites and associated online shopping experiences connected with 11.5 million quarterly unique visitors.
These Lithia e-commerce customers accounted for 36,600 or 25% of all units retailed in the quarter, and simply estimated at $5.9 billion of annualized revenues attributed to the e-commerce portion of our traditional Lithia channel.
These Lithia e-commerce sales are in addition to Driveway's growing successes that we will share in just a few moments.
To put this into perspective, these e-commerce sales as a percentage of monthly unique visitors, represents a 0.32% or what we call a golden ratio.
This performance level is similar to other established, digital-only used retailers.
To further illustrate the strength of our omnichannel strategy, when our LAD total sales are compared to unique visitors from all channels, our golden ratio was 1.46%, nearly 5 times more successful than our digital used-only peers.
Lastly, it's important to note that we are not incurring incremental spending on our stores' e-commerce tools as we are leveraging third-party vendors similar to our new vehicle franchise peers e-branding efforts.
Though we are pacing significantly ahead of our 2025 plan, we remind everyone that our revenues have experienced drag from inventory constraints, and earnings are greatly inflated from vehicle margins.
Finally, we are pleased to report that every channel and adjacency is considerably ahead of plan.
We remain humble and mindful that the elevated earnings levels of the past few quarters are driven by factors outside of our control and remain poised to capture every possible revenue and margin available to us in this market.
As a reminder, the 2025 plan assumes a pre-COVID business environment, margins, and growth rates.
Internally, we view the 2025 plan as a base case and our leaders are focused on taking our execution to the next level and de-linking $1 billion of revenue to produce more than $1 of EPS.
Key drivers of this are no further equity capital raises meaning no further dilution to EPS, leveraging our underutilized network to support a 2 times to 3 times increase in vehicle sales, and a 4 times increase in parts and service sales through the existing network.
Further improvements in personnel productivity, economies of scale, and marketing from national brand awareness; an investment-grade credit rating to reduce borrowing costs, and most importantly, further adjacencies with higher margins and structurally lower SG&A costs.
The adjacency we're furthest [Phonetic] along with is Driveway Finance or DFC, that has experienced rapid growth since expanding in spring of 2020.
During the quarter, DFC originated 6,200 loans, and now has a portfolio of $530 million.
We are planning to enter the ABS term market by the end of the year, which will allow us to quickly and profitably scale future consumer offering and lending volumes.
Important to note is that a loan originated with Driveway Finance earns 3 times the amount earned when we arrange financing with a third-party lender on a fully discounted basis.
We believe that Driveway Finance can penetrate 20% of refinanced [Phonetic] retail unit sales.
This percentage is lower than used-only peers finance companies as subvented leases and finance contracts with our manufacturer captives will always account for a sizable portion of our new and certified businesses.
The front-loading of our M&A provides a larger base for Driveway Finance to draw from and increases the potential contribution above what our current 2025 plan includes.
We are excited about the continued growth of Driveway and the interest and engagement it's seen from our consumers.
Driveway generated over 530,000 monthly unique visitors in September, a 68% increase over June.
96% of our customers were incremental and had never a transaction with Lithia or Driveway before.
Monthly shop transactions increased 86% during the quarter.
Strong Google and Facebook reviews and a net promoter score of 90 indicate Driveway is building an online reputation for exceeding consumer expectations for a fully digital, frictionless experience.
We recently launched Driveway marketing in Las Vegas and Phoenix, our 9th and 10 markets.
Continued improvement in our existing markets improved our overall Driveway golden ratio, even with the early dilution from these two new markets.
We anticipate entering further new markets soon and remain on pace to expand the nationwide marketing by the end of next year.
To support consumer demand, we accelerated the opening of our third Driveway care center in Dallas, which occurred in September.
In addition, we have ramped hiring at all three time zones care centers, and believe we are well-positioned to support the increased volume of traffic we expect to see in the coming months.
Driveway is on track for its 2021 target of 15,000 annual transaction run rate exiting December.
Looking forward to '22, we are forecasting 40,000 transactions with a 2.2 to 1 sell-to-shop ratio.
Driveway's dedicated management, operation, engineering, and marketing teams are continuously testing and learning as they enhance the Driveway website and consumer experiences, recently deploying another powerful new feature.
Driveway now offers consumers the ability to sort by distance.
This enables consumers to see which vehicles are in the closest proximity to them and delivered the fastest, with the lowest or no shipping fee.
This new feature will decrease delivery times and increase our golden ratio.
Viewing our dealerships' omnichannel tools and Driveway together, we are well positioned to retain our existing dealership customers by interacting with them in new ways that are aligned with their ever-evolving preferences.
Additionally, we believe our digital infrastructure will enable us to conquest market share from competitors that lack the resources to invest in technologies and/or nationwide network, or choose not to commit to a transparent, empowered negotiation-free experiences to effectively attract incremental customers.
Acquisition growth, the backbone of our strategy, continues to expand our physical network to support all of our business lines, whether in-store or in-home.
In our future state, we expect our optimal physical network to be approximately 500 stores across the US, placing us within 100 miles of all US consumers.
This enables us to offer timely, convenient, and affordable in-home solutions while realizing the economies of scale that will come from a nationwide footprint and brand.
While several large deals were announced recently, the automotive retail industry remains highly fragmented and unconsolidated with the market share of the 10 largest groups at only about 10%.
We have nearly $1.5 billion in annual revenue commitments as well as over $12 billion in the pipeline, which excludes our peers' large transactions.
We remain confident in our ability to find deals that best fit our regional network strategy and are priced at our disciplined 15% to 30% of revenues, and 3 times to 7 times EBITDA.
This ensures we meet our after-tax return threshold of 15% in a post-pandemic profit environment.
Lithia and Driveway are known in the industry as the buyer of choice, obtaining manufacturer approval, timely in certain closing of transactions, and retaining over 95% of the employees.
During the quarter, we completed acquisitions that are expected to generate $1.7 billion in annualized revenues, and year-to-date, we have completed $6.2 billion.
Included in the total, we made our first international acquisition partnering with Pfaff Automotive in Canada.
With a strong presence in Toronto, Canada's largest market, we are excited to have Chris Pfaff and his high-performing team join us.
In addition to its stores, Pfaff operates the leasing business, furthering our learnings of synergistic adjacencies.
We also expanded our US footprint, particularly in the Southeast Region 6, entering the Atlanta, Georgia and Mobile, Alabama markets.
In closing, we are acutely focused on executing our omnichannel strategy, designed to continue our [Phonetic] track record of earnings and revenue growth for decades to come.
Though our plan may seem complex, our fast-moving and hyper-proactive team with multiple decades working together is ready for any challenge or competitor.
We have grown exponentially, while maintaining industry low leverage of around 2 times, for nearly a decade.
With our various channels meeting customers, wherever, whenever, however they desire; we are well-positioned to gain share, outperform the market, and exceed our 2025 plan.
Entering the final quarter of 2021 with another record year already behind us, our store leaders continue to challenge their teams to embrace the future, evolving all business lines, and achieve the 2025 plan.
This includes ensuring that our 22,000 associates continue to lead the digital transformation of automotive retail in their respective markets, while exceeding customer expectations, increasing market share, and improving profitability.
As most of you are aware our manufacturer partners were impacted by microchip shortages and struggled to supply a sufficient volume of new vehicles to meet customer demand during the third quarter.
As a result, same-store new vehicle unit sales decreased 3% in revenue and 14% in units, consistent with the nationwide SAAR decrease.
We were able to offset the decreased volume with higher total variable GPUs, averaging $7,446 in the third quarter compared to $6,082 in the second quarter of 2021, and $4,754 in the prior year.
As of September 30, we had a 24 days supply of new vehicles on the ground, which excludes in-transits.
While the new vehicle day supply environment was challenging, our 58 days supply of used vehicle inventory exiting June 2021 positioned us well for the third quarter, where we saw a 40% increase in revenue on a 13% increase in units.
Our 1,000-plus procurement personnel did excellent work sourcing vehicles, enabling us to offer customers a wide spectrum of vehicles, meaning all levels of affordability.
We currently sit at a 48 days supply of used units and anticipate we will be able to continue to mitigate pressure on the new vehicle supply by maintaining solid used car comps and strong profitability.
In the third quarter, we saw a 74% of our used vehicles direct from consumer, such as trade-ins and off-lease, where we as top-of-funnel franchise dealers get first look at the used vehicle inventory pipeline.
Only 26% of our vehicles were procured from other channels such as auctions, other dealers, or wholesalers.
During the third quarter, we earned $3,897 in gross profit on used-vehicle sourced from customer channels, which turns in an average of 33 days.
For used vehicle sourced from other channels, on the other hand, we earned $2,696 in gross profit per unit, and those turned in an average of 51 days, which again, demonstrates the benefits of an omnichannel strategy for Lithia & Driveway.
Our expanding physical network of new vehicle franchises and the benefits of Driveway allow us to offer the most diverse inventory in North America.
We offer vehicles that meet all affordability levels, but the largest number of bulk manufacturer certified pre-owned vehicles and those priced under $10,000, or are over 10 years old.
Again these vehicles also turn the fastest and yield the highest margin percentages.
Additionally, our internal dealer trade network, which creates an opportunity for our own network to have first shot at the 100,000 units we wholesale annually, allows us to cost-effectively move vehicles to better match supply and demand, and increase our retail versus wholesale mix.
Turning to Parts and Service.
Same-store revenues increased 7.3% over last year.
The growth was distributed across all business lines except warranty.
We anticipate a continued tailwind benefiting service into 2022, as the substantial losses in the miles-driven rebounds and well positions our highest profit margin business line.
With SG&A, we are focused on improving productivity of our personnel, targeting investments in marketing, and further leveraging our fixed expenses.
These actions will improve our gross profit throughput when margins subside.
We believe that these actions reduce our normalized SG&A levels at least 300 basis points below pre-COVID levels, or to approximately 65% of gross profit.
As our teams prepare their 2022 annual operating plans, they remain hyper-focused on executing to ensure the topline growth is aligned with further productivity improvements that result from our investment in the omnichannel model wherever, whenever, and however customers choose.
These efforts, along with our exploration of adjacencies, translate to significant potential to increase leverage and drive additional profit as expected in our 2025 plan.
For the quarter, we generated over $530 million of adjusted EBITDA, a 104% increase over 2020.
And $304 million of free cash flow defined as adjusted EBITDA plus stock-based compensation, less the following items paid in cash: interest, income taxes, dividends, and capital expenditures.
We ended the quarter with $1.7 billion in cash and available credit, which if deployed to support network growth, could purchase up to $6.8 billion in annualized revenues.
As of September 30, we have $3.8 billion outstanding in debt, of which $1 billion was floor plan and used vehicle and service loaner financing.
The remaining portion of our debt primarily relates to senior notes and financed real estate as we own over 85% of our physical network.
Our disciplined approach is to maintain leverage between 2 times and 3 times as part of our commitment to obtaining an investment-grade credit rating, which would be another sizable competitive advantage once obtained.
As of quarter-end, our ratio of net debt to adjusted EBITDA is 1.25 times.
Our capital allocation priorities for deployment of our annual free cash flows generated remains unchanged.
We target 65% investment in acquisitions, 25% internal investment including capital expenditures, modernization and diversification, and 10% in shareholder return in the form of dividends and share repurchases.
With capital raises completed earlier this year and elevated free cash flows generated as a result of the current environment, we accelerated our investment in Driveway and DFC, incurring over $50 million in SG&A and capital expenditures, year-to-date.
The personnel cost for our over 500 associates who support the scaling and continued build-out of Driveway and DFC; the marketing investment for Driveway; and IT development cost, or current period headwinds.
And most importantly, supports the build-out of our future state and provides the foundation for a new generation of incremental profitability.
We are well-positioned for accelerated, disciplined growth on the path toward achieving our plan to reach $50 billion of revenue and exceed $50 of earnings per share by the year 2025.
We would now like to open up the call to questions. | compname reports q3 adj earnings per share $11.21.
lithia & driveway (lad) increases revenue 70%, earnings per share 47%, and adjusted earnings per share 63%, record third quarter performance.
q3 revenue $6.2 billion versus refinitiv ibes estimate of $5.78 billion.
adjusted q3 2021 net income attributable to lad per diluted share was $11.21. | 1 |
I hope you're all safe and well.
Earlier today, we reported our first quarter results for fiscal year 2022.
I'm pleased to share that Triumph demonstrated strong organic growth and year-over-year improvement in margins companywide, driven by increased MRO volumes, all while we continue to come through the pandemic and clean up our portfolio and balance sheet.
Having stabilized and exited most of our structures business, our focus in Q1 was on strengthening and improving our core business, while pivoting to growth and retiring several nonrecurring cash uses.
Our cost reduction actions continue to boost our results as the market recovers.
We continue to see promising macro trends this quarter on multiple fronts.
First, increases in demand for commercial aviation translated into higher orders for maintenance, repair and overhaul work.
MRO order flow, both in terms of volume and the nature of the work coming in, continue to be a strong indicator of recovery.
Our MRO job inductions metrics, which serve as an early indicator for carrier traffic recovery, increased 37% for the quarter with a 6% sequential increase overall led by engine accessories and the sales structures.
Aftermarket spares and repairs, sales were up overall more than 70% for the quarter.
Second, military continues to be a source of strength for Triumph, with new wins contributing to both revenue and backlog, offsetting planned declines in commercial aviation.
These platforms enjoy continued budget support, particularly those we supply.
Favorable trends in Systems & Support military helicopter and engine programs and increasing narrow-body production rates were key contributors to our continued recovery and reinforce the hidden value of Triumph's diversified customer base and platform content.
We're optimistic this upward trajectory will continue.
Commercial air travel indicators continue to be positive.
Delays in widebody recovery have been offset by narrow-body programs.
Orders for the A320 and 737 MAX have seen new highs since the beginning of the pandemic.
I want to congratulate Boeing for completing the first flight of the 737 MAX-10 on June 18, which was followed by June 29 order from United Airlines for 150 aircraft.
Orders for commercial transport aircraft are up in 2021 as Airbus and Boeing have reported 721 new orders, offset by 476 cancellations.
Bright spots include United's June order for 737 MAX and A321neo aircraft, the FedEx order for 767, and the May Southwest Airlines orders for the MAX.
Commercial transport backlog now stands at approximately 12,000 aircraft.
The industry's focus is now shifting to mitigating production ramp risks.
Boeing recently announced a slowing of the 787 production rate.
Triumph had already de-risked its twin-aisle build rates with our 787's percentage of sales and inventory, reflecting conservative assumptions.
Similarly, we are on a path to exit the A350 build-to-print brackets production line in our interiors business.
Reductions in these rates will not have a material effect on Triumph.
The combined benefits of strong military demand and recovering commercial MRO demand, coupled with our comprehensive actions to improve financial performance, create positive momentum for fiscal 2022 and the years to follow.
After 18 months of uncertainty, we have more clarity on near-term OEM and MRO demands as markets continue to stabilize, and we see lift from military and cargo demand.
Combined with our diversification, we are now able to provide guidance for fiscal '22 that reflects increasing revenue and positive cash flow over the balance of the year.
Environmental, social and governance initiatives remain a high priority for Triumph and our Board.
While reducing CO2 emissions, wastewater and energy usage, considerable investment has been made in the development of new products to enhance aircraft fuel efficiency.
We are adopting additive manufacturing across our core products, which has the benefits of lower production costs and substantially lower weight.
We are making similar advancements in heat exchangers to enable a more efficient airframe with less drag.
Triumph is investing in energy efficiency projects such as eliminating lead-based components and implementing closed-loop solvent recycling systems and converting hazardous waste to non-potable water.
Triumph has launched an energy conservation project in our largest production facility, which will reduce electrical power use by 25% annually.
As a result of this work, Triumph's Seattle R&D facility will be featured in a future episode of Earth with John Holden, which showcases an inspiring array of companies with eco-friendly initiatives that are enhancing the lives of Earth's inhabitants through advanced technologies.
Overall, we're pleased with Triumph's first quarter results, which are either in line with or above our expectations, enabling us to meet our objectives.
On slide four, I summarized some of the quarter's highlights.
MRO and aftermarket spares continue to be a leading indicator of the market recovery.
Our portfolio actions, cost reduction efforts and expanding sales resulted in improved operating margins across the enterprise.
We are on track to complete our final 747 production components this month, and in the last of our significant loss-making programs.
We repaid the remaining balance of our 2022 bonds while preserving strong liquidity.
Last, continued improvements and stability in the broader markets enhances our confidence in our outlook as we initiate financial guidance for fiscal 2022.
At this point, the worst of the pandemic is behind us and the macro trends remain positive, yet we recognize that the market recovery will continue to be uneven over the next several quarters.
So we're prudently maintaining our cost reduction austerity measures from last year, with intentions to reverse them as the market continues to improve.
Our actions, combined with OEM and MRO rate increases will support expanded margins and cash flow, putting us on a path to de-lever the company year-over-year.
On slide five, I quantify the drivers for this quarter's results.
First, organic growth was 11%, led by improved MRO and aftermarket spare sales within our core Systems and Support business.
OEM sales were driven by Airbus A320, 321 shipments, Bell 429 gearboxes and E2D actuation.
Systems & Support revenues for our third-party MRO increased 19%, while proprietary spare sales, primarily for military rotorcraft and commercial narrow-body production rates, more than offset commercial widebody declines.
Shipments to FedEx and UPS are up 52% for the quarter as cargo aircraft returned for deferred maintenance.
We continue to anticipate a bow wave of MRO repairs as deferred maintenance returns to our shops.
Military sales now comprise 53% of our sales in Systems & Support helping to offset the temporary commercial aerospace decline.
Military platforms such as the E2D, UH-60 and CH-47 contributed to the sequential sales growth driving a 12% increase in our military sales year-over-year.
As mentioned, we will deliver our final 747 structures this month, at which point Triumph will fulfill our program obligations.
We will close the second of two large structures facilities dedicated to the 747 in December, ending a long period of losses.
Setting the legacy cash-consuming programs, stabilizing performance across all of structures allowed them to be solidly profitable in Q1 on an adjusted basis.
Jim will provide an update on our exit of non-core structures business.
We remain on track to achieve our future state configuration as a largely pure-play Systems & Support provider to military and commercial customers, with interior structures capabilities.
Moving forward, we are increasingly leveraging our installed capacity and intellectual property portfolio to secure price increases on an annualized basis, which will benefit margin expansion plans.
A few updates on the state of the economy and our industry.
Early indicators within the aviation industry indicate steady progress in the quarter toward 2019 levels with airline travel bookings improving from 46% to 69% and corporate bookings up from 18% to 40% as strong summer bookings benefited domestic carriers.
Reflecting a return to airline normalcy and profitability, average airfare prices, weekly load factors and TSA throughput continue to recover in the U.S. Parked fleets have declined substantially with over 1,800 aircraft returned to service since March.
Finally, we are watching emerging defense legislative [marks] closely and are encouraged to see strong support for defense in key military programs on both the House Appropriations and Senate Appropriations committees, which should ensure stability and predictability in our defense programs for fiscal '22, including programs such as the CH-53K, F-15EX and E2D in our backlog.
As you know, the single-aisle segment will lead the aviation recovery, gratifying the OEM single-aisle deliveries for both Boeing and Airbus increase each month within the quarter, culminating in strong June numbers with Airbus delivering 62 single aisles and Boeing delivering 36.
We expect this positive trend to continue and are making plans across the supply chain to be ready for the ramp.
Overall, this is encouraging news, and I expect Triumph to gain momentum as the aviation recovery continues through the balance of the fiscal year.
We are well positioned to capture returning MRO business and OEM rate increases while expanding our defense programs.
Turning to wins for the quarter.
Our Systems, Electronics and Controls team are designing and upgrading engine controls for the global fielded fleet of T700 engines.
We received orders for FADECS upgrades to both U.S. Navy Seahawks and U.S. Army Apaches.
We are upgrading heat exchangers on the F-22 F119 engine for Pratt & Whitney, where we have significant IP.
95% of our heat exchangers are designed and developed by Triumph engineering teams.
We secured orders from GE for the F/A-18 E/F, F414 aircraft-mounted accessory drives.
This complex gearbox builds on the legacy of our F/A-18 C&D gearbox for the F404 engine.
Triumph is the world's largest and most capable third-party provider of gear and gearbox solutions, spanning the entire life cycle of gear products from design, development and test through manufacturing and sustainment.
Our customers value our capabilities and engage us in new and exciting opportunities such as the T-7A, the KF-X, Future Vertical Lift and classified programs.
Some of our largest customers in the MRO space are OEMs and Tier 1s.
We look to Triumph to support legacy program offloads, allowing them to concentrate on new platforms.
For the quarter, we completed another important Tier one agreement with Collins Aerospace, overhauling air cycle machines.
Finally, I'd like to highlight several strategic developments in our thermal business.
We are actively engaged with the Air Force Research Laboratory and the University of Dayton to design heat exchangers that use additive manufacturing to replace castings in an effort to address Air Force fleet sustainment issues.
While we started with heat exchangers, we believe additive has the potential to expand into other areas, which are traditionally constrained by casting suppliers, including gearbox and pump housings.
Finally, we completed an agreement with Paragon space to develop heat exchangers for their space vehicle life support systems.
In summary, we are pivoting from restructuring and contraction to growth across higher-margin IP-driven market segments.
In summary, our markets are improving, and we expect this trend to continue as commercial production rates increase into the next year.
We grew margins in the quarter across the enterprise, and retired several nonrecurring cash uses giving us the confidence to initiate financial guidance for fiscal 2022 with improving cash outlook quarter-over-quarter and year-over-year.
The combined lift of cost reductions, volume increases where favorable pricing and new product and service introductions, support our goal of doubling our profitability over our planning horizon while de-leveraging the company.
We will continue to invest sustainably in the development of our people, operations and products to enhance shareholder value year-over-year.
With that, Jim will now take us through results for the quarter in more detail.
We started our fiscal year with solid year-over-year organic growth and improving margins across the enterprise as the commercial aerospace market continues its recovery.
The actions we have taken through this first quarter enable us to have positive free cash flow over the balance of the year.
We continue to execute on our plans to pair the few remaining non-core businesses and product lines to decrease debt, maintain liquidity and focus on our profitable core business.
Our performance in the quarter, the improving market environment and the diversification of our business give us the confidence to establish financial guidance for the fiscal year.
I will discuss our consolidated and business unit performance on an adjusted basis.
On slide 10, you'll find our consolidated results for the quarter.
Sales are up 11% organically.
While the impact of the recent divestitures and sunsetting programs and structures led to lower sales compared to the prior year.
Q1 adjusted operating income was $31 million.
Adjusted operating margin was 8%, up 477 basis points from the prior year.
We continue to improve profitability on an adjusted basis quarter-over-quarter.
With respect to the segment results, on slide 11, net sales in Systems & Support were up 8%, and benefited from continued recovery in the aftermarket.
While an increase in narrow-body OEM work offset wide-body headwinds.
This segment sales were 53% military this quarter, up from 51% in the prior year quarter.
Adjusted operating margins for Systems & Support was 14%, 235 basis point improvement from the prior year, and benefited from increasing MRO demand.
Summarized on slide 12.
First quarter net sales for structures increased 15%, largely due to the prior year's impacts of the pandemic after adjusting for divestitures and the sunsetting 747 and G280 programs.
As noted on our prior call, the divestitures of the Composites and Red Oak businesses were completed in the quarter on May 7.
The results for the quarter include modest revenues and earnings through the date of the sale.
The continuing business is stable and improving as evidenced by the 10% adjusted operating margin compared to 1% in the prior year.
During the quarter, I visited our Grand Prairie, Texas facility and saw the significant progress our team has achieved to successfully complete the production of the 747 later this month.
Our remaining large structures facility in Stuart, Florida is a profitable business, and we are in active discussions with several strategic parties.
Turning to slide 13.
In Q1, we retired $100 million of discrete cash obligations related to advances, settlements, restructuring and wind down of 747 production.
Q1 included two quarterly payments of our advanced liquidations with no liquidation expected in Q2.
Excluding these sunsetting uses of cash, we used $51 million of cash in the first quarter on modest working capital growth in support of anticipated production rate increases, primarily on commercial narrow-body platforms.
We remain focused on aggressively managing our working capital with several initiatives across the enterprise targeted to improve our inventory turns.
Capital expenditures will accelerate over the remaining three quarters as we anticipate investment in our core Systems & Support segment in support of rising OEM and MRO demand.
On slide 14 is a summary of our net debt and liquidity.
Our net debt at the end of the quarter was approximately $1.4 billion, and our combined cash and availability was about $263 million.
In the quarter, we completed the mandatory paydown of approximately $112 million of first lien notes and redeemed the remaining $236 million of outstanding 22 notes.
Our next debt maturity is not until 2021 which gives us time to continue executing our deleveraging actions to strengthen our cash flow and improve our credit.
slide 15 is a summary of our FY '22 guidance.
Based on anticipated aircraft production rates, and excluding the impacts of potential divestitures, for FY '22, we expect revenue of $1.5 billion to $1.6 billion.
We expect adjusted earnings per share of $0.41 to $0.61.
Our earnings expectations take into consideration certain supply chain and inflationary pressures.
The good news is we have secured adequate inventory and supply commitments for critical materials, and we work to lock in the vast majority of our unit costs for the fiscal year and beyond.
Cash taxes, net of refunds received, is expected to be approximately $4 million for the year, while interest expense is expected to be approximately $140 million, including approximately $137 million of cash interest.
After approximately $150 million of free cash use in the first quarter, we expect in total to generate free cash flow over the balance of the year, with about $40 million to $60 million of use in Q2, approximately breakeven in Q3 and solidly cash positive in Q4.
For the full year, we expect to use $110 million to $125 million of cash from operations with approximately $25 million in capital expenditures, resulting in free cash use of $135 million to $150 million.
We've made significant progress in improving the predictability of our profitability and our cash flow.
We had solid organic growth and improving margins in Q1, and we expect to be cash positive over the balance of the year.
Cost reductions and operational efficiencies will help us to continue to improve margins as volume increases.
Measures we have taken and are taking are making us a stronger, more competitive and sustainable company moving forward.
We're off to a good start as are our customers, as we put the pandemic behind us.
Increasing OEM narrow-body production rates with continued signs of recovery within the MRO markets give us confidence that the worst of the pandemic is behind us.
Consistent with our full year guidance, we'll build momentum quarter-over-quarter by continuing the track record of growth and margin expansion in our core business and drive to positive free cash flow over the balance of the year.
We continue to take the hard actions to position Triumph for the future, including cost reduction, the exit of loss-making programs and divestitures.
Triumph is becoming a leaner, more profitable and cash positive company.
We continue to make strides toward our future state configuration, and we're unlocking the hidden value in our business, improving our win rates and delivering benefits for all stakeholders in a responsible and sustainable way.
Kevin, we're now happy to take any questions. | sees fy adjusted earnings per share $0.41 to $0.61.
sees fy sales about $1.5 billion to $1.6 billion. | 1 |
This is Ramesh Shettigar, Vice President of Investor Relations and Corporate Treasurer.
On the call today to present our second quarter results are Dante Parrini, Glatfelter's Chairman and Chief Executive Officer; and Sam Hillard, Senior Vice President and Chief Financial Officer.
These statements speak only as of today, and we undertake no obligation to update them.
Glatfelter delivered positive overall results versus expectations despite entering the quarter anticipating softer demand and market-related downtime associated with customer destocking for the Airlaid segment.
These outcomes were driven by a recovery in demand for tabletop products and strong performance from Mount Holly.
Also, consistent with the execution of our ongoing transformation and growth strategy, we announced the pending acquisition of Jacob Holm, a leader in the nonwoven sector.
I'll provide more details about this important acquisition throughout the call.
As for second quarter results, we reported adjusted earnings per share of $0.18 and adjusted EBITDA of $28 million.
slide three of the investor deck provides the highlights for the quarter.
Airlaid Materials performed above expectations driven by a rebound in the tabletop category as in-person dining began to recover globally.
Mount Holly contributed favorably to the quarterly results following the team's excellent execution in closing the transaction, standing up a new integrated system and restarting production and shipping, all within 48 hours after closing.
We're excited for the ongoing opportunities we see with the addition of Mount Holly to the Glatfelter portfolio.
While overall volume growth was healthy, we did experience lower-than-anticipated demand in hygiene products as customers continued to destock from elevated inventory levels maintained during the pandemic.
We expect the buying patterns in this category to return to more normalized levels during the third quarter and positively impact segment profitability in the second half of the year.
Composite Fibers results were below expectations as unfavorable mix and higher-than-anticipated energy prices negatively impacted profitability.
And while shipping volume was up meaningfully, inflationary headwinds proved to be challenging for this segment.
The pricing actions announced in the first quarter helped to address some of the raw material input cost pressures, but not enough to offset the higher-than-anticipated energy prices and logistics costs during the second quarter.
We expect a more meaningful benefit from the price increases to take effect in the third quarter.
At an enterprise level, our focus remains on the health and safety of Glatfelter people.
Our efforts continue to keep all facilities operational as they did in the quarter, while ensuring uninterrupted supply of essential products to our customers despite the current evolving nature of the pandemic.
It goes without saying that 2021 has been a momentous year thus far in executing Glatfelter's ongoing transformation and growth strategy.
In May, we closed on the acquisition of Mount Holly, which has strategically positioned us to more fully benefit from the long-term growth in the health and hygiene category, while also being immediately accretive to earnings.
I'll provide additional commentary on the Jacob Holm acquisition after Sam completes his review of our second quarter results.
Second quarter adjusted earnings from continuing operations was $8 million or $0.18 per share, a decrease of $0.04 versus the same period last year driven by pandemic-related softness in our Airlaid Materials segment reflected in our guidance last quarter.
Also noteworthy is that Q2 results include the acquisition of Mount Holly, reflecting six weeks of ownership during the quarter.
slide four shows a bridge of adjusted earnings per share of $0.22 from the second quarter of last year to this year's second quarter of $0.18.
Composite Fibers results lowered earnings by $0.01 driven by higher inflation in raw materials and energy.
Airlaid Materials results lowered earnings by $0.06 primarily due to softness in the hygiene category and lower production as customers continued to destock from pandemic-driven elevated inventory levels.
Corporate costs were $0.03 favorable from ongoing cost control initiatives.
And interest, taxes and other items were in line with the second quarter of last year.
slide five shows a summary of second quarter results for the Composite Fibers segment.
Total revenues for the quarter were 7.1% higher on a constant currency basis driven by higher selling prices of $2 million and the near doubling of our wallcover volume from the trough of the pandemic in 2020.
Excluding metallized, shipments in the quarter were approximately 26% higher driven by strong growth in wallcover, technical specialties and composite laminates.
The food and beverage category, however, was impacted by shipping container shortages, thereby resulting in lower volumes during the quarter.
The strong demand overall required increased levels of production, driving a $3 million benefit to earnings.
Higher wood pulp and energy prices negatively impacted results by $6 million, creating a significant headwind for this segment.
We continue to implement announced pricing actions, but during the quarter, selling price realization only partially offset the higher input costs.
And currency and related hedging activity unfavorably impacted results by $600,000.
Looking ahead to the third quarter of 2021, we expect shipments in Composite Fibers to be 2% to 3% higher sequentially, favorably impacting results by approximately $400,000.
We expect higher selling prices to fully offset raw material, energy and logistics inflation when compared to the second quarter.
And operations are expected to be in line with the second quarter.
Slide six shows a summary of second quarter results for Airlaid Materials.
Revenues were up 5% versus the prior year quarter on a constant currency basis, supported by the addition of Mount Holly and a strong rebound in tabletop demand as in-person dining began to recover globally.
Demand for hygiene products, however, was lower for the quarter as customers continued to destock from high inventory levels maintained during the pandemic.
As previously stated, we believe this decline is transitory.
And as a result, we are projecting meaningful growth in Q3 in all product categories.
As evidence, demand for wipes has picked up materially in July, and hygiene has started to improve.
We expect more normalized buying patterns in all of our categories to return in the second half of the year.
Selling prices increased from contractual cost pass-through arrangements with customers, but were more than offset by higher raw material and energy prices, reducing earnings by a net $800,000.
Operations lowered results by $1.9 million mainly due to lower production in the quarter to manage inventory levels and better align with customer demand.
And foreign exchange was unfavorable by $300,000 versus the second quarter of last year.
For the third quarter of 2021, we expect shipments in Airlaid Materials to be approximately 15% to 20% higher.
Selling prices and input prices are both anticipated to be higher, but fully offsetting each other.
Additionally, we expect higher production levels to meet the strong customer demand and also to prepare for a Q4 machine upgrade.
The increased production is expected to favorably impact operating profit by approximately $1 million to $2 million sequentially in addition to the increased volume.
slide seven shows corporate costs and other financial items.
For the second quarter, corporate costs were favorable by $1.9 million when compared to the same period last year driven by continued spend control.
We expect corporate costs for full year 2021 to be approximately $23 million, which is an improvement from our previous guidance of $25 million to $26 million.
Interest and other income and expense are now projected to be approximately $11 million for the full year, lower than our previous guidance of $12 million.
Our tax rate for the quarter was 33%.
And full year 2021 is estimated to be between 38% and 40%, lower than our previous guidance of 42% to 44%.
The lower overall tax rate is driven by changes in the jurisdictional mix of pre-tax earnings, slightly offset by an increase in the U.K. rate.
slide eight shows our cash flow summary.
Second quarter year-to-date adjusted free cash flow was lower by approximately $6 million mainly driven by higher working capital usage after adjusting for special items.
We expect capital expenditures for the year to be between $30 million and $35 million, with the reduction being driven largely by our better-than-anticipated execution on Mount Holly integration costs.
Depreciation and amortization expense is projected to be approximately $60 million.
slide nine shows some balance sheet and liquidity metrics.
Our leverage ratio increased to three times at June 30, 2021, mainly driven by the Mount Holly acquisition we completed in May 2021, which increased our net debt by approximately $175 million.
Even after this acquisition, we continue to maintain liquidity of approximately $200 million.
These figures do not include the recently announced pending acquisition of Jacob Holm, which Dante will cover more shortly.
We also have additional financing details located in the appendix of our investor deck.
Looking ahead, we remain very optimistic about the prospects for the second half of the year and beyond as we continue building momentum for the company.
Demand for Composite Fibers products is robust, and we expect that to continue for the foreseeable future.
Our pricing actions are taking hold and will be a meaningful contributor to earnings in this segment as we offset inflationary pressures.
We will continue to work to mitigate the effects of input cost inflation and global supply chain constraints in order to optimize operations and deliver on strong customer demand.
Airlaid Materials demand is strengthening across all categories.
Tabletop is benefiting from improved demand conditions as consumers resume leisure travel and in-person dining.
July was very strong for wipes, and we believe we are exiting the period of demand weakness associated with destocking that took place during the first half of the year.
Additionally, demand in the hygiene category is beginning to recover with the second half of the year expected to return to more normalized levels.
Our continued aggressive stance on cost control is contributing to maintaining an efficient cost structure, thereby improving EBITDA and free cash flow.
And Glatfelter people are performing exceptionally well, responding to challenges, seeking new opportunities for growth and delivering on the Mount Holly integration and synergy realization.
From a strategic perspective, I'm pleased with the accelerating pace of execution of our business transformation and growth initiatives.
As noted, we signed a definitive agreement to purchase Jacob Holm for $308 million.
We're very excited about this new addition to the portfolio, which will add meaningful scale, new technologies and product diversification and will expand Glatfelter's growth platforms and global footprint.
Jacob Holm is a leading producer of spunlace materials and sustainable nonwoven fabrics, providing access to new customers in the personal care, hygiene, industrial and medical categories.
Headquartered in Basel, Switzerland, the company has four manufacturing facilities, two in the United States and one each in France and Spain.
The company is organized in three operating units: Sontara Professional, a former DuPont business; Health & Skin Care and Personal Care.
As you can see from slide 12, their operating units offer an expansive product portfolio, covering diverse applications with a prominent customer base.
In the 12 months ending June 30, the Jacob Holm business generated revenue of approximately $400 million and EBITDA of approximately $45 million.
Of these earnings, we believe $10 million to $15 million could be attributed to COVID-driven demand that is expected to normalize.
We project this transaction to be highly synergistic with significant value creation opportunities that will benefit all Glatfelter stakeholders.
Through product line optimization, operational improvements, strategic sourcing savings and cost reductions, we anticipate annual synergies of approximately $20 million within 24 months after closing.
The estimated cost to achieve these synergies is $20 million.
The acquisition is subject to customary antitrust regulatory review and is expected to close later this year.
While we have obtained 100% committed financing for this transaction, we intend to finance the purchase with the issuance of a new $550 million senior unsecured bond.
With the Jacob Holm transaction, Glatfelter's net leverage is expected to increase from approximately three times to four times pro forma at closing when reflecting the COVID-adjusted EBITDA and synergies.
This acquisition will create an exceptional portfolio of premium quality, sustainable engineered materials with opportunities for the long-term growth that aligns well with post-COVID lifestyle changes.
It will also increase Glatfelter's global scale with pro forma annual sales of approximately $1.5 billion.
As you can see, these are exciting times at Glatfelter.
slide 13 provides a brief snapshot of the breadth and depth of the company's evolution and recent transformation actions and outcomes.
Our near-term priorities and value creation focus will be on integrating our new acquisitions with an emphasis on capturing synergies and deleveraging; accelerating innovation by fully utilizing our growing portfolio of technologies, assets and intellectual property; and exploring the next wave of growth investments, both organic and inorganic with continued balance sheet discipline.
We are truly generating momentum and accelerating the pace of execution as we build a new Glatfelter.
This concludes my closing remarks. | compname posts q4 earnings per share $0.04.
q4 earnings per share $0.04.
q4 sales $25.7 million versus refinitiv ibes estimate of $24.7 million.
revenue in fiscal 2022 is expected to be $130 million to $140 million.
expects approximately 40% to 45% of backlog will convert to revenue in fiscal 2022. | 0 |
Both of these documents are available in the Investor Relations section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
We appreciate you joining us and hope you're doing well.
I'll start today with some perspective on our first quarter results, current industry conditions, and company-specific opportunities.
Dave will follow with more specific detail on the quarter's performance and provide some additional color on our outlook and guidance.
And then, I'll close with some final thoughts.
In the early fiscal 2022, we are executing well and making progress on our strategic initiatives.
We reported record first quarter sales, EBITDA and earnings per share, as well as another strong quarter of cash generation despite greater working capital investment year-to-date.
As widely evident across the industrial sector, inflationary pressures and supply chain constraints are presenting challenges as industrial production and broader economic activity continues to recover.
Nonetheless, we are in a strong position to handle these conditions and believe the current backdrop is reinforcing our value proposition and long-term growth opportunity.
As it relates to the quarter and our views going forward, I want to emphasize a few key points that continue to drive our performance.
First, underlying demand remains positive.
Second, our industry position, operational capabilities, and internal growth initiatives are supporting results.
And third, we continue to benefit from efficiency gains and effective channel execution.
In terms of underlying demand, trends remain favorable across both our segments during the quarter.
Industrial supply chain constraints are having some impact on the timing of demand flowing through to sales, though solid execution and our favorable industry position, still drove an over 16% organic increase in sales versus prior year levels.
And stronger growth on a two-year stack basis relative to recent quarters.
This positive momentum has continued into our fiscal second quarter with organic sales month-to-date in October up by a mid-teens percent over the prior year.
As it relates to customer in markets, trends during the quarter were strongest across technology, chemicals, lumber and wood, pulp and paper and aggregate verticals.
In addition, we continue to see stronger order and sales momentum across heavy industries, including industrial machinery, metals and mining, providing incremental support to our sales growth in the early fiscal 2022.
Forward demand indicators also remain largely positive.
[Technical Issue] activity across our service center network is holding up well, despite sector wide supply chain pressures.
We believe this partially reflects the diversity of our customer mix, as well as sustained MRO demand as customers catch up on required maintenance activity, provide greater facility access, and continue to gradually release capital spending.
Our ability to provide strong technical and local support, inventory availability and supply chain solutions, places our service center network in a solid position to address our customers' evolving needs near term, while helping them prepare and execute growing production requirements over the intermediate to long-term.
In our Fluid Power and Flow Control segment, we continue to see strong demand from the technology sector.
This includes areas tied to 5G infrastructure and cloud computing, as well as direct solutions we are providing to semiconductor manufacturing.
Customer indications and related outlooks across the technology end market remained robust, reflecting various secular tailwinds and production expectations continue with an ongoing recovery and longer and later cycle markets such as industrial OE and process flow.
We believe the underlying demand backdrop across our fluid power and flow control operations remains favorable.
In addition, we're seeing strong growth indications across our expanding automation platform.
The current tight labor market, combined with evolving production considerations post the pandemic, is driving greater customer interactions and related order momentum for our automation solutions.
We remain focused on expanding our automation reach and capabilities, both organically and through additional M&A.
During the quarter, we announced the tuck-in acquisition of RR Floody Company, a regional provider of advanced automation solutions in the U.S. Midwest.
The transaction further optimizes our footprint and strategy across next generation technologies, including machine vision and robotics.
Overall, the demand environment remains positive and we're seeing ongoing contribution from our internal growth initiatives.
That said, we expect supply chain constraints to persist across the industrial sector near term.
Lead times remain extended across certain product categories, driving component delays and an increase in fulfillment timing.
We saw greater evidence of this across both our segments during the quarter.
Our teams are effectively managing through these issues to date, as reflected by our first quarter results, as well as our ability to increase operational inventory levels in the U.S. by 6% during the quarter.
Our products are primarily sourced across North America, limiting our direct exposure to international freight and supply chain dynamics.
Our technical scale, local presence and supplier relationships are key competitive advantages in the current backdrop, providing a strong platform to gain share as the cycle continues to unfold.
The broader supply chain backdrop is also increasing inflationary pressures across our business, both through the products we sell and the expense we incur to support our competitive position and growth initiatives.
We saw ongoing supplier price increases develop during the quarter, with indications of additional increases in coming quarters.
Our price actions, strong channel execution and benefits from productivity gains are helping offset current inflationary headwinds, as reflected by solid EBITDA growth and EBITDA margin expansion during our first quarter.
We continue to take appropriate actions to offset these headwinds.
Overall, we are encouraged by our ongoing execution.
First quarter results highlight the strength of our position and company-specific earnings potential despite broader challenges industrywide, and reinforce our ability to progress toward both near term and long-term objectives in any operational environment.
Combined with a strong balance sheet, increasing order momentum exiting the quarter, and greater signs of secular growth tailwinds across our business, we remain positive on our potential going forward.
This will serve as an additional reference for you as we discuss our most recent quarter performance and outlook.
Turning now to our results for the quarter.
Consolidated sales increased 19.2% over the prior year quarter.
Acquisitions contributed 2.1 percentage points of growth, and foreign currency drove a favorable 80 basis point increase.
The number of selling days in the quarter was consistent year-over-year.
In many of these factors, sales increased 16.3% on an organic basis.
On a two-year stack basis, [Technical Issue] positive in the quarter and strengthened from fiscal '21 fourth quarter trends.
As it relates to pricing, we estimate the contribution of product pricing on a year-over-year sales growth was around 140 basis points to 180 basis points in the quarter.
As a reminder, this assumption only reflects measurable topline contribution from price increases on SKUs sold in both periods, year-over-year.
On a two-year stack basis, segment organic sales were up nearly 2%, an improvement from fiscal '21 fourth quarter trends.
And markets such as lumber and forestry, open paper, chemicals, aggregates, and food and beverage had the strongest growth on a two-year stack basis during the quarter, while our primary metals, machinery, and mining are showing greater improvement, both year-over-year and sequentially.
In addition to solid sales performance in our U.S. service center operations, we saw favorable growth across our international operations, which contributed to the segment's topline performance in the quarter.
Within our Fluid Power and Flow Control segment, sales increased 24% over the prior year quarter with acquisitions contributing 6.6 points of growth.
On an organic basis, segment sales increased 17.4% year-over-year and 6% on a two-year stack basis.
Segment sales continue to benefit from strong demand within technology end markets, as well as across life sciences, chemical and agricultural end markets.
Sales trends within primary metals and refinery end markets, also improved nicely during the quarter, partially offset by moderating trends across certain transportation vertical.
By business unit segment, growth was strongest across fluid power and automation.
In addition, demand across our later and longer cycle flow control operations continues to improve, with customer quote activity and order momentum building through the quarter.
Extended supplier lead times and inbound component delays had some effect on segment sales growth during the quarter, though the overall impact remains limited and manageable to date.
Moving to gross margin performance, as highlighted on page eight of the deck.
Gross margin up 28.6% declined 22 basis points year-over-year.
During the quarter, we recognized LIFO expense of $3.6 million compared to $1.1 million of expense in the prior year quarter and a $3.7 million LIFO benefit in our fiscal '21 fourth quarter.
The net vital headwind had an unfavorable 25 basis point year-over-year impact on gross margins during the quarter.
LIFO expense was higher than expected during the quarter, reflecting supplier product inflation and a greater level of strategic inventory expansion year-to-date.
Excluding the impact of LIFO, gross margins were relatively unchanged year-over-year, and up sequentially, reflecting strong channel execution, pricing actions, and ongoing progress with internal margin initiatives.
Turning to our operating cost.
Selling, distribution and administrative expenses increased 10.6% year over year, or approximately 7% on an organic constant currency basis.
SG&A expense was 20.3% of sales during the quarter, down from 21.9% in the prior year quarter.
We had another solid quarter of SD&A expense control, reflecting our leaner cost structure following business rational vision [Phonetic] taken in recent years, as well as benefits from our operational excellence initiatives, shared services model, and technology investments.
These dynamics are helping mitigate the impact from inflationary pressures, higher employee-related expenses, lapping a prior year temporary cost actions, and normalizing medical expense.
Combined with improving sales and effective price cost management, EBITDA grew 31% year-over-year, while EBITDA margin of 9.9% was up 89 basis points over the prior year.
Including reduced interest expense and a slightly lower tax rate, reported earnings per share of $1.36 was up 52% from the prior year.
Moving to our cash flow performance and liquidity.
Cash generated from operating activities during the first quarter was $48.6 million, while free cash flow totaled $45 million or 85% of net income.
We had a strong quarter of cash generation considering creating greater working capital investment year-to-date, including a strategic inventory build during the quarter to support growth and address supply chain constraints.
We continue to benefit from our working capital initiatives and solid execution across our business.
Our cash performance and outlook continues to support capital deployment opportunities.
During the quarter, we deployed a total of $36 million on share buybacks, debt reduction, dividends, and acquisitions.
With regards to share buybacks, we repurchased nearly 77,000 shares for approximately $6.5 million.
We ended September with just over $247 million of cash on hand and net leverage at 1.7 times adjusted EBITDA, which is below the prior year level of 2.1 times and the fiscal '21 fourth quarter level of 1.8 times.
Our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million accordion option.
Combined with incremental capacity on our AR securitization facility, an uncommitted private shelf facility, our liquidity remains strong.
Turning now to our outlook.
This includes earnings per share in the range of $5 to $5.40 per share based on sales growth of 8% to 10%, including a 7% to 9% organic growth assumption, as well as EBITDA margins of 9.7% to 9.9%.
We are encouraged by our year-to-date operational performance and remain focused on our growth, margin, and working capital initiatives.
Combined with our favorable industry position, ongoing order momentum, and forward demand indications, our fundamental outlook and underlying earnings potential remain firmly intact.
That said, as previously highlighted, LIFO expense year-to-date is running higher than our initial expectations, assuming fiscal Q1 LIFO expense levels of $3.6 million sustained for the balance of the year.
This would result, in LIFO expense representing an approximate 40 basis point year-over-year headwind on EBITDA margins, compared to our initial expectation up 20 basis points to 30 basis points.
Combined with ongoing uncertainty from industrial supply chains and inflationary pressures, we currently view the midpoint of earnings per share guidance as most reasonable from a directional standpoint pending additional insight into how the year progresses.
In addition, based on month-to-date sales trends in October, and considering slightly more difficult comparisons in coming months, we currently project fiscal second quarter organic sales to grow by a low double-digit to low teen percentage over the prior year quarter.
We expect gross margins will be down slightly on a sequential basis during the second quarter, assuming a similar level of LIFO expense as the first quarter.
This would be directionally aligned with normal seasonal trends.
Further, we expect SD&A expense will be flat, to up slightly on a sequential basis, compared to first quarter levels of approximately $181 million.
Lastly, from a cash flow perspective, we continue to expect free cash flow to be lower year-over-year in fiscal 2022 compared to fiscal 2021 as AR levels continue to cyclically build and we replenish inventory.
That said, we are encouraged by our first quarter cash flow performance and continue to drive working capital initiatives as a partial offset across our business.
Overall, we are encouraged by how we started the year and what we see entering our fiscal second-quarter.
Order momentum remains firm across our businesses, our fluid power backlog is at record levels, and we are effectively building inventory to support our growth opportunities.
Our increased exposure to technology end markets is driving greater participation in secular growth tailwinds, while our later cycle Flow Control business is seeing increased activity across key market verticals.
We're also making great progress in building our automation platform, including organically as customer and supplier relationships continue to develop and broaden across new industry verticals, and within our legacy end markets.
Customer outlooks on underlying demand and capital spending, remain largely favorable over the intermediate term and we're on track to achieve our initial guidance provided in mid-August.
As is common across the industry right now, we're dealing with inflationary pressures, supply chain constraints, and lingering COVID related impacts.
As our historical track record and first quarter results show, we know how to execute in any environment.
In addition, I believe our strategy on our ongoing initiatives will prove out further in this environment as the industrial economy continues to evolve both cyclically and structurally.
The breadth and availability of our products, combined with our leading technical solutions and localized support, is a significant competitive advantage right now.
We look to leverage these capabilities across our expanded addressable market during these dynamic times and in years to come.
At the same time, our balance sheet and liquidity provide strong support to pursue strategic M&A opportunities.
We maintain a disciplined approach to M&A and are actively evaluating opportunities primarily across key priority areas of fluid power, flow control and automation.
There remains significant potential to further scale our leading technical industry position across these areas.
We're eager to demonstrate what we're fully capable out in the years ahead as we continue to leverage our position as the leading technical distributor and solutions provider across critical industrial infrastructure. | q4 adjusted earnings per share $0.47 from continuing operations.
q4 sales $438 million versus refinitiv ibes estimate of $422.6 million. | 0 |
The pandemic has given us an opportunity to display our agility as a company.
We increased our communications with retailers.
We changed our marketing messages.
We shifted investments to categories that are most important to consumers.
And we set new production records for VITAFUSION, ARM & HAMMER laundry and ARM & HAMMER baking soda.
And we've moved people to focus on the online class of trade.
So we've been proactive in seizing the opportunities presented by the crisis and are increasing manufacturing capacity in our plants and externally with new co-packers.
The agility and resilience of the Church & Dwight team is showing up in our results.
Our priorities continue to be employee safety, meeting the needs of consumers and retailers, helping the communities where we live and ensuring the strength of our brands.
Our plant, warehouse and laboratory employees have done an exceptional job in keeping safe, which has contributed to our ability to operate our supply chain.
Our office employees continue to work remotely and are doing a super job running the company.
So now let's talk about the results.
Q3 was another exceptional quarter.
Reported sales growth was 13.9% and adjusted earnings per share was $0.70.
Revenue, earnings and operating cash flow were all significantly higher in Q3 than last year, driven by the significant increase in demand for many of our products.
Organic sales grew 9.9%, driven by higher consumption.
Regarding e-commerce, we were already strong pre-COVID and well positioned online.
In Q3, our online sales increased by 77% as all retailer.coms have grown.
One example would be gummy vitamins.
In 2019, 8% of our full year sales were online.
This year, we expect full year to be about 14% online.
Recall, we began the year targeting 9% online sales as a percentage of global consumer sales.
In Q1, it was 10% online; Q2, 13%; and Q3, also 13%.
So we expect the full year to be actually close to 13% as well.
We continue to conduct research on the purchasing habits of U.S. consumers.
There's no surprises here, actually.
There is continued consumer concern that stores will run out of stock and websites will face delivery issues.
Consumers report that they are consolidating shopping trips and continue to stockpile to ensure that they have enough product for a couple of weeks at a time.
If we look at year-to-date shipment and consumption patterns, our brands remain generally in balance in the 15 categories in which we compete.
With respect to our brands, we had broad-based consumption growth in Q3.
We saw a double-digit consumption growth in VITAFUSION and L'IL CRITTERS gummy vitamins, ARM & HAMMER baking soda, OXICLEAN, FLAWLESS, ORAJEL, NAIR, FIRST RESPONSE pregnancy kits and cleaners.
In Household, our laundry business consumption was up 4% and ARM & HAMMER cat litter was up 8%.
Water flossers is another bright spot as consumption turned slightly positive in Q3.
Although our Lunch & Learn activity continues to be significantly curtailed, we intend to continue to address this with incremental advertising.
In addition to VITAFUSION and L'IL CRITTERS, water flossers is another brand we expect to benefit from the heightened consumer focus on health and wellness.
BATISTE dry shampoo remains impacted by social distancing, with consumption down 10%, but improved sequentially compared to Q2 when consumption was down 22%.
TROJAN consumption was down 6% in Q3, but also improved sequentially when we were down 15% in Q2.
There's no doubt that consumers have made health and wellness a priority.
VITAFUSION and L'IL CRITTERS gummy vitamins saw the greatest consumption growth of any of our categories in Q3, up 49%.
The category consumption was even higher.
Our expectation is that consumer demand for gummy vitamins will remain high.
And we have new third-party capacity coming online in late Q4 to take advantage of this trend.
Consumers are focusing on health and wellness, but also, cleaning, home cooking and new grooming routines.
At a recent investor conference, you may have heard me cite consumer research that suggests it takes 66 days to form a new habit.
And only time will tell if all of these new behaviors will translate into permanently higher levels of consumption.
But if they do endure over time, we believe we are well positioned.
Now a few words about private label.
As you know, our exposure to private label is limited to five categories.
Private label shares have remained generally unchanged for the first, second and third quarters of this year.
Our international business came through with double-digit organic growth in the quarter, driven by strong growth in our GMG business, that's our Global Markets Group, and Canada.
In October, our GMG business is off to another strong start, and we continue to see strong POS recovery in Canada and Europe.
After three consecutive quarters of growth, our Specialty Products business contracted 3.4% in Q3, primarily due to the poultry segment.
Now turning to new products.
Innovative new products will continue to attract consumers even in this economy.
VITAFUSION gummy vitamins launched a number of new products.
And to capitalize on increased consumer interest in immunity, we launched POWER ZINC and Elderberry gummies.
We've launched ARM & HAMMER CLEAN & SIMPLE, which has only six ingredients plus water compared to 15 to 30 ingredients for typical liquid detergents.
And in the second half, we launched ARM & HAMMER ABSORBx clumping cat litter, a new litter, which is 55% lighter than our regular litter.
Now let's turn to the outlook.
We're having an exceptional year.
We now expect full year adjusted earnings per share growth of 13% to 14%, which is far above our evergreen target of 8% annual earnings per share growth.
Given our strong performance, we have raised our full year outlook for sales growth to be approximately 11% and organic sales growth to be approximately 9%.
As mentioned many times in the past, we take the long view in managing Church & Dwight in order to sustain our evergreen model.
In the second half, we took the opportunity to increase our marketing spend behind our new products and we made incremental investments in the company.
As we wind up the year, we are putting together our 2021 plan.
It's safe to say that we have a high degree of confidence that we will meet our evergreen model in '21.
In February, we'll provide our detailed outlook for next year.
Now in conclusion, I would like to remind everyone of the many reasons to have confidence in Church & Dwight.
The great thing about our company is we are positioned to do well in both good and bad economic times.
The categories in which we play are largely essential to consumers.
And we have a few categories that stand to benefit from the current environment.
We have a balance of value and premium products.
Our power brands are number one or number two in their categories.
And we have low exposure to private label.
We're coming off some of the best growth quarters we've ever had.
And with a strong balance sheet, we continue to be open to acquiring TSR-accretive businesses.
We believe our company is stronger and more agile than ever.
And finally, we have the resources, the common sense and the ambition to ensure that our brands perform well in the future.
Next up is Rick to give you details on the third quarter.
We'll start with EPS.
Third quarter adjusted EPS, which excludes an acquisition-related earnout adjustment, grew 6.1% to $0.70 compared to $0.66 in 2019.
As we discussed in previous calls, the quarterly earnout adjustment will continue until the conclusion of the earnout period.
Stronger-than-expected sales performance allowed the company to spend incrementally on marketing.
Reported revenue was up 13.9%, reflecting a continued increase in consumer demand for our products.
Organic sales was up 9.9%, driven by a volume increase of 10.2%, partially offset by 0.3% of unfavorable product mix and pricing, primarily driven by new product support.
Volume growth was driven by higher consumption.
Now let's review the segments.
Organic sales increased by 10.7%, largely due to higher volume.
Overall, growth was led by VITAFUSION and L'IL CRITTERS gummy vitamins, WATERPIK oral care products, ARM & HAMMER liquid laundry detergent and OXICLEAN stain fighters.
We commonly get asked to bridge the Nielsen reporting to our organic results.
This quarter, tracked consumption was 7.7% for our brands compared to an organic sales increase of 10.7%.
In this environment, one might assume that is restocking retailer inventory.
That is not the case.
We had 400 basis points of help from strong growth in untracked channels, primarily online, and 100 basis point drag from couponing to support new products.
The good news is, as you heard from Matt, consumption and shipments are in balance, both low double digits.
Consumer International delivered 11.6% organic growth due to higher volume, offset by lower price and product mix.
This was a great recovery for our international business from a flat Q2.
Growth was primarily driven by the Global Markets Group and Canada.
For our SPD business, organic sales decreased 3.4% due to lower volume, offset by higher pricing.
The lower volume was primarily driven by the nondairy animal and food production in sodium bicarbonate business.
Turning now to gross margin.
Our third quarter gross margin was 45.5%, 110 basis point decrease from a year ago.
Gross margin was impacted by 110 basis point drag from tariffs and a 90 basis point impact from acquisition accounting.
In addition, to round out the Q3 gross margin bridge is a plus 100 basis points from price/volume mix; plus 160 basis points from productivity programs, offset by a drag of 80 basis points of higher manufacturing costs, inflation and higher distribution costs; as well as a drag of 90 basis points for COVID costs.
Moving now to marketing.
Marketing was up $45.7 million year-over-year as we invested behind our brands.
Marketing expense as a percentage of net sales increased 230 basis points to 13.8%.
For SG&A, Q3 adjusted SG&A decreased 30 basis points year-over-year, primarily due to leverage from strong sales growth.
Other expense all in was $12.3 million and $3.9 million decline due to lower interest expense from lower interest rates.
And for income tax, our effective rate for the quarter was 17.3% compared to 21.6% in 2019, a decrease of 430 basis points, primarily driven by higher tax benefits related to stock option exercises.
And now turning to cash.
For the first nine months of 2020, cash from operating activities increased 29% to $798 million due to significantly higher cash earnings and an improvement in working capital.
As of September 30, cash on hand was $549 million.
Our full year capex plan continues to be approximately $100 million as we begin to expand manufacturing and distribution capacity, primarily focused on laundry, litter and vitamins.
As I mentioned back at the Barclays conference in September, we do expect a step-up in capex over the next couple of years to approximately 3.5% of sales for these capacity-related investments.
In addition, as you read in the release, due to the strong cash position, the company may resume stock repurchases in the future.
For Q4, we expect reported sales growth of approximately 9%, organic sales growth of approximately 8%.
And as Matt mentioned, we have strong consumption across many of our categories.
Turning to gross margin.
We previously called 150 basis point contraction in the second half.
Now we're saying down 190 basis points.
The change is primarily due to nonrecurring supply chain costs.
We also expect significant expense, and we have called flat for the year in terms of a percent of sales, which implies a step-up in Q4.
We also anticipate a lower tax rate.
As a result, we expect Q4 adjusted earnings per share to be $0.50 to $0.52 per share, excluding the acquisition earnout adjustment as we exit 2020 with momentum.
And now for the full year outlook, we now expect approximately 11% for the year 2020 sales growth, which is above our previously 9% to 10% range.
We're also raising our full year organic sales growth to approximately 9%, up from our previous 7% to 8% outlook.
We raised our cash from operations outlook to $975 million, which is up 13% versus year ago.
Turning to gross margin.
We expect gross margin to be down 20 basis points for the year, primarily due to the impact of acquisition accounting, COVID costs, incremental manufacturing and distribution capacity investments and the higher tariffs on WATERPIK.
As to tariffs, remember back in 2018, we got caught up in Tier two tariffs for which we were granted an extension in 2019.
That exemption expired and was not extended as of Q3 2020.
We continue to work on mitigating that impact.
Another word or two on gross margin.
Previously, I have said the first half of the year was plus 150 basis points on gross margin and the second half was down 150 basis points on gross margin.
And so our outlook as of last quarter was flat for the year.
And then also last quarter, you heard me walk through investments we were making in the second half of 2020.
Examples here included a new third-party logistics provider, outside storage to handle surge inventories, preliminary engineering on capacity, VMS outsourcing costs as well as other investments around automation, consumer research and analytics.
Now we're calling down 190 basis points for the back half or down 20 basis points for the year, and that implies down 250 basis points for the quarter.
We have some supply chain nonrecurring costs.
Here are a few examples.
First, because of our outsized growth, I mentioned last quarter, we're adding a new 3PL distribution center.
In the quarter, we again had stronger sales.
And as such, had duplicative outside storage locations and the new 3PL distribution center that wasn't operational.
So for a period of time, we had duplicative costs.
We're also in the process of going through make first buy decisions.
And that will trigger a couple of asset write-offs likely in Q4.
We have lean training across the plants.
And finally, due to the great results this year, higher incentive comp cost that flow through COGS.
So our full year tax rate expectations are 19%, and we also raised our adjusted earnings per share growth to 13% to 14%.
Now that we're through the outlook, I also want to spend a minute on FLAWLESS.
As you saw in the release, we had an earnout benefit of approximately $50 million in the quarter in reported earnings.
We exclude any of the earnout movements in adjusted EPS.
Some color on that swing.
As a backdrop, we bought that business for $475 million upfront and a $425 million earnout tied to year-end 2021 sales.
That sales target represented in excess of 15% CAGR for three years off of a baseline of $180 million of trailing sales.
The revised 3-year CAGR for this business is closer to 8%.
And as such, the earnout liability comes down and earnings go up.
We're still positive on this business.
And the strong consumption growth these past six months is a great indicator for the future.
As you heard from Matt, the company is well positioned as we enter 2021.
And with that, Matt and I would be happy to take any questions. | q3 adjusted earnings per share $0.70 excluding items.
sees q4 sales up about 9 percent.
sees 2020 reported sales growth raised to 11%.
2020 organic sales growth raised to 9%.
2020 adjusted earnings per share growth raised to 13%-14%.
2020 cash from operations raised to $975 million. | 1 |
Joining the call today are Tom Ferguson, Chief Executive Officer; Philip Schlom, Chief Financial Officer; and David Nark, Senior Vice President, Marketing Communications and IR.
Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets and the metal coatings markets; prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing and availability of experienced management and employees to implement the company's growth strategies.
In addition, AZZ's customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic.
We continue to gain momentum in the second quarter and completed our fourth consecutive quarter of solid performance after the disruptions from COVID in the first half of last year.
Their perseverance through the past 19 months of COVID-19 turmoil has allowed AZZ to obtain the results we are now reporting.
Overall sales of $216 million improved 6.4% versus the prior year, or 8% when adjusted for the divestiture of SMS. Metal Coatings turned in another excellent quarter with sales up 10.7%, almost $130 million, and Infrastructure Solutions flat at about $87 million.
Sales were somewhat impacted by labor constraints and COVID-19-related material shortages in some businesses.
I will get into the details of this as we go along.
We are pleased to have completed another strong quarter performance.
We continue to generate strong cash flow during the second quarter, while also returning capital to our shareholders.
We generated net income of $18.9 million and earnings per share of $0.76 per diluted share, reflecting the resiliency of our businesses and the dedication of our people.
Our businesses leverage the realignment actions taken last year to improve profitability while maintaining their focus on providing outstanding quality and service to our customers.
We also benefited from lower interest expense while incurring a 20.4% tax rate for the quarter.
In line with our strategic commitment to value creation, we've repurchased over 290,000 shares for $15 million and distributed $4.2 million in dividends.
In Metal Coatings, which represented 60% of our sales in the second quarter, we achieved 24.4% operating margins on sales of $130 million.
This resulted in operating income being up over 17% from the previous year.
The margin improvement was primarily due to driving operating efficiencies and productivity, while realizing improved pricing in the face of rising zinc, labor and energy costs.
While we have several active acquisition discussions underway, we were slowed somewhat due to the uptick in COVID Delta variant cases that reduced some travel.
Our Metal Coatings team continues to demonstrate their ability to perform and deliver great results while managing labor shortages and the increasing zinc costs.
Our Infrastructure Solutions segment demonstrated continued profitability improvement through their seasonally slow second quarter.
We were up about 4.3% when considering the impact of the SMS divestiture.
The team delivered operating income of $7 million or 130%, up dramatically versus the prior year.
The segment benefited from its realignment actions from last year but did face some labor constraints and material delays.
We are focused on strategic selling initiatives and are well positioned to deliver a strong fiscal year 2022.
For fiscal year 2022, while COVID continues to generate some uncertainty in many sectors, given our strong performance in the first half and due to seeing more opportunities than risk the balance of this year, we are tightening and raising our guidance.
We anticipate sales to be in the range of $865 million to $925 million and earnings per share at $2.90 to $3.20.
This excludes any acquisitions or divestitures.
Metal Coatings is continuing focus on sales growth, including leveraging our spin galvanizing operations at several sites, operational execution and customer service as labor and operating expenses increased due to inflation.
Our Infrastructure Solutions segment has seen more normalized business levels and entered the third quarter with some momentum in bookings activity, particularly in electrical.
Our WSI business is seeing good results from the expanded Poland facility, although internationally the business continues to experience some intermittent project delays due to COVID outbreaks at certain customer sites.
The electrical platform is focused on operational execution and growing its e-house and switchgear businesses.
We anticipate continuing to benefit from low interest rates.
While we expect solid performance in the third quarter due to the continued COVID impact on our international markets, we do not anticipate quite as strong of a performance as we experienced in this past first quarter.
While the fall turnaround activity is good, we're seeing several projects that are already likely to stretch into the fourth quarter.
I will note that we are already seeing a lot of activity lining up for the spring season.
For fiscal year 2022, AZZ will continue to execute on our strategic growth objectives to drive shareholder value.
Our commitment to superior customer service is unwavering.
Our ability to generate strong cash flow is based on initiatives that drive operational excellence, manage costs, ensure pricing discipline and emphasis on receivables collection within our operating platforms.
We are confident that our businesses remain vital to improving and sustaining infrastructure.
So we are actively working to position our core businesses to provide sustainable profitability and regardless of whether we see any infrastructure legislation.
Bookings or incoming orders in the second quarter were $231.8 million, a $23.2 million or a 11.1% increase over the second quarter of the prior year.
Our bookings to sales ratio increased to 107% as we saw improving market conditions across both the Metal Coatings and Infrastructure Solutions segments.
As Tom previously mentioned, second quarter fiscal year 2022 sales of $216.4 million were $13.1 million or 6.4% higher than the prior year second quarter sales of $203.4 million.
We generated gross profit of $55.1 million compared with gross profit of $46.1 million in the second quarter of the prior year.
Our gross margin was 25.5% for the quarter, which was a 280-basis-point improvement compared with a gross margin of 22.7% in the second quarter of last year, as business in both segments continues to recover from the pandemic lows witnessed this time last year.
Operating income for the quarter was $26.5 million compared with $652,000 in the second quarter of the prior year.
During the prior year second quarter, we recorded restructuring and impairment charges of $18.7 million.
We believe the difficult decisions and actions management took last year are strongly impacting our financial results in both of our segments this fiscal year.
We believe we have established a strong foundation for future growth.
Our earnings per share of $0.76 was $0.26 higher than last year's second quarter adjusted earnings per share of $0.50 and $0.83 above the reported loss of $0.07.
The prior-year second quarter loss was significantly impacted by the impairment and restructuring charges and impacts of the pandemic as previously discussed.
Second quarter EBITDA for fiscal year 2022 was $36.6 million compared with adjusted EBITDA reported in the second quarter of fiscal year 2021 of $30.7 million, an increase of $5.9 million or 19.1%.
Year-to-date sales through the second quarter of fiscal year 2022 were $446.3 million, a 7.1% increase from last year's second quarter year-to-date sales of $416.7 million.
Excluding the impact of the SMS divestiture, sales would have increased 11% year-over-year.
Fiscal year 2022 year-to-date net income of $41.3 million was $22.8 million or 122.8% above the prior year-to-date adjusted net income of $18.5 million.
Prior year-to-date net income as reported was $3.8 million.
Year-to-date earnings per share of $1.64 was 131% higher than the prior year-to-date adjusted earnings per share of $0.71.
Turning to our liquidity and cash flows.
We continue to maintain a strong balance sheet and return capital to our shareholders.
The following are our capital allocation highlights: During the quarter, we renegotiated and renewed our five-year credit facility, retaining our facility at $600 million in borrowing capacity, supported by a strong group of banks.
Gross outstanding debt as of the second quarter is $183 million, $4 million above the $179 million in outstanding debt at the end of the second quarter of the prior year, which reflects increased share purchase activity as we have purchased nearly 70 million in outstanding shares during the last year.
Year-to-date, we have deployed $13.1 million in capital investments and we anticipate to still make capital investments of roughly $35 million this year.
Supply chain constraints have impacted and delayed to some extent the timing and spending of our planned capital expenditures.
As Tom noted, we repurchased $15 million in outstanding stock during the quarter and $21.2 million on a year-to-date basis.
We declared and continued our prior history of making quarterly dividend payments.
For the first half of the year, cash flow from operations was $37.8 million, up $5.6 million or 17.4% from prior year as a result of strong sales and solid net income generated by the business.
Free cash flow was $23.2 million, $10.3 million or 79.8% above the $12.9 million realized in the prior year.
We continue to execute on several merger and acquisition opportunities and expect to make announcements regarding the same before the end of our fiscal year.
Here are some key indicators that we are paying particular attention to.
For the Metal Coatings segment's galvanizing business, we are carefully tracking fabrication and construction activity, material and labor cost inflation and progress of infrastructure legislation.
For the Surface Technologies platform, we are primarily focused on expanding our customer base and benefiting from improved operational performance.
For Infrastructure Solutions, domestic turnaround and outage activity has returned to a normal level.
The fall season is currently looking to be good albeit somewhat muted as noted earlier, due to international customers being impacted by COVID-related issues.
The Electrical platform is benefiting from transmission distribution, utility spending and growing data center and battery energy storage activity.
In regards to the strategic review of Infrastructure Solutions, we have further narrowed the number of options we are pursuing and are increasingly confident that AZZ can and will become predominately a focused metal coatings company.
As we have noted previously, we are having regular meetings with the Board.
But due to the sensitivity of ongoing discussions and confidentiality agreements, we cannot be more specific at this time, but realize we are rapidly approaching one-year anniversary of our announcement.
We remain committed to our growth strategy around Metal Coatings and achieving 21% to 23% operating margins with galvanizing performance being quite steady, while we continue to improve Surface Technologies.
We will remain acquisitive, particularly in Metal Coatings.
For Infrastructure Solutions, we are focused on profitability and cash flow.
Our AIS business units should benefit from more normalized turnaround and outage seasons and a solid market for T&D, utility and data center, e-houses and switchgear.
Our corporate office is actively engaged in several merger and acquisition projects, while continuing to maintain tight accounting controls and providing support to the field for acquiring and retaining talent.
And finally, we will soon be issuing our first ESG report.
So please stay tuned. | autozone q4 same store sales up 4.3%; q4 earnings per share of $35.72.
autozone 4th quarter same store sales increase 4.3%.
4th quarter earnings per share increases to $35.72.
q4 earnings per share $35.72.
domestic same store sales, or sales for stores open at least one year, increased 4.3% for quarter.
quarter -end inventory increased 3.7% over same period last year. | 0 |