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The extraordinary circumstances of 2020 tested Assured Guaranty's business model, operations, and people once again and we delivered remarkably strong results in a year marked by a public health crisis and economic crisis, volatile financial markets, a tumultuous social and political environment.
We prepared well for the technological and organizational challenges of operating remotely and safely during the COVID-19 pandemic and our employees showed the dedication and capability to achieve strong results.
Most importantly, we saw the clear success of our efforts over many years with several in insured portfolio that would perform well in a severely distressed global economy.
The year's challenges made our 2020 accomplishments all the more impressive.
Our new business production totaled $389 million of direct PVP exceeded by $75 million -- the direct PVP we produced in every year but once since 2010.
The sole exception was the $553 million of direct PVP we produced in 2019 making the last two years direct production our best in this decade.
These strong results compare to a reliable base for future earnings for years to come.
In our core business, U.S. municipal bond insurance we guaranteed more than $21 billion of foreign primary and secondary markets, generated $292 million of PVP, both 10-year records for direct production.
We again set new per share records for shareholders' equity and adjusted operating shareholder's equity with totals at year-end of $85.66, $78.49 respectively.
During the year, our adjusted book value per share exceeded $100 for the first time.
At $114.87 year end of adjusted book value per share reflected the greatest single year increase since our IPO $17.88 and the second highest growth rate of 18%.
We retired a total of 16.2 million common shares mainly through highly accretive share repurchases at an average price of $28.23.
We spent 11% less in 2022 repurchase.
We repurchased 31% more shares than in 2019.
We returned a total of $515 million to shareholders through repurchases and dividends.
We also repurchased $23 million of outstanding debt.
Our Paris-based subsidiary Assured Guaranty SA was awarded ratings of AA by S&P and AA+ by KBRA and underwrote its first new transactions allowing us to seamlessly continue our continental European operations in the wake of Brexit.
We also transferred our portfolio of transactions insured by our UK subsidiary to the French company.
And we successfully integrated our asset management business in its first full year of operations and rebranded it Assured Investment Management.
2020 was a profitable year where we earned $256 million in adjusted operating income or $2.97 per share.
But our most compelling news of 2020 was our performance in U.S. public finance where conditions were volatile.
The benchmark 30 year AAA municipal market data interest rate began the year at 2.07%, jumped in March as high as 3.37%, bottomed down in August at a historic low of 1.27%.
In early spring investors were shocked by the potential scale of the pandemic's economic impact, municipal bond funds experienced method outflows.
At that time for PO analysts of any were predicting that 2020 will see $452 billion of municipal bonds issued the greatest annual par value on our volume on record.
This action by the Federal Reserve to help stabilize financial markets by maintaining short-term interest rates near zero and supporting the federal loan program.
These included $500 billion municipal liquid facility which reassured the bond market by providing a backup source of liquidity for states and municipal.
Investors returned to the municipal market with a heightened focus on credit quality, trading value stability and market liquidity all concerned to drive demand for our bond insurance.
And investment grade credit spreads widened significantly before [Indecipherable] BBB credits.
As a result bond insurance penetration rose to 7.6% of par volume sold in the primary market, almost a full percentage point above the past decade's previous high.
Assured Guaranty led this growth with a 58% share of insured new issue par sold.
$21 billion of U.S. public finance par we insured in 2020 was 30% more than in 2019 and included taxable and tax exempt transactions in both primary and secondary markets.
2020 PVP was up 45% year-over-year.
Many issuers took advantage of lower interest rates to refund existing issues in many cases using taxable bond for advanced refunding.
Correspondingly, taxable issues widened the investor base in non-traditional investors both domestically and internationally.
Many of these investors could particularly benefit from our guarantee because of our greater familiarity with the municipal bond structures and credit factors.
We insured $6.8 billion of forum taxable municipal new issues in 2020, up from $3 billion in 2019, $1.5 billion in 2018.
We also guaranteed $2.5 billion of par the new issues that had underlying ratings in the AA category from S&P or Moody's, which was $1 billion more than in 2019.
While investors had no reason to see default risk in such high quality credits many believe the risk, the rating downgrades had increased in all rating categories.
This gave investors an additional incentive to prefer our insured bonds over uninsured bonds.
There are Demonstratable cases where after [Indecipherable] bonds we had insured saw underlying downgraded or its credit viewed as distressed the insured bonds sell at market value better than the comparable uninsured bonds.
The increase in institutional demand for our guarantee was evident in 39 new issues, up from 22 in 2019 where we provided insurance in $100 million or more of par.
These include one of our largest U.S. public finance transactions in many years, $726 million of insured refunding bonds issued by Yankee Stadium, LLC.
Our production in Healthcare Finance made a strong contribution during 2020 as we guaranteed $2.7 billion of primary market par on 25 transactions.
As the only provider of bond insurance in the healthcare sector Assured Guaranty had 9.7% of all healthcare revenue bond par issued in 2020.
Additionally we guaranteed for $164 million of healthcare par across 39 different secondary market policies.
Another highlight was our reentry after seven years into the private higher education bond market where we insured a total of $690 million of par for Howard, Drexel and Seton Hall Universities.
For Howard University we insure two issues totaling $320 million in par in insured par.
Our International Public Finance business produced $82 million of PVP during 2020 even though a number of opportunities were delayed due to pandemic conditions.
However the pandemic also had the positive effects of widening credit spreads.
We executed significant transactions including three solar energy transaction in Spain, student accommodation financing for Kingston University in the United Kingdom.
We have developed a strong pipeline for 2020.
In our Worldwide Structured Finance business, we executed a diverse group of transactions in the asset-backed securities, insurance capital management and other structured finance sectors and generated $16 million of PVP during 2020.
Even though pandemic conditions constrained our marketing activities we were able to lay the groundwork for a variety of potential transactions in 2020.
The efficacy of our underwriting and risk management was evident in the overall performance of our insured portfolio.
This credit quality changed little even as necessary efforts to control the endemic disrupted the economy.
Our par exposure to credit review below investment declined by $531 million, a 6% decrease and ended the year at less than 3.5% of net par outstanding.
Our surveillance professionals reacted to the early news of the pandemic by properly identifying the insured portfolio sectors most likely to weaken evaluating the vulnerability of each of these sectors obligations, reaching out directly to issuers in many cases.
In general what we found was reassuring.
We have paid only relatively all first-time insurance claims we believe were due at least in par to credit stress rising specifically from COVID-19.
We currently project full reimbursement of these claims.
U.S. municipal bonds make up about three quarters of our insured portfolio, asset class they are well structured to protect bond holders with most of our transactions containing covenants that requires issuers to increase tax rates, fees and charges, make sure they are adequate funds to meet their service requirements.
And many also require remaining to debt service reserve funds with up two year's worth of debt service coverage.
Municipalities generally improved their financial condition in the decade since the Great Recession, which further prepared them to handle the market disruption caused by the pandemic.
Regarding Puerto Rico, we announced earlier this week that we have agreed to conditionally support their revise GO of public bidding authorities plan support agreement with the Oversight Board and other creditors of Puerto Rico in the PBA.
As we have said all along we support it consensually, negotiated and comprehensive approach to resolving Puerto Rico's current financial challenges.
We have conditionally supported this agreement with the express understanding that the affected parties will work with us in good faith to make this agreement part of a more comprehensive solution one that respects our legal rights and ultimately achieves the goal of bringing the Title 3 process to adjust an expeditious conclusion.
We will continue to work diligently and sharply toward the resolution of any remaining issues the GO and the PBA credits as well as other Puerto Rico credits such as salary and transportation bonds, prevention authority bonds and others.
This effort is taking place amid occurred during economic news, significant federal assistance has been unlocked, Commonwealth revenues continue to exceed the expectations underlying the Oversight Board's fiscal plans resulting in aggregate Commonwealth balances tripling over the last three years to more than $20 billion at year-end 2020 and reaching as high as almost $25 billion mid-year.
Our total net par exposure to Puerto Rico decreased in 2020 by $545 million including $372 million of water and sewer bonds that were redeemed without any claims having been made on our policy.
Turning to asset management, our corporate strategy for any new business -- for entering new business was to diversify our business profile by building a fee-based revenue source that complements our risk-based premium revenues utilizing our core competency of credit evaluation.
Assured Investment Management also gives us a in-house platform to generally improve investment returns -- to generate improved investment returns.
Our Asset Management subsidiary accomplished a number of strategic objectives.
AssuredIM issued two new CLOs, opened a European CLO warehouse during the year.
It also created a specialized investment advisor that launched new healthcare opportunity funds and continued its planned strategy of unwinding certain legacy funds.
AssuredIM sold CLO equity positions in those bonds to third parties.
Even though AssuredIM assets under management in the wind down funds were reduced by $2.4 billion its total AUM changed very little declining by less than 3% to $17.3 billion.
Assured Guaranty's insurance companies have allocated $1.1 billion of investments from AssuredIM to manage, of which, almost $600 million was funded as of year-end.
As of October 1, 2020, we were pleased to learn that Assured Guaranty would become a competitor of the Standard & Poor's Small Cap 600 Index.
We believe there are thousands of passive and active small cap mutual funds and exchange-traded funds, attractive benchmark to this Index and therefore are likely to hold our shares for the long term.
These investors' appetite for our shares was reflected in a 31% increase in our share price the week following the announcement.
Our share price continue to grow and in the year 44% higher than on October 1 almost doubling through February 25 of 2021.
Inclusion in the Index changed the composition of our shareholder base to be somewhat more heavily weighted toward the index focused asset managers including our second- and fourth-largest shareholders which together hold approximately 20% of our shares at year-end.
Times like these are no substitute for financial strength, experience and judgment.
These are qualities that enables Assured Guaranty to stand the test of time to more than three decades of market cycles and unexpected economic shocks.
They are attributes that enables us to help borrowers of public finance, infrastructure and structured finance markets as well as financial institutions, pension funds, insurance companies, retail investors to navigate the current economy.
We are optimistic about 2021.
On the whole U.S. municipal revenues have fared much better than the market originally feared from the pandemic.
They remain under stress.
But we believe few investment grade credits will default least of all those that we have selected to insure.
We are confident in the quality of our insured portfolio, our financial strength and our financial liquidity.
And many investors have a renewed appreciation of our value proposition.
As infrastructure spending increases in our markets to address deferred needs and provide economic stimulus we expect to continue to find opportunities to assist issuers managing their financing costs.
Longer term, we believe 2020 was a pivotal year that's likely to leave a lasting impression the great value our guarantee provides when something as unexpected and distressing as COVID-19 occurs.
We continue to work to create value through a thriving financial guarantee business and a growing asset management arm.
We will never lose sight of our role as stewards of capital where we are committed to managing efficiently protect policyholders, to reward our shareholders and our clients.
Let me start by highlighting this year's achievements against our long-term strategic initiatives.
In 2020 we had strong PVP results, particularly in the U.S. public finance sector which replenished enough deferred premium revenue to offset scheduled amortization and refundings.
We also retired 16.2 million shares, mainly through share repurchases which helped to boost adjusted book value per share to a new record of over $114 per share.
In our Asset Management business, we increased fee earning AUM from $8 billion to $12.9 billion or 62% across CLO opportunity and liquidity strategies.
As of yearend 2020 Assured Guaranty insurance companies had $1.1 billion of invested assets that is managed by Assured Investment Management of which $562 million is through an investment management agreement and $522 million is committed to Assured Investment Management funds, which had a total return of 15.6% on the invested balances.
Turning to our fourth quarter 2020 results, adjusted operating income was $56 million or $0.69 per share compared with $87 million or $0.90 per share in the fourth quarter of 2019.
The contribution from our insurance segment for fourth quarter 2020 was $109 million compared with $133 million in fourth quarter 2019.
While loss expense was higher in fourth quarter 2020 primarily related to our Puerto Rico exposures, our earned premiums and income from the investment portfolio both increased on a quarter-over-quarter basis.
Net earned premiums and credit derivative revenues increased $30 million to $159 million in fourth quarter 2020 compared with the $129 million in fourth quarter 2019.
These amounts include premium accelerations of $65 million and $39 million respectively.
Total income from the insurance segment investment portfolio consists of net investment income and equity earnings of investees totaling $94 million in fourth quarter 2020 and $84 million in fourth quarter of 2019.
Net investment income represents interest income when fixed maturity and short-term investment portfolio and with $70 million in fourth quarter 2020 compared with $85 million in the fourth quarter of 2019.
The decrease was primarily due to lower average balances in the externally managed fixed maturity investment portfolio due to dividends paid by the insurance subsidiaries and were used for AGL share repurchases and the shift of investments to Assured Investment Management funds and other alternative investments as well as lower short-term interest rates.
Equity in earnings of investees represents our investment in the Assured Investment Management funds as well as earnings from our strategic investments.
This component of investment earnings is more volatile and the net investment income on the fixed maturity portfolio and will fluctuate from period-to-period.
In the fourth quarter 2020 equity earnings was $24 million compared to a negligible amount in fourth quarter 2019.
As of December 31, 2020 the insurance subsidiaries investment in Assured Investment Management funds was $345 million, compared with only $77 million as of December 31, 2019.
The insurance companies have authorization to invest up to $750 million in Assured Investment Management funds of which over $43 million has been committed including $177 million that has yet to be funded.
In addition, the company has a commitment to invest an additional $125 million in unrelated alternative investments as of December 31, 2020.
As we shift assets into these alternative investments, average balances in the fixed maturity investment portfolio and the related net investment income may decline.
However, the long-term we expect the enhanced returns on the alternative investment portfolio to be approximately 10% to 12%, which exceeds the returns on the fixed maturities portfolio.
In the Asset Management segment adjusted operating income was a loss of $20 million compared with a loss of $10 million in fourth quarter 2019.
The additional net loss was mainly attributable to $5 million in placement fees associated with the launch of new healthcare strategy and an impairment of a right of lease -- right of use asset of $13 million related to the relocation of Assured Investment Management offices to 1633 Broadway, Assured Guaranty's primary New York City location.
Our long-term view of the Asset Management segment remains positive based on our recent success in increasing fee earning AUM by 62% and launching a $900 million healthcare strategy with significant third-party investment.
In addition, we believe the ongoing effect of the pandemic on market conditions may present attractive opportunities for Assured Investment Management and for alternative asset management industry as a whole.
Adjusted operating loss for the corporate division was $28 million in the fourth quarter of 2020 compared with $32 million in the fourth quarter of 2019.
The corporate division mainly consists of interest rate expense on U.S. holding company's debt.
It also includes Board of Directors and other corporate expenses in fourth quarter 2019 also included transaction expenses associated with the BlueMountain acquisition.
On a consolidated basis the effective tax rate may fluctuate from period-to-period based on the proportion of income in different tax jurisdictions.
In fourth quarter 2020 the effective tax rate was a provision of 12.7% compared with a benefit of 3.5% in fourth quarter 2019.
The benefit in fourth quarter 2019 was primarily due to the favorable impact of a new regulation related to base erosion in anti-abuse tax.
Moving on to the full-year results, adjusted operating income was $256 million in 2020 compared with $391 million in 2019.
The variance was mainly driven by the Insurance segment and Asset Management segment adjusted operating income, which declined $83 million and $40 million respectively on a year-over-year basis.
Please note asset Management full-year results are not comparable between 2020 and 2019 as 2020 includes a full year of operating results while 2019 includes only one quarter as the BlueMountain acquisition occurred on October 1, 2019.
The insurance segment had adjusted operating income of $429 million in 2020 compared with $512 million in 2019.
Full year insurance results were lower, primarily due to a large benefit in our RMBS exposures in 2019 that did not recur in 2020, partially offset by a commutation gain in 2020 on the reassumption of a previously ceded portfolio.
Net earned premiums and credit derivative revenues were $504 million in 2020 compared with $511 million in 2019 including premium accelerations of $130 million -- and a $130 million respectively.
Also, noteworthy is that public finance scheduled earned premiums increased 5% in 2020 compared with 2019.
The corporate division had adjusted operating loss of $111 million in both 2020 and 2019.
Turning to our capital management strategy, in the fourth quarter of 2020 we repurchased 4.3 million shares for $126 million at an average price of dollars and $28.87 per share.
This brings our full-year 2020 repurchases to 15.8 million shares or $446 million at an average price of $28.23.
So far in 2021 we have purchased an additional 1.4 million shares for $50 million.
Since January 2013, our successful repurchase program has returned $3.7 billion to shareholders, resulting in a 63% reduction in total shares outstanding.
The cumulative effect of these repurchases was a benefit of approximately $29.32 per share in adjusted operating shareholder's equity and $51.48 in adjusted book value per share, which helped drive these metrics to new record highs of $78.49 in adjusted operating shareholder's equity per share and $114.87 of adjusted book value per share.
From a liquidity standpoint, the holding company currently has cash and investments of approximately $204 million of which $133 million resides in AGL.
These funds are available for liquidity needs or for use in the pursuit of our strategic initiatives through to expand the asset management business or repurchase shares to manage our capital.
| q4 adjusted operating earnings per share $0.69.
|
These statements are based on how we see things today.
Actual results may differ materially due to risks and uncertainties.
Some of today's remarks include non-GAAP financial measures.
These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results.
Tom will provide some comments on our performance as well as a brief overview of the current operating environment.
Bernadette will then provide details on our first quarter results and fiscal 2022 outlook.
We're pleased with our strong sales growth in the quarter, which reflects the on growing broad recovery in demand across our out of home sales channels as well as continued improvement in our key international markets.
However, our margin improvement lags our volume recovery as a result of the timing of pricing actions to offset cost inflation as well as challenging macro factors that increase our cost and affected our production run rates and throughput.
These ongoing challenges combined with the extreme summer's heat negative, negative impact on potato crops in the Pacific Northwest will result in higher costs as the year progresses.
As a result, we now expect our gross profit margins will remain below pre-pandemic levels through fiscal 2022.
We believe many of these costs and supply chain challenges are transitory and we're taking aggressive actions to mitigate their effects on our operations and financial performance.
We're confident that our actions along with our investments to improve productivity and operations over the long-term will get us back on track to deliver higher margins and sustainable growth.
Before Bernadette gets into some of the specifics of our first quarter results and outlook, let's briefly review the current operating environment starting with demand.
In the U.S., we continue to be encouraged by the pace of recovery in restaurant traffic and demand for fries.
Overall, restaurant traffic has largely stabilized at about 5% below pre-pandemic levels led by the continued solid performance at quick service restaurants.
Traffic at full service restaurants continued to rebound in June and July, but it did soften a bit in August as the Delta variant surged across most of the country.
Demand improved at non-commercial Foodservice outlets especially in the education market, which help to offset the near-term slowdown in full service restaurants.
The fry attachment rate in the U.S. which is a rate at which consumers order fries when visiting a restaurant or other Foodservice outlets also continued to help support the recovery in demand by remaining above pre-pandemic levels.
Demand in U.S. retail channels also remained solid with overall category volumes in the quarter still up 15% to 20% from pre-pandemic levels.
Outside the U.S., overall fry demand continued to improve in the quarter, although the rate of improvement varied widely among our key international markets.
Demand in Europe, which is served by our Lamb-Weston/Meijer joint venture gradually recovered as vaccination rates climbed.
Demand in Asia and Oceania was solid but also softened in August due to the spread of the Delta variant and South America remain challenged especially in Brazil.
So overall, we're happy with the recovery in global demand and believe it provides a solid foundation for continued volume growth in fiscal 2022.
With respect to the pricing environment, I'm pleased with the progress of our recently implemented pricing actions demanded sharp input costs inflation.
In our Foodservice and Retail segments as well as in some of our international business, we'll begin to realize some of the pricing benefits in the second quarter and more fully in the third quarter.
In our Global segment, the contract renewables for large chain restaurant customers have largely progressed as we expected and we'll generally begin to see the impact of any pricing actions associated with these contracts in our third quarter.
In addition, we'll continue to benefit from price escalators for most of the global contracts that are not up for renewal this year.
These price adjustments reset based on the underlying timing of the contract renewals were largely during our physical third quarter.
Overall, we expect our price increases across our business segments will in aggregate mitigate much of the cost inflation.
However depending on the pace and scope of inflation and the increase of potato cost resulting from this year's poor crop we may take further price action as the year progresses.
In contrast to demand and pricing, the manufacturing and distribution environment continues to be difficult.
Our supply chain costs on a per pound basis have increased significantly due to input and transportation cost inflation as well as labor availability and other macro supply chain disruptions that are continuing to cause production inefficiencies across our global manufacturing network.
Although we're making gradual progress to mitigate these challenges, they have slowed our efforts to stabilize our manufacturing operations during the first half of physical 2022.
As a result, we expect the turnaround in our supply chain will take longer than we initially anticipated.
Now turning to the crop, the early read on this year's crop in the Columbia base in Idaho and Alberta indicates that it will be well below average levels and both yield and quality due to the extreme heat over the summer.
As we're still in the middle of the main crop harvest, the extent of the financial impact of the crop condition will be determined over the coming quarter as the harvest is completed.
While we expect this impact will be significant, we're examining a variety of levers to mitigate the effect on our earnings as well as on customer service and supply.
As usual we'll provide a more complete assessment of the crop and its impact on earnings when we release our second quarter results in early January.
So in summary, I feel good about the overall pace of recovery in French Fry demand especially in the U.S. and believe it provides a solid foundation for future growth.
I also feel good about the current pricing environment and how we're executing pricing actions in the marketplace.
We do expect higher potato costs input and transportation inflation, labor challenges and other industrywide operational headwinds to continue for the remainder of this fiscal year.
While we're taking specific actions to mitigate these challenges they will keep our gross margins below pre-pandemic levels through fiscal 2022.
And finally, I'm confident that we're taking the right steps to get our company back on track to delivering more normalized profit margins.
As many of you know, this is my first earnings call as CFO of Lamb Weston.
I've now been in the role for about nine weeks.
For those on the line that I haven't met, it's a pleasure to meet you over the phone.
I'm looking forward to meeting many of you in person over the coming months as we get back into the cadence of in-person investor meetings and industry events.
As Tom discussed, we feel good about the health of the category and our top line performance in the first quarter and expect our gross margins going forward will improve as we benefit from our recent pricing actions, as well as from other actions that we're taking to mitigate some of the macro challenges affecting our supply chain.
Specifically in the quarter, sales increased 13% to $984 million, with volume up 11% and price mix up 2%.
As expected, volume was the primary driver of sales growth reflecting the ongoing recovery in fry demand outside the home in the U.S. and in some of our key international markets, as well as a comparison to relatively soft shipments in the prior-year quarter.
Lower retail segment sales volume partially offset this growth, largely as a result of incremental losses of low-margin private label business.
Overall, our sales volume in the first quarter was about 95% of what it was during the first quarter of fiscal 2020 before the pandemic impacted demand.
Moving to pricing; pricing actions and favorable mix drove an increase in price mix in each of our core business segments.
As I'll discuss in more detail later, our pricing actions include the benefit of higher prices charged to customers for product delivery in an effort to pass through rising freight costs.
The offset to this is higher transportation costs in cost of goods sold.
Gross profit in the quarter declined $63 million, as the benefit of higher sales was more than offset by higher manufacturing and transportation costs on a per pound basis.
The decline in gross profit also includes the $6 million decrease in unrealized mark-to-market adjustments, which includes a $1 million gain in the current quarter compared with a $7 million gain in the prior year quarter.
The increase in cost per pound, primarily related to three factors.
First, we incurred double-digit cost inflation for key commodity inputs, most notably edible oils which has more than doubled versus the prior year quarter.
Other inputs that saw significant inflation include ingredients such as wheat and starches used to make batter and other coatings and containerboard and plastic film for packaging.
Higher labor costs were also a factor as we incurred more expense from increased unplanned overtime.
Second, our transportation costs increased due to rising freight rates as global logistics networks continue to struggle.
Our costs also rose due to an unfavorable mix of higher costs trucking versus rail as we took extraordinary steps to deliver product to our customers.
Together, inflation for commodity inputs and transportation accounted for approximately three quarters of the increase in our cost per pound.
The third factor driving the increase in cost per pound was lower production run rates and throughput at our plants from lost production days and unplanned downtime.
This resulted in incremental costs and inefficiencies.
Some of this is attributable to ongoing upstream supply chain disruptions including the timely delivery of key inputs and other vendor supplied materials and services.
However, most of the impact on run rates was attributable to volatile labor availability and shortages across our manufacturing network.
So what do we do to mitigate these higher costs and stabilize our supply chain?
First, price; we are executing our recently announced price increases across each of our business segments and implementation of these pricing actions are on track.
Our price-cost relationship will progressively improve as our pass-through pricing catches up with deflationary cost increases.
We'll begin to see some benefit from these actions in the second quarter and it will continue to build through the year.
If needed, we will implement additional rounds of price increases to mitigate the impact of further cost inflation.
We've also increased the freight rates that we charge customers to recover the cost of product delivery.
And we are adjusting them more frequently to better reflect changes to the market rates.
These adjustments have also lagged the cost increases.
While we saw some benefit in the first quarter, we expect to see more of a benefit beginning in the second quarter.
In addition, we're significantly restricting the use of higher costs spot rate trucking.
Second, we're optimizing our portfolio.
We're eliminating underperforming skews to drive savings through simplification in terms of procurement, production, inventory management, and distribution.
We're also partnering with our customers to modify product specifications without comprising food, safety and quality.
These modifications will help mitigate the impact of lower potato crop yields from this year's crop as well as some of the impact of reduced potato utilization that results from poor raw potato quality.
Third, we're increasing productivity savings with our Win As One program.
While realized savings to-date have been small given that the initiative is still fairly new we began to execute specific cost reduction programs around procurement, commodity utilization, manufacturing waste, inventory management and logistics as well as programs to improve demand planning and throughput.
We expect savings from these and other productivity programs will steadily build as our supply chain stabilizes.
And finally, we're managing labor availability and volatility.
This includes changing how we schedule our labor crews, which provides our employees more control and predictability over their personal schedules and reduces unplanned overtime.
We're also reviewing compensation levels to make sure we remain an Employer of Choice in each of our local communities.
This is in addition to the other recruiting tools and incentives such as signing and retention bonuses.
Moving on from cost of sales; our SG&A increased $13 million in the quarter.
This increase was largely driven by three factors.
First, it reflects the investments we're making behind information technology, commercial and supply chain productivity initiatives that should improve our operations over the long term.
About $4 million this quarter represents non-recurring ERP related expenses.
Second, it reflects higher compensation and benefits expense.
And third, it includes an additional $3 million of advertising and promotional support behind the launch of new branded items in our retail segment.
This increase compares to a low base in the prior year when we significantly reduced A&P activities at the onset of the pandemic.
Diluted earnings per share in the first quarter was $0.20, down from $0.61 in the prior year, while adjusted EBITDA including joint ventures was $123 million, down from $202 million.
Moving to our segments, sales for our Global segment were up 12% in the quarter with volume up 10% and price mix up 2%.
Overall, the segments' total shipments are trending above pre-pandemic levels due to strength in our North American chain restaurant business especially at QSRs.
Our international shipments in the quarter also approached pre-pandemic levels, despite congestion at West Coast ports and the worldwide shipping container shortage continuing to disrupt our exports as well as softening demand in Asia due to the spread of the Delta variant.
The 2% increase in price mix reflected the benefit of higher prices charged for freight, inflation driven price escalators and favorable customer mix.
Global's product contribution margin, which is gross profit less advertising and promotional expenses declined 45% to $43 million.
Input and transportation cost inflation as well as higher manufacturing costs per pound more than offset the benefit of higher sales volume and favorable price mix.
Moving to our Foodservice segment, sales increased 36% with volume up 35% and price mix up 1%.
The strong increase in sales volumes largely reflected the year-over-year recovery in shipments to small and regional restaurant chains and independently owned restaurants.
Volume growth in August was also tempered by the inability to service full customer demand due to lower production run rates and throughput at our plants largely due to labor availability.
Our shipments to non-commercial customers improved through the quarter as the education, lodging and entertainment channels continued to strengthen.
Overall non-commercial shipments were up sequentially to 75% to 80% to pre-pandemic levels from about 65% during the fourth quarter of fiscal 2021.
The increase in price mix largely reflected pricing actions including the benefit of higher prices charged for freight.
Foodservices product contribution margin rose 12% to $96 million.
Higher sales volumes and favorable price mix more than offset input and transportation cost inflation as well as higher manufacturing costs per pound.
Moving to our Retail segments; sales declined 14% with volume down 15% and price mix up 1%.
The sales volume decline largely reflects lower shipments of private label products, resulting from incremental losses of certain low margin business.
Sales of branded products were down slightly from a strong prior-year quarter that benefited from very high in-home consumption demand due to the pandemic, but remained well above pre-pandemic levels.
The increase in price mix was largely driven by favorable price including higher prices charged for freight.
Retails product contribution margin declined 59% to $15 million.
Input and transportation cost inflation, higher manufacturing cost per pound, lower sales volumes and a $2 million increase in A&P expenses to support the launch of new products drove the decline.
Let's move to our cash flow and liquidity position.
In the first quarter, we generated more than $160 million of cash from operations.
That's down about $90 million versus the prior year quarter due primarily to lower earnings.
We spent nearly $80 million in capital expenditures and paid $34 million in dividends.
We also bought back nearly $26 million worth of stock or about double what we have typically repurchased in prior quarters.
During the quarter, we amended our revolver to increase its capacity from $750 million to $1 billion and extended its maturity date to August 2026.
At the end of the first quarter, our revolver was undrawn and we had nearly $790 million of cash on hand.
Our total debt was about $2.75 billion and our net-debt-to-EBITDA including joint ventures ratio was 2.7 times.
Now, let's turn to our updated outlook.
We continue to expect our sales growth in fiscal 2022 to be above our long-term target of low to mid-single digits.
In the second quarter, we continued to anticipate sales growth will be largely driven by higher volume as we lap a comparison to relatively fast shipments during the second quarter of fiscal 2021 due to the pandemic.
We expect price mix will be up sequentially versus the 2% that we delivered in Q1 as the execution of pricing actions in all of our segments remain on track.
For the second half of the year, we continued to expect our sales growth will reflect more of a balance of higher volume and improved price mix as we begin to lap some of the softer volume comparisons from the prior year and as the benefit from our earlier pricing actions continue to build.
Our volume growth, however, may be tempered by global logistics disruptions and container shortages that affects both domestic and export shipments.
It may also be tempered by lower factory production due to macro industry and labor challenges, as well as a poor quality crop.
With respect to earnings, we expect net income and adjusted EBITDA including joint ventures will continue to be pressured through fiscal 2022.
That's a change from our previous expectation of earnings gradually approaching pre-pandemic levels in the second half of the year.
Driving most of this change is our expectation of significantly higher potato costs, resulting from poor yield and quality of the crops in our growing regions.
We previously assumed the potato crop that approached historical averages.
Outside of raw potatoes, we expect double-digit inflation for key production inputs, such as edible oils, transportation and packaging to continue through fiscal 2022.
We had previously assumed these costs would begin to gradually ease during the second half of the year.
We also expect the macro challenges that have slowed the turnaround in our supply chain to continue through fiscal 2022.
That said we expect the labor and transportation actions that I described earlier along with our Win As One productivity initiative will help us continue to gradually stabilize operations, improve production run rates and throughput and manage costs as the year progresses.
For the full year, we expect our gross margin may be at least 5 points to 8 points below our normalized annual margin rate of 25% to 26%.
While we recognize this is a wide range, it reflects the volatility and high degree of uncertainty regarding the cost pressures that I've discussed.
Consistent with prior years, we'll have a better understanding of the crop's financial impact in the next couple of months and we will provide an update when we release our second quarter results in early January.
Below gross margin we expect our quarterly SG&A expense will be in the high 90s as we continue our investments to improve our operations over the long-term.
While equity earnings will likely remain pressured due to input cost inflation and higher manufacturing costs both in Europe and the U.S. We've also updated a couple of our other targets for the year.
First, we've reduced our capital expenditure estimate to $450 million from our previous estimate of $650 million to $700 million.
This significant reduction is due to the timing of spend behind our large capital projects and effectively shift the spend into early 2023 -- fiscal 2023.
Despite the shift in expenditures, our expansion projects in Idaho and China remain on track to open in the spring and fall of 2023 respectively.
And second, we're reducing our estimated full year effective tax rate to approximately 22%, down from our previous estimate of between 23% and 24%.
Our estimates for total interest expense of around $115 million and total depreciation and amortization expense of approximately $190 million remain unchanged.
So in summary, the strong recovery in demand helped fuel our top line growth in the first quarter, but higher manufacturing and distribution costs led to lower earnings.
For fiscal 2022, we expect net sales growth will be above our long-term target of low to mid-single digit, but that our earnings will continue to be pressured for the remainder of the year due to higher potato costs from a poor crop and persistent inflationary and macro challenges.
Nonetheless, we expect to begin to see earnings improve in the second quarter behind our pricing actions and the steps we're taking to improve our cost.
Now, here's Tom for some closing comments.
Let me just sum it up.
We feel good about the near-term recovery in demand in the U.S. and our key international markets, as well as the long-term health and growth of the category.
We're taking the necessary steps with respect to pricing and continuing to focus on stabilizing our supply chain to mitigate near-term operational headwinds and improve profitability.
We're on track with our recently announced capacity investments to support our customer and category growth, as well as our long-term strategic and financial objectives.
| q1 earnings per share $0.20.
q1 sales $984 million versus refinitiv ibes estimate of $1 billion.
sees fy 2022 net sales growth above long-term target range of low-single digits.
lamb weston holdings - sees net income and adjusted ebitda including joint ventures to be pressured through fiscal 2022.
|
I'm joined today by Chris Simon, our CEO; 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 financial results and guidance.
Please note that these measures exclude certain charges and income items.
Before I get into our results, I want to review the news we announced a few weeks ago.
In April, CSL Plasma notified us that they do not intend to renew their US supply agreement for the use of our PCS2 plasma collection system equipment and the purchase of plasma disposables that expires in June of 2022.
We were informed that CSL's decision was not based on the level of service or quality of our products, but rather reflects the change in internal strategy that was made some time ago, presumably before they had experience with NexSys and Persona.
We are disappointed by CSL's decision, but it does not change our commitment to the plasma market and our technology to improve collections.
The NexSys and Persona value propositions are strong, supported by real-world data and real-time customer feedback.
And we are excited about what this platform means for our customers.
We are taking a comprehensive approach to address the impact the CSL transition will have in fiscal '23.
We are acting with urgency, but we are being thoughtful and balanced in our planning.
Our ability to respond is enhanced by the steps we have taken these past few years to strengthen our financial health, improve productivity, drive innovation, reshape our portfolio and build a collaborative performance-driven culture.
We are well positioned to navigate this change.
We are focused on driving value for customers and shareholders, and our decision making is guided by a through-cycle mindset.
We will continue to pursue growth strategies to maintain our market leadership, including developing innovation in partnership with our customers.
We also remain committed to productivity and being good stewards of the Company's resources.
We will provide more details on the path forward as our plans take shape.
With that, let me turn to our results for the quarter and the fiscal year.
Today, we reported organic revenue decline of 14% in the fourth quarter and 13% for fiscal '21; and adjusted earnings per share of $0.46, down 33% in the quarter, and down 29% to $2.35 for the year.
Fiscal 2021 was a difficult year for Haemonetics as the pandemic had varying effects across our businesses and their respective customers.
Despite the challenges, we made progress to build a stronger Haemonetics.
We divested non-performing assets like the Fajardo blood filter manufacturing operations, Blood Center donor management software in the US and Inlog SAS blood bank and hospital software in Europe.
We made organic and inorganic investments in attractive and growing markets, including the launch of Persona and the Donor360 app, and the acquisitions of ClotPro and Cardiva Medical.
We modified our capital structure for financial flexibility and remain diligent with cost containment, while continuing to fund growth.
We made significant changes to the way we source and make our products as part of our Operational Excellence Program.
While we cannot control the pandemic's impact on our customers' businesses, we met every challenge, keeping our employees safe and our plants operational with high levels of service and customer support.
Early fiscal '22 will continue to be challenging, but we expect the pace of recovery to accelerate over the year.
The end market demand for our products remain strong, and we do not see structural or other changes from the pandemic that would impact the need for lifesaving plasma-based medicines or hospital devices for critical areas of medicine like trauma, interventional cardiology and electrophysiology.
We have healthy and viable businesses, delivering exceptional value adding technology.
We have proven our resilience and our ability to drive growth and productivity, and we will do so again as our markets recover from the pandemic.
Turning now to our business units.
Plasma revenues declined 28% in the fourth quarter and 26% in fiscal '21, as the pandemic continued to have a pronounced effect on the US-sourced plasma donor pool.
We saw lingering effects beyond fourth quarter into April.
North America disposables declined by 31% in the fourth quarter, primarily driven by declines in volume and a negative impact from the expiration of pricing on a historical technology enhancement with one of our customers.
Sequentially, plasma collection volumes declined by 13% compared with historical average seasonal declines of about 7%, as additional economic stimulus hindered recovery.
Fiscal '21 was an especially difficult year for plasma collections, given the interplay of different factors affecting donor behavior.
Our customers have taken extensive measures to ensure the health and safety of donors and to launch a myriad of promotional campaigns to encourage plasma donations.
Our teams have remained focused on ensuring no disruptions to our supply, service and support.
Despite the environment, we advanced our innovation agenda with the FDA clearance of Persona, which safely yields an additional 9% to 12% of plasma on average per collection.
We extended the reach of our customers to donors via a Donor360 app, which allows donors to engage with centers before in-person visits, decreasing door-to-door time and improving the overall donor experience.
Given the pandemic's negative effect on collections, increased yield is more important than ever and feedback from NexSys customers operating with YES technology or Persona continues to be positive.
We believe they were able to offset some of the headwinds from the pandemic because they benefited from safe, higher plasma yield per donor, bidirectional paperless connectivity and increased donor satisfaction.
NexLynk DMS rollouts continue on pace, and the software continues to be a key enabler and differentiator for NexSys.
All of our major customers have agreed to adopt NexSys somewhere in their collection network, and we anticipate that by mid-fiscal '23, the majority of our customers, excluding CSL, will be on NexSys in the US or globally.
As we emerge from the pandemic and see future sustained increases in available donors, the operational efficiency benefits of NexSys, integrated with NexLynk DMS, will be an increasingly valuable tool to support greater donor traffic.
We anticipate initial Persona rollouts this fiscal year, as we strive to move in sync with our customers and pace our technology implementations to meet their individual needs.
We are committed to advancing our innovation agenda across devices, disposables and software to develop products that create long-term sustainable value for our customers.
We continue to do everything we can to support our customers, and we remain cautiously optimistic about the timing and pace of recovery.
The demand for plasma-derived medicines remains strong, and our customers are doing what they can to recruit and retain donors.
Unfortunately, donor economics play a critical role in plasma collections, and we expect collections will be muted until government stimulus wanes.
Beyond stimulus, we expect a return to the long-term 8% to 10% growth of the US-sourced plasma collections market, and we see potential to grow in excess of that as customers strive to replenish depleted plasma inventories.
Hospital revenue increased 12% in the fourth quarter and 4% in fiscal '21.
Our Hospital business experienced continued sequential improvement over the first nine months of the fiscal year.
Fourth quarter recovery was uneven, as we saw another spike in COVID cases early in the quarter, followed by a material improvement in February and March, coupled with the anniversary of the previous year impact of COVID-19 in China and other geographies that were affected earliest by the pandemic.
Hemostasis Management revenue was up 19% in the fourth quarter and 9% in fiscal '21.
North America, our largest market, showed sequential growth throughout the first nine months of the year.
And despite a spike in COVID cases early in the fourth quarter, the business exited in a strong position, including additional penetration into new accounts.
China, our second largest market, benefited from a lower comparator in the prior year fourth quarter due to the early onset of COVID-19.
Strong capital sales in North America and EMEA have also contributed favorably to our fourth quarter and fiscal '21 results.
We continue to drive our go-to-market strategies for viscoelastic testing to meet the unique needs of our regional markets.
We are executing on the Chinese market introduction of our locally designed and manufactured viscoelastic testing technology that expands our product offering to meet the needs of that geography.
Transfusion Management was up 9% in the fourth quarter and fiscal '21, primarily driven by strong growth in BloodTrack through new accounts and geographic expansion of SafeTrace Tx.
Our teams have used remote tools to advance installations and utilization in customer environments where access continues to be restricted.
Cell Salvage revenue grew 2% in the fourth quarter and declined 8% in fiscal '21.
Our Cell Salvage results in the quarter benefited from the easy comparison with the prior year quarter in China and 80% growth in capital sales as we continue to upgrade our customers to the latest technology.
Partially offsetting these benefits in the fourth quarter was overall lower procedure volume due to COVID-19.
The integration of Cardiva Medical is going well, and the performance of the business is exceeding expectations.
The VASCADE proprietary vascular closure technology strengthens our hospital portfolio in the attractive interventional cardiology and electrophysiology markets, and the team is focused on driving the strategy underlying this acquisition.
Although excluded from our organic revenue results, Cardiva added close to $8 million of revenue in March, as our teams continue to drive penetration in the top hospital accounts for interventional procedures in the US.
Additionally, as US procedure volume continues to improve, we've seen increasing benefit from product utilization among existing accounts.
Our long-term outlook for this business is strong, as our combined product development and regulatory teams work closely together on OUS registrations and driving additional product innovation.
Overall, the pandemic has validated the essential role of our technologies in hospital.
We have demonstrated our ability to safely and effectively sell, including to new and existing accounts, install and service our equipment despite limited access to hospitals.
Blood Center revenue declined 10% in the fourth quarter and 4% in fiscal '21.
Apheresis revenue declined 3% in the fourth quarter and grew nearly 1% in fiscal '21.
Fourth quarter apheresis results were impacted by unfavorable distributor order timing in EMEA and a competitive loss, partially offset by strong capital sales.
Order timing was overall a benefit to our full year fiscal '21 results, as distributors made large stocking orders in response to the pandemic, particularly in Europe and the Middle East.
We also benefited from strong capital sales as we continue to support our customers in the collection of convalescent plasma.
These benefits were partially offset by the previously disclosed competitive loss that had a $17 million impact on our full year results.
Excluding this loss, overall Blood Center revenue actually grew in fiscal '21.
Whole blood revenue declined 24% in the fourth quarter and 14% in fiscal '21, driven by lower collection volumes due to COVID-19 and discontinued customer contracts in North America.
We remain committed to supporting enhanced product quality and services for our blood center customers, while preserving cash generation and exploring portfolio rationalization as appropriate.
I will begin by discussing our fiscal '21 actual results, followed by our fiscal '22 guidance.
Chris has already discussed revenue, so I will start with adjusted gross margin, which was 50% in the fourth quarter, a decline of 30 basis points compared with the fourth quarter of the prior year.
Adjusted gross margin year-to-date was 50.3%, a decline of 130 basis points compared with the prior year.
On the positive side, we continue to benefit from productivity savings realized from our Operational Excellence Program and lower depreciation expense related to our PCS2 devices, which were mostly depreciated by the end of the prior fiscal year.
We also saw benefits from the recent acquisition of Cardiva Medical.
The primary drivers of the adjusted gross margin decline were unfavorable pricing and product mix, mainly due to the impact of COVID-19, higher inventory-related charges and the impact of recent divestitures.
These inventory-related charges, which relate to CSL's intent not to renew the US plasma disposables supply agreement, had about 220 basis points impact on our fourth quarter and about 60 basis points impact on our fiscal '21 results.
The combination of our recent divestitures and our strategic decision to exit the liquid solution business resulted in a net negative impact of 70 basis points on our fourth quarter and about neutral impact on our fiscal '21 adjusted gross margin.
Adjusted operating expenses in the fourth quarter were $81.9 million, an increase of $9.2 million or 13% compared with the fourth quarter of the prior year.
Adjusted operating expenses for fiscal '21 were $283 million, a decrease of $9.8 million or 3% compared with the prior year.
Adjusted operating expenses, both in the fourth quarter and fiscal '21, were impacted by higher variable compensation, the acquisition of Cardiva Medical and the impact from the 53rd week.
Contributions from our productivity savings and cost containment efforts that we put in place earlier in the pandemic helped to offset some of the impacts and allowed us to make additional growth investments into our business.
As a result of the performance in adjusted gross margin and adjusted operating expenses, fourth quarter adjusted operating income was $30.5 million, a decrease of $16.8 million or 35%, and adjusted operating income for fiscal '21 was $154.6 million, a decrease of $63.4 million or 29% compared with the prior year.
Adjusted operating margin was 13.5% in the fourth quarter and 17.8% in fiscal '21, down 630 basis points and 420 basis points respectively compared with the same periods in fiscal '20.
For both periods, the lost leverage from revenue, coupled with the inventory-related charges, higher variable compensation and impacts from portfolio changes, outpaced the impact of cost mitigation efforts and productivity savings.
These inventory-related charges and higher variable compensation put downward pressure on operating margins by approximately 500 basis points in the fourth quarter and approximately 100 basis points in fiscal '21.
The variable compensation incentives we established during the pandemic and the one-time inventory-related charge due to the recent customer announcement are not expected to affect future operating margins.
The adjusted income tax rate was 12% in the fourth quarter and 14% in fiscal '21 compared with 18% and 15% respectively for the same periods of the prior year.
Fourth quarter adjusted net income was $23.9 million, down $11.5 million or 33%, and adjusted earnings per diluted share was $0.46, down 33% when compared with the fourth quarter of fiscal '20.
Adjusted net income for fiscal '21 was $120.7 million, down $50.6 million or 30%, and adjusted earnings per diluted share was $2.35, down 29% when compared with the prior year.
The inventory-related charges and higher variable compensation had a downward impact on adjusted earnings per diluted share of $0.18 in the fourth quarter and $0.12 in fiscal '21.
Our Operational Excellence Program continued to deliver positive results and drive improvements in adjusted gross and adjusted operating margins.
This program has also enabled us to offset some of the challenges resulting from the pandemic.
During fiscal years '20 and '21, the program-to-date gross savings are approximately $34 million, with the majority of those savings dropping through to adjusted operating income.
Cash on hand at the end of the fourth quarter was $192 million, an increase of $55 million since the beginning of the fiscal year.
Free cash flow before restructuring and turnaround costs was $99 million in fiscal '21 compared with $139 million in the prior year.
Fiscal '21 included a $54.3 million payment for a compensation-related liability as part of the Cardiva Medical acquisition.
The total purchase price paid for Cardiva Medical was reduced by the amount of this liability.
Lower increases in inventory, lower capital expenditures and improvement in accounts receivable compared -- when compared with the prior year have benefited fiscal '21.
Although the free cash outflow for inventory is lower than in the prior year, the impact from lower sales volume in Plasma has resulted in a higher disposables inventory balance.
We will continue to monitor our inventory levels and expect inventory fluctuations to continue as we adjust our production to support customer demand and our Operational Excellence Program initiatives.
In addition to free cash flow, the fourth quarter ending cash balance benefited from the completion of a $500 million convertible debt offering, which resulted in a net cash inflow of $439 million.
Offsetting the cash inflow during fiscal '21 was $390 million of net cash spent on recent portfolio moves and $82 million of debt repayments, including a $60 million repayment of the revolving credit line that was outstanding at the end of fiscal '20.
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 fourth quarter, total debt outstanding under the facility was $302 million.
There were no borrowings outstanding under the $350 million revolving credit line at the end of fiscal '21.
During the fourth quarter, we completed a $500 million convertible debt offering.
Our EBITDA leverage ratio, as calculated in accordance with the terms set forth in the Company's existing credit agreement, is 3.4 at the end of fiscal '21.
The existing $500 million share repurchase authorization will expire at the end of May 2021 with $325 million remaining on the authorization.
We will update our capital allocation priorities in the next few quarters as we continue to develop our long-range plan.
Now, I will turn to our fiscal '22 guidance.
Our business continues to be impacted by the pandemic.
Therefore, our fiscal '22 guidance includes wider than usual ranges that reflect the uncertainty of the pace of the continuing recovery.
We will narrow or update our guidance as necessary throughout the year.
Our fiscal '22 organic revenue growth is expected to be in the range of 8% to 12%.
We remain confident in the continued market growth underlying the commercial plasma business and anticipate Plasma revenue growth of 15% to 25% in fiscal '22.
At the low end of our guidance range, we assume that the second and third rounds of economic stimulus will continue to impact plasma collections through the first half of fiscal '22 with stronger collection volumes in the second half of fiscal '22.
At the higher end of our guidance range, we assume that recovery will begin mid-second quarter with additional acceleration toward the end of the fiscal year as customers begin to replenish safety stock levels.
In both cases, we expect the run rate for plasma collections to be at or above fiscal '20 levels at the end of the fiscal year.
Disposable revenue related to CSL collection volume is included in the guidance for 12 months.
In fiscal '21, we recognized disposable revenue in the US from CSL of approximately $89 million.
This Plasma revenue guidance also includes the net impact of initial rollouts of Persona and NexSys adoption for customers with whom we have agreements, with the majority of the benefit toward the end of the fiscal year.
These benefits are partially offset by price adjustments, including the expiration of fixed term pricing on a historical PCS2 technology enhancement and a one-time safety stock order in fiscal '21.
We expect 15% to 20% organic revenue growth in our Hospital business in fiscal '22.
This growth rate assumes the recovery of hospital procedures will continue to improve throughout the year and will be close to fully recovered across all geographies by the end of our fiscal '22.
Our Hospital revenue guidance includes Hemostasis Management revenue growth in the mid-20s.
The Cardiva Medical acquisition is anticipated to deliver $65 million to $75 million of revenue and is excluded from organic revenue growth until the anniversary of the acquisition date.
Our fiscal '22 guidance for Blood Center revenue is a year-over-year decline of 6% to 8%.
The anticipated revenue decline in Blood Center reflects the annualization of business exits, primarily within North America whole blood, the non-repeating revenue related to convalescent plasma in fiscal '21 and the effects of order timing, which favorably impacted fiscal '21.
We expect fiscal '22 adjusted operating margins in the range of 19% to 20% and adjusted earnings per diluted share in the range of $2.60 to $3.00.
Our adjusted earnings per diluted share guidance includes an adjusted income tax rate of approximately 21%.
In fiscal '22, we expect our Operational Excellence Program to deliver gross savings of approximately $22 million with less than half benefiting adjusted operating income due to inflationary pressures and investments in manufacturing.
The program began in fiscal '20.
And by the end of fiscal '22, we anticipate achieving approximately $56 million of gross savings, with about 60% of those savings benefiting adjusted operating income.
The remaining year of the Operational Excellence Program is being updated as part of our comprehensive effort to address the impacts from the anticipated customer loss in early fiscal '23.
We intend to communicate the updated Operational Excellence Program as part of our longer range plan.
We also expect our free cash flow before restructuring and turnaround expenses in fiscal '22 to be $135 million to $155 million.
Before we open the call up for Q&A, I want to reiterate the key points that we hope you take away from today's call.
First, while the pandemic continued to impact our business, we don't believe it has caused any structural changes to the end market demand for our products.
By the end of our fiscal '22, we expect full recovery across all of our businesses, but the exact pace of the recovery is the biggest variable included within our guidance.
Second, we believe our product portfolio strongly positions us to capitalize on the market recovery ahead.
Despite the challenges put in front of us, our teams remain focused on rationalizing our product portfolio to emphasize the products and markets that meet our strategic goals, prioritizing investment and allocating capital to strengthen the core capabilities and technology that make us distinctive.
Third, our Operational Excellence Program continues to drive transformation, primarily in our manufacturing and supply chain, as we become more agile and flexible.
We made significant progress to date, which has allowed us to offset some of the headwinds due to the pandemic, and we expect to have close to 60% to 70% of the program completed by the end of our fiscal '22 with the majority of those savings benefiting our adjusted operating income.
And finally, we have a proven dedicated team, committed to driving value for our customers and our shareholders.
We are proud of the way our teams have risen to meet the challenges over the past year.
We recognize more challenges are ahead, including difficult donor economics and the eventual loss of CSL in Plasma.
We are committed to taking action, managing costs and mitigating the impact without compromising future growth of our business.
And while we have a lot of work to do in the coming quarters, we're confident that our teams' experience, resilience and agility will ensure that Haemonetics has a bright future.
| qtrly adjusted earnings per diluted share $0.46.
sees fy 2022 gaap total revenue growth of 13 – 18%.
sees fy 2022 adjusted earnings per share $2.60 - $3.00.
|
On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Matt Mandino, Executive Vice President and Chief Operating Officer; Jeff Kaminski, Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.
And with that, here is Jeff Mezger.
We delivered healthy results in the second quarter marked by one of the strongest quarters for both operating and gross margin performance in some time.
Operationally, our divisions are doing an excellent job of navigating this environment of demand strength and well-publicized supply chain constraints as we effectively balance pace, price and starts to optimize our assets and manage our production.
With our full year coming into better view, we are poised for continued returns-focused growth expanding our scale to about $6 billion in revenues and generating a return on equity of roughly 20%.
As for the details of the quarter, we produced total revenues of $1.44 billion and diluted earnings per share of $1.50.
We achieved an operating income margin of 11.3% driven by several factors.
In addition to strong market conditions, we are benefiting from solid performance in our newer communities, operating leverage from both the increase in our community absorption rate as well as overall higher revenues, disciplined management of our SG&A costs and the ongoing tailwind from lower interest amortization.
Our profitability per unit grew meaningfully on a sequential basis to nearly $47,000.
We achieved or surpassed our expectations across our financial metrics, although deliveries were at the low end of our range as some of our deliveries shifted into the third quarter due to supply shortages and municipal delays.
That said, with the benefit of local scale in most of our divisions, we are relying on our long-standing relationships with subcontractors and trade partners to mitigate delays.
With the progression of our work in process and our success in accelerating starts, we are confident in our ability to achieve full-year deliveries of between 14,000 and 14,500 homes.
Our balance sheet is solid.
Having worked through the bulk of our inactive assets, our inventory has rotated into a higher-quality portfolio of communities.
We have grown our equity while reducing our debt resulting in a significantly lower leverage ratio, which we expect will decline further by year-end.
We recently completed a $390 million debt offering, the net proceeds from which together with a portion of our existing cash will be used to retire our '21 maturity in full.
Ultimately the offering will contribute to a reduction of our debt levels and lower our average borrowing rate, providing an ongoing tailwind to our future margins.
We continue to allocate the substantial cash we are generating in a consistent manner prioritizing our future growth to drive greater earnings and returns.
In addition, our balanced approach includes returning cash to stockholders, primarily through our quarterly dividend, which we have raised in each of the past few years and reducing our debt, as I just mentioned.
In the second quarter, we invested $575 million in land acquisition and development, expanding our lot position sequentially by 7,800 lots to roughly 77,500 lots owned or controlled with 45% of the total optioned.
This growth in active inventory, together with improving margins, should help to drive further improvement in our return on equity.
As we discussed last quarter, we are assuming a lower monthly absorption in our underwriting as compared to our current pace and no inflation either in ASP or costs.
In addition, we are pursuing moderately sized deals in our preferred submarkets averaging between 100 and 150 lots and staying on strategy and positioning these new communities to be attainable near the median household income for that sub-market.
We believe using this disciplined approach helps to manage our risk as we acquire land throughout this cycle.
While we expect our near-term growth to come primarily from our existing markets as we work to gain market share and expand our scale, we are also selectively entering new markets.
Along with our success in Seattle and recent reentry into Charlotte, we are announcing today that we have started up a division in Boise, Idaho, a top 25 housing market.
We see a meaningful opportunity in this fast-growing metro area to offer our personalized homes at affordable prices and we are excited about extending our market strategy to Boise.
We now have over 900 lots under control and anticipate our first land parcel closing in the third quarter.
We successfully opened 33 new communities in the second quarter.
However, as a result of the heightened demand for our homes, we sold out more communities than we had projected and also experienced slippage in some community openings.
Jeff will provide more detail on our community count expectations for this year in a moment.
Looking forward to 2022 with our strong lot pipeline, we remain on track for double-digit year-over-year community count growth.
As we prepare for the significant acceleration of new community openings over the next six quarters, we have also stayed focused on building our backlog to drive our revenues for the balance of this year and into 2022.
Our monthly absorption rate rose to seven net orders per community during the second quarter, even as we managed sales primarily through price increases and secondarily through lot releases in order to balance pace, price and starts.
We are sensitive to affordability as we work to stay within appropriate range near the median household income of each submarket.
Our order ASP has climbed in the past three months, reflecting a combination of mix as well as rising prices.
Our largest sequential net order increase was in our West Coast region.
Although this region carries our highest average selling price, it remains competitive with resales within our submarkets.
Our Los Angeles/Ventura business provides a good example.
This division generated the strongest sequential order growth in the second quarter.
And although it operates at a higher ASP, it is still below the median resale price of homes in its submarkets which are as much as $100,000 higher and selling within a few weeks of being listed.
Resale prices have moved significantly and our relative position has actually been enhanced.
As to lot releases, our approach is similar to how we gauge interest in a new community.
Homebuyers complete an application and go through their initial credit process to join a list of qualified buyers.
We then work through that list as we release lots.
We are typically raising prices in conjunction with each lot release and have not seen a decrease in the conversion of qualified buyers even as base prices have risen.
Our teams work hard to earn our place as the number one customer ranked national homebuilder in third party customer satisfaction surveys by prioritizing service and the relationships we have with our buyers and we're focused on continuing to do so during this time of limited supply.
The metrics that we monitor internally for shifts in affordability are stable.
Buyers are not adjusting the size of the homes they are purchasing to stay in the market.
Although we offer floor plans below 1,600 square feet in over 75% of our communities, buyers are still selecting homes averaging 2,100 feet, which is consistent with their choices over the past couple of years.
As is evident in our results, the desire for homeownership is strong and we believe will remain so for the foreseeable future.
There are two primary factors in forming our view.
The first is an acute shortage of supply stemming not only from limited resale inventory, but also from the under production of new homes over the past 15 years.
This deficit will take many years to correct and until inventory reverts to more normalized levels, the imbalance between supply and demand should continue to support new home sales.
Another key factor is demographics.
The size of the millennial population and the pent-up demand from this cohort together with the Gen Zs now reaching their homebuying years form a large and healthy pool of prospective buyers.
These demographic groups value personalization and we believe we are well positioned to capture increases in home sales given our expertise in serving the first-time buyer which represents 64% of our deliveries this past quarter with our built-to-order approach.
Net orders were 4,300, our best second quarter since 2007 with strength throughout the quarter resulting in year-over-year growth of 145%.
This comparison narrowed at the end of May when we experienced a significant acceleration in order rates that has lasted for the past year.
We are matching starts to sales and in the first half of this year we have quickly scaled up our production to start over 8,500 homes.
To put this in context, the homes we started in the past two quarters represent about 75% of the total homes we started for the full year 2020.
Almost 95% of the homes in production are already sold and we remain committed to our built-to-order business model.
We value the visibility that our even flow [Phonetic] production provides and the flexibility that it affords in positioning our communities to move with demand.
Offering a personalized home creates meaningful differentiation for our Company, which we view as an advantage because buyers value choice.
Nearly 80% of our orders in the second quarter were for personalized homes, which also creates an additional revenue stream from our design studios and with lot premiums.
Our studio revenue per unit rose sequentially in the second quarter and is continuing to average about 9% of our higher base prices.
We continually monitor the frequency of studio selections and had been raising prices on some products, enhancing an already accretive studio margin.
As to lot premiums, we have found over time that if buyers can pick the home they want and build that home on a lot they choose, they're willing to pay for that choice and we can generate additional revenue.
Every incremental dollar of lot premium is an additional dollar of margin.
Between studio revenue and lot premiums, we are averaging about $40,000 per home today and believe there is opportunity to continue to grow this going forward.
We ended the quarter with a robust backlog value of $4.3 billion, up 126% year-over-year representing over 10,000 homes.
As I referenced earlier, our backlog supports the higher revenues we anticipate this year and sets the stage for another year of revenue growth in 2022.
KBHS Home Loans, our mortgage joint venture, continued to be a solid partner for our customers handling the financing for 75% of the homes we delivered in the second quarter.
These buyers have a strong and consistent credit profile with an average down payment of about 13% or over $50,000 and an average FICO score that inched up to 727.
The majority of our buyers are opting for conventional loans similar to the past few years.
Switching gears, we published our 14th Annual Sustainability Report in April, the longest-running report in our industry.
We've been on this journey for over 15 years.
And the commitment we have made to sustainable homebuilding has resulted in KB Home being the industry leader in energy efficiency.
We have built over 150,000 ENERGY STAR certified homes to-date, more than any other builder, and have the lowest published average Home Energy Rating System, or HERS, index score among production homebuilders.
And we're striving to be even better with an aggressive goal to further improve our average HERS score from 50 down to 45 by 2025, a level which translates into an additional estimated reduction in a KB Home's carbon emission of about 8% per year.
In closing, we are poised for an incredible year of expansion in revenues, margins and return on equity as we execute on our ongoing plan to increase our scale while driving a higher ROE.
Equally as important, we are positioned for a strong start to 2022 with the expected increase in our year-end backlog and projected community count growth next year.
We are pleased with how this year has unfolded and look forward to updating you on our continued progress.
I will now cover highlights of our financial performance for the 2021 second quarter and provide our current outlook for the third quarter and full year.
During the quarter, we generated improvements in all our key profitability measures and continued to enhance our balance sheet strength and liquidity.
With our operations performing well, we leveraged 58% growth in housing revenues to generate a 216% increase in operating income for the quarter.
In addition, our net orders reached their highest second-quarter level in 14 years.
Based on our robust financial results and our order performance, we are once again raising our outlook for the remainder of 2021.
Our housing revenues of $1.44 billion for the quarter increased from $910 million in the prior-year period, reflecting a 40% increase in homes delivered and a 13% increase in overall average selling price.
Considering our current backlog and construction cycle times, we anticipate our 2021 third quarter housing revenues will be in a range of $1.5 billion to $1.58 billion.
For the full year, we are projecting housing revenues in the range of $5.9 billion to $6.1 billion.
We believe we are very well positioned to achieve this top line performance due to our strong second quarter net orders and ending backlog of over 10,000 homes, representing nearly $4.3 billion in ending backlog value.
In the second quarter, our overall average selling price of homes delivered increased to nearly $410,000, reflecting strong housing market conditions, which enabled us to raise prices in the vast majority of our communities, as well as product and geographic mix shifts of homes delivered.
For the 2021 third quarter we are projecting an overall average selling price of $420,000.
We believe our ASP for the full year will be in a range of $415,000 to $425,000.
Homebuilding operating income significantly improved to $162.9 million as compared to $51.6 million in the year-earlier quarter, reflecting an increase of 560 basis points in operating income margin to 11.3% due to meaningful improvements in both our housing gross profit margin and SG&A expense ratio.
Excluding inventory related charges of $0.5 million in the current quarter and $4.4 million of inventory-related charges and $6.7 million of severance charges in the year-earlier quarter, this metric improved to 11.4% from 6.9%.
We expect our homebuilding operating income margin, excluding the impact of any inventory-related charges, to further improve to a range of 11.7% to 12.1% for the 2021 third quarter.
For the full year, we expect our operating margin, excluding any inventory-related charges, to be in the range of 11.5% to 12%.
Our housing gross profit margin for the second quarter expanded to 21.4%, up 320 basis points from the prior-year period.
The current quarter metric reflected the favorable pricing environment over the past several quarters when most of the orders relating to the second quarter deliveries were booked, increased operating leverage due to higher housing revenues and lower amortization of previously capitalized interest.
Excluding inventory related charges, our gross margin for the quarter increased to 21.5% from 18.7% for the prior-year period.
Our adjusted housing gross profit margin, which excludes inventory-related charges as well as the amortization of previously capitalized interest, was 24.2% for the 2021 second quarter compared to 21.9% for the same 2020 period.
Our continued gross margin improvement trend demonstrates that we have been successful in offsetting input cost inflation with selling price increases.
In addition, with our strategy of locking in material and labor costs at the time each home starts, we have largely mitigated the impact of cost inflation during the construction process.
Assuming no inventory-related charges, we expect a sequential increase in our 2021 third quarter housing gross profit margin to approximately 21.7% and further improvement in the fourth quarter.
Considering this expected favorable trend, we believe our full year housing gross profit margin, excluding inventory-related charges, will be within the range of 21.5% to 22% representing a 215 basis point year-over-year increase at the midpoint.
Our selling, general and administrative expense ratio of 10.1% for the quarter improved from 12.6% for the 2020 second quarter.
The 250 basis point improvement reflected the continued benefit of overhead cost reductions implemented last year in the early stages of the pandemic, increased operating leverage from higher revenues and the severance charges in the year-earlier quarter.
Considering anticipated increases in future revenues and our continuing actions to contain costs, we believe that our 2021 third quarter SG&A expense ratio will be approximately 9.8% and our full year ratio will be in a range of 9.8% to 10.2%.
Our income tax expense for the quarter of $30.3 million, which represented an effective tax rate of 17%, reflected the favorable impact of $14.8 million of federal energy tax credits recorded in the quarter relating to qualifying energy-efficient homes.
We expect our effective tax rate for the full year to be approximately 20%, including the expected favorable impact of additional federal energy tax credits in the third and fourth quarters.
Overall, we produced net income for the second quarter of $143.4 million or $1.50 per diluted share compared to $52 million or $0.55 per diluted share for the prior-year period.
Turning now to community count, our second quarter average of 205 communities decreased 17% from the year-earlier quarter.
We ended the quarter with 200 communities as compared to 244 communities at the end of the 2020 second quarter.
On a sequential basis, our average community count decreased 8% from the first quarter and ending community count was down 4%.
The decreases were due to our strong absorption pace of seven monthly net orders per community during the quarter, which show 42 close-outs as well as community openings that were delayed to the third quarter.
Over the past 12 months our robust absorption pace has driven the close-out of over 150 selling communities.
Although they will not generate additional net orders, we will continue to produce revenues and profit in future quarters associated with nearly 80% of these sold-out communities as we work through the construction and delivery of the sold homes.
The upside from our strong pace of orders is now reflected in our backlog which will drive increased future housing revenues.
Our expectation of continued strong net order activity will drive elevated levels of community close-outs in the second half of this year.
Our goal is to offset the impact of these close-outs by opening a higher number of new communities in both the third and fourth quarters to achieve sequential growth.
We anticipate our 2021 third quarter ending community count will increase sequentially by approximately 5%, followed by another modest sequential improvement in the fourth quarter.
With our significant year-over-year increase in lot supply and our focus on developing and opening new communities as quickly as possible over the next six quarters, we believe we can achieve sequential increases in our quarter-end community count over that period.
We remain committed to our target of double-digit year-over-year growth in community count for 2022.
Favorable operating cash flow in the quarter generated primarily from homes delivered net of higher levels of land investment resulted in quarter and total liquidity of approximately $1.4 billion including $608 million of cash and $788 million available under our unsecured revolving credit facility.
Earlier this month, we completed the $390 million issuance of 4% 10-year senior notes and used a portion of the proceeds to redeem approximately $270 million of tendered 7% notes that mature on December 15, 2021.
We expect to realize a charge of approximately $5 million for this early extinguishment of debt in the third quarter.
It is our intention to redeem the remaining $180 million of the 7% notes at par value on September 15.
Once completed, this redemption, partially offset by the new issuance, will result in a net $16 million reduction in debt and an annualized interest savings of nearly $16 million, contributing to our continuing trend of lowering the interest amortization included in future housing gross profit margins.
In addition, we believe the $350 million of our maturity in 2022 of 7.5% senior notes represents another opportunity to reduce incurred interest and enhanced future gross margins.
In summary, given the size and composition of our quarter-end backlog of over 10,000 homes, along with our expanded production capacity, we expect further improvement in our financial results and return metrics in 2021 as compared to our expectations at the time of our last earnings call.
Using the midpoints of our new guidance ranges, we now expect a 45% year-over-year increase in housing revenues and further expansion in our operating margin to 11.75%.
This profitability level should drive a return on average equity of approximately 20% for the full year.
We believe our emphasis on returns-focused growth will continue to drive improved financial results, increased scale and higher returns to further enhance long-term stockholder value.
Alix, please open the lines.
| q2 earnings per share $1.50.
q2 revenue $1.44 billion versus refinitiv ibes estimate of $1.5 billion.
qtrly homes delivered rose 40% to 3,504.
net orders for quarter grew 145% to 4,300, with net order value increasing by $1.35 billion, or 196%, to $2.04 billion.
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We are joined here today by Bill Meaney, president and chief executive officer; and Barry Hytinen, our executive vice president and chief financial officer.
In addition, we use several non-GAAP measures when presenting our financial results.
We have included the reconciliations to these measures in our supplemental financial information.
We are pleased to have delivered record performance for both the fourth quarter and the full year.
These record results are reflective of our broad offerings, deep customer relationships, resilient business model and our dedicated teams.
Despite the challenges associated with the pandemic and most recently with the Omicron variant, our Mountaineers around the world have continued each and every day to put our customers first now with renewed and invigorated focus on growth.
And our historically high revenue and profitability are a testament to our Mountaineers' commitment.
Speaking about our Mountaineers, I wish to begin my remarks by stating that we are all saddened by the overnight events in the Ukraine.
Our thoughts and prayers are with our customers there and our fellow 60 Mountaineers and their families living and working in the Ukraine.
I am sure for all of us, given the current events in Europe, it deals in many ways inappropriate discussing our financial results with this backdrop.
Yet at the same time, it is in keeping with our Mountaineer spirit.
With that, let me begin our discussion of our remarkable and record year.
In the fourth quarter, we achieved our highest ever quarterly revenue of $1.16 billion, yielding eight and a half percent of total organic revenue growth and record EBITDA of $431 million.
For the full year, we achieved record revenue of nearly $4.5 billion and EBITDA of $1.6 billion.
These results were fueled by increased demand for our services across key markets.
For the full year, we delivered organic storage rental revenue growth of 2.6%, reflecting continued benefit of pricing combined with positive volume trends.
We drove double-digit growth in digital offerings, including data center inside our digital transformation services and secure IT disposition, now referred to as ALM, or asset life cycle management.
Our digital services and ALM businesses continue to build momentum, growing over 20% in the fourth quarter and capping off an excellent year of growth.
Further to our recent success in the ALM area, we are also pleased to report that the acquisition of ITRenew, announced in December, closed in January.
This acquisition will accelerate our growth trajectory in this $30 billion market, which is growing over 10% per year.
Our newly created ALM division will absorb our historical secure ITAD business line.
This enlarged division not only helps us provide chain of custody for our customers' IT assets, but our ALM activities also assure our customers that their IT assets are wiped of any data at the end of their life and destroyed and recycled in a responsible way.
On this last point, in terms of recycling, our expanded offerings in this space around a circular economy are important for both IRM's and our customers' ESG goals leading to carbon neutrality.
This expanded ALM division also strongly complements our fast-growing data center business, bringing capabilities to serve some of the largest and most innovative companies in the world in a more cradle-to-grave way, consistent with the best security and ESG practices.
This expanded ALM platform will directly benefit from Iron Mountain's 225,000 loyal customer base, which includes 95% of the Fortune 1000.
This global customer base is supported by 25,000 Mountaineers across 1,450 facilities in 63 countries.
Our recent expansions in data center, machine learning-driven data analytics and insights and now ALM are just some of the examples of how we continue to invest in growth to capitalize on our many opportunities ahead, serving a customer base which has been loyal to Iron Mountain for decades.
I have shared with you previously how in the last five years, these investments have taken the total addressable market, or TAM, of our products and services from $10 billion to some $80 billion.
I am happy to report our continued build-out of new products and services in the last year as well as growth in these underlying markets has now taken our TAM to over $120 billion.
Our continued drive in building an ever-expanding set of synergistic and customer-centric solutions, together with global reach and scale, is the fuel behind much of the acceleration in our growth.
Let me share a few examples of how we've been empowering our customers' success in growth through our diverse solution offerings and unmatched customer service.
Our recent customer win with a large aerospace company, where we won a backfile digitization deal of over $20 million, is a superb example of collaboration among our entertainment services, technology organization and our global records organization, or GRO.
In order to achieve its goal of being a 100% model engineering company and to most effectively use designs and data from historical archives to refine new designs, this aerospace company sought help with the digitization and auto classification of over 50 million digital engineering assets.
We were tasked to store, classify and utilize machine learning to identify relevant information while maintaining compliance with International Traffic in Arms Regulations known as ITAR.
To this end, we developed and implemented an ITAR-compliant solution using our InSight machine learning platform operating in the AWS government cloud environment.
Iron Mountain is uniquely positioned to assist our partner with this initiative with our storage capabilities, our understanding of ITAR compliance complexities, our machine learning-trained analytic engines and our technological support to ensure efficiency and success.
Moreover, this project enables us to deliver critical insight into engineering data, not just to this company but also to other manufacturing and engineering customers across the globe.
We concluded a Phase 1 contract and have also been awarded a Phase 2 contract for this branch.
The agency originally planned to select three vendors for the first contract due to the high volume of microfilm reels needing to be processed, but our solution surpassed the customer's expectations, and Iron Mountain was awarded the exclusive contract to process all 177,000 of microfilm reels or over 2 billion records needing analysis.
This win was based on our unique splitting technique, proprietary machine learning, automated QA process and processing scalability that helped us to differentiate our offer from the competition.
These technology innovations for the customer have enabled future use cases, which rely on advanced pattern recognition at scale, including OCR microfilm processing projects, applying machine learning extraction techniques for digital mailroom, invoice processing and extracting information from claims documents, to name a few.
Another example how Iron Mountain is working with customers to support their digital transformation is our recent partnership with a production and development company operating in the U.K.'s North Sea.
We've undertaken a significant back scan of their legacy archive records to meet their regulatory obligations to the U.K. oil and gas authority in order to relinquish their license to operate on 230 wells they wish to abandon.
They're required to digitally upload all information assets to the National Data Repository.
Using the InSight platform, we were able to solve the problem of having enormous amounts of data to sift while consolidating physical and digital data in disconnected information silos and resulting in millions of dollars of annual savings.
Moving back above ground, recently in our Crozier Fine Arts division, we won a contract to provide comprehensive storage solutions and logistical support for the museum operations of the Academy Museum of Motion Pictures.
We were excited and proud that based upon a foundation of long-term partnership and trust built up through many years of support from Iron Mountain's entertainment services division, they came to us to meet their evolving needs where Crozier services were an ideal match.
Now, turning to wins in our data center business.
Recall that our bookings target for the year was 30 megawatts.
We are pleased to have finished the year with nearly 49 megawatts of leases signed with over 27 megawatts of leases in the fourth quarter alone.
This includes the new 20-megawatt lease in our Manassas, Virginia data center announced in December.
This lease is expected to commence in phases from mid-2022 through mid-2023.
We continue to see strong demand for comprehensive data center solutions from our existing customer base.
This lease is indicative of our ability to meet that demand and reflects our commitment to strategically partnering with our customers to meet their individual requirements.
Based on current design plans, we now expect that the VA2 facility to support 36 megawatts, up from 30 megawatts previously.
With these changes and other additions to our portfolio, our total capacity is now in excess of 600 megawatts.
Finally, we continue to be recognized for our leadership around ESG.
This has been an important focus for us for many years, having produced annual sustainability reports outlining our commitments and progress since 2013.
Some of our past recognitions have included 100% of our data center power is generated by renewables.
We were the launch provider of Green Power Pass, which allows our customers to report reductions in their carbon footprint when using our data centers.
We were a co-signer with Google to expand our commitment to green-powered data centers to 24/7 carbon-free electricity, and we were one of the original signatories of the UN Global Compact on Sustainability back in 2016.
More recently, we announced, in addition to their RE100 program, we have joined the Climate Group's EV100 initiative and reached a key milestone in electrifying our global vehicle fleet in line to reach our climate pledge commitment to achieve net zero carbon emissions by 2040.
We have made real progress toward our carbon reduction goals.
Since establishing our first science-based targets, we have reduced absolute greenhouse gas emissions by over 60% from our 2016 baseline while growing the business.
We believe that our commercial growth and ESG initiatives make us stand out, and we suspect they were a major factor of our being ranked among the top 100 on Newsweek's list of America's most responsible companies.
In summary, our future ahead is bright.
We are building on our growth momentum as we expand our portfolio to meet our customers' evolving needs.
And with our strong footprint, powerful portfolio and deep customer relationships, we are confident that we can continue this momentum as we ascend our mountain range and provide another set of performance records this year and the years ahead.
In the fourth quarter, our team delivered strong performance, exceeding the expectations we provided on our last call.
On a reported basis, revenue of $1.16 billion grew 9.4% year on year with total organic revenue up eight and a half percent.
Revenue was $10 million ahead of the high end of the expectations we shared previously despite the U.S. dollar strengthening and being more of a headwind in the quarter.
As an example of the momentum we are building, on a two-year basis, our total organic revenue growth continued to accelerate in the quarter.
Organic storage revenue grew 3.6% in the quarter, reflecting our strong pricing and data center commencements.
Organic service revenue increased $65 million or 17.6% driven by continued strong growth in digital solutions and asset life cycle management.
As revenue associated with our traditional transportation services were still down nearly 10% from pre-pandemic levels, we are even more pleased with this performance.
Adjusted EBITDA was $431 million, an increase of $56 million from last year.
As a result of strong flow-through driven by pricing and productivity, fourth quarter EBITDA exceeded the high end of our expectations by $6 million despite additional FX headwind.
AFFO was $267 million or $0.92 on a per share basis, up $76 million and $0.26, respectively, from the fourth quarter of last year.
In both cases, we significantly exceeded the high end of our expectations.
Now, let me briefly summarize the full year.
Revenue of $4.5 billion increased 8% on a reported basis and over 6% on an organic constant currency basis.
Adjusted EBITDA increased 11% year on year to $1.635 billion, an increase of $159 million year on year.
We achieved the high end of our full year guidance.
AFFO increased 14% to $1.01 billion or $3.48 on a per share basis, in both cases, exceeding our full year guidance ranges.
Now, let's turn to segment performance.
In the fourth quarter, our Global RIM business delivered revenue of $1.02 billion, an increase of $76 million from last year or 8% on a reported basis from last year.
On an organic basis, revenue increased 7%.
Constant currency storage rental revenue growth of 4.2% or two and a half percent on an organic basis reflects our focus on revenue management and solid volume trends.
With positive volume trends and growth in our adjacent and consumer businesses, total physical volume was in line with our expectations for the quarter and the year.
Global RIM adjusted EBITDA was $453 million, an increase of $49 million year on year.
Adjusted EBITDA margin was up 160 basis points year on year, reflecting continued pricing strength and productivity.
Turning to our global data center business.
Our team booked 27 megawatts in the quarter.
For the full year, bookings came in at 49 megawatts, significantly exceeding our full year guidance of 30 megawatts.
We are very pleased with the team's leasing performance.
To give some historical context, we leased 10 megawatts in 2018, 17 megawatts in 2019 and excluding our joint venture in Frankfurt, 31 megawatts in 2020.
In terms of revenue, as we projected, fourth quarter growth accelerated to 25% year over year.
Storage revenue grew 18% year on year, and service revenue was up sharply and in line with our projections.
As a reminder, service revenue in the second half includes fit-out services we are providing to our Frankfurt joint venture.
We expect that activity will be completed early in 2022.
Even with the large service component, EBITDA margin increased sequentially with strong commencements.
We are pleased with our data center performance, and our pipeline has continued to strengthen, both in terms of hyperscale and retail colocation.
In 2022, we expect to lease 50 megawatts, which would represent 28% annual bookings growth.
We project full year data center revenue growth in a range of high teens percent year on year with even higher growth rates on storage.
With our strong prior-year bookings and recent commencements, we have very good visibility to revenue.
With pricing and improved mix, we expect data center margin for the full year to be up modestly compared to 2021.
Turning to Project Summit.
This quarter, the team delivered $30 million of incremental year-on-year adjusted EBITDA benefit.
For the full year, as compared to 2020, Summit delivered $160 million of benefits.
We continue to expect another $50 million of year-on-year benefit in 2022.
Total capital expenditures were $219 million, of which $173 million was growth and $46 million was recurring.
For the full year, total capital expenditures were $606 million, of which $309 million was growth capital related to data center development.
In 2022, we expect total capital expenditures to be approximately $850 million.
We are projecting approximately $700 million of growth capex, with data center development representing about three-quarters of that.
We expect recurring capex to approach $155 million.
Turning to capital recycling.
As we have said before, we view the market for industrial assets as highly attractive as a means to supplement our growth capital.
With that backdrop, in the fourth quarter, we upsized our recycling program and generated approximately $63 million of proceeds, bringing the full year to $278 million.
Turning to the balance sheet.
We ended the quarter with net lease adjusted leverage of 5.3 times, in line with our projection and modestly improved compared to last quarter.
As we have said before, we are committed to our long-term leverage range of four and a half to five and a half times.
For 2022, with the closing of the ITRenew transaction, we expect leverage to tick up modestly in the first quarter.
We expect to exit the year at levels within our target range.
From a cash perspective, I would like to recognize our team for driving strong collections, improving our days sales outstanding and resulting in year-on-year improvement in our cash cycle.
The collective performance has resulted in a five-day improvement from pre-pandemic levels.
With our strong financial position, our board of directors declared our quarterly dividend of $0.62 per share to be paid in early April.
Also, as you may have seen, we are pleased to announce an important strategic milestone related to our unconsolidated joint venture focused on the fast-growing valet consumer storage market.
MakeSpace recently completed a merger with Clutter, a similarly sized business also focused on valet storage.
We expect the combination will result in considerable benefits, including a focus on a single brand, Clutter, broader reach and natural synergies.
Iron Mountain will continue to provide storage services to the business, and our ownership interest will be nearly 25% of the combined entity.
We are excited about the opportunities that lie ahead and expect continued benefit to our total physical volume.
Now, turning to our outlook.
For the full year 2022, we currently expect revenue of $5.125 billion to $5.275 billion.
We expect adjusted EBITDA to be in a range of $1.8 billion to $1.85 billion.
At the midpoint, our guidance represents revenue growth of 16% and EBITDA growth of 12%.
We expect AFFO to be in the range of $1.085 billion to $1.12 billion, which represents 9% year-on-year growth at the midpoint point.
We expect AFFO per share to be in a range of $3.70 to $3.82.
Our guidance assumes organic global physical volume will be consistent to slightly positive year on year.
We expect revenue management will be a significant benefit, and I will note that the majority of those actions have already been taken as we speak to you today.
And nearly all of them will be in place by the end of the quarter.
As Bill mentioned, we are planning for a continuation in the strong trends we are seeing in digital solutions and our organic ALM business, combined with a slight recovery in our service activity across the year.
Our guidance also assumes the contribution from our acquisition of ITRenew.
As we closed the deal at the end of January, we are including 11 months of the results in our guidance.
Our guidance includes approximately $450 million of revenue from ITRenew.
We estimate the stronger U.S. dollar will result in foreign exchange headwinds to revenue of approximately $60 million year on year with the vast majority of that in the first half.
In terms of EBITDA, our expectations include the benefit from revenue management and top-line growth, the contribution from ITRenew as well as Project Summit benefits.
dollar and the divestiture of the software escrow business, which we sold in late second quarter.
With the ongoing volatilities in the market associated with the pandemic as well as the closing of the ITRenew transaction during the quarter, we felt it would be helpful to share our expectations for the first quarter.
We expect total revenue to be in excess of $1.2 billion.
We expect EBITDA to be approximately $425 million.
We expect AFFO to be in excess of $250 million.
In summary, our team is executing well.
Our pipeline continues to expand, and momentum continues to build across our business.
Our addressable market has grown significantly over the last several years, and we expect this to continue to expand.
We feel confident in our ability to deliver higher levels of growth.
And with that, operator, please open the line for Q&A.
| q4 revenue rose 9.4 percent to $1.16 billion.
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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.
|
We are pleased to discuss our fourth quarter and full year results with you today.
This has been a record-breaking year for Miller Industries as we achieved the highest full year revenue and net income in our Company's history.
We finished the year with strong top line growth, gross margin expansion, and an increase in earnings per share.
Revenue during the fourth quarter increased 12.9% to $203.1 million versus $180 million a year ago, driven by broad-based demand across our portfolio.
Our domestic business continued its strong performance during the quarter as new order rates remained steady and our distributors continued to work at full capacity to deliver existing orders.
Our international business also performed in line with our expectations on a year-over-year basis.
Additionally, our fourth quarter results benefited from a catch-up related to supply chain delays we experienced during the third quarter.
Quarterly gross profits increased by 21.6% year-over-year to $26.9 million and our gross margin expanded 100 basis points year-over-year to 13.3%, which reflects strong demand, favorable mix and other cost reduction measures.
Additionally, during the quarter we continue to realize benefits from our cost control initiatives as SG&A expenses as a percentage of sales decreased by approximately 20 basis points from the prior year period.
Net income was $11.7 million or $1.03 per share compared to net income of $10.8 million or $0.95 per share in the fourth quarter of 2018.
As we move into the first quarter of 2020, our backlog remains healthy in both our domestic and international markets, and we remain committed to providing best-in-class customer services while continuing to invest in our business and generating shareholder value.
Further, our balance sheet remains healthy, as we continue to pay down debt and strategically deploy our resources to drive sustainable long-term growth.
After that, I'll be back with comments about the market environment and some closing remarks.
Net sales for the fourth quarter 2019 were $203.1 million versus $180 million for the fourth quarter of 2018, a 12.9% year-over-year increase driven by broad-based demand across our portfolio, as well as some additional sales that were included in the fourth quarter as a result of supplier delay issues we experienced in the preceding quarter.
Cost of operations increased 11.7% to $176.2 million for the fourth quarter 2019 compared to $157.8 million for the fourth quarter 2018, driven by our top line sales growth.
However, cost of operations as a percentage of net sales contracted approximately 100 basis points to 86.7% from the prior year period.
Gross profit was $26.9 million or 13.3% of net sales for the fourth quarter 2019 compared to $22.2 million or 12.3% of net sales for the fourth quarter 2018, reflecting a favorable product mix.
SG&A expenses were $11.8 million for the fourth quarter 2019 compared to $10.8 million for the fourth quarter 2018.
As a percentage of sales, SG&A decreased approximately 20 basis points to 5.8% from 6% in the prior year period, driven by our effective cost controls and increased operational efficiency across the organization.
Interest expense, net, for the fourth quarter 2019 was $565,000 compared to $449,000 for the fourth quarter 2018, as an increase in customer floor plan financing cost more than offset lower long-term debt-related interest expense.
Other income expense for the fourth quarter 2019 was a net gain of $211,000 compared to a net expense of $465,000 for the fourth quarter 2018, due primarily to currency exchange rate fluctuations.
Net income for the fourth quarter 2019 was $11.7 million or $1.03 per diluted share.
Net income for the fourth quarter 2018 was $10.8 million or $0.95 per diluted share.
Now, let me briefly review our results for the 12 months ended December 31, 2019.
Net sales for the year were $818.2 million compared to $711.7 million in the prior year period, an increase of 15%.
Gross profit for the year was $96.5 million or 11.8% of net sales compared to $83.3 million or 11.7% of net sales for 2018.
SG&A expenses were $43.4 million for 2019 or 5.3% of net sales compared to $39.5 million or 5.6% of net sales for 2018.
Net income for the year was $39.1 million or $3.43 per diluted share, an increase of 15.9% compared to net income of $33.7 million or $2.96 per diluted share in 2018.
Now, turning to our balance sheet.
Cash and cash equivalents as of December 31, 2019 was $26.1 million compared to $27.5 million as of September 30, 2019 and $27 million at December 31, 2018.
Accounts receivable at December 31, 2019 totaled $168.6 million compared to $165.8 million as of September 30, 2019 and $149.1 million at December 31, 2018.
Inventories were $88 million as of December 31, 2019, compared to $98.1 million as of September 30, 2019 and $93.8 million at December 31, 2018.
Accounts payable at December 31, 2019 was $95.8 million compared to $114.9 million as of September 30, 2019 and $98.2 million at December 31, 2018.
During the quarter, we reduced our long-term debt by approximately $5 million from the prior quarter, bringing the balance to approximately $5 million as of December 31, 2019.
Overall, our balance sheet remained strong and we continue to generate solid free cash flow, which provides us with financial flexibility to invest in our business and continue to drive long-term shareholder value.
Lastly, the Company also announced that its Board of Directors approved our quarterly cash dividend of $0.18 per share payable March 23, 2020 to shareholders of record at the close of business on March 16, 2020.
We are very proud of our performance this quarter and our record setting year.
Our performance this quarter was very encouraging as we returned solid year-over-year growth on both the top and bottom lines.
Our steadfast commitment to operational excellence, disciplined cost control measures and strategic capital deployment grant us flexibility to invest in long-term growth of our business while generating shareholder value.
Our quarterly dividend of $0.18 per share underscores our continued commitment to returning capital to our shareholders.
As we transition into this turbulent first quarter of 2020, we remain confident in the strength of our backlog and our underlying fundamentals in all our end markets.
We will continue to monitor the developing situation with COVID-19, and the impact it may have on our supply chain and operations.
Finally, we are confident that our previous and ongoing capital investments in conjunction with our strong cash flows and healthy balance sheet have positioned us to best serve our customers, while providing us with the financial flexibility to pursue any future opportunities to grow our business.
I'd like to close by welcoming our two new Board members, Leigh Walton and Deborah Whitmire.
Leigh Walton is an independent director and she has more than 40 years of experience, advising public companies on -- in the areas of corporate governance and corporate finance.
Debbie Whitmire, as the Company's Executive Vice President, Chief Financial Officer and Treasurer, and has provided invaluable expertise and leadership to our senior management team over the last several years as a member of our executive committee.
The leadership they will bring will be a valuable contribution, and I hope you all join me in congratulating them and welcoming them on the Board.
In addition, I'd like to just take one second to congratulate all the employees at Miller Industries and all of our vendors, suppliers and other partners, distributors for a phenomenal year, a record-breaking year after 30 years of $818 million in sales.
| compname reports q4 earnings per share of $1.03.
q4 earnings per share $1.03.
q4 sales rose 12.9 percent to $203.1 million.
|
Actual results may differ materially from those made or implied in such statements, which speak only of the date they are made and which we undertake no obligation to publicly update or revise.
Our Chairman and CEO, Clarence Smith, will now give you an update on our results.
And then, our President, Steve Burdette, will provide additional commentary about our business.
We're very pleased with another record quarter with sales of $260.4 million and net income of $24.2 million.
Our team has done an outstanding job in producing this performance through the ongoing COVID concerns, significant product pricing increases, major hiring challenges, especially in warehouse and distribution, rising operating costs in unprecedented supply chain disruptions.
I believe that we've outperformed the competition in being able to deliver to our customers.
We're very pleased with the efforts of our merchandising team and the pricing discipline at the store level.
Even with the unusual and significant demurrage and LIFO charges, we increased our gross margins and reached record operating profits.
Our available inventory is in the best shape we've had in over a year.
We're finally restarting new product development that was on hold due to COVID and the massive backlog of sold orders.
Clearly, our priority focus is bringing in sold merchandise to bring down our backlogs and to better serve our customers.
However, we are a home furnishings retailer, and fashion and style are important drivers of sales.
We're always excited to see the latest design and styles hit our floors, which is an important differentiator for Haverty.
In the past several months, we've added over 500 online exclusive products, including outdoor products and specialty occasional items which have had good response.
We greatly appreciate our manufacturing partners in China and Vietnam who struggled with COVID shutdowns over the past several months, but are opening back up and increasing their production levels.
Because of the COVID-related shutdowns, we will have gaps in imported products, creating some out of stocks, especially in case goods.
Our merchandising and supply chain teams have a strategy to soften this gap related to the Vietnam factory shutdowns.
We expect to end 2021 with 121 stores, one store over last year.
In 2022, we have plans to open five stores, netting three.
We're evaluating numerous opportunities for locations, which we can serve in our distribution footprint.
We've been pleased with our strategy of converting existing retail space to Haverty stores.
Recently, we've had very good results with stores in the 30,000 to 35,000 square foot size, a building size with more availability.
With the importance of our website and special order tools, we can present a large selection set of merchandise without requiring a much larger store.
We're in the process of planning 2022 capex.
We expect we will be in the same range as we had last -- this year, approximately $35 million net.
Investments in stores and renovations are the largest block.
Our single largest investment will be expansion of our Virginia Distribution Center, which we bought back earlier this year.
We're converting the facility from a regional home delivery center to a full distribution center to better serve our Atlantic Coast growth.
The expansion will allow us to receive direct shipments from the north port, reducing shipment cost and allow for quicker deliveries.
Our IT and marketing teams made major investments in remaking and upgrading our website to be the best in class industry leader.
We're focused on ease of use and inspiring our customers throughout the process, utilizing the Adobe platform.
It will align with an upgraded 3D floor plan, significantly improved graphics, design and search.
We're expecting the rollout of the new site early in the second quarter next year.
As we just released, our fourth quarter written sales were down approximately 3.5% from the same period last year with delivered sales up 17.5% over last year.
For perspective, this year's Q4 written sales to date are up 20.9% and delivered are up 41.5% over 2019.
We're having record delivery weeks as we receive more incoming sold product and are having much better inventory compared to last year.
As all of retail is struggling with the late shipments for Christmas, we also have real challenges in supply chain, and I would like to ask Steve Burdette, President, to give us an update on our supply chain status.
I am thrilled with our results for the third quarter.
Our performance could not have happened without the dedication of our entire team in the stores, distribution centers, home delivery service and home office, whom I want to congratulate personally for their efforts.
Our supply chain network has been able to increase the flow of products into our warehouses over the third quarter.
Our warehouse inventory levels rose over 8% for the third quarter, and we are seeing our inventories continue to rise so far in October.
We will expect to see a slowdown in imports arriving in the November-December timeframe.
The headwinds during the quarter continued with the Vietnam shut down beginning in late July, rising container rates, container congestion at the ports along with container capacity, staffing issues with the continued spread of the Delta variant and trucking pressures moving products within our network.
There was a bright spot during the quarter with the foam supply as our vendors do not see this as an issue moving into the fourth quarter.
Vietnam began its shut down in late July and things accelerated in August where majority of our factories were closed for the months of August and September.
We are getting positive news from our vendors that they began opening at the beginning of October.
However, it will be a slow process to get back to 100% production.
Majority of the vendors feel like they will be able to get back to 50% to 75% of production by Chinese New Year with a return to 100% not happening until late first quarter next year.
A few vendors did give a more upbeat outlook that they will be back to 100% production by the end of November because of the safety and medical protocols that they had in place.
Also, we continue to see shipments coming from Vietnam now.
Container capacity, container rates and port congestion continue to be areas of concern.
We expect these issues to continue well into 2022.
Our container prices on the spot market continued to increase during the quarter.
However, we are seeing a downward trend in October.
We continue to balance our shipping mix so that no more than 20% to 30% is on the water at one time at these spot market rates.
Due to our focus on ensuring that we could provide our customers with a more consistent flow of product, we incurred higher freight costs during the quarter and a substantial amount of demurrage and detention expense that we expect will be reduced significantly during the fourth quarter.
Staffing continues to be a concern as it is not only impacting our distribution, delivery and service areas, but it's impacting our manufacturers and trucking partners.
We continue to evaluate each of our areas of the business to ensure that we are competitive so that we are attracting the best talent.
We did start seeing some traction in the latter part of the quarter, but still have opportunities.
We consider our people our most valued asset as we know our service is what sets us apart from our competitors.
We have seen our average age of the undelivered pool continuing to increase to nine weeks from eight weeks over the quarter.
Our special order lead times have stabilized due to the improvement in foam supplies, and we have started seeing higher production quantities from our domestic suppliers over the last four weeks.
Our special order business is still suffering from these delays, but we feel confident that we will be able to see a bounce back due to a more confident sales team seeing the improvement in our lead times.
We remain optimistic for the fourth quarter.
Our teams are doing a wonderful job communicating with our customers regarding any delays with their products.
While there will be a slowdown in import receipts from Vietnam, we are expecting improved shipping times from our domestic suppliers and improvements in shipments from our bedding suppliers to help offset some of these delays.
In the third quarter of 2021, delivered sales were $260.4 million, a 19.7% increase over the prior year quarter.
Total written sales for the third quarter of 2021 were up 2% over the prior year period.
Comparable store sales were up 17.7% over the prior year period.
Our gross profit margin increased 60 basis points from 56.2% to 56.8% due to better merchandise pricing and mix and less promotional activity during the quarter.
These improvements were partially offset by an increase in our LIFO reserve as we continue to see increased freight and product cost.
Selling, general and administrative expenses increased $16.1 million or 16% to $116.2 million, primarily due to increased sales activity.
However, as a percentage of sales, these costs declined 1,400 basis points to 44.6% from 46%.
As Steve mentioned earlier, during the third quarter of 2021, we did experience increased port congestion and we incurred significant demurrage costs of approximately $2.3 million, which negatively impacted our selling, general and administrative costs.
However, as demonstrated in the past four quarters, our financial model has substantial operating leverage at these sales levels.
Other income in the third quarter of 2020 was $2.4 million, which includes the gain on surplus property that was adjacent to our distribution center in Dallas, Texas.
Income before income taxes increased $7.4 million to $31.9 million.
Our tax expense was $7.7 million during the third quarter of 2021, which resulted in an effective tax rate of 24%.
The primary difference in the effective rate and statutory rate is due to state income taxes and the tax benefit from vested stock awards.
Net income for the third quarter of 2021 was $24.2 million or $1.31 per diluted share on our common stock compared to net income of $18.3 million or $0.97 per share in the comparable quarter of last year.
Now looking at our balance sheet, at the end of the third quarter, our inventories were $119 million, which was actually up $29.1 million from the December 31, 2020 balance and up $28 million versus the Q3 2020 balance.
At the end of the third quarter, our customer deposits were $120.1 million, which was up $34 million from the December 31, 2020 balance and up $31.7 million versus the Q3 2020 balance.
We ended the quarter with $232.3 million of cash and cash equivalents.
We have no funded debt on our balance sheet at the end of Q3 2021.
Looking at some of the uses of cash flow.
Capital expenditures were $28.1 million for the first nine months of 2021 and we paid $13 million of regular dividends during the first nine months of 2021.
During the third quarter, we purchased $19.5 million of common stock as 537,196 shares.
As previously reported, our board of directors authorized an additional $25 million of share repurchases.
At the end of the third quarter of 2021, we had $22.3 million remaining under current authorization in our buyback program.
We continue to expect our gross profit margins for 2021 to be between 56.5% to 56.8%.
We anticipate gross profit margins will be impacted by our current estimate of product and freight costs and changes in our LIFO reserve.
Our fixed and discretionary type SG&A expenses for 2021 are expected to be in the $278 million to $281 million range, an increase over our previous estimate, primarily due to rising warehouse and demurrage costs.
The variable-type costs within SG&A for 2021 are expected to be in the range of 17% to 17.3%.
Our planned capex for 2021 remains at $37 million, anticipated new replacement stores, remodels and expansions account for $18.7 million, investments in our distribution network are expected to be $15.2 million and investments in our information technology are expected to be approximately $3.1 million in 2021.
Our anticipated effective tax rate for this year is expected to be 24%.
This projection excludes the impact from vesting of stock awards and any potential new tax legislation.
This completes my commentary on the third quarter financial results.
We are very pleased with the record performance here underway.
We're comparing well with the second half records of 2021 and against 2019.
We believe that the pneumatic return to home that COVID precipitated has changed the importance of home for years to come.
We agree with the recent editorial from Jerry Epperson, an industry veteran and analyst in furniture today this week.
Following the boomers, the millennials and Gen Xers have moved to desiring homes because of life changes related to having children.
We're having another housing boom where people want to move to the suburbs.
We're getting back to the 67% of our households being homeowners.
The home will continue to grow in importance.
You can now shop, bank, see the doctor and go to church from home.
This is going to transform our nation in terms of level of productivity, innovation and new ideas.
Haverty's 136-year history and strength is in serving the home furnishing needs in the 16 Southern Atlantic and Central states.
These areas are gaining the most transplants from the rest of the country.
We think that our locations, premium product merchandising, H Design services and dedicated distribution positions us to continue to grow from the all time record set in the past years.
We believe we have the experience, the deep resources and strong commitment to growing our sales and maintain strong double-digit operating profits in the years ahead.
| q3 earnings per share $1.31.
q3 same store sales rose 17.7 percent.
q3 sales rose 19.7 percent to $260.4 million.
qtrly comparable store sales increased 17.7%.
|
2020 was a year with many facets.
We started the year confident that the commodity price headwinds faced over the past several years would ultimately transform into tailwinds.
Then a pandemic hit and basically turned all of our worlds upside down.
Like most other public companies have started in the earnings cycle, navigating the choppy waters of 2020 was truly a challenge.
Our priorities during the COVID-19 pandemic continue to be protecting the health and safety of our employees, while continuing to provide our essential services to the industries and communities we serve.
We implemented significant changes and safety protocols across our global operations to protect our employees, serve our customers and ensure business continuity.
We did incur direct costs of about $7.5 million related to these actions to protect our employees from COVID.
This doesn't include the plant disruptions, production slowdowns or customer order delays.
The result of our efforts allowed us to continue our operations through fiscal 2020 with minimal disruption.
Your hard work made 2020 one of our best years in Darlings long history.
We finished the year strong with a combined EBITDA, adjusted EBITDA of $214.5 million in fourth quarter.
All of our segments in the Global Ingredients platform put up solid results as the $146.3 million of EBITDA in the base business was the best quarterly performance of 2020 and reflected the growing momentum of an improved pricing cycle.
The Feed segment ended the year with a solid performance of $90.2 million of EBITDA, driven by the higher raw material volumes and better prices in both proteins and fats for the quarter.
The commodity price momentum has certainly carried into 2021 as prices are close to their 10-year mean reversion average.
We believe that 2021 results for the Feed segment should increase significantly over the previous year.
I'll dive into that a little later in the call.
Our Food segment continued to show strength, finishing 2020 with its best quarterly performance in our history.
Our collagen peptide sales drove better results posting approximately $50 million of EBITDA for the fourth quarter.
With our three new Peptan facilities online last year, we anticipate solid growth in this segment for 2021.
Now, as we had indicated on our third quarter call, Diamond Green Diesel had its turnaround in early fourth quarter, which led to DGD selling approximately 57 million gallons of renewable diesel at $2.40 per gallon or contributing $68.2 million of EBITDA to Darling during the fourth quarter.
For the year, DGD certainly met our expectations, selling 288 million gallons of renewable diesel at an average of $2.34 per gallon.
Darling's share of EBITDA from DGD for 2020 was $337.3 million.
Our European Bioenergy business reported another solid quarter, which we believe will be steady through 2021.
This decision was based on the go-forward unfavorable industry economics for biodiesel.
Our action does free up valuable low carbon feedstocks that can be sold to DGD and also helps us focus our energy on making DGD the best low cost renewable diesel producer in the world.
Brad will cover the particulars of the asset impairment charge related to these shutdowns a little later in the call.
Our current take on the economic recovery is bullish.
Ag commodity markets are experiencing a very favorable pricing environment.
The energy market also is stronger than a year ago with ULSD trading above where it was at the end of February 2020.
These two together make for a strong operating environment for Darling and DGD.
We believe as the U.S. and world economies reopen later this summer, demand for eating out, taking road trips will help us to maintain a good percentage of the improved commodity price environment we are experiencing today.
At the top, we'd like to point out that our fiscal 2020 was a 53-week year with the extra week in our fourth quarter.
Also I will speak to several adjusted amounts, which reflect the shutdown of our two biodiesel plants with a restructuring and asset impairment charge recorded in the fourth quarter of 2020 and also adjusting the Q4 '19 and fiscal year 2019 results for the retroactive blenders tax credits related to 2018 and 2019 all being recorded in our fourth quarter 2019 results.
We think this will give a better comparison of our results period-to-period.
The previously mentioned pre-tax restructuring and asset impairment charge of $38.2 million related to the shutdown of the two biodiesel facilities included a goodwill impairment charge of $31.6 million, other long-lived asset charges of $6.2 million and $0.4 million of restructuring charges.
Now, for a few of the highlights; net income for the fourth quarter of 2020 totaled $44.7 million or $0.27 per diluted share compared to a net income of $242.6 million or $1.44 per diluted share for the 2019 fourth quarter.
Net income for fiscal 2020 was $296.8 million or $1.78 per diluted share compared to $312.6 million or $1.86 per diluted share for fiscal 2019.
In the fourth quarter of 2020, we recorded a 30.6 million after-tax restructuring and asset impairment charge related to the shutdown of our Canada and U.S. biodiesel facilities.
Excluding this charge, adjusted net income was $75.3 million or $0.45 per diluted share.
Additionally, the fourth quarter of fiscal 2019 included retroactive blenders tax credits related to 2018, as well as for all of 2019.
Excluding these credits for periods prior to the fourth quarter of 2019 resulted in an adjusted net income for the fourth quarter of 2019 of $50.1 million or $0.30 per diluted share.
Excluding the restructuring and asset impairment charge related to the shutdown of the two biodiesel facilities adjusted net income for fiscal 2020 was $327.4 million or $1.96 per diluted share.
Excluding the retroactive blenders tax credits related to 2018 adjusted net income for fiscal 2019 was $226 million or $1.34 per diluted share.
Now, turning to our operating income, we recorded $74.4 million of operating income for the fourth quarter of 2020 compared to $293.3 million for the fourth quarter of 2019.
Excluding the pre-tax $38.2 million restructuring and asset impairment charge adjusted operating income for the fourth quarter of 2020 was $112.5 million.
Excluding the retroactively reinstated blenders tax credits recorded in the fourth quarter of 2019 for prior periods, the adjusted operating income for the fourth quarter of 2019 was $100 million.
Therefore, on a comparative basis the fourth quarter of 2020 adjusted operating income improved $12.5 million over the fourth quarter of 2019.
The fourth quarter 2020 gross margin increased $29.8 million over the prior year amount, which partially offset the $38.2 million impairment charge and a $10 million increase in depreciation and amortization, which was partially attributable to the Belgium Group and Marengo acquisition assets added in the fourth quarter of 2020.
Operating income for fiscal 2020 was $430.9 million as compared to $475.8 million for fiscal 2019.
Excluding the $38.2 million restructuring and impairment charge, the adjusted operating income for fiscal 2020 was $469.1 million.
Operating income for fiscal 2019 was $475.8 million.
Excluding the retroactive blenders tax credits related to 2018 adjusted operating income for fiscal 2019 was $389.2 million.
The $79.9 million increase in adjusted operating income for fiscal 2020 as compared to fiscal 2019 was primarily due to a gross margin increase of $108.3 million and a larger contribution and equity earnings from our renewable diesel joint venture Diamond Green Diesel.
These improvements more than offset a $20 million increase in SG&A, asset sales gains of $20.6 million in fiscal 2019 and a $24.7 million increase in depreciation and amortization.
SG&A increased $20 million in fiscal 2020 as compared to fiscal 2019, primarily due to increases in insurance premiums, labor cost, COVID-related costs and foreign currency effect, which were partially offset by lower travel cost.
Interest expense declined $1.7 million for the fourth quarter 2020 as compared to the 2019 fourth quarter amount and declined $6 million for fiscal 2020 as compared to fiscal 2019.
Turning to income taxes, the company's 2020 effective tax rate of 15.1% is lower than the federal statutory rate of 21% primarily due to the biofuel tax incentives.
Tax expense and cash tax payments for 2020 were $53.3 million and $36.8 million respectively.
For 2021 we are projecting the effective tax rate to be 20% and cash taxes of approximately $40 million.
Looking at the balance sheet at year-end January 2, 2021 debt was reduced $141.4 million during the year with a net paydown of $189.8 million.
The bank covenant leverage ratio ended the year at 1.90.
Capital expenditures totaled $280.1 million for 2020 as we plan to spend approximately $312 million on capital expenditures in fiscal 2021.
The company received $205.2 million in cash distributions in 2020 from our Diamond Green Diesel joint venture.
Lastly, we repurchased approximately 2.2 million shares of common stock totaling $55 million during fiscal 2020 and paid approximately $29.8 million in cash in the fourth quarter of 2020 for the Belgium Group and Marengo acquisitions.
Now diving into 2021, with the commodity price improvement and continued strong raw material volumes, we believe that our Food, Feed and Fuel segments prior to adding Diamond Green Diesel should generate between $565 million and $600 million of EBITDA.
That's a conservative 12% to 20% improvement over 2020.
DGD, we believe will be able to earn at least $2.25 a gallon EBITDA in 2021 and should produce between 300 million gallons and 310 million gallons this year, which would generate between $335 million and $350 million of EBITDA for Darling share.
This range does not include any additional upside for renewable diesel gallons that could be produced in 2021 as the 400 million gallon expansion is on track to commission in early Q4.
We should know better in the middle of the year the exact timing of when the Norco expansion will be approximately online.
Now, the DGD Port Arthur location is making excellent progress with all key long lead equipment items ordered and site work nearing completion.
This 470 million gallon renewable diesel facility should be operational by the back half of 2023 securing Diamond Green Diesel's leadership position as the largest low-cost producer of renewable diesel in North America.
We anticipate all costs of both expansion projects will be funded by the internal cash flow of Diamond Green Diesel.
However, we still anticipate DGD putting a non-recourse revolver in place shortly.
Now, let's do something different and turn to the feedstock question.
I will try and answer this question now but sure you will ask it again during the Q&A.
Darling believes there's adequate low carbon feedstocks to supply the 1.2 billion gallon renewable diesel platform of DGD.
We do expect growth in animal fats and certainly think that used cooking oil will recover a little this year and grow in the future years.
Our approach for keeping our feedstock advantage for DGD is twofold.
What can Darling do to render or collect more out of our footprint today, either through process or technology improvements or competitive positioning and what are the bolt-on opportunities to grow our volumes of animal fats and waste oils around the world?
We do believe there are multiple avenues for us to pursue in expanding our feedstock footprint and we have faith that our large global presence will put us on a pathway to get results that others might not be able to achieve.
Operating animal byproduct businesses on five continents allows us to see what no one else can see and provide supply chain arbitrage that will make our renewable diesel platform second to no one.
As we grow another year older and wiser we continue to position our company in the best place to take advantage of the changing times.
We are excited about our outlook for 2021, encouraged by the growth of our low carbon fuel standards around the world and we are doubly pleased with the great progress at Diamond Green Diesel and our joint venture partner Valero as we are now inside of nine months of the biggest renewable diesel project in North America starting up.
So with that Alicia, let's go ahead and open it up to question and answers.
| q4 adjusted earnings per share $0.45 excluding items.
q4 net income $0.27 per gaap diluted share.
|
Actual results may differ materially from those made or implied in such statements, which speak only of date they are made and which we undertake no obligation to publicly update or revise.
Our Chairman and CEO, Clarence Smith will now give you an update on our results.
And then, our President, Steve Burdette will provide additional commentary about our business.
We're very pleased with the record results for the second quarter with sales of $250 million.
We've done a good job in our expense controls across the board, and combined with pricing disciplines from the merchandising teams and stores, we achieved solid gross margins and 11.7% pre-tax operating profits.
Our ongoing objectives are to grow market share in our existing distribution footprint and maintain double-digit operating margins.
We believe that the increased importance of home that was jump-started with the impact of COVID last spring is a longer-term trend.
While we don't expect the rush that impacted our industry to be at the elevated levels we experienced in recent quarters, we do believe that home is a priority and a sustainable trend for the near future.
The strong desire for homeownership, combined with Havertys strong positioning in Florida, Texas and the Southeast, puts us in an ideal position for today and for the future.
Our supply merchandising and distribution teams are working with our factories and shippers to bring in product to fill orders and reduce our record backlog.
The shipping challenges that home-related industries are experiencing have caused major delays for furniture, which we believe will be problems until the spring of 2022.
We are working to increase our inventories as the production and product flow improves.
We're investing in our distribution capacity to support growth over $1 billion over our regions.
We just completed additional racking to our mothership, the Eastern Distribution Center in Braselton, Georgia, which adds 20% more storage capacity.
We will evaluate potential expansions to our network to better serve our planned growth.
Our current focus is on building market share in our key markets with store positioning and target marketing to our core customer and new homeowners.
Examples of this were the opening of Myrtle Beach earlier this year, the opening of a third store in Austin, in the fast-growing Pflugerville, Round Rock markets and a store opening tomorrow in the villages in Central Florida.
We're in a deep dive reviewing potential locations in our best markets, which will reach the fastest-growing areas and leverage our existing infrastructure.
We expect to announce several new fill-in locations for the 2022 openings.
We're very excited about the rollout of the WE FURNISH HAPPINESS marketing campaign, which we believe more clearly separates Havertys from our competitors and continues to raise the bar on service, quality, furniture and design.
We continue to be focused on our front door, havertys.com.
We've committed to significant investments in IT and state-of-the-art systems to better reach and appeal to our customers.
We've contracted with Adobe to bring on a collection of applications and services that will lay the foundation for unmatched customer experience.
The new foundation will improve functionality, help us create content easier and faster, provide better personalizations using AI-driven automation and enhance our analytics and reporting.
Our goal is to have the best-in-class website experience.
I'm very excited with our results for the second quarter.
This performance was due to the commitment, passion and determination of the store, distribution, home delivery, service and home office teams, whom I want to congratulate personally for their efforts.
Our supply chain network has been able to increase the flow of products into our warehouses over the second quarter even with all the headwinds.
Container capacity continues to be under pressure with the continued increase in demand across all of retail.
We expect this to continue to be an issue for the remainder of the year, even if there is a softening in demand.
Also, container prices on the spot market continue to increase with prices varying between $12,000 and $22,000 a container.
We have been able to balance our shipping mix, so that no more than 20% to 30% is on the water at one-time at these increased rates.
As I stated last quarter, we finalized our contracts on May 1, which are significantly below the spot market rates.
Foam continues to be an issue for some of our domestic vendors, however, their production has increased during the second quarter, but still not at 100%.
Our import vendors are not having any foam issues.
The recent closures in Vietnam due to the increased spread of the Delta variant are not expected to have an impact on our customers, if the closures remain at the projected two weeks.
They are expected to open back up beginning the week of 8/2.
However, if the closures are prolonged four to six weeks then there may be an impact to our customers, who already bought and future customer lead times.
Also, we are seeing port congestion in Vietnam and China, along with continued issues at the LA port and railyards.
Our merchandising and supply chain teams are monitoring the situation very closely with our vendors.
Our pool is now approximately 2 times larger than last year, with the average pool age stretching to approximately eight weeks from six weeks over the last 90 days.
Our special order lead times have increased to 12 weeks to 20 weeks, depending on the vendor, causing some softening in our special order business.
Our distribution, home delivery service network delivered a record quarter.
Over 90% of our markets are delivering within a week to the customer's home once we have the product in our warehouses.
Staffing continues to be our #1 concern in both distribution and home delivery.
The extra unemployment moneys that have stopped in most of the states we operate our warehouses, but there is still not enough people looking for work to fill the jobs available.
However, we remain optimistic that we will see this improve during the third quarter.
In the second quarter of 2021, delivered sales were $250 million, a 127.3% increase over the prior year quarter.
If you recall, our retail operations were closed due to the pandemic in the month of April in 2020.
103 stores reopened on May 1, 2020, and the remaining stores reopened by June 20th.
Total written sales for the second quarter of 2021 were up 67.5% over the prior year period.
Comparable store sales were up 46.9% over the prior year period.
This only include stores that were open for a full month in both periods.
Our gross profit margin increased 240 basis points from 54.2% to 56.6% due to better merchandising, pricing and mix and less promotional activity during the quarter.
These improvements were partially offset by an increase in our LIFO reserve as we continue to see increased freight and product cost.
Selling, general and administrative expenses increased $39.8 million or 54.7% to $112.4 million, primarily due to increased sales activity.
However, as a percentage of sales, these costs declined over 2,000 basis points to 45% from 66.1%.
As demonstrated in the past three quarters, our financial model has substantial operating leverage at these sales levels.
Other income in the second quarter of 2020 was $31.8 million, which included the gain on the sale-leaseback transaction of three distribution facilities in 2020.
If you recall, the gross proceeds from the sale was approximately $70 million.
Income before income taxes increased $10.5 million to $29.2 million.
Our tax expense was $6.3 million during the second quarter of 2021, which resulted in an effective tax rate of 21.6%.
The primary difference in the effective rate and statutory rate is due to the state income taxes and the tax benefit from vested stock awards.
Net income for the second quarter of 2021 was $22.9 million or $1.21 per diluted share on our common stock compared to net income of $13.6 million or $0.72 per share in the comparable period last year.
Excluding the gain on the sale of our distribution assets in 2020, our adjusted earnings per share in the second quarter of last year was a $0.52 loss.
Now, turning to our balance sheet.
At the end of the second quarter, our inventories were $115 million, which was up $25 million from the December 31, 2020 balance, and up $10.2 million versus the second quarter of 2020.
At the end of the second quarter, our customer deposits were $116.1 million, which was up $29.9 million from the December 31st balance and up $58.5 million versus Q2 of 2020.
We ended the quarter with $235.3 million of cash, cash equivalents.
We have no funded debt on our balance sheet at the end of the second quarter of 2021.
Looking at some of our uses of cash flow, capital expenditures were $10.9 million for the first half of 2021, and we paid $8.6 million of regular dividends during the first half of 2021.
During the second quarter, we did not purchase any common shares in our buyback program, and we have $16.8 million remaining under current authorization for this buyback program.
We expect our gross margins for 2021 to be 56.5% to 56.8%.
We anticipate gross profit margins will be impacted by our current estimates of product and freight cost and changes in our LIFO reserve.
Our fixed and discretionary type SG&A expenses for 2021 are expected to be in the $275 million to $278 million range.
This is an increase over our previous estimate, primarily due to rising warehouse compensation and benefit cost.
The variable type costs within SG&A for 2021 are expected to be in the range of 17.3% to 17.5%, a slight decrease over our previous guidance.
Our planned capex for 2021 has increased from $23 million to $37 million.
Anticipated new or replacement stores, remodels and expansions account for $18.7 million.
Investments in our distribution network are expected to be $15.2 million, and investments in our information technology are expected to be approximately $3.1 million.
The largest increase in our planned capex for 2021 is in our distribution network.
In the third quarter of this year, we will be buying back our Virginia warehouse, which we sold and leased back last year.
This is a key distribution asset that may be expanded in the upcoming years.
Owning this asset gives us more flexibility as we evaluate our future growth plans.
Our anticipated effective tax rate in 2021 is expected to be 24%.
This projection excludes the impact from vesting of stock awards and any potential new tax legislation.
This completes our commentary on the second quarter financial results.
| compname reports q2 earnings per share $1.21.
q2 earnings per share $1.21.
q2 same store sales rose 46.9 percent.
q2 sales $250 million.
qtrly diluted earnings per common share of $1.21.
|
I'm Arnold Donald, President and CEO of Carnival Corporation & plc.
Today, I'm joined telephonically by our Chairman, Micky Arison, as well as David Bernstein, our Chief Financial Officer; and Beth Roberts, Senior Vice President, Investor Relations.
We are absolutely thrilled to be back doing what we do best, delivering amazing, memorable vacation experiences to our guests.
Our team members are overjoyed to be back on board and it shows our guests are having a phenomenal time.
Our onboard revenues for guests are off the charts, and our Net Promoter Scores have been exceptionally strong.
I've had the pleasure of visiting a number of ships in recent weeks, both here in the U.S. and abroad.
And I can tell you, the ship looks spectacular, and the crew has an amazing energy.
There is such an incredible spirit on board.
Our protocols have been working well, beginning with a seamless embarkation experience and have enabled us to build occupancy levels at a significant pace as we return more ships to service.
Our brands executed extremely well in this initial phase of our return to serve, particularly given significant restrictions on international travel, hampering our ability to offer our normal content-rich deployment options, as well as the operating requirements in certain jurisdictions that limit our normally high occupancy levels.
Our itinerary planners came up with creative deployment alternatives, our marketing department made them accessible with little investment, our yield managers priced them appropriately to achieve occupancy targets very close to them, and coupled them with bundled packages to drive exceptionally strong revenue on board.
And despite all the additional protocols, our crew delivered an amazing guest experience.
The combination of which enabled us to deliver cruise vacations at scale while producing significant cash from these restricted voyages.
Now while we normally don't disclose this level of information, we try to find a way to give you a sense of why we're viewing the restart as hugely successful beyond the enthusiasm of our guests and crew and the unprecedented Net Promoter Scores.
It became complicated because most of our voyages, while cash flow positive, are programs that could not be compared to 2019.
And in most cases, would normally be priced lower than the 2019 alternatives.
So for example, in the U.K., we're only able to offer senior cruises without any ports of call, and that's our version of vacation, which were not comparable in ticket prices to peak season Mediterranean or Baltic sailings offered in the summer of 2019.
That said, even with occupancy limitations, these cruises generated cash for our stakeholders.
They supported a return for our workforce, and they successfully served guests, resulting in high satisfaction levels.
Now at Carnival Cruise Line, we were able to offer more comparable itineraries than 2019, our revenue per dims were up 20% compared to 2019 and that's inclusive of the impact of incentives from previous cancellations, and that's despite the quoting nature of the bookings.
In fact, Carnival Cruise Lines restarted more ships out of the United States than any of the cruise brand and still achieved occupancy above 70%, all of which combined to generate an even greater cash contribution.
Clearly, Carnival Cruise Line is a brand that continues to outperform.
While the Delta variant and its corresponding effect on consumer confidence has certainly created a myriad of operating challenges for us to navigate in the near term and has led to some booking volatility in August, to-date it has not had a significant impact on our ultimate plan to return our full fleet to guest operations in the spring of 2022.
On our last quarterly business update, we said that we expected the environment to remain dynamic and it certainly have.
Of course, agility has been a key strength of ours over the last 18 months, and we continue to aggressively manage to optimize given this ever-changing landscape.
In fact, while by design, we're not yet at 100% occupancy.
We have individual sailings with over 4,000 guests.
To-date, we have carried over 0.5 million guests this year already.
And on any given day, we are now successfully carrying around 50,000 guests, and expect that number to continue to rise as we introduce more capacity and as we increase occupancy over the coming months.
The Delta variant has clearly impacted our protocols, which will continue to evolve based on the local environment.
In markets like the U.S., where case counts are higher, we've taken swift actions to reinforce our already strong protocol, such as additional testing requirements and indoor mass requirements with all U.S. sailings operating under the CDC's vaccination requirements.
Our protocols go above and beyond the terms of the conditional sale order and are much more rigorous than comparable land-based alternative.
Again, our highest responsibility and therefore, our top priority is always compliance, environmental protection and the health, safety and well-being of everyone, our guests, the people in the communities we touch and serve and of course, our Carnival family, our team members shipboard and shoreside.
The Delta variant has also created some disruption in our supply chain, impacted the timing of opening for some destinations and created a heightened level of uncertainty that has been reflected in the broader travel sector and in our own booking trends.
We quickly adjusted our deployment to push out the start date on a few select voyages.
For some of our more exotic winter deployments, like our popular world cruises, we rebooked guests for our 2023 departures.
Effectively, we've managed our near-term capacity to optimize the current environment, just as we indicated we would.
The modifications we've made to the pace of the roll of our fleet will optimize our cash position in the near term.
Looking forward, we continue to work toward resuming full operations in the spring, in time for our important summer season where we make the lion's share of our operating profit.
Of course, we have ample liquidity to see us through to full operation.
And we continue with a prudent focus on cash management to ensure we have flexibility under a multitude of scenarios.
The current environment, while choppy, has improved dramatically since last summer, and it should improve even further by next summer if the current trend of vaccine rollout and advancements in therapies continues.
For instance, in markets like the U.K., where vaccination rates are already higher, consumer confidence remains strong, and we are seeing strong momentum.
So far, we've announced the resumption of guest cruise operations for 71 ships through next spring, and that's across eight of our nine brands.
We're evaluating the remaining shifts through next spring, with a continued focus on maximizing future cash flow while delivering a great guest experience in a way that serves the best interest of public health.
Importantly, even at this very early stage of our rollout, our ships are generating positive cash flow.
Based on our current rollout, we expect cash from operations for the whole company to turn positive at some point early next year.
Looking forward, we believe we have the potential to generate higher EBITDA in 2023 compared to 2019, given despite our modest growth rate, additional capacity and our improved cost structure.
As further insight into booking trends, we are well positioned to build on a solid book position and intentionally constrained capacity for the remainder of 2021 and into the first half of 2022.
With the existing demand and limited capacity, we are focused on maintaining price.
Even recently with heightened uncertainty from the Delta variant affecting travel decisions broadly, we continue to maintain price.
We have also opened bookings earlier for cruises in 2023, and we're achieving those early bookings with strong demand and good prices.
And based on that success, we've begun to launch 2024 sailings even earlier.
In fact, these efforts contributed to the $630 million increase in guest deposits, our long-term guest deposits.
And that's deposits on bookings beyond 12 months, are 3 times historical levels, driven in part by our proactive efforts to open more inventory for sale in outer years.
Now we expect guests deposits to continue to grow through the restart as we return more ships to service and as we build occupancy levels.
Again, these favorable trends continue despite dramatically reduced advertising expense.
We continue to focus our efforts on our lower cost channels like direct marketing to our sizable past guest database of over 40 million guests, and earned media, as we build on our multiple new ship launches and restart news flow.
Of course, and most importantly, we are delivering on our guest experience.
Word-of-mouth remains the number-one reason people take their first cruise.
And as I mentioned, our Net Promoter Scores are well above historical levels across our ships that have returned to service so far.
During the quarter, we furthered our strong track record of responsibly managing the balance sheet.
We completed two refinancing transactions, among other efforts, resulting in a meaningful reduction in annual interest expense.
We have many more opportunities for refinancing ahead and are working through them at an aggressive pace.
Also importantly, we have continued to make advancements in our sustainability efforts.
Last week, we published our 11th Annual Sustainability Report, Sustainable from Ship to Shore, which can be found on our sustainability website www.
In the report, we build on the achievement of our 2020 goal by sharing more details on our 2030 goals and our 2050 aspiration.
The report shares additional light on the six focus areas that will guide our long-term sustainability vision, including climate action, circular economy -- that's wage reduction, sustainable tourism, health and well-being, diversity, equity and inclusion and biodiversity and conservation.
Now these areas align with United Nations' Sustainable Development Goals.
Climate action is a top sustainability focus area.
We are committed to decarbonization, and we aspire to be carbon neutral by 2050.
As we have previously shared, despite 25% capacity growth since that time, our absolute carbon emissions peaked in 2011 and will remain below those levels.
We are working toward transitioning our energy needs to alternative fuels and investing in new low-carbon technologies.
Now because of the pause in guest cruise operations, the 2020 sustainability performance measures are not comparable to prior year data.
That said, there is a lot of valuable information on the progress we made in our sustainability journey despite what an incredibly challenging year.
We were clearly among the most impacted companies by COVID-19, and I'm very proud of all we've accomplished collectively to sustain our organization through these challenging times, including all we did for our loyal guests, all we did for our other many stakeholders, and all we did for each other within our Carnival family.
In many regards, I believe our collective response to the pandemic is strong testimony to the sustainability of our company.
For that, I again express my deepest appreciation to our Carnival team members, both shipboard and shoreside, who consistently went above and beyond.
I'm very humbled by the dedication I've seen in these past 18 months.
We continue to move forward in a very positive way.
Throughout the pause, we've been proactively managing to resume operations as an even stronger operating company.
Our strategic decision to accelerate the exit of 19 ships left us with a more efficient and effective fleet, and has lowered our capacity growth to roughly 2.5% compounded annually from 2019 through 2025, and that's down from 4.5% pre-COVID.
We've opportunistically rebalanced our portfolio through the ship exits as well as a future ship transfer, any modification to our newbuild schedule to optimize our asset allocation, maximize cash generation and improve our return on invested capital.
While capacity growth is constrained, we will benefit from an exciting roster of new ships spread across our brands, enabling us to capitalize on the pent-up demand and drive even more enthusiasm and excitement around our restart plan.
And we will achieve a structural benefit to unit costs in 2023 as we introduce these new, larger and more efficient ships, coupled with the 19 ships leaving the fleet, which were among our least efficient, with the aggressive actions we've already taken, optimizing our portfolio and reducing capacity.
We are well positioned to capitalize on pent-up demand and to emerge a leaner, more efficient company, reinforcing our global industry-leading position.
We have secured sufficient liquidity to see us through to full operation.
Once we return the full operation, our cash flow will be the primary driver to return to investment-grade credit over time, creating greater shareholder value.
I'll start today with a review of our guest cruise operations along with our third quarter monthly average cash burn rate.
Then I'll provide an update on booking trends and finish up with some insights into our refinancing activity.
Turning to guest cruise operations.
It feels so great to be talking about operations again.
We started the quarter with just five ships in service.
During the third quarter, we successfully restarted ships across eight of our brands.
We ended the quarter with 35% of our fleet capacity in service.
Our plans call for another 27 ships to restart guest cruise operations during the fourth quarter and the month of December.
So on New Year's Day, we anticipate celebrating with 55 ships or nearly 65% of our fleet capacity back in service.
For the third quarter, occupancy was 54% across the ships in service.
Our brands executed extremely well.
Occupancy did improve month-to-month through the quarter and in the month of August, occupancy reached 59% from 39% in June and 51% in July.
Occupancy for our North American brands reflects our approach of vaccinated cruises, which for the time being, does limit the number of families with children under 12 that can sail with us.
Occupancy for our European brands reflects capacity restrictions, such as social distancing requirements for our Continental European brands and a 1,000-person cap per sailing for some of the quarter in the U.K. For the full third quarter, our North American brands occupancy was 68%, while for our European brands, occupancy was 47%.
Revenue per passenger cruise day for the third quarter 2021 increased compared to a strong 2019 despite the current constraints on itinerary offerings which did not include many of the higher-yielding destination-rich itineraries offered in 2019.
As Arnold indicated, our guests are having a phenomenal time and our Net Promoter Scores have been incredibly strong.
As always, happy guests seem to translate into improved onboard revenue.
Our onboard and other revenue per diems were up significantly in the third quarter 2021 versus the third 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 on board.
Over the past two 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 we did during the third quarter 2021.
As a result of these bundled packages, the line between passenger ticket revenue and onboard revenue seems to be blurring.
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.
As we previously guided, the ships in service during the third quarter were, in fact, cash flow positive.
They generated nearly $90 million of ship level cash contribution.
This was achieved with only a two-month U.S.-based restart during the third quarter as our North American brands began guest cruise operations in early July.
We expect the ship level cash contribution to grow over time as more ships return to service and as we build on our occupancy percentages.
For those of you who are modeling our future results, I did want to point out that due to the cost of a portion of our fleet being in pause status during the first half of 2022, restart related expenses and the cost of maintaining enhanced health and safety protocols, we are projecting ship operating expenses in 2022 per available lower berth day or per ALBD, as it is more commonly called, to be higher than 2019 despite the benefit we get from the 19 smaller, less efficient ships leaving the fleet.
Remember, that because a portion of the fleet will be in pause status during the first half, we are spreading costs over less ALBDs.
We do anticipate that most of these costs and expenses will end with 2022 and will not reoccur in fiscal 2023.
Now let's look at our monthly average cash burn rate.
For the third quarter 2021, our cash burn rate was $510 million per month, which was better than our previous guidance and was in line with the $500 million per month for the first half of 2021.
The improvement versus our guidance was due to the timing of capital expenditures, which are now likely to occur in the fourth quarter and some other small working capital changes.
With the timing of certain capital expenditures now shifting to the fourth quarter, the company expects its monthly average cash burn rate for the fourth quarter to be higher than the monthly average rate for the first nine months of the year.
Other good news positive factors impacting the fourth quarter are restart expenditures to support not only the 22 ships that will restart during the fourth quarter but also the additional ships that will restart in the first quarter of 2022, along with the significant increase in dry dock days during the fourth quarter, driven by the restart schedule.
All these expenditures have been anticipated, and given the announced restarts, many of them are now occurring in the fourth quarter.
Also, during the fourth quarter, we are forecasting positive cash flow from the 50 ships that will have guest cruise operations during the quarter.
And ALBDs for the fourth quarter are expected to be 10.3 million, which is approximately 47% of our total fleet capacity.
Now turning to booking trends.
Our booking volumes for the all future cruises during the third quarter 2021 were higher than booking volumes during the first quarter.
That trend continued over the first couple of months of the third quarter, such that we expected the third quarter would end at higher booking levels than the second quarter, but we did manage to achieve that because of lower booking volumes in the month of August when the Delta variant impacted travel and leisure bookings generally.
The impact on bookings in August was mostly seen on near-term sailings.
However, the impact quickly stabilized in the month of August.
Our cumulative advanced book position for the second half of 2022 is ahead of a very strong 2019 and is at a new historical high.
Pricing on our second half 2022 book position is higher than pricing on bookings at the same time for 2019 sailings, driven in part by the bundled pricing strategy for a number of our brands, but excluding the dilutive impact of future cruise credits or more commonly known as FCCs.
If we were to include the dilutive impact of future cruise credits, pricing on our second half 2022 book position is now in line with pricing at the same time for 2019 sailings.
This improved position is a result of positive pricing trends we have seen during the third quarter.
This is a great achievement, given pricing on bookings for 2019 sailings is a tough comparison as that was the high watermark for historical yield.
Finally, I will finish up with some insights into our refinancing activity.
We are focused on pursuing refinancing opportunities to extend maturities and reduce interest expense.
To-date, through our debt management efforts, we have reduced our future annual interest expense by over $250 million per year.
And we have completed cumulative debt principal payment extensions of approximately $4 billion, improving our future liquidity position.
The $4 billion extension results from three things: first, the July refinancing of 50% of our first lien notes were $2 billion.
Second, the completion of the European debt holiday amendments, which deferred $1.7 billion of principal payments.
The deferred principal payments will instead be made over a five-year period, beginning in April 2022.
And third, the extension of a $300 million bilateral loan with one of our banking partners.
As we look forward, given how support of the debt capital market investors and commercial banks have been, we will be pursuing additional refinancing opportunities to meaningfully reduce our interest expense and extend our maturities over time.
| carnival corporation & plc provides third quarter 2021 business update.
carnival corp - booking volumes for all future cruises during q3 of 2021 were higher than booking volumes during q1 of 2021.
carnival corp - cumulative advanced bookings for second half of 2022 are ahead of a very strong 2019.
carnival corp - voyages for q3 of 2021 were cash flow positive and company expects this to continue.
carnival - booking volumes for all future cruises during q3 of 2021 were higher than booking volumes during q1 2021, albeit not as robust as q2 2021.
carnival corp - monthly average cash burn rate for q3 of 2021 was $510 million.
carnival corp - also opened bookings for further out cruises in 2023, with unprecedented early demand.
carnival corp - company expects monthly average cash burn rate for q4 to be higher than the prior quarters of 2021.
carnival corp - expects monthly average cash burn rate for q4 to be higher than prior quarters of 2021.
carnival corp - expects a net loss on both a u.s. gaap and adjusted basis for quarter and year ending november 30, 2021.
carnival - consistent with gradual resumption of guest cruise operations, continues to expect to have full fleet back in operation in spring 2022.
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