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Today we will be reviewing our third quarter 2020 financial result, and providing investors with an update on our transformation and our response to the COVID-19 pandemic.
Further information can be found in our SEC filing.
Through their persistence and hard work, we successfully balanced lower sales by making durable changes to minimize cost.
We found innovative ways to engage with our customers and we kept our transformation plans on schedule.
We also overcame unprecedented global supply chain constraints, which was also challenging and improved tremendously since the early stages of the pandemic.
In addition, our pipeline of new products continues unabated with products that deliver innovative clinical solutions that are expected to drive incremental sales growth.
Taken all together, these actions should result in long-term improvements to our business since a public company forward it depend on its result.
We're pleased with our performance in the third quarter, achieving our 12th consecutive quarter of year-over-year improvement in adjusted EBITDA.
As guided, we delivered higher consolidated sequential net sales, driven by a double-digit increase in Europe as a result of the initial easing of public healthcare restrictions, primarily in France and Germany, with the U.K. still remaining fairly closed.
We continue to monitor our key markets and the potential impact on our business and believe we're prepared for the pandemic to sporadically recur during the winter months.
In North America, we saw a continued strength in respiratory products, offsetting diluted sales in mobility and seating products due to its longer quote order cycle, which we'll cover in more detail on later slides.
On the balance sheet, we retired a significant majority of the 2021 convertible notes, leaving just over $1 million maturing in February of next year.
Finally, our strong performance in the third quarter and our visibility into trends during the fourth quarter give us the confidence to raise our full year guidance for net sales and adjusted EBITDA.
Turning to Slide four.
In the third quarter, we delivered stronger operating income, both year-over-year and sequentially, continuing our track record of enhancing profitability.
Additionally, adjusted EBITDA improved year-over-year and grew nearly 50% sequentially, driven by higher net sales and lower SG&A expenses.
I'm pleased with our strong performance in this challenging environment, which demonstrates that our prior transformation initiatives are successfully driving improved results in line with expectations.
Turning to Slide five.
This is a chart we found helpful to depict the impact of the pandemic on our product lines over the past few quarters.
As expected, we continue to see above normal demand for our respiratory products, specifically stationary oxygen concentrators, which are used as an essential part of COVID-19 care.
With 95% of our sales in Northern Hemisphere, we anticipate continued elevated demand as winter weather forces more people indoors with pandemic blues occurring as a result.
In our lifestyle category, we returned to more normal sales levels, having passed peak surge demand for bed and related products for pandemic care.
Product mix shifted toward at-home care away from normally higher levels of institutional sales that have been lower due to limited access to long-term care facilities and lower admissions of new residents.
In mobility and seating, we saw a general recovery in demand more immediately in Europe, which went from very strict measures to more normal healthcare access.
As a result, reported net sales in Europe improved over 38% sequentially, although still lower than third quarter 2019.
We saw a similar type of recovery in North America in the form of higher quote volumes in the third quarter, which we anticipate will lead to increase sales through the end of the year.
Globally, we continue to launch an exciting full line of new products in all categories that will continue to drive customer interest and sales regrowth overall.
We'll be ready to react to regional pandemic outbreak and related public healthcare measures, which we expect to sporadically affect sales, although not to the same extent as we experienced earlier this year.
We're pleased with the sequential improvement in consolidated net sales and believe this may be an early indicator that markets are beginning to recover.
Turning to Slide six.
Our solid third quarter results reflect the hard work the team has put into transforming the company.
We delivered year-over-year and sequential improvement in operating results, and we expect this trend to continue as sales accelerate.
As we close 2020, we remain on track with our key business initiatives.
In North America, our IT modernization program is expected to launch in the first phase of go live during the fourth quarter.
As the new and improved system rolls out across the region, these advanced systems should help us better engage with our customers with tools to improve the efficiency of our associates and optimize working capital.
Customers would be able to use a more typical set of e-commerce tools we've all come to expect in our personal life.
This more intuitive platform will advance our growth, and I'm excited about the many benefits the program we will provide both internally and externally.
In addition, our German plant consolidation remains on track for completion in 2020.
This consolidates operations across Germany and is expected to generate approximately $5 million in annual cost savings beginning in 2021.
Underscoring the strength of our innovation culture, we were honored to have received awards in many categories for product excellence from a broad North American industry publication, including for our standing power wheelchair system and our SMOOV power add-on product.
In addition, we were recognized by an expert rehabilitation organization for our contribution to the advancement in assistive technology rehabilitation engineering.
These awards speak volumes about our associates who are developing great solutions for complex healthcare needs.
In summary, we overcame multiple challenges during the quarter to drive sequential improvements in operating results and took actions to reduce total outstanding debt.
At the same time, we made good progress in our key transformation initiatives to optimize the business and we launched several new products.
We look forward to an equally successful fourth quarter to close out the year.
Turning to Slide eight.
Reported net sales declined 10.1%, primarily due to lower sales of mobility and seating and lifestyle products, partially offset by growth in respiratory products.
Gross profit was lower by 40 basis points to 28.3% due to unfavorable manufacturing variances as a result of the lower sales volume.
To offset this, we were able to drive constant currency SG&A down 12.5% or $7.8 million through reduced employment cost, lower commercial expenses and favorable foreign exchange.
As a result, operating income improved by 21.2% or $500,000 and adjusted EBITDA was $9.8 million, up 2.5%, including the benefit of reduced SG&A expenses.
Free cash flow usage was $1.8 million, unfavorable to the third quarter 2019 by $14.1 million due to working capital needed to support operating activities.
Turning to Slide nine.
Sequentially, reported net sales increased 8% and constant currency net sales increased 4.3%, driven by higher sales of mobility and seating products, including a 30% increase in Europe.
Gross profit was lower by 60 basis points to 28.3% due to unfavorable manufacturing variances as a result of lower sales volume and the expected mix of lower acuity products as elective care resumed.
Constant currency SG&A decreased 6% or $3.4 million, driven by lower stock compensation expense, which is typically higher in the second and fourth quarters of the year.
Operating income improved by $5.2 million, and adjusted EBITDA improved 48.7% or $3.2 million, driven by higher net sales and lower SG&A expenses.
Free cash flow usage was comparable to the second quarter due to the benefit of higher profitability and lower inventory.
As a result of lower net sales and higher working capital as compared to the third quarter 2019, we did not experience the same pattern of seasonality in free cash flow as we have historically.
Turning to Slide 10.
We experienced stronger sales of mobility and seating products, particularly in Europe.
Lifestyle products continue to be impacted by limited access to long-term care facilities, while demand for respiratory products remained high.
I will discuss the product lines in more detail within each segment.
Turning to Slide 11.
As a result of the initial easing of public healthcare restrictions, constant currency sequential net sales increased by 8%, driven by a 30.4% increase in sales of mobility and seating products, reflecting an early rebound in demand, particularly in France.
We are beginning to see positive momentum in sales in our key countries of France and Germany, although the U.K. remains under relatively significant restrictions, as Matt mentioned earlier.
Gross profit was 230 basis points lower due to the reduced net sales and unfavorable manufacturing variances, both impacted by the pandemic, which affected sales volume and product mix.
Operating income was lower by $3.8 million due to reduced gross profit from lower net sales, partially offset by actions reducing SG&A expenses, such as furloughs and reduced work hours.
Moving to Slide 12.
North America remained resilient, demonstrated by both year-over-year and sequential improvement in net sales.
Constant currency net sales increased 1.2%, with growth in respiratory products partially offset by lower sales of mobility and seating and lifestyle products.
As a result of the longer quote to order cycle for mobility and seating products in the U.S., lower sales in the third quarter were a direct result of lower quote activity in the preceding quarter when access to healthcare professionals and clinicians was limited.
Sequentially, constant currency net sales of mobility and seating products increased 0.2%.
We believe that demand for mobility and seating products are largely nonperishable, as evidenced by significant higher quotes in the third quarter, which are expected to convert into stronger sales for the remainder of the year.
Gross profit increased 170 basis points or $2.6 million, driven by higher net sales and lower material and freight costs from prior transformation initiatives, partially offset by unfavorable variances and higher warranty expense.
Operating income was $3 million, an improvement of $4.7 million, driven primarily by actions which lowered SG&A expense.
Turning to Slide 13, all other, which includes the sales of the Asia-Pacific region, decreased by 3.1% on a constant currency basis, driven by lower sales of mobility and seating products, partially offset by higher sale of lifestyle products.
Operating loss increased by $500,000 due to lower operating profit as a result of the dynamic control divestiture in the first quarter 2020 and improved $1.6 million sequentially, primarily driven by lower stock compensation expense.
Moving to Slide 14.
As of September 30, 2020, the company had total debt of $273 million, excluding operating and finance lease obligations.
As of September 30, 2020, the company had $87 million of cash on its balance sheet, which was sequentially lower, primarily as a result of proactively repurchasing $24.5 million of convertible notes in the third quarter.
We are pleased to have retired the significant majority of these notes, which increased our financial flexibility, reduced ongoing interest expense and leave a balance of less than $1.3 million maturing in February of 2021.
We remain confident that our balance sheet will support us through the transformation.
And as always, we continue to assess opportunities to further optimize our capital structure.
Turning to Slide 15.
As a result of the sequential improvement in business performance achieved in the third quarter and our visibility into the fourth quarter, we are updating our full year guidance for 2020.
The company anticipates consolidated net sales to improve sequentially in the fourth quarter 2020, but remain lower than the fourth quarter last year based on continuing access to healthcare facilities without new public health restrictions and from the adoption of new products.
While the markets are expected to continue to remain open, pandemic-related closures may vary in regions over the winter months.
For the full year 2020, the company now expects reported net sales of at least $840 million, up from the previous range of $810 million to $840 million, driven by the expected recovery of sales based on the recent trends we've seen in the early part of the fourth quarter.
Adjusted EBITDA in the range of $28 million to $32 million, up from the previous range of $27 million to $30 million due to the benefit of prior transformation actions and our continued ability to optimize cost.
And free cash flow usage in the range of $8 million to $12 million, changed from the previous range of 7% to 10%, given the timing of the recognition of sales during the fourth quarter delaying the collection of cash into the first quarter of 2021.
So far, 2020 has been a year like no other.
It's impossible to overuse the word unprecedented as the pandemic has impacted almost every aspect of our daily lives, yet while we were still able to achieve year-over-year improvement in our operating results despite those continuing challenges.
Over the company's recent history, we faced adversity and we've always been up to the task.
Our transformation initiatives will drive our return to profitability and create a stronger, more agile organization, which will unlock further shareholder value.
We're already seeing the results of the diligent work.
We know there's plenty more progress to be made ahead of these challenges.
I believe it's even stronger, and I'm confident in our continued progress.
We'll now take questions.
| increases full year 2020 guidance for net sales and adjusted ebitda.
sees fy 2020 reported net sales of at least $840 million, up from previous range of $810 to $840 million.
sees fy 2020 adjusted ebitda in the range of $28 to $32 million, up from previous range of $27 to $30 million.
sees fy 2020 free cash flow usage in the range of $8 to $12 million, changed from previous range of $7 to $10 million.
|
Simply put, we have growing confidence that our strategies across merchandising productivity, real estate growth and e-commerce put us at a transformational moment for the Company.
We see a clear path to growing our business by several billion dollars over the coming years.
Our Board of Directors echoes this confidence and yesterday authorized an incremental $250 million share repurchase program, underscoring our collective belief in Big Lots' positive growth story and our continued commitment to returning value to our shareholders.
Turning now to our third quarter.
We were pleased to deliver results in line with guidance despite incremental supply chain disruptions compared to our beginning of quarter two.
In discussing our results and outlook, we will continue to reference comparisons to 2019, as generally being the most relevant given the abnormal impacts of COVID-19 on our business in 2020.
On a two-year basis, Q3 comparable sales increased 12%, while declining 5% to 2020.
Total sales increased over 14% [Phonetic] versus 2019 with 210 basis points of favorability from our net new and relocated stores.
The two-year growth in sales reflects the strength and resilience of our Operation North Star strategies as stimulus has faded as a factor in our results.
A loss per share of $0.14 was within our guidance range.
And while we were subject to the continuing macro pressures of which I'm certain you are all aware, including supply chain disruption, inflation and labor constraints, we were able to contain these for the quarter.
Sales for the quarter benefited from growth in basket, driven by AUR expansion across each category and positive mix effects as we penetrated deeper end of furniture and seasonal.
We saw strong positive two-year comps in Furniture, Seasonal, Soft Home, Hard home, and apparel, electronics and other.
As expected, consumables experienced single digit two-year growth and food was down mid-single digits due largely to a strategic reduction in square footage in conjunction with our pantry optimization reset last fall.
Furniture delivered another very strong quarter with two-year comps up low double digits.
Seasonal though was the quarter highlight with comps over 30% on a two-year basis with lawn and garden and Halloween and Harvest all doing very well.
We feel very good about the fourth quarter and even with some delayed receipts, we anticipate high sell-through of our holiday merchandise that will translate to a strong seasonal comp for the quarter.
Turning to marketing, we are thrilled with the continued rollout of our be a BIGionaire brand campaign that started in spring.
As a reminder, this campaign is grounded in extensive consumer insights around why customers love to shop us.
She sees us as the home of the hunt for exceptional bargains and surprising treasures.
As we turn to the fourth quarter for our holiday BIGionaire campaign featuring Eric Stonestreet and Molly Shannon, we are receiving excellent feedback that the ads are attention-grabbing, likable and driving intention to shop.
You can look forward to great things from this campaign featuring not only superstars, but more importantly, unique gifts and decor and always incredible value.
The campaign, coupled with our rewards program is resonating.
Rewards active members were up over 9% versus Q3 last year.
Now with 22.1 million members still boasting a five-year CAGAR of 10%.
In Q3, rewards members accounted for 64% of transactions and 76% of sales, both up 400 basis points to same quarter last year.
Before turning to our discussion of our strategic opportunities, I would like to provide a few brief comments on Q4.
First and foremost, our absolute focus for Q4 has been to position ourselves appropriately with inventory to drive sales and deliver an excellent holiday for our customers, and the quarter has started off strongly with positive 10% two-year comps for fiscal November.
While manufacturing and supply chain pressures will impact both our top and bottom lines in Q4, we are aggressively managing through them as we continue to grow the business.
This includes partnering closely with our manufacturing and transportation partners, strategically prioritizing receipts, creating new capacity with our forward distribution centers and our DC bypass program and ensuring we are competitive in recruiting and retaining DC associates.
In addition, we have taken pricing actions and we'll continue to do so in response to volatile supply chain costs, while continuing to deliver great value for our customers.
And we have line of sight to ending the fourth quarter with a strong inventory position to meet spring demand and deliver strong Q1 sales, and we know that we left sales on the table in each of the past two years.
Looking a bit further out, it is too soon to give specific guidance for 2022 as a whole.
So while we face a big hurdle with the lapping of stimulus in Q1 and Q2 of this year, which we estimate was worth about 5 points of comp on a full year basis and will result in negative comps in Q1 of '22, we expect to deliver overall sales growth in '22 on top of two years that greatly exceeded any prior sales level we achieved as a Company.
That growth in '22 and beyond will be achieved through the three key Operation North Star drivers we have referenced on prior calls, specifically growth in same-store sales, driven by our many successful merchandising initiatives, accelerated growth in our store footprint and growth driven by a rapidly scaling e-commerce and omnichannel operations.
I would like to take a moment on each of these to talk about the opportunity we see ahead of us.
Strategically building our merchandise assortment to maximize productivity will be a key driver of our growth in the coming year and beyond.
This will be driven by discrete in-store programs, new tools and by leveraging our rapidly growing owned brands.
Starting with our next generation furniture sales team, this initiative is rolling out presently and is making a strong positive sales and margin impact, driving close to a 50% lift to the furniture business in stores where it has rolled out.
This program is currently in 100 stores and will initially scale to around 500 stores in '22, driving at least a point of comp on an annualized basis for the entire Company.
Big Lots has been known for winning at holiday and in lawn and garden in the spring and summer with our outdoor seasonal patio sets, gazebo and pools [Phonetic].
However, we have a major whitespace space opportunity for elevating our seasonal assortment, increasing our newness in transitioning between seasonal moments with greater efficiency and effectiveness.
We will show a big for not just holiday, but for Valentine's Day, St Patrick's Day, 4th of July and other seasonally relevant moments, winning the seasons throughout the year.
Additionally, as I will discuss in more detail shortly, furniture and seasonal volume will both be supported by the expanded DC network capacity that we are developing to more efficiently flow bulky merchandise to our stores.
Moving to our own brands, in particular Broyhill and Real Living, we see major upside both with furniture and beyond.
Most importantly, we have proven that they resonate well with our customer.
Broyhill and Real Living each have the potential to achieve $1 billion in annual sales across all home categories and are well underway toward that, both north of $0.5 billion in sales on a year-to-date basis through Q3.
Broyhill accounted for over $160 million in Q3 sales, up close to 50% over the same quarter in 2020.
Approximately 40% of sales came through our home decor, Seasonal and hard lines.
Similarly, Real Living continues on its strong trajectory, almost doubling versus Q3 of last year and delivering over $60 million of growth during the quarter across multiple product categories.
As we referenced last quarter, our increased investment in apparel has helped us bring in new customers and is well on its way to making apparel significant category for us.
As the first graduate category from the Lot, we have built apparel in a scrappy way to be over $200 million program this year with a clear opportunity for more than doubling sales in the years to come.
Customers are giving us credit for our expanded offering as we better organize our offering in store around casual loungewear.
Additionally, while we will not become an apparel store, we have recruited seasoned leadership to bring focus to this productivity enhancing opportunity.
Additional space productivity enhancements have been made through our Lot and Queue Line strategies.
These two strategies now in over 1,300 stores have maintained their accretive sales impact and we plan to complete our rollout in '22.
In addition to these strategies, new initiatives such as Lots under $5 offering represents a further opportunity to drive higher productivity.
The Lots under $5 which will roll out in the middle of 2022 will create a value destination for our customers, anchored on surprise and delight treasure hunt products priced at $1, $3 and $5.
The assortment will be seasonally relevant and have impulse items to create excitement for newness as she increases visit frequency.
This is just an example of the ongoing category innovation that will be an integral part of our business going forward.
Supported by new tools and processes and an outstanding team, we are confident that our merchandise related strategies will deliver tremendous growth in productivity.
On our last few calls, we have discussed our whitespace opportunity for net new stores.
In 2021, we are reversing the historical trend of relatively stagnant store count and will increase our net new store count by over 20 stores.
In 2022, we expect that figure to be over 50.
While sales volumes will range depending on square footage and market demographics, we expect at least $120 million of annualized impact from next year's net new stores and that they will deliver 4-wall EBITDA margins of 10% or greater.
Turning to e-commerce, our year-to-date sales growth is around 300% versus 2019, and we have a clear line of sight to e-commerce becoming a $1 billion business over the next few years.
Our approach to date has been to replicate the friendliness of our in-store interactions online by removing friction points and allowing our customers to purchase where she wants, how she wants, with what tender she wishes and to have that product filled through the channel that she prefers.
Since the initial rollout of BOPUS in 2019, we now provide curbside pickup, ship from store capabilities and same-day delivery via Instacart and Pickup.
To support holiday, we increased the number of stores providing ship from store fulfillment to 65.
We continue to see over 60% of our demand fulfilled through these new capabilities.
Additionally, joining our lineup of Apple and Google Pay, we expanded our mobile wallet capabilities this past quarter with both PayPal and PayPal paying for, our first Buy Now Pay Later solution.
In the coming year, we expect to unveil further capabilities and additional Buy Now Pay Later choices.
Mobile payment now represents 35% of our total online transactions.
As I mentioned, even though our e-commerce channel has grown from close to nothing in 2017, to well over $350 million expected in 2021, huge opportunity remains to further upgrade user experience and drive conversion, where we have already made great strides.
Enhanced user search and checkout experience, enhanced inventory visibility and access further extending our isle and accelerating supplier direct fulfillment will all fuel this growth.
Perhaps more importantly, over the past few years, we have worked to expand our online choices to better reflect our in-store assortment selections.
What was less than 20% of our assortment a few years ago is now approximately two thirds of our over 30,000 choices.
I would now like to pivot to some of the key enablers of our future success.
Earlier this year, and specifically during last quarter's call, we discussed our need to invest in our supply chain through the rollout of our forward bulk product and furniture distribution centers or FTCs, and our transportation management system.
Our legacy distribution center network was designed for a $5 billion pick and pack, brick and mortar business model.
As we have grown substantially over the past few years, lean further into bulk furniture and seasonal businesses and significantly grown our e-commerce business, we have outgrown our capacity.
We are addressing this by distorting processing and logistics for bulk goods out of our five legacy distribution centers into our new FTC network, enabling us to better leverage the capacity of our original regional DCs that were designed for carton flow.
In addition, our transportation management system that launched last year and completed rollout this year will optimize how our more complex and higher capacity network functions.
In 2022, we plan to launch two additional FTCs, further relieving pressure on our regional DCs and enhancing our ability to process bulk product.
Additionally, through our strong relationships, we have the ability to open pop up, bypass DCs to further assist regional DCs and handling seasonal receipt peaks.
Finally, in 2022, we will begin work on our centralized repacking facility at our Columbus distribution center to handle individual unit pick products, further enhancing our regional distribution center throughput.
As we optimize our store footprint and enhanced inventory availability, we need to ensure consistent customer experience across our stores.
Another key enabler as we referenced on the prior quarter's call is our Project Refresh program to upgrade approximately 800 stores, which were not included in the 2017 to 2020 Store of the Future program.
Completing this project will create a more consistent consumer experience, while better representing the Big Lots brand and will harmonize internal processes as we are currently catering to too many differently formatted or condition stores.
At an average cost of a little over $100,000 per store, far below our Store of the Future conversions.
These stores are getting new exterior signage, interior repainting and floor repair, a new vestibule experience, remodel bathrooms and interior wall graphics.
Project Refresh is underway with around 50 stores being completed in the fourth quarter and we are in the process of finalizing our plans for a more extensive rollout in 2022.
To summarize, I'm greatly enthused about not just where we can be in a few years, but in what we are achieving every day to make that reality occur.
Our growth driver is led by an ambitious driven and highly talented team, will continue to materially scale our business in the coming years.
Our mission at Big Lots is to help her live big and save lives and we'll do that by being her best destination home discount store, chockfull of exceptional value and surprising and fund products, all wrapped in a delightful and easy shopping experience.
As I turn the discussion over to Jonathan, I do wish all of you a wonderful and meaningful holiday season.
Be safe, stay healthy and stop into your local Big Lots for you gifts, decorations, special treats and supplies.
Net sales for the quarter were $1.336 billion, a 3.1% decrease compared to $1.378 billion a year ago, but up 14.4% to the third quarter of 2019.
The decline versus 2020 was driven by a comparable sales decrease of 4.7%, in line with our negative mid single-digit comp guidance.
Two-year comps were 12.3% and was strongest in August, but remained healthy throughout the quarter, driven by basket size.
Our third quarter net loss was $4.3 million compared to $29.9 million net income in Q3 of 2020, and a loss of $7 million in 2019.
EPS for the quarter was a loss of $0.14, in the middle of our guidance range.
As a reminder, we reported diluted earnings per share of $0.76 last year.
Supply chain impacts across gross margin and SG&A accounted for around $0.60 of the year-over-year reduction in EPS.
The gross margin rate for Q3 was 38.9%, down 160 basis points from last year's third quarter rate and 80 basis points below 2019, slightly outperforming our guidance.
The 38.9% rate reflects the freight headwinds that we have discussed, partially offset by pricing increases.
Total expenses for the quarter, including depreciation were $523 million, up from $515 million last year.
This was also in line with our expectations coming into the quarter and driven by incremental expense investments in labor and in our forward distribution centers.
While expenses deleveraged versus last year, they leveraged 90 basis points to Q3 2019, driven primarily by efficiencies in store expenses, partially offset by supply chain expense, including the costs of our new forward distribution centers and expense from the June 2020 sale and leaseback of our regional DCs.
Operating margin for the quarter was a loss of 0.3% compared to a profit of 3.1% in 2020, and a loss of 0.4% in 2019.
Interest expense for the quarter was $2.3 million, down from $2.5 million in the third quarter last year and down from $5.4 million in Q3 2019.
In September, we announced the successful amendment and extension of our unsecured revolving credit facility.
The amendment provides more favorable pricing and covenants.
With this new facility, we anticipate saving a minimum of $850,000 in interest and fees on an annualized basis and substantially more if we draw on the revolver.
The income tax rate in the third quarter was a benefit of 29.3% compared to last year's expense rate of 24.1%, with the rate change primarily driven by the impact of the disallowed deduction for executive compensation and the favorable impact of the discrete item in the prior year.
On a full year basis, we expect our tax rate to be slightly favorable to 2020.
Total ending inventory was up 17% to last year at $1.277 billion and up 14% to 2019, somewhat ahead of our beginning of quarter guidance.
The increase versus prior years was a purposeful heavy up of inventory to support holiday to right set furniture depth and support incremental inventory for the Lot and apparel.
The increase versus guidance reflects our successful efforts to get more inventory receipts into the supply chain ahead of holiday, as well as increased unit costs due to inbound freight.
During the third quarter, we opened nine new stores and closed three stores.
We ended Q3 with 1,424 stores and total selling square footage of $32.5 million.
Capital expenditures for the quarter were $46 million, compared to $34 million last year.
Depreciation expense in the third quarter was $35.9 million, up $3 million so the same period last year.
We ended the quarter with $70.6 million of cash and cash equivalents and no long-term debt.
As a reminder, at the end of Q3 2020, we had $548 million of cash and cash equivalents and $39 million of long-term debt.
The year-over-year reduction in cash levels reflects our deployment of proceeds from the sale and leaseback of our distribution centers toward share repurchases and the payment of taxes on the gain on the sale and leaseback.
We repurchased 2 million shares during the quarter for $97 million at an average cost per share of $47.43, completing our August 2020 $500 million authorization.
Under that authorization, we have repurchased 9.35 million shares in total at an average cost of $53.49 per share including commission.
We announced today that our Board of Directors has approved a new share repurchase authorization, providing for the repurchase of up to $250 million of our common shares.
The authorization is effective December 8th and is open-ended.
Also, our Board of Directors declared a quarterly cash dividend for the third quarter for fiscal 2021 of $0.30 per common share.
This dividend is payable on December 29, 2021 to shareholders of record as of the close of business on December 15, 2021.
As Bruce commented earlier, we see ongoing capital return as a key component of long-term shareholder value creation.
For the quarter, we expect diluted earnings per share in the range of $2.05 to $2.20, compared to $2.59 of earnings per diluted share for the fourth quarter of 2020 and $2.39 cents in Q4 of 2019.
For the full year, we now expect diluted earnings per share in the range of $5.70 to $5.85.
The $0.20 reduction from our prior guidance range is entirely accounted for by additional supply chain, SG&A expense, which I will come back to in a moment.
The guidance does not incorporate any share repurchases we may may complete in the quarter.
In addition, the Q4 sales will see a benefit of approximately 180 basis points from net new and relocated stores.
On a two-year basis, we expect comps to be up high-single digits.
For the full year, we expect a negative low-single digit comp versus 2020, which will again equate to double-digit comps on a two-year basis.
We expect the fourth quarter gross margin rate to be down around 150 basis points from last year and and also Q4 2019.
This is somewhat more erosion and estimated in our prior guidance, impacted by higher freight as we have successfully worked to move inventory through the supply chain to drive sales.
For the full year, we expect gross margin rate to be down approximately 70 basis points versus 2019 and approximately 120 basis points versus 2020.
At this point, we are not counting on any early abatement of freight pressures, but we do expect this over time.
In the meantime, without factoring in any freight-driven tailwind, we expect to see 2022 margin improvement, driven by taking additional price increases where appropriate and reflecting a benefit from new pricing and promotion capabilities as well as from the deployment of new planning tools.
We expect Q4 expense expense dollars to be up by a mid single-digit percentage to last year, driven by incremental expense investments in store and DC labor, our forward distribution centers and depreciation expense.
Relative to our prior full-year guidance, forth quarter distribution and transportation expenses have increased by around $14 million.
This includes $4 million related to additional receipt volume during the quarter, in addition to the $6 million we called out on our last earnings call.
It further includes $4 million of higher initial costs related to our new FTCs, $2 million related to fuel and domestic carrier rates, and $2 million related to additional actions we have taken on DC labor rates.
We expect most of these expenses to be transitory or timing related.
For the full year, SG&A expense dollars will be up around 3% to 2020, driven by the full year impact of the sale and leaseback of our distribution centers, additional supply chain expenses, including investments in our new FTCs, other strategic investments and higher equity compensation expense.
We now expect inventory to end Q4 of approximately 20% to 2019.
This reflects strong progress in rebuilding our inventories to support spring sales and as noted above, will result into additional receipt processing expense in Q4.
As a reminder, we began both 2020 and 2021 with depleted inventories.
In addition, we have intentionally pulled forward seasonal inventory receipts.
We now expect 2021 capital expenditures to be between $170 million and $180 million, including around 55 store openings, of which around 20 will be relocations.
The reduction from prior quarters guidance in capex is driven by timing shifts, including the move of our new centralized repacking spend out of 2021.
Our capital projection includes approximately 50 Project Refresh stores in 2021.
On a net basis, we expect total store count to grow by around 20 stores in 2021, we expect to further accelerate store count in 2022 and beyond.
As Bruce described, we are increasingly confident in our long-term topline opportunity and we expect to achieve -- to achieve a record new sales year in 2022, driven by our net new store openings.
In addition, as noted a moment ago, we expect to turn the corner on gross margin rate for 2022.
We will have some additional growth-related expenses in 2022 related to new stores, our FTC rollout and other strategic investments, and we will also face inflationary wage and other pressures.
To help fund these investments, we will maintain our focus on achieving structural reductions in our expenses, building on the excellent progress we have already made under Operation North Star.
We are excited by the opportunities ahead of us in '22 and beyond, and we look forward to providing more color on this as we enter 2022.
| compname reports q3 loss per share of $0.14.
q3 loss per share $0.14.
net sales for q3 of fiscal 2021 totaled $1,336 million, a 3.1% decrease compared to $1,378 million for same period last year.
compname announces new $250 million share repurchase authorization.
for q4 of fiscal 2021 co expects to report diluted earnings per share in range of $2.05 to $2.20.
qtrly comparable sales decrease of 4.7%.
expects q4 gross margin to be down about 150 basis points to last year, driven by freight headwinds.
big lots - for fy, expects negative low single digit decrease in comparable sales.
expects a sales benefit of about 180 basis points for q4 as a result of net new store openings.
supply chain challenges will continue in near-term.
big lots - impact of freight headwinds for fy is expected to result in a 120 basis point decline in full year gross margin compared to last year.
have taken pricing actions and will continue to do so in response to volatile supply chain costs.
guidance does not incorporate further potential share repurchases in fiscal year.
|
As I review this past quarter and provide insights into our current quarter's business, I want to reiterate that we will be providing comparisons to both 2020 and 2019.
Given the periods of quarantining and stimulus that impacted the business in waves last year, we are anchoring comparisons to 2019 to show underlying business trends.
To that point, I am pleased with our second quarter performance as we continue to demonstrate strong growth versus 2019, proving out our Operation North Star strategies, demonstrating progress in our core assortment and underscoring the relationships that we are building, both online and in store with our existing and newly acquired customers.
In the quarter, we saw strong double digit, two-year comps in Furniture, Soft Home, Hard Home and Apparel, Electronics & Other.
Consumables also posted a positive two-year comp, while Food was down mid-single digits, reduced on square footage basis by our pantry reset last fall.
As a result, while down 13% to last year on a comparable basis, comparable sales for the second quarter increased 14% to 2019.
Additionally, we delivered diluted earnings per share of $1.09 within our guidance range, despite ongoing supply chain and distribution headwinds that were greater than expected at the beginning of the quarter and cost us at least 1 point of comp.
While the Big Lots team is always busy, we were really busy over the past quarter engaging with customers leaning into our store count growth, continuing to upgrade our omnichannel offerings and removing friction from our e-commerce channel, launching a new warranty offering through Allstate, rolling out additional Lot and Queue Line stores, preparing for the launch of our two new forward distribution centers and Project Refresh at the start of the third quarter, further rolling out our BIGionaire's brand activation campaign and navigating a challenging supply chain market.
While addressing these initiatives and macro forces, our teams remained unwaveringly focused on our customers' needs, continuing in our mission to help them live big and save lots.
We are dealing with it now and navigating the dynamic and ever-changing complexities of the supply chain.
But at the same time we are leaning into and investing in our future and our promising long-term growth opportunity.
I speak for all Big Lots leadership when I convey how indebted we are to the over 30,000 Big Lots team members.
We remain very excited about the huge white space opportunity ahead of us, and know that investing in our customer, our people and our infrastructure will be critical to bringing that growth potential to fruition.
Freight headwinds weighed on gross margin for the quarter, and in addition, our performance for the quarter was also impacted by labor challenges in two of our regional distribution centers.
This dynamic is improving as we enter Q3, and stress on our network will be further reduced by the opening of our first two forward distribution centers.
In addition to alleviate immediate supply chain pressures and maintain speed to market, we have set up a nimble and agile temporary DC bypass program for the fourth quarter that will increase efficiency of our DCs and capacity to our network.
Meanwhile, we remain excited by our merchandising opportunities, and we are focused on driving customer-centric deals every day.
We continue to expand our ability to find close-out product in most areas of the store.
We are working hard to find great deals and big buys for our customers, whether we source them from closeouts, engineered closeouts or just incredible product we find add value in the market.
We see the potential for close-out opportunities to grow in 2022.
As we focus on item merchandising and key value messaging, our customer is responding well.
For example, our increased investment in apparel is leading to the acquisition of customers that are exploring more of the Big Lots assortment.
Additionally, this is a great example of increasing merchandised productivity within the box, driving incremental sales with a strong initial markup and expanding our brand recognition with quality product.
Turning to our category performance, Food and Consumables both declined versus Q2 2020 as we lap last year's COVID impact.
The Consumables were positive on a two-year basis and both categories exceeded our beginning of quarter expectations.
In Food, we have continued to see a shift away from grocery and baking categories and into more snacks, beverage, energy drinks and on the go food.
In consumables, we saw a rebound in the household chemicals category as well as cosmetics, while paper sales, demand on bath tissue and paper towels continue to be a bit challenged, driven by the prior COVID related stock-ups.
A year ago we reset Food and Consumables across the store and this is performing well.
As we approach lapping this reset, we continue to see opportunity to improve overall productivity and improved values with big deals, own brands and everyday low prices on brand names.
Our Seasonal assortment, which includes patio, lawn and garden and summer categories like coles, and 4th of July themed goods was challenged for the quarter due to shipping delays and inventory availability.
The overall category comped down 15% to last year, but up 4% to Q2 2019.
Moving into Q3, our inventory situation has improved, and we have seen a resurgence in sales with early strength from our Halloween and Harvest assortment.
Although supply chain pressures related to Asian port and manufacturing disruption will continue to create challenges, we are much better prepared to win at the all important holiday season.
Soft Home comps were up 14% versus 2019.
While we saw softness in fashion bedding, all other categories met expectations.
Bath rugs and towels, patio rugs and floor mats were particularly strong this quarter.
Also noteworthy were the candle collection categories within home decor with strong double-digit growth to 2019.
Hard Home comps were up 13% to 2019, exceeding our expectations with appliances and home organization, delivering double-digit increases in 2019.
Key classifications such as floor care, kitchen appliances, storage, dinnerware and cookware continued to trend strongly, partially offset by lower, but positive comp sales to 2019 in tabletop, food prep and home maintenance.
Closeouts in Hard Home were up even more over 2020 with appliances, cookware, home organization all doing very well.
Toys, now rolled into our Hard Home category following our merchandising reorganization also performed quite well and ahead of expectations.
Furniture delivered another very strong quarter, with comps down 10% to last year, but up 30% to 2019.
The furniture team did an outstanding job of mitigating inventory challenges, primarily as a result of chemical shortages affecting foam production, and we achieved our strategic goal of winning Memorial Day weekend with positive comps to last year and two years ago.
Upholstery was particularly strong in Q2, delivering a flat comp to 2020 and up almost 40% to 2019, driven by high demand for sofas and sectionals.
Anchored by the Broyhill brand, which continues to gain share, it is now over 40% of total upholstery sales.
Apparel, Electronics & Other also performed very strongly, up 15% to 2020.
Apparel delivered a 90% comp for the quarter, with casual and athletic lifestyle dressing dominating the women's business.
Although tops remains strong, we saw high sell-throughs in capris and shorts as well.
Mens active tops and shorts performed well.
Closeouts continued to build within the assortment, offering value, breadth and new classifications.
Accessories saw nice increases with hair and jewelry.
Additionally, luggage was introduced as a new category in July with strong sales results that will provide additional growth as we look toward the back half of the year and into 2022.
The Lot continues to strengthen as delighting our customers with fun, innovative treasures just right for life's occasions while delivering nearly 2% of the Company's sales in the quarter.
We executed a camping theme set and a nostalgia set during the quarter, both of which resonated well with big hits from national brand camping suppliers, novelty [Phonetic] small appliances and unexpected finds such as PopCorn-themed items, a TV projector, large video game units and novelty pet styles.
I would now like to turn to our longer-term growth strategy.
We remain excited about the tremendous progress we are making under Operation North Star, where our growth drivers are growing, our customer base, improving our e-commerce conversion, improving merchandise productivity and increasing our store count.
With regard to customer growth, we are thrilled with the continued rollout of our, Be A BIGionaire, brand campaign that we gave a glimpse of last quarter.
This program is grounded in extensive consumer insights around why customers love to shop us.
She sees us as the home of the hunt for exceptional bargains and surprising treasures.
I'm delighted to share that this campaign is driving a 2% lift in transactions in the markets where we have rolled it out.
New BIGionaires visiting Big Lots for the first time are driving 60% of these incremental transactions.
The campaign has also increased brand awareness, consideration and purchase rates, showing that we are gaining relevance.
Our first campaign featured Retta who successfully transferred her relatability and humor from Good Girls and Parks and Recreation into our BIGionaire campaign.
As we gear up for this holiday, you can expect to see additional stars hunting for bargains and treasures at their neighborhood Big Lots.
Coming soon, you'll see Eric Stonestreet, most famous for his role in the beloved comedy, Modern Family and Molly Shannon, best known for her fantastic characters on Saturday Night Live.
Both Eric and Molly embraced the Big Lots personality.
We cannot wait to share future details with you soon.
We're also thrilled that the campaign is resonating with the younger audience.
In our demographic distribution, we've seen a 600 basis point share increase in new customers with ages 25 to 39, with the distribution shifting from those 55 and older.
Savvy shoppers of all ages are discovering Big Lots and they love that we provide everything for their home with incredible value and superior style.
Meanwhile, our rewards membership continues to contribute productive growth to the business with active membership of 8% versus the second quarter of 2020 adding 1.8 million more new members this past quarter with rewards membership currently at 21.5 million.
Additionally, rewards customers in total spent 16% more than last year and 7% more per customer.
Over 72% of our sales this past quarter were attached to our rewards membership.
That penetration to sales is up 400 basis points to the same quarter last year.
Finally, we continue to see great reactivation through thoughtful win back programs to recapture lapsed rewards members and keep them coming back.
Demand increased 10% over the second quarter of 2020 representing over 400% of growth to Q2 2019.
While side business declined in the quarter versus Q2 2020, as we lap the height of the pandemic response in 2020, the declines in traffic were more than offset by increases across conversion and basket size.
Demand for our seasonal lawn and garden assortment and for furniture continued the momentum that we saw in the first quarter.
ECom growth is supported by our investments in the channel to further improve search, purchase and fulfillment capabilities, buy online pickup in store, curbside pickup, ship from store and same-day delivery with Instacart and Pickup.
They've all been very successful and drove over 60% of our demand fulfillment.
To support holiday, we are increasing the number of stores providing ship from store fulfillment to 65.
We are further reducing transaction friction by introducing our third mobile wallet payment program, PayPal, in time for holiday joining our lineup of Apple and Google Pay, and we expect to introduce a new buy now, pay later offering later this quarter.
Additionally, we have updated the look and feel of the website to match and enhance the upbeat feeling of our brand and the BIGionaire campaign.
Turning to merchandise productivity, momentum remained strong within our growing Broyhill businesses as the assortment drove $194 million in Q2 sales.
This represents a $77 million increase to Q2 2020, at which point we had just launched the brand.
We remained thrilled with Broyhill's trajectory and continue to see strong growth ahead for the brand with over $400 million in year sales today, up to last year's full year performance and showing continued acceleration to becoming $1 billion brand.
In addition, it's important to call out that Broyhill is just one aspect albeit a huge focus of our own brand strategy.
We are also leaning heavily into Real Living, a private brand in our furniture and home goods area of the store with a lower price point than Broyhill.
We are seeing early growth in this brand by consolidating our offering of unbranded goods and transitioning from other private labels currently in the store.
We are also introducing new products to make sure we have a complete offer in the Real Living brand.
Real Living has ramped up quickly, generating over $400 million in sales year-to-date, and we are confident that it, too, will become a $1 billion own brand for Big Lots.
For Lot and Queue Line, front end strategies are now rolled out to approximately 1,225 stores.
These initiatives act as innovation labs with newness that plays into the rest of the stores assortment, strengthening customer engagement.
The Lot and Queue Line continues to drive 3% incremental combined lift to our store performance.
Additionally, both have become established aspects of the Big Lots shopping experience as transactions containing items from the Lot tend to be of larger value, include more items and attached to more of the balance of the assortment, while the queue lines are driving strong incremental unit impulse buying upon checkout.
In prior calls, we introduced you to our next generation furniture sales team test that puts dedicated furniture focused associates on the sales floor to help educate our customers about the breadth and quality of our home furnishings.
I'm excited to announce that this test now in over 80 stores continues to perform very well, delivering around a 15% furniture sales lift.
We expect to roll this next-generation model to several hundred stores in 2022 delivering at least 1 point of comp to the total Company, on an annualized basis.
Finally, with regard to store count, our growth is accelerating this year and will further accelerate in 2022 and beyond.
Based on all the work that we have done in recent months, we are confident that there is white space to grow our store count by hundreds of stores in the coming years with two to three times the net store growth in 2022 than the net increase of around 20 stores we expect to achieve this year.
At the same time, we expect to continue slowing our rate of closures as a result of our store intervention program, which this year will be only around 15 stores.
All of these growth drivers are supported by key enabling investments.
Earlier this year, we announced that we would be opening mid-year two forward bulk [Phonetic] and furniture distribution centers to support our growth and relieve pressure in our current regional distribution centers.
We are pleased to announce that our first FDC opened in early August, and our second will be receiving inventory early next week.
Additionally, we are pleased with the performance of our new transportation management system, which has been crucial to mitigating the pressures that we've experienced within our distribution network.
Meanwhile, during Q2, we initiated a multi-year program, which we're calling Project Refresh to upgrade our approximately 800 stores not included in our 2017 to early 2020 Store of the Future program.
These stores will get new exterior signage, interior repainting and floor repair, a new vestibule experience, remodeled bathrooms and anterior wall graphics, all at a much lower cost than our prior Store of the Future conversions.
This will create a consistent brand experience across our stores and enhance our brand for the long run.
The average cost per store will be around $100,000, much lower than the prior Store of the Future program.
As I hope I've impressed upon you, both in this quarter's discussion and in previous calls, we have resolute belief in our Whitespace potential and in the continued growth opportunities that Operation North Star presents.
The underlying progress we are making is increasingly evident.
Before handing over to Jonathan, I want to turn back to the supply chain and distribution headwinds we've discussed, which we expect will continue to impact our business in Q3 and Q4.
Prior to the recent global resurgence of COVID, we were seeing increased import cost driven by global increase in demand for ocean freight.
Over the past few months, we have seen that dynamic exacerbated by the temporary shutdown of the port at Yantian, China and temporary factory and port closures elsewhere in Asia.
Vietnam, where segments of our furniture and seasonal categories are sourced is currently under COVID restrictions that impact our supplier's ability to produce at scale.
The Vietnamese government is targeting September 15th, as the date to ease restrictions.
In addition, the port of Ningbo, China experienced a terminal closure in mid-August, although has now reopened.
These developments highlight the fluidity of the situation and the ongoing uncertainties caused by COVID-19.
While these pressures are expected to be transient, they are resulting in both cost increases due to an imbalance of container supply and demand, as well as sales impact due to delayed inflow of product, particularly from Vietnam.
The guidance that Jonathan will cover in a moment bakes in our current estimates of these impacts.
In summary, we are facing some near-term challenges, but our underlying business remains strong as evidenced by our strong two year comps in the second quarter, which have continued into Q3.
We are as confident as ever that our Operation North Star strategies will drive significant growth in the coming years, supported by key investments we are making.
As Bruce referenced, so much was accomplished this quarter as our teams remain focused on providing a great experience, great assortment and great value to our customer.
Net sales for the second quarter were $1.457 billion, and a 11.4% decrease compared to $1.644 billion a year ago.
The decline was driven by a comparable sales decrease of 13.2% as we lap stimulus impacts in 2020, on the height of last year's nesting activities, partially offset by 180 basis points impact from net store openings and relocations.
Our comp result was slightly off our negative low-double digit guidance, driven by labor challenges at two of our regional DCCs -- regional DCs, which adversely impacted store inventories.
Sales in total were up 16% to 2019's $1.252 billion with a two-year comp of 14% [Phonetic] driven by basket size.
As a side note, when we reference two-year comps going forward, we will be doing so on a multiplied rather than an additive basis.
Net income for the second quarter was $37.7 million compared to $110.1 million in Q2 of 2020 and $20.6 million in 2019.
Diluted earnings per share for the quarter was $1.09 within our guidance range coming into the quarter.
As a reminder, we reported adjusted earnings per share of $2.75 last year, which excluded the gain on the sale of our four owned distribution centers.
EPS for this year's second quarter reflected continued strong control of expenses which offset the slight miss on sales.
In addition, we've got approximately $0.03 of benefit from share repurchases during the quarter.
Gross margin rate for Q2 was 39.6%, down 200 basis points from last year's second quarter rate, and 20 basis points below 2019, in line with our guidance.
Our margin rate reflects freight headwinds, partially offset by first cost benefits, pricing increases and judicious markdown deployment.
Freight headwinds were greater than initially expected with freight costs closing close to 200 basis points of gross margin contraction year-over-year.
Total expenses for the quarter, including depreciation were $524 million, down from $534 million last year, and slightly lower than beginning of quarter expectations, despite the distribution and transportation cost pressures, while deleveraging versus last year expenses leveraged 120 basis points versus 2019.
All of the above drove us to an operating margin for the quarter of 3.7%, versus 9.1% last year and 2.6% in 2019.
Excluding the freight headwinds, our operating margin would have been closer to 5.7%, a 300 basis point improvement to 2019.
Interest expense for the quarter was $2.3 million, down from $2.5 million in the second quarter last year.
In light of our strong liquidity position and current market conditions, on June 7th, we prepaid the remaining $44.3 million principal balance under our 2019 term note secured on the Apple Valley distribution center equipment.
In connection with the prepayment, we incurred a $0.4 million prepayment fee and recognized $0.5 million loss on debt extinguishment in the second quarter.
The income tax rate in second quarter was 26.7% compared to last year's rate of 25.8%, with the increase primarily driven by the impact of the Section 162(m) executive compensation add back.
Moving on to the balance sheet, total inventory was up 32% to $943.8 million, slightly ahead of our beginning of quarter guidance.
The increase was driven by the lapping of a typically low inventory levels at the close of the second quarter in 2020.
Inventories were up 8% of Q2 2019, maintaining a strong two-year turn improvement while supporting our ability to drive third quarter performance.
During Q2, we opened 12 new stores and closed seven stores.
We ended Q2 with 1,418 stores and with total selling square footage of 32.3 million.
Capital expenditures for the quarter were $45 million compared to $41 million last year.
Depreciation expense in the quarter was $35.3 million, approximately $1.3 million lower than the same period last year.
We ended the second quarter with $293 million of cash and cash equivalents and no long-term debt.
As a reminder, at the end of Q2 2020, we had $899 million of cash and cash equivalents and $43 million of long-term debt.
The year-over-year reduction in cash levels, reflects our deployment of proceeds from the sale and leaseback of our distribution centers toward share repurchases and the payment of taxes on the gain on sale and leaseback.
We repurchased 2.4 million shares during the quarter for $153 million at an average cost per share of $63.57, under our previously announced $500 million authorization.
There is approximately $97 million remaining as of the end of the second quarter of 2021.
For the program to date, we have repurchased 7.3 million shares at an average cost of $55.18, including commission.
As announced in a separate release today, our Board of Directors declared a quarterly cash dividend for the third quarter of 2021 of $0.30 per common share.
This dividend is payable on September 24, 2021 to shareholders of record on the close of business on September 10th, 2021.
As Bruce noted earlier, we are facing significant sales and margin challenges as a result of Asian manufacturing and supply chain disruption due to recent COVID issues.
In addition, we will incur additional expense in the back half related to actions we are taking to ensure we are competitive in hiring and retaining labor in our stores and DCs.
Our guidance below incorporates are a best estimate to all of these impacts, although they remain fluid.
In the third quarter, we expect a diluted loss per share in the range of $0.10 to $0.20 compared to $0.76 of earnings per diluted share for the third quarter of 2020.
For the full year, we expect earnings per share in the range of $5.90 to $6.05.
While this represents a decline to last year's adjusted diluted earnings per share of $7.35, it represents 60% plus growth to 2019 earnings.
The guidance does not incorporate any share repurchases we may complete in the third or fourth quarters.
On a two year basis, we expect comps to be up low double digits.
As Bruce referenced, our Q3 has got off to a good start, with two year comps running ahead of Q2, but we have baked in some moderation as the quarter progresses due to receipt delays.
For the full year, we expect a negative low-single digit comp versus 2020 which will again equate to double-digit comps on a two-year basis.
Our full year sales outlook bakes in approximately $60 million of adverse impact in Q3 and especially Q4, related to COVID related manufacturing shutdowns in Vietnam.
We expect the third quarter gross margin rate to be down approximately 175 basis points to last year, driven by freight headwinds as Bruce previously discussed.
Versus 2019, the rating -- versus 2019, the rate is expected to be down approximately 100 basis points, essentially all freight-related.
Recent shutdowns of the port of Yantian in China resulted in a significant increase in container rates that will impact our cost of goods in Q3 and Q4.
For the full year, we now expect a gross margin rate impact from freight of approximately 150 basis points resulting in gross margin rate being down approximately 50 basis points versus 2019 and approximately 100 basis points versus 2020.
We expect freight pressures to abate as we move forward and we continue to see other areas of gross margin opportunity, including promotional and pricing optimization and shrink reduction.
With regards to SG&A, at our projected sales levels, we expect Q3 and the full year to deleverage versus 2020, but both to show healthy leverage versus 2019.
In Q3, expense dollars will be up slightly to last year, driven by incremental expense investments in labor and in our forward distribution centers.
The full year SG&A expense dollars will be up to 2020 driven by the full year impact of the sale and leaseback of our distribution centers, additional supply chain expenses including investments in our new forward distribution centers, other strategic investments and higher equity compensation expense.
These increases will be mitigated by more than $30 million of structural expense savings, which remain an ongoing area of focus and priority.
We continue to expect 2021 capital expenditures to be around $200 million to $210 million including around 55 store openings, of which around 20 will be relocations.
Our capex outlook also includes the first wave of store upgrades, under our new Project Refresh program.
On a net basis, we expect total store count to grow by about 20 stores in 2021.
We expect to further accelerate store count in 2022 and beyond.
As Bruce said, our work has increasingly validated the opportunity to grow our store count materially in the coming years, and we are making the necessary investments to support that.
We continue to expect inventory to increase significantly versus 2020, reflecting very depleted levels of a year ago.
As Bruce referenced earlier, we are seeing strong early sales for our late fall and early holiday assortment, supported by higher inventory levels.
We expect ending Q3 inventory to be up around 10% versus 2019, continuing to reflect healthy turn improvement.
We expect a similar two-year inventory increase at the end of Q4, which will include some accelerated lawn and garden receipts, support Q1 sales and minimize the risk of further supply chain disruption.
We know we left sales on the table and seasonal over the past 12 months to 18 months, and we are heavily focused on recapturing those sales as we go forward.
As well as the impact in Q4 ending [Phonetic] inventory, these early receipts will drive around $6 million of additional supply chain expense in Q4.
Overall, our third quarter will be a challenging one, driven by supply chain challenges, resulting sales impacts and cost increases.
However, we expect our underlying business measured by our two year comp trend to remain strong, with healthy margins after adjusting for freight effects, supported by continued strong expense management.
We continue to work very hard to ensure we are well positioned -- as well positioned as possible for the all important holiday season.
And we look forward to continuing to demonstrate strong underlying performance in 2022 and beyond.
| big lots q2 earnings per share $1.09.
q2 earnings per share $1.09.
qtrly sales of $1.46 billion with 2-year comp of 14%.
sees q3 loss per share $0.10 to $0.20.
qtrly ecommerce demand up 10% to q2 2020 and up 400% to 2019.
sees full year earnings per share in range of $5.90 to $6.05.
|
As we all know, 2020 was a very trying year.
And I could not be more proud of the unwavering commitment of our team to serve our customers, communities and each other during this unprecedented time.
It has been truly remarkable.
When I assumed the role of Chairman in January, the fundamentals of the economy were strong.
And I was looking forward to working with our executive team to execute our relationship banking strategy.
Then in March, our focus shifted due to COVID.
Despite the many challenges the pandemic posed, we have proven our resilience and achieved many important accomplishments along the way.
This includes the Bank and the Comerica Charitable Foundation, together providing $11 million in assistance to local communities and businesses.
We funded $3.9 billion in PPP loans to small and medium-sized companies.
We were able to quickly enable the majority of our employees to work remotely and introduce programs to provide support, such as Promise Pay and Dependent Care Stipends.
As consumers' desire to utilize digital channels increased, we enhanced our online capabilities for deposit accounts as well as loan originations.
Also, we achieved our 2020 environmental goals set in 2012 to meaningfully reduce our water, waste, paper and GHG emissions.
Our commitment to corporate responsibility was recognized, including receiving high marks from Newsweek, DiversityInc.
, Civic 50, CDP and Corporate Nights.
The compassion and tireless efforts of our colleagues across the Bank has allowed Comerica to persevere and remain in a strong position as we move forward.
Slide 4 provides a review of our 2020 financial results, which included solid loan performance and a record level of deposits.
This growth, combined with prudent management of loan and deposit pricing and action we took to deploy excess liquidity, helped offset the pressure of rates dropping to ultra-low levels.
In light of the swift deterioration of the economy, we significantly increased our credit reserve and took a large provision in the first quarter.
While we saw some negative credit migration through the year, it has been manageable.
And our net charge-offs for the year were 38 basis points or 14 basis points excluding energy.
A true testament to our relationship banking strategy and deep credit experience.
Card fees and securities trading income were strong, while other fees such as deposit service charges and commercial lending fees were impacted by the slowdown in economic activity.
Expenses remained well controlled and included COVID-related cost.
We maintained our strong capital levels and booked -- our book value grew 7% to over $55 per share.
In summary, a solid performance, particularly considering the difficult environment.
Our fourth quarter performance is outlined on Slide 5.
We generated earnings of $215 million or $1.49 per share, a 3% increase over the third quarter, driven by an increase in revenue and strong credit quality.
Compared to the third quarter, loans essentially performed as we expected.
While lower on a quarter-over-quarter basis, average loans increased in December relative to November by nearly $300 million excluding PPP loan repayments.
Our loan pipeline continue to grow through the year to pre-COVID levels at year end.
Average deposits increased by nearly $1.5 billion to an all-time high with 55% of the growth derived from non-interest-bearing accounts.
Customers continue to prudently manage their cash, cutting costs and reducing leverage.
Yet, they remained cautiously optimistic that the economy will pick up in the back half of this year.
Net interest income increased $11 million benefiting from our continued careful management of loan-to-deposit pricing, combined with the contribution from fees related to PPP loan forgiveness.
This was partly offset by lower loan balances.
In addition, lower yields on our securities portfolio were mostly offset by actions we took in the third quarter to deploy a portion of excess liquidity by increasing the size of the portfolio.
As far as credit, our metrics remained strong and our provision was a credit of $17 million.
Criticized loans declined and net charge-offs were only 22 basis points.
Positive portfolio migration and the slight improvement in the economic forecast resulted in a reduction of the credit reserve to just under $1 billion or nearly three times non-performing assets.
Through the cycles, our credit performance relative to the industry has been a key differentiator.
And I believe we will continue to outperform.
Non-interest income increased $30 million or 5% as customer activity continued to rebound.
This included strong derivative income and commercial lending fees.
We continue to maintain our expense discipline as we invest for the future.
While expenses were higher in the fourth quarter, this was primarily driven by performance incentives as well as outside process related to our card platform.
Our capital levels remained strong.
Our CET1 ratio increased to 10.35%, above our target of 10%.
As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.
Turning to Slide 6.
Average loans decreased approximately $600 million or 1%, which compared favorably to the industry HA data.
Loans in Corporate Banking and General Middle Market decreased as customers are performing well, prudently managing their business to increase cash flow and reduce debt.
For the fourth consecutive quarter, energy loans decreased and are at the lowest level since 2011.
The U.S. rig count is less than half of what it was a year ago.
However, it has been gradually increasing since late summer as oil prices began to recover.
Technology and Life Sciences loans declined about $180 million, mainly due to M&A and increased liquidity, driven by fundraising activity and companies reducing cash burn.
Equity Funds Services, which provides capital call lines to investment companies increased $244 million as activity has picked up with new fund formation.
National Dealer increased $190 million as inventory levels are rebuilding, yet remains $2 billion below fourth quarter 2019.
Mortgage Banker reached a new record with strong activity in both refi and home sales.
Period end loans were stable and included a decline in PPP balances of $298 million, primarily due to loan forgiveness.
Line utilization at year end for the total portfolio remained relatively low at 48%.
Loan yields increased seven basis points with accelerated fees from PPP forgiveness and continued pricing actions, particularly adding LIBOR floors when possible as loans renew.
Average deposits increased 2% or $1.5 billion to a new record of $70.2 billion, as shown on Slide 7.
The largest driver continues to be non-interest-bearing deposits and growth has been broad-based with increases in nearly every business line.
Customers continue to conserve and maintain excess cash balances.
Period end deposits increased over $4.4 billion.
Timing of monthly benefit activity in our government prepaid card business increased balances by $2.2 billion at quarter end.
However, this does not include the latest stimulus payments, which were received in early January.
With strong deposit growth, our loan-to-deposit ratio decreased to 72%.
The average cost from interest-bearing deposits reached an all-time low of 11 basis points, a decrease of six basis points from the third quarter and our total funding cost fell to only 10 basis points.
As you can see on Slide 8, the average balance of the securities portfolio increased.
This was due to the third quarter purchase of $2.25 billion in additional securities, primarily treasuries, as we took some action to put some of our excess liquidity to work.
The additional securities combined with lower rates on the replacement of prepays, which totaled about $1 billion, resulted in the yield on the portfolio declining to 1.95%.
We expect repayments of MBS to continue to be about $1 billion per quarter and yields on reinvestments to be in the low-to-mid 100 basis point range.
Turning to Slide 9.
Net interest income increased $11 million to $469 million and the net interest margin was up three basis points to 2.36%.
Interest income on loans increased $6 million, adding four basis points to the margin.
Higher fees, mostly related to PPP loan forgiveness and continued pricing actions as loans renew, together added $10 million and four basis points to the margin.
Other portfolio dynamics, including higher non-accrual income, added $1 million.
The decrease in loans had a $5 million unfavorable impact.
Lower securities yields had a $6 million or three basis point negative impact.
This was mostly offset by the higher balance, which added $5 million.
Average balances of the Fed increased over $500 million, impacting the margin by one basis point.
Our extraordinarily high Fed balances of $13 billion continue to weigh heavily on the margin with the gross impact of approximately 43 basis points.
Finally, prudent management of deposit pricing added $5 million and three basis points to the margin and lower rates on wholesale funding added $1 million.
Given the nature of our portfolio, our loans reprice very quickly as rates dropped earlier last year, so the bulk of the impact from lower rates has been absorbed.
Also, while deposit rates are at record lows, we continue to manage deposit pricing with a close eye in the competitive environment and our liquidity position.
Overall, credit quality was strong, as shown on Slide 10.
Gross charge-offs were only $39 million, a decrease of $14 million from the third quarter.
Net charge-offs were $29 million or 22 basis points.
Non-performing assets increased $24 million, yet remained below our historical norm at 69 basis points of total loans.
Inflows to non-accrual were about half of the amount of the third quarter and the lowest level of any quarter since the pandemic began.
Criticized loans declined $459 million and comprised 6% of the total portfolio.
We believe our disciplined underwriting and diverse portfolio are assisting us in managing through the pandemic conditions.
Positive migration in the portfolio combined with a modestly improved economic outlook resulted in a small decrease in our allowance for credit losses.
As the path to full economic recovery remains uncertain due to the unprecedented challenges of the COVID-19 pandemic, our reserve ratio remains elevated at 1.90% or 2.03%, excluding PPP loans.
We are well positioned with a relatively high credit reserve and overall improving credit quality.
Slide 11 provides detail on segments that we believe pose higher risk in the current environment.
Period end loans in the social distancing segment declined slightly.
Criticized loans were stable and non-accruals remain under 1%.
This segment has performed better than expected, but issues can be lumpy and sudden and resulted in net charge-offs of $21 million in the fourth quarter.
The new round of PPP will certainly be helpful for customers that are challenged by the current environment.
Energy loans decreased 13% to $1.6 billion at quarter end, representing 3% of our total loans.
Oil prices have increased and credit quality has improved with reductions in criticized, non-accruals and net charge-offs.
We have seen a little more capital markets activity and fall redeterminations resulted in only a slight decrease in borrowing basis due to lower reserves.
Additional information can be found in the appendix.
While we are pleased with the performance of these segments, we have applied a more severe economic forecast to them, and believe we are well reserved.
Non-interest income increased $13 million, as outlined on Slide 12, continuing the positive trend we've seen since post the shutdown of the economy earlier last year.
Fourth quarter includes increased customer activity in most categories.
Customer derivative income increased $8 million with higher volume due to interest rate swaps and energy hedges, combined with the change in the impact from the credit valuation adjustment.
Specifically, there was an unfavorable adjustment of $6 million in the third quarter and a favorable adjustment of less than $1 million in the fourth quarter.
Commercial lending fees increased $5 million with the seasonal pickup in syndication activity and higher unutilized line fees.
We had smaller increases in fiduciary, foreign exchange and letters of credit.
Also, card fees remained very strong due to government card and merchant activity spurred by the economic stimulus and changes in customer behavior related to the COVID environment.
Securities trading income, which includes fair market adjustments for investments we hold related to our Technology and Life Sciences business, decreased $5 million from elevated levels generated over the last couple of quarters.
Note, deferred comp asset returns were $9 million, a $1 million increase from the third quarter and are offsetting non-interest expenses.
All in all, a strong quarter for fee income.
Turning to expenses on Slide 13.
Salaries and benefits increased $14 million with higher performance-based incentives, severance, staff insurance expense and technology-related labor.
Note that on a full year basis, salary and benefit expense was stable with a reduction in incentive compensation, offsetting annual merit, higher deferred comp and COVID-related costs.
We realized a $7 million increase in outside processing due to card activity, technology spend as well as PPP program costs.
Occupancy increased $2 million due to a catch-up in maintenance projects that were delayed due to COVID as well as seasonal expenses.
There is also a seasonal increase in advertising expense.
Our strong expense discipline is well ingrained and is assisting us in navigating this low rate environment as we invest for the future.
Our capital levels remained strong, as shown on Slide 14.
Our CET1 ratio increased to an estimated 10.35%, above our target of 10%.
As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.
In this regard, we've maintained a very competitive dividend yield.
As far as share repurchases, we have a long track record of actively managing our capital and returning excess capital generated to shareholders.
As we sit here today, a great deal of uncertainty remains about the ultimate pace of the economic recovery, whether it be faster or slower than economists forecast.
For that reason, we have paused for share repurchases and look forward to starting the program as soon as we deem it prudent to do so.
Slide 15 provides our outlook for the first quarter relative to the fourth quarter as well as some color in the year ahead.
In the first quarter, we expect National Dealer loans to continue to increase at a moderate pace as auto inventory rebuilds.
Also, middle market is expected to grow as a result of increased economic activity.
However, this will be more than offset by Mortgage Banker declining from its record high due to seasonally lower purchase and refi volumes.
Energy is expected to decrease due to higher oil prices driving improved cash flow and capital markets activity.
As far as PPP loans, we expect the pace of loan forgiveness could potentially exceed the second round of fundings.
Looking past the first quarter, excluding PPP loan activity and based on improving economic conditions, we expect loans to grow throughout the year.
We expect average deposits to remain strong in the first quarter as customers continue to carefully manage their liquidity.
As far as net interest income, continued management of loan and deposit pricing is expected to be accretive, albeit to a lesser degree than we've seen so far.
We are currently in the process of deploying some excess liquidity by repaying $2.8 billion of FHLB advances over an eight week period, which will provide a modest lift.
These benefits are expected to be more than offset by reduced loan balances, lower yields on securities, slightly lower LIBOR as well as two fewer days in the quarter.
As we move through the year, assuming there is no change from rates that we experienced in the fourth quarter, we expect quarterly pressure on securities yields and swap maturities to mostly -- to be mostly offset by loan growth, excluding PPP impacts.
We expect net charge-offs to increase from low levels we've seen recently.
However, with our credit reserve at year end at over 2% of loans, excluding PPP, we believe we are well positioned to manage through this period of economic uncertainty.
We expect non-interest income in the first quarter to benefit from higher deposit service charges, fiduciary and brokerage fees.
As deferred comp is difficult to predict, we assume it will not be repeated.
We expect a seasonal decline in syndication activity.
Also, card, warrants and securities trading income are expected to decline from elevated levels.
As we progress through the year, we believe that customer-driven fee categories in general should grow with improving economic conditions.
We expect expenses to be lower in the first quarter.
Our pension expense is expected to decline $9 million in the first quarter to get to the new run rate for 2021.
The decline is primarily due to strong investment performance in 2020.
As I mentioned, we do not forecast deferred comp of $9 million to repeat.
Also, marketing and occupancy expenses are expected to be seasonally lower, and there are two less days in the quarter.
Partly offsetting all of this, first quarter includes annual stock comp and associated higher payroll taxes.
We remain focused on maintaining our expense discipline while we invest in the future.
Therefore, on a full year basis, we expect higher salary expense related to normal merit and incentive comp as well as higher tech spend will be mostly offset by lower pension and deferred comp returns.
We expect a 22% tax rate, excluding discrete items.
Finally, as mentioned on the previous slide, we remain focused on maintaining our strong capital levels and providing an attractive return to shareholders.
While difficult and uncertain conditions persist, I am confident that our team will continue to adapt and thrive as we have over the past year.
We expect the economy will improve in 2021.
We believe firming trade and manufacturing conditions, increasing business and consumer confidence as well as pent-up demand will support solid economic growth, particularly in the back half of the year.
Comerica has a long history of successfully managing through challenging times.
We have demonstrated our resiliency and unwavering dedication to provide a high level of customer service as we navigate the COVID pandemic.
We maintain a culture that drives continuous efficiency improvement.
We believe this will assist us in preserving our cost base as the economy improves, and we continue to invest in our future.
Our discipline credit culture and strong capital base continues to serve us well.
Utilizing our deep expertise and experience to help our customers navigate these difficult times builds and solidifies long-term relationships.
These key strengths provide the foundation to continue to deliver long-term shareholder value.
This has been demonstrated by our ROE, which increased over 11% in the fourth quarter and our book value per share, which grew 7% over the past year as well as the current dividend yield, which remains above 4%.
| compname reports q4 net income of $1.49 per share.
q4 2020 net income $1.49 per share.
qtrly net interest income increased $11 million to $469 million.
q1 2021 average deposits to remain strong.
sees decline in net interest income with lower average loan balances, libor and security yields as well, in q1 2021 versus q4 2020.
qtrly provision for credit losses decreased $22 million to a benefit of $17 million versus q3.
q4 net interest income $469 million versus $544 million in q4 2019.
|
Although, we believe estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.
Well, first and foremost, all of us at Brandywine sincerely hope that you and yours continue to be safe, healthy and engaged, and while we remain optimistic about the accelerating vaccine deployment and the path to recovery, the pandemic still continues to disrupt all of our lives and every business, and unfortunately duration of the recovery cycle still remains a bit unclear.
Our portfolio remains about 15% to 20% occupied, which is comparable to our occupancy levels as of our October call.
And as noted in the SIP, most of the jurisdictions where we have properties still have significant return to work restrictions in place.
Additional details on our COVID-19 approach are outlined on pages 1 to 5 of our Supplemental Package.
During our comments today, we'll briefly review fourth quarter results, discuss our '21 business plan and provide color on our recent transactions and developments, Tom will then provide a brief review of 2020, discuss our '21 guidance, and update you on our strong liquidity position.
After that, certainly, Tom, Dan, George and I are available for any questions.
We closed 2020 on a very strong note.
Many of our revised '20 business plan objectives were achieved despite the protracted nature of the recovery.
We exceeded our speculative revenue target by $400,000, executed lease volumes increased quarter-over-quarter, and our pipeline increased by 229,000 square feet.
For the fourth quarter, we posted strong rental rate mark-to-market of almost 19% on a GAAP basis, and 11% on a cash basis.
For the full year '20, our mark-to-market was a very strong 17.5% on a GAAP basis, and 9.3% on a cash basis.
In addition, we had 59,000 square feet of positive absorption during the quarter, which included 33,000 square feet of tenant expansions with no tenant contractions.
Our full year 2020 same-store number did come in below our revised business plan, primarily due to the JV sales activity that we'll discuss, several COVID-related occupancy delays, and parking revenues that were well below our original forecast due to the slower return to the workplace.
Our tenant cash collection efforts continue to be among the best in the quarter, in the sector rather, and we have collected over 98% of fourth quarter billings, and our January collection rate continues to track very well with 98.5% of office rents collected as of yesterday.
Our capital costs for '20 were better than our targeted range due to very good success in generating short-term lease extensions with minimal capital outlay.
Tenant retention came in at 52%, slightly above our full year forecast, and our core occupancy and lease targets were below our ranges simply due to pandemic-related delays and targeted move-ins, and lease executions and negotiations sliding into early '21.
We did post FFO of $0.36 per share, which was in line with most consensus estimates.
A general update on COVID-19 impact is first, consistent with all applicable state and local CDC guidelines, we do remain in a doors open, lights on condition in all of our buildings.
As we noted, the set most large employers have yet to return to the workplace for a variety of factors, primarily public policy mandates, employer liability concerns, mass transit, virtual schooling and safety concerns.
However, we're seeing more small and mid-sized companies beginning to return more employees to their various workspaces.
Portfolio stability remains top of mind, and our progress on several key factors can be found on pages 1 to 3 of the SIP.
We do continue to stay in touch with our tenants to understand their concerns and their transition plans.
A key priority of ours has been to work with those tenants whose spaces role in the next two years.
Those efforts have resulted in 79 active tenant renewal discussions, totaling about 750,000 square feet and to date have resulted in 62 tenants, aggregating 500,000 square feet actually executing leases.
These leases had an average term of 30 months with a roughly 4% cash mark-to-market and 4% capital ratio.
An important point to note is that this early renewal activity, when we exclude the large known roll-outs at 2340 Dulles and the retirement of 905 Broadmoor, we've reduced our remaining '21 rollover to just 4.2%.
So looking at '21.
We are providing 2021 earnings guidance, frankly not an easy call, given the overall economic and pandemic picture.
However, our early renewal efforts, expense control programs, near term visibility into our forward pipeline, and the recently executed transactions, we think have established a solid operating plan with a clear pathway to execution.
That plan is based on a gradual return to work environment beginning in the second quarter through the balance of the year.
So our approach was to be conservative, but as transparent as possible to frame at a defined operating plan with all key metrics quantified, and present the '21 earning guidance range as a platform to build from.
And with the '21 plan set, we do remain focused on revenue and earnings growth, whether that be through accelerated leasing, margin improving cost controls, we're working with institutional partners to seek investments in capital structures where we can create value.
The '21 plan is really headlined by two key operating metrics that we think demonstrate excellent growth potential.
Our cash mark-to-market range is between 8% and 10%, and our GAAP mark-to-market range is between 14% and 16%.
For 2021, we do expect all of our regions will post positive mark-to-market results on both the cash and GAAP basis.
We do have several larger blocks of space to fill, particularly at Barton Skyway in Austin, 1676 International in Tysons, and several others.
But looking forward, achieving our leasing objectives on those spaces can be significant revenue boosters, and our '21 plan only has about $1 million of revenue coming in from those larger spaces.
Our GAAP same-store NOI growth of 0 to 2% and our cash same-store of 3% to 5% is primarily driven by Austin up about 8%, Pennsylvania suburbs close to 5% increase, and Philadelphia around 2%.
Our Metro D.C. region will continue to be negative, while the 1676 International Drive continues through its reabsorption phase.
With that renovation now complete, our overall leasing activity has really accelerated, and our pipeline is up significantly to about 600,000 square feet this quarter versus around 370,000 square feet last quarter.
And also, we will be retiring 905 Broadmoor permanently as part of our Broadmoor master plan development.
Other key operating highlights.
Spec revenue will range between $18 million and $22 million.
We have $14.7 million achieved or 74% achieved at this point.
This is the first time we're providing a spec revenue range versus $1 target, but given the lack of real forward visibility on the acceleration of leasing, we felt that it was warranted.
Occupancy levels, we think, will be between 91% and 93% at year-end and with leasing percentages being between 92% and 94%.
Capital will run about 11% of revenues, which is below our 2020 target range and we are forecasting a debt-to-EBITDA being between 6.3 and 6.5 times, and Tom will certainly talk about that.
Our leasing pipeline has picked up.
It stands at 1.3 million square feet, including about 88,000 square feet in advanced stages of negotiations and as I mentioned before that pipeline is up about 230,000 square feet.
Interestingly too knowing that physical tours have yet to fully return for a variety of pandemic-related reasons, we have launched a virtual tour platform for all of our availabilities and to date, we're generating close to 300 tours per month with over 500,000 square feet being inspected.
So we think that is early harbinger of tenants beginning to really look at their office space requirements going forward.
From a liquidity standpoint, we're in great shape.
We anticipate having $562 million on our line of credit available year-end.
We have no unsecured bond maturities until 2023, and with the recent secured mortgage payoffs, we have a fully unencumbered wholly owned asset base.
The dividend remains extremely well covered with a 53% FFO and 68% CAD payout ratio.
Now, looking at our investment and development opportunities.
During the fourth quarter, we completed several investment transactions.
We did execute a joint venture with an institutional partner on 12 properties totaling 1.1 million square feet.
These properties are located in suburban Philadelphia and Rockville, Maryland.
The portfolio has added $193 million.
We retained a 20% ownership stake.
In addition to the $121 million first mortgage finance we put in place, we also elected to provide seller financing in the form of a $20 million preferred equity position that has a 9% current pay.
As a result of that, we did receive about $156 million of net cash proceeds and with all of our -- as with all of our ventures, we will generate an attractive fee stream by retaining property and asset management as well as leasing and construction management services.
On our previous calls, we had highlighted that we had about $250 million of remaining non-core assets in our wholly owned pool.
This portfolio had been our primary target and leaves us with very few assets that are not considered core holdings.
This partnership, similar to others we have done, did create a different capital structure that more than doubles our return on invested equity from a mid-single digit return to mid-teen return on our remaining invested capital and also avoids about a $20 million of direct capital investment by Brandywine.
It's interesting as well too, with this transaction, we now have over 80% of our revenue stream coming in from submarkets that are ranked A+ or A++ by Green Street's recent office Market Snapshot.
We had also made a preferred investment in 90% of lease to building portfolio, totaling 550,000 square feet in Austin, near the airport.
That preferred investment totaled $50 million, also has a 9% current pay, excellent cash coverage and a several year term, and this was similar to the type of transaction we did a number of years ago at Commerce Square here in Philadelphia.
This investment increases our revenue contribution from Austin toward our 25% goal and will enable us to take advantage of the market knowledge and position we have to create a structured well covered financial instrument.
Our partner will have a 45% preferred interest in the joint venture with Brandywine holding the remaining 55% equity interest.
The project will be built with 7% blended yield that will consist of 326 apartment units, a 100,000 square foot -- feet of life science and 100,000 square feet of innovative office along with underground parking and 9,000 square feet of street level retail.
We do have an active pipeline totaling over 300,000 square feet for the life science and office space component of this project and based on this level of interest, we do plan a construction start in March of '21.
We are currently sourcing construction loan financing and plan to have a loan in place for the next 90 days at a targeted 55% to 60% loan-to-cost, and given the front-loading of the equity commitment of about $115 million assuming a 60% loan-to-cost construction financing.
The first funding of the construction loan wouldn't occur until April of '22.
Our share of the equity will be about $63 million of which about $35 million is already invested.
And looking at our production assets, they all remain ready to go subject to pre-leasing.
As we've noted every quarter, each of these projects can be completed within four to six quarters and cost between $40 million to $70 million.
The pipeline on those production assets is around 450,000 square feet and we are continuing actively our marketing efforts along those lines to hopefully get some pre-leasing done there as the market recovers.
And looking at the two existing development projects, 405 Colorado is on track for a Q1 '21 completion.
We have a pipeline that has built since our last call that approaches 360,000 square feet, including 53,000 square feet in advanced discussions.
To be conservative, given the pace of the recovery in the market, we have extended the stabilization until Q1 '22.
We've increased our cost by approximately $6 million, primarily due to additional TI and leasing commissions, a bit longer absorption schedule, which has resulted in our targeted yield being reduced to 8%.
3000 Market construction is under way on this building, which will be fully occupied by Q4.
The building is fully leased for 12 years and will deliver a develop yield of 9.6%.
The commencement date did slide one quarter due to COVID-related construction delay, but we have increased our yield on the project by 110 basis points due to some design scope modifications and success on the buyout.
Couple other quick comments on Schuylkill Yards and Broadmoor.
We do continue our strong life science push at Schuylkill Yards.
The overall master plan is about 3 million square feet, it can be life science space, so we can really build on the work we've done at 3000 Market, The Bulletin Building, and now Schuylkill Yards West.
Plans for 3151, which is our 500,000 square foot life science dedicated building is well under way.
We do have a leasing pipeline of over 500,000 square feet for that project and the goal would be to start that later this year, assuming if pre-leasing market conditions permit.
We have started constructing to convert several floors within Cira Centre to life science use and that program is moving along per our plan.
In Broadmoor, we are advancing Blocks A and F, which is a total of 350,000 square feet of office and 870 apartments.
Block A had $164 million, 350,000 square foot office as part of that phase, along with 341 multi-family units at a cost of $116 million.
We are heavily engaged in joint venture partnership selection process.
That process is going very well with discussions well under way with several parties and we hope to be able to start the residential component of Block A by the third quarter of '21.
Tom will now provide an overview of our financial results.
Our fourth quarter net income totaled $18.9 million or $0.11 per diluted share and our FFO totaled $61.4 million or $0.36 per diluted share.
Some general observations regarding the fourth quarter results.
They were generally in line with a couple of exceptions.
Portfolio operating income fell about $75.5 million and exceeded our $74 million previous estimate, primarily due to lower operating costs benefited by lower tenant physical occupancy.
Termination and other income totaled $1.6 million or $3 million below our third quarter guidance.
The results were negatively impacted by several one-time transactions that we anticipated occurring in the fourth quarter, that are now anticipated to close in the first half of 2021.
FFO contribution from unconsolidated joint ventures totaled $6.3 million or $1.2 million below our third quarter guidance number primarily due to some co-working tenant write-offs, and that was slightly offset by the JV announced at the end of the year.
Our cash and GAAP same-store results came at 126[Phonetic] basis points lower, again due to lower parking revenue and some tenant leasing slides, all of which have commenced.
Our fourth quarter fixed charge and interest coverage ratios were 3.8 and 4.1 respectively.
Both metrics improved as compared to the third quarter.
Our fourth quarter annualized net debt-to-EBITDA decreased to 6.3 at the lower end of our 6.3 to 6.5 range.
The ratio is benefited from improved operating income and higher than expected year-end cash balances due to our recent fourth quarter transactions.
Two additional points on cash collections.
Our overall collection rate continues to be very strong above 38 -- 98%.
Additionally, our fourth deferred billings were less than $100,000.
So our core collection rate would essentially remain unchanged for those deferrals and our write-offs in the fourth quarter on the wholly owned portfolio were minimal.
For cash same-store is outlined on Page 1 of our Supplemental.
Looking at '21 guidance.
At the midpoint, net income will be $0.37 per diluted share and FFO will be $1.37 per diluted share and that includes roughly $0.04 of dilution related to the fourth quarter transactions we announced.
Our '21 range was built with the following general assumptions.
Portfolio operating income, our property level GAAP income will be roughly $285 million or a decrease of about $30 million compared to 2021 due to the following items.
2340 Dulles Corner and the retirement of 905 Broadmoor will generate about $10 million reduction from '20 to '21.
The Mid-Atlantic portfolio JV results in another $17 million decrease.
The full year effect of Commerce Square results in a $19 million decrease, those are partially offset by the full year effect of one Drexel park and Bellet Building being about $4 million, the 2021 completions of 405 Colorado and 3000 Market for about $3 million and about $3 million increase in our same-store portfolio GAAP NOI.
FFO contribution from our unconsolidated joint ventures will total $20 million to $25 million.
That increase is primarily due to the full year effect of Commerce Square as well as the transaction with the Mid-Atlantic portfolio.
G&A will be between $31 million and $32 million.
Investments, there is no new property acquisition or sales activity in our guidance.
Interest expense will decrease to approximately $67 million to $68 million, that's primarily due to the payoff of our two remaining mortgages as higher interest rates.
Capitalized interest will approximate $4 million as we complete the 405 Colorado building but also commence Schuylkill Yards West.
Investment income will increase to $6.5 million, primarily due to the new structured finance investment in -- at Austin, Texas.
Land sales and tax provision will net to about $2 million as we anticipate selling some non-core land parcels.
Termination and other income totaling $7.5 million, which is above the 2020 amount primarily due to one-time items, and again, were being moved from the fourth quarter of 2020 into the first half of '21.
Net management leasing and development fees will be $16 million, which is just above our 2020 actual due to the full year effect of Commerce Square and the JV for the Mid-Atlantic properties.
In addition, we anticipate that we will get some development fees from Schuylkill Yards West once we commence operation there with the development.
No anticipated ATM or share buyback activity.
Looking close -- more closely at the first quarter, we anticipate portfolio of property NOI totaling about $70 million and will be about -- sequentially about $5.5 million lower primarily due to 2340 Dulles as well as the Mid-Atlantic JV.
FFO contribution from our unconsolidated joint ventures will be $6.5 million.
G&A for the first quarter will increase from $6.3 million to $8 million.
Other sequential increases consistent with prior years and primarily timing of compensation expense recognition.
Interest expense will approximate $16 million, capitalized interest will be roughly $1.5 million, termination and other income, we continue to anticipate that to be $4 million with some of those transactions moving to '21.
Net management fee and development fee income will be $4.5 million with investment income being $1.6 million.
We expect some land gains potentially in the first quarter of about $0.5 million.
Our capital plan is very straightforward and totals to $350 million.
Our 2020 CAD ratio is between 75% and 81%, the main contributors to the lower coverage ratio is going to be the property level NOI reductions, as well as anticipated lease up in upcoming -- with the upcoming rollovers.
Using that as a guide, our uses in 2021 will be $145 million of development and redevelopment.
That does include the additional cash that is going to be necessary to complete our equity contribution into Schuylkill Yards West, $130 million of common dividends, $35 million of revenue maintain and $40 million of revenue creating capex.
The primary sources will be $185 million of cash flow after interest payments, $99 million use of the line, $46 million of using the cash on hand and roughly $20 million in proceeds from land in other sales.
Based on the capital plan outlined, our line of credit balance will be 5 -- roughly $500 million.
We have projected that our net debt-to-EBITDA range of 6.3 to 6.5 with the main variable being timing and scope of our development activities.
In addition, our net debt-to-GAV will approximate 14%.
In addition, we anticipate our fixed charge ratio and -- to be 3.7 and our interest coverage ratio to be 3.9.
So a couple of key takeaways.
Our portfolio and operations are really in solid shape.
We have excellent visibility into our tenant base, all signs at this point is evidenced by the numbers we've presented, our markets seem to be holding up fairly well.
Our leasing pipeline continues to increase as tenants think about their workplace return.
Look, safety and health, both in design and execution, are really and rapidly becoming tenants' top priorities and we do believe that new development and/or trophy-class stock as well as its extensive capital maintenance programs we had in place over the years will really benefit from that trend.
The private equity and debt markets are extremely competitive and strong operating platforms like Brandywine are gaining, I think, significant traction for project-level investments as certainly is evidenced by our recent activity.
I think our recent investment activity further improved our liquidity and created additional frameworks for growth for our shareholders.
And our partnership with Schuylkill Yards West I think really reinforces the increasing attractiveness of the emerging life science sector in Philadelphia and I really think, does create an excellent catalyst to accelerate the overall pace of the Schuylkill Yards development.
So we'll end where we started, which is that we wish you were all doing well and your families are safe.
We do ask in the interest of time you limit yourself to one question and a follow-up.
| brandywine realty trust - qtrly net income allocated to common shareholders; $18.9 million, or $0.11 per diluted share.
brandywine realty trust - qtrly funds from operations (ffo) of $61.4 million, or $0.36 per diluted share.
|
Before we get started, I want to let you know that we have slides to accompany our discussion.
Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measure are posted on our website as well.
Turning to the agenda on Slide 3.
I'll start with some highlights of the third quarter, and how we're thinking about the remainder of the year before handing it over to John, who will go into more detail on our performance.
Let's start with an overview of the quarter turning to Slide 4.
Their ability to remain focused on execution, helped us deliver our eighth consecutive quarter of earnings growth.
In the second half of 2021, we've seen a shift in the challenges created by the COVID operating environment.
We've moved away from having to adjust to the fluctuations that came from lockdowns, like the change in demand from foodservice to food processors.
Instead, we're adapting to an environment that is driven by an uneven global recovery.
This dynamic demand is driving increases in commodity and energy prices, and creating many supply chain challenges.
Our team has remained agile and I'm proud of how we've navigated this market shift.
We also responded well to unforeseen disruptions like the great work our team did managing the impact from Hurricane Ida in North America.
We also continue to set high watermarks across a number of our key operating metrics.
We've done this all while continuing to prioritize the safety of our team, their families and communities, as COVID remains with us.
In addition to solid operational execution, our positioning and approach to risk management allowed us to capture opportunities quickly when the market conditions changed.
This was especially true as crush margins improved over the late-summer when oil seed prices dropped and oil values expanded due to tightening supply.
The strength of our global platform and footprint continue to provide benefits.
In the face of broad logistical disruptions, our integrated value chains and owned ports have helped us to continue supporting customers at both ends of the supply chain.
This quarter, and our results over the last 1.5 years have shown the power of our global network and operating model.
Looking ahead, we continue to see a dynamic set of factors and we're more confident than ever in our ability to react and manage well to capture market opportunities.
As part of our work to continue positioning Bunge for the structural shift we are seeing in the consumer demand for sustainable fuel, in September, we announced our proposed joint venture with Chevron.
As a key step, we will increase production of renewable feedstocks by nearly doubling the combined capacity of two soy crush facilities that will be contributed to the JV.
Chevron recognizes our expertise in oil seed processing and farmer relationships, as well as our commitment to sustainable agriculture, and we recognize Chevron's expertise in refining and distribution.
Partnering with a global leader in energy is a significant step forward in building the capability to make change at scale, to help reduce carbon in our own and our customers' value chains.
This partnership will establish a reliable supply from farmer to Chevron's downstream production and distribution to the infuel consumer.
It also allows us to better serve our farmer customers by accessing demand in the growing renewable fuel-sector.
It will also enable us to pursue new growth opportunities together in lower carbon intensity feedstocks as well as consider feedstock pre-treatment investments.
In addition to the Chevron JV transaction, we announced an agreement to sell our wheat mills in Mexico to Grupo Trimex.
As part of continuously looking for ways to improve our portfolio, we concluded the business was not in line with our long-term strategic goals, and we're pleased with the outcome of selling to a well-respected wheat miller.
We expect the sale to be completed in 2022.
Turning to our segment performance.
Results in Agribusiness were driven by strong execution and better than expected market environment.
In processing, we benefited from higher margins in soy and soft crush in the Northern Hemisphere.
Merchandising results were better than expected and very strong compared to prior year.
Results in Refined & Specialty Oils improved in all regions, with particular strength in North America, driven by strong demand from foodservice and renewable diesel.
We're also seeing continuous improvement in our innovation pipeline, which enabling us to launch exciting new products to the market.
I'd like to congratulate our team for their efforts to help customers with creative solutions.
This innovation capability as well as our skill at solving supply chain issues have helped create a step change in many long-term customer collaborations and commitments.
Our team is also making measurable progress, improving sustainability across our operations and investments.
Following the launch of the Bunge sustainable partnership in Brazil earlier this year, we've already improved the visibility into our indirect supply in high priority regions to approximately 50%, and that's exceeding our 2021 target of 35%.
And while we still have work to do, having this insight into our supply chain will help us meet our industry leading non-deforestation commitment.
And finally, regarding our non-core businesses.
I want to call out the role our sugar JV has had in our year-over-year improvement.
We're pleased that this business has been performing well in a challenging weather market.
Additionally, Bunge Ventures had a successful quarter as a result of the Benson Hill IPO.
And John will give you more details on the impact of that investment in the quarter.
We also repurchased $100 million in shares and our Board authorized a new $500 million repurchase program, demonstrating our confidence in the business.
This reflects our balanced approach to capital allocation, where the return of capital to shareholders is always evaluated along with other investment opportunities.
And before handing the call over to John, I wanted to note, we've increased our outlook for 2021, reflecting our strong third quarter results and continued favorable market trends.
For the full year, we now expect to deliver adjusted earnings per share of, at least, $11.50, and we expect the strong momentum to carry over into 2022.
Let's turn to the earnings highlights on Slide 5.
Our reported third quarter earnings per share was $4.28 compared to $1.84 in the third quarter of 2020.
Our reported results included a negative mark-to-market timing difference of $0.22 per share and a $0.78 per share gain on the sale of our U.S. interior grain elevators, which closed back in early July.
Adjusted earnings per share was $3.72 in the third quarter versus $2.47 in the prior year.
Adjusted core segment earnings before interest and taxes or EBIT were $698 million in the quarter versus $580 million last year, reflecting higher results in Agribusiness and Refined & Specialty Oils.
In processing, high results in North America, European softseeds, and our Asian-European destination soy value chains, all benefited from improved margins.
These were partially offset by lower results in South America, where margins were down from a strong prior-year.
In merchandising, improved performance was primarily driven by higher results in ocean freight, due to strong execution and our global vegetable oil value chain, which benefited from increased margins.
In Refined & Specialty Oils, the strong performance in the quarter was primarily driven by higher margins and volumes in North American refining, which continued to benefit from the recovery in foodservice and increased demand from the renewable diesel sector.
Higher margins in Europe, largely driven by favorable product mix, also contributed to the improved performance.
Results in South America and Asia were slightly higher than last year.
In milling, lower results in the quarter were driven by Brazil where higher volume and lower unit costs were more than offset by lower margins.
Results in North America were comparable with last year.
The increase in corporate expenses during the quarter was primarily related to performance-based compensation accruals.
The gain in other was primarily related to our Bunge Venture's investment in Benson Hill, which went public during the quarter.
Improved results for our non-core sugar and bioenergy joint venture were primarily driven by higher prices and sales volumes of ethanol and sugar.
For the quarter, GAAP basis income tax expense was $92 million compared to $38 million for the prior year.
The increase in income tax expense was due to higher pre-tax income.
Net interest expense of $38 million was below last year, resulting from higher interest income related to the resolution of an historical value added tax matter.
Here you can see our continued positive earnings per share and EBIT trend, adjusted for notable items and timing differences over the past four fiscal years, along with the most recent trailing 12-month period.
This is an exceptional performance, and I echo Greg's appreciation of the amazing execution by our global team.
Slide 7 compares our year-to-date SG&A to the prior year.
We achieved underlying addressable SG&A savings of $25 million, of which approximately 75% was related to indirect cost.
Looking ahead, we are monitoring cost inflation globally and we will be working hard to offset this impact where we can, while still making the necessary investments in our people, processes and technology.
Moving to Slide 8.
For the most recent trailing 12-month period, our cash generation, excluding notable items and mark-to-market timing differences were strong with approximately $1.9 billion of adjusted funds from operations.
This cash flow generation was well in excess of our cash obligations over the past 12 months, allowing us to continue to strengthen our balance sheet.
Turning to Slide 9.
During the quarter, we received two credit rating upgrades.
Moody's raised us to Baa2 and Fitch upgraded us to BBB, both with stable outlooks.
This now puts us at our target rating of BBB, Baa2 with all three rating agencies.
The chart on this slide details our year-to-date capital allocation of adjusted funds from operations.
After allocating $137 million to sustaining capex, which includes maintenance, environmental health and safety, and $25 million to preferred dividends, we had approximately $1.1 billion of discretionary cash flow available.
Of this amount, we paid $215 million in common dividends, invested $102 million in growth and productivity capex and repurchased $100 million of common shares, leaving approximately $725 million of retained cash flow.
Our pace of capex spend this quarter was below our expectations due to supply chain related delays, which we don't see improving by year end.
As a result, we are reducing our 2021 capex forecast by about $100 million and we'll be rolling over these projects into next year.
In addition, we have a nice pipeline of growth and productivity investments that are under consideration which we will likely -- which will likely lead to a higher than baseline spend for the next couple of years.
We will provide more details on our outlook during our Q4 earnings call in February.
The $100 million of share repurchases in the quarter completed our $500 million authorization.
As Greg mentioned earlier, Bunge's Board has authorized a new $500 million program.
Earlier this year, we increased our quarterly common dividend by 5%.
In May of next year, we will again review our dividend with consideration for the recent increase in our earnings baseline from $5 per share to $7 per share, and the success in strengthening our balance sheet.
So as we have been demonstrating, we will continue to take a balanced and disciplined approach to capital allocation.
As you can see on Slide 10, by quarter end, readily marketable inventories exceeded our net debt by approximately $1.1 billion, a significant change from a year ago.
For the trailing 12 months, adjusted ROIC was 19.4%, 12.8 percentage points over our RMI adjusted weighted average cost of capital at 6.6%.
ROIC was 13.7%, 7.7 percentage points over our weighted average cost of capital at 6% and well above our previously stated target of 9%.
The spread between these metrics reflects how we use RMI in our operations as a tool to generate incremental profit.
Moving to Slide 12.
For the trailing 12 months, we produced discretionary cash flow of approximately $1.6 billion and a cash flow yield of 21.6%.
The decline in cash flow yield from the prior year reflects a growth in book equity of the Company.
As Greg mentioned in his remarks, taking into account our strong third quarter results and favorable market trends, we've increased our full year adjusted earnings per share from $8.50 to $11.50.
Our outlook is based on the following expectations.
In Agribusiness, results were expected to be up from our previous outlook and now forecasted to be higher than last year.
In Refined & Specialty Oils, results are expected to be up from our previous outlook and well above last year.
We continue to expect results in milling to be generally in line with last year.
Excluding Bunge Ventures, corporate and other is expected to be lower than last year, driven by higher performance-based compensation, a portion of which was historically allocated to the segments.
Additionally, the Company now expects the following for 2020.
An adjusted annual effective tax rate in the range of 15% to 17%.
Net interest expense in the range of $200 million to $210 million.
Capital expenditures in the range of $350 million to $400 million, and depreciation and amortization of approximately $420 million.
In non-core, full year results in the Sugar and Bioenergy joint venture are now expected to be up considerably from the prior year.
With that, I'll turn things back over to Greg for some closing comments.
Before opening the call to Q&A, I want to offer a few closing thoughts.
As John and I noted, we expect a strong close to 2021, driven by Agribusiness and Refined & Specialty Oils.
Looking ahead, we expect favorable market conditions to continue and we're confident in our ability to capture the upside from opportunities while minimizing the downside.
Based on what we can see right now, we would expect earnings per share to be well above our baseline for the next couple of years, driven by higher than baseline assumptions for refined and specialty oils and soft seed crushing.
And we'll continue to deploy cash we generate to create value by investing in growth projects with strong returns and returning capital to shareholders.
In closing, we're very pleased with our team's strong performance and our revised outlook.
In today's environment, we're right where we need to be, a key participant in the global food and agricultural network.
We're excited about our role in the accelerating shift in demand for sustainable food, feed and fuel and the growth we have ahead of us.
| compname reports q3 gaap earnings per share $4.28.
q3 gaap earnings per share $4.28.
sees fy adjusted earnings per share at least $11.50.
qtrly adjusted earnings per share $3.72.
qtrly agribusiness results driven by strong execution and better than expected market environment.
increasing full-year adjusted earnings per share outlook to at least $11.50 based on strong q3 results and favorable market trends.
bunge board authorized new $500 million program.
expect favorable market trends to continue.
are well-positioned to help our customers across supply chain address challenges in meeting increasing consumer demand.
in agribusiness, fy results are expected to be up from our previous outlook and now forecasted to be higher than last year.
in non-core, full-year results in sugar and bioenergy joint venture are now expected to be up significantly from prior year.
in refined and specialty oils, fy results are expected to be up from our previous outlook and well above last year.
|
Before we get started, I want to let you know that we have slides to accompany our discussion.
Reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures are posted on our website as well.
So turning to the agenda on Slide three.
I'll start with some highlights of the second quarter before handing it over to John, who will go into more detail on our performance.
Let's start with an overview of the quarter, turning to Slide four.
We're very pleased with how we've managed our operations as well as our earnings at risk with the appropriate level of discipline.
We also helped our customers navigate and manage through the volatility of this quarter that came from weather issues, domestic and international supply chain challenges and other complexities in the current environment.
Turning now to our segment performance.
Results in Agribusiness were down versus a very strong quarter last year but exceeded our expectations as the team effectively managed trade flows and capacity utilization.
We set quarterly and year-to-date records in soy crush volume, capacity utilization and lower unplanned downtime.
Additionally, we reduced power consumption to an all-time low in our European rapeseed crush operations.
While we faced complexities in the quarter related to freight, transportation and other areas that affected many other companies and industries, our results clearly demonstrate that with our commercial and industrial teams working closely together, we have built resilient supply chains that allow us to be successful through a range of macro environments.
Results in Refined and Specialty Oils improved in most regions, with particular strength in North America.
In the U.S., we saw foodservice demand come back stronger and faster than and anticipated, and we're experiencing a greater impact from renewable diesel demand than we expected.
In response to the higher demand for Refined and Specialty Oils, we've been working to find greater efficiencies to increase supply.
We've also worked with our food customers to help them manage their risk as well as reformulate products where it makes sense.
The multiple drivers behind the strength in edible oils gives us confidence there are significant growth opportunities ahead of us.
I also want to highlight that this was a strong quarter for our noncore Sugar JV.
As we've noted in the past, we continue to assess our strategic options regarding this business, but we're very pleased with the improvement over the last year.
Taking into account our year-to-date results and based on what we can see now in the forward curves, we are increasing our outlook for the year and expect to deliver adjusted earnings per share of at least $8.50 for the full year 2021.
Despite the global volatility, we have confidence in our ability to deliver in the back half of the year, based on the business already committed, the crush outlook and the demand for Refined and Specialty Oils.
As we look ahead, we're confident that the performance of our operating model and market trends provide support for a higher mid-cycle earnings.
So in our June 2020 business update, we outlined our earnings baseline of $5 per share.
With the changes we've made in our business as well as the fundamental shifts in the marketplace, we're taking that baseline earnings per share up to $7, and that's a $2 increase.
And consistent with last time, this reflects our existing portfolio only and does not include any future growth investments.
I'll now hand the call over to John to walk through the financial results, the 2021 outlook and additional detail on the updated earnings baseline.
I'll then close with additional thoughts on some of the trends we're seeing.
Let's turn to the earnings highlights on Slide five.
Our reported second quarter earnings per share was $2.37 compared to $3.47 in the second quarter of 2020.
Our reported results include a negative mark-to-market timing difference of $0.24 per share.
Adjusted earnings per share was $2.61 in the second quarter versus $1.88 in the prior year.
Adjusted Core segment earnings before interest and taxes for EBIT was $550 million in the quarter versus $564 million last year, reflecting lower results in Agribusiness partially offset by improved performances in Refined Specialty Oils and Milling.
In processing, higher results in North America and Argentina were more than offset by lower results in Europe and to a greater extent in Brazil, which reflected a decreased contribution from soybean origination due to an accelerated pace of farmer selling last year.
In merchandising, improved performance was primarily driven by higher results in ocean freight due to strong execution and positioning in our global corn and wheat value chains, which benefited from increased volumes and margins.
In Refined and Specialty Oils, the outstanding performance in the quarter was largely driven by higher margins and record capacity utilization in North American refining, which benefited from strong foodservice demand and increased demand from the growing renewable diesel sector.
Improved results in South America were due to the combination of higher margins and lower costs, more than offsetting lower volumes.
Europe benefited from increased volumes and margins from higher capacity utilization and product mix.
In Milling, higher volumes, lower costs and good supply chain execution in South America were the primary drivers of improved performance in the quarter.
Results in North America were comparable with the last year.
The increase in corporate expenses during the quarter was primarily related to performance-based compensation accruals, a portion of which was not allocated out to the segments as was done in previous years.
The increase in Other was related to our captive insurance program.
Improved results in our noncore Sugar and Bioenergy joint venture were primarily driven by higher ethanol volume and margins.
Prior year results were negatively impacted by approximately $70 million in foreign exchange translation losses on U.S. dollar-denominated debt of the joint venture due to significant depreciation of the Brazilian real.
For the six months ended Q2, income tax expense was $242 million compared to an income tax expense of $113 million in the prior year.
The increase in income tax expense is due to higher year-to-date pre-tax income, partially offset by a lower estimated effective tax rate for 2021.
Net interest expense of $48 million was below last year, primarily driven by lower average variable interest rates, partially offset by higher average debt levels due to increased working capital.
Here, you can see our continued positive earnings trend adjusted for notable items and timing differences over the past four fiscal years, along with the most recent trailing 12-month period.
This improved performance not only reflects a better operating environment, but also the increased coordination and alignment of our global commercial, industrial and risk management teams due to our new operating model.
Slide seven compares our year-to-date SG&A to the prior year.
We have achieved underlying addressable SG&A savings of $20 million, of which approximately 80% is related to indirect costs.
Through our team's disciplined focus on costs, we were able to continue to achieve savings even when compared to last year, which was already lower as a result of the pandemic and the actions we took to reduce spending.
Looking ahead, we are monitoring cost inflation in many markets, especially in Brazil, and we'll be working to offset this impact where we can while still making the necessary investments in our people, processes and technology.
Moving to Slide eight.
For the most recent trailing 12-month period, our cash generation, excluding notable items and mark-to-market timing differences, was strong with approximately $2 billion of adjusted funds from operations.
This cash flow generation was well in excess of our cash obligations over the past 12 months, allowing us to strengthen our balance sheet.
Shortly after quarter end, we closed on the sale of our U.S. grain interior elevators, receiving additional cash proceeds of approximately $300 million and another $160 million for net working capital.
Slide nine details our year-to-date capital allocation of adjusted funds from operations.
After allocating $76 million to sustaining capex, which includes maintenance, environmental, health and safety and $17 million to preferred dividends, we had approximately $800 million of discretionary cash flow available.
Of this amount, we paid $141 million in common dividends and invested $57 million in growth and productivity capex, leaving over $600 million of retained cash flow.
As you can see on Slide 10, readily marketable inventories now exceed our net debt with the balance of RMI being funded with equity.
For the trailing 12 months, adjusted ROIC was 18.4%, 11.8 percentage points over our RMI adjusted weighted average cost of capital of 6.6%.
ROIC was 13%, seven percentage points over our weighted average cost of capital of 6% and well above our stated target of 9%.
The spread between these return metrics reflects how we use RMI in our operations as a tool to generate incremental profit.
Moving to Slide 12.
For the trailing 12 months, we produced discretionary cash flow of approximately $1.7 billion and a cash flow yield of nearly 24%.
As Greg mentioned in his remarks, taking into account our strong Q2 results and our outlook, we have increased our full year adjusted earnings per share from $7.50 to at least $8.50, above last year's record of $8.30.
Our outlook is based on the following expectations.
In Agribusiness, full year results are expected to be up modestly from the previous expectations but still down from a very strong 2020.
In Refining and Specialty Oils, we expect full year results to be up from our previous outlook and significantly higher compared to last year due to our strong first half results and positive demand trends in North America.
We continue to expect results in Milling and Corporate and Other to be generally in line with last year.
In noncore, full year results in our Sugar and Bioenergy joint venture are expected to be a positive contributor.
Additionally, the company expects the following for 2021: an adjusted annual effective tax rate in the range of 17% to 19%, which is down from our previous outlook of 20% to 22%; net interest expense in the range of $220 million to $230 million, which is down $10 million from our previous expectation; and capital expenditures in the range of $450 million to $500 million, which is up $25 million from our previous forecast; and depreciation and amortization of approximately $420 million.
Shifting to our updated mid-cycle baseline.
The waterfall chart on Slide 14 shows the areas and magnitude of increased earnings being primarily driven by what we see as a structural improvement in the oilseed market fundamentals.
This is due to increased vegetable oil demand by the renewable diesel industry and greater benefits as a result of the change in our operating model to a global value chain approach.
Turning to Slide 15 and the drivers behind these increases.
Consistent with our approach in June 2020, we introduced -- when we introduced our $5 baseline, we were defining our long-term average oilseed crush margin range by using the weighted average of our footprint over the past four years plus the trailing 12 months.
This increases our average soy crush margin by $1 a metric ton to a range of $34 to $36 per metric ton and, more significantly, it increases our average softseed crush margin, which is more sensitive to oil demand, by about $10 a metric ton to a range of $48 to $52 per metric ton.
We feel these ranges reflect more reasonable normalized numbers in the go-forward structural market environment.
We have also increased the normalized earnings of our oilseed origination and distribution businesses and our merchandising subsegment, reflecting the more coordinated and aligned approach within the value chains from our new operating model.
The approximate 30% increase in Refined and Specialty Oils earnings is driven by a higher capacity utilization in North American refining and increased contribution from specialty oils due to improvement initiatives that are underway.
Importantly, we assume that margins in North American refining normalize back to historical averages as we expect in time that the renewable diesel industry will add pretreatment capabilities to their facilities.
There are no changes from our prior baseline in Milling.
Corporate and Other are down primarily due to higher performance-based compensation from the increase in our baseline.
There is no change in the assumed contribution from our Sugar and Bioenergy JV.
Net interest expense is reduced by approximately $25 million compared to the $5 baseline, reflecting debt paydown from strong cash flow in 2021 and normalized working capital.
Given potential tax policy changes in the future, we are increasing our estimated effective tax rate by two percentage points.
It's important to note that our earnings baseline of $7 is not earnings powered.
Aside from upside that may come from higher-margin environment, we have a number of opportunities that we are pursuing that can drive earnings upside as summarized on Slide 16.
Strengthening our Oilseeds platform with targeted acquisitions is a top priority.
Expanding our industry-leading Refined and Specialty Oils position to serve new and existing customers with differentiated products and services is an area of opportunity.
We're also excited about the growth and demand for renewable feedstocks and plant-based proteins.
And finally, we're continuing to invest in technology that will drive increased efficiency throughout our global operations.
Turning to Slide 17.
At a $7 per share baseline, we should generate approximately $1.4 billion of adjusted funds from operations.
After allocating capital to sustaining capex and preferred and common dividends to shareholders, we should have about $800 million of discretionary cash available annually for reinvestment in the business or returns to shareholders.
This is an increase of approximately $200 million of cash per year from our $5 baseline.
With that, I'll turn things back over to Greg for some closing comments.
Before opening the call to Q&A, I want to offer a few closing thoughts.
From where we sit, it's clear there's a structural shift underway in the consumer demand for sustainable food, feed and fuel.
The conversations we've been having with existing and new customers are significantly different than they were even just six months ago.
We're pleased with our position to help support meaningful change.
And with our global platform, we have the ability to do so at scale.
Consumers have demonstrated they will pay more to get what they care about, and it's our job to provide these alternatives to our customers.
To meet this demand, we work with customers on sourcing sustainable alternatives under -- or helping them reformulate.
We help food and feed customers source ingredients to minimize the carbon impact of moving them, and we work with fuel customers to source and transport feedstock for renewable fuels.
Importantly, we do all of this with the goal of driving value back to farmers to allow them to invest in stewardship, to support regenerative agriculture and to encourage production in optimal locations, which means getting the highest production per acre using the least amount of inputs.
We're really excited about the role we can play in this accelerating shift.
| bunge sees fy adjusted earnings per share at least $8.50.
q2 gaap earnings per share $2.37.
sees fy adjusted earnings per share at least $8.50.
sees 2021 capital expenditures in range of $450 to $500 million.
qtrly adjusted earnings per share $2.61.
in agribusiness, results are expected to be modestly up from previous outlook, but still forecasted to be down from 2020.
now expects 2021 capital expenditures in the range of $450 million to $500 million.
updating mid-cycle earnings baseline with $2 per share increase reflecting structural changes in oilseed market environment.
|
Now to kick this off, the beginning of a new year, I believe, is a good time to take stock of where KMI stands as an investment opportunity for its present and potential shareholders.
Whether you look at the results for the fourth quarter of 2021, the full year '21, or our budget outlook for 2022, which we released in December, it's apparent that this company produces substantial cash flow under almost any circumstances.
In my judgment, this is the bedrock for valuation because it gives us the ability to fund all our capital needs out of the recurring cash flow.
As I've stressed so many times, we can use that cash to maintain a solid balance sheet, invest in selected high-return expansion capex opportunities, pay a very rewarding and growing dividend and buy back shares on an opportunistic basis.
But I believe there's more of the story than that.
While we demonstrated by assets that we acquired during 2021 that we are participating meaningfully in the coming energy transition, it's also become apparent, particularly over the last several months that this transition will be longer and more complicated than many originally expected.
In short, there is a long runway for fossil fuels and especially natural gas.
Investing in the energy sector has been very lucrative recently with the energy sector, the best-performing sector of the S&P 500 during 2021.
We expect that favorable view to continue in 2022, and the year has started out that way.
Within the energy segment, I would argue that midstream pipelines are a good way of playing this trend.
They generally have less volatility and less commodity exposure than upstream and most have solid and growing cash flow underpinned by contracts to a large extent with their shippers.
We believe KMI is a particularly good fit for investors.
We are living within our cash flow.
We paid down over $12 billion in debt since 2016 and 2022 marks the fifth consecutive year we have increased our dividend, growing it over those years from $0.50 per share to $1.11 per share.
In addition to returning value to our shareholders through our dividend, our board has approved a substantial opportunistic buyback program, which we have the financial firepower to execute on during this year if we so choose.
Finally, this is a company run by shareholders for shareholders with our board and management owning about 13% of the company.
I hope and trust you'll keep these factors I have mentioned in mind when making investment decisions about our stock over the coming year.
More to come on all these subjects at our Investor Day conference next Wednesday.
As to 2021, we wrapped up a record year financially.
Much of that was due to our outperformance in Q1 as a result of the strong performance of our assets and our people during Winter Storm Uri.
Putting Uri aside, we were running a bit shy at plan in the full year guidance that we were giving you through our quarterly updates.
But by the end of the year, we closed the gap and met our EBITDA target, even excluding Uri, but including the benefit of our Stagecoach acquisition.
We also set ourselves up well for the future, getting off to a fast start in our energy transition ventures business with the acquisition of Kinetrex renewable natural gas business and adding to our already largest in the industry gas storage asset portfolio with the acquisition of Stagecoach.
Both of those acquisitions are outperforming our acquisition models.
Third, as we'll cover in detail at next week's conference, our future looks strong.
Our assets will be needed to meet growing energy needs around the world for a long time to come.
And over the long term, we can use our assets to store and transport the energy commodities of tomorrow.
And we have opportunities, as we have shown you, to enter into new energy transition opportunities at attractive returns.
We're entering 2022 with a solid balance sheet, including the capacity to repurchase shares with well-positioned existing businesses and with an attractive set of capital projects.
Our approach to capital allocation remains principled and consistent.
First, take care of the balance sheet, which we have with our budget showing net debt to EBITDA of 4.3 times, then invest in attractive return projects and businesses we know well at returns that are well in excess of our cost of capital.
Our discretionary capital needs are running more in the $1 billion to $2 billion range annually, and at $1.3 billion, we're at the lower end of that range in our 2022 budget, not at the $2 billion to $3 billion that we experienced in the last decade.
We're also generally seeing -- or we're continuing to tilt, I guess, I would say, toward generally smaller-sized projects that are built off of our existing network, and we can do those at very attractive returns and with less execution risk.
The final step in the process is return the excess cash to shareholders in the form of an increasing and well-covered dividend that's $1.11 for 2022 and in the form of share repurchases.
As we said in our 2022 budget guidance released in December, we expect to have $750 million of balance sheet capacity for attractive opportunities, including opportunistic share repurchases.
Given the current lower capital spending environment we are now experiencing, we would expect to have the capacity to repurchase shares even if we add some investment opportunities as the year proceeds in the form of additional projects, etc.
As we've always emphasized when discussing repurchases, we will be opportunistic, not programmatic.
We believe the winners in our sector will have strong balance sheets, invest wisely in new opportunities to add to the value of the firm, have low-cost operations that are safe and environmentally sound and the ability to get things done in difficult circumstances.
We're proud of our team and our culture.
And as always, we will evolve to meet the challenges and opportunities in the years ahead.
Starting with our Natural Gas business unit for the quarter.
Transport volumes were down 3% or approximately 1.1 million dekatherms per day versus the fourth quarter 2020 that was driven primarily by continued decline in Rockies production, the pipeline outage on EPNG and FEP contract expirations, which were offset somewhat by increased LNG deliveries and PHP and service volumes.
Physical deliveries to LNG facilities off of our pipeline averaged about 5 million dekatherms per day that's a 33% increase versus the fourth quarter of '20.
Our market share of LNG deliveries remains around 50%.
Exports to Mexico were down in the quarter when compared to the fourth quarter of 2020 as a result of third-party pipeline capacity recently added to the market.
Overall deliveries to power plants were up slightly, at least in part, partially driven by coal supply issues, while LDC deliveries were down as a result of lower heating degree days.
Our natural gas gathering volumes were up 6% in the quarter.
For gathering volumes, though, I think the more informative comparison is the sequential quarter.
So compared with the third quarter of this year, volumes were up 7%, with a big increase in Haynesville volumes, which were up 19% and Bakken volumes, which were up 9%.
Volumes in the Eagle Ford increased slightly.
In our products pipeline segment, refined product volumes were up 9% for the quarter versus the fourth quarter of 2020.
Compared to prepandemic levels using the fourth quarter '19 as a reference point, road fuel, gasoline, and diesel were down about 2% and Jet was down 22%.
In Q3, road fuels were down 3% versus the prepandemic number, though we did see a slight improvement.
Crude and condensate volumes were down 3% in the quarter versus the fourth quarter of '20.
Sequential volumes were down approximately 1%, with a reduction in Eagle Ford volumes, partially offset by an increase in the Bakken.
If you strip out Double H pipeline volumes from our Bakken numbers that pipeline is impacted by alternative egress options.
And you look only at our Bakken gathering volumes, they were up 7%.
In our Terminals business segment, our liquids utilization percentage remains high at 93%.
If you exclude tanks out of service for required inspection, utilization is approximately 97%.
Our rack business, which serves consumer domestic demand is up nicely versus Q4 of '20 and also up versus prepandemic levels.
Our hub facilities, primarily Houston and New York, are driven more by refinery runs, international trade and blending dynamics are also up versus the Q4 of '20.
But those terminals are still down versus prepandemic levels.
We've seen some green shoots in our marine tanker business with all 16 vessels currently sailing under firm contracts.
On the bulk side, volumes increased by 8%, and that was driven by coal and bulk volumes are up 2% versus the fourth quarter of '19.
In our CO2 segment, crude volumes were down 4%, CO2 volumes were down 13% and NGL volumes were down 1%.
On price, we didn't see the benefit of increasing prices on our weighted average crude price due to the hedges we put in place in prior periods when prices were lower.
However, we did benefit from higher prices on our NGL and CO2 volumes.
For the year versus our budget, crude volumes and price were better than budget, CO2 volumes and price were better than budget and NGL price was better than budget.
So a good year for our CO2 segment relative to our expectations and CO2 volumes have started the year above our '22 plan.
As Steve said, we had a very nice year.
We ended approximately $1 billion better on DCF and $1.1 billion better than our EBITDA with respect to -- our EBITDA budget.
And most of that was due to the outperformance attributable to winter storm or all of it was due to the outperformance attributable to Winter Storm Uri.
If you strip out the impact of the storm and you strip out roughly $60 million in pipe replacement projects that we decided to do during the year that impacts sustaining capex, we ended the year on plan for both EBITDA and DCF.
So for the fourth quarter 2021, we are declaring a dividend of $0.27 per share, which brings us to $1.08 of declared dividends for full year 2021, and that's up 3% from the dividends declared for 2020.
During the quarter, we generated revenue of $4.4 billion, up $1.3 billion from the fourth quarter of 2020.
That's largely up due to higher commodity prices, which also increased our cost of sales in the businesses where we purchase and sell commodities.
Revenue less cost of sales or gross margin was up $107 million.
We generated net income to KMI of $637 million, up 5% from the fourth quarter of 2020.
Adjusted net income, which excludes certain items, was up -- was $609 million, up 1% from last year, and adjusted earnings per share was $0.27 in line with last year.
Moving on to our segment performance versus Q4 of 2020.
Our Natural Gas segment was up driven by contributions from Stagecoach and PHP, partially offset by lower contributions from FEP where we've had contract expirations, NGPL because of our partial interest sale and EPNG due to lower usage and park and loan activity.
Products segment was up due to refined products volume and favorable price impacts.
Our terminals segment was down driven by weakness in the Jones Act tanker business and an impact from a gain on sale of an equity interest in 2020.
CO2 was down, as favorable NGL and CO2 prices were more than offset by lower CO2 and oil volumes, the oil volumes were above plan.
G&A and corporate charges were higher due to larger benefit costs, as well as cost savings we achieved in 2020 driven by lower activity due to the pandemic.
Our JV DD&A was lower primarily due to lower contributions from the Ruby Pipeline.
And our sustaining capital was higher versus the fourth quarter of last year that was higher in natural gas, terminals, and products, and that is a fairly large increase, but we were expecting the vast majority of it has -- much of the spend from early in the year was pushed into later in the year.
For the full year versus plan on sustaining capital, we are $72 million higher and roughly $60 million of that is due to the pipe replacement project that Kim mentioned.
The total DCF of $1.093 billion or $0.48 per share is down $0.07 versus last year's quarter, and that's mostly due to the sustaining capital.
On the balance sheet, we ended the year with $31.2 billion of net debt with a net debt to adjusted EBITDA ratio of 3.9 times, down from 4.6 times at year-end 2020.
Removing the nonrecurring Uri contribution to EBITDA, that ratio at the end of 2021 would be 4.6 times, which is in line with the budget for the year.
Our net debt declined $404 million from the third quarter, and it declined $828 million from the end of 2020.
To reconcile the change for the quarter, we generated $1.093 billion in DCF.
We spent -- or paid out $600 million in dividends, we spent $150 million in growth capex, JV contributions, and acquisitions, and we had a working capital source of $70 million, and that explains the majority of the change for the quarter for the year.
We generated $5.460 billion of DCF.
We paid out dividends of $2.4 billion.
We spent $570 million on growth capex and JV contributions.
We spent $1.53 billion on the Stagecoach and Kinetrex acquisitions.
We received $413 million in proceeds from the NGPL interest sale, and we had a working capital use of approximately $530 million.
And that explains the majority of the $828 million reduction in net debt for the year.
But if you've got more questions, get back in the queue, and we will come back around to you.
| qtrly adjusted earnings per share $0.27.
|
At this time, all participants are in a listen-only mode.
Please note that this conference is being recorded and will be available for replay.
For information on how to access the replay, please visit our website at mdcholdings.com.
These, and other factors, that could impact the company's actual performance are set forth in the company's 2020 Form 10-K, which is expected to be filed with the SEC today.
It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures.
MDC delivered strong results in the fourth quarter of 2020, highlighted by fully diluted earnings per share of $2.19, representing a 54% increase over the fourth quarter of 2019.
Home sales revenues increased 10% year-over-year, and home sales gross margin expanded 350 basis points to 22%.
We continue to experience robust demand across our homebuilding operations as the dollar value of our net new orders increased 92% for the quarter on a sales pace of 4.7 homes per community per month.
The strong order activity resulted in backlog value of $3.26 billion, our largest year-end backlog ever.
The size and quality of our backlog gives us great visibility into 2021 and allows us to enter the new year in a position of strength.
Adding to our communities' position of strength is our current financial condition.
In December, we successfully increased the size of our unsecured revolving credit facility from $1 billion to $1.2 billion.
Shortly thereafter, we issued $350 million of senior notes due in 2031 with a coupon of 2.5%, the lowest rate ever achieved by a non-investment grade company for 10-year issuance.
These two transactions greatly increased our liquidity position and improved our cost of capital putting us in a great position to grow our presence in our existing markets, and potentially expand into new ones.
With respect to new markets, I'm pleased to announce that MDC has made the strategic decision to establish a presence in Boise, Idaho.
Boise exhibits many of the characteristics we look for in a new market, such as a diverse and growing local economy, rising income levels and a strong population of buyers.
We recently signed our first lot deal in the market and expect to deliver our first home by the end of 2021.
Boise presents a great opportunity for our company and we are actively seeking similar expansion opportunities in other parts of the country.
Our goal has been to design innovative homes that allow for personalization with an eye toward better affordability and the response has been tremendous.
Several of our operation in places like California, Florida and the Pacific Northwest have reached volume levels that allow for better economics of scale, which has translated into better margin contributions for those areas, while our established positions in places like the Mountain West continues to generate strong margins and returns for our company.
In terms of broader macroeconomic factors that affect our industry, we continue to see an extremely positive landscape as we enter the new year.
We believe demand will remain in place after the threat from the virus subsides due to the sheer size of buying population and the structural shift that occurred as a result of the pandemic, which place a greater emphasis on now and where to live.
In summary, the fourth quarter of 2020 capped a remarkable year for our company, culminating in a 54% increase in our annual net income as compared to 2019.
We responded to the challenges brought about by the pandemic with heightened safety protocols, modified sales techniques and innovative operational procedures, all of which contributed to the strong rebound we experienced in the back half of the year.
These changes to our business practice required the coordinated efforts of all of our team members and I could not be more proud of how they performed.
2020 provided to be a challenging year for our country and economy, but I'm optimistic about the direction of both in the new year.
Our build-to-order business model and more affordable product focus have proven to be ideally situated for the current market conditions, and I believe this will be true going forward.
On behalf of the company, I would like to extend my sincere gratitude to our employees and sub-contractors for making 2020 an incredibly successful year in spite of the immense challenges we faced.
We ended 2020 with another strong quarter as pre-tax income from our homebuilding operations increased $48.9 million or 52% from the prior year quarter to $142.3 million.
As Larry mentioned, this increase was driven mostly by higher gross margins.
To a lesser extent, our homebuilding profits also benefited from improved home sale revenues, which increased by 10% to $1.18 billion.
Our financial services pre-tax income increased $10.2 million or 54% to $29 million.
The increase was driven by our mortgage business, which continues to benefit from the increased volume generated by our homebuilding operations.
Our mortgage business has further benefited from year-over-year improvements in capture rate and profit margin on loans originated.
As a result, overall net income increased 59% to $147.5 million or $2.19 per diluted share for the fourth quarter of 2020.
Our tax rate decreased from 17.5% to 13.9% for the 2020 fourth quarter.
The decrease in rate was primarily due to a larger benefit from federal energy efficient home tax credits in the 2020 fourth quarter due to an increase in the estimated amount of energy tax credits to be received.
For 2021, I would roughly estimate an effective tax rate of 24%, excluding any discrete items, and not accounting for any potential changes in tax rates or policy.
Turning to Slide 6.
Homes delivered increased 7% year-over-year to 2,564, driven by an increase in the number of homes, we had in backlog to start the quarter.
Backlog conversion for the quarter was significantly lower than the fourth quarter of 2019 as a result of the considerable year-over-year increase in net orders during the back half of 2020, most of which remained in backlog as of year-end.
The average selling price of homes delivered during the quarter increased 2% to about $461,000 and 61% of the units we closed were a part of our more affordable collections.
We are anticipating home deliveries for the first quarter of 2021 to reach between 2,200 and 2,400 units.
The corresponding backlog conversion will be lower than the first quarter of 2020 as a result of the strong year-over-year increase in orders during the 2020 fourth quarter and, to a degree, construction delays we are experiencing in certain markets as a result of the pandemic.
We expect the average selling price for 2021 first quarter deliveries to be between $470,000 and $480,000.
Gross margin for home sales improved by 350 basis points year-over-year to 22%, which is our best gross margin in over a decade.
We experienced improved gross margin from home sales across each of our segments on both build-to-order and spec home deliveries, driven by price increases implemented across nearly all of our communities over the past 12 months.
Home deliveries in the first quarter of 2021 will be negatively impacted by the lumber price increases experienced in the latter half of 2020.
As a result, the gross margin for home sales for the 2021 first quarter is expected to be approximately 21.5% assuming no impairments and no warranty adjustments.
This would still be 150 [Phonetic] basis points higher than the prior year.
Additionally, we currently expect that gross margin for the remainder of the year will improve from our 21.5% estimate for Q1.
Our total dollar SG&A expense for the 2020 fourth quarter increased $12.8 million from the 2019 fourth quarter.
General and administrative expenses increased $7.1 million due to an increase in stock-based compensation expense related to performance-based awards, consulting fees related to energy tax credits recognized during the quarter, and a $2.2 million charitable contribution approved by our Board of Directors during the quarter.
The increase in marketing and commission expenses was due to variable selling and marketing expenses that increased in line with the 10% increase in home sale revenues during the period.
Looking forward to the first quarter of 2021, we currently estimate our general and administrative expense to be approximately $55 million, which is a slight increase from what we just recognized in the fourth quarter.
This increase is primarily due to increased headcount as we continue to prepare for growth in 2021.
In the fourth quarter alone, we saw a 5% increase in our headcount.
As always, our actual results for the first quarter may differ from our estimate for a variety of reasons, such as changes in the amounts or timing of various accruals.
Let's take a look at Slide 9.
The dollar value of our net orders increased 92% year-over-year to $1.32 billion and unit net orders increased by 72%, driven by a 67% increase in our monthly absorption rate to 4.7.
The average selling price of our net orders increased by 12% year-over-year, driven by price increases implemented over the past 12 months.
Demand was broad-based from both a geographical and product perspective during the quarter.
We experienced significant year-over-year increases in our absorption pace in each of our markets, as well as on both more affordable and traditional product types.
Our net new orders remained strong through each month of the fourth quarter and were well above the prior year.
In addition, our cancellation rates were also lower than last year.
Sales through January also remained strong and are significantly above the prior year.
However, we do not expect to see the typical seasonal jump in sales when comparing the first quarter of 2021 to the fourth quarter of 2020 due to the unseasonably high orders that occurred in the fourth quarter.
Moving on to backlog on Slide 10.
As a result of the strong sales we just discussed, we ended the quarter with an estimated sales value for our homes in backlog of $3.26 billion, which was up 87% year-over-year and, as Larry mentioned, was our highest year-end backlog dollar value ever.
The average selling price of homes in backlog increased 7% due to price increases implemented over the past 12 months, decreased incentives and a shift in mix to California.
These factors were slightly offset by a shift in mix to our lower-priced communities consistent with our ongoing strategic focus on our more affordable home plan.
As Bob just previously noted, backlog conversion for the first quarter of 2021 will be lower than the first quarter of 2020.
This is largely the result of the construction status of our homes in backlog as of year-end.
Only 38% of homes in backlog at December 31, 2020 had reached the frame stage of construction compared to 52% of homes in backlog at December 31, 2019.
We ended 2020 with 194 active subdivisions, up 5% from 185 at the end of 2019.
For 2021, we are currently targeting an active subdivision increase of at least 10% year-over-year.
Naturally, our actual active subdivision count to end 2021 may differ from this target for a variety of reasons, such as the timing of community close-outs and delays opening new communities due to the impact of the pandemic.
We acquired 4,976 lots during the quarter, a 51% increase from the prior year, reflecting our confidence in market conditions and our focus on continued growth for our company.
We spent $359 million on land acquisition and $124 million on land development during the period, making our total land spend $483 million.
As a result of our recent land acquisitions, our total lot supply to end the year was 8% higher than at the end of 2020, nearly reaching the 30,000 lot mark.
We believe that this lot supply, combined with continued lot approval and acquisition activity, provides us with a solid platform to meet our growth targets for 2021.
In summary, while 2020 presented many challenges, the resilience of the housing market afforded us the opportunity to deliver one of our strongest years ever.
Our build-to-order model and focus on affordability continue to prove successful during these unprecedented times.
Looking forward to 2021, we believe it has the potential to be an even stronger year based on the dollar value and gross margin of our current backlog and the ongoing strength of demand.
To that end, our current target for home deliveries in 2021 is between 10,000 and 11,000 units.
From a strategic perspective, we remain focused on continuing to expand our operating margin, as well as growing our homebuilding operations in 2021.
As previously mentioned, we are targeting a 10% increase in active subdivisions during the year, and we are expanding our geographic footprint with the addition of the Boise market.
In anticipation of this growth, we increased our liquidity to roughly $1.7 billion at the end of the year and further enhanced that liquidity with our $350 million senior note issuance in January.
Even with a solid balance sheet and a strong demand environment, risk continue to exist that could impact the execution of our strategic initiatives for 2021.
These risks will be closely monitored as we work to grow our company and the safety of our employees, subcontractors and customers will remain a top priority.
Last week, we were pleased to announce that our Board of Directors declared a $0.40 per share cash dividend and a special 8% stock dividend.
This demonstrates our continued commitment to rewarding our shareholders for their ongoing support.
| q4 earnings per share $2.19.
qtrly home sale revenues increased 10% to $1.18 billion from $1.07 billion.
qtrly average selling price of deliveries up 2% to $461,000.
qtrly dollar value of net new orders increased 92% to $1.32 billion from $684.9 million.
backlog dollar value at december 31, 2020 up 87% year-over-year to $3.26 billion.
sees full year 2021 home deliveries between 10,000 and 11,000.
sees home deliveries for 2021 q1 between 2,200 and 2,400.
|
The company's annual report on Form 10-K filed with the Securities Exchange Commission on March 16, 2021, and any subsequent filings with the Securities Exchange Commission, all of which are available on gapinc.com.
Joining me on the call today are chief executive officer, Sonia Syngal; and chief financial officer, Katrina O'Connell.
As I reflect on the last 18 months, I'm inspired by the incredible transformation our teams have made in such a short time despite an ongoing pandemic-related disruption to our business and the broader economy.
Coming off record sales performance in Q2, we had accelerated momentum heading into the back half before facing disruption to our supply chain, driven by the two-and-a-half-month closure of our top manufacturing country, Vietnam, as well as port congestion, both of which affected our ability to fully meet strong customer demand.
While we had planned into the known supply chain constraints as we entered the quarter, including COVID-related closures in Vietnam, the shock to our business persisted longer than anticipated as weeks turned into months.
We have been all hands on deck to address these headwinds and the resulting impact on our business, proactively navigating holiday and beyond, ensuring that the customer is at the center of every decision we make.
To secure our supply and meet the needs of our customers, we chose airfreight over ocean vessel for a significant portion of our assortment, taking on extreme transitory cost.
We're disappointed in the short-term impact on earnings, but we made the choice to invest in our customer promise and build loyalty that will help sustain growth over the long term.
Katrina will go into greater detail on our mitigation efforts later.
Overall, we continue to believe the scale of our supply chain is the material advantage.
We have deep relationships with our manufacturers across multiple countries of origin optimized for cost, speed, and expertise.
And we have strong transportation partners, offering speed advantage and industry-leading rate.
That said, learnings from this crisis will not go to waste.
We're using them as an opportunity to accelerate digitization efforts that were already underway across our product-to-market process.
There was a sizable increase in the enterprise clock speed on transformative initiative as we combated the current crisis with an eye on a better future faster.
For example, we're adding supply chain capabilities that will allow us to better anticipate the unexpected.
We've made significant progress digitizing core operating processes with a targeted focus on inventory management, loyalty, and personalization.
And we're transforming product creation by using digital tools to unlock speed and efficiency.
All of this work will pay forward in 2022 and beyond.
These near-term pressures have not distracted us from our core strategy.
We have an acute focus on what really matters, our unique, ownable asset.
It's because of the simple, consumable, and executable strategy we shared in October of last year, our Power Plan 2023, the Gap Inc. is in a stronger, more resilient position today than we were entering this fiscal year.
Even in the face of current headwinds, I'm confident this is true.
Our brands are healthy, demand for our product is strong, and we have pricing power with average unit retail contributing to the highest gross margins in over a decade.
We are becoming digitally led.
Online sales grew 48% in the quarter compared to 2019, representing 38% of total sales, and our migration to the cloud has unlocked innovation in our tech portfolio.
We will strategically shed an estimated 1 billion in sales by year-end versus 2019 by closing unproductive stores, divesting smaller brands, and partnering our European business to drive focus and profitability.
Nearly three-quarters of active customers are loyalty shoppers, and they are spending twice as much as nonloyalty customers.
And we have fortified our strong balance sheet by restructuring long-term debt, allowing us to invest for growth while continuing to return cash to shareholders.
I have watched you navigate, persevere, and accelerate through these needs -- near-term challenges while executing a long-term strategy.
Despite the supply chain disruption, comp sales were up 5% on a two-year basis, with three of our four brands delivering positive two-year comps.
Net sales were down 1% to 2019, which includes an estimated 8%-point impact due to supply chain headwinds.
Our strategy is on track and is working.
Let me walk you through how our Power Plan came to life in Q3.
Starting with the power of our brand.
Each of our billion-dollar brands is finding new and relevant ways to expand reach and cut through to the consumer.
This is driving an increase in brand power and a decrease in discounting.
Let me start with Old Navy.
Old Navy delivered 8% sales growth versus 2019, a deceleration from the first half as the brand was disproportionately affected by inventory lateness during the quarter.
Old Navy maintained its No.
1 rank in kids market share according to NPD and sustained its kids and baby growth trend from the first half with strong back-to-school performance.
BODEQUALITY, Old Navy's inclusive sizing integration launched successfully in August.
The brand more than doubled its extended size customer files since launch.
Fifteen percent of customers who shopped extended sizes are new to the brand, and more than a third have shopped Old Navy before but are new to the category.
We are seeing strong extended-sized demand across fashion categories, a clear signal that our customer is craving trend choice lacking in the market.
The momentum continues at Gap brand, particularly North America, with comparable sales up 13% versus 2019, and net sales nearly flat despite the almost 18 percentage points of revenue we shed through strategic store closures.
This marks the third consecutive quarter of positive comparable twp-year sales growth in North America as Gap brand improves the core health of the business from tighter assortments and better quality product to an increase in digital penetration and lighter and brighter stores.
Gap reached a critical milestone in our Power Plan, concluding its strategic review of the European market, driving a more profitable business model by shuttering our U.K. stores and working with local partners to amplify growth.
We have identified strong partners in the U.K., Ireland, France, and Italy, and together, are committed to serving and growing our Gap customers in Europe.
Our newest Yeezy Gap icon, the Perfect Hoodie, delivered the most sales by an item in a single day in gap.com history.
With over 70% of the Yeezy Gap customers shopping with us for the first time, this partnership is unlocking the power of a new audience for Gap, Gen Z plus Gen X men from diverse background.
We've successfully launched new brand positioning focused on acceptable luxury.
Through unique storytelling and experiences, the brand is going back to its roots, igniting the adventure in all of us.
Banana Republic reported a net sales decline of 18% versus 2019, and a negative 10% two-year comp.
Like Gap, we walked away from about 10 percentage points of unprofitable revenue due to strategic store closures.
Product margins expanded during the quarter as luxury products like merino, leather, cashmere, and silk resulted in increased average transaction, drawing higher-value customers willing to pay for great quality.
And finally, Athleta delivered an outstanding quarter with 48% net sales growth versus 2019, using its unique and ownable mission to empower women and girls through the power of she.
The brand is investing in new touchpoints that increased awareness and drove new customer acquisition, which has more than doubled versus Q3 2019.
Athleta grew brand awareness of 33% versus 27% last year, according to YouGov, by embracing celebrity partnerships, Simone Biles and Allyson Felix, who took to the world stage in Tokyo.
The brand expanded into Canada with the launch of its online business and its first company-operated store in Vancouver and Toronto.
And customers are quickly embracing Athleta well, their new immersive digital community rooted in well-being with the active user base growing 50% every month since launch.
We believe this platform has tremendous potential over the coming years to revolutionize how we monetize vulnerable brand experiences.
Next, the power of our platform and portfolio.
We leveraged our size and scale to drive advantage for our four purpose-led, billion-dollar brands.
Our leading omni platform provides customer convenience and engaging experiences, whether in-store, on mobile, or through curbside pickup.
Our online sales grew 48% in the quarter compared to 2019, and we maintained our rank as No.
Our sizable active customer file sits at 64 million, and those customers are spending more on average than they were two years ago.
But the more important is that the health of our customer file is improving.
Compared to 2019, newly acquired customers are spending more with us than our existing customers with increased average transactions, average unit retail, and basket size.
We're pleased with the launch of our innovative rewards program and our ability to build customer lifetime value.
Now, with more than 45 million members, our loyalists are two times more likely to shop across brands, and three times more likely to shop across channels.
We fuel our brands through our scale technology advantage operations.
We are investing capital to drive growth, reduce costs, and increase speed and agility.
To diversify and strengthen our business, we are also seeding new capabilities that will unlock additional value.
For example, we acquired Drapr, which we expect will power new e-commerce tools with 3D fit technology; and we acquired CB4, our machine learning and AI acquisition with broad potential across sales, inventory, and consumer insights.
We have plans to scale these solutions in 2022 to build our core digital capability.
This will help our brands lower return, boost in-stock levels, increase margins, and deliver better customer experiences online and in-stores across all four brands.
The power of our portfolio comes to life through our leadership in key categories.
Our strong active and fleece business and our Denim business are expected to generate revenue of 4 billion and 2 billion, respectively, this year; and our kids and baby business owns 9% market share across Old Navy, Gap, and Athleta.
Even as occasions and wear-to-work categories have strengthened, it's clear comfort and style will sustain.
We're extending our customer reach across every age, body, and occasion from value to premium through category expansion and new addressable markets.
We can test and pilot in one brand and then leverage learnings to scale across the rest.
For example, starting our inclusive sizing rollout in Athleta and scaling at Old Navy with BODEQUALITY, or using Old Navy, Gap, and Banana Republic's strong presence and infrastructure in Canada to enable Athleta's quick and seamless entry into the market.
It's the collective power of our brand that gives us scale advantage.
We continue to innovate in sustainable sourcing with a focus on empowering women, enabling opportunity, and enriching community.
Every industry will be impacted by climate change, and we are doing our part to mitigate this impact, both in our supply chain and on the communities where we operate.
Earlier this month, the USAID, Gap Inc., Women + Water Alliance announced that we have empowered 1 million people to improve their access to clean water and sanitation, already halfway to our goal of reaching 2 million by 2023.
Looking ahead, we anticipate robust apparel and accessory retail sales across the industry for the remainder of the year and into the next.
That said, we are balancing the favorable consumer climate against current supply constraints.
As I mentioned earlier, we are doing everything we can to improve our on-hand inventories versus fall.
And still, we remain cautious given the current environment.
One last thought before I hand it over to Katrina.
While the near-term headwinds and resulting impact on our performance are difficult, we remain focused on executing our strategy for long-term sustainable growth.
We are focused on what matters, demand-generating investments in our billion-dollar brands fueled by cut-through creative, deploying data and science to drive efficiency in the way we work, and restructuring our business to reduce cost.
All of these allow us to emerge from the crisis, growing share, increasing brand health, and delivering profitable growth long term.
As Sonia said, we're deeply proud of the progress we're making to transform Gap Inc. through our Power Plan 2023.
We have strong demand for our brands and our fleet optimization through store closures, international partnerships, and divestitures is progressing well and adding value.
Our operating margin remains on track to hit 10% by 2023, in line with our plan, even as we navigate these near-term disruptions.
Our balance sheet, fortified with our recent debt restructuring, enables us to invest in our business to drive growth while returning cash to shareholders.
The core tenets of our Power Plan 2023 strategy are well underway in delivering value.
While we're confident with our strategy, widely reported worsening global supply chain issues meaningfully impacted our third-quarter performance.
We lost approximately $300 million of revenue or eight percentage points of sales growth on a two-year basis due to longer transit times and lost weeks of production, which led to on-hand inventory shortages in the quarter.
The backlog at U.S. ports deteriorated meaningfully from the first half of the year, resulting in up to three continuous weeks of unanticipated delays to fall product deliveries throughout the quarter.
In addition, while our production capacity is largely globally diversified, approximately 30% of our product is produced in Vietnam, where factory closures extended to over two and half months, significantly longer than initially anticipated.
Our average on-hand inventory in Q3 was 11% below fiscal year 2019.
So despite strong sell-through trends, we lost volume as a result of limited supply.
While our brands all experienced delays in styles and sizes that limited their ability to fully meet strong demand, Old Navy was disproportionately impacted.
We believe these supply chain disruption impacts to our sales and margins are transitory, although will persist in Q4 and potentially into early next year.
With that, we've taken some near-term actions to proactively improve supply for holiday, and we're using the learnings from acute supply crisis to accelerate new capabilities for 2022 that we believe will help to better mitigate logistics challenges and more profitably increase speed to market go forward.
Let me touch on some efforts.
First, in the near term, we've secured incremental air capacity to support holiday inventory.
In addition to an estimated $100 million of air costs incurred in Q3, we've also invested approximately $350 million in Q4 airfreight to further expedite holiday deliveries.
And second, where possible, we have routed a modest portion of our inventory to East Coast ports to bypass the congestion in the L.A. Long Beach port.
While we aspire to improve our on-time deliveries for holiday by adding air capacity and utilizing alternate ports, the supply chain situation continues to be volatile.
Newly opened Vietnam factories are behind on holiday profits production, ramping up slowly.
Ongoing port delays are worsening and air charters are causing new airport congestion.
Our mitigation efforts are driving significant transitory costs, but we're focused on the long-term impact that delighting our customers with the products they love during the holiday season have in preserving market share and maintaining customer loyalty.
We remain cautious in our outlook for the balance of the year and are updating 2021 earnings per share guidance range to $0.45 to $0.60 per share on a reported basis, and $1.25 to $1.40 per share on an adjusted basis.
We are updating our guidance solely based on the acute revenue and margin impact from supply chain disruptions.
This range now reflects the estimated lost sales from supply disruptions in the second half of 2021 to be $550 million to $650 million.
In addition, our updated guidance range reflects approximately 450 million of transitory airfreight costs we have chosen to incur as we seek to meet as much customer demand as possible.
And we are confident that when adjusting for these substantial disruptive impacts to 2021, our underlying business is ahead of plan, and we will emerge strong in 2022 and beyond.
As we look to 2022, we are adding new capabilities that will enable us to navigate these disruptions with more flexibility and significantly less airfreight.
Beginning with summer 2022, our teams have added the expected longer port delay times into product booking deadlines, which we believe will enable us to ship goods largely by ocean for on-time deliveries.
In addition, Old Navy has now accelerated its use of digital product creation for the majority of its fall orders with vendors.
This has added speed to the pipeline as the breakthrough and efficiency for the brand.
Also, to increase geographic diversification and flexibility, we expect to leverage more multinational vendors.
And we will begin to deploy AI from our recent CB4 acquisition to better drive inventory in-stock in our stores.
AI, combined with ongoing inventory management transformation efforts and the leverage of our new loyalty program, gives us confidence in the sustainability of strong average unit retails in 2022.
Now turning to third-quarter financials.
Before I get into specific results, I'd like to note that there are select charges we incurred in the quarter that are excluded from our adjusted financials, specifically costs related to restructuring our long-term debt and the transition of our European market to a partnership model.
I'll provide more details on these as I talk through the results.
Net sales of 3.9 billion for the quarter were down 1% to 2019 with our Q3 sales deceleration from the first half of the year due to supply chain issues.
Comp sales improved 5% on a two-year basis.
We're particularly pleased that three of our four brands delivered strong two-year comp growth with Old Navy up 6%, Gap Global up 3%, and North America up 13%, and Athleta up 41%, all while navigating acute supply issues.
And while Banana Republic's two-year comp was down 10%, the brand made progress in the quarter through its product and customer experience relaunch.
Our strong e-commerce channel continues to be an advantage as online sales were up 48% compared to 2019, contributing 38% of sales in the quarter, up from 25% of total sales in Q3 2019.
Moving to gross margin.
Third-quarter reported gross margin was 42.1%, an increase of 310 basis points versus 2019.
Excluding impacts related to the transition of our European business to a partnership model, adjusted gross margin of 41.9% for the quarter represent the highest Q3 gross margin rate in over 10 years, expanding 290 basis points versus 2019 gross margin.
This is primarily driven by 300 basis points in ROD leverage from higher online sales and lower rent occupancy and depreciation as a result of strategic store closures and renegotiated rents.
Merchandise margins were down just 10 basis points, despite nearly 200 basis points of higher online shipping costs and about 250 basis points in short-term headwinds related to airfreight.
Product acceptance was strong across all brands with our overall Q3 discount rate at the lowest level in five years.
Reported SG&A, which includes 26 million in charges related to the transition of our European operating model was 38.3% of sales, deleveraging 470 basis points compared to Q3 2019.
On an adjusted basis, SG&A was 37.6% of sales, 610 basis points above 2019 adjusted SG&A.
We continue to execute our strategy of driving down fixed costs while investing a portion of those costs into demand generation in the form of marketing and technology.
Fixed costs have been significantly reduced as we successfully closed stores in North America, divested of two brands earlier this year, and reached partnership agreements for our European markets.
Marketing, up 360 basis points versus 2019, supported the rollout of our new initiatives, particularly loyalty, inclusive sizing at Old Navy, and the brand relaunch at Banana Republic, and is a major contributor to our low discount rates.
The balance of Q3 investments were primarily focused on technology to build out our digital and supply chain capabilities, as well as on higher bonus accruals versus a low 2019 baseline as no meaningful incentive payouts were granted in that year based on performance.
The investments we're making today are long-term differentiators, and we're committed to our strategy while remaining prudent even in the face of near-term supply headwinds.
Regarding operating margin, operating margin for the quarter was 3.9% on a reported basis.
Excluding $17 million in charges related to our European market transition, adjusted operating margin was 4.3%, which as I noted earlier, includes the impact of an estimated 300 million in lost sales due to constrained inventory in addition to approximately 100 million in nonstructural airfreight costs.
Moving on to interest and tax.
During the quarter, we restructured our long-term debt by retiring all of our 2.25 billion senior secured notes and issuing 1.5 billion of lower coupon unsecured senior notes.
Through this debt restructuring, we were able to reduce our overall debt balance, achieve material interest savings, approximately $140 million on an annual basis beginning in 2022, and unencumber our real estate assets previously pledged as collateral.
We incurred a 325 million nonrecurring charge related to debt extinguishment in the quarter.
Q3 net interest was $43 million.
Full-year net interest is now expected to be $163 million.
Looking beyond 2021, we expect annual net interest expense of around $70 million.
The effective tax rate was 29% for the third quarter.
Excluding the impact from fees related to debt extinguishment and the charge changes to our European operating model, the adjusted effective tax rate was 20%.
We expect the full-year effective tax rate to be about 23% on a reported basis and about 26% on an adjusted basis.
Regarding earnings on the quarter, Q3 reported earnings reflect a loss of $0.40 per share.
Excluding fees associated with our long-term debt restructuring and the transition of our European markets to a partnership model, adjusted earnings per share for the quarter were $0.27.
Inventory delays worsened throughout the quarter, and our Q3 sales down 1% versus 2019 outpaced average on-hand inventory of down 11% to 2019.
Third-quarter inventory ended flat to 2019 and down 1% versus 2020, with average on-hand inventory down 7% and in-transit up 16% versus last year.
On-hand inventory at the end of the quarter remained seasonally relevant with markdowns below Q3 fiscal '19 quarter-end levels.
We expect Q4 ending inventory to be up high single digits versus last year, although this point-in-time outlook may change given continued volatility in the supply chain.
Regarding the balance sheet and cash flow, we ended Q3 with $1.1 billion in cash, cash equivalents, and short-term investments.
During the quarter, we continue to earn -- to return cash to shareholders, paying a Q3 dividend of $0.12 per share and repurchasing $73 million in shares as part of our current plan to offset dilution.
And earlier this month, we announced a Q4 dividend of $0.12 per share.
Looking at our global store fleet, we are planning to close 350 Gap and Banana Republic.
North America stores is expected to be approximately 75% complete by the end of the year.
And with the recent announcement of our agreement to transition to a partner model in Italy, we've now concluded an important phase of the restructure of our European market.
All markets are expected to be transferred to our new partners in early 2022.
Now, I'd like to provide an update on our full-year financial outlook, which we are downwardly revising solely based on the acute impact of sales and margin of the supply chain disruptions.
Full-year 2021 reported earnings per share are now expected to be in the range of $0.45 to $0.60, which includes net charges of 445 million, comprised of 325 million in fees related to the restructuring of our long-term debt, and approximately 120 million related to divestitures and the transition of our European business model to a part -- European business to a partnership model.
Excluding these charges and associated tax impacts, full-year 2021 adjusted earnings per share is expected to be in the range of $1.25 to $1.40.
This updated guidance now includes the following assumptions.
First, we expect 2021 full-year revenue growth of about 20% versus 2020.
This range now reflects the expected lost sales from supply disruptions in the second half of 2021 of approximately 550 million to 650 million, including an estimated 300 million from Q3 and an estimated 250 million to 350 million in Q4.
Second, we expect full-year nonstructural airfreight to be approximately $450 million.
We consciously chose to air approximately 35% of our holiday product given the two-and-a-half-month delays from Vietnam closures in Q3 and the over three-week West Coast port delays so that we can give our customers as much holiday product as we can to deliver on their expectations.
While this is material to our profitability, we believe it is necessary to further mitigate sales losses and retain customers for the long term.
With the added air cost and the meaningful sales impact from supply constraints, we now expect full-year 2021 reported operating margin to be about 4.5%, with adjusted operating margin at about 5% for fiscal 2021.
This is inclusive of short-term air costs in the back half, impacting operating margin by about 270 basis points.
Full-year capital spend is still expected to be approximately $800 million.
In summary, when adjusting for the acute impact of supply chain disruptions, we are still expecting the year to end at or above our original plan for 2021, demonstrating that our underlying business trends are quite strong and providing real momentum.
The progress we've made on our Power Plan 2023 strategy in the face of these challenges highlights the strength of our core business and the health of our brands, and we remain confident in our path as we move toward a 10% operating margin in 2023.
With that, we'll open it up for Q&A.
| qtrly loss per share $0.40; qtrly non-gaap earnings per share $0.27.
qtrly online sales grew 48% versus q3 2019 and represented 38% of the total busines.
sees fy earnings per share in the range of $0.45 to $0.60.
sees fy adjusted earnings per share in the range of $1.25 to $1.40.
now expects fy revenue growth to be about 20% versus fiscal year 2020.
qtrly old navy net sales were up 8% versus 2019; qtrly gap net sales declined 10% versus 2019.
qtrly comparable sales were up 5% versus 2019.
global supply chain disruption, including covid-related factory closures, continued port congestion, caused significant product delays in q3.
meaningfully reduced inventory positions throughout quarter negatively impacted sales as brands were unable to fully meet strong consumer demand.
leveraging increased air freight, port diversification to navigate ongoing delivery challenges for holiday.
qtrly banana republic net sales declined 18% versus 2019; qtrly athleta net sales were up 48% versus 2019.
|
Now, what a difference a year makes.
Last April was rather dark I think for all of us and May, with the George Floyd tragedy, was hopeless and, boy, I'll tell you this -- the Company has rebounded tremendously.
And in particular our colleagues have shown incredible resilience over the past year.
I'm proud of our colleagues, I'm proud of our Company, what we've accomplished and our performance amid the continuing echo of change in this post-pandemic world.
We are the world's premier organizational consultancy.
There is no question about that.
We're meeting the key objectives that we discussed last quarter, which included diversifying our offerings, capitalizing on our leadership and relevant solutions, driving an integrated go-to-market strategy, advancing our position as a premier career destination and pursuing transformational opportunities at the intersection of talent and strategy.
And all of this is translating to what I believe is outstanding performance.
During the quarter we generated about $555 million in fee revenue.
It was an all-time high that was up 26% year-over-year.
Our profitability was strong.
We had an adjusted EBITDA margin of a little over 20% and adjusted earnings per share of $1.21.
We've clearly accelerated through the turn and it's a testament to the pivot we made and the agility of our colleagues over this past year.
The diversity and relevance of our offerings and our ability to deliver our consulting services in a virtual world have helped clients achieve organizational opportunities and our Company deliver strong financial results.
In this new world there is tangible opportunity for Korn Ferry.
The center of gravity for today's workforce is shifting from a place of work to a location for collaboration.
It's no longer about the where, it's all about the why and how work gets done differently.
Almost every company on the planet is reimagining and will have to continue to reimagine its business from its strategy to its people to its culture.
Quite simply, companies are rethinking their organizational structure, roles and responsibilities, how they compensate, how they motivate, how they engage, how they develop their workforce, let alone the type of agile talent they hire and how they hire that talent and they're going to need to lead differently.
Gone are the days of vertical leadership that focuses on driving results up the chain.
Today companies need more horizontal leadership.
That's all about leading across the enterprise.
And these changes align with Korn Ferry's businesses.
Whether it's M&A services, change management, virtual sales effectiveness or customer experience services, Korn Ferry is poised to seize this opportunity.
We've also used this time of change as an opportunity to reimagine our own business.
In a post-pandemic world and beyond, we're delivering an integrated value change, digitally enabled and delivered.
To deliver this at scale, we're bringing everything together in a digital framework.
All this makes our world-class IP even more relevant and unique.
To fulfill our vision and position our Company for long-term success, we remain relentlessly focused on meeting the evolving needs of our clients.
Number one, we're driving an integrated solutions based go-to-market approach through our marquee and regional accounts.
That not only facilitates growth and enduring partnerships, but it's also key to more scalable and durable revenues.
We have about 350 marquee and regional global accounts and they continue to demonstrate the power of this strategy.
The accounts, they generated about $640 million in fee revenue during the year and they sustainably utilize all of our global capabilities even during challenging economic periods.
Today the fight for talent is more profound than ever.
The pandemic shakeout is driving a robust market for our talent acquisition expertise, capabilities and approach and we're helping companies find the right talent, fitting the right need, from senior level executives, the board members to professional level talent.
And looking at our digital and consulting businesses, we've been actively marrying our capabilities with today's megatrends.
The result is larger projects with greater sustainability and more durable revenue.
Right now, we're seeing high areas of demand in D&I and organizational transformation as well as our core solutions such as assessment, pay and governance and leadership and professional development.
We indeed have a lot of opportunity in front of us.
We've become a much different company with a broader and deeper mix of business.
Importantly, we're translating the value we are creating for our clients and the returns for our shareholders.
As part of our balanced capital allocation framework, I'm pleased to announce that our Board has approved a 20% increase in our quarterly dividend to $0.12 per share.
Looking to the fiscal year ahead, I truly feel we have the right strategy with the right people at the right time to help our clients drive performance in this new world.
Bob, it's over to you.
Our fourth quarter results continue to demonstrate the relevance and importance of our human capital solutions in the rapidly evolving business environment that we find ourselves in.
It also validates our strategy and highlights the strength and durability of our business model.
By all measures, the fourth quarter was the strongest quarter in our history with record revenue and profitability.
Our new business in the fourth quarter was also a record and it actually accelerated throughout the quarter, leaving us well positioned for growth in fiscal '22.
Now before I jump into the actual results for the quarter, I want to talk about a couple of proof points that we have shared with you in the past that really continue to demonstrate the success of our strategy.
First, our overall business has demonstrated more resilience than at any other time in our history and just by way of example, in just three quarters from our COVID recession trough, we've achieved new all-time highs in new business revenue and profitability.
In contrast, coming out of the great recession, approximately 10 years ago, it took over 12 quarters for fee revenue to rebound past the prior pre-recession high.
Our second marquee and regional account program that Gary talked about, really continues to add value, providing a steady, strong growing stream of fee revenue for our firm.
For all of fiscal year '21, 35.3% of our consolidated fee revenue was generated from these accounts.
Further, our year-over-year fee revenue on marquee and regional accounts was essentially flat, while the rest of the Company was down about 9%.
For new business, our marquee and regional accounts were actually up 11% year-over-year while the rest of the Company was flat.
And finally, our success driving cross line of business referrals continues to grow.
Just over three years ago cross line of business fee revenue referrals were approximately 15%.
Today, fee revenue from cross line of business referral stands at almost 27% for all of fiscal '21 and almost 29% for the fourth quarter.
Now let's turn to some important highlights of our fourth quarter.
As Gary mentioned, fee revenue in the fourth quarter was up $115 million year-over-year and $80 million sequentially, reaching an all-time high of $555 million.
Growth continued to be broad-based with fee revenue improving sequentially for the third consecutive quarter in each of our lines of business.
Recent growth trends for our flagship talent acquisition businesses have been particularly strong.
Consolidated fee revenue growth in the fourth quarter measured year-over-year was up 26% with Executive Search being up 20%, RPO and Pro Search up 46% and Consulting up 27%, all reaching new all-time quarterly fee revenue highs.
New business growth in the fourth quarter was also very strong with all business lines generating new business at levels higher than before the pandemic.
Additionally, earnings and profitability were at record levels in the fourth quarter.
Adjusted EBITDA grew $16 million or 17% sequentially to $113 million with an adjusted EBITDA margin of over 20% for the second consecutive quarter.
Our earnings and profitability continued to benefit from both higher consultant and execution staff productivity and lower G&A spend driven in part by virtual delivery processes.
Our adjusted fully diluted earnings per share also reached a record level in the fourth quarter, improving to $1.21, which was up $0.26 or 27% sequentially and up $0.61, or 102% year-over-year.
Now, it's important to note that the fourth quarter expenses included $13.5 million of non-reoccurring expense accruals.
That's roughly 2.5 percentage points of margin related to our business recovery plan, as we decided to reimburse employees for the remaining portion of salaries that were foregone during the year.
Now, turning to new business, the month of March and April were the two best months of new business ever.
On a consolidated basis, new business awards, excluding RPO, were up 48% year-over-year and up 16% sequentially.
Measured on a sequential basis, new business growth in the fourth quarter also showed broad-based improvement led by our talent acquisition businesses with Executive Search up 29% and Professional Search up 18%.
In addition, our digital business was up 8% and consulting was up 5%.
RPO new business was also strong in the fourth quarter with an additional $115 million of new contracts.
Our cash balance also improved.
At the end of the fourth quarter, cash and marketable securities totaled $1.1 billion.
Now excluding amounts reserved for deferred compensation arrangements and for accrued bonuses, our investable cash balance at the end of the fourth quarter was approximately $642 million and that's up $108 million sequentially and up $110 million year-over-year.
Now it continues to be our priority to invest back into our business to maximize future growth.
Now, this includes the hiring of additional fee earners.
Over the last three quarters combined across all of our business lines, we have hired approximately 160 new consultant fee earners and that includes about 86 in the fourth quarter with the rest coming from quarters two and three.
Additionally, as Gary mentioned, consistent with our balanced capital allocation framework, our Board has approved a 20% increase in our quarterly dividend to $0.12 per share and that's going to be payable on July 30 to shareholders of record on July 6, 2021.
Starting with KF Digital.
Global fee revenue for KF Digital was $80.5 million in the fourth quarter, which was up 16% year-over-year and up 6% sequentially.
The subscription and licensing component of KF Digital fee revenue continues to improve.
In the fourth quarter subscription and license fee revenue was $24 million, which was up over 14% year-over-year.
Global new business for KF Digital in the fourth quarter reached $108 million, the second consecutive quarter of new business over $100 million.
Additionally, for all of fiscal '21, new business tied to subscription and license services improved approximately 72%.
Earnings and profitability also improved for KF Digital in the fourth quarter with adjusted EBITDA of $27.9 million and a 34.7% adjusted EBITDA margin.
Now turning to Consulting.
In the fourth quarter Consulting generated $153.6 million of fee revenue, which was up approximately $32.6 million or 27% year-over-year and up approximately $17.3 million or 13% sequentially.
Fee revenue growth was broad based across all solution areas and strongest regionally in North America.
Consulting new business also improved in the fourth quarter, growing approximately 53% year-over-year and 5% sequentially.
Additionally, new business tied to large engagements, those over $500,000 in value, was up approximately 56% in the fourth quarter and up approximately 31% for all of fiscal '21.
Regionally, new business growth was also broad based and remained strongest in North America.
Adjusted EBITDA for Consulting in the fourth quarter was up $16.1 million or 145% year-over-year with an adjusted EBITDA margin of 17.7%.
RPO and Professional Search global fee revenue improved to $120.3 million in the fourth quarter which was up 46% year-over-year and up 26% sequentially.
Both RPO and Professional Search benefited from the post-recession surge in demand for skilled professional labor.
RPO fee revenue grew approximately 58% year-over-year and 34% sequentially, while Professional Search fee revenue was up approximately 27% year-over-year and up 17% sequentially.
With regards to new business, in the fourth quarter, Professional Search was up 17% sequentially and RPO was awarded $115 million of new contracts, consisting of $23 million of renewals and extensions and $92 million of new logo work.
Adjusted EBITDA for RPO and Professional Search surged to approximately $30 million in the fourth quarter, which is up approximately $17.2 million or 136% year-over-year and $10.3 million or 53% sequentially.
Adjusted EBITDA margin for RPO and Professional Search was 24.9% in the fourth quarter.
Finally, in the fourth quarter, global fee revenue for Executive Search exceeded $200 million for the first time in Company history.
Global Executive Search fee revenue was up approximately 20% year-over-year and up approximately 19% sequentially in the fourth quarter.
Growth was also broad based and led by North America, which grew 28% year-over-year and 23% sequentially.
Sequentially, fee revenue in EMEA and APAC was up approximately 15% and 9% respectively.
The total number of dedicated Executive Search consultants worldwide at the end of the fourth quarter was 524, which was down 32 year-over-year and up two sequentially.
Annualized fee revenue production per consultant in the fourth quarter improved to a record $1.54 million and the number of new search assignments opened worldwide in the fourth quarter was up 39% year-over-year and 32% sequentially to 1,712.
In the fourth quarter, global Executive Search adjusted EBITDA grew to approximately $49.8 million, which was up 5% year-over-year and up 19.5% sequentially.
Adjusted EBITDA margin was approximately 25%.
The acceleration of new business in the month exiting the fourth quarter and entering the first quarter of fiscal '22 has positioned us very well for further growth.
Our combined total new business in the months of March, April and May was easily the highest total for any three-month period in Company history.
Additionally, strong new business activity has been broad based with all of our lines of business taking advantage of both the market strengthening and the acceleration of demand for our unique combination of service offerings.
For the last couple of quarters demand across all of our lines of business has been strongest in North America, but I will say during the fourth quarter, we did begin to see signs of acceleration in international markets as well.
Now if recent new business activity continues and normal seasonal patterns hold, we expect that new business in the first quarter will remain strong.
We saw that in May and so far new business month-to-date in June is in line with our expectations.
Recognizing normal seasonal patterns and assuming no new major pandemic-related lockdowns or changes in worldwide economic conditions, financial markets or foreign exchange rates, we expect our consolidated fee revenue in the first quarter of fiscal '22 to range from $535 million to $555 million and our consolidated diluted earnings per share to range from $1.04 to $1.14.
As we close out the fiscal year, we are very encouraged by the momentum in our business.
This is the momentum that we believe is reflective not only of the macro conditions but of the intentional steps we have taken to build this business and extend our comprehensive offerings to our clients to enhance our financial profile and really to position Korn Ferry for long-term success.
Through the power of our offerings, we look forward to building on these results for quarters and years to come.
With that, we'd be glad to answer any questions that you may have.
| compname posts q4 adjusted earnings per share $1.21.
q4 adjusted earnings per share $1.21.
fee revenue of $555.2 million in q4 fy'21, an increase of 26% from q4 fy'20.
q1 fy’22 fee revenue is expected to be in the range of $535 million and $555 million.
q1 fy’22 diluted earnings per share is expected to range between $1.04 to $1.14.
|
In particular, the extent of the continued impact of COVID-19 on our business remains uncertain at this time.
During today's call, we will discuss GAAP and non-GAAP financial measures.
As for the content of today's call, Kevin will start with a discussion of the business.
And Lewis will follow with a recap of Dolby's financial results and provide our fourth quarter, second half and fiscal 2021 outlook.
Q3 was another strong quarter for Dolby.
Our revenue and earnings for the quarter were solid, and we are on track to deliver annual revenue growth of over 10% and year-over-year earnings growth at an even higher rate.
At the same time, Dolby experiences are accessible to a growing number of people around the world, highlighted by the launch of Dolby Atmos on Apple Music and the Tokyo Olympics broadcasted in Dolby Vision and Dolby Atmos.
Before Lewis takes you through the numbers, I wanted to highlight the recent progress we have made in enabling Dolby experiences across a much broader range of content, which creates opportunities for continued revenue and earnings growth.
The inclusion of Dolby Atmos on Apple Music marks a significant step forward in bringing Dolby Atmos Music to a much larger audience and establishing it as the best way to create and listen to music.
The Dolby Atmos music experience has been prominently featured by Apple and has been met with positive and enthusiastic reactions from artists, industry partners and consumers.
Apple Music subscribers around the world can easily access albums and playlists of Dolby Atmos songs and can enjoy their music across Apple's wide range of products that support the combined Dolby experience.
And recently, Dolby Atmos-enabled Android devices can also enjoy Dolby Atmos on Apple Music.
Beyond Apple Music, Naver Vibe, a music streaming service in South Korea, launched support for Dolby Atmos this quarter.
And additionally, our partners like TIDAL, Amazon Music, Hungama and Anghami continue to grow the number of songs available in Dolby Atmos on their streaming services.
As the ways in which consumers can enjoy Dolby Atmos music expands, we are also focused on growing the library of music through our engagement with artists and music distributors.
DistroKid, a leading distributor of independent music, announced that they will be delivering songs in Dolby Atmos on both Apple Music and TIDAL.
We see enthusiastic engagement from popular artists, including Ariana Grande, BTS, Billie Eilish and Glass Animals, who are among the many artists highlighting the availability of their music in Dolby.
As we expand the availability of Dolby Atmos music to consumers, we add to the reasons to adopt Dolby Atmos in mobile, PC and automotive.
We also had some exciting wins in live broadcast this quarter.
Comcast is currently delivering NBC's Live Tokyo Olympics coverage in both Dolby Vision and Dolby Atmos to their X1 customers.
This marks the first time that the Olympics can now be enjoyed in the combined experience.
Also this quarter, Euro 2020 broadcasted in Dolby Atmos across multiple broadcasters in Poland, Malaysia, across the Middle East and North Africa.
And the Eurovision Song Contest was broadcast in Dolby Atmos live to viewers in the Netherlands.
By enabling a growing number of live broadcast events, we build upon our strong presence in movie and TV content and add to the value proposition for deeper adoption of Dolby in TVs, set-top boxes, DMAs and mobile applications.
The momentum of Dolby Vision and Dolby Atmos content across streaming services continues to be strong as our partners bring new titles in Dolby Vision and Dolby Atmos.
Paramount+ added support for Dolby Atmos when they recently released A Quiet Place II in the combined Dolby experience.
We have also seen our partners expand the amount of original local content that is enabled in Dolby.
iQIYI recently announced they will be making Dolby Vision and Dolby Atmos content available on their international app that is available in over 190 countries and will be enabling Dolby experiences in new original local content on their platform.
Apple TV+ is enabling new local episodic content in Dolby Vision and Dolby Atmos in Korea.
Netflix released their first original film for Thailand in Dolby Vision this quarter, and Disney+ Hotstar is enabling new local content for India in Dolby.
Stan, a leading OTT service in Australia, now supports the combined Dolby experience on their platform.
Enabling relevant local content in Dolby is another important factor in driving more adoption across the global markets that our OEM partners serve.
This quarter, Xiaomi and Skyworth released new TV models highlighting both Dolby Vision and Dolby Atmos.
In Japan, Regza launched their first TV with Dolby Vision IQ, adding to a growing list of partners that includes LG, Panasonic, TCL, Xiaomi and Hisense.
Sagemcom recently launched their all-in-one video soundbox, which combines set-top box and sound bar functionality with support for Dolby Atmos.
And LG announced the rollout of updates coming to their OLED TVs that optimize for the best gaming experience in Dolby Vision.
Gaming is another area we are focused on growing the number of experiences in Dolby, and we have begun to see momentum with mobile games becoming available in Dolby Atmos.
With gaming and music, we are enabling more of the relevant content for mobile phones and PCs to now be Dolby experiences, adding to the reasons for adoption on these devices.
This quarter, we saw Dolby Atmos highlighted across several mobile phone launches in India, including Oppo and their Realme branded phones and Xiaomi's Redmi gaming smartphone.
Within PC, Samsung recently launched a new Galaxy book lineup featuring Dolby Atmos.
We continue to build our momentum of Dolby Vision and Dolby Atmos across content, services and devices.
And at the same time, we still see significant opportunity to increase adoption as we grow the amount of content experiences available in Dolby.
Let me shift to Cinema.
We now have about 95% of our Dolby Cinemas open globally, and our partners remain deeply engaged.
In recent months, more content has returned to the big screen, and we have seen positive signs in box office performance.
This was highlighted in the U.S. with strong opening weekends from titles like Black Widow and F9: The Fast Saga that were both available in Dolby Cinema.
We continue to see moviegoers seeking to enjoy these movies in the best way possible with box office skewing more towards Dolby Cinema and premium experiences compared to pre-pandemic levels.
And we are now bringing Dolby expertise and innovations that create the best way to enjoy content to a much broader range of experiences and real-time interactions through Dolby.io.
Marie brings strong leadership experience and a track record of leading engagement with developer communities, including most recently at DocuSign, where she established the company's first-class developer experience.
During our first year with Dolby.io in market, our focus has been on building our engagement with the developer community, learning from these interactions and continually evolving our offerings to best meet the needs of developers.
Since launch, we have seen strong demand for higher-quality, real-time experiences.
We have now begun to roll out a significant update that will enable larger scale interactions with more participants.
We have positive feedback from current customers who are now live with this release, and we are actively engaging a significant pipeline of potential customers that these increased capabilities can directly address.
We see engagement across a variety of use cases, including podcasting, remote collaboration tools, virtual meetings and online education.
We are excited by the many ways developers are engaging with our APIs, and we are just at the beginning of what Dolby.io can enable in creating higher-quality, everyday audiovisual experiences.
So to wrap up, Dolby is available to a much larger audience across a wider range of content today than ever before.
As we build upon our presence in movie and TV content with more Dolby experiences in music, gaming and live events, we increase the reasons for deeper adoption of Dolby across devices.
And with Dolby.io, we are building the momentum to bring the Dolby magic to a wide range of use cases and experiences.
All of this gives us confidence in our ability to drive revenue and earnings growth into the future.
And with that, I'd like to hand it over to Lewis to take us through the financials.
And as Kevin said in his opening comments, we did have another solid quarter.
So let me go through the Q3 numbers, and then I'll walk you through the outlook for Q4.
So starting off with revenue.
Revenue in the third quarter was $287 million, which was at the higher end of our guidance range and included a true-up of about $14 million for Q2 shipments reported that were above the original estimates, and that item is not uncommon.
On a year-over-year basis, third quarter revenue was about $40 million above last year's Q3 as we benefited from higher market TAMs, along with greater adoption of our Dolby technologies.
And then on a sequential basis, revenue was down from Q2, mainly due to timing of revenues from contracts and from patent licensing programs, and both of these topics were anticipated when we gave guidance.
So Q3 revenue was comprised of $272 million in licensing and $15 million in products and services.
So let's discuss the trends in licensing revenue by end market, starting with broadcast.
Broadcast represented about 46% of total licensing in the third quarter.
Broadcast revenues increased by about 40% year-over-year, and that was driven by higher market volume, higher recoveries and higher adoption of our Dolby technologies.
And then on a sequential basis, broadcast increased by about 18%, and that was due mostly to higher recoveries.
In the mobile space, mobile represented about 18% of total licensing in Q3.
Mobile declined by about 36% year-over-year, mainly due to lower recoveries, and that was offset partially by higher market volume.
And then on a sequential basis, mobile was down by about 24%, due mostly to timing of revenue under contracts, and we did anticipate that.
Consumer electronics represented about 14% of total licensing in Q3.
And on a year-over-year basis, CE licensing increased by about 86%, driven by higher market volume, higher adoption of Dolby and higher recoveries.
On a sequential basis, CE went down by about 22%, and that was due mainly to timing of revenue under contracts.
PC represented about 9% of total licensing in the third quarter.
PC was higher than last year by about 6%, due to higher market volume, along with increased adoption of Dolby Vision and Dolby Atmos, offset partially by lower recoveries.
And sequentially, PC was down by about 51%, due mostly to timing of revenue, and that lines up with some of the comments I made last quarter about its increase that quarter because of timing.
Other markets represented about 13% of total licensing in the third quarter.
They were up about 42% year-over-year, and that was driven by higher revenue from Dolby Cinema, via admin fees and gaming.
And on a sequential basis, other markets increased by about 4% due mostly to Dolby Cinema and to gaming.
So if I go beyond licensing, our products and services revenue was about $15.2 million in Q3 compared to $16 million in Q2 and $11.8 million in last year of Q3.
The year-over-year increase reflects just modestly higher demand in the cinema industry.
So now I'd like to discuss Q3 margins and our operating expenses.
Total gross margin in the third quarter was 89% on a GAAP basis and 89.7% on a non-GAAP basis.
Products and services gross margin on a GAAP basis was minus $3.9 million in Q3 compared to minus $345,000 in the second quarter, and products and services gross margin on a non-GAAP basis was minus $2.6 million in Q3 compared to a positive $1.1 million in the second quarter.
Both GAAP and non-GAAP product gross margins were lower than what I had guided, and that was due to write-downs we took during the third quarter for conferencing hardware.
Operating expenses in the third quarter on a GAAP basis were $199.1 million compared to $204 million in Q2, and our operating expenses in the third quarter on a non-GAAP basis were $173.6 million compared to $178.4 million in the second quarter.
Now operating expenses were below guidance in Q3, and that was mainly due to some of our marketing programs that shifted in timing from Q3 into Q4.
And you will see that sort of mirrored back and reflected in our Q4 expense guidance, where the delta from Q3 to Q4 will be driven mostly by our marketing programs.
And then our operating income in the third quarter was $56.1 million on a GAAP basis or 19.6% of revenue compared to $34.1 million or 13.8% of revenue in Q3 of last year.
Operating income in the third quarter on a non-GAAP basis was $83.6 million or 29.1% of revenue compared to $60.5 million or 24.5% of revenue in Q3 of last year.
Income tax in Q3 was 7.7% on a GAAP basis and 13.7% on a non-GAAP basis.
Net income on a GAAP basis in the third quarter was $54.6 million or $0.52 per diluted share compared to $67.3 million or $0.66 per diluted share in last year's Q3.
Now I'd like to point out as a reminder, last year's Q3 net income, and that's both GAAP and non-GAAP, included $36 million of discrete tax benefits, which does affect the year-over-year comparisons.
So our net income on a non-GAAP basis in the third quarter was $74.8 million or $0.71 per diluted share compared to $87.5 million or $0.86 per diluted share in Q3 of last year.
And again, that benefits -- the last year number benefits from that onetime tax credit.
For both GAAP and non-GAAP, net income in the third quarter was above guidance due to revenue landing at the higher end of our range and expenses coming in below the range.
During the third quarter, we generated $172 million in cash from operations compared to $134 million generated in last year's third quarter.
We ended the third quarter with about $1.3 billion in cash and investments.
During the third quarter, we bought back about 400,000 shares of our common stock and ended the quarter with about $37 million of stock repurchase authorization available.
Today, we announced that the Board of Directors has approved an additional $350 million of stock repurchase authorization.
So if I combine that new approval with the remaining balance that was at the end of June, means that as of today, we have $387 million of stock repurchase authorization available going forward.
We also announced today a cash dividend of $0.22 per share.
The dividend will be payable on August 19, 2021, to shareholders of record on August 11, 2021.
So now let's discuss the forward outlook.
Last quarter, when I discussed guidance for Q3, I laid out a scenario that said our second half revenue could range from $560 million to $600 million.
Now with Q3 under our belt and having landed in the range, we are updating the second half revenue range to $570 million to $600 million, in other words, bumping up the lower end by $10 million, which means we are anticipating Q4 revenue to range from $280 million to $310 million.
Within that, licensing could range from $265 million to $290 million, while products and services could range from $15 million to $20 million.
With respect to market conditions and industry analyst reports that look out over the horizon, there's still a fair amount of uncertainty out there, and so we are maintaining similar assumptions as what we talked about last quarter, namely that PC TAMs in the second half could be higher on a year-over-year basis, while TAMs for TVs and other consumer devices could be down in the second half.
We also continue to anticipate that we'll see organic growth on a year-over-year basis from broader adoption of Dolby technologies across various markets.
And we also anticipate some higher revenue from Dolby Cinema as that industry looks to improve, which we have seen some signs of in recent times, and Kevin made a couple of comments about that with some of the titles that came out.
So let me move on to the rest of the P&L outlook for Q4.
Q4 gross margin on a GAAP basis is estimated to range from 88% to 89%, and the non-GAAP gross margin is estimated to range from 89% to 90%.
Within that, products and services gross margin is estimated to range from about breakeven to $1 million on a GAAP basis and from about $1 million to $2 million on a non-GAAP basis.
Operating expenses in Q4 on a GAAP basis are estimated to range from $216 million to $226 million, and operating expenses in Q4 on a non-GAAP basis are estimated to range from $190 million to $200 million.
As I mentioned earlier, the increase from Q3 to Q4 would be driven primarily by specific marketing programs, some of which shifted in timing from Q3 into Q4.
But in total, Q3 plus Q4 marketing is expected to land at a similar amount as we were thinking last quarter.
And to repeat a comment I made last quarter, marketing expenses for the full year FY '21 would be similar to what they were last year or maybe a bit lower depending on how Q4 turns out.
So let's finish up the Q4 guidance.
Other income is projected to range from $1 million to $2 million for the fourth quarter, and our effective tax rate for Q4 is projected to range from 19% to 20% on both a GAAP and non-GAAP basis.
Based on a combination of the factors I just covered, we estimate that Q4 diluted earnings per share could range from $0.25 to $0.40 on a GAAP basis and from $0.47 to $0.62 on a non-GAAP basis.
And now that we've provided guidance for Q4, here's a full year outlook that would correspond to that.
FY '21 revenue is anticipated to range from $1.28 billion to $1.31 billion, with gross margin ranging from 89% to 90% on a GAAP basis and 90% to 91% on a non-GAAP basis.
Total operating expenses for the year are estimated to range from $810 million to $820 million on a GAAP basis and from $710 million to $720 million on a non-GAAP basis.
And full year diluted earnings per share are estimated to range from $2.79 to $2.94 on a GAAP basis and from $3.57 to $3.72 on a non-GAAP basis.
So operator, hopefully, my phone is working okay now.
Can you queue up the first question?
Yes, Mr. Chew, your line is open.
Let's move on to the rest of the P&L outlook for Q4.
I wasn't quite sure where I dropped off.
Q4 gross margin on a GAAP basis is estimated to range from 88% to 89%, and the non-GAAP gross margin is estimated to range from 89% to 90%.
Within that, products and services gross margin is estimated to range from about breakeven to $1 million on a GAAP basis and from about $1 million to $2 million on a non-GAAP basis.
Operating expenses in Q4 on a GAAP basis are estimated to range from $216 million to $226 million, and operating expenses in Q4 on a non-GAAP basis are estimated to range from $190 million to $200 million.
As I mentioned earlier, the increase from Q3 to Q4 would be driven primarily by specific marketing programs, some of which shifted in timing from Q3 into Q4.
But in total, Q3 plus Q4 marketing is expected to land at a similar amount as we were thinking last quarter.
And to repeat a comment I made last quarter, marketing expenses for the full year FY '21 would be similar to what they were last year or maybe a bit lower depending on how Q4 turns out.
So let's finish up the Q4 guidance.
Other income is projected to range from $1 million to $2 million for the fourth quarter, and our effective tax rate for Q4 is projected to range from 19% to 20% on both a GAAP and non-GAAP basis.
Based on a combination of the factors I just covered, we estimate that Q4 diluted earnings per share could range from $0.25 to $0.40 on a GAAP basis and from $0.47 to $0.62 on a non-GAAP basis.
And now that we've provided guidance for Q4, here's a full year outlook that would correspond to that.
FY '21 revenue is anticipated to range from $1.28 billion to $1.31 billion, with gross margin ranging from 89% to 90% on a GAAP basis and 90% to 91% on a non-GAAP basis.
Total operating expenses for the year are estimated to range from $810 million to $820 million on a GAAP basis and from $710 million to $720 million on a non-GAAP basis.
And full year diluted earnings per share are estimated to range from $2.79 to $2.94 on a GAAP basis and from $3.57 to $3.72 on a non-GAAP basis.
So operator, hopefully, my phone is working okay now.
Can you queue up the first question?
| compname reports q3 non-gaap earnings per share of $0.71.
sees fy revenue $1.28 billion to $1.31 billion .
q3 non-gaap earnings per share $0.71.
q3 gaap earnings per share $0.52.
board of directors has approved increasing size of its stock repurchase program by $350 million.
h2 total revenue is estimated to range from $570 million to $600 million.
fy diluted earnings per share is anticipated to range from $2.79 to $2.94 on a gaap basis and from $3.57 to $3.72 on a non-gaap basis.
|
We have Ryan Lance, our chairman and CEO; Bill Bullock, executive vice president and chief financial officer; Dominic Macklon, executive vice president of strategy, sustainability, and technology; Tim Leach, executive vice president of Lower 48; and Nick Olds, executive vice president for global operations.
And finally, we'll also make reference to some non-GAAP financial measures today.
So, 2021 was a truly remarkable year for ConocoPhillips.
Our operating performance around the globe was outstanding, we generated strong returns on and of capital for our shareholders and closed on two significant, highly accretive acquisitions in the heart of the Permian Basin.
Our exceptional results last year are directly attributable to the talent and dedication of our global workforce.
We produced 1.6 million barrels per day and brought first production online at GMT2 in Alaska, the third Montney well pad, and the Malikai Phase 2 and S&P Phase 2 projects in Malaysia.
We also completed the Tor II project in Norway and achieved all of this with excellent cost, schedule, safety, and environmental performance.
Financially, we achieved a 14% full-year return on capital employed or 16% on a cash-adjusted basis and generated $15.7 billion in CFO, with over $10 billion in free cash flow.
And we returned $6 billion to our shareholders, representing 38% of our cash from operations.
We also continued our rigorous portfolio optimization work, completing the truly transformative Concho and Shell Permian acquisitions and further high-grading our asset base around the world.
In the Asia Pacific region, we exercised our pre-emption right to acquire an additional 10% in APLNG and announced the sale of assets in Indonesia for $1.4 billion.
In the Lower 48, we generated $0.3 billion in proceeds from the sale of noncore assets last year, and last week, we signed an agreement to sell an additional property set, outside of our core areas for an additional $440 million.
Collectively, these transactions reduced both the average cost of supply and the GHG intensity of our more than 20-billion-barrel resource base and we're well down the road toward achieving our $4 billion to $5 billion in dispositions by 2023.
In early December, consistent with our 10-year plan and capital allocation priorities, we announced a returns-driven capital budget for 2022 that's expected to deliver modest growth this year.
We also introduced a new variable return of cash, or VROC, tiered to our distribution framework and provided a full-year target of $7 billion in total returns of capital to our shareholders.
Based on current prices on the forward curve, we've increased the target to $8 billion, with the incremental $1 billion coming in the form of increased share repurchases and a higher variable return of cash.
The $0.30 per share VROC announced for the second quarter represents a 50% increase over our inaugural variable return to shareholders that we paid this quarter.
Now, to put the $8 billion in perspective, it equates to an increase of more than 30% from the $6 billion returned last year and a greater than 50% increase in projected cash return to shareholders.
Our three-tier distribution framework provides a flexible and durable means to meet our returns commitment through the price cycle and truly is differential to others in this sector as our returns commitment is based on a percentage of CFO and not free cash flow.
And as you know, we are guided in everything we do by our triple mandate.
We must reliably and responsibly deliver oil and gas production to meet energy transition pathway demand.
We need to generate competitive returns on and of capital for our shareholders and achieve our Paris-aligned net-zero ambition by 2050.
Just as I'm very proud of the excellent operational and returns-focused performance we delivered in 2021, I'm equally pleased about the progress we have made in support of the third pillar of our mandate.
We increased our medium-term emissions intensity reduction target to 40% to 50% by 2030 and expanded it to include both gross operated and net equity production.
As a reminder, we're also committed to further reducing our methane emissions and achieving our zero routine flaring ambition by 2025.
And as highlighted in our December release, we've allocated $0.2 billion of this year's capital program for projects to reduce the company's Scope 1 and 2 emissions intensity and investments in several early stage, low-carbon opportunities that address end-use emissions.
We strongly believe that this level of focus on and performance toward is fully realizing our triple mandate as ConocoPhillips is very well positioned to not just survive through the energy transition, but to thrive regardless of the pathways it takes.
While we're on the topic of energy transition, I'd like to touch on the macroenvironment.
Commodity prices today reflect global energy demand returning to pre-pandemic levels, along with supply being impacted by decreased investment in oil and gas over the past couple of years, concerns about inventory levels, and the amount of available spare production capacity in the system.
All these factors demonstrate the ongoing importance of our sector to the global economy today and for the foreseeable future.
It's becoming increasingly clear that the energy transition isn't going to happen with the flip of a switch.
What people and businesses around the globe need is a managed and orderly transition, but that's not what the world is seeing to this point.
Supply and demand balances are fragile at the moment, likely driving continued volatility and the current commodity price situation in Europe may be providing a cautionary signal.
The simple reality is that most alternative energy sources still have a long way to go toward becoming as scalable, reliable, affordable, and accessible as the world needs them to be, which brings me back to our triple mandate and the importance of performing well across all three of the pillars, for our shareholders and for the people in the world who need and use our products.
Looking at fourth-quarter earnings, we generated $2.27 per share in adjusted earnings.
This performance reflects production above the midpoint of guidance and strong price realizations, as well as some commercial and inventory timing benefits, partially offset by slightly higher costs in DD&A.
Lower 48 production averaged 818,000 barrels of oil equivalent per day for the quarter, including 483,000 from the Permian, 213,000 from the Eagle Ford and 100,000 from the Bakken.
As previously communicated, our Permian and overall Lower 48 production were both increased roughly 40,000 barrels of oil equivalent per day in the quarter due to the conversion from two- to three-stream accounting for the acquired Concho assets.
At the end of the year, we had 20 operated drilling rigs and nine frac crews working in the Lower 48, including those developing the acreage we recently acquired from Shell.
As Ryan touched on earlier, operations across the rest of the portfolio also ran extremely well last year with our GMT2 project in Alaska producing first oil in the fourth quarter as planned.
Turning to cash from operations, we generated $5.5 billion in CFO, excluding working capital, resulting in free cash flow of $3.9 billion in the quarter.
For the full year 2021, we generated $15.7 billion in CFO, $10.4 billion of free cash flow, and returned $6 billion to shareholders.
In addition to the asset dispositions Ryan covered, we also sold 117 million shares we held in Synovis in the year, generating $1.1 billion in proceeds that we used to fund repurchases of our own shares.
This left us with a little over 90 million Synovis shares at the end of the year, which we intend to fully monetize by the end of this quarter.
We ended the year with over $5 billion in cash, maintaining our differential balance sheet strength, even after completing the all-cash acquisition of Shell's Delaware Basin assets.
So, to recap, it was not only a strong quarter but one that also bodes very well for 2022 and future years.
We continue to optimize the portfolio.
Our businesses are running very well around the globe, and we have had an overall reserve replacement ratio of nearly 380%, establishing an incredibly powerful platform for the company as we head into this year and beyond.
Our cash flow performance and leverage to prices have substantially improved over the past couple of years as demonstrated by our fourth-quarter results and expect it will continue to improve as we begin including the newly acquired Delaware assets in our consolidated results this quarter.
Now, demonstrating this point and appreciating that it's helpful for the market to have an accurate sense of our stronger CFO generating capacity, at a WTI price of $75 a barrel with a $3 differential to Brent and a Henry Hub price of $3.75, we estimate our 2022 full-year cash from operations would be approximately $21 billion, which reflects us reentering a tax-paying position in the U.S. this year at those price levels.
And our free cash flow for the year would be roughly $14 billion.
And of course, we continue to be unhedged across our global diverse production base, so we expect to fully capture the upside of the current price environment.
We provided updated sensitivities in today's supplemental materials to help estimate how much earnings and CFO are projected to change this year with market price movements.
So, to sum it up, all that we've shared with you today underscores our readiness to reliably generate very competitive returns for our shareholders as we thoughtfully move forward as a responsible, valuable E&P player in the energy transition.
That is our triple mandate.
It's what we have ConocoPhillips built for and are ready to deliver.
Now, with that, let's go to the operator to start the Q&A.
| compname reports fourth-quarter and full-year 2021 results; increases planned 2022 return of capital to $8 billion and declares quarterly dividend and variable return of cash distribution.
q4 adjusted earnings per share $2.27 excluding items.
announced a $1 billion increase in expected 2022 return of capital to shareholders.
declared both ordinary dividend of 46 cents per share & second-quarter variable return of cash (vroc) payment of 30 cents per share.
completed all-cash shell permian acquisition.
|
I'll begin with some brief comments on the quarter and some highlights for the year.
I would like to start by commenting on our fourth quarter performance.
We had a strong quarter with consolidated earnings of $0.54 per share versus $0.45 per share earned during the fourth quarter of 2019, a 20% increase.
You can see from this slide that each of our three operating segments contributed to the substantially improved performance.
Eva will discuss this slide in more detail in a few minutes.
Now, let's turn our attention to highlights for the full year, where we also had strong financial results in addition to providing essential uninterrupted services to our customers.
For the year, we reported diluted earnings per share of $2.33 as compared to $2.28 reported for 2019 or $2.24 per share after excluding the $0.04 per share retroactive impact of the electric general rate case decision from 2019 related to the full year of 2018.
In 2020, American States Water achieved a consolidated return on equity of 13.9%.
During the year, we also filed a new Golden State Water Company general rate case for the years 2022 through 2024, continued our capital improvement work at our regulated utilities, continued to improve water and wastewater systems on the military bases we serve, raised the dividend by nearly 10% and reached 66 consecutive years of annual dividend increases.
This was a unique and challenging year as a result of the COVID-19 pandemic.
First and foremost, we are proud that we were able to maintain essential, safe, and reliable services for our regulated customers and military service personnel across the country.
In order to do this, starting in March of last year, we made adjustments for our field workers to keep them safe and instructed or office staff to telecommute.
At the local level, we worked closely to manage changes in delays in construction schedules, balancing the needs of keeping the water, wastewater, and electric systems running well, with the uncertainty and needed flexibility that the pandemic has brought to communities.
In addition, the California Public Utilities Commission, or CPUC, has issued orders on service shut-off due to non-payment, helping those households who are unable to keep up with water or electric bills during this unprecedented time.
Recently, the CPUC extended the suspension of service shut-offs due to non-payment through June 30 of this year.
We continue to invest in the reliability of our systems, spending $123.4 million in company-funded infrastructure at our regulated utilities during the year.
At ASUS, we continue to perform necessary construction work on the military bases we serve and are well-positioned to win more contracts in the coming years.
We remain committed to our communities.
Golder State Water continue to spend with diverse business enterprises, achieving results that were well above the CPUC's requirements for the eighth consecutive year.
In addition, ASUS continue to exceed the U.S. government's requirements to hire small businesses to perform work on the bases it serves.
In addition to these fiscal 2020 highlights, we have received positive news at our water segment to start 2021 related to the continued use of the Water Revenue Adjustment Mechanism, or WRAM, as well as third-year rate increases, both of which I'll discuss later on during the call.
We at American States Water Company continue our steadfast commitment to our customers, broader communities, military personnel, shareholders, employees, and suppliers.
Our financial results are just one part of our efforts and success.
Let me start with an overview of our fourth quarter financial results on Slide 9.
As Bob mentioned, consolidated diluted earnings for the quarter were $0.54 per share compared to $0.45 per share.
Again, a 20% increase over the same period last year.
Earnings at our water segment increased $0.04 per share for the quarter.
The increase in the water segment's earnings were largely due to a higher water gross margin from new water rates.
In addition, a decrease in interest expense and an increase in gains earned on investments held to fund a retirement plan were partially offset by the impact of a higher effective income tax rate.
Overall, operating expenses other than supply costs were relatively flat for the water segment.
Earnings from the electric segment for the fourth quarter of 2020 were $0.07 per share as compared to $0.05 per share recorded for same period in 2019.
The increase was due to rate increases authorized by the CPUC, as well as lower overall operating and interest expenses.
Earnings from the contracted services segment were $0.17 per share as compared to $0.12 per share for the fourth quarter of '19.
This was largely due to an increase in construction activity as well as an overall decrease in operating expenses.
Consolidated revenue for the three months ended December 31, 2020, increased by approximately $11.2 million as compared to the same period in 2019.
The decreases were due to rate increases at both of our water and electric utilities and an increase in construction work at our contracted services business.
Turning to Slide 11, our water and electric supply costs were $24.1 million for the quarter, an increase of $900,000 from the same period last year.
Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts.
Looking at total operating expenses excluding supply costs, consolidated expenses increased approximately $5.8 million versus the fourth quarter of 2019, mostly due to an increase in construction costs at ASUS as a result of the higher construction activity and property and other taxes, partially offset by lower maintenance expenses resulting from timing differences and a decrease in outside service costs.
Other income and expense for the fourth quarter of 2020 was a net expense of $2.1 million, which was $1.8 million lower in the same period of last year due to lower interest rate, as well as an increase in gains generated on investments held in the trust to fund a retirement benefit plan.
Slide 12 shows the earnings per share bridge comparing the fourth quarter of 2020 with the same quarter of 2019.
The slide shows the full-year results.
Consolidated earnings for 2020 were $2.33 per share as compared to $2.28 per share for 2019.
The 2019 CPUC final decision on the electric general rate case was retroactive to January 2018.
And as a result, the cumulative retroactive earnings impact related to 2018 of $0.04 per share was recorded as part of 2019's results.
Excluding this retroactive impact, consolidated earnings for 2020 increased $0.09 per share as compared to $2.24 per share for 2019 as adjusted.
Earnings from the water segment increased by $0.05 per share as compared to 2019, mostly due to new water rates as result of the full second-year step increase effective January 1, 2020, which added $10.4 million in water gross margins for 2020.
The increase in earnings from the higher gross margin was partially offset by an increase in operating expenses and a higher effective income tax rate due to changes in flow-through adjustments.
Moving on to the electric segment, earnings were $0.05 per share higher than in 2019 after excluding the retroactive impact for 2018 from the 2019 CPUC final decision.
The higher electric earnings were due to new rates authorized in the final decision as well as lower interest expense and a lower effective income tax rate due to changes in certain flow-through taxes as compared to the year before.
These increases to earnings were partially offset by an overall increase in operating expenses.
For both 2020 and 2019, diluted earnings from contracted services were $0.47 per share, excluding a retroactive price adjustment of $0.01 per share recorded in 2019 related to period prior to 2019.
Earnings from the contracted services segment for 2020 increased by $0.01 per share, largely due to an increase in management fee and construction revenue and also overall lower operating expenses, partially offset by higher construction costs.
AWR parent's earnings decreased $0.01 per share compared to 2019 due to higher state unitary taxes recorded at the parent level.
Net cash provided by operating activities were $122.2 million as compared to $116.9 million in 2019.
The increase was primarily due to the refunding of $7.2 million to customers in 2019 related to the Tax Cuts and Jobs Act with no similar refund in 2020 and an increase in water customer usage.
These increases were partially offset by decreases in cash flows from accounts receivable from utility customers, due to the economic impact of the COVID-19 pandemic, and the CPUC-mandated suspension of service disconnections, and from the timing of billing of and cash receipt for construction work at military bases.
As Bob mentioned, our regulated utility invested $123.4 million in company-funded capital projects in 2020.
We expect to invest $120 million to $135 million in 2021.
At this time, we do not expect American States Water to issue additional equity.
I'd like to provide an update on our recent regulatory activity.
As you may know, the water segment has an earnings test it must meet before implementing the second and third-year step increases in the third-year rate cycle.
I'm pleased to report that we have timely invested our capital projects and achieved capital spending consistent with the amount authorized by the CPUC.
As a result, substantially all of the third-year step increases have been authorized and effective January 1, 2021.
These new rates are expected to generate an additional $11.1 million of water gross margin.
We continue to make prudent and timely capital investments.
In July 2020, Golden State Water filed a general rate case application for all of its water [Technical Issues] for new water rates for the years 2022, 2023, and 2024.
Golden State Water requested capital budgets in this application of approximately $450.6 million for the three-year rate cycle and another $11.4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed.
A decision in the water general rate case is scheduled for the fourth quarter of 2021 with new rates to become effective January 01, 2022.
In a procedural hearing held earlier this month on this pending general rate case, the assigned administrative law judge confirmed that Golden State Water is authorized to continue using the Water Revenue Adjustment Mechanism, or WRAM, and the Modified Cost Balancing Account, also known as the MCBA, until its next general rate case application covering the years 2025 through 2027.
If you recall, the CPUC issued a final decision in the first phase of its order instituting rulemaking, evaluating the low-income ratepayer assistance and affordability objectives contained in the PUC's 2010 Water Action Plan.
This final decision, among other things, removes the continued use of the WRAM and MCBA by California water utilities in any general rate case application filed after the August 27, 2020, effective date of this decision.
Golden State Water's pending water rate case application was filed in July 2020, prior to this effective date.
As a result of this procedural hearing, we will continue using the WRAM and MCBA mechanisms through the year 2024.
In January 2021, Golden State Water along with the three other large California water utilities requested a one-year deferral of the date by which each of them must file their next cost of capital application.
Golden State Water will file its cost of capital application by May 1 of this year with an effective date of January 1, 2022.
Turning our attention to Slide 17, this slide presents the growth in Golden State Water's rate base as authorized by the CPUC for 2018 through 2021.
The weighted average water rate base has grown from $752.2 million in 2018 to $980.4 million in 2021, a compound annual growth rate of 9.2%.
The rate base amounts for 2021 do not include any rate recovery for advice letter projects.
Let's move on to ASUS on Slide 18.
After adjusting the 2019 financial results for the $0.01 per share retroactive earnings impact related to periods prior to 2019 that Eva discussed earlier, ASUS's earnings contribution for 2020 increased by $0.01 per share as compared to 2019.
This was accomplished despite weather delays and slowdowns in permitting for construction projects and government funding for new capital projects experienced throughout 2020.
We continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work for improvement of the water and wastewater infrastructure at the military bases we serve.
During 2020, the U.S. government awarded ASUS $15.5 million in new construction projects for completion in 2020 and 2021.
Completion of filings for economic price adjustments, request for equitable adjustment, asset transfers, and contract modifications awarded for new projects provide ASUS with additional revenues and dollar margin.
We are actively involved in various stages of the proposal process at a number of other bases considering privatization.
The U.S. government is expected to release additional bases for bidding over the next several years.
Due to our strong relationship with the U.S. government as well as our expertise and experience in managing bases, we are well-positioned to compete for these new contracts.
In light of our continued uncertainty associated with the effects of COVID-19, we reaffirm our projection that ASUS will contribute $0.45 to $0.49 per share for 2021.
I would like to turn our attention to dividends outlined on Slide 19.
In 2020, we increased the annual dividend by 9.8% to $1.34 per share.
American States Water Company has paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year for 66 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result.
On February 02, our Board of Directors approved a quarterly dividend of $0.335 per share.
As a reminder, our dividend policy is to achieve a compound annual growth rate in the dividend of more than 7% over the long term.
Our strength and attractiveness to customers and shareholders alike is our ability to execute on our business strategies, stability, continued timely investment in our systems and customer service, our regulated operations in a constructive regulatory environment in California, our growing contracted service business with strong market share and an unwavering commitment to reliability and safety.
Our capital investment includes replacing and upgrading critical infrastructure as well as ensuring we can meet our customers' needs for generations to come, all while driving operational efficiency and delivering outstanding customer service.
| compname reports q4 earnings per share of $0.54.
q4 earnings per share $0.54.
|
I'm Dave Martin, VP of Investor Relations for Harsco.
A few weeks ago, we announced the appointment of our new CFO Anshooman Aga.
He will join us later this month.
and I could not be more pleased with the outcome of our search process.
We look forward to introducing Anshooman to you once he is settled into the role.
Again, I appreciate Pete's willingness to defer his retirement and remain with us through the transition over the next few months.
I'm also very pleased with our Q2 results.
We delivered our highest quarterly revenue since 2013, and our adjusted EBITDA growth and margins were strong, both year-over-year and sequentially versus our first quarter.
Our results reflect impressive execution by our team.
And I'll highlight the ongoing integration of ESOL and Clean Earth, our high level of service to a booming steel industry and advances in operational excellence in the Rail business.
The Rail and Contaminated Materials segments had lagged the recovery of other sectors, and we are pleased with the way in which we've met the increased demand.
In short, the business momentum is now more broad based than it was in Q1, and we are maintaining a positive outlook for the balance of the year.
I'll comment on each of the segments, beginning with Harsco Environmental.
Capacity utilization of the steel mills that we support is approaching that of the first half of 2019 before the market began to turn down.
And the outlook into next year includes further volume growth.
When coupled with the shift toward an improved mix of environmental services and lower capital spending, AG's outlook for 2022 is as bright as ever.
From a macro perspective, the steel industry's heightened focus on sustainability fits well with our focus on ESG and the portfolio of environmental solutions in our innovation pipeline.
Our business has never been better positioned as a true strategic partner to the steel industry, and we look forward to continuing the work with our customers to advance and expand their green steel initiatives.
Our Clean Earth segment continues to perform well.
We are delivering on our commitment to maximize the value from last year's ESOL acquisition while also taking advantage of the benefits of a market recovery.
After realizing more than $10 million of synergies last year, we anticipate at least another $20 million this year.
So while the recovery in the each of Clean Earth's end markets is firmly rooted, the business is experiencing some pressure from tightness in the labor market and with end disposal assets.
We have factored these items into our outlook for the year and where possible, are taking action to mitigate the impact.
At the same time, we continue to recognize new growth opportunities in the hazardous waste industry supporting the initial steps we have taken to transform our portfolio of businesses.
The Rail segment recorded its highest quarterly profit in two years, and we expect EBITDA growth to exceed 60% for the full year.
The business has benefited from a recovery in domestic spending and also its global aftermarket platform.
COVID challenges remain, particularly in Asia and Latin America, but this has been accounted for in our outlook.
The team is also executing at a high level of managing our large contracts, dealing with COVID-related supply chain issues and as noted earlier, improving key operational metrics.
Finally, in May, we released our most comprehensive ESG report to date, highlighting our ESG accomplishments and providing a detailed look at our ESG strategy as well as focus areas, the governance structure to align with our business strategy and commitment to ESG with shareholder value creation.
Highlights of these are on page four of the slide deck.
We are particularly proud of our safety record last year and our contributions to the circular economy.
Last year, Harsco recycled or repurposed over 75% of the material that we processed and we continue to see increases in our ESG ratings.
We are reinforcing our commitment to the environment and to social and governance matters by incorporating related goals into Harsco's annual incentive plan.
So let me start by turning to our results for the quarter and our unchanged outlook for the year.
As Nick mentioned, we are pleased with our Q2 results and our continued expectations for a strong year.
Harsco's revenues totaled $570 million and adjusted EBITDA reached $78 million in the second quarter outperforming the prior year and sequential quarters.
Also, our Q2 EBITDA was at the top end of the guidance range we provided in May.
Importantly, each of our segments performed well in the quarter.
Strong performance and execution in Environmental as well as the mix and timing of some shipments in Rail drove results to the higher end of our guidance.
Clean Earth results were consistent with our expectations, and it was good to see the anticipated improvement in our Contaminated Materials business that we discussed on our May earnings call.
Both our Contaminated Materials business and Rail business which have been lagging as economic conditions strengthened over the past year are now experiencing positive momentum.
And as Nick noted, these businesses are expected to further improve in the second half of the year.
Harsco consolidated revenues increased 27% compared with the second quarter of 2020 and 8% compared with the first quarter of 2021.
Each of our segments contributed to these increases.
Harsco's adjusted earnings per share from continuing operations for the second quarter was $0.28, and this figure compares favorably to adjusted earnings per share of $0.13 in the prior year quarter and is above the guidance range of $0.21 to $0.27 we provided in May.
Lastly, our free cash flow for the quarter of $6 million was consistent with our expectations.
The change versus the comparable quarter in 2020 is principally driven by higher capital spending, much of which, as we've discussed before, had been deferred from the prior year.
We did see a sequential improvement in cash flow from Q1, as anticipated, and we expect our cash performance to improve meaningfully for the remaining quarters of the year.
Revenues totaled $273 million and adjusted EBITDA was $58 million.
These results compare favorably to the prior year quarter when EBITDA totaled $40 million.
Our quarterly margin improved to just over 21%.
Compared with Q2 of 2020, the EBITDA improvement is primarily attributable to higher services and applied products demand globally.
These impacts also include the benefit of higher nickel prices in the quarter.
These positives were partially offset by higher SG&A, including incentive compensation as well as a modest impact from site exits.
Steel production at our customer sites continued to improve.
Liquid steel tonnage, or LST, increased roughly 25% versus the prior year, and we expect to benefit from increased production as the global economy continues to improve.
Our customers operated at less than 80% of capacity in Q2, which leaves room for further improvement in service levels in the future.
For the quarter, revenues were $196 million, and adjusted EBITDA totaled $18 million.
Compared to the second quarter of 2020, revenues increased 21% with both our contaminated and hazardous materials businesses contributing higher revenues.
The EBITDA increase year-on-year was mainly driven by higher hazardous waste volumes and our integration and value creation activities.
Integration benefits totaled roughly $5 million in the quarter versus the prior year period.
And overall, our integration efforts are progressing well with us on track to realize $20 million of benefits this year.
These positive impacts were partially offset by incentive comp and SG&A investments, including some rebranding and IT costs, which won't repeat next year.
Lastly, on Clean Earth, I'd highlight that our year-to-date free cash flow now totals $24 million.
This total represents more than 70% of its EBITDA and reflects the positive results and financial characteristics of this business.
Rail revenues totaled $101 million, up 24% from the prior year quarter and the segment's adjusted EBITDA totaled $10 million in the second quarter.
The revenue increase versus the prior year quarter is attributable to higher equipment sales, including our work progress under a number of long-term contracts.
Meanwhile, EBITDA was essentially unchanged year-on-year.
Here, the benefit of higher equipment contributions was offset by a less favorable aftermarket mix, mainly in Asia, timing of certain contracting services and higher selling-related costs.
With this said, our Q2 results in Rail improved sequentially and were slightly better than anticipated.
Again, this reflects the positive market developments and improved outlook we discussed on our May earnings call.
So now turning to slide nine, which is our consolidated 2021 outlook.
As I mentioned earlier, our outlook details are unchanged from those communicated in May.
Adjusted EBITDA is expected to be within a range of $295 million to $310 million.
Adjusted earnings per share is expected to be within a range of $0.82 and $0.96 and we expect free cash flow of $35 million to $55 million for the year.
Our Q2 results support this guidance.
Underlying market performance was consistent with expectations in recent months, and our outlook for the relevant end markets is unchanged.
With that said, our implied outlook range for the second half of the year also contemplates some modest potential headwinds largely comprising labor availability and inflation related to our trucking fleet at Clean Earth.
Also, the tightness and availability of end disposal options in the industry, including incineration capacity remains a potential headwind in the coming months.
We are, however, anticipating end disposal markets to loosen later in the year.
Let me conclude on slide 10 with our third quarter guidance.
Q3 adjusted EBITDA is expected to range from $75 million to $81 million.
Each segment is expected to see improvement relative to the prior year quarter, given favorable market conditions as well as internal improvements and investments.
Sequentially, Q3 results are expected to be comparable with the second quarter at the midpoint of the range, reflecting some improvements in Clean Earth and Rail.
In Environmental, we expect that services mix will be slightly less favorable in Q3 versus the second quarter.
I've met him I spoke with him.
He will be a fantastic addition to the leadership team of this company, a company that I've had the privilege to be part of for seven years.
Since this will be my last earnings call, let me once again say that while my wife and I are very excited about starting the retirement phase of our lives, there is much I will miss about Harsco.
Most importantly, the great people I've been proud to work with.
Nick, my colleagues on the executive leadership team and my global finance and IT teams, I will miss them greatly.
However, rest assured, I will enjoy watching and sharing in the continued successes of Harsco on the sidelines as an investor for years to come.
| q2 adjusted earnings per share $0.28 from continuing operations.
q2 revenue $570 million versus refinitiv ibes estimate of $556.4 million.
sees 2021 adjusted diluted earnings per share $0.82 - 0.96.
sees q3 gaap earnings per share $0.15 - 0.21.
|
We had a very strong start to the year with first quarter consolidated net income of $64.4 million and earnings per share of $0.59.
These results were 93% and 90%, respectively, above the same quarter last year and were driven by stronger earnings at both the utility and the bank.
In the first quarter, Hawaiian Electric benefited from continued savings from the robust cost management program we started last year.
The savings will be delivered to customers in rates beginning in June, and, along with other timing elements, we expect the utility to remain within the full year guidance range we announced in February.
American's first quarter results reflect good execution in an environment that remains challenging for bank profitability.
Our results benefited from a release of provision as we continue to conservatively manage credit in the improving Hawaii economy.
As Greg will cover in more detail, we're increasing our bank guidance and consolidated HEI guidance for the year to reflect this improvement.
We're seeing strengthening in the local economy as Hawaii continues to manage the virus well and the vaccine rollout continues.
Unemployment declined to 9% in March.
While still above the national average, it's headed in the right direction, having declined from a peak of nearly 24% a year ago.
We've seen significant growth in tourism arrivals this year.
And lately, we've experienced multiple days where arrivals have approached prepandemic averages.
At this point, almost all our arrivals are from the U.S. mainland as the COVID situation and vaccinations abroad have been more challenging than domestically.
Hawaii real estate fundamentals are strong and continue to support the conservative portfolio mix at the bank.
Year-to-date March, Oahu's sales volumes are up 19% for single-family homes and 53% for condos.
Median prices are also up 17% to $950,000 for single-family homes and 4% to $450,000 for condos.
In its March outlook, the University of Hawaii Economic Research Organization accelerated its forecast for the state's economic recovery by 18 months with the GDP now expected to rise 3.7% in 2021 and 3.1% in 2020.
COVID-19 cases in Hawaii have remained far below the mainland.
The seven-day rolling average was 94 for the state and is the fifth lowest per capita among U.S. states as of May six.
40% of our residents are now fully vaccinated and more than half have had at least one dose.
While this is encouraging, we're mindful that we're still in the early stages of Hawaii's economic recovery, and there is still some uncertainty about the pandemic's course.
At the utility, cost efficiency, our transition to the new PBR framework and our clean energy future have been and continue to be our major focus.
We and our stakeholders are all learning the new PBR framework, which is designed to align our interests as we work together to increase renewable energy and decarbonize our economy in a way that is affordable, reliable, resilient and equitable.
Our commitment to cost efficiency positions us well as we transition into PBR.
The utility has been successful in implementing efficiencies and achieving savings to deliver on our management audit savings commitment and the customer dividend.
We'll start returning these savings to customers through the Annual Revenue Adjustment, or ARA, when PBR goes into effect June one.
Cost management will continue to be a focus as we operate under PBR.
We've been working with stakeholders to finalize the new PBR performance incentive mechanisms, or PIMs, as well as the scorecards and metrics we'll report on going forward.
We are expecting the PUC to issue an order setting forth the parameters of the new PIMs in the near future.
As we've said before, reaching our collective clean energy and decarbonization goals must be done in a way that is kakou, a Hawaiian word that means it takes everyone working together.
We're working to bring projects from Hawaii's largest ever renewable energy and storage procurement online as soon as possible.
We are fully committed to this effort, which is no easy task given the number of projects, the scale of this procurement relative to our small system, community considerations, land constraints and the need to ensure reliability on isolated island grids.
We're actively working with independent power producers, government agencies and other stakeholders to overcome obstacles to bring projects online faster.
Last week, the PUC directed us to establish regulatory liabilities to track costs to customers resulting from delays in commercial operations of approved Stage one, Stage two and CBRE Phase one projects.
While we do not believe we are liable for any amount, we believe the PUC's intention may be to track rather than record costs before determination is made.
So we will be seeking reconsideration or clarification.
Last week, the PUC also approved, with conditions, our agreement for the Kapolei Energy Storage project, a stand-alone battery project that will help ensure reliability when the Oahu coal plant retires and enable integration of more renewable energy.
While technically an approval, the order imposes conditions that may prevent us and the developer from moving forward with this project.
The regulatory process allows us to raise our concerns to the PUC, and we will be filing a motion for reconsideration on Monday.
Another key focus is accelerating the addition of more distributed energy resources, or DERs, and demand response.
On May 3, we filed our recommendations to achieve this acceleration while underscoring the importance of equity and fairness in how the programs are designed.
We're advancing programs to benefit all customers, including expanding our community solar program, proposing a rooftop rental program and procuring aggregated grid services from DERs.
Grid modernization is key to facilitating faster deployment and effective use of demand response and DERs.
In March, the PUC approved our proposal to shift from an opt-in to an opt-out approach for advanced meters in targeted areas, allowing us to deploy advanced meters more quickly and thus enabling operational efficiencies and more advanced rate programs.
Turning to the bank.
American continues to perform well in a challenging environment.
In the first quarter, we continued to have strong mortgage production and deployed an additional $150 million of ASB CARES or Paycheck Protection Program loans to support small businesses in round two of that program.
Year-to-date, that amount has increased to over $170 million.
Record deposit growth, in large part driven by federal stimulus, continues to outpace lending opportunities in this early stage of Hawaii's economic recovery.
We're taking a balanced approach to managing our portfolio, optimizing fee income and loan portfolio growth in a low interest rate environment.
While net interest margin is still pressured, record-low funding costs and balance sheet growth are helping grow net interest income consistent with our expectations.
Our first quarter release of reserves for credit losses reflects the resilience of our customers as well as the moderating credit risk environment as Hawaii's economy begins to recover.
We continue to manage our reserves for credit losses conservatively.
American has also continued its cost control efforts, leading to lower noninterest expense in the first quarter even as we invest in our anytime, anywhere banking transition.
Improved profitability is also allowing the bank's dividend to HEI to increase.
We're accelerating our digital transformation to enable customers to bank with us anytime and anywhere.
Today, 44% of deposits are made through self-service channels such as ATMs and mobile, more than double prepandemic levels.
And we've seen increased customer satisfaction across all channels over that time.
We're enhancing our digital offerings to make banking even easier for our customers.
This includes providing new online financial wellness tools, upgrading our ATM fleet, strengthening our mobile app, expanding online capabilities and opening new digital centers where our teammates will help customers with digital banking solutions.
Now Greg will discuss our financial results and our outlook.
Over to you, Greg.
Turning to our first quarter results.
Consolidated earnings per share were $0.59 versus $0.31 in the same quarter last year.
Both the utility and the bank reported strong performance, reflecting the resilience of our company's and the Hawaii economy that has showed signs of a strengthening recovery.
At the utility, earnings reflect lower O&M expenses from cost reduction efforts and delays on timing of generation overhauls, coupled with higher revenues from our annual rate adjustment mechanism, including timing-related charges for target revenue recognition to eliminate seasonality impacts.
The bank benefited from the release of provision for credit losses as certain credits earned upgrades, and we saw stable credit trends in an improving economic outlook.
While the holding company loss is well in line with plan, we increased charitable giving during the quarter, including a $2 million contribution to support our community through challenging times.
Compared to the same time last year, consolidated trailing 12-month ROE improved 80 basis points to 10%.
Utility ROE increased 160 basis points to 9%; and bank ROE, which we look at on an annualized basis, was 16%.
The utility outlook remains unchanged, however, and the ROE expectations will be impacted by the management audit savings and customer dividend as O&M cost reductions that have improved earnings for the quarter are used to fund customer bill reductions under PBR.
Regarding the utility's results, net income for the quarter was $43.4 million compared to $23.9 million in the first quarter of 2020.
The most significant variance drivers were $10 million lower O&M expenses compared to the first quarter last year.
There were three main factors that drove O&M lower: lower staffing and efficiency improvements from the ongoing cost management program; timing-related items, including higher bad debt expense in the first quarter of 2020 related to COVID-19, which has since been deferred; and fewer generating facility overhauls, some of which will be performed later in the year.
There were also higher costs in 2020 related to an increased environmental reserve and higher outside service costs to support the PBR docket and other customer service projects.
In addition to lower O&M, we benefited from a $5 million revenue increase from higher rate adjustment mechanism revenues; a $4 million revenue increase related to timing of the recognition of target revenues during the year, which we -- will have no net impact on 2021 and which is due to a change in methodology that eliminates seasonality for recognizing target revenues within the year; a $1 million lower enterprise resource planning system implementation benefits to be passed on to customers; and $1 million lower nonservice pension costs due to a reset of pension costs included in rates as part of a final rate case decision.
These items were partially offset by $1 million higher depreciation.
Regarding the drivers of utility performance for the rest of the year, we expect no meaningful contribution from the performance incentive mechanisms during 2021.
We currently have approximately $22 million of COVID-related cost, primarily bad debt expense accrued in a deferred regulatory asset account.
We will continue deferring COVID-related costs through June 30.
The moratorium on customer disconnections is in place through May 31 2021, and we will -- and we continue to work with customers on extended payment plans and assisting with other bill assistance alternatives.
We plan to file a separate application to seek recovery of costs once actual costs are known.
We will also be filing a request for approval to continue deferring COVID-related costs beyond June 30.
As mentioned, our O&M expense was positively impacted by the timing of overhauls.
We do expect some of these overhauls to occur later in the year, in line with our annual guidance.
The utility's ability to achieve accelerated management audit savings commitment is an important driver of O&M expenses.
The utility is on track to achieve the savings necessary to meet the annual $6.6 million commitment, which will be returned to customers starting June one.
Utility capital investments for the quarter of approximately $60 million were lower than planned due to unexpected delays.
Some of the delays were due to extended repairs being made at one of our substations, limiting work that can be done on other parts of the electric system.
We also experienced additional design work required for T&D projects, COVID travel limitations and meter deployment delays that impacted our grid modernization work.
Despite the delays, we still expect to achieve our utility capital investment plan for 2021.
And we are maintaining the capex and rate base growth guidance we issued during our previous earnings call and still expect 2021 capex of approximately $335 million to $355 million, reflecting rate base growth of 4% to 5%.
Turning to the bank.
ASB's net income for the quarter was $29.6 million compared to $15.7 million last quarter and $15.8 million in the first quarter of 2020.
The increase primarily reflected moderation of the elevated credit risk environment as Hawaii's economy begins to recover, and the results benefited from a release of reserves for credit losses, which I'll discuss further.
Net interest income reflects the impact of strong deposit growth, lower loan demand and increased growth of our investment portfolio.
Noninterest income benefited from strong mortgage origination and sales in line with plan despite being below the prior year's quarter.
Noninterest expense remained in line with the plan as ASB continues to focus on strategic investments to drive efficiency and productivity.
ASB's net interest margin compressed 17 basis points during the quarter.
NIM was 2.95% compared to 3.12% in the fourth quarter of 2020.
The low interest rate environment and record deposit growth each contributed to NIM compression.
$3.1 million in fees from PPP lending and a record low cost of funds helped soften the pressure on asset yields.
The average cost of funds was 0.08%, down one basis point from the linked quarter and 16 basis points from the prior year.
We expect continued pressure from low interest rates and from excess liquidity due to strong deposit growth and lower reinvestment yields.
Consequently, we're updating our NIM guidance range to 2.80% to 3%.
We anticipate that balance sheet growth should still lead to net interest income in line with expectations for the year.
In the first quarter, the bank released $8.4 million in provision for credit losses compared to provisions of $11.3 million in the fourth quarter and $10.4 million in the first quarter last year.
This reflects credit upgrades in the commercial loan portfolio, reduced exposure to riskier but profitable consumer unsecured loans and lower net charge-offs as Hawaii's economy begins to recover and credit -- the credit risk environment moderates.
ASB's net charge-off ratio for the quarter was 0.18% compared to 0.36% in the fourth quarter and 0.44% in the first quarter 2020.
Nonaccrual loans were up slightly to 1% compared to 0.89% in the fourth quarter and 0.90% in the prior year.
We remain conservative as we take a wait-and-see approach to Hawaii's economic recovery.
And at 1.73% as of quarter end, our allowance for credit losses was the highest among Hawaii peers.
We're seeing positive loan deferral trends across ASB's portfolio.
Nearly all deferred loans have returned to scheduled payments.
Active deferrals are just 0.2% of the total loan portfolio.
We're -- we've experienced declining delinquencies in the higher-risk commercial and consumer portfolios.
While realizing a slight uptick in delinquencies in the residential portfolio, that portfolio is a low-risk -- is low risk and secured by rising value in the Hawaii real estate market.
These two factors have contributed to a decreasing profile of our overall -- risk profile of our overall loan portfolio.
ASP continues to manage liquidity and capital conservatively, maintaining ample liquidity and healthy core capital ratios.
The bank has approximately $4 billion in available liquidity from a combination of reliable resources.
ASB's Tier one leverage ratio of 8.33% was comfortably above well-capitalized levels.
Prospectively, given the lower risk profile of our portfolio, we're anticipating managing closer to an 8%-or-above Tier one leverage ratio and drive competitive profitability metrics, growth of the ASB dividend while maintaining a strong capital position.
We expect higher bank dividends to HEI this year than reflected in our February guidance given ASB's strong performance and outlook and efficient capital structure.
We now expect dividends of approximately $50 million to $60 million versus the previously estimated $40 million.
For the quarter, the ASB Board has declared a $23 million dividend to HEI.
We still do not anticipate the need to issue any external equity in 2021 at HEI unless we identify significant additional accretive investment opportunities.
We are committed to maintaining an investment-grade profile.
At the utility, we're pleased to have had recent utility credit rating upgrades by S&P to BBB flat and Moody's to Baaone, both with stable outlooks.
Turning to our guidance.
We're reaffirming our previously issued utility guidance.
While the utility had a strong first quarter, we'll be returning cost savings to customers beginning June one and expect additional overhauls later in the year.
In addition, while the first quarter benefited from higher revenues due to a methodology change to remove seasonality in recognizing target revenues, a portion of that will reverse later in the year.
However, we are revising our banking consolidated guidance.
Our revised guidance is $0.67 to $0.74 per share, up from our prior guidance of $0.52 to $0.62.
We're revising our NIM expectations at the bank to 2.8% to 3%, down from 2.90% to 3.15%.
The impact on net interest income should be muted by balance sheet growth.
Given strengthening credit dynamics and outlook for the Hawaii economy, we now expect provision to range from $0 to $10 million, which we believe remains appropriately conservative given continued uncertainty for the economy until we see increased vaccination levels and the eventual return of international travel.
We expect that, that stronger bank profitability will translate into consolidated earnings growth as well as increase bank dividends to the holding company.
And we're increasing HEI guidance -- earnings per share guidance to $1.90 to $2.05 per share.
I'm proud of the dedication of our employees and the resilience of our companies as we continue to provide essential electricity and banking services and deliver solid financial results while helping Hawaii reach its aggressive climate goals and build back better.
Last month, we issued our second consolidated ESG report, which includes our ESG priorities and our first Task Force on Climate-related Financial Disclosures-aligned reporting.
We're considering the implications for our companies of the Biden administration's goal to cut carbon emissions 50% from a 2005 baseline by 2030.
We believe our goals and plans here in Hawaii and the work we've been doing for some time place us on a strong path to achieve a net-zero future.
We're updating our planning and analysis, and we'll report further on that in the future.
And finally, we say aloha to Rich today as he is leaving American to pursue other interests.
Rich accomplished a great deal during his more than 10 years at the helm of American.
Rich leaves American in great shape, as evidenced by ASB's strong first quarter earnings and Greg's comments earlier.
Under Rich's leadership, ASB has grown its assets, expanded its customer base, products and services and improved operational efficiency.
He and his team have provided great customer service and made banking easy for customers.
Ann Teranishi, currently the bank's Executive Vice President of Operations, will succeed Rich as President and CEO later today.
Ann is a strong, collaborative leader with deep banking industry knowledge and a 14-year track record of success at American.
We look forward to Ann's leadership.
| q1 earnings per share $0.59.
|
With us on the call today are Michael Kasbar, Chairman and Chief Executive Officer; and Ira Birns, Executive Vice President and Chief Financial Officer.
If not, you can access the release on our website.
Before we get started, I would like to review World Fuel's safe harbor statement.
A description of the risk factors that could cause results to materially differ from these projections can be found in World Fuel's most recent Form 10-K and other reports filed with the Securities and Exchange Commission.
As with prior conference calls, we ask that members of the media and individual private investors on the line participate in listen-only mode.
I hope you're all well, and I hope you are as optimistic as I am about the medium and long-term future market opportunities.
We opened the year with a strong first quarter, once again demonstrating the resiliency of a well-diversified portfolio.
And considering current market conditions, all of our businesses performed well.
Our balance sheet and cash flow has never been stronger.
We believe we had a significant medium- and long-term opportunity to deploy capital in our North American C&I, meaning commercial and industrial, liquid fuel business and globally in fuel, gas, power, carbon and renewables to serve our aviation, marine and land customers and drive the energy transition.
As I mentioned last quarter, the work we have done over the last few years in talent, culture and leadership is having a positive impact.
We are converging our organization and business solutions in line with the transitioning marketplace.
Combining functions and the business itself is creating greater efficiencies and effectiveness as well as greater mobility and career opportunities for our global teams.
Consolidating our global origination, fulfillment and support with our digital and sustainability competencies gives us a forward-ready business as the world emerges from this global health and economic crisis.
We are already a globally diverse group, and the inclusiveness that convergence drives is accelerating value creation as our customers see comprehensive solutions and pathways to lower carbon footprints and supply chains.
We are maintaining the cost discipline achieved so far on operations as markets reopen.
We have grown market share in our global land business with higher quality, ratable business activity.
We see a long runway of growth opportunities in this space.
And now, as we experience the world's growing commitment to sustainability, we view this as an incredible opportunity to tap into our ability to create innovative solutions.
I am personally more excited and enthusiastic about our future prospects as a global team than I have been in years.
We have been through our most challenging stress test ever, and our global teams performed flawlessly.
We have never been tighter or more coordinated.
Building a global, diverse and increasingly digital energy and logistics solutions business is not easy.
So that is exactly what we have done.
And we are highly motivated to continue to build and leverage our platform.
It's not easy to have global share of anything, but we have achieved that in two businesses, and we are well on our way to do that in our World Connect global land business, simultaneously creating lower carbon synergies for our global marine and aviation businesses.
We are not only becoming more sustainable ourselves, but driving sustainability for the marketplace.
We are truly helping to build the better tomorrow by accelerating the green and digital agenda within and for our partners around the world.
It is hard to find an energy-related subject or a problem anywhere in the world that we cannot address in one way or the other.
World Connect is the emerging brand for comprehensive energy solutions.
And finally, more of our teams are getting fully vaccinated.
And this is both raising optimism and providing opportunities for greater engagement with each other and the market.
I hope you are all doing well and finding ways to return to some sense of normalcy.
Although the pandemic continues to present significant challenges across businesses globally, there has certainly been some encouraging developments, which has many of us a bit more optimistic about the prospects of increased levels of business activity.
I am extremely proud of how well our team has performed in the face of a multitude of ongoing challenges.
And our results this quarter are a testament to the value of our diversified business model, our expertise in the markets we serve and the dedication of our global team.
The nonoperational items for the quarter principally related to acquisition, divestiture and restructuring-related adjustments and expenses.
Now let's begin with some of the first quarter highlights.
Adjusted first quarter net income and earnings per share were $21 million and $0.33 per share respectively.
Adjusted EBITDA for the first quarter was $62 million.
We generated another $103 million of operating cash flow during the first quarter and increased our net cash position to more than $210 million.
Consolidated revenue for the first quarter was $6 billion, an increase of $1.3 billion or 27% sequentially, but still well behind the pre-COVID revenue levels, which is principally driven by the year-over-year decline in volume in our aviation and marine segments when compared to 2020.
Our aviation segment volume was 1.1 billion gallons in the first quarter, essentially flat sequentially, but still well below pre-COVID activity levels.
While cargo operations and business aviation activity remains strong, overall aviation volume remains significantly below prior-year levels, driven by continued softness in global commercial passenger aviation activity, principally given slower vaccine rollouts abroad.
In the U.S., we have been experiencing increased activity with TSA daily throughput back to nearly 65% of prepandemic levels.
But despite some modest improvements in parts of Europe in the first quarter, continuing restrictions in most of Europe and Asia will likely prolong the broader recovery until vaccination rates accelerate in these regions.
Volume in our marine segment for the first quarter was 4.2 million metric tons, flat sequentially and down 13% from the strong prior year results we generated where the new IMO 2020 regulations were implemented last January.
Our land segment volume was 1.3 billion gallons or gallon equivalents during the first quarter, that's down 6% year-over-year, but up 2% sequentially, principally driven by increases in our World Connect natural gas operations as well as some seasonal improvement in the U.K. Land volumes have now rebounded to 97% of first quarter 2019 prepandemic levels.
Consolidated volume in the first quarter was 3.6 billion gallons, up slightly on a sequential basis, but down year-over-year, again, related to the items already mentioned.
Consolidated gross profit for the first quarter was $192 million.
That's a decrease of 18% compared to the first quarter of 2020 with an increase of $26 million or 16% sequentially.
Our aviation segment contributed $77 million of gross profit in the first quarter, down 15% year-over-year, but up 9% sequentially.
Year-over-year, in addition to the COVID-related profit declines from depressed commercial passenger aviation activity, the decrease was also related to the decline in government-related activity associated with the continued drawdown of troops in Afghanistan.
These declines were partially offset by higher average margins from a more profitable core business mix.
As we look ahead to the second quarter, aviation gross profit should increase sequentially, principally driven by the continuing recovery in domestic commercial passenger activity, partially offset by a further decline in our government business in Afghanistan.
As I am sure you are aware, earlier this month the U.S. and NATO announced its final withdrawal from Afghanistan by September, and therefore we expect further declines in this business activity over the balance of the year.
The marine segment generated first quarter gross profit of $25 million, that's down 57% year-over-year, but up 12% sequentially.
In addition to the pandemic-related impact, the year-over-year declines were principally driven by the strong results we saw in the first quarter of 2020, again related to the IMO transition to very low sulfur fuel oil.
But as we forecasted on last quarter's call, marine gross profit increased sequentially relating to strong results from our physical operations.
As we look ahead to the second quarter for Marine, based on what we've experienced through the first few weeks of April, we expect Marine gross profit to increase sequentially, driven by improvement in our core resale business activity.
And as we look to the latter part of the year, there's an increasing likelihood that cruise lines will begin sailing again, providing opportunities for additional improvement in the fourth quarter and into 2022.
Our land segment delivered gross profit of $89 million in the first quarter, up 5% year-over-year when excluding the profitability related to the multi-service business from last year's results and actually up 24% sequentially.
As we anticipated, we experienced solid sequential improvement in our U.K. heating oil business, driven in part by lockdowns for most of the quarter, but we also generated additional profitability during the quarter related to improved performance in our U.S. natural gas supply activities that was principally driven by the extremely cold weather in parts of the U.S. in February.
Looking ahead to the second quarter, we expect the traditional seasonal decline in land gross profit, which will be further impacted by the strong natural gas product contribution in the first quarter.
We believe the land segment has many opportunities ahead, from global sustainability initiatives to potential infrastructure bill spending, which would all benefit our commercial and industrial fuels business as well as our natural gas power and sustainability activities.
We continue to manage our operating expenses prudently.
Core operating expenses, which excludes bad debt expense, were $146 million in the first quarter, down $29 million or 17% from the first quarter of last year.
Looking ahead to the second quarter, operating expenses, excluding bad debt expense, should be generally in line with the first quarter in the range of $144 million to $148 million.
We had debt expenses in the first quarter with $3.6 million, down both sequentially and year-over-year and down materially from the elevated levels in the second and third quarter of 2020.
This is further evidence of the solid team effort in managing our receivables portfolio through this stage of the pandemic.
Adjusted income from operations for the first quarter was $42 million, down 38% from last year but up 68% sequentially related to the segment activity that I mentioned previously.
Adjusted EBITDA was $62 million in the first quarter, down 29% from 2020 and up 39% sequentially.
Again, the year-over-year decline in income from operations and adjusted EBITDA was principally driven by the impact of the pandemic as well as benefits from supply imbalances and price volatility arising from the IMO 2020 implementation in the first quarter of 2020 for our marine business.
First quarter interest expense was $8.7 million, which is down 44% year-over-year and approximately 20% sequentially.
Total interest expense continues to benefit from lower average borrowings and interest rates.
At the end of the first quarter, we again had no borrowings outstanding under our revolver and ended the quarter in a net cash position in excess of $200 million.
We expect interest expense in the second quarter to be approximately $9 million to $10 million.
Our adjusted tax rate for the first quarter was 35.8% compared to 30.6% in the first quarter of 2020.
At this time, we expect our effective tax rate to remain elevated in the near term, primarily due to the current mix of U.S. and foreign earnings as well as the continuing effects of guilty and valuation allowances on certain of our foreign entities.
Our total accounts receivable balance increased significantly on a sequential basis to approximately $1.7 billion at quarter end, principally related to the 37% rise in average fuel prices from the fourth quarter.
We remain focused on managing working capital requirements, which resulted in operating cash flow generation of $103 million during the first quarter despite a significant sequential increase in accounts receivable.
In closing, despite continued weakness in the commercial passenger aviation market, we delivered a solid quarter, driven principally by very strong results in our land segment.
And we again delivered strong operating cash flow.
With vaccination rates up significantly in the United States, we are encouraged by the recent trends we are seeing in domestic commercial passenger activity and are hopeful that other parts of the world will begin to catch up over the next several months.
While we are appropriately inwardly focused over the first 12 months of the pandemic, during which time our team performed at a level of excellence for which they should all be very proud, we can now more clearly see the light at the end of the tunnel.
And we are coming out of the pandemic with a strong balance sheet, actually a stronger balance sheet than where we started prepandemic.
This strong balance sheet, including $735 million of cash, provides us with capital to further grow our core business organically as well as the ability to capitalize on strategic investment opportunities which should drive scale and efficiencies, most specifically in our land and World Connect business activities.
Our balance sheet liquidity and solid operating cash flow also provide us with capital to repurchase shares and fund dividends to further enhance shareholder value.
In demonstration of our commitment to enhancing shareholder value, over the past two years we've repurchased $134 million of our shares, and we increased our cash dividend twice, most recently, a 20% increase during the first quarter.
| compname reports q1 adjusted earnings per share of $0.33.
q1 adjusted earnings per share $0.33.
qtrly revenue $5,957.9 million versus $8,015.2 million.
|
Joining us today on the call are Jordan Kaplan, our president and CEO; Kevin Crummy, our CIO; and Peter Seymour, our CFO.
You can also find our earnings package at the investor relations section of our website.
You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package.
Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.
Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will prove to be incorrect.
Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material.
When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up.
I'm pleased to report that our rent collection and leasing activity improved during the fourth quarter, despite continued headwinds from the pandemic and tenant-oriented lease enforcement moratoriums.
In recent months, we have started to see movement on tenant payment plans for rent deferred under the pandemic.
To date, we have reached agreements with tenants who own about 15% of the outstanding balances.
These deals are exempt from the moratorium protections, and we have already begun collecting deferred rent under them.
Except for immaterial amounts, we have not forgiven rent and we still expect to collect a large majority of all past due amounts.
In prior downturns, the impact of personal guarantees and small business owners' commitment to their companies have kept our default rate extremely low.
Our cash collections have also improved.
As of today, we have collected 92.7% of our rent from the three quarters affected by the pandemic, including 96% of our residential rent, 95% of our office rent and 45% of our retail rent.
We saw stronger leasing demand last quarter, driven primarily by small tenants.
We signed an impressive 197 leases, and retention was also above average.
We see the economy beginning to recover with tenants increasingly confident about their future.
As more tenants engage, we should shift back to positive absorption.
Of course, predicting the pace of recovery remains challenging at this early stage.
And because occupancy is a lagging indicator, we expect to see some further decline during the first half of this year.
Overall, we remain confident over the longer term.
As I've said throughout the pandemic, I believe that companies will return to the office.
Our tenants generally have short commutes, and they don't face significant mass transit, parking or vertical transportation barriers to reoccupancy.
In the meantime, Douglas Emmett remains well capitalized, with no debt maturities before 2023.
We own a dominant share of the best buildings in the best markets in LA, and there is no threat of material new office supply in the near future.
Our integrated operating platform is built to withstand recessions, and our team continues working to get better every day.
Our two multi-family development projects continue to make impressive headway.
The demand for new units at 1132 Bishop, our office to residential conversion project in downtown Honolulu, remains robust.
As I previously mentioned, we have fully leased the first phase of 98 units, and by year end, it already leased 29 out of the 76 units in the second phase.
Construction at our Brentwood high-rise apartment is nearly topped off, and delivery of the first units remains on schedule for early 2022.
In December, one of our joint ventures sold an 80,000-square foot Honolulu office property for $21 million.
Our decision to close the health club as a result of the pandemic triggered interest from a number of owner users targeting that type of space.
The buyer will use the club for space for youth vocational training and after-school programs.
Property transactions in our markets remain slow as many potential sellers are in a watch-and-wait mode given current uncertainties.
In Q4, we signed 197 office leases covering 612,000 square feet, including 202,000 square feet of new leases and 410,000 square feet of renewal leases.
As Jordan said, the recovery in demand from our tenants last quarter was led by our smaller tenants.
As a result, the average size of the leases we signed last quarter was 3,100 feet compared to our overall portfolio average of 5,600 square feet.
This resulted in our office lease percentage declining to 88.6%.
The leases we signed during the fourth quarter will provide almost 10% more rent than the expiring leases for the same space.
Although the initial cash rents were 5.8% lower as a result of large annual rent bumps over the term of the prior leases.
On the multifamily side, our lease rate improved to 98.2% from 97.5%, with gains in both West LA and Hawaii.
The fourth quarter reflected the continuing impacts from the pandemic.
FFO was $0.46 per share, down 15% from Q4 2019.
AFFO declined 16% to $76 million, and same-property cash NOI declined by 20%.
Compared to the third quarter, FFO increased by $0.06 from fire insurance proceeds and $0.02 from better collections and lower expenses.
Those increases were partly offset by $0.02 of issue advocacy expenses for the November election.
As a result, FFO increased by a net $0.06 per share compared to Q3.
At only 4.6% of revenues, our G&A for the fourth quarter remains well below that of our benchmark group.
Given the continuing uncertainties around the pandemic and local government ordinances, we are not providing guidance.
However, I do want to share some general observations based on what we currently see.
We expect further improvements in collections and parking revenue as the economy opens up and local moratoriums are lucent.
These will be gradual at first, but prior history suggests that we will collect a large majority of past due amounts in the end.
We expect that leasing will recover over the course of the year.
Because it is a lagging indicator, we expect occupancy to decline at least through the first half of the year.
We expect straight-line rent to be minimal in 2021, largely as a result of tenants who were put on a cash basis in 2020.
We expect revenue from above and below market leases to resume its normal decline.
As usual, these observations do not assume the impact of future acquisitions, dispositions or financings.
| douglas emmett quarterly ffo per share $0.46.
quarterly ffo per share $0.46.
expect straight line revenue to be minimal in 2021 and revenue from above/below market leases to resume its normal decline.
|
I'm Dave Martin of Harsco.
For a discussion of such risks and uncertainties to the Risk Factors section in our most recent 10-K and 10-Q.
The third quarter developed largely as we anticipated on a consolidated basis with our environmental businesses improving sequentially, while our rail business, which did not see a significant impact from COVID through Q2, was affected by weak demand and an unfavorable product mix.
Overall, EBITDA was consistent with our expectations, while cash flow was better.
Revenues in our environmental businesses, which represent more than 80% of total Harsco revenue, were up 15% versus the second quarter.
Volumes were up in all waste categories, led by hazardous medical waste.
Retail and industrial waste volumes were also up by double digits, while steel waste or LST, was up high single digits.
Revenue was also up in the contaminated materials segment with strength in the dredge business, offsetting weakness in our high-margin soils business, which has been affected by softness in large nonresidential construction projects in the Mid-Atlantic and Northeast regions.
Our key priorities have remained consistent for most of 2020: Keeping our people safe during the pandemic, preserving liquidity, capturing the value of the ESOL acquisition and executing our operational recovery plan in rail.
I'm very pleased with the execution on each of these critical initiatives during the third quarter.
The number of COVID cases across our employee population has remained steady at modest levels for several months.
And we have not experienced any significant disruption to our operations related to employee health.
The degree of employee compliance with our global COVID-related principles is quite high, and has served to counter the worrisome trends across the general populations of the more than 30 countries in which we operate.
Pete will comment on our liquidity position in a moment, but I would like to recognize Pete and his finance organization for their outstanding management of our cash flow and liquidity position over the last several months.
Cash flow continues to be strong and is well above the 2019 level despite the impact of COVID on cash earnings.
The integration and value capture of the ESOL acquisition continues at a brisk pace.
The vast majority of our value actions have been launched and the corresponding benefits for the year will be ahead of our original plan.
These actions range from logistics and disposal optimization to various SG&A and commercial initiatives.
This past week, David Stanton, the Clean Earth President and I visited a number of our sites across the U.S. was energizing to again see firsthand, the tremendous opportunities we have to grow the business and improve the efficiency of its operations.
The operational recovery program at Rail is on track to deliver against its objectives by the end of the year.
The backlog in Rail remains at record high levels, so the SCOR program is oriented toward ensuring we have the appropriate capacity, competency and governance principles in place, to deliver high-quality products to our customers on time.
In terms of next steps, we plan to establish and sustain the lean based operating model required for a best-in-class supply chain and fulfillment capability.
Looking ahead, we expect our end markets to continue to improve throughout the quarter and into 2021, with recovery in our environmental businesses leading that of our Rail business.
Our Q4 outlook reflects these positive trends in both Harsco Environmental and in Clean Earth.
We are not yet comfortable providing more specific guidance for next year given the current economic situation, and the potential impacts on our planning process.
In terms of management focus, we will continue to execute our current programs and strengthen our balance sheet.
Together with the expected improvements in our end markets, these actions should build on our foundation and enable us to take the meaningful next steps in our portfolio transformation.
In the third quarter, Harsco's revenues totaled $509 million, and adjusted EBITDA totaled $59 million.
Our revenues increased 14% over the second quarter of this year with each of our businesses realizing a nice improvement in revenues from the second quarter when we believe the impacts of the pandemic peaked for most of our end markets.
The sequential improvement in revenue ranged from a 20% increase at Clean Earth, to a 9% increase at Harsco Environmental.
Our third quarter adjusted EBITDA of $59 million is consistent with our expectations in August and is comparable to our adjusted EBITDA result in Q2, despite the unfavorable timing impact of certain expenditures we discussed on our earnings call last quarter.
These incremental items consisting largely of the timing of insurance and compensation related amounts, negatively affected the quarter-on-quarter comps by approximately $10 million.
Otherwise, underlying performance improved compared with Q2 as a result of volume growth driven by the ongoing economic recovery, and strong underlying operating performance within our businesses.
Including at ESOL, where margins improved considerably as our integration and operational improvement actions began to take hold.
And as you may recall, Q3 was our first full quarter of owning ESOL after we acquired it in April.
Relative to our expectations at the beginning of the quarter, our results were aided by better top line and margin performance in Harsco Environmental and lower corporate spending as a result of our ongoing focus on managing costs.
Our EBITDA in the third quarter of 2019 totaled $87 million.
The change year-on-year clearly reflects the ongoing impact of the pandemic on end market demand as well as the fact that the prior year quarter was particularly strong due to a favorable mix in both Rail and Clean Earth.
Harsco's adjusted earnings per share from continuing operations for the third quarter was $0.08.
And lastly, our free cash flow totaled $18 million in Q3, a strong performance considering that this figure is net of approximately $14 million of tax-related outflows that we had deferred from the second quarter.
This figure compares with free cash flow of $5 million in the third quarter of 2019.
And year-to-date, our free cash flow is now $10 million positive, significantly improved from 2019.
Capital spending discipline and improved working capital performance have been the main drivers of the improvement this year and should continue to be so for the foreseeable future.
Generating positive free cash flow is clearly an important focus for us and we expect to generate positive free cash flow in Q4 as well.
Revenues totaled $223 million and adjusted EBITDA was $40 million, translating to a margin of 18%.
This EBITDA figure compares to $60 million in the prior year with the change driven by pandemic effects on the demand for services and applied products as well as related impacts on new site ramp-ups.
Steel output at our customer sites declined approximately 6% on a continuing site basis compared with the prior year quarter.
Relative to the second quarter of this year, Harsco Environmental's revenues rose 9% on a similar improvement in steel volumes.
Adjusted EBITDA was unchanged quarter-on-quarter.
However, as I mentioned earlier, the comp to Q2 was negatively impacted by the timing of expenses, which totaled approximately $5 million for HE.
So I believe these results again illustrate strong performance by our Harsco Environmental team and their ongoing focus on operational excellence and financial discipline in controlling operating expenses.
Harsco Environmental's free cash flow totaled $32 million in the quarter and now totaled $64 million for the year.
This year-to-date figure compares with free cash flow of $10 million in the prior year.
The improvement during 2020 has largely been driven by lower capital spending and cash generated from working capital, as I mentioned earlier.
For the quarter, revenues were $194 million, and adjusted EBITDA totaled $20 million.
Compared to the third quarter of 2019, our dredged material processing business had a strong quarter.
And the inclusion of ESOL offset the volume pressures linked to the pandemic in our legacy Clean Earth has waste business.
Our soils business was impacted by less favorable mix and delays in nonresidential construction projects, again due to the pandemic.
Relative to the second quarter of 2020, revenues increased roughly 20% with ESOL and legacy Clean Earth experiencing similar improvements.
By line of business, the sequential revenue growth was most significant in medical and dredge material processing, followed by industrial and retail hazardous waste.
ESOL contributed nearly $130 million of revenue in the quarter.
And it's great to see the ESOL business bounce back from Q2 when many medical facilities and industrial plants as well as a good number of retail stores were closed.
And I believe this illustrates the recurring and essential nature of its revenues and its resilience during atypical business cycles.
Further, ESOL's margin performance improvement was also very positive in the quarter.
Additional volume helped in the quarter, but I believe this result is more importantly, a direct positive reflection on the improvement initiatives that we've only begun to implement.
ESOL's run rate EBITDA as a result is now above pre-acquisition levels despite the pandemic.
Last quarter, I mentioned that we expect to realize approximately $5 million of benefits in 2020 from our initiatives.
Today, I'm confident we will exceed this target.
And as a reminder, the major improvement levers we're pursuing are our disposal optimization, site productivity, inbound and outbound logistics, procurement and commercial initiatives.
Although we still have some work to do in order to achieve our goal of doubling ESOL's EBITDA within three years, we're off to a great start.
Lastly, on the Clean Earth segment, free cash flow and cash conversion remains impressive.
The segment's free cash flow totaled $17 million in the quarter and year-to-date, it now stands at $38 million versus adjusted EBITDA of $42 million.
Rail revenues increased to $93 million, while the segment's adjusted EBITDA declined to $5 million in the third quarter.
The change in EBITDA relative to the prior year quarter can be principally attributed to a less favorable mix across all product categories and lower aftermarket and pro train volumes due to the pandemic headwinds affecting our customers, which became more pronounced during the quarter.
These impacts were partially offset by lower SG&A spending.
While economic conditions related to the pandemic clearly hit the low point in Q2 for Clean Earth and Environmental, that wasn't the case for Rail, as the end markets continue to feel pressures from pandemic-related headwinds on freight and passenger rail demand.
As we started to see early this quarter, this has created some deferrals of our customers' capital spending versus their original plans.
And accordingly, the demand for short-cycle products across all business lines in Rail was soft.
While Rail traffic and ridership has started to improve, the outlook is still fairly volatile given the pandemic headwinds.
Furthermore, our business generally lags leading indicators such as traffic and ridership by a few quarters.
We have some important customer discussions in the coming weeks about their forthcoming capital spending plans and are cautiously optimistic that we will see some further improvements late in the year and early 2021.
Now bright spot continues to be business development in our backlog, where we continue to see opportunities to bid on larger, longer-term contracts despite softness in the short-cycle market, and we've had a number of notable sizable wins during the quarter.
These wins included a follow-on option contract with the New York City Transit Authority to supply them with additional vehicles and a new contract with the Chicago Transit Authority to supply them with snow removal vehicles.
As a result, Rail's backlog remains robust, totaling more than $450 million at the end of the quarter.
So before moving to our outlook on slide eight, let me comment on our balance sheet.
Our financial flexibility remains strong.
Our leverage, as expected stood at 4.5 times and our liquidity totaled $325 million at the end of the quarter.
Reducing our leverage is a top priority for us and our goal remains to reduce our leverage to below 2.5 times within a couple of years.
Now let me turn to the outlook on slide eight With the exception of our Rail business, our visibility and confidence has continued to improve in recent months.
And as a result, we believe we're in a position to provide some quantitative guidance for the fourth quarter.
As you all know, the current economic environment continues to be fluid, and recent COVID infection trends are not favorable.
However, with this in mind and based on the current market environment, we see fourth quarter total Harsco adjusted EBITDA ranging from $58 million to $63 million.
Business conditions are expected to improve modestly for Clean Earth and Harsco Environmental during Q4 relative to the third quarter.
For these two segments, Q4 margins are projected to be stable versus the third quarter.
Rail results in the fourth quarter are currently expected to be similar to the third quarter performance, and corporate costs are expected to be modestly above Q3 levels.
Also, we expect our free cash flow to be between $20 million and $25 million in the fourth quarter.
And this outcome would place our free cash flow for the full year north of $30 million.
Now as I mentioned earlier, this outlook does not contemplate any meaningful impact to our business from any new lockdowns or restrictions, which may be implemented by state or national governments as a result of negative COVID developments.
Nonetheless, despite the unusual conditions we've all experienced these past few months, I'm very pleased with the performance, discipline and focus on execution by each of our businesses and keeping our people safe while delivering our strong results to date.
And I expect this to continue into the fourth quarter and into 2021.
| compname says q3 adjusted earnings per share $0.08 from continuing operations.
q3 adjusted earnings per share $0.08 from continuing operations.
q3 revenue $509 million versus refinitiv ibes estimate of $474.1 million.
expects its q4 ebitda to be within a range of $58 million to $63 million.
|
The last several months are unlike anything most of us have experienced in our life times.
With long overdue calls for social equality, persistent global pandemic and recovery curves, the only certainty today is uncertainty.
But amid all this change, we'd be remiss not to recognize all the heroes.
It's been truly uplifting to see the humanity around us, our healthcare workers and other first responders and all of those who are committed to making our world a safer, better and more equal plains.
I've never been more proud of our firm and how we've responded during these times.
At the beginning of this pandemic, we adopted a framework of safety, caution and agility to navigate the crisis.
That included mobilizing almost all of our global colleagues to a work from home environment in really the course of days.
And we sized our business to the current reality while preserving tremendous muscle, which we believe will allow us to accelerate through the term.
We took a strong voice in the world, hosting multiple COVID-19 webinars, which were attended by over 20,000 leaders and we led Race Matters webinars for colleagues and clients that attracted more than 100,000 leaders from global organizations.
And we're continuing to engage with clients in these discussions, given our large diversity and inclusion consulting business.
And we appointed Mike Hyter as our Chief Diversity Officer, elevating our ongoing focus on and continuing commitment to not only diversity, but much more importantly, inclusion.
Diversity is a fact, inclusion is a behavior, and we're committed to continuing that conversation beyond the pledge through action.
Now let me comment briefly on our fiscal fourth quarter.
Fee revenues were down about 7.9% at constant currency as the impact of the virus accelerated through the quarter.
Our adjusted EBITDA margin was almost 16% and we delivered $0.60 of adjusted EPS.
Full year revenues were $1.9 billion and we delivered approximately $300 million of adjusted EBITDA and $2.92 of adjusted EPS.
Now for the future.
There is no question that the magnitude of the humanitarian and economic impact brought on by the virus far outweighs with anyone could have expected a few short months ago.
The pace and magnitude of the decline caused by this global health crisis is unprecedented, at least in the last 100 years.
But with the crisis there is also tremendous opportunity.
And we believe that includes real tangible opportunities for Korn Ferry.
Almost every company on the planet is and will have to reimagine their business.
And I believe in the next two years, there is going to be more change than in the last 10.
Quite simply, different work needs to get done and work needs to get done differently.
And to get work done differently, companies will need to rethink their org structure, roles and responsibilities.
How they compensate, engage and develop their workforce, let alone the type of talent they hire and how they hire that talent in a virtual world, which will depend to even a greater extent on assessment.
And as a reminder, our assessment and learning business is almost 25% of the company.
So these are Korn Ferry's businesses and this is on top of our M&A change management, virtual sales effectiveness and customer experience services, let alone the D&I services that we offer to the marketplace.
That's real opportunity for us.
And as an organizational consulting firm, we enable people and organizations to exceed their potential.
And to exceed potential, people need in abundance of opportunity, development and sponsorship, which is absolutely foundational to our service offerings.
We're also using this time of change as an opportunity to reimagine our business.
For example, we're moving from analog to digital delivery of our assessment and learning business, which as I just mentioned, it's 25% of the company in a way that makes our IT more relevant and scalable.
On the recruiting side, we're further refining our platform processes, such as AI, video and technology.
And on the administrative front, we're continuing to further consolidate our activities, adopting a One Korn Ferry approach to deliver greater efficiencies across the entire organization.
When I look back during the Great Recession, our revenue was up almost 60% four quarters from the trough, eventually growing 5x to almost $2.1 billion revenue run rate, annual revenue run rate a few months ago.
We believe the opportunity to grow after the pandemic subsides lies in front of us.
We're a much different company today.
Our firm's recovery could be substantially different with a pronounced upswing based on a broader and deeper mix of business.
To undertake this journey, we're going to be agile, flexible and responsive to the environment and our clients.
Fortunately, we're facing this crisis from a position of strength when we consider we have a solid balance sheet with high levels of cash and liquidity and we've taken swift and decisive actions to protect the company, and more importantly, preserve its muscle.
We've also seen some green shoots in new business and client wins.
April, May and June stabilized, down approximately 30% year-over-year.
And sequentially, June was up approximately 18% over May.
So June was better than May and was better than June in terms of new business.
We've also set operational guardrails in our business, designed to preserve our position of strength and enable the firm to invest into the recovery.
We're committed to maintaining at least neutral EBITDA.
This preserves the muscle of the firm and our ability to fully harness the opportunities and the recovery and we will maintain our dividend this quarter.
As we discussed in the last earnings call, we continue to assess the changing health and economic environment and the impact it has on our forward visibility.
As city, states and countries reopen their economies, there has been a significant resurgence of COVID-19 cases in a number of places.
In some cases this has resulted in the delay or even cancellation of plans to reopen.
Despite the recent positive data indicating that our new business trends may be stabilizing as well as the resilience that our clients and colleagues are demonstrating, the near-term predictability of our business remains clouded.
As a result, we will not be providing specific revenue and earnings guidance for the first quarter of FY '21.
In wrapping up my remarks, I want to leave you with this.
You know at some point, we'll be looking at this virus through the rearview mirror.
And I truly believe that we have the right strategy with the right people at the right time to accelerate further through the turn like we've done before.
We have a demonstrated track record of doing that.
So now, I'm joined virtually by Bob Rozek and Gregg Kvochak.
I'll start with a few important highlights for the full year and the fourth quarter of fiscal year '20 before I address new business trends.
For the full year of fiscal '20, our fee revenue was $1.93 billion, which was essentially flat year-over-year.
Our adjusted EBITDA margin was -- our adjusted EBITDA, I should say, was $301 million and the adjusted EBITDA margin was 15.6%.
And as Gary indicated, adjusted fully diluted earnings per share were $2.92.
Now turning to the most recently completed quarter, our fourth quarter.
Fee revenue was $440.5 million, which was down 7.9% year-over-year measured at constant currency.
In the fourth quarter, fee revenue for Executive Search was down 10% globally, RPO and Pro Search was down 9%, Consulting down 14% and Digital grew 14%, and all of that's at constant currency.
Adjusted EBITDA in the fourth quarter was approximately $70 million with a 15.8% adjusted EBITDA margin, and our adjusted fully diluted earnings per share in the quarter were $0.60.
Our balance sheet and liquidity remained very strong at the end of the fourth quarter.
Cash and marketable securities totaled $863 million, and that's up about $95 million year-over-year.
And then when you pull out amounts reserved for deferred compensation and accrued bonuses, that's our -- what we define as our investable cash, that balance at the end of the fourth quarter was approximately $532 million, that's up about $150 million year-over-year.
At April 30, 2020, we have undrawn capacity of $646 million on our revolver.
So we have close to $1.2 billion in liquidity to manage our way through COVID-19, and as Gary indicated, to invest back into the business through the recovery.
Last, the firm had outstanding debt at the end of the fourth quarter of about $400 million.
Finally, due to the negative economic impact of COVID-19, we did take swift and decisive actions to downsize our cost base.
As previously announced, we took cost actions that were targeted at compensation as well as G&A spend.
And we have initially reduced our cost base by about $300 million on a run rate basis.
We believe these actions will help us manage the business to maintaining our minimum operating boundary of adjusted EBITDA neutrality throughout the COVID crisis.
And in the current environment, maintaining operational flexibility is critical for us and will allow us not only to preserve the franchise, but as I indicated, will allow us to invest into the recovery.
Gregg, do you want to go through some of the operating segment?
I'm going to start with the Digital segment.
Global fee revenue for KF Digital was $69 million in the fourth quarter and up approximately $7 million or 14% year-over-year measured at constant currency.
The subscription and licensing component of KF Digital's fee revenue in the fourth quarter was approximately $21 million, which was up $6 million year-over-year and was flat sequentially.
Adjusted EBITDA in the fourth quarter for KF Digital was $17 million with a 24.5% adjusted EBITDA margin.
Now shifting to the Consulting segment.
In the fourth quarter, Consulting generated $121 million of fee revenue, which was down approximately 14% year-over-year at constant currency.
In every region, Consulting fee revenue in the fourth quarter was negatively impacted by the sudden shift to work from home protocols, which limited our consultants' ability to execute and complete advisory assignments at client sites.
Adjusted EBITDA for Consulting in the fourth quarter was $11.1 million with an adjusted EBITDA margin of 9.2%.
RPO and Professional Search generated global fee revenue of $82 million in the fourth quarter with both components down approximately 9% year-over-year at constant currency.
Adjusted EBITDA for RPO and Professional Search in the fourth quarter was $12.7 million with adjusted EBITDA margin of 15.4%.
Finally for Executive Search, global fee revenue in the fourth quarter of fiscal '20 was approximately $168 million, which compared year-over-year and measured at constant currency was down approximately 10%.
At constant currency, North America and EMEA were each down 10% year-over-year and APAC was down 16%.
The total number of dedicated Executive Search consultants worldwide at the end of the fourth quarter was 556, down nine year-over-year and down 26 sequentially.
Annualized fee revenue production per consultant in the fourth quarter was $1.18 million.
And the number of new search assignments opened worldwide in the fourth quarter was 1,229, which was down approximately 28% year-over-year.
Adjusted EBITDA for Executive Search in the fourth quarter was approximately $47.5 million with an adjusted EBITDA margin of 28.3%.
So globally year-over-year decline in monthly business as we exited fiscal year '20 and entered fiscal year '21 appear to have stabilized.
Excluding new businesses for RPO, our global new business measured year-over-year was down approximately 20% in March and 34% in April.
Starting our new fiscal year, May was down approximately 32% year-over-year and June was down 26%.
And over the past two years, June has been sequentially better than May kind of in the 5% to 7% range.
In the current year, we're obviously seeing the same [Technical Issue] of improvement.
And obviously at this point, we still don't know July is new business yet.
With regards to the RPO, new business in the fourth quarter was once again strong with $109 million of global awards, which was comprised of $72 million of new clients and $37 million of renewals and extensions.
In the near-term, the new business pipeline for RPO remains strong.
We'd be glad to answer any questions that you have.
| compname reports q4 adj earnings per share $0.60.
q4 adjusted earnings per share $0.60.
fee revenue was $440.5 million in q4 fy'20, a decrease of 10%.
will not issue any specific revenue or earnings guidance for q1 of fy'21.
plan to reassess suspension of our guidance once we are comfortable that coronavirus uncertainties have largely passed.
|
Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10-K and our other SEC filings.
Additionally, we'll be discussing certain non-GAAP financial measures.
I'd like to begin by taking a moment to extend my thoughts and prayers to those who are impacted by the ongoing pandemic as well as the many wildfires.
At Lowe's, we remain committed to the health and safety of our associates and customers while supporting the communities in which we operate.
The resilience of our customers and our associates is something that I admire on a daily basis.
Now, turning to our results.
We are very pleased with the performance for the second quarter.
Our outstanding two year performance was driven by great execution of our total home strategy, which allowed us to win with both the pro and DIY customers while meeting the aggressive growth demands across Pro, Lowes.com and our installation services business.
As anticipated, during the quarter, we saw a decline in DIY demand versus last year as many families transition back to pre-COVID purchase patterns and weekend mobility after Memorial Day.
But because of the agility of our total home strategy, we were able to capitalize on pro demand driving growth of 21% this quarter and 49% on a two year basis.
This level of pro growth would not have been possible without our intense focus on the pro customer over the past 24 months.
This intense pro focus includes our U.S. stores reset project that we executed last year.
This reset has allowed us to create a more intuitive store layout for the pro aligned across product adjacencies, so pros can quickly and easily locate all products they need for their jobs.
And as a reminder, our core pro customer is a small- to medium-sized business owner.
These customers shop frequently across the store, impacting numerous product categories.
And as we continue to capture more of their spend, we will continue to increase productivity across the top and bottom line of our stores.
Later in the call, Bill will discuss how we will continue to expand our pro product offerings and then Joe will discuss our enhanced online experience for the Pro.
We also delivered double-digit growth this quarter in our installation services.
We continue to expand the products available for installation and we're leveraging our enhanced e-commerce platform and our revamped business model to deliver a better customer experience.
We expect our installation services business to continue to play an important role in our total home strategy as customers increasingly look to us to provide an end-to-end turnkey solution for their home project needs.
And at Lowes.com, sales grew 7% on top of 135% growth in the second quarter of 2020, which represents a 9% sales penetration this quarter and a two year comp of 151%.
Our enhanced omnichannel offering continues to resonate with our customers who increasingly expect total flexibility in shopping however, whenever and wherever they choose.
We're also pleased with the performance of our Canadian business.
In the second quarter, Canada delivered comp growth in line with the U.S. despite several COVID-related operating restrictions.
We also continued to elevate our product offering, which is another pillar of our total home strategy as we help fulfill the aspirations of our customers to upgrade their homes and style.
And we delivered strong positive comps across kitchen and bath, flooring, appliances and decor on top of 20% growth in these categories last year.
The 17% growth we experienced in ticket over $500 was in large part driven by these categories, reflecting continued consumer confidence in investing in their homes.
This also reinforces the consumers' confidence in Lowe's as the right destination for their home decor needs.
And during the quarter, operating margin expanded approximately 80 basis points leading to diluted earnings per share of $4.25, which is a 13% increase as compared to adjusted diluted earnings per share in the prior year.
In the face of unprecedented lumber price volatility during the second quarter, our improved operating performance reflects the benefits of our new price management system along with our disciplined focus on perpetual productivity improvement, or PPI.
Bill and Joe will discuss both these initiatives in more detail later in the call.
I'd now like to take a moment to discuss a very important milestone in the company's transformation.
When I joined Lowe's as CEO back in July of 2018, I discussed the importance of transforming and modernizing our supply chain.
The foundation of this transformation is transitioning the company from a store-based delivery model to a market-based delivery model for big and bulky products.
I'm pleased to announce that this quarter, we completed the conversion of our Florida region to a market-based delivery model for appliances and other big and bulky items like grills, riding lawn mowers and select patio furniture.
In this new delivery model, product flows from the bulk distribution centers to cross-dock terminals directly to customers' homes, bypassing the stores altogether.
This replaces a legacy store delivery model where we hold appliances in stockrooms and storage containers behind our stores and then leverage store-based trucks and associates to deliver these products to customers' homes.
To say this legacy process is inefficient would be an extreme understatement.
The new market-based delivery model is already driving higher appliance sales, improved profitability, lower inventory, higher on-time delivery rates and improved customer satisfaction.
And we're freeing up space in our stockrooms, which will enable us to expand our same-day and next-day pro and DIY fulfillment capabilities in the near future.
over the next 18-plus months.
With this new delivery model, we will continue to drive sales, inventory turns and operating leverage through a technology-driven, simplify and customer-centric process.
Before I close, I'd like to share my perspective on the home improvement market as well as Lowe's opportunity to win in this market.
The outlook for the home improvement industry remains very positive.
Residential investment is expected to remain high due to historically low mortgage rates while home prices continue to appreciate.
We're also pleased that we continue to see higher household formation trends and longer-term wallet share shift to the home.
It's also worth noting that any near-term pressures on housing turnover is not related to an economic downturn as typical.
In fact, there is more housing demand than supply, resulting in home prices continuing to rise.
And because of this, consumers have an increased confidence in repairing and remodeling their homes.
As a reminder, approximately two-thirds of Lowe's annual sales are generated from repair and maintenance activity.
Further, our research shows that it will take years for the supply of homes to meet the projected demand.
This remains a very positive indicator for home improvement.
In addition, the customers' mindset regarding their home is very straightforward.
As long as their home is increasing in value, they see upgrades and enhancements to their home as an investment and not an expense.
Looking ahead, although the business environment remains uncertain, we are confident that our total home strategy provides us with the agility to operate with profitability in times of high and low customer mobility.
And finally, I would like to extend my heartfelt appreciation to our frontline associates.
As I travel the country on a weekly basis visiting stores, I'm continually inspired by the hard work and commitment of our associates to support our communities while providing excellent customer service.
U.S. comparable sales were down 2.2% in the second quarter but up 32% on a two year basis.
We drove solid positive comps in our building products and home decor divisions.
And while we delivered a terrific spring over the first half of the year, the pivot in consumer behavior after Memorial Day resulted in negative comps in our seasonal categories this quarter.
However, growth was broad-based on a two year basis with all product categories up more than 15% in that time frame.
In building products, we delivered double-digit comps in electrical and lumber driven by strong pro demand as well as high levels of inflation.
And as Marvin mentioned, our merchandising and finance teams navigated through unprecedented lumber price volatility this quarter.
Our enhanced pricing systems enabled us to effectively mitigate the impact on our product margins.
Dave will provide more detail on the near-term impact of the lumber price decline on our margins and sales, but I'm confident that our talented teams have the right pricing tools and processes to continue to manage through elevated levels of inflation and pricing volatility.
I'm also pleased with our performance in home decor as DIY customers continue to rely on Lowe's for their home remodeling needs.
By leveraging our total home strategy, we delivered positive comps across appliances, kitchens and bath, flooring and decor on top of over 20% growth in these categories last year.
Capitalizing on our No.
1 position in appliances, we delivered strong comps in the category this quarter with particularly standout performance in washers and dryers as well as refrigerators and freezers.
Countertops, kitchen cabinets and vanities were the strongest contributors to our kitchen and bath comps as our customers continue to appreciate the new on-trend, coordinated styles that are available in our own allen + roth brand.
Vinyl flooring was the top-performing category within flooring driven by new and innovative WetProtect product from Pergo.
It's a leading brand in this category that is exclusive to Lowe's and this product provides peace of mind to our customers with its guaranteed waterproof protection for both the flooring and sub-floor.
We also delivered a strong spring season in the first half of the year that kicked off with the launch of our new SpringFest event.
We were very pleased that our customers took advantage of the strong product offerings to help make the most out of their outdoor living spaces In this quarter, we delivered over 30% growth in battery-operated outdoor power equipment.
Both our DIY and pro customers are drawn to the convenience and the quality of the EGO, Kobalt, CRAFTSMAN and Skill brands with their zero-emission, rechargeable equipment.
And the addition of the EGO and Skill brands only bolsters our No.
1 position in outdoor power equipment and they truly complement our other leading brands such as John Deere, Honda, Husqvarna, Aaron's and CRAFTSMAN.
We continue to add new brands and products to our lineup, especially for our pro customer.
This quarter, with the launch of Flex Power Tools, we featured an in-store demo station for our new Flex cordless power tools.
This brand is exclusive to Lowe's and delivers innovation to the power tool category, bringing more power and faster charging time than its competition.
We also introduced the Mansfield brand across our bath department with drop-in tubs, showers and toilets.
Another exclusive in the home center space, Mansfield is a strong pro brand and their products are made right here in the United States.
And I'm excited to announce that we'll be bringing more U.S.-manufactured product to Lowe's this fall with the launch of SPAX fasteners.
SPAX is the market leader in multi-material construction screws.
Their industry-leading innovation delivers some of the most advanced fasteners on the market.
The addition of SPAX to the fastener program now rounds out the pro assortment in this category that our pro customers need.
The addition of Flex Power Tools, Mansfield plumbing products and SPAX fasteners, continues to enhance our pro brand arsenal, which already includes strong pro brands such as Simpson Strong-Tie, DEWALT, Bosch, Spyder, GRK, FastenMaster, ITW, Lufkin, Marshalltown, S-Wing, Eaton, SharkBite and LESCO.
As Marvin previously discussed, we delivered strong sales growth of 7% and a two year growth of 151% on Lowes.com.
This quarter, we enhanced our omnichannel customer experience with the launch of our virtual kitchen design, which enables customers to create their dream kitchen, allowing them to work on their projects seamlessly between Lowes.com and the specialists on our virtual central design team.
As part of our total home strategy, we are launching virtual search in our stores, which now allows a customer to hover their smartphone over a product and explore an endless aisle of similar items on Lowes.com.
This is just one example of how we continue to integrate the online and in-store shopping experiences.
And looking ahead, we are excited about the upcoming fall and winter holiday seasons as our customers will turn their attention to doing their homes and outdoor living spaces as the weather cools.
We are confident that our total home strategy will enable us to continue to elevate our product assortment and allow us to take market share across our DIY and pro customers.
We will also continue to leverage our new price management system to effectively manage our product margins with a disciplined approach to vendor cost management and a data-driven portfolio approach to pricing to further enhance and refine our everyday competitive price strategy.
And before I close, I'd like to once again extend my appreciation to our vendor partners and our merchants for their commitment to serving our customers.
For the second quarter, we continued to drive improved execution in our stores with our associates laser-focused on serving customers and maintaining a safe store environment.
In early August, in response to the surge of the Delta variant, we reinstated mask requirements for all of our associates regardless of their vaccination status.
I'm appreciative that our associates are once again rising to the dynamic challenges presented by this pandemic.
I'm pleased to announce that for the sixth consecutive quarter, 100% of our stores earned a Winning Together profit-sharing bonus, resulting in a $91 million expected payout to our frontline hourly associates.
And because our efforts once again exceeded expectations, this represents an incremental $20 million over the target payment level.
We're also very pleased that our PPI initiatives continue to gain traction, driving operating efficiency again this quarter as we leverage store payroll through operational process improvements and technology enhancements, reducing the amount of time our associates spend on tasking activities so they can focus instead on serving the customer.
During the quarter, we maintained strong staffing levels despite isolated labor shortages in some areas of the country.
We continue to enhance the labor scheduling system that we launched in 2019, which allows us to align our payroll hours with customer traffic patterns.
It also enables us to respond rapidly and effectively to changing market conditions so that we can ensure that we continue to provide great customer service while also driving operating leverage.
This year, we've installed our homegrown self-checkout solution in over 550 stores that did not have any self-checkout capability for our customers.
This Lowe's-designed self-checkout was built with the home improvement shopper in mind, featuring a simplified user interface, multiple ways to scan product and the ability to use Lowe's military and credit card discounts.
This new solution is already driving higher customer adoption rates and incremental payroll leverage.
And with the digital signs fully rolled out across lumber and appliances, we are not only driving labor savings but also enhance product margins as we can now adjust prices more quickly to protect share and margins during periods of price volatility.
As previously discussed, our online penetration for the quarter was 9%.
And with approximately 60% of online orders picked up in the store, our dedicated in-store fulfillment teams are an integral part of the Lowe's omnichannel customer experience.
We are continuing to leverage technology to improve efficiency in the customer experience, whether customers get their orders the front desk or through curbside or through their favorite option, our new pickup lockers.
Now, let's turn to our performance of the pro customer.
As discussed earlier, pro continues to outpace DIY with pro comps of 21% for the quarter and 49% on a two year basis.
We continue to expand our digital connection with the pro customers.
We just completed the migration of Lowe's for pros to the cloud.
This important step in our pro business evolution enables enhanced features, faster updates, improved site stability and more personalized offers for the Pro.
One new feature is rapid reorder, which enables our pro customers to quickly reorder items that they frequently purchase through Lowe's.
We are focused on making the pro shopping experience both online and in-store as easy and intuitive as possible.
We're also growing our pro loyalty program as we look for innovative ways to expand our members-only benefits.
Every day, we are striving to demonstrate that Lowe's is the new home for pros .
Looking ahead, I'm excited about the second half of the year as we leverage our total home strategy to build on the momentum in pro and installation services while also meeting the needs of the DIY customers as they continue to tackle interior and exterior projects to improve their homes.
Before I close, I would like to once again extend my appreciation to our frontline associates along with other executive and senior officers as well as merchants and field leaders.
I'm out visiting stores on a weekly basis to ensure that we continue to engage with and support our frontline associates in this challenging operating environment.
I'm incredibly proud of this team and their continued hard work and dedication.
In the second quarter, we generated $2 billion in free cash flow driven by continued strong operational execution and consumer demand.
We returned $3.6 billion to our shareholders through a combination of both dividends and share repurchases.
During the quarter, we paid $430 million in dividends at $0.60 per share and we announced a 33% dividend increase to $0.80 per share for the dividend paid on August 4.
Additionally, we repurchased 16.4 million shares for $3.1 billion and we have $13.6 billion remaining on our share repurchase authorization.
Capital expenditures totaled $385 million in the quarter as we invest in the business to support our strategic growth initiatives.
We ended the quarter with $4.8 billion in cash and cash equivalents on the balance sheet, which remains extremely healthy.
At quarter end, adjusted debt-to-EBITDAR stands at 2.08 times, well below our long-term stated target of 2.75 times.
With that, now I'd like to turn to the income statement.
In Q2, we generated diluted earnings per share of $4.25, an increase of 13% compared to adjusted diluted earnings per share last year.
During the quarter, we drove improved operating leverage as we executed against numerous productivity initiatives across the company.
My comments from this point forward will include approximations and comparisons to certain non-GAAP measures where applicable.
Q2 sales were $27.6 billion with a comparable sales decline of 1.6%.
Comparable average ticket increased 11.3% driven by over 400 basis points of commodity inflation, mostly in lumber, as well as higher sales of appliances and installations.
This was offset by comp transaction count declining 12.9% due to lower sales to DIY customers of smaller ticket items like cleaning products, paint, mulch and live goods.
In Q2, we cycled over a period when consumer mobility was limited, so many of our customers were tackling smaller projects around their homes.
Also in Q2 of this year, DIY customers pulled back on purchasing lumber and related attachments due to extremely elevated lumber prices in the quarter.
Keep in mind that comp transactions increased 22.6% last year, which results in a two year comp transaction count increase of 6.8%.
As Marvin indicated, our investments in our total home strategy gave us the ability to pivot during the quarter and led to outperformance in many of our key growth areas with pro up 21%, online up 7%, installation services up 10% and strong positive comps across DIY decor categories.
comp sales were down 2.2% in the quarter but up 32% on a two year basis.
Our U.S. monthly comps were negative 6.4% in May, negative 1.8% in June and a positive 2.6% in July.
After Memorial Day, there was a noticeable increase in consumer mobility and consumers engaged in the opportunity to travel and spend in other discretionary categories.
We saw a related decline in DIY customer traffic in our stores on the weekends while weekday traffic remained strong.
Looking at U.S. comp growth on a two year basis from 2019 to '21, May sales increased 32 and a half percent, June increased 32% and July increased 31 and a half percent.
Gross margin was 33.8%.
As expected, gross margin rate declined 30 basis points from last year but was up 165 basis points as compared to Q2 of '19.
Product margin rate improved 40 basis points.
Our teams effectively managed product cost and pricing this quarter despite unprecedented volatility in lumber prices.
Our teams continue to minimize vendor cost increases driven by higher commodity prices and elevated industry transportation costs.
Also, higher credit revenue drove 30 basis points of benefit to gross margin this quarter.
These benefits were offset by 20 basis points of pressure from shrink and live good damages from the extreme weather conditions in the West, also 25 basis points of mix pressure related to lumber and 20 basis points from less favorable product mix in other categories.
Supply chain costs also pressured margin by 35 basis points as we absorbed some elevated distribution costs and continue to expand our omnichannel capabilities.
Our supply chain team continues to leverage our scale and carrier relationships to minimize the impact of these distribution costs experienced across the retail industry.
Now, I'd like to spend just a moment discussing the near-term impact from the steep drop in lumber prices beginning in early July.
Since that time, we have been selling many of our lumber products at compressed margins because we had previously purchased these products at higher cost.
However, we expect that by the end of August, we will have substantially sold through these higher cost inventory layers.
And despite these short-term pressures, we are still expecting that our gross margin rate to be up slightly for the full year versus last year.
SG&A at 17% of sales levered 135 basis points versus LY driven primarily by lower COVID-related costs.
We incurred $25 million of COVID-related expenses in the quarter as compared to $430 million of COVID-related expenses last year.
The $405 million reduction in these expenses generated 145 basis points of SG&A leverage.
These benefits were offset by 20 basis points of pressure from higher overall employee healthcare costs.
Operating profit was $4.2 billion, an increase of 6% over LY.
Operating margins of 15.3% of sales for the quarter was up 80 basis points to the prior year.
This improvement was generated by improved SG&A leverage, partially offset by lower gross margin.
The effective tax rate was 24.4% and it was in line with prior year.
At the end of the quarter, inventory was $17.3 billion, down $1.1 billion from Q1 and in line with seasonal trends.
This reflects an increase of $3.5 billion from Q2 of 2020 when our in-stock positions were pressured due to elevated demand levels and COVID-related supply disruption.
Current inventory includes a year-over-year increase of $665 million related to inflation, the majority of which is attributable to lumber.
Now, before I close, let me comment on our current trends and how we are planning the business for the second half of this year.
Clearly, we continue to manage our business in a very fluid environment with the Delta variant trends injecting new uncertainty into the forecast.
However, given our strong first half performance, Lowe's is clearly tracking well ahead of our robust market scenario that we shared with investors back in December of 2020.
Our outlook assumes that the home improvement market will moderate somewhat in the second half given lower levels of commodity inflation and a continued increase in consumer mobility driven by return to work and school.
We are expecting Lowe's mix-adjusted market demand to be essentially flat for the full year.
This relevant market view reflects Lowe's higher DIY mix and lower online penetration.
Now, in this revised scenario, we expect Lowe's to deliver sales of approximately $92 billion for the year, representing two year comparable sales growth of approximately 30%.
Month-to-date, August U.S. comp sales trends are materially consistent with July's performance levels on a two year comparable basis.
As expected, we are already seeing a several hundred-basis-point improvement in comp transaction count over the Q2 levels, partially driven by increased unit sales of DIY lumber and related attachments as DIY customers who were sitting on the sidelines reengaged after lumber prices dropped.
Importantly, we expect gross margin rate to be up slightly versus the prior year as we leverage our pricing and promotional strategies to mitigate the impacts of product and transportation cost inflation.
With elevated sales levels projected and our current productivity efforts taking hold, we are now raising our outlook for operating income margin to 12.2% for the full year.
We are expecting a 10-basis-point negative impact from elevated cost inflation.
Furthermore, we are tracking well ahead of our operating plans.
And as such, we now expect to incur higher-than-planned incentive compensation, resulting in 20 basis points of pressure.
Together, these expenses represent 30 basis points of operating margin deleverage relative to the $92 billion revenue outlook.
Without these offsets in expenses, we would be expecting an operating income margin of 12 and a half percent for the full year.
When I consider our outlook for the business for the remainder of this year, I'm very pleased that we are now expected to deliver approximately 145 basis points of operating margin improvement over 2020.
This reflects a disciplined focus on driving productivity and operational excellence across the organization.
We are planning for capital expenditures of $2 billion for the year.
Furthermore, we expect to execute a minimum of $9 billion in share repurchases.
In closing, we are operating in a great sector expected to benefit from the secular tailwinds over the next several years.
We are investing in the business and our total home strategy to drive long-term growth so that we continue to outperform the market and drive meaningful long-term shareholder value.
| compname reports q2 earnings per share of $4.25.
q2 earnings per share $4.25.
q2 sales $27.6 billion versus refinitiv ibes estimate of $26.85 billion.
q2 earnings per share $4.25 excluding items.
qtrly consolidated comparable sales decreased 1.6%.
qtrly u.s. comparable sales decreased 2.2%.
raises fiscal 2021 financial outlook.
sees fy 2021 revenue of about $92 billion.
for fiscal 2021, company expects capital expenditures of approximately $2 billion.
sees fy 2021 revenue of about $92 billion, representing about 30% comparable sales growth on a two-year basis.
|
We are very pleased with our fourth quarter earnings performance, which was significantly ahead of our expectations.
In the period we delivered adjusted earnings per share of $1.18 compared to $1.22 last year.
While our revenues were 23% below last year and in line with our expectations, our digital businesses accelerated more than what we had anticipated, posting a 38% revenue increase in North America and Europe and our licensing business also outperformed.
Offsetting these improvements were lower retail revenues due to additional store closures and restrictions, mostly in Europe and Canada and an anticipated shift in wholesale shipments in Europe into Q1.
In spite of the revenue decline we managed our business well and delivered an adjusted operating margin of 11.4% in the period, only 70 basis points below last year.
The main driver of the outperformance for the quarter was our gross margin, which increased 240 basis points versus last year.
With this performance we closed a challenging but rewarding year for our Company.
While we experienced a significant revenue contraction of 30% in the year due to the pandemic, we were very proactive and lead the business carefully managing inventories well and controlling expenses tightly.
All considered, we were able to reverse our first quarter adjusted operating loss of $109 million to close the year with an adjusted operating profit of $20 million.
We ended the year in a good inventory position.
We have the right product and our ownership is appropriate to service our business well in the new fiscal year.
As with the rest of our industry, we have experienced disruption in our supply chain both to sourcing and transportation, which has caused some delays in product deliveries globally.
However, given the fact that we were operating with restrictions in some regions, we were able to appropriately allocate the product to service our demand.
These conditions have resulted in limited supply, contributing to less promotional activity across the industry from which we are benefiting.
In addition to time, these delays caused an increase in transportation costs.
Of course, we have been prioritizing shipments and choosing alternative transportation options to minimize this cost.
We believe that the port congestion delays, including the recent event in the Suez Canal, will be normalized by the summer, and we have made provisions to anticipate the receipt of goods wherever possible to mitigate further delays.
During the year, we prioritized our investments in our digital and omnichannel initiatives and rationalized our global store footprint and expense structure.
We also returned value to our shareholders via dividends and we purchased $39 million of our shares.
We closed the year with a strong balance sheet with $469 million in cash.
I am encouraged by our trends entering the new year.
It is clear that the customer is responding well to our products and assortments.
Our digital channels are accelerating, our wholesale business shows we are gaining market share and when our stores are open, they are performing well with solid product sell-throughs.
Our customer traffic is showing sequential improvement while still significantly below pre-COVID levels.
At the same time, our conversion continues to meaningfully exceed pre-COVID levels.
In the US, we are experiencing a considerable acceleration in our direct to consumer businesses since the stimulus checks were announced.
We are confident in our business as we emerge from this pandemic.
As vaccination levels increase across different countries in the upcoming months, as we have seen in the US, the consumer will be inspired to venture out and buy new clothes.
Our product assortment is ideal for post-pandemic business in our industry.
I believe that lifestyles have been forever altered by the pandemic and casualization is here to stay.
I am pleased that we expanded our line to include categories like athleisure and essentials to support this lifestyle.
But we also have rich assortments of dressier apparel and accessories for multiple occasions which will resonate as our customers begin to socialize again.
we flourish in times like this.
There is a strength of character that is present in the Guess?
Our founders had this since day one and Paul has that same strength and commitment for our Company, our team and our Guess?
brand today, something he demonstrates every single day with this work.
The proof of courage in Guess?
is evident with every decision we make, always running the business with a long-term view, leading our team with a clear vision to build the Company and the value of our brand for the next generation, not just the next quarter.
Our capacity to adapt to each and every change in the industry and the business has been validated by the multiple business model changes our Company has endured successfully over the last 40 years.
From our denim category assortment to our lifestyle offering and brand image, from own businesses to licensed ones, from wholesale to retail, from a domestic business to a global one, from bricks and mortar retail to an omni-channel model, I strongly believe that our Company's ability to adapt to change is the foundation of our business success and value creation.
I will now pass the call to Katie and I will return to review and update our five-year strategic plan.
I'm happy to report that we finished this fiscal year strong with our fourth quarter earnings significantly exceeding our expectations despite higher COVID resurgences across the globe.
With revenue in line with our outlook, but margin significantly higher than expected, we were able to deliver $74 million in adjusted operating profit.
We saw operating profit increases to prior year in all of our business segments except for Europe which was significantly impacted by government mandated store closures and a shift in wholesale shipments.
We also saw a nice momentum in our e-commerce business, which was up 38% for the quarter in North America and Europe versus 19% in Q3 and 9% in Q2.
And let me take you through the details.
Fourth quarter revenues were $648 million, down 23% in US dollars and 26% in constant currency.
Stronger than expected momentum in our European digital business and an increase in licensing revenue was offset by the impact of continued COVID resurgences.
The impact of temporary store closures on our sales versus prior year for the total Company during the quarter was about 10%, mostly in Europe, but also in Canada.
We had some anticipated shifts in European wholesale shipments which were worth about 6% of total Company sales to prior year.
Excluding these two factors, the 23% Q4 sales decline would have been a decline of about 7%.
Now let me get into the detail on sales performance by segment.
In Americas Retail revenues were down 24% in constant currency where negative store comps and temporary and permanent store closures were partially offset by growth in our e-commerce business.
Store comps in the US and Canada were down 21% in constant currency, slightly better than Q3, which was down 23% as continued sequential improvement in US sales was offset by softening in Canada due to traffic declines as a result of the pandemic.
The underlying trend in the US showed even greater recovery.
However, the business was hurt by restrictions on capacity and consumers avoiding crowds on what are typically the busiest shopping days of the year.
In fact, if we remove the five super high-volume days in Q4 from the sales calculation, our Q4 store sales comp in the US and Canada would have been about 5% better than what we reported.
In Europe, revenues were down 32% in constant currency.
As you know, the region started experiencing increased lockdowns and operating restrictions at the end of Q3, which continued to the end of the fourth quarter and remain in place today.
Store comps for Europe were down 26% in constant currency, significantly impacted by the increase in COVID levels in that region.
Our e-commerce sales, however, accelerated nicely in the fourth quarter and helped to mitigate some of these headwinds.
As Carlos mentioned, the wholesale business in Europe in Q4 was down to prior year as a result of the planned shift in shipments for the spring, summer collection into next year.
In Asia store comps were down 22% in constant currency driven by a resurgence of the virus in some of those markets like Korea.
Our Americas Wholesale business was down 14% in constant currency compared to down 34% last quarter and 49% in Q2, still under pressure from the deceleration in demand, but showing vast improvement quarter-to-quarter.
Licensing revenues were strong, up 12% to prior year in Q4, driven by continuing recovery in the business, but also some timing in sales.
Gross margin for the quarter was 42.6%, 240 basis points higher than prior year.
Our product margin increased 140 basis points this quarter primarily as a result of higher IMU, as well as lower promotions.
Occupancy rate decreased 100 basis points as a result of rent relief and business mix, partially offset by deleverage on sales.
This quarter we booked roughly $15 million in rent credits for fully negotiated rent relief deals across Europe, North America and Asia.
There is still some negotiations with our landlords that are outstanding and we are also extending our conversations with landlords to address the second round of closures.
Adjusted SG&A for the quarter was $202 million compared to $237 million in the prior year, a decrease of $35 million or 15% and better than our expectations.
We continue to benefit from changes to our expense structure, lower advertising spend and a decrease in expenses related to permanent store closures versus last year.
In addition, there were some one-time benefits from government subsidies, mainly in Europe, which were partially offset by higher variable expenses related to the growth of our e-commerce business.
Adjusted operating profit for the fourth quarter was $74 million versus $102 million in Q4 of last year.
Our fourth quarter adjusted tax rate was 7%, down from 17% last year, driven by the mix of statutory earnings.
Inventories were $389 million, down 1% in US dollars and down 5% in constant currency versus last year.
Our inventory levels in Europe were artificially high due to the timing of inventory receipts and the increase in in-transit inventory due to the transit delays that Carlos mentioned earlier.
We ended the year with $469 million in cash versus $285 million in the prior year and we had an incremental $272 million in borrowing capacity.
Capital expenditures for the year were $19 million, down from $62 million prior year.
Free cash flow for the year was $183 million, an increase of $50 million versus $133 million last year.
This year, we benefited from lower capital expenditures, extended payment terms with our vendors and unpaid rents.
In addition, last year's outflow included the non-recurring payment of the $46 million European Commission fine.
This was a strong finish to a tough year.
For the fiscal year, we lost almost $800 million or 30% of our sales versus prior year as a result of the pandemic.
However, we were still able to maintain positive adjusted operating profit of $20 million, $130 million lower than prior year, allowing for only 16% of those lost revenues to flow through to our bottom line.
This demonstrates the tremendous control that we have over what we can control and a super dynamic global environment.
This year we expanded product margins, executed over $30 million in rent abatement and relief, cut SG&A by over 20% and managed our capital very tightly, all the while we had our eye on the future of our brand, positioning this Company to win as we emerge from the pandemic.
We returned value to our shareholders reinstating our dividend in Q3 and completing $39 million of share repurchases at an average price of $10.
And while COVID will remain a near-term headwind, there is reason to be hopeful as vaccines roll out.
Now let's talk about our near-term future.
Given the continued level of uncertainty in the current environment, we are not going to provide formal guidance.
However, I will walk you through how we are thinking about the first quarter.
I'm going to anchor our comparisons to the pre-COVID Q1 of fiscal year 2020, which ended May 4th, 2019 as this past year's fiscal first quarter is clearly not a normalized comparison.
We expect first quarter revenues to be down in the high single digits to fiscal year 2020 as pandemic-related shutdowns and traffic declines are partially offset by continued momentum in our global e-commerce business and the favorable timing of our wholesale shipments in Europe.
Quarter-to-date, we have seen sales comps at our retail locations of down 4% in the US and Canada, down 19% in Europe, and down 22% in Asia.
Our business in Europe continues to be impacted by government mandated store closures.
Currently, we have over 240 stores closed with approximately 400 additional stores with reduced operating hours.
E-commerce growth has continued to accelerate and is up 58% to prior year for the quarter-to-date in North America and Europe.
Lastly, as discussed, Q1 will benefit from the shift of wholesale shipments in Europe for the spring, summer collection from Q4 of this past year.
We estimate that the negative impact of the temporary store closures will roughly offset the positive impact of the wholesale timing for the quarter.
In terms of profit, adjusted gross margin in the first quarter is expected to be around 200 basis points better than fiscal quarter 2020, driven primarily by business mix as well as improved IMUs.
We anticipate that this margin expansion will be offset by an increase in adjusted SG&A expenses as a percent of sales as deleverage from lost revenue will be partially offset by the cost savings initiatives rolled out over the last year.
For full fiscal year 2022, we expect revenues down in the high single digits to the fiscal year 2020 barring COVID shutdowns past Q1.
This includes the resumption of a normal cadence for product development and shipments for European wholesale.
As you may recall, in response to the pandemic last year we made the strategic decision to elongate the fall-winter season shipping window and cancel the development of the pre-spring, summer line.
We are not planning on repeating this in fiscal 2022.
With that, I'll hand it back to Carlos to talk about the five-year strategic business plan.
I'm very excited to share with you today my view of our future.
This past year was truly a year of crisis, but like Winston Churchill said we didn't let the crisis go to waste.
During the year, we made great progress executing our strategic plan and were able to accelerate the implementation of several key initiatives.
Today, we are confirming our strong belief that our opportunities for value creation remain intact for us.
Furthermore, we remain committed to delivering net revenues of $2.9 billion and an operating margin of 10% by fiscal year 2025.
I am confident that we have an opportunity to more than double our earnings per share to $3 and increase our free cash flow by 65% by fiscal 2025 respect to fiscal 2020.
As a result, we plan to more than double our return on invested capital to 26% by fiscal 2025 from 12% in fiscal 2020.
Let me begin with a quick review of our key accomplishments last year.
From the beginning of the pandemic, we focused on the areas we could control, including our capital availability and liquidity.
We managed our capital effectively and were able to return value to our shareholders through share repurchases and the reinstatement of our dividend when our visibility improved.
We were able to accelerate the implementation of our new sales force platform in the US, Canada and Europe, which is now fully complete.
This is a major milestone for us and the initial results are very strong.
For example in Europe, we have a faster platform with a homepage download over 3.5 times faster, a 13% lower bounce rate and an 18% increase in mobile conversion rate from our previous site.
We also rolled out omni-channel capabilities in Europe in addition to North America and we expanded our online product assortment globally.
During the year, we were able to rationalize our store portfolio closing over 125 underperforming stores and renegotiating 290 leases at favorable terms.
As part of the store rationalization, we were successful in repositioning our business in China, partnering with four new franchisees in separate regions of the country to represent Guess?
with local market expertise and capital for expansion.
And we also integrated our G by Guess?
brand into our GUESS Factory business in the US, converting almost 60 of our stores which have already shown very encouraging results.
Last but not least, we identified ways to transform our business model.
This includes a global reorganization of our team, an omni-channel focus for our direct to consumer business, the development of our first global product line and the introduction of new product categories like athleisure and essentials.
We also worked hard to eliminate redundancies and streamline processes across our operations.
Last year during our Investor Day we shared our purpose to inspire our customers to feel confident and passionate about their style and their future.
we dare to dream.
That same day we shared our vision for our organization and our commitment.
These constitute a timeless foundation for our team and our Company.
As I said, we see an extra ordinary opportunity to create significant value for our stakeholders over the next four years and beyond.
This starts with our opportunity to gain market share and all the markets and businesses that we operate.
I believe the value of our offering represented by the quality, styling and price of our products is unmatched in today's marketplace.
Capacity has been eliminated in our space, primarily as a result of substantial store closures.
Furthermore, many of our wholesale customers have chosen to concentrate their buys with fewer, stronger brands and we are certainly one of them.
Somewhat related to this is our opportunity for product category growth.
I believe that we have an amazing assortment in key product categories such as denim, outerwear and handbags to expand our presence in the marketplace.
And our new product lines like athleisure and essentials give us additional opportunity for growth.
While we are currently in approximately 100 countries, we have whitespace in multiple markets where we are underdeveloped.
China, Russia, Poland and Germany are just good examples of this.
Our opportunity for operating margin expansion has been well documented and the asset-light model that we are creating at Guess?
will contribute to our ability to more than double our return on invested capital in the next few years.
Last year we also shared the six strategic objectives of our five-year plan.
This plan still constitutes the right roadmap for our future, despite the changes in the environment over the last year.
Our six pillars are, one, organization and culture.
We will always strive to have a best-in-class team that works effectively and efficiently together.
We strive for our brands to be relevant with three key target consumer groups, heritage, Millennials and Generation Z customers.
We will design, make and distribute amazing product to support our customers' lifestyles.
We will always place the customer at the center of everything we do.
Five, is global footprint.
We will develop an effective and profitable global distribution ecosystem.
And six, functional capabilities.
We will always invest in our infrastructure to support our business well long term.
For our organization and culture objective we are organizing our teams, emphasizing global functional responsibilities and capitalizing on local market expertise and accountability.
We also plan to develop each market with an omnichannel approach where the accountability is placed on one team to develop all channels in the market instead of using a traditional approach with separate accountability by channel and business unit.
we strive to be a conscious capitalist organization and we consider our ESG priorities a driving force for change.
We have big goals to improve our environmental agenda and deliver 100% denim to be equal and 100% recycle synthetic materials and packaging by 2030.
Today we are at 25%.
brand has always been in business with a strong and consistent point of view.
We know who we are and we know who we are not.
Our brand well-protected is a lifetime asset.
And it is for this reason that we have a plan to elevate our brand.
Quality and consistency are key to strengthening our brand relevancy and the new customer environment.
Quality starts with product, the quality of the materials we use, a sustainability focus on increased perceived value for each item are key to win in this area.
We plan to increase full price selling, reduce promotional activity and focus on certain key product categories.
And last but not least, in order to elevate our brand we must elevate the customer experience across our Guess?
ecosystem including stores, websites, wholesale partners and licensees all over the world.
In addition, collaborations, partnerships and unique go-to-market strategies are key to drive brand awareness and fuel new customer acquisition, especially for the younger consumers.
Our next strategic pillar is about product excellence.
In our business, product is everything.
We have four key initiatives to fulfill this objective in the next four years.
First is product quality, styling and assortment.
Second is our focus on key product categories.
They consist of women's and men's apparel, including denim, athelisure and essential products, handbags, footwear and kids.
Our third product initiative is our one global line.
As we have said in the past, this initiative drives consistency in all markets, enables us to elevate the quality of our products and will result in significant efficiencies throughout our supply chain.
Our fourth initiative regarding product is the expansion of our assortment to support our omnichannel business.
The next pillar is about customer centricity.
We have four big goals to optimize our strategy.
Customer data collection and analysis, the understanding of our customer segments, their journeys and their preferences, creation of a seamless customer experience using world-class tools and the optimization of customer engagement on brand loyalty programs.
On the heels of our sales force and omnichannel capability rollout, we are implementing Customer 360, a fully integrated suite developed by salesforce.
This solution will enable us to optimize data capture, dissect the customer journeys engagement, conduct personalized marketing and analyze the results of every activity and point of engagement.
Regarding CRM and our loyalty program.
We have a rich global base with almost 5 million customers in all three regions and we see big opportunities to put the Customer 360 tool to work on this and grow this program in the next few years.
Regarding our global footprint, I believe stores are a key component in our omnichannel network, a great environment to represent our lifestyle brand and our number one customer acquisition vehicle.
We have been very successful in rationalizing our global store fleet over the last few years and still have significant flexibility to optimize our portfolio as 80% of our leases worldwide are expiring in the next three years.
We made the decision to exit more than 15 unprofitable flagship locations, some of which have already been closed while others are planned to close later this year.
And as I mentioned, we will continue to pursue opportunistic new store openings in those markets where we are underrepresented.
All together, we estimate that our plan will contribute to 200 basis points of operating margin improvement by fiscal year 2025 versus fiscal year 2020.
Next I will touch on our functional capabilities.
Over the next few years, we will focus on optimizing our product management, leveraging technology to become a true data-driven business and creating meaningful efficiencies across our global organization.
We think about product management optimization from end to end.
This means, product development, sourcing and production to distribution and logistics to inventory management.
There are a few key components to this plan.
We are migrating our suppliers to the most efficient places and consolidating vendors to achieve both operational and cost efficiencies.
In fact, over the last two years we have reduced our number of suppliers by over 60%.
Faster lead times to market are more important now than ever.
We are digitalizing our product development processes, which could reduce lead times by up to two months as well as conducting capacity planning with our key vendors to react quickly to changes in demand.
In distribution and logistics we are developing an efficient global network that capitalizes on low cost labor regions and automation.
Inventory management is key to maximizing both sales and margin.
We are focusing on assortment planning, allocation, fulfillment and markdown optimization.
I believe that becoming a data-driven organization is a key enabler to allowing us to compete effectively in the future.
This process is an evolution and must remain a constant focus for us.
Our technology plan supports our strategic plan and is anchored in innovation and data analysis.
Some initiatives, in addition to the technology work that we're doing on customer centricity, include modernizing and enhancing our systems to ensure a reliable, secure and integrated global infrastructure and a migration to the cloud.
Lastly, as a global organization we are focused on a true global infrastructure.
This means simplifying our business practices and eliminating system and process redundancies across the globe.
In Europe, we have a multi-channel, multi-country infrastructure in place.
We will leverage this model to streamline the organization and drive cost savings.
This is a big opportunity for us.
This is the last chapter in my professional journey and I am giving everything I have to make it extraordinary.
I have a great partner in Paul, a great team, an incredible brand and a dynamic business.
Our position in the market is strong and staying focused on this roadmap will allow us to grow our business very profitably.
I am very confident in our team's ability to execute our plan and meaningfully grow the value of this great company.
With that, let me pass it to Katie.
Let me give you some more color on the financials that fall out of the strategic plan.
As Carlos mentioned, we are confirming the commitment that we presented in December of 2019 to deliver 10% operating margins by fiscal year 2025.
And while we still believe in sales growth for our brand over the next few years, I get particularly excited that the meat of our path to double earnings per share from fiscal year 2020 to $3 in fiscal year 2025 lies in the middle of the P&L, where we have the most control.
And this past year is proof that we can execute what we can control.
As we did with Q1, we are going to anchor our comparisons in this conversation to the pre-COVID fiscal year 2020, which ended February 1st, 2020 for a more normalized comparison.
In terms of revenue we anticipate that we will reach $2.9 billion in fiscal 2025 versus $2.7 billion in fiscal 2020.
Most of this growth is being fueled by our e-commerce business with growth in wholesale being offset by a decline in retail.
As a result, we see our e-commerce penetration of direct to consumer sales growing from 13% in fiscal year 2020 to 23% in fiscal year 2025.
I'll mention that e-comm penetration was 22% this past year, but that was inflated a bit with the pandemic induced store closures.
In terms of adjusted operating margin, we see 440 basis points of growth over the next few years.
The vast majority, 400 basis points, is coming from operational efficiencies with the remaining 40 basis points coming from leverage on higher sales.
Store portfolio optimization represents a large portion of the margin expansion, about 200 basis points.
This is higher than we had modeled pre-pandemic.
We expect 90 basis points of supply chain efficiencies primarily from better IMUs.
We've been very successful in expense streamlining this year and are working on longer term opportunities as well.
We anticipate 70 basis points of margin expansion from fiscal 2020 in this area.
Lastly is logistics which is expected to contribute 40 basis points of operating margin improvement.
The operational efficiencies that Carlos mentioned will be partially offset by variable costs associated with e-commerce growth.
We see the 400 basis points of operational efficiency falling roughly equally over the next four fiscal years as some of the initiatives require some lead time.
I will say though that while the underlying savings will be present in fiscal year 2022 sales to leverage will slightly offset the impact on operating margin expansion from these savings.
With that I'll pass it to Fabrice to walk you through the rest of the five-year financials.
Protecting our strong balance sheet and returning capital to shareholders was and remains the key priority for us.
We believe we can generate higher free cash flows over the next four years as we continue to remain disciplined on managing working capital and driving operating margin to 10%.
At the same time, we believe we can support our strategic plan with investment levels flat to 2020 of roughly $65 million.
This should result in $220 million of annual free cash flow by fiscal 2025, 1.7 times that of our fiscal 2020.
Turning to capital allocation.
Our picking order going forward will remain consistent.
Our first priority is to make the investments that will enable the execution of our strategic plan.
Our second priority is to return capital to shareholders through dividend and share repurchases.
We will continue to prioritize capital allocations throughout the technology and infrastructure that will support our transformation into a truly customer-centric, data-driven company.
We would invest in remodeling some of our key store locations across the globe and opening new stores in underpenetrated markets.
One of our key objectives is to improve our return on invested capital.
Our plan provides a path to increase profitability from the smaller but more efficient portfolio of assets.
As we exit underperforming stores, optimize our working capital and migrate to a capital-light model where appropriate, our goal is to more than double return on invested capital to 26% by fiscal 2025, that is 12% in fiscal 2020.
Our second priority is the dividend payment which we resumed in Q3.
We have been able to deliver significant shareholder value here in the past.
As a reminder, we repurchased slightly over 25% of our shares over the last two years at an average price of $15.76.
We believe that our five-year strategic plan provides a solid roadmap to value creation.
And we will continue to approach share repurchases opportunistically when we believe that our stock is trading below its intrinsic value.
| compname reports q4 adjusted earnings per share $1.18.
q4 adjusted earnings per share $1.18.
reaffirms plan to deliver 10% operating margin by fiscal 2025.
not providing detailed guidance for q1 or full fiscal year ending january 29, 2022.
expect revenues in q1 of fiscal 2022 to be down in high-single digits versus q1 of fiscal 2020.
for fy 2022, assuming no covid-related shutdowns past q1, we expect revenues to be down in high single digits versus fiscal 2020.
|
Our momentum continued this quarter with comparable sales up 2.2% for the total company and 2.6% for the U.S. on top of over 30% growth last year.
on a two-year basis.
These outstanding results were driven by disciplined execution of our Total Home strategy, which allowed us to grow our share of wallet with both Pro and DIY customers as they gain confidence in Lowe's as the right destination for all of their project needs.
Our results also benefited from the great work by our merchants and supply chain teams who delivered competitive in-stock positions as we leverage our scale and carrier relationships to build inventory in key high-demand categories despite widespread disruption in the global supply chain.
Later in the call, Bill will discuss how we are navigating these unprecedented challenges in order to meet the continued strong demand for home improvement products.
After Labor Day, we saw an increase in DIY demand on the weekends as travel activity slowed down and children returned to school.
As a result, consumers were once again spending more time on projects in their homes.
Our elevated product assortment across our home decor offerings are resonating with consumers, resulting in particularly strong performance in appliances and flooring and contributing to an 11% increase in ticket over $500.
The strength in the higher-ticket categories reflects the continued consumer confidence in their homes as a sound investment and reflects the early success of our Total Home strategy.
We're also making significant progress growing Pro sales.
Pro once again outpaced DIY this quarter with Pro growth over 16% and over 43% on a two-year basis.
Over the past two years, we have relentlessly focused on improving the Pro offering in our stores and online with better service levels, deeper inventory quantities, a more intuitive store layout combined with an increased number of Pro national brands.
As we continue to drive higher Pro growth, we will increase sales productivity and operating leverage across our stores.
Later in the call, Bill will discuss our continuing efforts to expand our Pro product offerings, and then Joe will discuss how we continue to enhance our Pro shopping experience.
For the past 18 months, the home has increased in importance for all of us and perhaps especially for our baby boomer customers, who are increasingly interested in aging in place in their own homes.
We will offer affordable on-trend solutions like walk-in bathtub, grab bars, stairlifts, nonslip floors, pull-down cabinets and wheelchair ramps.
These solutions will help our customers modify their homes to fit their lifestyle needs.
Our collaboration with AARP will leverage their trusted brand and expertise as we help to educate our customers on how to approach aging in place.
We look forward to updating you on this very exciting initiative on future calls.
Now turning to Lowes.com.
Sales grew 25% on top of 106% growth in the third quarter of 2020, which represents a 9% sales penetration this quarter and a two-year comp of 158%.
As we modernize our omnichannel offering, we continue to gain traction with consumers who increasingly expect a seamless integrated shopping experience.
And as a further indication of the strides we've made in upgrading our dot-com platform, I'm pleased to announce that we have recently launched Lowe's' One Roof Media Network.
Our recognition for the first time in 17 years as Fortune's Most Admired Specialty Retailer and our inclusion as one of the top three marketers of the year in Ad Age's annual list means that we are well positioned to put our vendor partners at the forefront of the home lifestyle movement, helping them to capitalize on the shift in consumer behavior and sentiment toward the home.
We're excited to participate in this rapidly growing segment of digital advertising.
During the quarter, operating margin expanded approximately 240 basis points, leading to diluted earnings per share of $2.73, which is a 38% increase as compared to adjusted diluted earnings per share in the prior year.
Our improved operating performance continues to reflect the great execution of the team, as well as the benefits of our new price management system and the success of our perpetual productivity improvement initiatives, or PPI.
Dave and Joe will provide further details on both of these initiatives later in the call.
Now turning to our results in Canada.
While our performance lagged the U.S. as the Canadian business is more heavily weighted toward lumber, the Canadian leadership team remains focused on driving productivity by leveraging technology and processes that have already yielded strong results in the U.S. I'd now like to take a moment to discuss how we're expanding our fulfillment capabilities to meet the ever-increasing consumer demand for omnichannel shopping solutions.
This quarter, we completed the conversion of our second geographic area, the Ohio Valley region, to the market-based delivery model for big and bulky product, building on the success we gained in Florida.
As a reminder, in the market-based delivery model for big and bulky products flowing from our supply chain directly to consumers' homes, bypassing the stores all together.
This replaces the legacy store delivery model, which is highly inefficient and relies on each store to function as its own distribution node for these products.
This new delivery model is already driving higher sales in appliances, improved operating margins, reduced inventory and higher on-time delivery rates.
We plan to complete the rollout across the entire U.S. over the next 18-plus months.
Now let's talk about the importance of culture at Lowe's.
This year, we're celebrating our centennial with a $10 million investment in 100 communities across the country with projects ranging from renovating homeless shelters, updating youth centers and addressing unique needs for communities all around the country.
You can go to Lowes.com and see a full list of all 100 community projects.
This is our way of expressing our appreciation for our loyal customers and paying tribute to the company's long-standing commitment to community service.
In addition to commitment to the community, at Lowe's, we are proud of our relationship with and support of our military veterans and active-duty service members.
This is demonstrated by the $1 billion in discounts that we give our military families in our country this year through our Military Discount program.
Joe will discuss this program in more detail later in the call.
Before I close, I would like to extend my appreciation for our frontline associates.
Every week, I'm fortunate to travel across the country visiting stores, and I'm impressed by our associates' resilience and commitment to serving our customers and our communities.
And I'm very pleased to announce that for the seventh consecutive quarter, 100% of our stores earned a Winning Together profit-sharing bonus.
This $138 million payout to our frontline hourly associates is $70 million above the target payment level and reflects our appreciation for the hard work of our hourly workforce.
In the third quarter, U.S. comparable sales increased 2.6% and 33.7% on a two-year basis as our Total Home strategy continues to gain traction with our DIY and Pro customers.
This quarter, we drove positive comps across our home decor and hardlines divisions.
Comps in the building products divisions were down slightly as compared to the prior year as we cycled over a period of extremely high DIY demand for lumber.
Growth continued to be broad-based on a two-year basis with all product categories up more than 17% in that time frame.
In our home decor division, appliances and flooring delivered standout performances as we leveraged our competitive in-stock positions and updated product assortments to deliver strong positive comps on top of 20% growth in these categories last year.
Within appliances, sales of refrigerators, freezers and washers and dryers were particularly strong.
In flooring, vinyl flooring remains the top-performing category supported by innovative product like the WetProtect from Pergo, which is exclusive to Lowe's.
And we are pleased to see the new product offerings in our own allen + roth brand resonating with our customers, like the new allen + roth Lifestyle Performance rugs.
These rugs have the appearance of an indoor rug, but they are hose-washable, which makes them ideal for busy families with kids and pets.
Turning to our performance in our hardlines division.
Customers also invested in outdoor entertainment and upgrading their outdoor living spaces, as well as holiday decorations for their homes and yards, driving strong positive comps in seasonal and outdoor living and lawn and garden, resulting in two-year comps over 43% in each category.
We were also pleased with our performance in Halloween as we've sold through much earlier than in previous years.
And our early sales of holiday trim and tree are tracking ahead, as well as consumers are getting a jump start on their holiday decorating.
In addition to early sales of holiday, we have also seen customers purchasing cold weather products like snow throwers earlier than in years past.
With broader awareness of potential global supply chain disruptions, we are seeing many consumers looking to purchase products as soon as they are available in our stores.
In the quarter, we also leveraged our No.
1 position in outdoor power equipment to deliver over 20% growth in battery-operated outdoor power equipment.
Both our DIY and Pro customers are enjoying the zero-emission rechargeable products available in the EGO, Kobalt, CRAFTSMAN and Skill brands.
We continue to expand our brand and product assortment, building on the powerful lineup of brands that include John Deere, Honda, Husqvarna, Aaron's and CRAFTSMAN.
In building products, comps were down slightly due to a decline in DIY lumber sales despite double-digit comps in electrical and strong positive comps in rough plumbing and building materials.
We feel good about the traction that we are gaining with the Pro customer as we continue to build out our product assortments that are tailored to their needs.
This quarter, we completed the launch of the SPAX fastener program in our stores.
SPAX is the market leader in multi-material construction screws.
We also continue to build out our Pro power tool accessory program with new launches from Spyder and DEWALT. This quarter, Spyder will be launching their new TARANTULA circular saw blades, offering seven new options to tackle a wider variety of tough construction jobs, all of which are exclusive to Lowe's.
And DEWALT will be launching their new ELITE SERIES circular saw blades, which are designed to maximize productivity for heavy-duty projects, and these will also be exclusive to Lowe's.
These new products are strong additions to our Pro brand lineup, which includes great programs like Simpson Strong-Tie, DEWALT, Metabo, Bosch, Spyder, GRK, FastenMaster, ITW, Lufkin, Marshalltown, Estwing, Eaton, SharkBite and LESCO and the recent additions of FLEX, SPAX and Mansfield.
Now shifting to Lowes.com.
We delivered sales growth of 25% in the quarter and 158% on a two-year basis.
Following the launch of Lowe's virtual kitchen design and visual search in Q2, we enhanced our omnichannel customer experience with the introduction of our paint visualizer on Lowes.com in the third quarter.
We are continually working to remove friction from the buying process and to fully integrate the online and in-store shopping experience.
Before I close, I'd like to discuss how we're navigating the unprecedented disruptions across the global supply chain that are impacting the retail industry.
As one of the largest importers in the U.S., we are fortunate to be able to leverage our scale and carrier relationships to secure shipping and transportation capacity and work to minimize the impact of cost increases.
We're also taking a very proactive approach by ordering inventory earlier than the years past, including our seasonal buys for both 2021 and 2022.
This gives us more time to manage through any unforeseen delays in either the production or the distribution of our orders.
Once the product lands in the U.S., we are able to leverage our growing network of coastal holding facilities so that we can hold the product upstream from our regional distribution centers and bulk distribution centers until it's needed.
From there, we can quickly flow the product to the right areas of the country.
Looking ahead, we are ready to flex our seasonal pads to a variety of different winter and early spring offerings after we sell through our trim and tree product.
The investments that we made in the U.S. stores reset last year expanded our operating capabilities and has allowed us to respond rapidly to the changing consumer shopping habits, like the early season buying that we're seeing right now.
As Marvin mentioned, this quarter, 100% of our stores earned their Winning Together profit-sharing bonus, resulting in a payout of $138 million to our frontline hourly associates.
The current hiring environment remains competitive, and we continue to align labor to meet demand.
Our labor management system has allowed us to serve the needs of our customers while addressing the lifestyle demands of our associates.
Lowe's offers a unique opportunity for job seekers as we foster a culture that is geared toward associates' skill and career development.
During the quarter, we expanded Lowe's University leadership curriculum across all of our stores.
Lowe's U provides all associates with new learning and development opportunities in addition to the standard onboarding courses.
Our program provides small digestible lessons that improve their product and how-to knowledge and is tailored to the associate's role.
The additional training complements their existing knowledge and supports improved customer service and leadership development.
Lowe's University is available for all store associates via our smart mobile devices on the sales floor or in the newly created Lowe's U learning labs in our stores, and we continue to expand it into our contact centers, as well as our distribution centers.
In addition to competitive wages and benefits and rewarding career opportunities, Lowe's U will play a pivotal role in our efforts to retain an experienced and engaged workforce.
I'd also like to provide you with an update on our perpetual productivity improvement initiatives, which continue to drive payroll leverage through the quarter.
As a reminder, PPI is an ongoing process in a series of initiatives that scale over time instead of one large single project.
One example is the simplified interface that we introduced in the checkout area last year, which allowed us to accelerate the cashier training process and improve the customer experience.
We have begun introducing the simplified interface to other selling stations throughout the store, including appliances, kitchens and bath and millwork.
This new interface will replace the primitive green screen technology that is cumbersome and difficult to learn.
Associates are starting to use this intuitive modern platform for consultative selling.
With more time to focus on the customer, the associate is now better able to capture the entire project.
Lowe's homegrown self-checkout is another PPI initiative that will drive increased labor productivity as we scale it over time.
This new option, which was designed specifically for the home improvement shopper, is so much easier to use that we are already seeing higher customer adoption rates.
These two initiatives are fantastic examples of what PPI is all about: leveraging technology to reduce tasking and drive labor productivity while improving the associate and the customer experience.
Our Pro customers are expressing appreciation for our new in-store convenience features, including Pro trailer parking, free phone charging stations and air stations for refilling tires.
This helps them get in and out of our stores quickly with additional conveniences that cut down on the number of stops they need to make during the week.
Time is money for this busy customer, so we're focused on helping them maximize the time they spend on the job site.
We recently completed our inaugural Pro Pulse Survey, which provides great insight into what is on the Pro's mind and how they view their future business opportunities.
We are encouraged to learn more about their optimistic outlook and their strong job pipelines.
I look forward to updating you on future calls on our ongoing initiatives to grow share with this very important customer.
As a veteran, I'm particularly proud of the commitment to the 10% discount for active-duty service members and our veterans and their families every single day with no purchase limit.
And I also wanted to mention that we offered our first responders a Lowe's discount for the first time this quarter.
This recognition reflects our heartfelt appreciation for their commitment to serving others during the ongoing pandemic.
At Lowe's, we remain focused on improving the communities where our associates work and live, and there is no better way to do this than to support our first responders.
In Q3, we generated $1.9 billion in free cash flow, driven by better-than-expected operating results.
Capital expenditures totaled $410 million in the quarter as we invest in our strategic initiatives to drive the business and support long-term growth.
We returned $3.4 billion to our shareholders through a combination of both dividends, as well as share repurchases.
During the quarter, we paid $563 million in dividends at $0.80 per share.
Additionally, we repurchased 13.7 million shares for $2.9 billion and have over $10.7 billion remaining on our share repurchases authorization.
And today, I'm excited to announce that we are now planning to repurchase an incremental $3 billion of shares in Q4.
This will bring our total share repurchases to approximately $12 billion for the full year, a clear reflection of our commitment to driving long-term value for our shareholders.
Our balance sheet remains very healthy with $6.1 billion in cash and cash equivalents at quarter end.
Adjusted debt-to-EBITDAR stands at 2.14 times, well below our long-term stated target of 2.75 times.
Now I'd like to turn to the income statement.
In the quarter, we reported diluted earnings per share of $2.73, an increase of 38% compared to adjusted diluted earnings per share last year.
This increase was driven by better-than-expected sales growth, improved gross margin rate and SG&A leverage as a result of strong execution across our business.
My comments from this point forward will include approximations where applicable.
In the quarter, sales were $22.9 billion with a comparable sales increase of 2.2%.
Comparable average ticket increased 9.7% driven primarily by higher-ticket sales of appliances and flooring, as well as product inflation.
Keep in mind that commodity inflation did not have a material impact on comparable sales in Q3 as deflation in lumber was largely offset by inflation in other categories, including copper.
Year-to-date, commodity inflation had lifted total sales by approximately $2.1 billion and improved comp growth by 300 basis points.
In the quarter, comp transaction count declined 7.5% due to lower sales to DIY customers of smaller-ticket items, as well as lower DIY lumber unit sales.
In the quarter, we once again cycled over a period where consumer mobility was limited.
So many of our DIY customers were working on smaller home improvement projects.
Comp transactions increased 16.4% last year, which resulted in a two-year comp transaction increase of 7.7%.
We continue to gain momentum in our Total Home strategy as both Pro and DIY customers alike increasingly look to Lowe's for a one-stop solution to their project needs.
We delivered growth of over 16% in Pro, 25% on Lowes.com and positive comps across all home decor categories.
U.S. comp sales increased 2.6% in the quarter and was up 33.7% on a two-year basis.
monthly comp sales were down 0.4% in August, up 1.1% in September and up 7.7% in October.
Trends improved as we moved through the quarter with stronger weekend traffic post Labor Day.
As Bill mentioned, we are seeing some indications of early seasonal buying, consistent with broader retail trends.
comp growth on a two-year basis.
From 2019 to '21, August sales increased 28.4%, September increased 33.3% and October increased 40%.
U.S. comp transaction count improved each month of the quarter and in October, up double digits on a two-year basis.
Gross margin was 33.1% of sales in the third quarter, up 38 basis points from last year.
Product margin rate declined 25 basis points.
Lumber margins were pressured, particularly toward the beginning of the quarter as we sold through the higher-cost inventory layers after the steep drop in lumber prices in early July.
These pressures were largely mitigated by data-driven pricing and product cost management strategies across many other product categories.
Gross margins also benefited from five basis points of favorable product mix due to a lower percentage of lumber sales versus the third quarter of last year.
In addition, higher credit revenue benefited margins by 60 basis points, while improved shrink contributed 20 basis points of benefits this quarter.
These benefits were partially offset by 30 basis points of increased supply chain costs due to higher importation and transportation costs, as well as the expansion of our omnichannel capabilities.
We are leveraging our scale and our carrier relationships to minimize the impacts of these higher distribution costs.
However, we are not immune to these rising costs, and we expect that we will continue to absorb higher cost in our distribution network going forward.
SG&A at 19.1% of sales levered 230 basis points versus LY due to better-than-expected sales and disciplined expense management.
We incurred $45 million of COVID-related expenses in the quarter, as compared to $290 million of COVID-related expenses last year.
The $245 million reduction in these expenses generated 110 basis points of SG&A leverage.
Additionally, we incurred $100 million of expenses related to the U.S. stores reset in the third quarter of last year.
As we did not incur any material expense related to this project this year, this generated 50 basis points of SG&A leverage compared to LY.
And finally, we've generated approximately 50 basis points of favorable SG&A leverage from our PPI initiatives.
We are very pleased with our operating income performance as we are driving solid growth in operating profits while significantly expanding operating margin rate.
For the quarter, operating profit was $2.8 billion, adding $600 million or a 28% increase over last year.
Operating margin of 12.2% of sales for the quarter increased approximately 240 basis points over LY driven by improved SG&A leverage and higher gross margin rate.
The effective tax rate was 26.1%.
This is above the prior year rate where there was a timing shift that benefited Q3 at the expense of Q4.
At the end of the quarter, inventory was $16.7 billion, which is $1 billion higher than the third quarter of 2020 when our in-stock positions were pressured due to strong consumer demand and COVID-related supply constraints.
Inflation did not have a material impact on inventory levels as deflation in lumber was largely offset by inflation in other categories, including copper.
Our push to land spring product earlier than normal has increased our inventory position modestly, and this approach also limits our ability to significantly improve inventory turns in the near term.
However, as both Marvin and Bill have indicated, our relatively strong in-stock positions create a competitive advantage in the current environment given the ongoing global supply chain constraints.
Now before I close, I'd like to comment on our current trends and our improved 2021 financial outlook.
We are seeing continued momentum in our business as reflected in better-than-expected results.
Month-to-date, November U.S. comparable sales trends are materially consistent with October's performance level on a two-year basis as we continue to see early holiday spending trends.
Our improved expectations for 2021 include sales of approximately $95 billion for the year, representing two-year comparable sales growth of approximately 33%.
This compares to our prior expectations of approximately $92 billion of sales, which represents approximately 30% comparable sales growth on a two-year basis.
We continue to expect gross margin rate to be up slightly versus 2020 levels.
With higher projected sales levels and our productivity efforts taking hold, we are raising our outlook for operating income margin to 12.4% from 12.2% for the full year.
We expect capital expenditures of up to $2 billion for the year.
And as I mentioned earlier, we're now planning to return excess capital to shareholders via an additional $3 billion in share repurchases in Q4.
This will bring our total share repurchases to approximately $12 billion for the full year, which is higher than our original expectations of $9 billion due to better-than-anticipated performance.
In closing, we are operating ahead of expectations, expect to benefit from the secular tailwinds over the next several years.
I am confident that the combination of our strong operating results and our shareholder-focused capital allocation strategies will continue to drive meaningful long-term shareholder value.
And as Kate announced earlier, we look forward to providing you with our 2022 financial outlook on December 15.
| compname reports q3 earnings per share $2.73.
q3 earnings per share $2.73.
q3 sales $22.9 billion versus $22.3 billion.
q3 earnings per share $2.73 excluding items.
qtrly comparable sales increased 2.2%.
sees fy 2021 revenue of about $95 billion, representing approximately 33% comparable sales growth on a two-year basis.
qtrly comparable sales for u.s. home improvement business increased 2.6%.
for fiscal 2021, company expects capital expenditures of up to $2 billion.
|
I'm joined virtually by Christa Davies, our CFO; and Eric Andersen, our President.
Over the last year plus, certainly, every organization around the world has wrestled with how to best support employees, how to manage record volatility and how to deliver more value to customers.
At Aon, our colleagues have led through all this while also preparing for a substantial integration.
What our team has accomplished is extraordinary.
Today, we move forward with the benefit of all that work without the constraint of regulatory uncertainty.
My remarks will cover our outstanding financial performance in Q2 and year-to-date, provide some observations on the termination of our combination with Willis Towers Watson, then speak to our go-forward plan to continue delivering great service and innovation on behalf of clients, enabling growth for colleagues and delivering excellent return to shareholders.
In Q2, our global team delivered outstanding results across each of our key financial metrics, and I'd note particular strength across the top and bottom line with 11% organic revenue growth, driven by mid-single-digit or greater organic revenue growth from every solution line, highlighted the particular strength in commercial risk at 14%, which translated into 17% adjusted earnings per share growth in Q2 and 13% free cash flow growth for the first half.
Our 8% organic revenue growth for the first half reflects mid-single-digit or greater organic revenue growth from four of our five solution lines.
Our Aon United strategy is delivering net new business generation and ongoing strong retention.
We also saw double-digit growth overall in the more discretionary portions of our business, including transaction liability, human capital and project-related work within Commercial Risk Solutions.
One fantastic Aon United client example in the quarter was around cybersecurity organization design.
Aon colleagues came together across solution lines to address a significant yet common client challenge.
Our client cyber risk was increasing, while our security organization faced the rapidly increasing cost in attracting and retaining top talent to execute their cyber defense strategy.
Colleagues from our cyber solutions group within commercial risk and from our rewards practice within human capital, combined with our unique expertise in cyber risk, with best practices and benchmarking around talent and compensation.
The results for our client was an organizational design solution that aligns their HR and technology teams to manage their cyber risk in a more cost and efficient way.
The result for Aon is a repeatable offering that helps address the common need for many of our clients in an area of growing risk.
I would also note that we saw strong global macroeconomic conditions in the quarter, but we continue to assess three key factors as we have since the beginning of the pandemic.
Those factors are the virus and vaccine rollout, including the potential impact of the delta variant; as well as government stimulus; and overall GDP growth.
These macro conditions do affect our clients and our business.
For example, we continue to see impact to our travel and defense practice within Data & Analytic Services.
Considering the current outlook for these factors, we continue to expect mid-single-digit or greater organic revenue growth for the full year 2021 and over the long term.
Turning now to the termination of our combination with Willis Towers Watson.
We recently announced our mutual agreement to move forward as two independent companies.
We have the utmost respect for them and have truly enjoyed getting to know the team.
The combination had significant regulatory momentum, including, notably, approval from the European Commission as well as approval from many jurisdictions globally who had thoroughly evaluated and vetted the transaction, with the exception of the United States.
The demands made by the U.S. Department of Justice on our U.S. business would have stifled innovation and reduced our client-serving capability.
Meeting these demands would have significantly impacted our existing U.S. business with potential shareholder value creation as a combination, and our ability to continue to drive ongoing progress against our key financial metrics.
Similarly, the path forward on litigation was untenable because current courts appear to take us well into 2022, and we could not accept that level of delay.
Ultimately, the choice was clear.
We simply would never compromise colleague and client priorities to close the combination.
Our decision to end the combination and pay the termination fee creates certainty and clarity about how we move forward.
And we're confident this is the right decision for our firm, for our colleagues, our clients and our shareholders.
We move forward with energy and applied confidence in our ability to continue delivering new and innovative solutions for clients, exceptional opportunity for colleagues and financial performance for shareholders.
As we look forward, there are three important points that were clear when we announced the combination and are equally, if not more, important now.
First, the world is becoming more volatile, and clients need a partner capable to accelerate innovation on their behalf.
Just look at the socioeconomic impact of the pandemic, the rise of state-sponsored cyber hack, the floods in Eastern Europe, the fires in Western America and the challenges globally of working remotely.
Second, the events of the past 16 months have honed the power of Aon United and our ability to work together to deliver new sources of value to clients.
Over this time, we crystallized our operating model and cemented our one firm mindset.
We've uncovered countless new growth, investment and efficiency opportunities.
And at this point, we're better connected across our firm with all the value of this work and none of integration distractions.
Third, we're moving forward with a proven platform and are operating from a position of strength and momentum, as demonstrated by our client feedback and colleague engagement stores at/or approaching their highest levels for the past decade.
Our colleagues are delivering client retention and net new business generation across all solution lines, driving 8% organic revenue growth over the first half and 11% organic revenue growth this quarter, our strongest performance in almost two decades.
And our Aon Business Services operating platform is digitizing our firm, improving the client experience and enabling efficiency, as demonstrated by operating margin expansion and 13% free cash flow growth in the first half.
Aon has never been in a better position to propel top and bottom line growth and build on over a decade of progress on our key financial metrics.
In summary, our second quarter results demonstrate the successful momentum of our Aon United strategy.
We're operating from a position of strength, and we've never been better positioned to deliver for clients, support our colleagues and generate shareholder value.
We delivered continued progress for both the quarter and year-to-date, including an impressive 11% organic revenue growth in Q2.
Through the first half of the year, we translated strong organic revenue growth into double-digit operating income, earnings per share and free cash flow growth, demonstrating the power of our Aon United strategy.
As I further reflect on our performance for the first half of the year, as Greg noted, organic revenue growth was 11% in the second quarter and 8% year-to-date.
We continue to expect mid-single-digit or greater organic revenue growth for the full year 2021 and over the long term.
I would also note the total reported revenue was up 16% in Q2 and 12% year-to-date, including the favorable impact from changes in FX rates, driven by a weaker U.S. dollar versus most currencies.
Our strong revenue growth and ongoing operational discipline contributed to adjusted operating income growth of 11% in Q2 and 14% through the first half of the year.
Turning to expenses and margins.
There are two key points I wanted to describe further.
First, I want to speak to the impact of our previously communicated repatterning of expenses as compared to COVID-impacted spend in 2020, which I'll describe before any 2021 growth.
As we communicated in Q1, the timing of expenses is changing year-over-year such that $135 million of expenses moved into Q2 from Q4.
This impact is due to the actions we took and highlighted last year as we reduced discretionary expenses to be prepared for the potential impact of COVID-19 and potential macroeconomic distress.
The $135 million is approximately 1.5% of our total 2020 expense base.
In Q2, this repatterning negatively impacted margins by approximately 470 basis points, resulting in Q2 operating margin contraction of 100 basis points.
Excluding this impact, margins would have expanded by 370 basis points in Q2 and 250 basis points for the first half of 2021.
As we said before, we expected a further $65 million to move from Q4 into Q3 for a total of $200 million of expenses moving out of Q4.
A second key factor impacting margins has been the relative speed of revenue growth and investment.
In Q2, excluding the impact of repatterning, our strong revenue growth significantly outpaced expense growth.
We continue to evaluate investments using our ROIC framework.
While we made deliberate investments in people, operations and technology to enable long-term growth, the expenses associated with these investments were not fully incurred in Q2 and will ramp up during the second half of the year.
We also anticipate some potential resumption of T&E and modest potential increase in real estate costs as more colleagues return to the office.
Collectively, the headwind from expense repatterning and tailwind from slower investment as compared to growth were the main factors driving 100 basis points of margin contraction in Q2 and the 40 basis points of margin expansion in the first half of 2021.
Looking forward, as we've said historically, we expect to deliver full margin expansion for 2021 and over the long term.
Turning back to the results in the quarter.
We've translated strong operating income growth into adjusted earnings per share growth of 17% in Q2 and 16% year-to-date.
As noted in our earnings material, FX translation was a favorable impact of approximately $0.04 in Q2 and $0.22 year-to-date.
If currency to remain stable at today's rates, we'd expect a $0.02 per share favorable impact to Q3 and $0.01 per share favorable impact in Q4.
As Greg mentioned, Aon and Willis Towers Watson mutually agreed to terminate our business combination agreements and move forward immediately as two independent firms.
In accordance with the business combination agreement, we have paid the $1 billion termination fee to Willis Towers Watson.
With respect to the termination of fee.
Our U.S. businesses were the primary focus of the Department of Justice's challenge, and we paid this fee to defend that business from additional remedy divestitures that are essential to our ability to serve clients as well as the continuing delay in uncertainty in completing the combination.
As part of the termination, we also expect to incur approximately $350 million to $400 million of additional charge in Q3 related to transaction costs and compensation expenses as well as a small number of actions related to further steps on our Aon United operating model.
These charges are related to costs to terminate and conclude the combination, including related divestitures.
They will all be incurred in Q3 as part of a clean break with Willis Towers Watson.
Given the outstanding work our colleagues have done over the last past 16 months, we've taken steps internally to ensure our colleagues share in the growth potential of the firm going forward, and this includes those who are previously offered retention bonuses in connection with the combination.
The majority of the cash relating to these charges will be paid in Q3 and Q4.
Aside from these transaction costs, we do not expect any further significant impacts from the termination of the transaction on our financials going forward.
Excluding the termination fee, our performance and outlook for free cash flow growth in 2021 and going forward remains strong.
Free cash flow increased 13% year-to-date to $1.3 billion, driven primarily by strong operating income growth and a decline in structural uses of cash.
We continue to expect to drive free cash flow growth over the long term, building on our long-term track record of 14% CAGR over the last 10 years, based on operating income growth, working capital improvements and reduced structural use of cash.
As we communicated in Q1, we continue to expect capex for the full year to increase modestly year-over-year as we invest in technology to drive business growth.
Given our outlook for long-term free cash flow growth, we expect share repurchase to continue to remain our highest return on capital opportunity for capital allocation.
In the second quarter, we repurchased approximately 1.1 million shares for approximately $240 million.
We also expect to continue to invest organically and inorganically in innovative content and capabilities to address unmet client needs.
Our priority areas of investments are focused on: addressing new forms of volatility like cyber; helping clients build a resilient workforce, with better solutions around engagement and employee benefits; rethinking access to capital, such as within intellectual property solutions; and addressing the underserved with digital solutions like CoverWallet.
Our M&A pipeline is focused on bringing innovation at scale to our clients' biggest challenges, delivered by the connectivity of Aon United.
Now turning to our balance sheet and debt capacity.
We remain confident in the strength of our balance sheet and manage liquidity risk through a well-laddered debt maturity profile.
Our financial profile has improved over the past 18 months.
And considering our June 30 balance sheet and the payment of the termination fee, we estimate we have $1.5 billion of additional debt capacity for discretionary use in the second half as we return to historical leverage ratios while maintaining our current investment-grade credit rating.
Over the long term, we expect to return to our past practice of growing debt as EBITDA growth.
Further, I'd note that free cash flow generation in the second half is seasonally stronger than the first half, and we intend to allocate this cash to our highest and best use based on return on capital.
In summary, we ended the second quarter in a position of strength as our Aon United strategy and investments in long-term growth are driving strong top and bottom line performance.
While the termination of our combination with Willis Towers Watson was not the outcome we originally intended, the opportunity for Aon has only grown.
Our disciplined approach to return on capital, combined with our expected long-term free cash flow growth and increased debt opportunity, provides financial flexibility to unlock significant shareholder value creation over the long term.
| q2 revenue rose 16 percent to $2.9 billion.
total operating expenses in q2 increased 16% to $2.2 billion.
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As always, we appreciate your interest in Central Pacific Financial Corp
We are beginning the 2022 year with much excitement and optimism.
Our financial results for 2021 are among our best ever.
In fact, this is the best earnings report since before The Great Recession.
Our recently announced executive leadership promotions went into effect starting January 1 and our teams are energized and ready to continue our digital transformation.
After an in-depth evaluation of the banking-as-a-service market, we identified an opportunity to enter this fast-growing market in a way that leverages our strength to maximize our impact as a banking-as-a-service provider, we will focus on partnering with select fintech companies to create strategic customized programs resulting a new differentiated financial products.
There is strong demand for this type of banking-as-a-service offering in the market today.
We believe this creates a great opportunity for us to expand our reach beyond Hawaii and will drive future revenue generation to increase the value of the CPF franchise.
Last quarter, we announced the launch of our new product, Shaka Checking.
It is Hawaii's first and only digital bank account from a local financial institution.
Shaka allowed us to test the product development and launch strategies that we will leverage in our future Mainland banking-as-a-service programs.
The Shaka account demand has far surpassed our initial expectations.
We opened over 3,300 Shaka accounts since its launch in early November.
It's obvious Shaka is serving a key need with a younger tech-savvy audience in Hawaii.
It has a strong value proposition that includes getting your paycheck up to two days early, no ATM fees and 24/7 digital convenience, among other benefits.
As part of our banking-as-a-service initiative to drive additional growth beyond Hawaii, we are also pleased to announce that we will be making an equity investment and bank sponsorship of Swell, a new fintech company that we played a major role in developing.
Swell is scheduled to launch in mid-2022 and we believe will provide a differentiated product offering that the market needs today.
Swell's mission is to provide retail banking services to people via one integrated app that includes the digital checking account with a line of credit.
Elevate is another equity investor in Swell and will be providing the systems and servicing for the Swell line of credit.
There is a revenue-sharing agreement in place between Swell, Elevate and CPF.
And Elevate is also providing a credit enhancement structure to us.
We are currently evaluating additional banking-as-a-service partnerships to create even more value for CPF and plan to announce further developments later in 2022.
Finally, we are announcing the exciting new banking-as-a-service initiative.
We remain committed to Hawaii and are continuing to build a successful and profitable franchise here.
Here to talk about the Hawaii economy and our strong position here is Catherine Ngo, our executive vice chair.
I'll start by giving an update on the Hawaii environment.
We were pleased to have a strong visitor holiday travel season with the daily average air arrivals over 25,000 in November through December.
Our statewide unemployment rate continued to decline and was at 6% in November 2021.
And while we were not immune to the COVID case spike related to the Omicron variant, our state has been able to manage through it, particularly as our vaccination rate is strong at approximately 75%.
We have also not seen any significant slowdown in Hawaii business activity or investment due to Omicron.
The housing market in Hawaii remains very hot with our median single-family home price holding at just over $1 million.
Overall, the Hawaii economy remains on track for recovery.
Our asset quality continues to be very strong with nonperforming assets at just 8 basis points of total assets as of December 31.
Additionally, total criticized loans were at about one and a half of total loans.
Finally, during the quarter, we had net recoveries of $900,000.
In the fourth quarter, our core loan portfolio increased by $183 million or 4% sequential quarter, which was offset by PPP forgiveness paydowns of $127 million.
Year over year, our core loan portfolio increased by 10%.
The core loan growth was broad-based across almost all loan categories.
Our residential mortgage production continued to be very strong, with total production in the fourth quarter of $354 million as several large condominium projects in Honolulu were completed during the quarter, with CPB leading the takeout financing for the homeowners.
Total net portfolio growth in residential mortgage and home equity was $146 million in the fourth quarter.
For all of 2021, we once again had record residential mortgage production, totaling $1.2 billion, putting us near to top of all residential mortgage lenders in Hawaii.
PPP forgiveness continues to progress well with 99% of the loan balances originated in 2020 and 73% of the balances originated in 2021 forgiven and paid down through December 31.
During the fourth quarter, we continued consumer unsecured purchases with our established vendors on an ongoing flow basis.
The purchases during the quarter all were within our established credit limits and had a weighted average FICO score of 750.
As of December 31, total Mainland consumer unsecured and auto purchase loans were approximately 5.7% of total loans.
Both our Mainland and Hawaii consumer portfolios continue to perform well.
Our target range for total Mainland loans, including commercial and consumer is around 15% of total loans.
With Hawaii's steady economic recovery, we have a healthy loan pipeline in all loan product categories and we are expecting our favorable loan growth trends to continue in 2022.
On the deposit front, we continue to see strong inflow deposits with total core deposits increasing by $66 million or 1% sequential quarter growth.
On a year-over-year basis total core deposits increased by $1 billion or 20%.
Additionally, our average cost of total deposits in the fourth quarter was just 6 basis points.
Finally, we plan to build upon our early success with our Shaka digital checking product going into 2022.
With this differentiated product and its strong market acceptance, we expect our comp growth to continue.
We will be expanding our relationships with the new-to-CPB Shaka account holders, which represented over 50% of the new accounts and explore further complementary product offerings using the Shaka brand.
Net income for the fourth quarter was $22.3 million or $0.80 per diluted share, an increase of $1.5 million or $0.06 per diluted share from the prior quarter.
Return on average assets in the fourth quarter was 1.22% and return on average equity was 16.05%.
For the full 2021 year, net income was $79.9 million or $2.83 per diluted share.
This compares to $37.3 million or $1.32 per diluted share in 2020.
Net interest income for the fourth quarter was $53.1 million, which decreased by $3 million from the prior quarter due to less PPP fee income as the forgiveness process winds down.
Net interest income included $4.7 million in PPP net interest income and net loan fees compared to $8.6 million in the prior quarter.
At December 31, unearned net PPP fees was $3.5 million.
The net interest margin decreased to 3.08% in the fourth quarter compared to 3.31% in the prior quarter.
The NIM normalized for PPP was 2.87% in the third quarter compared -- I'm sorry, in the fourth quarter compared to 2.96% in the prior quarter.
The normalized NIM decrease was driven by lower loan yields due to market pricing competition.
While we expect market pricing for loans to remain competitive, our new loan origination yield in the fourth quarter approximated our overall loan portfolio yield and our balance sheet is slightly asset-sensitive.
Fourth quarter other operating income increased to $11.6 million from $10.3 million in the prior quarter.
The increase was driven by higher mortgage banking income and higher bank-owned life insurance income.
Other operating expense for the fourth quarter was $42.2 million, which included nonrecurring expenses of $1.1 million of severance payments, $0.4 million branch consolidation costs and $0.3 million in promotion expenses related to our Shaka digital checking launch.
At the end of 2021, we consolidated one of our Honolulu branches into a nearby branch.
We anticipate $0.8 million in annualized savings from this consolidation.
With the continued successful customer migration to digital banking services, we plan to consolidate three additional branches in 2022.
At the same time, we are continuing to invest in select strategic branch locations including acquiring real estate and fee and developing fully modernized branches.
The efficiency ratio increased to 65.6% in the fourth quarter due to lower net interest income and nonrecurring expenses.
We remain focused on driving positive operating leverage with our strategic initiatives to continue to improve efficiency.
At December 31, our allowance for credit losses was $68.1 million or 1.36% of outstanding loans excluding PPP loans.
In the fourth quarter, we recorded a $7.4 million credit to the provision for credit losses due to continued improvements in the economic forecast and our loan portfolio as well as net recoveries during the quarter of $0.9 million.
The effective tax rate was 25.4% in the fourth quarter.
And going forward, we continue to expect an effective tax rate to be in the 24% to 26% range.
Our capital position remained strong.
And during the fourth quarter, we repurchased 305,000 shares at a total cost of $8.4 million or an average cost per share of $27.64.
Yesterday, our board of directors approved a new share repurchase authorization of up to $30 million.
Finally, our board of directors also declared a quarterly cash dividend of $0.26 per share, which was an increase of $0.01 or 4% from the prior quarter.
Central Pacific had a solid fourth quarter and 2021 year.
Looking forward, we are very excited about the key items we announced today, which we believe will position us extremely well and enable us to deliver greater shareholder value in the near and long term.
In summary, we had record 2021 earnings.
We increased our quarterly cash dividend by 4%.
We will continue share repurchases under our new $30 million board-approved authorization.
We launched our banking-as-a-service strategy, which started with our successful Shaka digital checking launch in Hawaii.
And upcoming soon, we will expand the Mainland with our Swell fintech investment as well as other selected partners.
Further, we remain committed to providing support to our employees, customers and the community as we continue to progress through the economic recovery.
At this time, we will be happy to address any questions you may have.
Back to you, Charlie.
| quarterly earnings per share $0.80.
net interest income for q4 of 2021 was $53.1 million, compared to $51.5 million in year-ago quarter.
on jan 25, board authorized repurchase of up to $30 million of its common stock from time to time.
on jan 25, board declared quarterly cash dividend of $0.26 per share on outstanding common shares.
|
I'm pleased to be here today with Granite President, Kyle Larkin; and Executive Vice President and Chief Financial Officer, Lisa Curtis.
We begin today with an overview of the company's Safe Harbor language.
Actual results could differ materially from statements made today.
Certain non-GAAP measures may be discussed during today's call, and from time to time, by the company's executives.
These include but are not limited to adjusted EBITDA, adjusted EBITDA margin, adjusted net income or loss and adjusted earnings or loss per share.
Although it was a difficult decision, we concluded that it was in the best interest of the company, as well as our shareholders to move forward.
Following court approval, we will be able to put this litigation behind us and focus on our business and people.
Granite portion of the settlement is insurance is $66 million and we expect it to be paid from existing cash on hand.
As Lisa will explain in further detail later in the call, despite this event, our liquidity and cash position remains strong.
As I've discussed in previous calls, our core values guide us in our day-to-day operations and are serving as the foundation of our cultural reinvigoration.
On the last call, I provided an overview of our sustainability core value and the efforts that are under way to drive sustainability forward at Granite.
Today, I will touch on two more of our core values; safety and inclusion, and how we are integrating them into our day-to-day operations to drive desired behaviors.
Granite's choice to continue to include safety as a core value is embedded in our culture and reflects our belief that the safety and well-being of our people, our partners and the public is our greatest responsibility.
Every level of our organization supports our safety culture with training, planning and engagement.
We approach every task with safety built into the process, and we do not sacrifice anyone safety to get the job done.
While safety is front of mind every day at Granite, it is particularly timely to talk about our safety commitment on the heels of safety week, which is just concluding today.
Safety week is an industry wide national event, and Granite was one of the founding members almost a decade ago.
Across the country on Granite projects and in our offices, we conduct daily activities to reinforce and strengthen our commitment to safety.
This week, I had the opportunity to visit Granite project teams and take part in safety meetings across the country.
The planning and attention to detail that our teams presented in these safety meetings are impressive and demonstrate our focus on safety.
Inclusion is a core value that was added this year, but it's been an important focus since 2019.
Since it's a new core value, we want to provide additional details as to why we chose to recognize the importance of inclusion.
Inclusion is how we build value in our company by welcoming contributions from all of our employees.
Our differences enhance creativity and innovation to create a high performance culture and have a positive impact on how we achieve our business goals and objectives.
At Granite, when we know the value of inclusion, we value and respect the workforce diverse and perspective, experience, knowledge and culture, and we are committed to an inclusive environment in which everyone feels a sense of belonging and can grow.
To live this value, we must understand a couple of things.
First, we know that diversity is the mix of our employees, our clients and our community and inclusion is how we make that makes work.
We have made significant progress in our inclusive diversity journey, starting with our employee resource groups, Granite Resources and Opportunities for Women or GROW, and supporting and recognizing the veteran community for service.
GROW advocates for and supports women who're mentoring, networking in career development, service supports and recognize employees that have served, and friends and family members employees that have served, and all branches of the military.
We have also established executive inclusive diversity and multicultural councils, conducting leadership training and establishing relationships with historically black colleges and universities.
In 2020, we had over 200 interns, and more than half were diverse.
In addition, 1/3 of our executive team and nearly half of our Board of Directors are diverse.
Looking forward, we will continue to create clarity around inclusive diversity by having dialogue concerning how we can be more inclusive.
We will continue to develop talent and strengthen our talent pipeline at all levels, with a focus on women and people of color.
And we will continue to build capability to training leaders and employees to challenge ourselves to be more inclusive.
We know that having an inclusive environment doesn't happen overnight, it happens over time.
I'm proud of our inclusion efforts and I'm excited about the culture we are creating here at Granite.
Let's switch gears and talk about our business segments starting with transportation.
The first quarter is typically our slowest quarter with cold and wet weather regularly hampering work in many of our markets.
Even with the challenges of weather, I am pleased with the performance of the segment, not only on the top line, but also at the gross profit level due to good execution across our operating groups.
Some good news to share.
We continue to burn through the backlog of Heavy Civil Operating Group Old Risk portfolio with a minimal impact to gross profit during the quarter.
This was a marked improvement over the last two years.
The remainder of the segment, which is primarily comprised of vertically integrated projects also completed a solid first quarter, setting the stage for a busy remainder of the year.
The bidding environment is strong with robust opportunities in our markets, resulting in an increase in our bid volume year-over-year.
While we routinely share information about our larger project wins, we also continue to have success in winning the smaller to medium sized projects that are the foundation of our portfolio.
The first quarter of the year is historically a very competitive bid environment with contractors more aggressively bidding to build backlog early in the year.
We have seen this dynamic in the first quarter of 2021.
We've increased bid volume and strong competition.
As anticipated, transportation committed and awarded projects or CAP, decreased year-over-year with the shift in the portfolio as Heavy Civil Operating Group cap is burned and replaced with cap from our vertically integrated businesses, including best value procurement work.
The extension of the FAST Act, the $13.6 billion infusion to the Highway Trust Fund for 2021 and the enactment of Coronavirus relief bills have combined to provide direct and indirect support for transportation funding.
Funding is positive across our markets and we are hopeful that a federal infrastructure bill will be signed into law this year.
Turning to the water segment.
In the first quarter, we continue to see a recovery from the pandemic, but the deep freeze in Texas during the quarter interrupted the supply chain, resulting in a spike in resin costs.
Resin is a product used in our torrentuous, secured [Phonetic] in place pipe rehabilitation business Granite Inliner.
Although this segment was hardest hit by the pandemic, we are seeing an increase in bid opportunities, positive indication for the remainder of the year.
As a result, water segment cap remains strong as of the end of the first quarter at $339 million.
This figure does not include the recently awarded Leon Hurse Dam project in Texas for approximately $160 million, which will be included in our second quarter cap.
This award is a component of the overall Lake Ralph Hall project, which will be one to Texas newest lakes and one of the state's biggest water projects in the last 30 years.
Granite has a long history of working on complex dam projects and we are proud to continue this work on the Leon Hurse Dam.
All levels of the government recognize the critical need to repair and support water infrastructure across the country, as seen in the ongoing discussion with the federal infrastructure bill and the Senate recently passed $35 billion water infrastructure bill.
We have been successful in winning water infrastructure projects and there are multiple opportunities in the water market that Granite is currently pursuing.
We believe we are well positioned to continue to procure work in this area.
Moving on to the specialty segment.
Our team has turned in a solid quarter and ended with a record cap of over $1 billion.
In the first quarter, we added to cap a significant new $267 million tunnel project in Columbus, Ohio.
We are excited to continue our relationship with the City of Columbus, where we successfully completed a large tunnel project just a couple of years ago.
Additionally, operating groups continue to foster new relationships, as well as build upon existing relationships to expand our footprint with both public and private clients.
Recent project wins include several projects with a variety of mining clients in different geographies across our business; a project to establish a new rail yard in the Port of Stockton, California; and a federal project to expand a military facility in Guam.
Both the private and public markets within the diverse specialty segment continue to be strong, with investment driven by the overall positive economic outlook.
The segment is a growing area of our business and we look for that to continue in 2021 and beyond.
Moving on to the material segment.
The first quarter results were terrific in our seasonally slowest quarter.
We ended the quarter with significantly higher material orders compared to the prior year, which resulted in higher sales volumes in 2021 led by the California operating group.
As of the end of the quarter, materials orders continue to outpace the prior year with strong demand in both California and Northwest operating groups.
This demand is a positive indicator for the remainder of 2021; not only in the material segment, but also for our vertically integrated construction businesses.
As of the end of the first quarter, our consolidated cap is $4.5 billion, an increase during the quarter of over $170 million compared to year-end levels.
Cap in our Specialty and Water segments continues to grow as we pursue end market diversification.
The old risk portfolio, design build cap, continues to decline as our risk profile has transformed following our new project selection criteria.
And finally, our cap portfolio is more evenly distributed across operating group geographies.
As I mentioned on previous calls, we have been transforming our cap portfolio focused on reducing risk.
Our teams have made significant progress and continue to execute on our plan.
Starting with revenue and gross profit.
The first quarter delivered strong results on both measures.
First quarter consolidated revenue grew 5% year-over-year to $670 million with gross profit increasing 166% year-over-year to $63 million with a gross profit margin of just under 10%.
Within our transportation segment, revenue was up slightly year-over-year to $351 million, led by an increase from the California Operating Group, which offset a revenue decrease from the Heavy Civil Operating Group.
Transportation gross profit for the quarter increased 41% to $36 million, resulting in a gross profit margin of 10%.
The increase in gross profit was primarily due to a decrease in project losses from the Heavy Civil Operating Group Old Risk portfolio.
Losses from the Old Risk portfolio in the first quarter of 2021 under $1 million, compared to losses of $13 million in the first quarter of 2020.
The Old Risk portfolio, backlog decreased by nearly $100 million during the quarter, which is on pace to meet our estimated project burn of $425 million to $475 million during 2021 that I mentioned in our last call.
Our team's execution in the first quarter, serve to mitigate exposure in the old risk portfolio, and we are optimistic this will continue in the future.
In our water segment, first quarter revenue was down 2% year-over-year as the segment continued its recovery from the COVID-19 pandemic.
Water gross profit for the first quarter decreased to 8% to $9 million, resulting in a gross profit margin of 9%.
This decrease in gross profit was primarily due to temporarily higher resin costs and Granite Inliner associated with supply chain disruptions due to winter weather events in Texas.
Moving on to the Specialty segment.
First quarter revenue increased 17% year-over-year to $156 million.
Specialty gross profit increased 262% to $17 million with a gross profit margin of 11%.
As a reminder, there was a significant write down during the first quarter of 2020 related to a dispute on a tunneling project, which reduced gross profit in the prior year.
Finally, the Materials segment completed an exceptional first quarter with a revenue increase of 26% year-over-year to $63 million in 2021.
This increase was largely due to strong sales volumes in the West.
Materials gross profit increased to $2 million, resulting in a gross profit margin of just under 3% as compared to breakeven in the prior year.
This increase in the gross profit was also primarily related to higher volumes across the business.
Turning now to our non-GAAP financial metrics.
Adjusted EBITDA for the first quarter increased $35 million year-over-year to $17 million, resulting in an adjusted EBITDA margin of over 2% for the quarter.
The increase in adjusted EBITDA was driven in part by improvement in project execution, as we continue to burn through the Heavy Civil Operating Group Old Risk gross portfolio during the first quarter of 2021.
In addition, we also benefited from improvements in gross profit in the Specialty and Materials segments year-over-year.
Our first quarter resulted in an adjusted net loss of $5 million, which was a $27 million improvement from an adjusted net loss of $32 million in the prior year.
As a reminder, these non-GAAP financial metrics are adjusted to exclude other costs, which includes the impact of the legal settlement and legal and accounting fees, non-cash impairments of goodwill, transaction costs and amortization of debt discount.
Now turning to cash and liquidity.
We had another strong cash quarter with cash from operations of $38 million and a net increase in cash during the quarter of $17 million compared to year-end.
This was an outstanding result for the first quarter of the year.
We ended the first quarter with cash and marketable securities of over $464 million and our teams remain focused on working capital management.
Upon court approval and finalization of the securities litigation settlement, we expect to pay our portion from existing cash on hand.
While we anticipate seasonal cash trends to be consistent with prior year patterns, our 2021 cash projections for the remainder of the year remains solid.
With the completion of the first quarter, we are reiterating our guidance for the full fiscal year 2021.
There are opportunities within each of our markets and very active bid schedules across the company.
We believe we can capitalize on these opportunities to achieve low to mid-single digit revenue growth.
SG&A increased $2.5 million year-over-year to $76 million, which was 11.3% of revenue for the first quarter.
This increase was primarily attributable to a change in the fair market value of our non-qualified deferred compensation plan liability of $5 million year-over-year.
This increase is offset by corresponding investment gains and other income and expense, net.
For the full year, our guidance is unchanged with an expected SG&A expense of 8.5% to 9% of revenue.
During the first quarter, we had solid execution across all groups and segments.
We expect this execution will allow us to achieve an adjusted EBITDA margin range of 5.5% to 7.5%.
Let me close with the following points.
In what is typically a seasonally tough quarter, we are pleased with our first quarter performance across the company.
Our teams have done a great job maintaining focus on execution, particularly in the oil risk portfolio.
We believe the Securities litigation settlement is in the best interest of the company-hander shareholders.
This will allow us to focus on execution in 2021 as we work to refresh our longer-term strategic plan.
Across our markets, we are seeing a healthy bidding environment, but we have opportunities to continue the transformation of our portfolio and build quality cap.
Finally, we are optimistic about the funding environment.
The economy appears to be strong with continued investment from the private market and public funding environment.
The public funding environment has been supported by direct and indirect infrastructure legislation from several different measures and we remain hopeful the enactment of a federal infrastructure bill will occur this year and will serve to further strengthen the environment in 2021 to 2022 and beyond.
| company reaffirms our guidance for 2021.
|
Today we will be reviewing our third quarter 2021 financial results and providing investors with an update on our full-year outlook.
Further information can be found on our SEC filings.
Actual future results may differ materially from those expressed in our statements today due to various uncertainties.
Starting on slide three, I'm pleased to announce that we achieved constant currency net sales growth of 2.9% with increases in all key product categories despite continuing global supply chain challenges.
Revenue growth was led by solid performance in Europe and Asia-Pacific and North America realized growth in mobility & seating and respiratory products appeared with strong new order intake, we continue to experience higher than typical backlog levels across all product categories compared to pre-pandemic levels, which is expected to drive sequential sales growth in the fourth quarter.
As always, we're working diligently to maximize our throughput and improve our service levels to better support our customers' needs.
Turning to gross profit, we've benefited from sales growth and favorable sales mix with higher gross profit on lower percentage of sales.
Gross margin was impacted by previously disclosed changes to input costs ahead of offsetting price adjustments.
We view these challenges as transitory and during the quarter we undertook actions to address them which I'll discuss more in detail in the next slide.
To support existing levels of demand and expected sales growth, free cash flow usage increased as a result of greater investment in working capital, specifically inventory, which Kathy will discuss later.
Overall, our third quarter sales results were in line with expectations with solid revenue growth year-over-year in all major product categories.
Turning to slide four, we expect to finish the year on a strong note, while we anticipate global supply chain challenges to persist in the near-term, the disruptions are generally more predictable, and the actions we've taken should mitigate some of the remaining uncertainty.
In addition, our customers continue to demonstrate strong demand for our products even though access to healthcare has not fully rebounded from pre-pandemic levels.
As mentioned previously, we're taking action to mitigate the supply chain challenges which impacted sales and gross margins.
For example, we expanded our network of freight providers for more timely shipments, we found ways to improve staffing levels to increase throughput, and we have further increased inventory to mitigate supply chain uncertainties.
In addition, we continue to adjust price and freight charges were applicable to offset the substantially higher material and logistics costs we continue to experience.
Well still early in the fourth quarter, we're seeing positive signs that our actions should be effective.
As we work through these near-term challenges, we're also marching forward with the next phase of our IT modernization Initiative in North America.
I'm pleased to share that the program took a big step forward following the launch of our new e-commerce platform, which has features to enhance the customers experience and to improve the ease of doing business with Invacare.
In 2022, we expect to launch the next phase in North America, which will focus on driving operational efficiencies, lowering costs and improving working capital management.
Turning to sales, demand remains strong and we continue to see solid order rates in all regions and product categories.
As we grow revenue, our order backlog has also continued to increase.
In the third quarter, product availability in our targeted inventory strategy were key factors in driving strong sales growth in both Europe and Asia-Pacific.
Specific material shortages, limited some of lifestyle product availability in North America balancing overall results.
All things taken together, we expect fourth quarter will improve in all key metrics with sequential constant currency net sales growth, driving substantially higher profitability and free cash flow.
We believe the progress we have made sets us up for a strong finish to the year and continued improvement in 2022.
Turning to slide six, reported net sales increased 5.8% and constant currency net sales increased 2.9% in line with our quarterly guidance, and driven by growth in all key product categories, sales growth was the result of continued strong order intake, and the conversion of a portion of the excess backlog from the second quarter of 2021.
Gross profit increased $300,000 and benefited from net sales growth and favorable sales mix.
However, gross profit as a percentage of sales declined 140 basis points.
As previously discussed, gross margin continued to be impacted by global supply chain related challenges and labor shortages resulting in elevated manufacturing costs for the quarter.
We expect many actions we have undertaken to mitigate these higher costs to become effective and benefit margins in the fourth quarter of '21.
Constant currency SG&A expense decreased primarily related to lower employee related costs, including stock compensation expense.
To drive profitability, we continue to align commercial expenses with net sales growth and monitor all discretionary spending.
Operating loss excluding the goodwill impairment charge was $3.8 million, an improvement of $900,000 from the third quarter of 2020.
This improvement was driven by sales growth and lower restructuring costs.
In the third quarter of '21, the company recorded a one-time non-cash charge related to an impairment for Goodwill of $28.6 million.
The company's reporting units for Goodwill assessment North America HMV, and the Institutional Products Group merged into one reporting unit as a result of changes to the operating structure of the North America business and the implementation of a new enterprise resource planning system at the end of the quarter.
This change was considered a triggering event and required the company to perform an interim goodwill impairment test.
Adjusted EBITDA was $18.1 million, an increase of $8.3 million primarily attributable to $10.1 million of CARES Act benefit, and net sales growth partially offset by higher supply chain costs.
Excluding the CARES Act benefits, adjusted EBITDA for the third quarter was $8 million.
Note that the CARES Act benefit was and is not considered in the company's full-year 2021 guidance for adjusted EBITDA.
Free cash flow usage for the quarter reflects an investment in working capital, including $10.1 million of additional inventory as compared to the second quarter of '21.
As previously disclosed, the company increased inventory levels to mitigate supply chain disruptions and to prepare for expected sequential sales growth in the fourth quarter.
We anticipate that inventory levels and accounts receivable will remain elevated at year-end and convert to cash over the next few quarters.
Turning to slide seven, reported net sales in all key product lines improved despite supply chain challenges, which continued to limit the conversion of orders to revenue.
We continue to see strong demand in all product categories and in all regions, which resulted in excess order backlog that was higher than typical compared to pre-pandemic levels and similar to the end of the second quarter.
We're working diligently to reduce the excess backlog and return our service levels back to more normal lead times.
On a consolidated basis, constant currency net sales of Lifestyle products grew 5.2% driven by exceptionally strong sales of manual wheelchairs and hygiene products in Europe.
Mobility & seating products also achieved constant currency net sales growth in North America and Asia Pacific.
In addition, we continue to see elevated demand for respiratory products globally related to the pandemic.
Turning to slide eight, Europe constant currency net sales increased 4.5% driven by more than 17% growth in lifestyle products as a result of heightened demand for products that were readily available, demonstrating the importance of our targeted inventory strategy.
While respiratory demand remained strong, fulfilling that demand has been hindered by the availability of components to complete orders.
Gross profit increased $3.2 million, and gross margin increased 20 basis points driven by net sales growth and favorable product mix partially offset by higher freight costs and supply chain disruptions.
As Matt mentioned, we have taken actions to mitigate the impact of these additional costs and expect to see benefits starting in the fourth quarter.
Operating income benefited from SG&A leverage and increased by $2 million, driven by higher gross profit from revenue growth.
Turning to slide nine, North America constant currency net sales decreased slightly, a 7% increase in mobility & seating and an over 6% increase in respiratory products was more than offset by lower sales of lifestyle products.
Higher sales of mobility & seating products was driven by power wheelchairs and power add-on products.
The lifestyle product category was impacted by supply chain issues limiting the availability of materials and components in particular for bed.
In addition, access to institutional and government customers' remains limited compared to pre-pandemic level.
That said, overall, we continue to see increased customer interest in all products and strong order intake.
Gross profits declined by $2.8 million and gross margin declined 80 basis points due to unfavorable operating variances as a result of supply chain challenges, partially offset by favorable product mix.
Operating loss of $1.5 million was impacted by reduced gross profit and higher SG&A expense, the latter of which came primarily as a result of spending supporting revenue growth.
As noted the goodwill impairment charge previously discussed is not included in the operating results for North America.
Turning to slide 10, constant currency net sales in the Asia Pacific region increased 17%, driven by significantly higher sales of respiratory products, and an over 15% increase in mobility & seating products.
Sales rebounded in the Asia Pacific region as a result of receiving products delayed from the second quarter, which had been impacted by global shipping issues.
Operating loss improved by $2.2 million, driven primarily by lower corporate SG&A expense, including reduced stock compensation expense.
This was partially offset by lower profitability in the Asia Pacific region impacted by higher material and freight costs as well as higher SG&A expense.
Moving to slide 11, as of September 30, 2021, the company had total debt of $318 million, excluding financing and operating lease obligations, and $74 million of cash on the balance sheet.
Lower cash balances are primarily related to higher levels of working capital, which we anticipate will remain elevated through the end of the year.
As part of the company's strategy to mitigate supply chain challenges and to prepare for expected sales growth, the company added $10.1 million of incremental inventory in the quarter, which is expected to convert to cash over the next few quarters.
In the third quarter of 2021, the company received forgiveness of its CARES Act that obligation of $10.1 million of principal and accrued interest.
Turning to slide 12, we are reaffirming our full-year guidance for 2021 consisting of constant currency net sales growth in the range of minus 1% to positive 2%.
Adjusted EBITDA in the range of $30 million to $37 million, and free cash flow usage in the range of $10 million to $20 million.
As previously mentioned, full-year adjusted EBITDA guidance does not include the CARES Act benefit recognized in the third quarter.
For the fourth quarter, the company anticipates sequential improvement and constant currency net sales growth driven by continued strong order intake and the conversion of a portion of its elevated backlog into revenues.
We expect the actions we have taken to support sales growth and manage near-term supply chain challenges will drive sales growth, favorable sales mix and expand gross margin.
As a result, adjusted EBITDA and free cash flow are expected to improve materially.
Turning to slide 13.
We're pleased that our third quarter results reflect constant currency net sales growth.
We anticipate the actions we have taken will enable us to finish the year on a strong note and instill confidence that we will achieve our full-year guidance.
Looking further ahead, I'm confident that the durable benefits from our recent actions and our capable team will allow us to drive sustainable profitable growth in 2022 and beyond.
We'll now take questions.
| full year 2021 financial guidance reaffirmed.
|
blackhillscorp.com, under the Investor Relations heading.
Leading our quarterly earnings discussion today are Linn Evans, President and Chief Executive Officer; and Rich Kinzley, Senior Vice President and Chief Financial Officer.
Although we believe that our expectations and beliefs are based on reasonable assumptions, actual results may differ materially.
I'll begin on Slide 4, which lists our key achievements during the first quarter.
Our top priority of Black Hills Corporation is safety, which works hand-in-hand with reliability in our predominantly cold weather service territories.
I'm proud of our team's exceptional and resilient performance.
The Black Hills team along with our electric and natural gas systems and our generating fleet performed very well through the historic decrees of the Winter Storm Uri.
We successfully served extraordinary demand, keeping our customers safe through life threatening cold conditions across our service territory.
Our balanced mix of power generation resources, including reliable and dispatchable generation capacity allowed us to completely avoid rolling blackouts experienced in other areas of the country, even while our South Dakota electric utility served a new winter peak load.
Of course, our success in serving our customers during Winter Storm Uri didn't happen by chance, rather it was a result of our relentless focus on our customers and ongoing investments for our safe, reliable and resilient infrastructure.
Winter Storm Uri demonstrated how critical energy is to our daily lives.
The storm highlighted the need for safe, reliable natural gas utilities and reliable generation capacity when our customers experienced temperatures as low as 27 degrees below zero, setting numerous all-time record lows across our communities.
As an example, Lincoln, Nebraska reported 11 straight days of temperatures below zero in February with lows of the minus 20s.
Recognizing essential value of natural gas during these weather events, we're pleased that four of our six gas states: Arkansas, Iowa, Kansas and Wyoming, recently passed legislation that protects our customers freedom to choose a type of energy is right for them.
Last week we announced, we joined the ONE Future Coalition of gas utility companies who are voluntarily reducing emissions.
This is an addition to our previously announced participation in the EPA's Methane Challenge as we enhance our commitment to modernize and make our pipelines more resilient.
Continuing on Slide 4.
We remain encouraged by the ongoing steady growth in new customer connections driven by population migration into our service territories.
Our team also showcased our agility and the strength of our financing strategy during the first quarter.
Given the unprecedented and unforeseeable market pricing for natural gas in February, we immediately supplemented our liquidity with additional short-term financing by securing an $800 million term loan on favorable terms.
This term loan and other ongoing cash conservation initiatives ensures our ability to continue funding our strong capital investment program.
Slide 5 sets out our financial outlook.
However, absent these storm cost, our financial results were otherwise strong.
During the February storm, we immediately implemented expense and cash management initiatives and we're executing on other opportunities to mitigate the impact of the storm.
Rich will cover the details in his financial update.
Given these ongoing initiatives and the opportunities we see for the remainder of this year, our 2021 earnings guidance remains unchanged.
We also reaffirmed our 2022 earnings guidance and we remain confident in our long-term growth targets, including 5% to 7% earnings growth for 2023 through 2025 and at least 5% annual dividend growth.
Slide 6 illustrates our disciplined growth plan with upside potential.
We plan on capital investments in more than $3 billion through 2025 and we expect to identify and develop incremental projects.
We're also developing other growth opportunities including less capital intensive projects such as data center load additions and other innovative customer solutions, including renewables and other technologies.
I noted already that we're seeing accelerated population migration into our service territories and we're gaining confidence this trend will continue.
The last item on this slide is a focus on cost discipline and continuous improvement.
These are long-term initiatives for leaner more efficient processes and the use of new technologies to be better every day.
Moving to Slide 7.
We've made progress on our regulatory initiatives.
Our team is finalizing three rate review applications to be filed in the second quarter.
We plan to file a new rate review for Colorado Gas, and we recently completed a hearing before the commission regarding our ongoing safety and integrity investment rider.
In Kansas, we're filing our first rate review in seven years, which renews our five year system safety and integrity investment rider.
And in Iowa, we plan to file our first rate review in more than a decade, including a request for a new system safety and integrity investment rider.
In addition to our normal regulatory activity, we're engaged with regulators regarding recovery for costs associated with Storm Uri.
Moving to Slide 8.
For our electric utilities, resource planning is a key focus, as we determine how best to reliably and cost effectively serve growing customer demand and achieve our greenhouse gas emission goals.
We're targeting early July to submit our integrated resource plan for our jointly operated South Dakota and Wyoming electric systems.
We're modeling various scenarios to meet our growing customer demand.
Initial modeling which is always subject to change, indicates a need to add renewable, dispatchable natural gas generation, battery storage, additional transmission and upgraded pipeline capacity.
These scenarios consider customer impacts in achieving our greenhouse gas emission goals.
We are also modeling a scenario that considers the Biden Administration's economywide greenhouse gas emission goals and what that would cost customers.
I'm excited about this process as we look to provide greater clarity into these future opportunities in the upcoming months.
And finally on Slide 9, we're well positioned as an integrated utility with a strong long-term growth outlook.
We're executing our customer-focused strategy and are confident in our future.
Slide 11 summarizes earnings per share for the first quarter.
We delivered earnings per share of $1.54 compared to $1.59 as adjusted in Q1 2020.
Impacts from Winter Storm Uri overshadowed what were otherwise solid financial results.
The net storm impacts were $0.15 per share, which more than offset weather favorability and the benefit of new rates.
We estimate weather benefited earnings by $0.07 per share compared to normal.
For the quarter, heating degree days were 4% higher than normal at our electric utilities and 3% higher than normal at our gas utilities, attributable primarily to extreme cold in February, offsetting warmer than normal weather in January and March.
Compared to Q1 2020, the weather impact was favorable by $0.11 per share, given a warmer than normal first quarter heating season last year.
Slide 12 details how we are addressing Winter Storm Uri impacts.
In the first quarter, we incurred approximately $571 million of incremental cost to serve our customers.
This includes $559 million of deferred utility fuel costs we booked as a regulatory asset.
We've had constructive dialog with regulators in a filed or expect to file our remaining storm-related regulatory recovery requests in the second quarter.
We've already filed requests for our gas utilities in Arkansas, Iowa, Nebraska and Wyoming and for South Dakota Electric.
Recovery plans vary by state with proposed recovery in some states within one year while other states may take up to five years or longer.
In the first quarter, we booked storm-related net expenses of $12.55 million pre-tax or $0.15 per share after tax.
The largest contributor was $8.2 million of non-recoverable incremental gas purchase costs at Black Hills Energy Services, which serves 52,000 of our regulated utility customers in Nebraska and Wyoming through the Choice Gas program.
This program allows customers the option to choose their gas provider and is supported by a hedging and procurement plan based on demand history and forecasts.
Serving our Choice Gas customers is a small, low risk and profitable piece of our business.
However, it was subjected to the unprecedented market pricing and elevated demand caused by storm Uri.
For our electric businesses, the impact to our wholesale power margin sharing of $3.2 million was partially offset by $1.7 million of power generation benefits.
We also incurred $2.1 million of fuel costs that are outside of our regulatory cost recovery mechanisms, primarily in Montana, where we serve two industrial customers pursuant to contracts.
This small piece of our utilities is typically very low risk but was subjected to the same unprecedented market pricing and elevated demand.
In February, we immediately implemented strategies to mitigate the $0.15 earnings per share impact from Uri over the remainder of the year through cost management, ongoing wholesale power marketing opportunities and identified regulatory proceedings.
Slide 13 illustrates the drivers of change in net income year-over-year for the first quarter.
All amounts listed are after-tax.
The main drivers compared to last year were gross margin improvements at our gas utilities offset by Storm Uri impacts.
Natural gas margin increases were driven by weather favorability and new base rates and rider recovery on investments for customers.
Electric utility margins were lower than the prior year, primarily due to tax reform benefits that we passed on to our Colorado Electric customers.
We credited over $9 million of tax reform benefits, which lowered revenue and had an offsetting income tax benefit, resulting in minimal overall impact to first quarter results.
The additional quarter-over-quarter tax benefits in the far right were related primarily to additional production tax credits related to the Corriedale Wind Project that went into service in late 2020.
O&M was impacted by higher employee costs and outside services.
Outside services increased over the prior year because of higher Director fees tied to our stock price performance, which was much stronger in Q1 this year compared to last year.
The change in other income expense over the prior year was driven by market impacts on a non-qualified deferred compensation expense.
Additional first quarter detail on segment earnings can be found in the Appendix.
Slide 14 shows our financial position through the lens of capital structure, credit ratings and financial flexibility.
We have a manageable debt maturity profile and are committed to maintaining our solid investment grade credit ratings.
At the end of April, we had approximately $530 million of available liquidity on our revolving credit facility.
In February, we entered into an $800 million, nine-month term loan to bolster our liquidity in light of the increased fuel costs related to Storm Uri.
We repaid $200 million of that term loan at quarter-end and are developing the appropriate refinancing strategy for the remaining $600 million as we finalized Storm Uri recovery mechanisms.
I expect we will issue debt with a three to five year term in the second or third quarter to match the recovery period of the bulk of the dollars from the deferred Storm Uri fuel cost.
New debt and deferred recovery of fuel cost temporarily increased our debt to total capitalization ratio to 62% at the end of March.
As we recover storm costs, repay debt and execute on our equity program, we expect to reduce the debt to total capitalization ratio and continue to target a debt to total cap ratio in the mid 50s.
Our equity issuance expectations are unchanged.
We expect to issue $100 million to $120 million in 2021 and $60 million to $80 million in 2022 through our at-the-market equity offering program.
We will continue to evaluate financing needs as we finalize our storm cost recovery proposals.
Moving to our dividend on Slide 15.
In 2020, we proudly marked 50 consecutive years of annual dividend increases, one of the longest track records in our industry.
Since 2016 we have increased our dividend at an average annual rate of 6.6%.
Looking forward, we anticipate increasing our dividend by more than 5% annually through 2025 while maintaining our 50% to 60% payout target.
We are uniquely positioned as an integrated utility in constructive jurisdictions with a complementary business mix across stable and growing territories.
We continue to be well positioned both operationally and financially to be ready to serve all our stakeholders.
| qtrly earnings per share $1.54.
reaffirming our 2021 and 2022 earnings guidance and five-year capital plan of more than $3 billion.
remain confident in our strategy and opportunities ahead as we target 5% to 7% earnings growth beyond 2022.
|
We will also discuss certain non-GAAP financial measures.
Several other executives will be available for the Q&A session.
We had another strong quarter, and I'm excited to talk to you about our progress on many different fronts.
Yesterday, we reported third quarter 2021 GAAP earnings of $0.85 per share.
Our operating earnings were $0.82 per share, which is above the top end of our guidance range.
Our customer-focused strategies, positive mix of weather-adjusted load, great operational performance and financial discipline continue to drive solid results.
Furthermore, I'm proud of our progress to resolve important legacy issues and strengthen all aspects of our company.
In Ohio, we continue to take a collaborative approach, and we're engaged in settlement discussions with a broad range of parties to resolve several of our pending cases before the PUCO.
Our meetings continue to be productive, and we're making good progress.
We are also making progress on the Ohio corporate separation, DMR and DCR audits.
The corporate separation audit report was filed on September 13 and showed no findings of major noncompliance.
The expanded DCR audit report is due by November 19.
And we continue to work through the DMR audit, which is now due on December 16.
Since our last earnings call, we've taken additional steps to strengthen our compliance program and instill a culture focused on ethics, integrity and accountability across our organization.
These include: a new Compliance & Ethics Program Charter and policies in multiple areas; instructor-led business Code of Conduct awareness training for senior leadership and individuals with significant roles in our control environment; training on the concepts of our new internal Code of Conduct for everyone in leadership, with training for all employees planned in the first quarter of 2022; and publishing our new corporate engagement report.
Additionally, we have started to develop a new integrated risk management platform to enhance our ethics and compliance, audit and risk functions.
The new tool will help us streamline case management of ethics and compliance concerns, manage the life cycle of corporate policies, assess and respond to risks, and report on our compliance with internal controls and regulatory requirements across the organization.
As we've discussed, over the last 12 months, our Board and management team acted quickly and decisively, adding additional independent board members, making changes in our management structure, establishing effective controls, reinforcing our culture change and building a best-in-class ethics and compliance program.
Our relentless focus in these areas resulted in remediation of the material weakness in internal controls associated with our tone at the top.
While this is an important step, we continue driving these cultural changes and keeping compliance and integrity at the center of everything we do.
We are working every day to continue rebuilding stakeholder trust and confidence in FirstEnergy and to ensure that our employees can be proud of our company and our mission.
Yesterday, we announced another key hire to enhance our leadership team.
Camilo Serna will join FirstEnergy on November eight as our new Vice President of Rates and Regulatory Affairs.
Camilo brings a great depth of experience, developing and implementing state and federal regulatory strategies.
His experience will be invaluable as we build a smarter electric grid and support the transition to a cleaner energy future.
We continue taking steps to achieve these goals.
For example, last month, JCP&L submitted a proposal to PJM and the New Jersey BPU for transmission investments that would connect clean energy generated from the state's offshore wind farms to the power grid, while minimizing the impact on the environment and communities.
We expect a decision on this proposal, which supports the clean energy investments driven by the New Jersey Energy Master Plan in the second half of 2022.
In West Virginia, we recognize our responsibility to operate our two regulated fossil plants for the benefit of our customers in the state.
Later this year, we intend to file an effluent limitation guideline, or ELG plan, that calls for additional capital expenditures at the two plants to comply with environmental rules and to ensure that they can continue to operate beyond 2028.
At the same time, we intend to begin discussing with stakeholders our plans for a timely clean energy transition.
As a part of that transition, later this year, we plan to file with the West Virginia Public Service Commission for 50 megawatts of utility scale solar generation.
Our wind connection and solar proposals support core components of our climate strategy, building a more climate-resilient energy system that meets our customers' changing needs, enables the transition to a carbon-neutral economy and powers a sustainable and prosperous future for our stakeholders.
In the other recent regulatory activity, this month, our ATSI transmission subsidiary reached a settlement with parties to a FERC proceeding that will address legacy issues associated with ATSI's move from MISO to PJM in 2011 and provide for partial recovery of the MISO transmission project costs that will be allocated to ATSI in the future.
It's an exciting time for our company.
We have a robust long-term pipeline to modernize our transmission network, and we plan to continue embracing renewables.
In our distribution business, we're incorporating emerging smart technologies and building a technologically advanced distribution platform.
And our industry will play a key role in the infrastructure build-out for electric vehicles, battery storage and other technologies.
We're pleased with our strong performance through the first nine months of 2021.
As we close out the year, we are raising and narrowing our operating earnings guidance from $2.40 to $2.60 per share to $2.55 to $2.65 per share.
The midpoint of this range represents a 9% increase over 2020 operating earnings results.
Finally, I can't pass the call over to Jon without acknowledging that it's been one year since I stepped into my leadership role under very sobering circumstances.
It's been a challenging year on many fronts.
I continue to be impressed by the grit and the resilience of the entire team.
Together, we are building positive, sustainable momentum, and creating a new FirstEnergy that is a forward thinking and industry-leading company.
Now Jon will provide a review of third quarter results and a financial update.
Yesterday, we announced GAAP earnings of $0.85 per share for the third quarter of 2021 and operating earnings of $0.82 per share.
As Steve mentioned, this exceeded the top end of our guidance range.
In our distribution business, results for the third quarter of 2021 as compared to last year reflect the absence of Ohio decoupling and lost distribution revenue, which totaled $0.04 per share as well as lower weather-related usage.
These were partially offset by higher revenues from our capital investment programs, new rates from our JCP&L distribution base rate case and lower operating expenses.
Consistent with the trends we've discussed over the last few quarters, total distribution deliveries increased on both an actual and weather-adjusted basis compared to the third quarter of 2020.
While weather was hotter than normal in our region this summer, it was cooler in the third quarter of 2020.
Weather-adjusted residential sales for the third quarter of 2021 were essentially flat compared to the third quarter of 2020 as many of our customers continue to work from home.
Comparing our results to the pre-pandemic levels in the third quarter of 2019, weather-adjusted residential usage was nearly 6% higher this quarter.
While the commercial and industrial classes have not yet recovered to levels we saw before the pandemic, they are starting to trend in the right direction.
Weather-adjusted commercial deliveries increased 3% while industrial load was up nearly 4% compared to the third quarter of 2020.
Industrial load increased in most of the sectors in our service territory this quarter, led by steel, chemical and fabricated metal.
In our regulated transmission business, we continue to see benefits from higher transmission investments at our MAIT and ATSI subsidiaries as part of our Energizing the Future program.
However, this was offset by higher interest from the debt issuance at FET earlier this year and a prior year formula rate true-up.
And in the Corporate segment, results reflect lower O&M and benefit expenses.
For the first nine months of 2021, operating earnings were $2.10 per share compared to $2.07 per share in the first nine months of 2020.
The increase was driven by our ongoing investments in our distribution and transmission systems, higher weather-related usage and lower expenses.
These items more than offset the $0.17 of decoupling and lost distribution revenues recognized in the first nine months of 2020.
Our strong results and financial discipline have resulted in year-to-date adjusted cash from operations of $2.4 billion, which represents an increase of $600 million versus last year.
While we expect a few offsets in the fourth quarter, we now expect cash from operations of approximately $2.8 billion for the year, which includes approximately $300 million of investigation and other related costs, the largest of which is associated with the $230 million EPA settlement.
Earlier this month, we successfully restructured our revolving credit facilities from a 2-facility model to 6, fulfilling our commitment to complete this action before the end of the year.
The 2021 credit facilities provide for aggregate commitments of $4.5 billion and are available until October of 2026, with two separate 1-year extensions.
The credit facilities and their sublimits are detailed in the strategic and financial highlights.
We are also pleased that following the restructuring of these facilities, S&P issued a one notch upgrade to the 10 distribution companies and the three transmission companies.
While we're glad to return to investment-grade ratings for these companies with all three rating agencies, we remain committed to improving our balance sheet and the overall credit profile at the parent company.
We previously communicated that we were targeting FFO to debt in the 12% to 13% range.
We're raising that target to be solidly at 13%, which will provide ample cushion to the new Moody's threshold of 12%.
And we expect to set the company on a firm glide path to mid-teens.
On a number of recent calls, we've communicated that we're contemplating a minority asset sale as we consider alternatives to raise equity capital.
Currently, we are engaged in a process to sell a minority interest in our transmission holding company, FirstEnergy Transmission, which owns ATSI, MAIT and TrAILCo.
The interest is very strong and preliminary indications are very supportive of our financial plan and targets.
But given where we are in the process, we can't comment any further on the details.
We continue to evaluate all options to raise equity capital in an efficient manner to support our longer-term outlook, which includes traditional rate base growth and formula rate investments, planned rate case activity, and incremental and strategic capex that supports the transition to a cleaner electric grid.
We are optimistic that we'll be in a position to share our overall financing plan and our longer-term outlook within the next couple of weeks.
In fact, you may have noticed that we've expanded the information in the appendix of our strategic and financial highlights document.
Given the current status of the proposed asset sale, we recognize that the fact book will be more relevant once we can include the outcome from that transaction.
During the fourth quarter, we expect to provide you with 2022 guidance and a detailed capital plan, along with the runway of our FFO-to-debt target, longer-term capital forecasts, and targeted rate base and earnings growth rates.
| sees fy non-gaap operating earnings per share $2.55 to $2.65.
q3 gaap earnings per share $0.85.
operating (non-gaap) earnings for q3 of 2021 were $0.82 per share.
|
Our discussion today includes certain non-GAAP financial measures, which provide additional information we believe is helpful to investors.
These measures have been reconciled to the related GAAP measures in accordance with SEC regulations.
Please consider the risks and uncertainties that are mentioned in today's call and are described in our periodic filings with the SEC.
For the third quarter, Barnes Group delivered respectable financial performance as we continue to manage through the challenging environment presented by the ongoing global COVID-19 pandemic.
We generated earnings per share toward the high end of our July outlook, and our cash generation continues to be good.
We also saw incremental sales growth in both of our operating segments over the quarter, with promising signs of recovery in our industrial business, and the moving on from what we believe was the second quarter revenue trough in our Aerospace business.
Clearly, there remains a lot of uncertainty, but we can see signs of a path to recovery with more clarity.
Given our strong management team and thoughtful actions, we expect to drive profitable performance throughout this challenging period, while maintaining a sharp focus on accelerating our key strategic initiatives to position the business for future growth.
For the third quarter, total sales decreased 28% over the prior year period with organic sales down 26%, driven by lower volumes given the pandemic's impact on our end markets.
On a positive note, total sales did improve 14% sequentially from the second quarter, primarily driven by the performance of our Industrial segment.
Adjusted operating income decreased 53% compared to a year ago, while adjusted operating margin declined 640 basis points to 11.7%.
Earnings per share were $0.30, down 66% from last year, obviously, significant declines from a year ago, but somewhat better than expectations we laid out in July.
More importantly, total sales improved sequentially through the quarter.
At the same time, cash performance was once again solid, and our leverage continues to remain manageable.
Ongoing cost management and further working capital improvements in the quarter also helped to mitigate some of the impact of lower demand.
Moving now to a discussion of our business segments and end markets.
At Industrial, we're seeing some of our end markets exhibiting positive signs of recovery, coinciding with what has been a rapid increase of manufacturing PMIs.
U.S. and Europe PMIs have risen substantially from the second quarter lows, and China has strengthened to its already favorable reading.
Exiting the third quarter, all had solid PMI readings of 53 or better.
Overall, segment book-to-bill was slightly better than one times and orders grew 24% sequentially from the second quarter.
In our Molding Solutions business, sales of medical molds and hot runners remained solid.
And for the second consecutive quarter, we saw a nice year-over-year pickup in both packaging and personal care orders, reflecting the release of previously deferred projects.
Correspondingly, we generated a sequential sales increase in both of these end markets in the quarter.
In our automotive hot runner business, while sales were relatively flat to the second quarter, order saw a sequential bump as a few postponed projects were released.
We're seeing this market slowly ramping, in part driven by the influence of new electric vehicles.
In our Force & Motion Control business, sheet metal forming market saw a modest sequential improvement in orders and sales, while general industrial orders and sales likewise trended positively.
At Engineered Components, general industrial end markets experienced the meaningful sequential bump in orders and sales, another positive signal and fully aligned with the trend in manufacturing PMIs.
Our global automotive production markets saw the most sequential improvement, which was foreshadowed by the positive auto production forecast trend we highlighted last quarter.
While global automotive production is still anticipated to be meaningfully down in 2020, next year's growth is projected to be up in the mid-teens.
In our Automation business, we saw a solid quarter of performance with both year-over-year and sequential improvement in orders and sales.
Demand for our end-of-arm tooling solutions and various automotive applications saw a nice bounce, while precision grippers for medical and pharma applications also remained a bright spot.
For the segment, we continued to forecast sequential orders and sales improvement into the fourth quarter as the recovery progresses, albeit at a measured pace.
Moving now to our Aerospace business.
In the third quarter, total Barnes Aerospace sales were down nearly 50% with OEM down 44% and aftermarket down 58%.
Commercial aviation remained significantly disrupted by the global pandemic, yet passenger traffic has improved from the lows of April.
In the short-term, we expect our OEM business to see soft demand for its manufactured components as aircraft production rates of both Boeing and Airbus have been lower.
Although we expect our OEM sales to improve sequentially in the fourth quarter, getting back to pre-pandemic levels is forecasted to take several years.
In the aftermarket, lower aircraft utilization and weakened airline profitability will no doubt result in a slow recovery as less maintenance is required and/or gets deferred.
However, as commercial flights return with domestic traveling -- travel happening sooner than international demand, we anticipate volumes in our aftermarket business to gradually pick-up.
For the fourth quarter, we forecast flattish sequential aftermarket sales.
Despite a second consecutive quarter of 50% down sales, Aerospace delivered adjusted operating margin of close to 10%, a tribute to the quality of the team.
Also, while addressing the substantial day-to-day challenges of the current environment, Barnes Aerospace improved its position by securing a long-term agreement with GE Aviation for the manufacturer of existing and additional components on the LEAP engine program.
With this agreement, we'll employ our expertise and technology in the machining and assembly of complex hot section engine components.
The agreement provides for an increase of production share for select parts on LEAP engine programs, extends the term of previous agreements by 10 years for select parts and expands our portfolio of components on LEAP engines.
Inclusive of the contract extension benefit, the estimated sales is over $700 million through 2032.
Just before I close today, I'd like to take a few minutes to talk about another very important aspect of our business, which is Environmental, Social and Governance or ESG matters and to highlight the progress we are making.
At Barnes Group, we are committed to being an exemplary corporate citizen, and we take that responsibility very seriously.
In doing so, over the last several years we've worked to further our ESG progress and have recently published our sixth annual ESG corporate social responsibility report.
You can find our report and a summary of our ESG efforts on our company website under About BGI.
At Barnes, we began our ESG journey several years ago by educating ourselves on the global standards for measuring and reporting sustainability progress.
Barnes Group's ESG efforts are currently focused on aligning our sustainability actions around the Global Reporting Initiative or GRI.
The GRI is a common language used by organizations to report on their sustainability impacts in a consistent and credible way.
Our teams are engaged in several projects that will illustrate to our varied stakeholders how we are striving to meet those sustainability standards.
I'm also proud to report that we have recently established environmental targets for 2025.
As a company, we will work to reduce the energy we use in our factories as measured in carbon dioxide equivalents by 15%, reduce the amount of water we use by 20% and reduce the amount of industrial process waste we generate from our manufacturing operations by 15%.
These efforts are a testament to our Barnes Enterprise System.
Reducing all types of waste and inefficiencies to achieve operational excellence is the hallmark of our operating system and demonstrates our commitment to running sustainable businesses that conserve natural resources, while minimizing the impact of our footprint on the environment.
So to conclude, we continue to effectively manage our business as we deal with the disruptive effects of the pandemic on our end markets.
Across the company, we've been focused on the safety of our employees, protecting profitability and driving cash performance.
At the same time, we are pursuing various opportunities for growth, like the recent GE deal, to better position Barnes Group to leverage the speed at which we exit the current downturn.
As difficult as the last couple of quarters have been, I am very proud of the Barnes team and encouraged by the direction of our progress.
And while the level of uncertainty remains elevated, I am very optimistic that our end markets have begun the recovery and that the future looks promising.
Let me begin with highlights of our 2020 third quarter results.
Third quarter sales were $269 million, down 28% from the prior year period, with organic sales declining 26%.
As you'd expect, the severe demand disruption brought on by the global pandemic continues to impact many of our end markets.
As we previously mentioned, we view the second quarter as the sales low point, with modest recovery commencing in Q3 led by Industrial, which is indeed, what we're seeing.
We saw a 14% sequential improvement in sales relative to the second quarter.
However, on a year-over-year basis, the pandemic impact remained significant.
Also, influencing our sales results, the divestiture of Seeger had a negative impact on sales of 4%, while FX had a positive impact of 2%.
Operating income was $31.2 million as compared to $67.6 million in last year's third quarter.
Operating margin was 11.6%, down 650 basis points.
Interest expense of $3.7 million decreased $1.6 million from the prior year period due to lower average borrowings and a lower average interest rate.
Other expense decreased by $2.5 million from a year ago as a result of favorable FX.
The company's effective tax rate for the third quarter of 2020 was approximately 44% as compared to 23.4% for the full year 2019.
The increase in the third quarter's tax rate over last year's is primarily due to a change in the forecasted geography sources or the geographic sources of income with reductions incurring in several low tax jurisdictions, and the impact of global intangible low tax income, commonly referred to as GILTI.
Our current expectation for the full year 2020 tax rate is approximately 39%, which includes the recognition of tax expense related to the Seeger sale that occurred in the first quarter.
As we look out to next year, given where things stand today, we expect our 2021 tax rate to be in the range of approximately 27% to 29%.
Net income for the third quarter was $0.30 per diluted share compared to $0.89 a year ago.
Let me now move to our segment performance, beginning with Industrial.
Third quarter sales were $197 million, down 15% from a year ago.
Organic sales decreased 12%, Seeger divested revenues had a negative impact of 6%, while favorable FX increased sales by 3%.
On the positive side of the ledger, total Industrial sales increased 19% sequentially from the second quarter.
Industrial's operating profit for the third quarter was $24.4 million versus $34.8 million last year.
Like last quarter, the primary driver is lower sales volume, offset in part by our cost mitigation efforts, which included the previously announced workforce-related actions and the curtailing of discretionary spending.
Operating margin was 12.4%, down 260 basis points.
I'll close my Industrial discussion with quarterly organic orders and sales relative to last year.
Molding Solutions organic orders and sales were down approximately 10%.
Force & Motion Control organic orders were down mid-teens and sales down approximately 20%.
Engineered Components organic orders were up 8% with sales down approximately 10%.
And Automation organic orders were up high-teens with sales up low-single-digits.
Clearly the business remains under considerable pressure.
Sales were $72 million, down 49% from last year.
Operating profit was $6.8 million, down approximately 80%, reflecting the lower sales volume and partially offset by cost actions.
Operating margin was 9.4% as compared to 23.2% a year ago.
On an adjusted basis, excluding $300,000 in restructuring charges, operating margin was 9.9%.
Between the volume impact on factory absorption and the unfavorable aftermarket mix, the Aerospace team did a nice job to protect profitability.
Aerospace OEM backlog ended the quarter at $534 million, down 4% from June 2020, and we expect to ship approximately 45% of this backlog over the next 12 months.
Year-to-date cash provided by operating activities was $163 million, an increase of approximately $2 million over last year-to-date, driven by ongoing working capital improvements.
We continue to have good receivable collections, and we began to see reductions in inventory levels.
Year-to-date free cash flow was $133 million versus $124 million last year.
And year-to-date capex was $30 million, down approximately $8 million from a year ago.
With respect to our balance sheet, our debt-to-EBITDA ratio, as defined by our credit agreement, was 2.8 times at quarter end, up from 2.4 times at the end of June.
The company is in full compliance with all covenants of our credit agreements and maintained sufficient liquidity to fund operations.
As we announced last week, the company has amended on a temporary basis the debt limits allowed under our credit agreements.
For the next four quarters, our senior debt covenant maximum, our most restrictive covenant, has increased from 3.25 times EBITDA as defined to 3.75 times.
Given the level of uncertainty in several of our end markets, we believe that is a prudent risk mitigation action.
Our third quarter average diluted shares outstanding was 50.9 million shares.
Our share repurchase activity remains suspended.
For the fourth quarter, we expect organic sales will be lower than last year by approximately 20%, though up approximately 5% sequentially from the third quarter.
Operating margin is forecasted to be approximately 11%, while adjusted earnings per share are anticipated to be in the range of $0.27 to $0.35.
Forecasted 2020 capex is approximately $40 million, a bit lower than our prior view.
So to close, while significant challenges remain in the current business environment, we're focused on managing those items that we can control, whether they be growth opportunities, cost actions or cash management.
All things considered, our financial performance demonstrates that focus.
As Patrick mentioned, the sentiment is that we're starting to turn the corner on a recovery.
And while much work is still to be done, our efforts on positioning the company to best leverage and improving environment continues.
Operator, we'll now open the call to questions.
| compname says operating margin is expected to approximate 11% for q4.
q3 gaap earnings per share $0.30.
q3 sales $269 million versus refinitiv ibes estimate of $245.6 million.
sees q4 2020 adjusted earnings per share $0.27 to $0.35.
for q4 of 2020, will continue to be impacted by covid-19 global pandemic.
current view is for q4 organic sales to be lower than last year's q4 by approximately 20%.
adjusted earnings per share are anticipated to be in range of $0.27 to $0.35 for q4.
full year 2020 capital expenditures forecast of $40 million is down slightly from prior view.
|
We will also discuss certain non-GAAP financial measures, reconciliations between GAAP and non-GAAP financial measures.
Participants in today's call include our President and Chief Executive Officer, Steve Strah; Vice Chairperson and Executive Director, John Somerhalder and Senior Vice President and Chief Financial Officer, Jon Taylor.
We also have several other executives available to join us for the Q&A session.
Operating earnings were $0.59 per share, which is above the top end of our earnings guidance.
These strong operational results reflect a customer-focused investment strategy in our regulated distribution and transmission businesses, solid financial discipline and the continued shift in higher weather-adjusted demand from our residential customers.
We're pleased with our performance as well as the substantial progress we've made to transform FirstEnergy and position our company for the future.
We have taken critical steps to build a best-in-class compliance program while identifying and driving initiatives to deliver long-term value to all stakeholders.
Our leadership team is committed to modeling the behaviors and the humility necessary to restore trust with our stakeholders.
We look forward to continuing this work and achieving the milestones that will mark our progress.
I'll start our call today with an update on the DOJ and other investigations related to House Bill 6 and John Somerhalder will join us for a brief discussion on board activity and the progress of our compliance program.
Yesterday, we announced that we've entered into an agreement with the U.S. Attorney's Office for the Southern District of Ohio to resolve the DOJ investigation into FirstEnergy.
This deferred prosecution agreement was filed in federal court.
Under the three-year deferred prosecution agreement, we agreed to pay $230 million, which will be funded with cash on hand.
Half of these funds is designated for the U.S. Treasury and the other half is being directed to the benefit of utility customers by the Ohio Development Service Agency.
No portion of the filing will be recovered from customers.
We also agreed to the government's single charge of honest services wire fraud, which will be eventually dismissed, provided we abide by all the terms of the agreement.
In accordance with the agreement, we will provide regular reports to the government regarding our compliance program, as well as internal controls and policies and continued efforts to build on the comprehensive compliance initiatives we've rolled out this year.
The conduct that took place at our company was wrong and unacceptable.
Our Board, the management team and the entire FirstEnergy organization have done extensive work and are committed to make the necessary changes to move on from this.
Our progress on these efforts, along with the DPA, demonstrate that we are making meaningful headway in navigating through this period and we are positioned to move forward as a stronger integrity bound organization.
We will continue to cooperate fully with the ongoing investigations, audits and related matters as we work to resolve these issues and rebuild trust with our employees, customers, regulators and investors.
We are intently focused on fostering a strong culture of compliance and ethics and assuring that we have robust processes in place designed to ensure that nothing like this happens again.
In May, we held our first compliance town hall with employees to discuss what compliance, ethics and integrity mean at FirstEnergy and the importance of building a culture of trust where everyone is comfortable with speaking up when something doesn't feel right.
In the weeks following the town hall, our management team has responded to employee questions and concerns and we are committed to continuing this conversation and engagement.
Next week, we plan to hold another town hall meeting with employees where we will introduce our updated mission statement, reinforcing the role of uncompromising integrity as the cornerstone of FirstEnergy's identity and business strategies.
We will also refresh our core values to better reflect the importance of integrity together with safety, diversity, equity and inclusion, performance excellence and stewardship.
These values will be embedded in our practices and processes and become ingrained in the way we work.
Additionally, we updated our code of business conduct, which John Somerhalder will speak to in a moment.
We also continue to strengthen our leadership team with two more new hires, Michael Montaque joined us earlier this month as Vice President, Internal Audit and yesterday we announced that Soubhagya Parija has been named Vice President and Chief Risk Officer effective August 16.
These two experienced professionals represent another important step as we strengthen our key internal functions and I'm confident that they will help us develop best-in-class audit and enterprise risk programs.
Now, John Somerhalder will join us to provide an update on board matters and other facets of our compliance program.
Then I'll be back to discuss FE Forward and review some regulatory updates.
Our progress with the DOJ builds on the substantial steps we have taken to enhance our Board, strengthened our leadership team, ensured we have a best-in-class compliance program and significantly modify our approach to political engagement as we work to regain the trust of our stakeholders.
I'll start with a review of recent Board changes.
As you know, Jesse Lynn and Andrew Teno joined the Board from Icahn Capital in March, but they do not currently have voting rights pending regulatory approval.
I'm pleased to note that FERC approved our request for voting rights last week.
The process in Maryland continues as we have communicated FERC's recent action to the Commission.
Melvin Williams was elected to the Board at our Annual Meeting in May and last month we added two more independent directors, Lisa Winston Hicks and Paul Kaleta.
Jesse, Melvin, Lisa and Paul comprise our Special Litigation Committee.
This committee has full and binding authority to determine the company's action with respect to the pending shareholder derivative litigation.
I'll also note that with the formation of the Special Litigation Committee, the Board has dissolved Independent Review Committee.
As previously discussed, the company's internal investigation has now been transitioned from a proactive to a response mode and in light of the significant review, investigation and related actions accomplished by the independent review committee, the Board has also dissolved that committee.
But many proactive actions taken by the Board and management over the past year have improved our governance and put us in a strong position to remediate the material weakness associated with our tone at the top by the time we file our four quarter results.
Over the last several quarters, we've talked a lot about the work we're doing to elevate our ethics and compliance program and reinforce our values and expectations with all employees.
We continue to make timely progress in this area and our new, more centralized compliance organization is taking shape under Antonio Fernandez, who joined the company in April as our Chief Ethics and Compliance Officer.
Yesterday, we published our updated internal Code of Business Conduct, The Power of Integrity, which will be supported by ongoing education around behaviors and the importance of reporting ethical violations and we have continued to strengthen our policies, processes and internal controls including those around 501(c)(4)s, other corporate engagement and advocacy and business disbursements.
While the transformation of our culture and our steps to restore trust with all stakeholders will be long-term endeavors, this team has started building a stronger company built around a foundation of ethics, honesty and accountability.
The comprehensive assessment and recalibration of our ethics and compliance program has been running on a parallel path to FE Forward.
Our transformational effort to enhance value for all stakeholders by investing in modern and distinctive experiences that will improve the way we do business, we have improved our programmatic efforts to mature our ethics and compliance program into the FE Forward work.
In this way, we can leverage FE Forward's rigor to implement changes quickly and efficiently, embed ethics and compliance into our operational culture and ensure we sustain a comprehensive transformation well into the future.
FE forward has entered its third phase, which is a full-scale effort to execute our implementation plans.
The program is expected to deliver value and resilience including cumulative free cash flow improvements of approximately $800 million from 2021 through 2023 and an annual run rate capex efficiencies of about $300 million in 2024 and beyond.
At the same time, we expect the program to build on our strong operations and business fundamentals as we reinvest a portion of our efficiencies into strategic opportunities to better serve our customers and support a smarter and cleaner electric grid.
To ensure our organizational structure supports these improvement over the long term, we realigned our business units last month around five pillars: Finance and Strategy, Human Resources and Corporate Services, Legal, Operations and Customer Experience.
This new structure reflects a best-in-class model and supports operational excellence, clarity in decision making and accountability and less complexity.
As part of this new organizational structure, we've created a customer experience function that will truly understand our customers' evolving expectations, so we can develop solutions and drive benefits to customers.
We've also created a new position, Vice President transformation to shepherd the FE Forward initiatives across our company, while also developing customer focused emerging technology opportunities.
The development of executable plans, a best-in-class compliance program and critical organizational changes will position the company to move forward in a positive sustainable direction.
I'll just take a moment now and review recent regulatory matters starting in Ohio.
First, in July, the PUCO approved our filing to return approximately $27 million to our Ohio utility customers, representing all revenues that were previously collected through the decoupling mechanism plus interest.
Our Ohio utilities have filed supplemental testimony in the quadrennial review of our ESP IV.
We are committed to working with a broad range of parties in Ohio to resolve the range of issues that are still pending here.
We held our first full-scale collaborative meeting on March 31 and have since received further feedback from participants.
We are preparing for another collaborative meeting in the next few weeks.
We are also working through regulatory audits in Ohio, New Jersey, Pennsylvania and the FERC.
Finally, in April, the New Jersey BPU approved JCP&L's three year $203 million energy efficiency and conservation plan, which includes a return on certain costs, as well as the ability to recover lost distribution revenues.
As per our financial results, we're pleased with our strong performance in the first half of the year.
We are reaffirming our 2021 operating earnings guidance of $2.40 to $2.60 per share and we expect to be at the top half of that range.
We are also introducing third quarter guidance of $0.70 to $0.80 per share.
We remain focused on executing our plans, maintaining our costs and building on this positive momentum.
We are making substantial progress to transform FirstEnergy live up to our values and deliver long-term value to all of our stakeholders.
Yesterday, we announced GAAP earnings of $0.11 per share for the second quarter of 2021 and operating earnings of $0.59 per share.
As Steve mentioned, this exceeded the top end of our guidance range.
Special items in the second quarter of 2021 include investigation and other related costs, which include the impact from the deferred prosecution agreement, as well as regulatory charges and state tax legislative changes.
In our distribution business, 2021 second quarter results as compared to 2020 reflect growth from our capital investment programs, rate increases and lower expenses, primarily related to the absence of pandemic related expenses we incurred in the second quarter of last year, partially offset by the absence of Ohio decoupling and lost distribution revenues in the second quarter of 2020, which we stopped collecting earlier this year.
Total distribution deliveries increased on both an actual and weather-adjusted basis compared to the second quarter of 2020 when many of the pandemic related restrictions were in full effect.
However, the mix of customer usage resulted in a flat year-over-year earnings impact.
Second quarter 2021 weather-adjusted residential sales were 6% lower than the same period last year when many of our customers were under strict stay at home orders.
However, as we look at trends, weather-adjusted residential usage over the past few quarters has been on average about 4% higher than pre-pandemic levels and in fact, the second quarter of this year was close to 8% higher than weather-adjusted usage we saw in the second quarter of 2019.
We think more permanent work from home initiatives could impact our longer-term load forecast and we will be watching closely to see if the structural shift in our residential customer class continues.
Weather-adjusted deliveries to commercial customers increased 8% and industrial load increased 11% as compared to the second quarter of 2020.
Despite the increase in commercial activity this spring, weather-adjusted demand in this customer class continues to lag pre-pandemic levels by an average of about 6%.
Looking at the industrial class, we are encouraged by the steady recovery in demand over the past year.
In fact, this quarter, industrial load was only slightly down compared to the second quarter of 2019.
We continue to see higher load from the shale gas industry, but that was offset by lower load in other industrial sectors such as steel, auto and mining, which have not fully recovered to pre-pandemic levels.
In our Regulated Transmission segment, higher net financing costs in the second quarter of 2021, primarily related to our revolving credit facility borrowings were more than offset by the impact of higher transmission investment at MAIT and ATSI related to our Energizing the Future program.
Our transmission investments drove year-over-year rate base growth of 7%.
And in our Corporate segment results reflect the absence of discrete tax benefits recognized in the second quarter of 2020, as well as higher interest expense.
For the first half of 2021, operating earnings were $1.28 per share compared to $1.23 per share in the first half of 2020.
This increase was the result of continued investments in our transmission and distribution systems, weather-related sales and lower expenses and consistent with our second quarter results, the positive drivers for the first half of this year more than offset the absence of $0.13 of decoupling and lost distribution revenues that were recognized in the first half of 2020 that are no longer in place this year.
Additionally, our continued focus on financial discipline together with strong financial results helped drive a $196 million increase in adjusted cash from operations versus our internal plan and a $264 million increase above the first six months of last year, building on the improvements we noted on our first quarter earnings call.
As per capital markets activity, we continue making good progress on this year's debt financing plan with five of our six debt transactions complete, all with pricing similar to investment grade companies.
In May, we issued a $150 million in senior notes at Toledo Edison and MAIT with pricing at 2.65% and 2.55% respectively.
And in June, we issued $500 million in senior notes at JCP&L that priced at 2.75%.
In addition, we made progress on our commitment to reduce short-term debt during the second quarter by repaying $950 million under our revolving credit facilities bringing our borrowings down to $500 million as of June 30.
And earlier this week, we repaid the remaining $500 million under these facilities.
While we did obtain a waiver for our credit facilities related to the DPA, this repayment was voluntary and not required by the bank group.
We plan to operate on a normal course going forward and we utilize the revolving credit facilities on an as needed basis as we have done historically.
As you know, we have two revolving credit facilities, one for FE Corp, which is shared with our utility companies and one for FET both expiring in December of 2022.
Over the next few months, we plan to work with our bank group to evaluate and refinance these bank facilities with the goal of completing this initiative before the end of the year.
And finally, we continue to consider alternatives to our equity needs.
We continue to think through options that include a minority sale of distribution and/or transmission assets, which would raise substantial proceeds and eliminate all of our expected non-SIP equity needs, ensure the execution of our balance sheet improvement plans and provide funding for strategic capex in customer-focused emerging technologies that support the transition to a cleaner electric grid.
Based on our current timeframe, we expect to provide you with an update in the fourth quarter.
| reaffirms fy non-gaap operating earnings per share view $2.40 to $2.60.
q2 gaap earnings per share $0.11.
q2 revenue $2.6 billion versus refinitiv ibes estimate of $2.65 billion.
for q3 of 2021, providing a gaap and operating (non-gaap) forecast range of $380 million to $435 million, or $0.70 to $0.80 per share.
operating (non-gaap) earnings were $0.59 for q2 of 2021.
|
I am joined by Tom Greco, our President and Chief Executive Officer and Jeff Shepherd, our Executive Vice President and Chief Financial Officer.
We hope you're all healthy and safe amid the ongoing pandemic and recent surge of the delta variant.
It's because of you that we're reporting the positive growth in sales, profit and earnings per share we're reviewing today.
In Q2, we continued to deliver strong financial performance on both the one and two year stack, as we began lapping more difficult comparisons.
In the quarter, we delivered comparable store sales growth of 5.8% and adjusted operating income margin of 11.4%, an increase of 11 basis points versus 2020.
As a reminder, we lapped a highly unusual quarter from 2020 where we significantly reduced hours of operation and professional delivery expenses reflective of the channel shift from pro to DIY.
As we anticipated, the professional business accelerated in Q2 2021, and between our ongoing strategic initiatives and additional actions, we expanded margins.
Our actions offset known headwinds within SG&A and an extremely competitive environment for talent.
On a two-year stack, our comp sales improved 13.3% and margins expanded 227 basis points compared to Q2 2019.
Adjusted diluted earnings per share of $3.40 increased 15.3% compared to Q2 2020 and 56.7% compared to 2019.
Year-to-date, free cash flow more than doubled, which led to a higher than anticipated return of cash to shareholders in the first half of the year, returning $661.4 [Phonetic] million through a combination of share repurchases and quarterly cash dividends.
Our sales growth and margin expansion were driven by a combination of industry-related factors as well as internal operational improvements.
On the industry side, the macroeconomic backdrop remained positive in the quarter as consumers benefited from the impact of government stimulus.
Meanwhile, long-term industry drivers of demand continued to improve.
This includes a gradual recovery in miles driven along with an increase in used car sales, which contributes to an aging fleet.
While we delivered positive comp sales in all three periods of Q2 our year-over-year growth slowed late in the quarter as we lapped some of our highest growth weeks of 2020.
Our category growth was led by strength in brakes, motor oil and filters, with continued momentum in key hard part professional categories.
Regionally, the West led our growth benefiting from an unusually hot summer, followed by the Southwest, Northeast and Florida.
To summarize channel performance, we saw double-digit growth in our professional business and a slight decline in our DIY omnichannel business.
To understand the shift in our channel mix, it's important to look back at 2020 to provide context.
Beginning in Q2, we saw abrupt shifts in consumer behavior across our industry due to the pandemic, resulting from the implementation of stay-at-home orders.
This led to more consumers repairing their own vehicles, which drove DIY growth.
In addition, our DIY online business surged as many consumers chose to shop from home and leverage digital services.
Finally, as we discussed last year, our research indicated that large box retailers temporarily deprioritized long tail items, such as auto parts, in response to the pandemic.
These and other factors resulted in robust sales growth and market share gains for our DIY business in 2020.
Contrary to historical trends, the confluence of these factors also led to a slight decline in our professional business in Q2 2020.
As we began to lap this highly unusual time, we leveraged our extensive research on customer decision journeys.
This enabled us move quickly as customer shifted how they repaired and maintained their vehicles.
Our sales growth and margin expansion in Q2 demonstrates the flexibility of our diversified asset base as we adapted to a very different environment in 2021.
Specific to our professional business, we began to see improving demand late in Q1 2021, which continued into Q2, resulting in double-digit comp sales growth.
This is directly related to the factors just discussed, along with improved mobility trends as more people returned to work and miles driven increased versus the previous year.
Strategic investments are strengthening our professional customer value proposition.
It starts with improved availability and getting parts closer to the customer as we leverage our dynamic assortment machine learning platform.
Within our Advance Pro catalog, we saw improved key performance indicators across the board including, more online traffic, increased assortment and conversion rates and ultimately growth in transaction counts and average ticket.
We also continued to invest in our technical training programs to help installers better serve their customers.
Our TechNet program is also performing well as we continue to expand our North American TechNet members, providing them with a broad range of services.
Each of these pro-focused initiatives have been a differentiator for Advance, enabling us to increase first call status with both national strategic accounts and local independent shops.
Finally, we're pleased that through the first half of the year, we added 28 net new independent Carquest stores.
We also announced the planned conversion of an additional 29 locations in the West as Baxter Auto Parts joins the Carquest family.
We're excited to combine our differentiated pro customer value proposition with an extremely strong family business, highlighted by Baxter's excellent relationships with their customers in this growing market.
In summary, all of our professional banners performed at or above our expectations in Q2, including our Canadian business, despite stringent lockdowns.
Moving to DIY omnichannel, our business performed in line with expectations, considering our strong double-digit increases in 2020.
While Q2 DIY comp sales were down slightly, DIY omnichannel was still the larger contributor to our two-year growth.
DIY growth versus a year ago gradually moderated throughout the quarter as some consumers returned to professional garages.
Within DIY omnichannel, we saw a shift in consumer behavior back to in-store purchases, consistent with broader retail.
We've also been working to optimize and reduce inefficient online discounts.
These factors along with highly effective advertising contributed to an increase in our DIY in-store mix and a significant increase in gross margins versus prior year.
We remain focused on improving the DIY experience to increase share of wallet through our Speed Perks loyalty platform.
We made several upgrades to our mobile app to make it easier for Speed Perks members to see their status and access rewards.
We continue to see positive graduation rates among our existing Speed Perks members.
In Q2, our VIP membership grew by 8% and our Elite members representing the highest tier of customer spend, increased 21%.
Shifting to operating income, we expanded margin in the quarter on top of significant margin expansion in Q2 2020.
This was led by our category management initiatives, which drove strong gross margin expansion in the quarter.
First, our work on strategic sourcing remains a key focus as consistent sales growth over several quarters resulted in an increase in supplier incentives.
Secondly, we've talked about growing own brands as a percent of our total sales.
This has been a thoughtful and gradual conversion and we began to see the benefits of several quarters of hard work in Q2.
This was highlighted by our first major category conversion with steering and suspension, where we saw extremely strong unit growth for our high margin Carquest premium products.
In addition, the CQ product is highly regarded by our professional installers.
With consistent high level of quality standards, they are now delivering lower defect rates and improved customer satisfaction.
We also recently celebrated the one-year anniversary of the DieHard battery launch.
Following strong year one share gains in DIY omnichannel, we've now extended DieHard distribution into the professional sales channel, where we're off to a terrific start.
Further expansion of the DieHard and Carquest brands is planned for other relevant categories.
In terms of strategic pricing, we significantly improved our capabilities, leveraging our new enterprise pricing platform.
This platform enabled us to respond quickly as inflation escalated beyond our initial expectations for the year.
Moving to supply chain, while we're continuing to execute our initiatives, we faced several unplanned, offsetting headwinds in Q2.
Like most retailers, we experienced disruption within the global supply chain, wage inflation in our distribution centers and an overall shortage of workers to process the continued high level of demand.
In addition, our suppliers experienced labor challenges and raw material shortages.
Despite a challenging external environment, we continue to execute our internal supply chain initiatives.
This includes the implementation of our new Warehouse Management System or WMS, which we're on track to complete in 2022.
In the DCs that we've converted, we're delivering improvements in fill rates, on-hand accuracy, and productivity.
The implementation of WMS is a critical component of our new Labor Management System or LMS. Once completed, LMS will standardize operating procedures and enable performance-based compensation.
We also continue to execute our Cross Banner Replenishment or CBR initiative, transitioning stores to the most freight logical servicing DC.
In Q2, we converted nearly 150 additional stores and remain on track with the completion of the originally planned stores by the end of Q3 2021.
In addition to CBR, we're on track with the integration of Worldpac and Autopart International, which is expected to be completed early next year.
Shifting to SG&A, we lapped several cost reduction actions in Q2 2020, which we knew we would not replicate in 2021.
We discussed these actions on our Q2 call last year, primarily a reduction in delivery costs as a result of a substantial channel mix shift along with the reduction in store labor costs at the beginning of the pandemic.
Jeff will discuss these in more detail in a few minutes.
In terms of our initiatives, we continue to make progress on sales and profit per store.
Our team delivered sales per store improvement and we remain on track to reach our goal of $1.8 million average sales per store within our timeline.
Our profit per store is also growing faster than sales per store, enabling four wall margin expansion.
In addition to the positive impacts of operational improvements we've implemented to drive sales and profit per store, we've also done a lot of work pruning underperforming stores and we're back to store growth.
In the first half of the year, we opened six Worldpac branches, 12 Advance and Carquest stores and added 28 net new Carquest independents, as discussed earlier.
We also announced the planned conversion of 109 Pep Boys locations in California.
We're very excited about our California expansion with the opening of our first group of stores scheduled this fall.
The resurgence of the delta variant has resulted in some construction related delays in our store opening schedule.
We expect to complete the successful conversion of all stores to the Advance banner by the end of the first quarter 2022.
Finally, we are focused on reducing our corporate and other SG&A costs, including a continued focus on safety.
Our total recordable injury rate decreased 19% compared to Q2 2020 and 36% compared to Q2 2019.
We're also finishing up our finance ERP consolidation, which is expected to be completed by the end of the year.
Separately, we are in the early stages of integrating our merchandising systems to a single platform.
Both of these large scale technology platforms are expected to drive SG&A savings over time.
The last component of our SG&A cost reduction was a review of our corporate structure.
In terms of the restructuring of our corporate functions announced earlier this year, savings were limited in Q2 due to the timing of the actions.
We expect SG&A savings associated with the restructure beginning in Q3.
In summary, we're very pleased with our team's dedication to caring for our customers and delivering strong financial performance in Q2.
We're optimistic as the industry-related drivers of demand continue to indicate a favorable long-term outlook for the automotive aftermarket.
We remain focused on executing our long-term strategy to grow above the market, expand margins and return significant excess cash back to shareholders.
Now let me pass it to Jeff to discuss more details on our financial results.
In Q2, our net sales increased 5.9% to $2.6 billion.
Adjusted gross profit margin expanded 239 basis points to 46.4%, primarily as a result of the ongoing execution of our category management initiatives, including strategic sourcing, strategic pricing and own brand expansion.
We also experienced favorable inventory-related costs versus the prior year.
These benefits were partially offset by inflationary costs in supply chain and unfavorable channel mix.
In the quarter, same SKU inflation was approximately 2% and we expect this will increase through the balance of the year.
We're working with our supplier partners to mitigate costs where possible.
Year-to-date, gross margin improved 156 basis points compared to the first half of 2020.
As anticipated, Q2 adjusted SG&A expenses increased year-over-year and were up $109 million versus 2020.
This deleveraged 228 basis points and was a result of three primary factors.
First, our incentive compensation was much higher than the prior year, primarily in our professional business as we lapped a very challenging quarter in 2020 when pro sales were negative.
Second, we experienced wage inflations beyond our expectations in stores.
We remain focused on attracting, retaining and developing the very best part people in the business and we'll continue to be competitive.
We expect both headwinds to continue in the back half of the year.
Third, and as expected, we incurred incremental costs associated with professional delivery and normalized hours of operations when compared to Q2 2020.
These increases in Q2 were partially offset by a decrease in COVID-19 related expenses to approximately $4 million compared to $15 million in the prior year.
As a result of these factors, our SG&A expenses increased 13.3% to $926.4 million.
As a percent of net sales, our SG&A was 35% compared to 32.7% in the prior year quarter.
Year-to-date, SG&A as a percent of net sales improved 88 basis points compared to the first half of 2020.
While we've seen a decrease in COVID-19 related costs year-to-date, the health and safety of our team members and customers will continue to be our top priority.
As the current environment remains volatile and the delta variant remains a concern, we may see increased COVID-19 expenses in the back half of the year.
Our adjusted operating income increased to $302 million compared to $282 million one year ago.
On a rate basis, our adjusted OI margin expanded by 11 basis points to 11.4%.
Finally, our adjusted diluted earnings per share increased 15.3% to $3.40 compared to $2.95 in Q2 of 2020.
Our free cash flow for the first half of the year was $646.6 million, an increase of $338.4 million compared to last year.
This increase was driven in part by our operating income growth along with continued momentum in our working capital initiatives.
Our capital spending was $58.7 million for the quarter and $129.6 million year to-date.
We expect our investments to ramp up in the back half of the year.
And in line with our guidance, we estimate we will spend between $300 million and $350 million in 2021.
Due to favorable market conditions along with our improved free cash flow in Q2, we returned nearly $458 million to our shareholders through the repurchase of 2 million shares at an average price of $197.52 and our recently increased quarterly cash dividend of $1 per share.
We're pleased with our performance during the first half of the year and moving into the first four weeks of Q3 on a two-year stack, our comparable store sales are in line with Q2.
We're continuing to monitor the COVID-19 situation as well as other macro factors, which may put pressure on our results, including, inflationary cost in commodities, wages and transportation.
Based on all these factors, we are increasing our full year 2021 guidance ranges, including net sales in the range of $10.6 billion to $10.8 billion, comparable store sales of 6% to 8% and adjusted operating income margin of 9.2% to 9.4%.
As you heard from Tom on our new store openings, we've encountered some delays in the construction process of converting Pep Boys stores, primarily permitting and obtaining building materials related to the ongoing pandemic.
As a result, we're lowering our guidance range and now expect to open 80 to 120 new stores this year.
Additionally, given the improvement of our free cash flow and our accelerated share repurchases in the first half of the year, we are also increasing our guidance for free cash flow to a minimum of $700 million and an expected range for share repurchases of $700 million to $900 million.
We remain committed to delivering against our long-term strategy as we execute against our plans to deliver strong and sustainable total shareholder return.
| advance auto parts q2 adjusted earnings per share $3.40.
q2 adjusted earnings per share $3.40.
q2 sales $2.6 billion versus refinitiv ibes estimate of $2.64 billion.
q2 same store sales rose 5.8 percent.
increased full year 2021 guidance.
|
During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin and free cash flow.
To ensure our disclosures are consistent, these slides will provide the same details as they have historically, and as I've said, are available on the Investor Relations section of our website.
With these formalities out of the way, I'm joined today by Steven Gunby, our president and chief executive officer; and Ajay Sabherwal, our chief financial officer.
Always have to remember to take off from you, Mollie.
My guess is many of you, like me, are extraordinarily happy to see 2020 behind us.
I think also many of us realized that some elements of 2020 are not yet fully behind us.
The COVID cases are coming down from the extraordinary levels that we saw over the holidays.
But of course, they're not down to zero chance, and there's still a lot of it around.
We have vaccines, but they're not yet in each of our arms.
And I guess most important, the disruption that COVID-19 has caused to our businesses, our personal lives and society more broadly, obviously, remain.
Having said that, I think we all see some light at the end of this tunnel and I, for one, am so, so grateful to see that.
Today, I have two messages about our company.
The first is that I am, and I hope you are, incredibly impressed by how our company has weathered this unprecedented set of challenges of 2020 and continue to do so thus far in 2021.
And the second is to suggest that the resilience shown in 2020 further underscores my condition in the tremendous power of this company and just how bright our future is coming out of COVID.
Our teams did an incredible job.
Keeping our people safe, keeping their family safe, supporting each other and our families through that challenging year, all while delivering for clients in unprecedented ways, in critical ways from home.
As a result of those efforts, even in the face of those challenges, we won and delivered on some of the most important assignments in our company's history.
We built our brand.
While maintaining incredible morale around the firm, we promoted terrific people.
We attracted more great people to FTI.
And through all that, we delivered solid financial results, even while parts of our business faced unprecedented challenges.
With respect to the financial results, I'm going to leave most of the discussion to Ajay, but let me talk about why I use the word solid.
Some folks could look at the $5.99 of adjusted EBITDA -- sorry, the adjusted earnings per share for 2020 and point out, it's another record year, another record year of adjusted earnings per share for the company.
In truth, when you unpack it, and Ajay will unpack it a bit further, I think it's more appropriately viewed as a solid performance.
As you know, there are a bunch of things in any quarter that can play out one way or another like taxes or success fees.
In the fourth quarter, those items played out positively in a much bigger way than we typically have -- when we typically see.
If you adjust for that, you don't see it as a record year but rather a solid year.
And I think that's a better way to look at it.
Because if you look at some of the underlying factors, it's also, I think, a solid year.
We grew, but we grew less fast than we had hoped to at the beginning of the year, but we grew less than the headcount we added.
Adjusted EBITDA, which you know we've been growing over time, this year, it was really flat.
So I think a solid year is a more appropriate description of 2020.
But another way to look at it, and I think this is an important part, but we had a solid year.
For example, we grew in the face of COVID.
A solid year in a year when some parts of our business had unprecedented challenges.
Some parts of our business were close to shutdown for parts of the year.
And importantly, we drove those solid results without short changing our future, in fact, while supporting and investing for the future of this company.
We didn't risk teams that were facing slow periods.
We continue to attract great people, develop our people, retain terrific talent.
We made both organic and inorganic investments.
We didn't cut headcount in the face of COVID.
We increased our billable headcount by 14.5%.
We seized the opportunity created by disruptions in the market to attract 36 terrific SMDs laterally.
We didn't make those investments to bolster our profitability this year on the short term.
As we talked about in the past, most investments like that in professional services cost you in the short term.
We made them because we believe they, like the prior investments we made, build our business and will build their business for the next many years.
And we made those investments because we could.
Because the investments we had made in prior periods had given us a strength that allowed us to have the wherewithal to invest at a time when others we're not so fortunate.
Those moves, those investments, that support for the great core team of FTI in my position, in my opinion, position us extremely well for the period coming out of COVID.
You could ask other challenges ahead -- of course, they're a challenge ahead.
I think we all know them.
I've never seen a world with more uncertainty, with more disruption, whether it's economic uncertainty, credit uncertainty or political uncertainty.
You can point to lose money out there and government interactions that are dampening restructuring activity, you can look at the fact that there are new variants of the coronavirus that could accelerate cases conceivably, and we can all point to stress and uncertainty in the global political world.
But to me, if this year proves anything about our company, it is the incredible resilience of our business and our people, our ability to thrive through a myriad of challenges over any medium term.
A few quarters ago, we had some businesses that had record low utilization and were, for the first time ever, not profitable.
In those circumstances, you always have some people question, oh, should we do layoffs?
Will these businesses ever come back?
We thought those were great businesses with great people, and we continue to support them.
And now just two to three quarters later, that confidence in this business is being rewarded.
The efforts of the people in those businesses that they made to stay relevant to clients, connected to critical issues, connected to their people, not only resulted in those businesses coming back, but as a result of us being involved in critical matters and our backlogs up dramatically from where they were just a few quarters ago.
This past year confirms for me lessons I've learned over many years in professional services, which in times of difficulty, if you avoid focusing on the quarter, avoid overreacting, but rather concentrate on aggressively building positions around the most important market needs, attracting and supporting the best professionals, you can use that period to help build an institution that's a powerful growth engine.
Perhaps not in that quarter or the next one, but for years to come.
An institution that great professionals want to be part of, that they want to help grow and an institution that creates economic value for those committed employees and for shareholders.
That is what we have been doing in these last years.
It has led to some quarters, some quarters with down results, and some years with only solid results.
But it's also led to years where we can deliver the highest employee engagement scores and the lowest turnover ever.
We can invest in important initiatives for the future of this company, like diversity, inclusion and belonging and corporate citizenship.
It allows us to continue to attract great talent.
I think it's not generally known that two-thirds of our SMDs in this firm today either joined the firm or were promoted in during my six years.
And it allows you to win more big impactful cross-segment jobs in more places than ever before.
Ultimately, those sorts of investments allow you to build a better, stronger, more attractive vibrant institution, which ultimately then also allows you to deliver a lot of shareholder value.
For example, as many of you know, we've more than doubled the market cap of this company over the last few years.
I so look forward to continuing that journey, hopefully, with each of you in the years ahead.
I'll begin with some highlights for the year.
Revenues of $2.461 billion increased $108.6 million or 4.6%.
GAAP earnings per share of $5.67 compared to GAAP earnings per share of $5.69 in 2019.
Adjusted earnings per share of $5.99 compared to adjusted earnings per share of $5.80 in 2019.
As Steve mentioned, our GAAP and adjusted earnings per share included a significant tax benefit that boosted full-year 2020 earnings per share by $0.30.
And adjusted EBITDA of $332.3 million was down from $343.9 million in 2019.
Our performance this year is the result of the breadth of our service offerings and the continued investments we have made for future growth.
The global pandemic boosted demand for our restructuring services.
Though such demand peaked in the second quarter as governments increased liquidity and placed moratoriums on insolvency proceedings.
Conversely, in the second half of the year, increase in liquidity spurred M&A activity, creating more demand for our Economic Consulting and Technology segments as well as our transactions practice within our Corporate Finance & Restructuring segment.
Undeterred by the impact of the pandemic on co-closures and travel, which especially hurt our Forensic and Litigation Consulting or FLC segment, we continue to invest in growth.
In 2020, our total billable headcount for the company grew 14.5%, on top of the 17.8% growth in 2019.
Lower SG&A expenses from the constraints on travel and entertainment and lower weighted average shares outstanding or WASO from share buybacks also boosted 2020 EPS.
Overall, given the challenging year, we are very pleased with these results.
Now I will turn to fourth-quarter results, which exceeded our expectations.
For the quarter, revenues of $626.6 million increased $24.4 million or 4%.
GAAP earnings per share of $1.57 compared to $0.76 in the prior-year quarter.
Noteworthy during the quarter, we recorded an $11.2 million tax benefit from the use of foreign tax credits in the United States and a deferred tax benefit arising from an intellectual property license agreement between our U.S. and U.K. subsidiaries, which boosted both GAAP earnings per share and adjusted earnings per share by $0.32 for the quarter.
Additionally, the impact of lower WASO from share repurchases increased earnings per share by $0.11.
Adjusted earnings per share of $1.61, which excludes $0.04 of noncash interest expense related to our 2023 convertible notes compared to adjusted earnings per share of $0.80 in the prior-year quarter.
Net income of $55.6 million compared to $29.1 million in the fourth quarter of 2019.
Adjusted EBITDA of $82.3 million or 13.1% of revenues compared to $58.3 million or 9.7% of revenues in the prior-year quarter.
The increase in EBITDA was primarily due to higher revenues in our Corporate Finance & Restructuring, Economic Consulting and Technology segments, which was partially offset by a decline in FLC and lower SG&A expenses due to a true-up of bonuses and lower travel and entertainment expenses.
These increases were only partially offset by higher compensation related to a 14.5% increase in billable headcount.
Now turning to our performance at the segment level for the quarter.
In Corporate Finance & Restructuring, revenues of $219.8 million increased 21.4% compared to Q4 of 2019.
Acquisition-related revenues contributed $19 million in the quarter.
Excluding acquisition-related revenues, the increase was primarily due to higher demand for restructuring services, largely in North America and EMEA as well as higher success fees.
This increase was partially offset by a $7.6 million decline in pass-through revenues due to a decline in billable travel and entertainment expenses.
Adjusted segment EBITDA of $35.4 million or 16.1% of segment revenues compared to $24.8 million or 13.7% of segment revenues in the prior-year quarter.
This increase was due to higher revenues, which was partially offset by an increase in compensation, primarily related to 38.6% growth in billable headcount and higher variable compensation.
Of note, the net year-over-year increase of 461 billable professionals includes continued organic hiring, 147 professionals from the acquisition of Delta Partners and the transfer of 66 professionals from our FLC segment into Corporate Finance, which occurred in the second quarter of 2020.
On a sequential basis, Corporate Finance & Restructuring revenues decreased 7.1% due to the decline in restructuring activity.
This decline was partially offset by a sequential increase in revenues from our transactions-related services.
Moving on to FLC.
Revenues of $127.2 million decreased 15.4% compared to the prior-year quarter.
The decrease was primarily due to lower demand for disputes and investigation services.
Adjusted segment EBITDA of $7.6 million or 6% of segment revenues compared to $17.4 million or 11.6% of segment revenues in the prior-year quarter.
This decrease was primarily due to lower revenues with lower staff utilization, which was partially offset by a decline in SG&A expenses.
Sequentially, FLC revenues increased 6.8% due to higher revenues in North America particularly driven by higher demand for our dispute services.
As with last quarter, we continue to see momentum steadily building with an increase in new matters being opened, the gradual reopening of courts and trial dates getting scheduled, though utilization is still below pre-COVID levels.
Economic Consulting's record revenues of $160.5 million increased 4.9% compared to Q4 of 2019.
The increase in revenues was primarily due to higher demand and realized bill rates for M&A-related and non-M&A-related antitrust services.
Adjusted segment EBITDA of $31.3 million or 19.5% of segment revenues was a record and compared to $17.3 million or 11.3% of segment revenues in the prior-year quarter.
This increase was due to higher revenues, a reduction in our use of external affiliates and lower SG&A expenses.
Sequentially, revenues in Economic Consulting increased 3.5% as we continue to see higher demand for our non M&A-related antitrust services.
In Technology, revenues of $58.6 million increased 13.8% compared to Q4 of 2019.
The increase in revenues was largely due to higher demand for M&A-related second request services and litigation services.
Adjusted segment EBITDA of $10.2 million or 17.3% of segment revenues compared to $7.8 million or 15.1% of segment revenues in the prior-year quarter.
This increase was due to higher revenues, which was partially offset by an increase in compensation.
Lastly, in strategic communications, revenues of $60.5 million decreased 8.8% compared to Q4 of 2019.
The decrease in revenues was primarily due to a $4.8 million decline in pass-through revenues.
Adjusted segment EBITDA of $11.7 million or 19.4% of segment revenues compared to $9.9 million or 14.9% of segment revenues in the prior-year quarter.
This increase was primarily due to a decline in SG&A expenses compared to the prior-year quarter.
Sequentially, revenues in Strategic Communications increased 14.2%, primarily due to higher demand for corporate reputation and public affairs services in the EMEA region.
Now I will discuss certain cash flow and balance sheet items.
Net cash provided by operating activities; of $327.1 million compared to $217.9 million in the prior year.
Free cash flow of $292.2 million in 2020 compared to $175.8 million in 2019.
In 2020, we repurchased 3.3 million of our shares for a total cost of $353.4 million.
In Q4 alone, we repurchased 1.6 million shares at an average price per share of $105.84 for a total cost of $169.2 million.
And throughout 2020, we continue to invest in the business through both organic and inorganic investments, including attracting and developing senior managing directors through lateral hires and promotions and our acquisition of Delta Partners.
Despite using $353.4 million for share repurchases, a 14.5% increase in billable headcount and the acquisition of Delta Partners, we ended the year with our total debt, net of cash, up only $74.4 million compared to December 31, 2019.
Turning to our 2021 guidance.
As usual, we are providing revenues, GAAP earnings per share and adjusted earnings per share guidance for the year.
We estimate that revenues for 2021 will be between $2.575 billion and $2.7 billion.
We expect our GAAP earnings per share which includes estimated noncash interest expense related to our 2023 convertible notes of approximately $0.20 per share to range between $5.60 and $6.30.
We expect full-year 2021 adjusted EPS, which excludes the impact of the noncash interest expense, to range between $5.80 and $6.50.
You may notice that our guidance ranges are slightly wider than previous years.
And the low end of our guidance for adjusted earnings per share is up only slightly compared to our full-year 2020 performance after adjusting for the benefits of our tax strategy.
Our 2021 guidance range is shaped by several assumptions.
Globally, increased liquidity and moratoriums and insolvency have benefited even the most distressed companies.
Such that speculative debt default levels are at a record low.
We expect restructuring activity to be subdued in terms of new defaults, at least through the first half of 2021.
However, we believe that, eventually, moratoriums will be lifted and there may be limits to liquidity, resulting in an increase in restructuring activity but when such demand surfaces or to what extent is uncertain.
Conversely, we see the current backdrop of strong M&A activity continuing to favorably impact our Economic Consulting, Technology and Strategic Communications segments as well as our transactions business within our Corporate Finance & Restructuring segment.
We have also invested significantly in capacity in our business transformation and transactions businesses where we believe we have enormous growth potential.
The segment which was most impacted by COVID-19 in 2020 was FLC.
We're already seeing a recovery, albeit slow, and our current expectations are that we will continue to gain momentum.
We expect a higher effective tax rate in 2021.
We currently expect our full-year 2021 tax rate to range between 23% and 26%, which compares to 19.7% in 2020.
And we expect SG&A to gradually increase through the year as the pandemic eases.
Before I open the call to questions I, like Steve, would like to express my gratitude to our employees for their performance in 2020 in the face of COVID-19 and to our shareholders and clients for their continued support.
And now I'll close my remarks today by emphasizing a few key themes.
First, our business is resilient.
Because of our diverse mix of services, which uniquely positions us to help our clients as they navigate their most complex business challenges, regardless of business cycle.
Second, our business is strong, not only in North America, but also globally, our capacity to serve our clients in multiple jurisdictions is one of our distinct competitive advantages.
Both our EMEA and Asia Pacific regions had record revenues in 2020.
Our CAGR for revenues in EMEA since 2017 is a 23.9%.
As Steve said, we succeed by building positions around the most important market needs and attracting and supporting the best professionals.
Third, our leadership team remains focused on growth with strong staff utilization.
And finally, our business generates excellent free cash flow, and our balance sheet is exceptionally strong.
We have the capability to continue to boost shareholder value through share buybacks, organic growth and acquisitions when we see the right ones.
| q4 earnings per share $1.57.
q4 revenue $626.6 million versus refinitiv ibes estimate of $617.6 million.
sees fy 2021 adjusted earnings per share $5.80 to $6.50.
sees fy 2021 earnings per share $5.60 to $6.30.
q4 adjusted earnings per share $1.61 excluding items.
|
I'm joined today by Tom Greco, our President and Chief Executive Officer; and Jeff Shepherd, our Executive Vice President and Chief Financial Officer.
As always, we hope that you and your families are healthy and safe.
Their continued dedication to provide outstanding service to our customers allowed us to deliver another quarter of top line sales growth, adjusted margin expansion and a double-digit increase in earnings per share.
We've been investing in both our team and our business over multiple years to transform and better leverage Advance's assets.
In Q3, this helped enable us to comp the comp on top of our strongest quarterly comparable store sales growth of 2020.
Specifically, we delivered comp store sales growth of 3.1%, while sustaining an identical two-year stack of 13.3% compared with Q2.
As expected, this was led by the continued recovery of our professional business and a gradual improvement in key urban markets.
By putting DIY consumers and Pro customers at the center of every decision we make, we've been able to respond quickly to evolving needs.
In Q3, this was highlighted by an overall channel shift back to Professional and a return to stores for DIYers.
Within Professional, we're seeing increasing strength in certain geographies, which, like the rest of the country last year as the ongoing return to office of professional workers in large urban markets, catches up with the rest of the country.
Our diversified digital and physical asset base has enabled us to respond rapidly to these changing channel dynamics in the current environment.
In addition, we also delivered significant improvements in our adjusted gross margin rate of 246 basis points, led by our category management initiatives.
Our adjusted SG&A costs as a percentage of net sales were 209 basis points higher as we lapped a unique quarter in Q3 2020.
As we've discussed over the past year, our SG&A costs were much lower than normal in Q2 and Q3 of 2020.
This was due to an unusually high DIY sales mix and actions we took last year during the initial stages of the pandemic, which were not repeated.
Overall, we delivered adjusted operating income margin expansion of 37 basis points to 10.4% versus Q3 2020.
Adjusted diluted earnings per share of $3.21 increased 21.6% compared with Q3 2020 and 31% compared with the same period of 2019.
Our year-to-date adjusted earnings per share are up approximately 50% compared with 2020.
Year-to-date, our balance sheet remains strong with a 19% increase in free cash flow to $734 million, while returning a record $953 million to our shareholders through a combination of share repurchases and quarterly cash dividend.
Consistent with the front half of the year, there were several industry-related factors, coupled with operational improvements, contributing to our sales growth and margin expansion in Q3.
The car park continues to grow slightly.
The fleet is aging and perhaps most importantly vehicle miles driven continue to improve versus both 2020 and 2019.
More broadly, the chip shortage continues to impact availability of new vehicles and is contributing to a surge in used car sales.
This benefits our industry as consumers are repairing and maintaining their vehicles longer.
As we all know, over the last 18 months, the pandemic changed consumer behavior across our industry, which led to a surge in DIY omnichannel growth in 2020, while the Professional business declined.
However, as the economy continues to reopen, with miles driven steadily increasing, our Professional business is now consistently exceeding pre-pandemic levels as discussed last quarter.
Regional performance was led by the Southwest and West.
Category growth was led by brakes, motor oil and filters as miles driven reliant categories improved versus the softer 2020.
We also saw continued strength in DieHard batteries, which led the way on a two-year stack basis.
Each of these categories performed well as a result of the diligent planning between our merchant and supply chain teams, enabling a strong competitive position despite global supply chain disruptions.
At the same time, we experienced challenges in Q3 as we strategically transitioned tens of thousands of undercar and engine management SKUs to own brand.
Importantly, these in-stock positions are now significantly improved and we're confident these initiatives will help drive future margin expansion.
Overall, comp sales were positive in all three periods of Q3, led by Professional.
DIY omnichannel delivered slightly positive comp growth in Q3, while lapping high double-digit growth than the prior year.
Within Professional, we navigated a very challenging global supply chain environment to allow us to say yes to our customers.
The investments we've made in our supply chain, inventory positioning and in our dynamic assortment tool help put us in a favorable position competitively.
We've implemented the dynamic assortment tool in all company-owned US stores as well as over 800 independent locations.
Our MyAdvance portal and embedded Advance Pro catalog continues to be a differentiator for us, while driving online traffic.
Our online sales to Professional customers continues to grow as we strengthen the speed and functionality of Advance Pro.
We remain committed to providing our industry-leading assortment of parts for all Professional customers.
This will help enable us to grow first call status and increase share of wallet in a very fragmented market.
In addition, we expanded DieHard to our Professional customers.
Following a recent independent consumer survey, DieHard stake disclaims as America's most trusted auto battery.
During Q3, we announced a multi-year agreement with our national customer Bridgestone to sell DieHard batteries in more than 2,200 tire and vehicle service centers across the United States.
With this systemwide rollout during Q3, we replaced their previous battery provider, making us the exclusive battery supplier across all Bridgestone locations.
In terms of our independent business, we added 16 net new independent Carquest stores in the quarter, bringing our total to 44 net new this year.
We continue to grow our independent business through differentiated offerings for our Carquest partners, including our new Carquest by Advance banner program, which we announced earlier this month.
As we continue to build and strengthen the Advance brand and our DIY business, Carquest by Advance adds DIY relevance for our Carquest-branded independent partners, while providing incremental traffic and margin opportunities.
We've recently enrolled this new initiative out to our independent partners and look forward to further expansion over time for both new and existing Carquest independents.
Transitioning to DIY omnichannel, comparable store sales were slightly positive in Q3.
As you'll recall, our DIY omnichannel business reported strong double-digit comp sales growth in Q3 2020.
We continue to enhance our offerings and execute our long-term strategy to differentiate our DIY business and increased market share.
In Q3, we continue to leverage our Speed Perks loyalty program as VIP membership grew by 13% and our number of ELITE members, representing the highest tier of customer spend, increased 21%.
Last year, the launch of our Advance Same Day suite of services helped enable a huge surge in e-commerce growth.
This year, as DIYers return to our stores, in-store sales growth led our DIY sales growth.
Part of this was expected due to a planned reduction in inefficient online discounts, which significantly increased gross margins.
Turning to margin expansion.
We again increased our adjusted operating income margin in the quarter.
Like Q2, this was driven by category management actions within gross margin, where our key initiatives played a role.
First, we are realizing benefits from our new strategic pricing tools and capabilities.
Like other companies, we're experiencing higher-than-expected inflation.
However, our team has been able to respond rapidly in this dynamic environment as industry pricing remains rational.
Behind strategic sourcing, vendor income was positive versus the previous year with continued strong sales growth.
Finally, double-digit revenue growth in own brand outpaced our overall growth in the quarter as we expanded the Carquest brand into new category.
Carquest products have a lower price per unit than comparable branded products, which reduced comp and net sales growth in the quarter as expected.
At the same time, the margin rate for own brands is much higher and contributed to the Q3 adjusted gross margin expansion.
Shifting to supply chain.
We continue to make progress on our productivity initiatives.
In Q3, the benefits from these initiatives were more than offset by widely documented disruptions and inflationary pressure within the global supply chain.
As a result, we did not leverage supply chain in the quarter.
We completed the rollout of cross-banner replenishment, or CBR, for the originally planned group of stores in the quarter.
The completion of this milestone is driving cost savings through a reduction in stem miles from our DCs to stores.
Over the course of our implementation, our team identified additional stores that will be added over time.
Secondly, we're continuing the implementation of our new Warehouse Management System, or WMS. This is helping to deliver further improvements in fill rate, on-hand accuracy and productivity.
We successfully transitioned to our new WMS in approximately 36% of our distribution center network as measured by unit volume.
As previously communicated, we follow WMS with a new Labor Management System, or LMS, which drive standardization and productivity.
We are on track to complete the WMS and LMS implementations by the end of 2023 as discussed in April.
Further, our consolidation efforts to integrate WORLDPAC and Autopart International, known as AI, are also on track to be completed by early next year.
This is enabling accelerated growth, gross margin expansion and SG&A savings.
Gross margin expansion here comes behind the expanded distribution of AI's high margin owned brand products, such as shocks and struts, to the larger WORLDPAC customer base.
Finally, as we expand our store footprint, we're also enhancing our supply chain capabilities on the West Coast with the addition of a much larger and more modern DC in San Bernardino.
This facility will serve as the consolidation point for supplier shipments for the Western US and enable rapid e-commerce delivery.
In addition, we began to work to consolidate our DC network in the Greater Toronto area.
Two separate distribution centers, one Carquest and one WORLDPAC will be transitioned into a single brand-new facility that will allow us to better serve growing demand in the Ontario market.
We continue to execute our initiatives, both sales and profit per store along with the reduction of corporate SG&A.
As previewed on our Q2 call, we also faced both planned and unplanned inflationary cost pressure versus the prior year in Q3.
SG&A headwinds include higher than planned store labor cost per hour, higher incentive compensation and increased delivery costs associated with the recovery of our Professional business.
Jeff will discuss these and other SG&A details in a few minutes.
We remain on track with our sales and profit per store initiative, including our average sales per store objective of $1.8 million per store by 2023.
In terms of new locations year-to-date, we've opened 19 stores, six new WORLDPAC branches and converted 44 net new locations to the Carquest independent family.
This puts our net new locations at 69, including stores, branches and independents during the first three quarters.
Separately, we're actively working to convert the 109 locations in California we announced in April.
However, we're experiencing construction-related delays, primarily due to a much slower-than-normal permitting process.
This is attributable to more stringent guidelines associated with COVID-19, which were exacerbated by the surge of the Delta variant.
We now expect the majority of the store openings planned for 2021 to shift into 2022.
As a result, we're incurring start-up costs within SG&A for the balance of the year, while realizing less than planned revenue and income.
The good news is, we remain confident that once converted, these stores will be accretive to our growth trajectory.
The final area of margin expansion is reducing our corporate and other SG&A costs.
We began to realize some of the cost benefits related to the restructuring of our corporate functions announced earlier this year, in addition to savings from our continued focus on team member safety.
In Q3, we saw a 22% reduction in our total recordable injury rate compared with the prior year.
Our lost time injury rate improved 14% compared with the same period in 2020.
Our focus on team member safety is only one component of our ESG agenda at Advance.
Our vision advancing a world in motion is demonstrated by the objective we outlined last April to deliver top quartile total shareholder return in the 2021 through 2023 timeframe.
While delivering this goal, we're also focused on ESG.
As part of this commitment, we launched our first materiality assessment earlier this year to help prioritize ESG initiatives.
During Q3, we completed this assessment and are working to finalize the findings.
The results will be incorporated in our 2021 Corporate Sustainability Report, which we expect to publish in mid-2022.
Before turning the call over to Jeff, I want to recognize all team members and generous customers for their contribution to our recent American Heart Association campaign.
This year, we introduced a new technology solution in stores that allows customers to round up at the point of sale.
This made it even easier for customers to participate and helped us achieve a record-setting campaign of $1.7 million.
The mission of this organization is important to all of us across the Advance family.
In Q3, our net sales increased 3.1% to $2.6 billion.
Adjusted gross profit margin improved 246 basis points to 46.2%, primarily the result of our ongoing category management initiatives, including strategic pricing, strategic sourcing, own brand expansion and favorable product mix.
Consistent with last quarter, these were partially offset by inflationary product and supply chain costs as well as an unfavorable channel mix.
In the quarter, same SKU inflation was approximately 3.6%, which was part of [Phonetic] our plan entering the year and was by far the largest headwind we had to overcome within gross profit.
We're working with all our supplier partners to mitigate costs where possible.
Year-to-date, adjusted gross margin improved 184 basis points compared with the same period of 2020.
As expected, our Q3 SG&A expenses increased due to several factors we discussed earlier in the year.
As a percent of net sales, our adjusted SG&A deleveraged by 209 basis points, driven primarily by labor costs, which included a meaningful cost per hour increase as well as higher incentive compensation compared to the prior year.
In addition, we incurred higher delivery expenses related to serving our Professional customers and approximately $10 million in start-up costs related to the conversion of our California locations in Q3.
Year-to-date, SG&A as a percent of net sales was relatively flat compared to the same period of 2020, increasing 9 basis points year-over-year.
While we've reduced our COVID-19-related costs by $13 million year-to-date, the health and safety of our team members and customers continues to be our top priority.
Our adjusted operating income increased to $274 million in Q3 compared to $256 million one year ago.
On a rate basis, our adjusted OI margin expanded by 37 basis points to 10.4%.
Finally, our adjusted diluted earnings per share increased 21.6% to $3.21 compared to $2.64 in Q3 of 2020.
Compared with 2019, adjusted diluted earnings per share was up 31% in the quarter.
Our free cash flow for the first nine months of the year was $734 million, an increase of 19% versus last year.
This increase was primarily driven by improvements in our operating income as well as our continued focus on working capital metrics, including our accounts payable ratio, which expanded 351 basis points versus Q3 2020.
Year-to-date through Q3, our capital investments were $191 million.
We continue to focus on maintaining sufficient liquidity, while returning excess cash to shareholders.
In Q3, we returned approximately $228 million to our shareholders through the repurchase of 1.1 million shares at an average price of $205.65.
Year-to-date, we've returned approximately $792 million to our shareholders through the repurchase of nearly 4.2 million shares at an average price of $189.43.
Since restarting our share repurchase program in Q3 of 2018, we returned over $2 billion in share repurchases at an average share price of approximately $164.
Additionally, we paid a cash dividend of $1 per share in the quarter totaling $63 million.
We remain confident in our ability to generate meaningful cash from our business and expect to return excess cash to our shareholders in a balanced approach between dividends and buybacks.
As you saw in the yesterday's 8-K filing with the SEC, we recently closed the refinancing of our new five-year revolving credit facility.
The prior facility was set to mature in January 2023.
And the bank markets have returned to pre-pandemic levels, we took the opportunity to secure our liquidity for another five years.
This included improved pricing and terms while also increasing the overall facility size to $1.2 billion.
We have strong relationships with our banks.
And this commitment allows us to secure future financial flexibility.
More details of this facility can be found in our 8-K filings.
Turning to our updated full year outlook.
We are increasing 2021 sales and profit guidance to reflect the positive results year-to-date and our expectations for the balance of the year.
Through the first four weeks of Q4, we're continuing to see sales strength in our two-year stack, remaining in line with what we delivered in the last two quarters.
This guidance incorporates continued top-line strength, ongoing inflationary headwinds and up to an additional $10 million in start-up costs in Q4 related to our West Coast expansion.
As discussed, the construction environment in California remains challenging, resulting in a reduction of our guidance from new store openings and capital expenditures.
As a result, we're updating our full year 2021 guidance to net sales of $10.9 billion to $10.95 billion, comparable store sales of 9.5% to 10%, adjusted operating income margin rate of 9.4% to 9.5%, a minimum of 30 new stores this year, a minimum of $275 million in capex and a minimum of $725 million in free cash flow.
In summary, we're very excited about our current momentum.
We remain focused on the execution of the long-term strategy, while delivering top quartile total shareholder return over the 2021 to 2023 time frame.
| compname reports q3 adjusted earnings per share of $3.21.
q3 adjusted earnings per share $3.21.
q3 sales rose 3.1 percent to $2.6 billion.
q3 same store sales rose 3.1 percent.
sees 2021 capital expenditures of minimum $275 million.
sees fy 2021 comparable store sales growth of 9.5% to 10%.
|
We undertake no duty to update or revise any forward looking statements whether as a result of new information, future events or otherwise.
technologies.com under the link, Investor Relations.
So we're hearing from Chris in a few minutes.
In addition to that, we've got Dave Schatz here with us, who had recently replaced Alyson as our General Counsel.
So before we get into the details of the quarter, I'd like to start off by introducing and welcoming Chris Tucker.
He joined us a few weeks ago as the newest member of our executive management team.
Chris will be serving as Senior Vice President and Chief Financial Officer replacing Gary who previously announced his retirement.
Chris comes to us from Emerson, where he served in numerous financial leadership roles with increasing responsibilities over the years.
He also led their Investor Relations Group for several years.
It's great to join all of you today.
I just wanted to take a minute, give a brief introduction to myself, before we jump into details of the Q2 performance.
As you know, I'm joining ESCO from Emerson, where I spent the last 24 years of my career.
Emerson is a great company and I'd a great experience there.
I started off in the Corporate Accounting and Finance team back in 1997 and finished up as the Group CFO for one of the few business platforms.
And of course, there were several important stops in between those two bookends.
During my time there I had a chance to work on a variety of operational issues, business development opportunities and overall value creation strategies.
I also lead the Investor Relations efforts for a few years during my tenure there, which was a good bit of training for calls like we're doing right now.
My prior experiences have put me in a strong position as I transitioned to this new role.
I'm very excited to be part of this team here at ESCO.
Gary has been extremely helpful as we've worked together over the last few weeks and everyone from the corporate staff, to the Board of Directors has been collaborative and great to work with.
ESCO is really great company and has a lot of exciting initiatives going on really across all the businesses.
I'm excited to be here and start building on Gary's legacy of strong financial leadership as we move into the future.
We'll look forward to working with you.
I'd be remiss, if I didn't mention today's COVID environment.
And how we continue manage and around this impact, on our aerospace consulting businesses.
I think our results demonstrate we're succeeding.
Since beginning of the pandemic, our primary goal is remain the same.
Provide a safe working environment and protect the health of our employees.
And today, we're really encouraging our staff to fully vaccinated, for the benefit of all.
Our solid operating results in Q2 and for the first six months of the year, coupled with our increasing liquidity, demonstrate that the measures we've taken over the past 12 months have significantly mitigated COVID impact on earnings.
And I believe will it allow us to continue successfully navigating through this challenge.
Our previous cost reduction actions, along with our enhanced focus on operational efficiency will benefit ESCO going forward as things continue to move forward in more normal state.
And I'm confident that our disciplined approach to operating business will result in continued success, throughout the balance of the year.
While Gary will provide the financial details, I'll offer some top level commentary to set the tone.
Our Q2 and year-to-date, AMD sales were significantly lower than prior year, due to COVID impact at commercial aerospace.
Our portfolio diversity allowed us to mitigate this headwind, as we're able to hold our ESCO consolidated adjusted EBITDA constant at $31 billion in Q2, compared to pre-COVID Q2 results from last year.
Additionally, we were able to increase our fiscal 21 year-to-date adjusted EBITDA and adjusted earnings per share from a prior year, despite a 6% decrease in sales.
This improvement is delivered by solid contributions from other operating units and as a result of favorable sales mix, and meaningful cost reductions across the company.
From the segment level, there are several positives to report.
Within AMD we're seeing signs of recovery in commercial aerospace.
This past year board is continued increase, and more airlines are adding idle aircraft back into service.
Our navy and space businesses remain strong and well funded.
And our outlook for, near-term growth opportunities continue to materialize in both of these areas.
Our test business continues to outperform, as we saw sales growth in both Q2 and year-to-date, with increasing margins, as our project execution remained solid.
We expect this outlook remain positive, driven by the strength of the serve markets, including 5G.
our USG business are reporting a solid for Q2 than originally projected report a solid first half of the year, from both the sales and adjusted EBIT perspective.
USD delivered an adjusted EBITDA margin of 26% for the first six months of the year, up from approximately 22% in the prior year's first half.
This is a result of year-end spending cash in our first quarter, along with our lower cash and cost base.
Overall, the fundamentals of our portfolio are strong, and our goal remains the same to create long-term shareholder value.
As we continue navigating through what we hope, is the near-end of COVID.
Our number one financial priority remains the same, increasing and maximizing our liquidity to position us for future M&A growth, and increased investment in new products and solutions.
We have a rock solid balance sheet today.
And we are poised to use it to our advantage.
I'll highlight the significant cash we've generated this year, as we've set a record for cash flow during the first half is the highest in our history.
We delivered free cash flow conversion at 134% of net earnings for the first six months.
Clearly our working capital initiatives are producing solid results.
Today, we have approximately $760 million of liquidity at our disposal between cash on hand and available credit capacity, while carrying a modest leverage ratio 0.23.
We fully realize that while this is a positive metric, it is not the ideal capital structure given the historically low cost of debt, and with that said, we're committed to putting our balance sheet to work.
One of our primary objectives in the near-term is to add leverage to fund acquisitions, with our focus directed at bringing on new businesses that provide an ROIC well in excess of our cost of capital.
As we believe this return spread is a cornerstone of value creation.
In the release, we call about a couple of discrete items, which are described in detail and are excluded from the calculation of adjusted EBITDA and adjusted earnings per share in both years presented, so I will not repeat them here.
I'll now touch on a few comparative highlights noted in the release.
We beat the consensus estimate of $0.55, as we reported Q2 adjusted earnings per share of $0.59 cents of share.
This compares to $0.68 of share in the prior year Q2.
Considering Q2 of this year was influenced by the COVID operating environment, I'm pleased to report that we've delivered adjusted EBITDA of $31 million in the current period, which is equal to the $31 million we reported last year in Q2 pre-COVID.
More impressively, this was achieved despite the noted sales decline in Q2 that Vic mentioned earlier.
Our Q2 adjusted EBITDA margin increased at 19% from 17% last year.
Year-to-date our adjusted EBITDA increased over $60 million with an 18% margin up from 17% prior year today.
Over the past year, we took several cost reduction actions across the company, and as a result, we were able to increase our Q2 and year-to-date gross margins to 38.1% and 38.7%, respectively.
We reduced our Q2 and year-to-date SG&A spending by 3% in both Q2 and year-to-date periods compared to prior year.
These favorable outcomes were achieved, despite including the acquisition of ATM in October, which has not yet at full operating capacity during its transition to Crissair.
And it was done despite our continued spending on R&D, and new product development.
Amortization of intangibles and interest expense both decreased, while tax expense as a percent of pre-tax income increased in Q2 and the first half as we had several large tax strategies implemented last year, which benefited the 2020 competitive rates, but were not repeated in the current year.
Q2 orders were solid as we booked $176 million in new business and ended the quarter with a backlog of $522 million with a book-to-bill of 106%.
A bright spot worth mentioning was the order volumes recorded in our commercial aerospace businesses, which grew their backlog $7 million during the quarter.
As we move through the balance of the year, I'll remind you that our DoD businesses led by our participation on the Block V contract for additional Virginia class submarines, where we booked several large orders during fiscal 2020 will be delivering products against those orders, which are multi-year programs, which will mathematically reduce the optics of our book-to-bill.
Consistent with our November communications and from a directional perspective, we can point to several areas where we see positive momentum.
Our commercial aerospace and utility end markets are showing some degree of customer stabilization, which supports our current outlook suggesting a movement toward continue to recover in the second half of fiscal 2021.
The increasing distribution of the COVID-19 vaccine is anticipated to benefit and accelerate the recovery of commercial air travel and utility spending, with customers resuming more normal buying patterns.
While we solidly beat Q2, and are ahead of our original plan at the halfway point, we still expect the second half of 2021 to be slightly favorable in comparison to the second half of fiscal 2020, given the various elements of recovery that we are anticipating.
We expect to show growth in fiscal 2021 adjusted EBITDA, adjusted earnings per share as compared to fiscal 2020.
With an adjusted EBITDA reasonably consistent with that was which was reported in 2019.
If we complete any additional acquisitions during the year, it is expected that these would contribute to the expectations I've just mentioned.
Since that touched on quite a few of my thoughts or my commentary I'll offer a few qualitative comments about our end markets and our expectations for the balance of the year.
Starting with our A&D segment, as I mentioned, we're seeing some signs of modest recovery in commercial aerospace.
We expect continued softness over the next three months.
We're starting to see stabilization in the OEM build rates and increase in airline passenger traffic and flight miles.
Just as we saw in Q1, the defense portion of our A&D business is and will remain strong for the foreseeable future, given our backlog and platform positions.
We also see the current situation, the aerospace market as an opportunity for ESCO, as we've been made aware of some situations where other suppliers or competitors are not fulfilling their customer requirements.
And those customers have reached out to us to see if we can step down and satisfy their demands.
Our Test business delivered another really solid quarter by beating our internal expectations and delivering the EBIT margin of 13%.
Test outlook remained solid, given the diversity of its serve markets.
As I noted on the previous call, when USG had a really strong first quarter, we expected USG sales to be down in Q2, before returning to more normal levels in the second half of the year.
And that's what we've seen.
But the positive is increased margin contribution USG delivered in Q2 in year-to-date compared to prior year.
We've recently visited with our USG management teams and I remain pleased with the enthusiasm surrounded their new products and solutions, and we continue to see energies and markets improving as the investments in renewable energy are increasing in both wind and solar.
Our solar revenues have been growing far better than anticipated, and we expect that trend to continue.
Moving on M&A, we continue to evaluate several opportunities and we expect to take action on these opportunities to grow our businesses as we have in the past.
Our board is extremely supportive of our M&A strategy and our current balance sheet provides us with plenty of liquidity to allow us to add to our existing business.
To wrap up, we delivered a solid second half and first quarter from both the cash flow and earnings standpoint.
As we move through the second half of our fiscal 2021, Our plan is to continue to focus on the fundamentals and look for opportunities to leverage our existing cost structure through M&A, to create additional operating efficiencies, ensure we're well positioned for long-term success.
So with that, I'll be happy to take any questions.
| q2 adjusted earnings per share $0.59 excluding items.
continues to see tangible signs of recovery that point to a solid outlook for back half of year.
esco technologies - second half of 2021 is expected to compare favorably to second half of 2020 given anticipated elements of recovery.
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technologies.com under the link, Investor Relations.
With the ongoing challenges from COVID, we continue to see great efforts and contributions from everyone across the Company, and for that, I'm very appreciative.
Since the beginning of the pandemic, our primary goals remain the same, provide a safe working environment and protect the health of our employees and today we continue to encourage our staff to get fully vaccinated for the benefit of everyone.
There were a few challenges in the third quarter, but overall, the Company continues to perform well.
Cash generation year-to-date has been excellent.
We have teams focused on the working capital initiatives around the Company and there is still room for improvements as we move forward.
This will be a long-term value creation tool for ESCO.
Our previous cost reduction actions, along with our enhanced focus on operational efficiency will benefit ESCO going forward as our end markets continue moving toward a more normalized level of activity and I'm confident that our disciplined approach to operating the business will result in continued success as we move into fiscal 2022.
While Chris will provide the financial details, I'll offer some top level commentary to set the tone.
While our year-to-date A&D sales continue to be lower than prior year due to COVID's impacts on commercial aerospace, our portfolio diversity allowed us to mitigate this headwind as our year-to-date consolidated adjusted EBITDA margins are only down slightly compared to prior year-to-date margins.
This performance was driven by solid contribution from our other operating units as a result of a favorable sales mix and meaningful cost reductions across the Company.
From a segment level, there are several positives to report.
Within A&D, we're seeing signs of recovery in the commercial aerospace as passenger boardings continue to increase and more airlines are adding idle aircraft back in the service.
Sales from our commercial aerospace customers were still down in the third quarter as a recovery in the sectors have been a bit slower than we anticipated.
US domestic travel has picked up but it's still slightly below 2019 levels.
Those of you who've been to an airport lately are probably surprised, but this is what the TSA statistics show.
It's important to understand that the business travel remains soft and air travel in Europe and overall international travel are still well below 2019 levels.
The good news is that we're starting to see order activity increase in the third quarter and our overall A&D segment orders increased by more than 40% compared to last year's third quarter.
Additionally, our navy and space businesses remain strong and well-funded and our outlook for near-term growth opportunities continue to materialize in both of these areas.
Our test business continues to be steady.
We have a good order input on a global basis and we're actively managing material inflation and transportation issues as they arise.
We expect test outlook to remain positive driven by the strength of the served markets, including 5G, medical and automotive.
Our USG business continues to outperform from a profitability perspective with year-to-date adjusted EBIT margins of 19.4% compared to 15.1% last year.
The renewables business and energy has performed well in 2021, while the orders from billables utility customers have been a bit soft.
We did see sales growth from delve over approximately 8% in the quarter, we have not yet seen demand return to pre-pandemic levels.
We feel great about the long-term outlook for the USG business and are very excited about the announcements today regarding closing two acquisitions.
Our agreement to acquire Altanova had been announced back in May, and we were able to get the deal closed in July 29.
This business brings exciting new product offerings to our USG business and also significantly increases our global footprint.
Additionally, we announced today the purchase of Phenix Technologies.
This is also an exciting business, it further enhances a product offering of our USG Group and provides greater access to the commercial and industrial markets.
We've had initial meetings with the teams for both of these businesses.
I'm very encouraged by the quality of the people and their enthusiasm to join ESCO.
We are confident these will be strong additions to ESCO and USG's portfolio that will drive future sales and earnings growth.
So overall, the fundamentals of our portfolio remain strong.
The second half sales outlook is a bit behind initial projections but orders have started to increase and we feel good about the growth outlook for 2022 and beyond.
I'll start by briefly touching on a few comparative highlights.
Sales in the third quarter grew by 5% with A&D up 1.8%, USG up 12% and Test growing 4.6%.
This has been the first quarter in 2021 where we saw sales growth from all three segments.
Adjusted EBIT margins were 12.7% in the quarter compared to 14.2% in the prior year quarter.
The margin decline was driven primarily by the operational efficiencies and inventory write-offs at Westland.
In the quarter we did become aware of some issues at Westland.
They've experienced several challenges related to new product development programs, which led to increased production cost and product quality issues.
No bad product were sent or billed to customers, but we did have charges recorded in the quarter of $2.1 million and year-to-date charges of $4.4 million.
The first and second quarter charges represent corrections to our previously reported financials and going forward, our 2021 year-to-date numbers will be updated to reflect these amounts.
We have started work immediately to get the production issues fixed into address cost issues within the business.
There are strong synergies between Westland and our Global subsidiary and we have already begun the work to bring these businesses together under one leadership structure.
We have a strong outlook for this business and are committed to driving significant improvements as we move forward.
Adjusted earnings per share came in at $0.67 per share in the quarter below prior year $0.76 per share.
Adjusted pre-tax dollars were down 2.5% compared to prior year Q3 and we had an exceptionally low tax rate in prior year Q3 which further reduced EPS.
Segment highlights in the quarter are as follows, A&D did see a return to sales growth in the quarter.
The Navy business grew by over 20%, which more than offset declines in the commercial aerospace sales of approximately 10%.
While the commercial aerospace sales were down, we did see the rate of decline improve and we are seeing signs that the business is beginning to rebound.
Margins for A&D were down driven by the issues at Westland.
USG saw growth of 12% in the quarter.
The renewables business was very strong.
The Utility business did grow in Q3, but it is not return to pre-pandemic levels adjusted EBIT margins were 18.3% in Q3 compared to 14.8% in the prior year Q3.
The strong improvement is driven by leverage on the sales growth and benefits from prior cost reduction activities.
The test business grew 4.6% in the quarter, continued steady performance from this group, margins were down in the quarter due to mix and timing issues.
Year-to-date, operating cash flows of over 40%.
We continue to see great results from our focus on driving balance sheet improvements, the teams across the Company continue to work multiple strategies for operating capital improvement and the results are very good.
Some programs driving this performance include negotiating performance-based payments, in our A&D and test segments, this has had a significant impact as it oftentimes results in new orders being cash-positive throughout the life of the contract.
Other efforts include adjusting safety stock levels and extending payment terms.
Year-to-date, our adjusted EBITDA was nearly $91 million with a 17.8% margin compared to 18% in the 2020 year-to-date.
Over the past year, we took several cost reduction actions across the Company that have allowed us to hold margins during this down sales environment.
Examples here include closure and consolidation of facilities, the move of manufacturing content to our Mexico facility and ongoing make/buy [Phonetic] programs.
Amortization of intangibles and interest expense decreased while tax expense as a percent of pre-tax income increased in Q3 and year-to-date as we had several tax strategies implemented last year which benefited the 2020 competitive rates.
Orders were a good story in Q3 as entered orders were strong.
We booked $203.8 million of new business in the quarter ended with a backlog of $539 million and a book to bill of 112%.
This represents 29% growth compared to prior year Q3, strength in orders came from all three segments with A&D orders increasing 44%, USG increasing 10% and Test increasing 28%.
As we continue navigating through what we hope is the near end of COVID, our number 1 focus remains the same increasing and maximizing our liquidity to position us for future M&A growth and increased investment in new products and solutions.
We have a strong balance sheet today and are excited about the recent acquisitions that Vic mentioned earlier.
We still have ample capacity for further acquisitions and we obviously continue to invest in the core business to enhance our organic growth profile.
Our significant cash generation this year is a testament to this focus on liquidity.
We have delivered free cash flow conversion at 118% of net earnings for the first nine months.
As mentioned above, we have clear momentum in our working capital initiatives.
I did want to talk for a minute about the Q4 guidance.
In the release we did provide Q4 guidance.
This is the first quarter that has included guidance since COVID began.
The guidance for Q4 is a range of $0.73 to $0.78 per share.
The sales levels in Q4 are key issue as we think about the guidance and this range is predicated on a sales level in the range of $190 million to $200 million.
In the last three months, we have reduced the Q4 sales outlook for the commercial aerospace businesses and also for the utility businesses.
The commercial aerospace backlogs are beginning to build that we see those more drivers for 2022 as opposed to Q4.
For the utility space, we are seeing some growth compared to prior year, but not to the levels we had previously anticipated.
The long-term outlook for both of these markets continues to be positive and we feel good about our positioning as we look toward 2022.
We also want to be clear that this outlook excludes any impact from the acquisitions that were announced today.
We will have sales and earnings impacts from those transactions, but they are not yet quantified and are therefore not included in the guidance that is provided.
Since I touched on quite a few of my thoughts earlier in my commentary, I'll just offer a few more comments before we move into Q&A.
As Chris mentioned, we are a little softer than planned here in the back half of the year for the commercial aerospace and Doble's utility market.
This doesn't change our long-term commitment to these markets.
We feel great about our end market exposure and our diverse portfolio allows us to manage through periods like this.
Outside these markets, we see a lot of growth opportunities in A&D for the military, aerospace, navy and space end markets.
Investments in renewable energy market continue to drive very strong performance for our NRG business and test business seeing a lot of opportunities for telecom, automotive, and medical markets.
We just finished up a Board meeting in Boston last week and during those meetings, we took the time to visit the Doble and Globe operations.
We had a great set of meetings and really exciting interactions with the teams at the operating units.
At Doble, we did a full update of the USG segment.
The team has made great progress updating the product line across the business from renewable focus products at NRG to the new F8 launch Doble.
It's great to see the innovation happen inside that business as our customers start spending again and will be ready to support.
This also provided a chance to update our Board on Phenix and Altanova acquisitions.
So you could first hand see the excitement around these transactions.
After visiting the Doble headquarters, we took the Board to visit the Globe facility.
This was another great visit.
The team at Globe has done an exceptional job driving tremendous growth with the Navy Surface hull treatment product line.
The team has worked very hard to master a difficult manufacturing process.
They really roll and it's fun to see a winning team in action.
We had full couple of days in Boston and accomplishing all of this, but it was time well spent.
So with that, and I think we're ready for some Q&A.
| esco technologies inc - q3 gaap earnings per share $0.57 and adjusted earnings per share $0.67.
q3 gaap earnings per share $0.57 and adjusted earnings per share $0.67.
q3 sales rose 5 percent to $181 million.
sees q4 adjusted earnings per share $0.73 to $0.78.
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We're having a technical difficulty on our end, and we'll be extending the call by 15 minutes to be sure that we make up for any of the lost time.
As the operator said, I'm Lauren Scott, the company's director of investor relations.
Patrick Burke, Callaway's SVP of global finance; and Jennifer Thomas, our chief accounting officer, are also in the room today for Q&A.
We apologize for the late start.
I'm pleased to report another quarter of strong results and look forward to providing more detail around our outlook for the year ahead.
2021 was a pivotal year for Callaway marked by exceptional results significant growth and strong momentum across all our business segments.
We closed on the acquisition of Topgolf in Q1, transforming our company into the unrivaled leader in the modern golf and lifestyle apparel space.
Over the past five years, we've combined a traditional Golf Equipment business with select lifestyle apparel brands and the world's leading tech-enabled Golf entertainment company to deliver a truly differentiated business model.
Amid continued high demand for our Golf Equipment and Lifestyle products.
Our global sales and operations teams worked tirelessly delivering quarter after quarter of impressive results despite significant global COVID-related operating challenges.
The team has proven itself to be an impressive and battle-hardened asset for [Audio gap].
In addition, we've increasingly made key investments in infrastructure and people to support a larger business and to set us up for continued growth and financial success.
Our positive results would not be possible without your dedication and passion for this business.
Our results came in better than expected, led by another quarter of exceptional results from Topgolf and continued high demand for both Golf Equipment and Lifestyle Apparel and Gear.
Total net revenue was $712 million, up 90% year over year, and adjusted EBITDA was $14 million, up $27 million.
Turning to Topgolf, for the quarter, both walk-in traffic and event sales surpassed our expectations, driving same venue sales to an impressive increase of 6% over 2019 levels.
For the full year, same venue sales were approximately 95% of 2019 levels, meaningfully higher than projected and an encouraging and very strong result given the operating environment.
A resurgence in corporate events business drove most of the same venue sales positive surprise in Q4.
Walk-in sales in smaller social events have been strong for some time and continued their trends.
Having said this, as one would expect, in the last week of December and continuing into January, we have seen some softness in same venue sales as the rise in omicron has resulted in a decline in group events and increased short-term staffing challenges.
venues, which experienced omicron impacts approximately a month ahead of our U.S. venues bounce back very quickly and are now once again performing quite well.
This is a good indicator of the resiliency we expect in the U.S. business through the remainder of Q1 and we are already starting to see some signs of this anticipated improvement.
For the first quarter of 2022, we're expecting same venue sales to be down slightly compared to 2019.
And for the full year, we anticipate low single-digit growth over 2019 levels.
New venue openings continued on pace with our 72 Bay Fort Myers, Florida location opening strongly in mid-November.
While we're on venues, I want to remind everyone on the success rate we're consistently delivering here.
We had nine very successful openings in 2021, and the financial performance of this group is on track to exceed our expectations despite the challenging operating environment.
I've had a ringside seat watching Topgolf open venues for nearly 10 years now.
And in my opinion, we are uniquely good here.
As a result of increasing brand strength, competency of our real estate team, and our operating team's expertise, this is now a proven and repeatable model, a fact I believe the financial community may not fully appreciate yet.
For 2022, we are confident in our ability to deliver at least 10 new venues with the potential of adding an 11th in very late Q4.
We're also extremely excited about the lineup for this year, with the first two Southern California locations opening in the Los Angeles area in Q1 and Q2: one in Ontario, which is just east of LA; and the other in El Segundo, near SoFi Stadium.
The El Segundo location is particularly intriguing as is the first venue to include an on-course element.
And in true Topgolf fashion, this will not be your typical golf course.
It will be a 10-hole lighted course perfect for night-time rounds, incorporating elements of entertainment and our Toptracer technology to create a truly unique guest experience.
Additional locations of note include Seattle and Baltimore, both of which will feature our latest premium venue enhancements, as well as Callaway fitting base.
It's important to note that due to the disruption of the development activities in 2020, the timing of this year's venue openings will be heavily weighted toward the back half of the year with five expected to open in Q4.
This timing will impact this year's contribution from new venues.
During [Audio gap] we installed over 1,700 new bays, bringing our total for the year to just under 7,000 new bay installations.
We remain encouraged by continued strong demand and expect to install 8,000 bays or more in 2022.
Lastly, within the Topgolf media business, I'm pleased to announce that we are leveraging our mobile game development expertise from World Golf Tour to launch a new game later this year that caters to the younger, more traditional gamer, whereas existing game focuses more on the traditional golfer.
While we expect the game to have minimal contribution to our financial results in 2022, we believe that it will provide future upside as our community of digital customers continues to grow.
In addition, in due time, we'll integrate this new game into our digital offerings at both our venues and Toptracer ranges, thus driving synergies from our game development capabilities.
Moving to our Golf Equipment segment.
We're pleased to report that demand remains very high for our clubs and balls and trade inventory remains low across the industry.
According to the National Golf Foundation's annual report, the number of on-course golfers increased by approximately 300,000 in 2021 to 25.1 million players, marking the fourth straight year of increased participation in traditional golf.
Off-course participation also continued to grow, with 24.8 million people visiting nontraditional venues such as Topgolf and 5-Iron and approximately half of those playing exclusively off course.
Looking out over the next 12-months and beyond, as Topgolf venues continue to expand, we expect even more new players to be introduced to the sport, both on and off course.
For Q4, our Golf Equipment results were in line with our expectations.
As we explained last quarter, we anticipated some softness in Q4 revenues as we made the decision to shift production to build 2022 new launch product.
In addition, we launched several new products in the comparable fourth quarter of 2020, thus creating an uneven year-over-year comparison.
As we look ahead to Q1 and the full year 2022, we are seeing promising momentum with the launch of our new Rogue ST family of Woods & Irons and new Chrome Soft golf balls.
The reception has been very positive so far.
Pre-books are up significantly and feedback on the product has been outstanding, with Rogue ST being the No.
1 driver on tour in its first week on tour at the tournament of Champions, and Callaway receiving more gold metals than any other manufacturer in Golf Digest's Recent Hot list.
The new launch product will be available at retailers starting next week.
For the full year, we are reiterating our Golf Equipment business will grow based on continued strong demand from consumers, price increases on our new launch product, and the opportunity for a restocking at retail.
Turning to our Apparel and Gear.
In our Apparel and Gear segment, revenue was up 33% year over year in Q4, led by a 40% increase in Apparel and a 19% increase in Gear.
TravisMathew continued to grow at a roaring pace, with our own retail comp store sales up over 67% versus 2020.
E-commerce sales were also up a healthy 30% versus 2020.
The team also signed a high-profile new ambassador, actor Chris Pratt, during Q4, who helped further increase brand visibility and raise awareness for a multi-day charity flash sale benefiting the Special Olympics.
The event was very successful with TravisMathew contributing over $1 million in donations to this very worthy cost.
On the product side, TravisMathew expanded its product range to include women's apparel as part the His and Her Cloud Collection launched in December, as well as more cold-weather gear within their outerwear collection.
Both additions performed very well with the women's product selling out predominantly in the first 48 hours, and jackets and pants accounting for 37% of direct-to-consumer sales.
Jack Wolfskin sales were up in the quarter as compared to both 2020 and 2019 as the public relaunch of the brand's fresh new image was positively received by consumers.
Feedback on prebooks has been outstanding, and we're excited for the year ahead.
On the sustainability front, Jack Wolfskin launched a new initiative in Q4 called the Nature Counts campaign, which is dedicated to forestry, rewilding, and conservation efforts.
In place of Black Friday and Cyber Monday sales discounts, the brand decided to donate 2 euros from every purchase made during the week to Peter Rowland's Forest Academy.
We love to see the brand stay true to its roots and continue to be an ambassador for environmentalism.
Lastly, our Callaway Apparel business in Asia continued to thrive.
The Callaway Golf brand in Japan have the No.
1 share in the wholesale channel during the quarter and direct-to-consumer efforts paid off with strong sales in our owned retail stores as foot traffic in the region increased.
Looking ahead to 2022 and the consolidated company, we believe revenue will increase approximately 21%, and we expect adjusted EBITDA will be between $490 million and $515 million.
This strong outlook is underpinned by our belief that our Golf Equipment business will continue to grow as participation remains high and supply continues to scales up to match exceptional consumer demand.
Our strong prebooks and demand trends for [Inaudible] Apparel and Gear brands and embedded growth in the Topgolf business through new venue openings and year-over-year growth in same venue sales.
Longer term, we remain excited and confident about the direction of the business.
While macro trends over the past two years have provided favorable tailwinds for golf, we believe there has also been a more sustainable structural shift in the market that will support all of Callaway's businesses.
These structural shifts include what we believe are long-term increases in remote and hybrid work.
The increase desire to get out in the nature.
The momentum behind Casual Lifestyle Apparel brands, the growth of new golfers with waiting list to get into golf courses, and the growth and positive impact of off-course golf.
Off-course golf experiences such as Topgolf are both growing rapidly in their own right and at the same time, changing the way people are introduced to the sport of golf, creating increased interest in more new entrants.
We believe Callaway is uniquely positioned to engage with these consumers through our differentiated portfolio of brands and look forward to unlocking the embedded growth within this business for years to come.
In conclusion and before handing the call off to Brian, I want to call out two additional items.
First, I'm pleased to announce that we're planning to publish our first comprehensive sustainability report next month.
As a company, we were [Inaudible] Callaway's view that good ethics is good business, and we continue to operate with this ethos at our core today.
You will see this theme carried out through the report and through the four strategic pillars of our sustainability strategy: people, planet, product, and procurement.
I encourage you to review the report and when it comes out and engage with the team to discuss the content is an important component of our long-term business strategy.
Second, I'm very excited to announce our plan to hold an Investor Day in Q2, where you have the opportunity to hear more from senior executives across each of our businesses and learn more about our medium- and long-term vision for the company.
More details for this event will be provided by the IR team in the coming weeks, and we hope you can participate.
2021 was an outstanding and transformational year for Callaway, which is clearly highlighted in our financial results.
The Topgolf business recovered from COVID more quickly and significantly than we expected and demand for our Golf Equipment and Apparel products remain strong throughout the year and has continued so far in 2022.
As Chip mentioned, we believe there has been a structural shift in the market that will benefit each of our businesses including increased interest and participation in golf, momentum behind Casual Lifestyle or Power brands, and an increased desire for leisure and entertainment, such as Topgolf, hiking, and camping.
As a result, we expect continued high demand and growth across each of our businesses into 2022 and beyond.
Shifting to our financial results.
As shown on Slides 10 and 11, consolidated net revenue for the full year 2021 was $3.1 billion, a 97% increase, compared to full year 2020 revenue of $1.6 billion.
Full year 2021 adjusted EBITDA was $445 million, an increase of 170% over full year 2020 adjusted EBITDA of $165 million.
The outperformance versus our guidance was related to Topgolf and resurgence in corporate events during the quarter, as Chip mentioned earlier.
The Golf Equipment and soft goods businesses were in line with our guidance.
When you look at a breakdown of our 2021 revenue, Golf Equipment represented 39% of total revenue.
Topgolf was 35%, and Apparel, Gear, and Other represented 26%.
We believe Golf Equipment continued to grow at a steady pace and be an important component of our strategy moving forward.
But as Topgolf venues continue to expand at the rate of 10-plus new openings per year, and the strong momentum of TravisMathew and Jack Wolfskin continues, we see a larger portion of our revenue more toward these high-growth segments.
For the fourth quarter, consolidated net revenue was $712 million, an increase of 90% compared to Q4 2020.
Topgolf was the largest contributor by segment, generating $336 million.
Our strong social events, strengthening corporate events, and continued robust demand from walking guests collectively delivered 6% same venue sales growth over 2019.
Apparel, Gear, and Other also performed very well during the quarter with revenue up 33% year over year as strong brand momentum, recovery from COVID, and well-positioned products translated to strong sales growth in the quarter.
Consistent with our guidance, and as Chip highlighted earlier, the Golf Equipment segment was down year over year due to third-quarter supply chain disruptions and a shift to prioritizing 2022 new launch inventory over fourth quarter 2021 sales.
We also launched several new products in Q4 2020, thus creating an uneven year-over-year comparison.
Changes in foreign currency rates had a $6 million negative impact on fourth quarter 2021 revenues.
Total costs and expenses were $755 million on a non-GAAP basis in the fourth quarter of 2021, compared to $397 million in the fourth quarter of 2020.
Of the $358 million increase, Topgolf added an incremental $330 million of total costs and expenses.
The remaining $28 million increase includes moving spending levels back toward normal levels, increased corporate costs to support a larger organization, investments in growth initiatives, including TravisMathew expansion and the Korea apparel business, and increased freight costs and inflation.
As we move into 2022, we continue to believe that higher sales volumes and select price increases will balance out inflationary pressures.
Fourth quarter 2021 non-GAAP operating income was a loss of $43 million, down $21 million, compared to a loss of $22 million in the fourth quarter of 2020 due to the previously mentioned planned shift in Golf Equipment supply to 2022 launch products, as well as the increased costs previously mentioned.
Non-GAAP other expense was $37 million in the fourth quarter, compared to other expense of $13 million in Q4 2020.
The increase was primarily related to a $28 million increase in interest expense related to the addition of Topgolf.
Non-GAAP loss per share was $0.19 on approximately 186 million shares in the fourth quarter of 2021, compared to a loss of $0.33 per share on approximately 94 million shares in the fourth quarter of 2020.
Lastly, fourth quarter 2021 adjusted EBITDA was $14 million, compared to negative $13 million in the fourth quarter of 2020.
The $27 million increase was driven by a $46 million contribution from the Topgolf business.
Turning to certain balance sheet items on Slide 13.
I am pleased to report that we are in a strong financial position with ample liquidity.
As of December 31, 2021, available liquidity, which is comprised of cash on hand and availability under our credit facilities was $753 million, compared to $632 million at December 31, 2021, an increase of 19%.
In addition, the Topgolf funding requirements from Callaway have improved compared to our initial expectations.
When we announced the merger over a year ago, the funding needs for Topgolf were estimated at $325 million.
As of year-end, their need for funding was significantly lower due to its faster-than-expected recovery and strong 2021 performance.
At this point, we estimate that Topgolf will need almost $200 million less funding than we originally anticipated.
And going forward, we estimate Topgolf will only need incremental funding from Callaway of less than $70 million, which would be used for future venue growth.
Topgolf is already operating cash flow positive [Audio gap].
And we expect Topgolf to be able to fund its own growth and be free cash flow positive in 2024.
At quarter-end, we had a total net debt of $1.4 billion, including venue financing obligations of $593 million related to the development of Topgolf venues.
Since the merger, our leverage ratios have improved significantly.
Our net debt leverage ratio was 3.1 times at December 31, 2021, compared to five times at March 31, 2021.
Consolidated net accounts receivable was $105 million, a decrease of 24%, compared to $138 million at the end of the fourth quarter of 2020.
Days sales outstanding for our Golf Equipment and Apparel businesses improved to 35 days as of December 31, 2021, compared to 45 days as of December 31, 2020.
Our inventory balance increased to $523 million at the end of the fourth quarter of 2021, compared to $353 million at the end of the fourth quarter 2020 as we built supply for our new products within the Golf Equipment and Apparel businesses.
In addition, Topgolf added $22 million in inventory.
Capital expenditures for the full year 2021 were $234 million, net of REIT reimbursements.
This includes $173 million related to Topgolf, primarily for new openings for the 10 months since the merger.
This does not include $12 million of capex for January and February of 2021 prior to the merger.
The full year 2022 forecast for Callaway and Topgolf is approximately $310 million, net of REIT reimbursements, including approximately $230 million for Topgolf.
This increase in capital expenditures is due to the timing of REIT reimbursements and investment in systems integration and growth within the Golf Equipment and Apparel businesses.
Lastly, on December 13, we announced that our board of directors approved a $50 million stock repurchase program.
We repurchased a total of approximately 947,000 shares at an average price of $26.41 during the quarter and now have approximately $25 million authorization remaining under that program.
Now, turning to our full year and first quarter 2022 outlook on Slide 14 and 15.
For the full year, we expect revenue to be approximately $3.8 billion.
That compares to $3.13 billion in 2021.
Our full year 2022 net revenue estimate assumes continued positive demand for our Golf Equipment and soft goods segments and no significant supply chain or retail shutdowns due to any COVID resurgence.
It also assumes approximately $1.5 billion in net revenue from Topgolf for the year.
Full-year adjusted EBITDA is projected to be $490 million to $515 million, which assumes approximately to $210 million to $220 million from Topgolf.
As Chip stated, we plan to add at least 10 new Topgolf venues in 2022, although the venue openings will be heavily weighted toward the back half of the year with five expected to open in the fourth quarter.
From a profitability perspective, this means our 2022 venues will have a more limited impact to adjusted EBITDA in 2022 as we will incur full preopening costs for those venues with limited revenue.
From a cost perspective, we will be making investments in personnel and infrastructure to support an overall larger business and future growth.
We also anticipate continued cost pressure from increased freight cost and inflation including labor and commodity prices.
Lastly, we anticipate a negative impact from changes in foreign currency rates of approximately $54 million on revenue and $38 million on pre-tax income due to a strengthening U.S. dollar and $8 million in hedge gains that are not expected to repeat.
Despite these headwinds, we continue to believe strong demand, sales volumes, and select price increases across our business segments will balance out these pressures, and we expect all businesses to grow this year.
Lastly, looking at the share count for full year 2022, want to note an accounting change taking effect this year that will cause our share count to increase to approximately 204 million shares.
This change relates to the accounting for our convertible bond.
This new role will require us to account for the bond, assuming it has been converted for calculating earnings per share.
When calculating EPS, we will eliminate the interest paid related to the bond, and we will add 14.7 million shares to the earnings per share calculation as if the bond had been converted.
For purposes of this calculation, we do not include the benefit of the [Inaudible] transaction we entered into at the time of the bond issuance, which at maturity would reduce the number of new shares issued by us [Inaudible] conversion by approximately 4 million to 5 million shares at current prices.
Moving to the first quarter 2022 outlook.
Our revenue guidance is just over $1 billion.
Adjusted EBITDA guidance is $130 million to $145 million.
This includes a negative foreign currency impact of approximately $21 million on revenue and $21 million in pre-tax income.
Again, including the $8 million hedge gains in Q1 2021 that are not expected to repeat.
I want to emphasize that there are several factors which could cause a positive or negative shift in our financial results between Q1 and Q2.
Some of these factors include the timing of when we receive supply in the Golf Equipment or soft goods segments and whether products scheduled to be shipped at the end of March or beginning of April are deferred to Q2 or accelerated into Q1 as our Q1 guidance reflects our assumption that COVID continues to lessen during Q1 and that the Topgolf business including corporate events, returns close to 2019 levels.
The pace at which happens will affect our first-quarter results.
We feel good about our full-year guidance.
In closing, we are proud of the performance of our business in 2021 and are excited to share our continued progress throughout 2022.
Operator, over to you.
| q4 non-gaap loss per share $0.19.
sees full year 2022 revenue outlook of $3,780 million to $3,820 million and adjusted ebitda guidance of $490 million to $515 million.
sees fy 2022 adjusted ebitda $490 million - $515 million.
changes in foreign currency effects are estimated to have a negative full year impact of $54 million on net sales.
|
For those of you that have not, it is available on the Investor Relations section of our website at investor.
Non-GAAP net earnings and non-GAAP EPS, which have been adjusted for certain items which may affect the comparability of our performance with other companies.
I'm very pleased with the strong start to 2021 and the positive momentum in revenue and margins we delivered in the first quarter, demonstrating the strong operating leverage in our business.
Consolidated revenues increased 11.1% year-over-year in our first full quarter as a stand-alone public company.
The revenue increase included same-store revenue growth of 14.8% and we reported adjusted EBITDA margin that improved to 15.4% of revenues.
This is the first quarter in over a decade that the Company has delivered double-digit same-store revenue growth.
Our teams in the field and our store support centers and Woodhaven are performing at a very high level and are energized and engaged.
As I visit Aaron's stores around the country to support our operations team, I'm seeing a strong sense of pride and optimism about our brand and our competitive position.
Our team members and customers are embracing the innovation that we are delivering and the dynamic lease-to-own market.
Over the last five years, we've significantly transformed the company for the goal of continuing to provide an exceptional customer and team member experience while also driving greater efficiencies in our operating model.
I'm proud to say that as of today we have a centralized decisioning platform that provides greater control and predictability resulting in a higher quality lease portfolio.
We have enhanced digital payment platforms that are enabling over 75% of monthly customer payments to be made outside of our stores.
We have an industry-leading, fully transactional e-commerce platform that is attracting a new and younger customer, and we have a portfolio of 51 GenNext stores that is currently outperforming our expectations with many more store openings in the pipeline.
All of these initiatives are underpinned by the investments that we have made in enhanced analytics and when combined with our more efficient operations are enabling us to deliver strong revenue and earnings growth.
These transformations to our business model are contributing to our outstanding performance in the first quarter of 2021.
We are encouraged by the continuing improvement and the quality and size of our same-store lease portfolio, which ended the quarter up 6.2% compared to the end of the first quarter of 2020.
This improvement was primarily driven by strong demand for our products, few release merchandise returns, and lower inventory write-offs.
In addition, our customer continues to benefit from the ongoing government stimulus, one of the most meaningful contributors to our strong portfolio performance was centralized decisioning, which we implemented across all Company-operated stores in the U.S., in the spring of 2020.
Today, nearly 70% of our portfolio is made up of lease agreements that were originated using this technology.
Centralized decisioning delivers consistency and predictability in the performance of our lease portfolio.
It enables store managers the flexibility to focus their time on growth-oriented activities such as sales and lease servicing.
We believe our algorithms provide better outcomes for both the customer and Aaron's with the goal of having a greater number of customers achieve ownership while at the same time reducing our cost to serve.
We continue to refine this decisioning across our various channels, and we expect this will continue to drive greater productivity from our lease portfolio.
Another contributor to our strong performance in the quarter was our e-commerce channel, which represented more than 14% of lease revenues.
Our e-commerce team has really delivered, driving traffic growth to aarons.com by 12.8% and increasing revenues by 42% in the first quarter as compared to the prior-year quarter.
E-commerce lease originations increased as compared to the year-ago quarter despite the significant shift of customer activity through our online platform in March of 2020 as stores closed during the early days of the COVID-19 pandemic.
In addition, e-commerce write-offs improved by more than 50% compared to last year's quarter, primarily as a result of ongoing decisioning optimization, operational enhancements, and strong customer payment activity.
Our e-commerce team continues to deliver ongoing improvements through our online customer acquisition, conversion, and servicing capabilities, which is leading to margin growth and continued positive momentum in this important channel.
Our e-commerce growth in the quarter is enabled by our stores, which are not just showrooms and service centers but are also last-mile logistics hubs delivering an expanded assortment of products with same or next day delivery.
Finally, our Real estate repositioning and reinvestment strategy is gaining momentum and we expect it will drive future growth.
Our new GenNext stores have larger and more modern showrooms, expanded product assortment, and improved brand imaging and digital technologies.
To date, we have opened 51 new GenNext stores and have generated results that are meeting or exceeding our targeted internal rate of return equally as encouraging, monthly lease originations in the first quarter.
Our plan for 2021 is to plan to open in the second and third quarters.
While we're excited about both the early financial results and the infrastructure we're building to accelerate our progress, we continue to maintain a disciplined approach around our execution of this strategy.
We remain focused on our key strategic initiatives of simplifying and digitizing the customer experience, aligning our store footprint to our customer opportunity and promoting the Aaron's value proposition of low payments high approval rates and best-in-class service.
For the first quarter of 2021, revenues were $481.1 million compared to $432.8 million for the first quarter of 2020, an increase of 11.1%.
The increase in revenues was primarily due to the improving quality and increased size of our lease portfolio and strong customer payment activity during the quarter, aided in part by government stimulus and partially offset by the net reduction of 166 Company-operated and franchised stores compared to the prior year.
As Douglas called out earlier, e-commerce revenues were up 42% compared to the first quarter of the prior year and represented 14.2% of overall lease revenues compared to 11.3% in 2020.
On a same-store revenue basis, revenues increased 14.8% in the first quarter compared to the prior-year quarter, the first double-digit, same-store revenue growth since 2009, and our fourth consecutive positive quarter.
Same-store revenue growth was primarily driven by a larger same-store lease portfolio and strong customer payment activity, including retail sales and early purchase option exercises.
We believe this growth is partially a result of the government stimulus programs passed in 2020 and 2021.
Additionally, the company ended the first quarter of 2021 with a lease portfolio size for all company operated stores of $128.8 million, an increase of 3.6% compared to the lease portfolio size as of March 31, 2020.
Lease portfolio size represents the next month's total collectible lease payments from our aggregate outstanding customer lease agreements.
Operating expenses excluding restructuring expenses, spin-related transaction costs and the impairment of goodwill and other expenses, which were both recorded in the first quarter of 2020 were down $1.5 million as compared to the first quarter of last year.
This decrease was primarily due to a reduction in write-offs, store closures and the impact of the COVID-related reserves recorded in 2020, partially offset by higher personnel costs related to variable performance compensation, higher marketing expenses and an increase in bank and credit card related fees.
Adjusted EBITDA was $73.9 million for the first quarter of 2021 compared with $34.7 million for the same period in 2020, an increase of $39.2 million or 112.9%.
As a percentage of total revenues, adjusted EBITDA was 15.4% in the first quarter of 2021 compared with 8% for the same period last year, an improvement of 740 basis points.
The improvement in adjusted EBITDA margin was primarily due to the items that drove the total revenues increase and a 310 basis point reduction in overall write-offs to 3.1% of lease revenues, including both improvement in the e-commerce and store origination channels compared to the prior year.
The improvement in write-offs was due primarily to the implementation of new decisioning technology, improved operations, the benefit of government stimulus and the impact of COVID-related lease merchandise reserves recorded in the first quarter of 2020 and not repeated in 2021.
On a non-GAAP basis, diluted earnings per share were $1.24 in the first quarter of 2021 compared to non-GAAP diluted earnings per share of $0.30 for the same quarter in 2020, an increase of $0.94 or 313.3%.
Cash generated from operating activities was $20.2 million for the first quarter of 2021, a decline of $36.6 million compared to the first quarter of 2020, primarily due to higher inventory purchases, partially offset by higher customer payments and other changes in working capital.
During the quarter, the company purchased 252,200 shares of Aaron's common stock for a total purchase price of approximately $6.3 million.
As of the end of the quarter, we had approximately $143.7 million remaining under the company's share repurchase authorization that was approved by our Board on March 3rd of this year.
The Company's Board of Directors also declared our first quarterly cash dividend of $0.10 per share last month and we paid the dividend on April 6.
As of March 31, 2021 the company had a cash balance of $61.1 million, less than $500,000 of debt and total available liquidity of $295.5 million.
Turning to our outlook, based on our performance in the first quarter of 2021 and the passage of the American Rescue Plan Act in March, we have revised our full-year 2021 outlook.
For the full year, we expect consolidated revenues of between $1.725 billion and $1.775 billion representing an increase in our revenue outlook of $75 million.
We also expect adjusted EBITDA of between $190 and $205 million, representing an increase in our adjusted EBITDA outlook of $35 million.
For the full year 2021, our outlook for the effective tax rate, depreciation and amortization and diluted weighted average share count are unchanged.
We have also increased our full-year same-store revenue outlook from a range of 0% to 2% to a range of 4% to 6%.
Similar to our original outlook, total revenue and adjusted EBITDA in the first half of 2021 are expected to be higher in the second half of 2021.
This outlook assumes no impact from the expansion and acceleration of the child tax credit payments expected to begin in July 2021.
Additionally, our updated outlook assumes no significant deterioration in the current retail environment or in the state of the U.S. economy, as compared to its current condition and a continued improvement in global supply chain conditions.
| q1 revenue rose 11.1 percent to $481.1 million.
q1 non-gaap earnings per share $1.24.
sees fy revenue $1.725 billion to $1.775 billion.
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Second quarter adjusted income from continuing operations per diluted share increased to $0.82, up nearly 37% from the year ago quarter.
We generated significant operating leverage with adjusted EBITDA improving 17% year-over-year to $106.6 million and adjusted EBITDA margin increasing 100 basis points to 7.1% on slightly higher revenues.
We are pleased to note that for the first time in five quarters, growth in four of our key segments, B&I, T&M, Education and Technical Solutions more than offset the softness in Aviation which, while improved on a sequential basis, continue to reflect the impact of the pandemic.
In short, our second quarter performance reflected a consistently high level of operational execution by our team amid gradually improving business conditions, in sync with the reopening of the economy.
This strong showing and our current visibility have enabled us to increase our full-year guidance for adjusted earnings per share, while we continue to invest to support future growth.
Consistent with what we have discussed over the past several quarters, our customers continue to prioritize protecting their people and spaces, driving strong demand for our higher-margin virus disinfection work orders.
EnhancedClean, our proprietary and trusted protocols for cleaning and disinfecting spaces was an important contributor to our second quarter results as well.
We also continue to benefit from efficient labor management as our flexible labor model enabled us to identify and capitalize on staffing efficiencies arising from the adoption of remote and hybrid work environments, particularly within our B&I segment where office occupancy in large metropolitan areas remain relatively low.
As employees transition back to the office, we anticipate some easing in our labor efficiency, but we expect revenue growth in the second half of the year and increased work orders to mitigate that effect.
With our scale, capabilities, end market diversity and breadth of services, ABM remains well positioned for continued revenue and earnings growth as the reopening momentum continues.
There are several key trends that support our outlook for continued strong performance in the coming quarters.
First, our clients in both the office and manufacturing markets indicate they plan to continue to incorporate disinfection into their cleaning protocols as they prepare for the return of staff and workers to their offices and industrial facilities.
In fact, given the heightened concerns around pandemic risks and greater awareness of public health issues in general, we expect these specialized services to remain in demand and to become part of our client contracts.
ABM has been an essential partner in helping our customers navigate through the challenges of the past year and our 90%-plus retention rate, which ticked up in the second quarter speaks to the confidence our customers have in our services and capabilities.
Second, we expect continued sequential improvement in our Aviation segment, as pent-up demand for travel translates into higher demand for aviation services.
As Earl will discuss in his comments, we are transitioning our Aviation business mix to favor higher-margin contracts with airports and adjacent facilities, with less of a focus on airline services.
This strategic shift has created attractive growth opportunities for ABM outside of the airport, such as parking services and provides for a more consistent and more profitable business mix in our Aviation segment.
Additionally, we expect to see increased demand for disinfection and cleaning services in line with the pickup in travel activity.
Early signs of return to leisure travel have been encouraging and increased business travel is projected to follow later in the year and into next year.
Third, school districts have accelerated the return to in-person learning.
Our conversations with school district professionals and educational institutions indicate that with the full-time return to school expected this fall, cleaning and disinfecting will be a priority throughout the school year.
We expect these services to become part of the broader scope of services for new contracts and rebids, providing ABM with revenue and growth opportunities.
Finally, the energy efficiency and retrofit solutions that we offer in our Technical Services segment, our highest margin business, provide significant operating cost savings for our customers and enable them to reduce their environmental impact.
Now that we have greater access to client sites, we expect to increasingly work through our Technical Services backlog, which was at a record level at the end of the second quarter.
Additionally, this segment is well positioned to benefit from the new administration's priorities around decarbonization and energy efficiency.
As we look toward the second half of the fiscal year, we are confident that we can leverage our significant competitive advantages to achieve continued progress.
You may recall that at the very outset of the pandemic, we established 19 operational task forces or pods as we call them, to marshal our tremendous internal resources on the issues at hand, to focus on our virus disinfection offerings; our field operations; as well as finance, legal, liquidity, cash flow and human resources.
This task force model proved to be a fast and effective way of identifying potential business issues and utilizing cross-functional expertise to develop and implement solutions.
Given the success of these initiatives, we will continue to use this model to address emerging situations.
In fact, our human resources task force is now focused on recruiting and retention and will be instrumental in helping us manage utilization as additional staffing is required to accommodate increased occupancy levels.
Additionally, our strong balance sheet and robust cash flow provide us with substantial resources to fund investments to support future growth.
We invested in information technology initiatives during the first half of fiscal 2021 and we anticipate investing further during the second half of the year.
These investments in technology, data analytics and strategic initiatives are designed to strengthen our client relationships and further empower our employees.
While we will speak about these initiatives later in the year, I can share that we are currently piloting client-facing solutions using sensors to generate real-time occupancy data that inform our janitorial programs and allow us to share service delivery details with our clients via digital displays.
Additionally, we are expanding our use of technology to workforce management with a digital test management solution that records work performed and facilitates dynamic route changes to accommodate shifting client demand.
Lastly, the ABM brand is recognized worldwide, and our recent advertising campaign has served to reinforce the scale, scope and capabilities of our organization.
These attributes enabled us to step in immediately to provide our branded services to clients needing a safe environment for their employees and consumers.
The ABM brand is synonymous with this tremendous commitment to customer service, which is supported by our ability to deliver.
As we enter a post-pandemic environment, we believe the ABM brand will provide us with considerable competitive advantages across our business segments.
Turning now to the specifics of our outlook.
Given our strong performance in the first half and our expectations for continued year-over-year growth in the second half, we are maintaining our guidance for full-year fiscal 2021 GAAP income from continuing operations of $2.85 to $3.10 per diluted share, inclusive of a second quarter litigation reserve of $0.32.
At the same time, we are increasing our guidance for full-year 2021 adjusted income from continuing operations to $3.30 to $3.50 per diluted share, up from $3.00 to $3.25 previously.
This includes additional investments in client-facing technology and workforce management.
We're also increasing our outlook for adjusted EBITDA margin to a range of 7% to 7.3% from 6.6% to 7% previously.
We also ended the first half with robust new sales of $727 million, including $100 million associated with our EnhancedClean offerings, another first half record.
This supports our confidence in the Company's organic second half performance.
Additionally, we continue to explore acquisition opportunities where, as a strategic buyer, we would be able to drive meaningful revenue and operating synergies.
Over the past year, we have made tremendous operational progress and have proven our value as an essential partner to our clients during these dynamic and challenging times.
I've never been more inspired by our purpose, our team and our organization.
As we emerge from this difficult period, I am so pleased with our performance and are more confident than ever in our future potential.
Second quarter revenue was $1.5 billion, up 0.1% from last year.
As Scott mentioned, revenue in four of our segments grew on a year-over-year basis, offsetting the continued pandemic-related softness we've experienced in the Aviation segment.
Key revenue growth drivers in the quarter included higher disinfection related work orders and continued strong demand for our EnhancedClean services.
On a GAAP basis, income from continuing operations was $31.1 million or $0.46 per diluted share.
By comparison, in last year's second quarter, we reported GAAP income from continuing operations of negative $136.8 million or negative $2.05 per diluted share.
As Scott mentioned, GAAP income from continuing operations in this year's second quarter includes a non-cash $30 million reserve for an ongoing litigation equivalent to $0.32 per diluted share.
This non-cash reserve relates to litigation dating back 15 years, primarily relating to a legacy timekeeping system that was phased out in full by 2013.
You will find additional information in our Form 10-Q, which will be filed later today.
The recorded reserve is based on a host of factors, considerations and judgments and the ultimate resolution of this matter could be significantly different.
As this litigation remains ongoing, we are unable to disclose further information at this time.
As a reminder, last year's GAAP loss included a $2.55 per share impairment charge.
Excluding these charges, our adjusted income from continuing operations in the second quarter of fiscal 2021 was $55.5 million, or $0.82 per diluted share compared to $40.4 million or $0.60 per diluted share in the second quarter of last year.
The increase in adjusted income from continuing operations was attributable to our strong operational performance, including growth in our higher margin services as well as efficient labor management and the recapture of bad debt.
In addition, we benefited from favorable business mix, particularly in our Technical Solutions segment where we executed on higher-margin projects.
Excluding items impacting comparability, corporate expense for the second quarter increased by $26.6 million year-over-year.
Approximately $10 million of the variation was due to increased stock-based compensation, with the remaining $16 million representing investments and other-related expenses.
Thus, information technology and other strategic investments spend in the first half of fiscal 2021 was $20 million, in line with our expectations.
Now, turning to our segment results.
Business & Industry revenue grew 1.4% year-over-year to $796.2 million, driven largely by strength in demand for higher-margin disinfection related work orders and EnhancedClean services.
As a result, operating profit in this segment increased 44.1% to $85.3 million.
Our Technology & Manufacturing segment continue to see upside from demand for COVID-19 related services.
Revenue here increased 5.4% year-over-year to $246.3 million, and operating profit margin improved to 10.9%, up from 8.4% last year.
We benefit from the recapture of roughly $2 million of bad debt in this year's second quarter.
But even adjusting for this, our profit margin still showed improvement.
The growth in revenue and margin was fueled by a higher level of work orders and new customer contract wins for our services.
Education revenue grew 7% year-over-year to $214.2 million, representing the strongest growth rate among our segments in the second quarter.
The acceleration in revenue growth primarily reflected the positive impact from the reopening of schools and other educational facilities in the second quarter and the shift toward more in-person learning.
Education operating profit totaled $13.6 million, representing a margin of 6.3%, slightly down year-over-year on an operating [Phonetic] basis as a result of labor challenges in our Southern U.S. operations.
Bad debt expense was roughly $1 million lower than last year, and this was a contributing factor to the operating profit improvement we experienced in this segment.
Although the specific labor costs I mentioned will not recur in the third quarter, we anticipate that the return of students to school on a full-time basis will lead to some reduction in labor efficiency within this segment in the second half.
Aviation revenue declined 19.7% in the second quarter to $148.3 million.
Although reduced global travel continues to weigh on this segment, revenue improved 3.6% on a sequential basis, marking the third consecutive quarter that Aviation segment revenue has improved sequentially.
With industry data points indicating a progressive recovery in global travel, we are optimistic that revenue in our Aviation segment will continue to improve over the second half of fiscal 2021.
Aviation operating profit was $5.8 million, representing a margin of 3.9%.
While our airline customers continue to request higher margin enhanced cleaning services such as electrostatic spraying, margin remain below normalized levels given reduced volumes.
As Scott mentioned, we are focused on securing more profitable overall business with airports and related facilities and have continued to de-emphasize our airline services work.
This strategic shift in our Aviation segment business mix had a positive revenue and margin impact on our second quarter results and should benefit future periods as well.
Technical Solutions revenue increased 2.6% year-over-year to $125.5 million.
Operating margin was 8.2% in the second quarter, up significantly from 5.3% in the first quarter of fiscal 2021 due to a favorable mix of higher-margin projects.
As client site access improves, we remain positive on the growth trajectory of the Technical Solutions segment.
Shifting now to our cash and liquidity.
We ended the second quarter with $435.7 million in cash and cash equivalents compared to $394.2 million at the end of fiscal 2020.
With total debt of $797.9 million as of April 30th, 2021, our total debt to pro forma adjusted EBITDA, including standby letters of credit, was 1.7 times for the second quarter of fiscal 2021.
Second quarter operating cash flow from continuing operations was $125.9 million, down from $162.3 million in the same period last year.
The decline in cash flow from continuing operations during the second quarter was primarily due to the timing of cash taxes.
For the six month period ending April 30th, 2021, operating cash flow from continuing operations totaled $171.2 million.
Free cash flow from continuing operations was $117 million in the second quarter of fiscal 2021 and $156 million for this year's first half.
As a reminder, cash flow is benefiting from payroll tax deferral related to the CARES Act.
Beginning next year, the deferral will be paid at $66 million in each of the next two years.
We were pleased to pay our 220th consecutive quarterly dividend of $0.19 per common share during the second quarter, returning an additional $12.7 million to our shareholders.
Our Board also declared our 221st consecutive quarterly dividend, which will be payable in August to shareholders of record on July 1st.
Supported by the strength of our balance sheet, we have the financial resources to support our capital allocation priority of adding additional growth by investing organically while pursuing potential acquisitions.
Now, I'll provide some additional color on our guidance and outlook.
As mentioned, our increased guidance for full year fiscal 2021 adjusted income from continuing operations is now a range of $3.30 to $3.50 per diluted share compared to $3.00 to $3.25 previously.
Our upward revised adjusted earnings forecast reflects the strength of our first half as well as our positive view for the second half.
As a reminder, our third quarter has one fewer day than last year, equivalent to about $6 million and reduced labor expense.
On a GAAP basis, we continue to expect earnings per share from continuing operations of $2.85 to $3.10, inclusive of the $0.32 litigation reserve in the second quarter.
We continue to expect a 30% tax rate for fiscal 2021, excluding discrete items such as the Work Opportunity Tax Credits and the tax impact of stock-based compensation awards.
As we noted in our first quarter conference call in March, our expectation was to achieve cash flow above our historical range of $175 million to $200 million for fiscal 2021.
Now having generated $171 million of operating cash flow in the first half alone, we are confident that we will achieve free cash flow for fiscal 2021 of $215 million to $240 million.
We are pleased with our positioning, as business across the country emerge from the pandemic and we look forward to helping our clients provide safe environment for their employees and customers.
And I am personally looking forward to meeting with each of you in person, hopefully as soon as later this year and to connecting with you virtually until then.
| q2 adjusted earnings per share $0.82 from continuing operations.
q2 gaap earnings per share $0.46 from continuing operations.
raises fy adjusted earnings per share view to $3.30 to $3.50 from continuing operations.
q2 revenue $1.5 billion versus refinitiv ibes estimate of $1.48 billion.
co is maintaining its guidance for fy fiscal 2021 gaap income from continuing operations.
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There are many factors that may cause future results to differ materially from these statements, which are discussed in our most recent 10-K and 10-Q filed with the SEC.
Our first quarter results put us on track to achieve our 2021 guidance and 7% to 9% average annual growth through 2025.
Gustavo will provide more color on our financial results later in the call.
As we spoke about on our Investor Day in early March, we see a great opportunity for growth given the momentous changes in our sector, and we are very well positioned to capitalize on the shift to low-carbon sources of energy.
Over the past five years, we have transformed our company to be a leader in renewables, and we have invested in innovative technologies that will give us a competitive advantage for many years to come.
Although it has been less than two months since our Investor Day, we had a number of significant achievements to announce, including a landmark deal with Google, which I will describe in more detail later, a strategic collaboration to develop new battery technologies between Fluence and Northvolt, the leading European supplier of sustainable battery systems, and a significant increase in LNG sales in Central America and the Caribbean to support those economies in their transition away from heavy fuels.
First, let me lay out our strategic priorities for 2021 and the substantial progress that we have made year-to-date toward achieving those objectives.
Turning to Slide four.
Our five key goals for the year are: one, signed contracts for four gigawatts of renewables.
Two, launched the first 24/7 product for carbon-free energy on an hourly basis; three, further unlock the value of our technology platforms; four, continue to improve our ESG positioning through the transformation of our portfolio; and five, monetize excess LNG capacity in Central America and Caribbean.
Turning to Slide five.
Last year, we set and exceeded a goal of signing two to three gigawatts of PPAs for renewables and energy storage.
This year, we are increasing that goal by 60% to a target of four gigawatts.
Today, I am pleased to report that year-to-date, we've already signed 1.1 gigawatts including a landmark deal with Google.
As you can see on Slide six, we have a backlog of 6.9 gigawatts of renewables, consisting of projects already under construction or under signed power purchase agreements, or PPAs.
This equates to 20% growth in our total installed capacity and a 60% increase in our renewables capacity.
Turning to Slide seven.
We continue to increase our pipeline of projects to support our growth and now have a global pipeline of more than 30 gigawatts of renewable projects, roughly half of which is in the United States.
With increasing demand from corporate customers and a much more favorable policy environment, we expect the need for renewables to grow dramatically, and we're taking steps to ensure a continued competitive advantage.
Moving to Slide eight.
Our second key goal for this year is to launch the first 24/7 energy product that matches a customer's load with carbon-free energy on an hourly basis.
To that end, earlier this week, we announced a landmark, first of its kind agreement to supply Google's Virginia-based data centers with 24/7 carbon-free energy sourced from a portfolio of 500 megawatts of renewables.
Under this innovative structure, AES will become the sole supplier of the data center's energy needs, ensuring that the energy supplied will meet carbon-free targets when measured on an hourly basis for the next 10 years.
The carbon-free energy will come from an optimized portfolio of wind, solar, hydro and battery storage resources.
This agreement sets a new standard in carbon-free energy for commercial and industrial customers who signed 23 gigawatts of PPAs in 2020.
As we discussed at our Investor Day, the almost 300 companies that make up the RE100 will need more than 100 gigawatts of new renewables by 2030.
This transaction with Google demonstrates that a higher sustainability standard is possible, and we expect a substantial portion of customers to pursue 24/7 carbon-free objectives.
Based on our leadership position, we are well placed to serve this growing market.
And in fact, we've already seen significant interest from a number of large clients.
Turning to Slide nine.
Our third key goal is to further unlock the value of our technology platforms.
One of these platforms is Uplight, an energy efficiency software company that works directly with the utility and has access to more than 100 million households and businesses in the U.S. Uplight is at the forefront of the shift to low-carbon and digital solutions on the cloud.
In March, we announced a capital raise with a consortium led by Schneider Electric, valuing Uplight at $1.5 billion.
Now to Slide 10.
We're seeing increasing value in many of our other technology platforms as well.
Fluence, our joint venture with Siemens, remains a global leader in energy storage, which is a key component of the energy transition.
This dynamic industry is expected to grow 40% annually, and Fluence is well positioned to capitalize on this immense opportunity through its distinctive competitive advantages, including its AI-enabled bidding engine.
Turning to Slide 11.
As you may have seen, last month Fluence announced a multiyear agreement with Northvolt, the leading European battery developer and manufacturer, for assured supply and to co-develop next-generation battery technology.
This is an example of Fluence's continued innovation, which has been validated by their consistent rank as the number one utility-scale energy storage technology company according to Guidehouse insights.
Similarly, we see the rapid progress of our prefab solar solution, 5B, as you can see on Slide 12.
This technology doubled the energy density and cuts construction time by 2/3.
We now have 5B projects in Australia, Panama and Chile.
We will be including 5B technology in our bids in Puerto Rico, where it's proven resilience to category four hurricane winds will provide greater energy security, proving out the unique value proposition of 5B could significantly speed up the adoption of solar in cyclone prone areas.
Lastly, we continue to work toward the approval of the first large-scale green hydrogen based ammonia plant in the Western Hemisphere, in Chile.
Moving to Slide 13.
We have undergone one of the most dramatic transformations in our sector.
Over the past five years, we have announced the retirement or sale of 10.7 gigawatts of coal, or 70% of our coal capacity, one of the largest reductions in our spectrum.
We recognize that we have more work to do and have set a goal of reducing our generation from coal to less than 10% of total generation by 2025.
Furthermore, we expect to achieve net-zero emissions from electricity by 2040, one of the most ambitious goals of any power company.
As we achieve these decarbonization targets and continuing our near-term growth in renewables, we anticipate being included in additional ESG-oriented indices.
Finally, turning to Slide 14.
We see natural gas as the transition fuel that can lower emissions and reduce overall energy costs as markets work toward a future with more renewable power.
Last month, we reached an agreement to provide terminal services for an additional 34 tera BTUs of LNG throughput under a 20-year take-or-pay contract.
This will bring our total contracted terminal capacity in Panama and the Dominican Republic to almost 80%.
There are 45 tera BTUs of available capacity remaining, which we expect to sign in the next couple of years.
Our LNG business is focused on providing environmentally responsible LNG or green LNG as soon as feasible, which ensures the lowest levels of emissions throughout the entire supply chain.
As Andres mentioned, we are off to a good start this year, having already achieved significant milestones toward the strategic and financial objectives that we discussed on our Investor Day.
We are also encouraged by the continued economic recovery across our markets, with Q1 demand in line with pre-COVID levels.
Turning to our financial results for the quarter.
As you can see on Slide 16, adjusted pre-tax contribution, or PTC, was $247 million for the quarter, which was very much in line with our expectations and similar to last year's performance.
I'll discuss the key drivers of our first quarter results and outlook for the year in the following slides.
Turning to Slide 17.
Adjusted earnings per share for the quarter was $0.28 versus $0.29 last year.
With adjusted PTC essentially flat, the $0.01 decrease in adjusted earnings per share was the result of a slightly higher effective tax rate this quarter.
In the U.S., in utilities, strategic business unit, or SBU, PTC was down $27 million, driven primarily by a lower contribution from our legacy units at Southland and higher spend in our clean energy business as we accelerate our development pipeline given the growing market opportunities.
These impacts were partially offset by the benefit from the commencement of PPAs at the Southland Energy combined cycle gas turbines, or CCGTS.
At our South America SBU, PTC was down $31 million, mostly driven by lower contributions from AES and is formerly known as AES Gener, due to higher interest expense and lower equity earnings from the Guacolda plant in Chile.
These impacts were partially offset by higher generation at the Chivor hydro plant in Colombia.
Lower PTC at our Mexico, Central America and the Caribbean, or MCAC SBU, primarily reflects outages at two facilities in Dominica Republic and Mexico, with both already back online since April.
Results also reflect the expiration of the 72-megawatt barge PPA in Panama.
Finally, in Eurasia, higher PTC reflects improved operational performance and lower interest expense in our Bulgaria businesses.
Now to Slide 22.
With our first quarter results, we are on track to achieve our full year 2021 adjusted earnings per share guidance range of $1.50 to $1.58.
Our expected 2021 quarterly earnings profile is consistent with the average of the last five years.
Our typical quarterly earnings is more back-end weighted with roughly 40% of the earnings occurring in the first half of the year and the remaining in the second half.
Growth in the year to go will be primarily driven by contributions from new businesses, including a full year of operations of the Southland repowering project, 2.3 gigawatts of projects in our backlog coming online during the next nine months, reduced interest expense, the benefit from cost savings and demand normalization to pre-COVID levels.
We are also reaffirming our expected 7% to 9% average annual growth target through 2025.
Now turning to our credit profile on Slide 23.
As discussed at our Investor Day, strong credit metrics remain one of our top priorities.
In the last four years, we attained two to three notches of upgrades from the three credit rating agencies, including investment-grade ratings from Fitch and S&P.
These actions validate the strength of our business model and our commitment to improving our credit metrics.
We expect the positive momentum in these metrics to continue, enabling us to achieve BBB flat credit metrics by 2025.
Now to our 2021 parent capital allocation plan on Slide 24.
Consistent with the discussion at our Investor Day, sources reflect approximately $2 billion of total discretionary cash, including $800 million of parent free cash flow and $100 million of proceeds from the sale of Itabo in the Dominican Republic, which just closed in April.
Sources also include the successful issuance of the $1 billion of equity units in March, eliminating the need for any additional equity raise to fund our current growth plan through 2025.
Now to uses on the right-hand side.
We'll be returning $450 million to shareholders this year.
This consists of our common share dividend, including the 5% increase we announced in December and the coupon of the equity units.
And we plan to invest approximately $1.4 billion to $1.5 billion in our subsidiaries as we capitalize on attractive growth opportunities.
Approximately 60% of the investments are in global renewals, reflecting our success in renewables origination during 2020 and our expectations for 2021.
About 25% of these investments are in our U.S. utilities to fund rate base growth with a continued focus on grid and fleet modernization.
In the first quarter, we invested approximately $450 million in renewables, which is roughly 1/3 of our expected investment for the year.
In summary, 85% of our investments are going to the U.S. utilities and global renewables, helping us to achieve our goal of increasing the proportion of earnings from the U.S. to more than half and from carbon-free businesses to about 2/3 by 2025.
The remaining 15% of our investment will go toward green LNG and other innovative opportunities that support and accelerate the energy transition.
As I have noted, we have made great progress on our 2021 and long-term strategic goals, and we are reaffirming our 2021 guidance and expectations through 2025.
We see a tremendous opportunity for growth, and further increasing our technological leadership as the industry transition unfolds.
From advancing our renewables to unlocking the value of our new technology businesses, we have a competitive advantage that will continue to benefit our customers and investors.
| aes achieves key strategic milestones reaffirms 2021 guidance and 7% to 9% average annual growth target through 2025.
aes achieves key strategic milestones; reaffirms 2021 guidance and 7% to 9% average annual growth target through 2025.
q1 adjusted non-gaap earnings per share $0.28.
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Before we begin, let me remind you that the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call.
In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA.
I will begin with highlights for the quarter, and David and Nick will follow up with additional operating detail.
First, let's start with the obvious.
Operating two separate and distinct service business segments with 17,000 employees during a national pandemic brings unique, unpredictable and abrupt challenges.
Fortunately VITAS and Roto-Rooter have been classified as essential services allowing Chemed to operate during the pandemic.
Maintaining operations in this environment is far from business as usual.
First and foremost, our number one focus has been and will remain on the safety and well-being of our employees, patients and customers.
We will maintain this focus regardless of the cost to safely operate during the pandemic.
April 2020 was probably the most challenging month, we have ever seen significant operating issues emerge daily, triggered primarily from incredibly fast-moving and sometimes contradictory federal, state and local government regulations.
Logistical operating issues were identified, analyzed and solutions for put in practice immediately.
We were able to develop and continuously refine effective work arounds on supply chain issues, labor and scheduling issues, patient access restrictions, employee safety, healthcare protocols, technology solutions as well as information security protocols allowing our employees to continuously serve our local communities in a safe agile manner.
We closely followed the myriad of federal, state and local regulations in the development and implementation of infrastructure necessary to safely allow our field, support and corporate support staff to safely limit as much as practical, physical interaction among our 17,000 employees.
On the VITAS segment, the federal government and specifically HHS and CMS have been exceptionally supportive in terms of relaxing regulations, allowing the use of telehealth capabilities where appropriate and providing pragmatic flexibility in caring for our 19,000 plus patient census.
As most of you are aware on March 27, 2020 the CARES Act was signed in the law.
The CARES Act includes financial support for healthcare providers to maintain operational capacity as well as assist providers with issues caused by the coronavirus panic.
On April 10, 2020, VITAS without application received $80.2 million of CARES Act funds, that was formulaically determined by the federal government based on our 2019 Medicare fee-for-service revenue.
These CARES Act funds are specified to be used to prevent, prepare for and respond to the coronavirus, and shall reimburse the recipient for healthcare-related expenses or loss revenues that are attributable to coronavirus.
The ability of VITAS to retain and utilize the full $80.2 million from the relief fund will depend on the magnitude, timing and nature of the economic impact of COVID-19 within VITAS, as well as the guidelines and rules of the relief fund program.
This financial support is material for VITAS in maintaining its operational capacity at the safely care for our 19,000 patients.
In our first quarter earnings conference call, I stated we anticipated disruption within our patient referral and addition patterns due to significant healthcare system service restrictions in the coming quarter.
This disruption did materialize in our second quarter 2020 admissions declined 3.8% over the prior year.
However, the admissions trend did materially improve throughout the quarter.
Our April 2020 admissions were challenging and had a decline of 6.6%, may improve slightly with admission decline of 5.8%.
June showed significant improvement generated in admissions growth of 1.1%.
Roto-Rooter operations were also severely impacted at the start of the pandemic.
In late March 2020, we observed significant disruption in our Roto-Rooter commercial business.
As a reminder, historically, commercial services represented approximately 28% of Roto-Rooters consolidated revenue.
We made the decision for Roto-Rooter to maintain full staffing and operating capacity with no employee layoffs, as we entered the second quarter.
This decision could maintain our full operating strength was potentially an expenses strategic move and we monitored our demand metrics daily.
The decision to operate at full capacity is a classic risk reward calculation weighing brand awareness, customer satisfaction and the financial needs of our employees.
We also wanted to positioned to capitalize on any potential snapback in commercial and residential demand, both to protect existing marketing share as well as maximize our opportunities to grow market share.
I believe this is proven to be the correct strategic course.
Roto-Rooter services demand began to show weekly improvement beginning in the later part of April, and had strengthened unabated throughout the remainder of the second quarter.
This is reflected in our monthly performance with Roto-Rooter and unit-for-unit commercial revenue declining 38.6% in April, improving slightly to 31.8% decline in May and declining 19.7% in June.
Our residential services have proven to be exceptionally resilient, with our unit-for-unit residential revenue declining a modest 1.6% in April, increasing 11.7% in May and 18.7% in June.
All this translated into Roto-Rooter -- I mean unit-for-unit basis, having the second quarter 2020 commercial revenue declining 29.1%, residential revenue increasing 10.4% and Roto-Rooter consolidated unit-for-unit revenue declining a modest 1.6% when compared to the prior year quarter.
Although, we did have a modest decline in unit-for-unit revenue in the second quarter.
Including acquisitions Roto-Rooter generated consolidate revenue -- consolidated revenue growth of 8.6%.
Overall Roto-Rooter solid revenue growth with excellent adjusted EBITDA margins and adjusted EBITDA growth.
Roto-Rooter's adjusted EBITDA in the second quarter of 2020 totaled $46.8 million, an increase of 20.7%.
The adjusted EBITDA margin was 26.8%, which is a 269 basis point increase when compared to, I'm sorry, excuse me.
The have increase in Roto-Rooter's adjusted EBITDA margin is a contributed to our residential services, having a higher margin than commercial services, as well as increased residential excavation and water restoration services, which have a significantly higher direct contribution margin compared to commercial plumbing and drain cleaning services.
I'm very appreciative of the hard work, creative solutions and willingness of our 7,000 employees to adjust our operational routines and embrace new procedures.
With that, I would like to turn the teleconference over to David.
VITAS' net revenue was $327 million in the second quarter of 2020, which is an increase of 4.7% when compared to our prior year period.
This revenue increase is comprised primarily by 2.8% increase in days of care, a geographically weighted average Medicare reimbursement rate increase, including the suspension of sequestration on May 1 of 2020 of approximately 5.4% and acuity mix shift, which reduced the blended average Medicare rate increase by approximately 310 basis points.
The combination of increased Medicare Cap and a decrease in Medicaid net room and board pass-throughs, as well as reductions in other contra revenue activity, reduced total revenue growth in additional 42 basis points in the quarter.
Our average revenue per patient per day in the second quarter of 2020 was $194.02, which including the impact from acuity mix shift is 2.3% above the prior year period.
Reimbursement for routine home care and high acuity care averaged $165.22 and $985.23, respectively.
During the quarter, high acuity days of care were 3.5% of our total days of care, 69 basis points less than the prior year quarter.
This 69 basis points mix shift and high acuity days of care reduce the increase in average revenue per patient per day from 5.4% to 2.3% in the quarter.
VITAS accrued $5.8 million in Medicare Cap billing limitations and then second quarter of 2020.
This $5.8 million of Medicare Cap, includes approximately $2.3 million of cap liability attributed to the pandemic.
The suspension of sequestration resulted in additional 2% increase in reimbursement effective May 1 of 2020.
In Medicare, provider numbers that we're in a Medicare cap liability situation, there is 2% reimbursement increase was effectively eliminated by a corresponding increase in Medicare cap liability in those markets.
In addition, disruption in Medicare admissions and these Medicare cap liability markets resulted in a further increase in the projected fiscal 2020 Medicare Cap billing limitation.
The second quarter 2020 gross margin excluding Medicare Cap increased cost for personal protection equipment or PPE disinfecting facilities and increased costs for additional paid off or PTO for our front-line employees was 27.2%, which is a 352 basis point margin improvement when compared to the second quarter of 2019.
This increase in gross margin for VITAS is attributed to increased reimbursement from the elimination of sequestration on May 1, 2020.
A level of care mix shift to higher margin routine home care as well as efficiencies from utilizing telehealth were appropriate.
And from cost from reduced admissions volume intake and reduced high acuity hospital referred admissions that have short length of stay and in some cases negative gross margins.
Now let's turn to the Roto-Rooter segment.
Roto-Rooter generated quarterly revenue of $175 million in the second quarter of 2020, an increase of $13.9 million or 8.6% over the prior year quarter.
And a unit-for-unit basis, which excludes the Oakland and Hoffman Southwest acquisitions completed in July 2019 and September 2019 respectively.
Roto-Rooter generated revenue of $158 million for the second quarter of 2020 a modest decline of 1.6% over the prior year quarter.
Total Roto-Rooter commercial revenue, excluding acquisitions, decreased 29.1% in the quarter.
This aggregate commercial revenue decline consisted of drain cleaning revenue decreasing 31.2%, commercial plumbing and excavation declining 28%, and commercial water restoration declining 20.3%.
Total residential revenue, excluding acquisitions increased 10.4%.
This aggregate revenue growth for residential consisted of residential drain cleaning increasing 10.2%, plumbing and excavation expanding 14.4% and commercial water restoration increasing 4.3%.
Roto-Rooter's gross margin in the quarter was 51.2%, a 247 basis point increase when compared to the second quarter of 2019.
Now let's look at consolidated Chemed.
As of June 30, 2020 Chemed had total cash and cash equivalents of $20.4 million and no long-term debt.
On our guidance, historically Chemed earnings guidance has been developed using previous year's key operating metrics, which are then modeled and projected out for the calendar year.
Critical within these projections is the understanding of traditional pattern correlations among key operating metrics.
Once, we complete this phase of our projected operating results, we would then modify the projections for the timing of price increases, changing the commission structure, wages, marketing programs and a variety of continuous improvement initiatives that our business segments plan on executing over the coming year.
This modeling exercise also takes into consideration anticipated industry and macroeconomic issues outside of management's control but are somewhat predictable in terms of their timing and impact on our business segments operating results.
The 2020 pandemic has made accurate modeling and providing meaningful earnings guidance for Chemed exceptionally challenging.
Federal, state and local government authorities are forced to make swift decisions within our healthcare system, labor pools and general economy.
These governmental decisions have the potential for an immediate and material impact on VITAS and Roto-Rooter operating results.
However over the past four months, Chemed has been able to successfully navigate within this rapidly changing environment and produce operating results that we believe provide us with the ability to issue meaningful guidance for the remainder of the calendar year.
However, this guidance should be taken with the recognition the pandemic will continue to materially disrupt all aspects of our healthcare system and general economy to such an extent that future rules, regulations and government mandates could materially impact our ability to achieve this guidance.
With that said, revenue growth for VITAS in 2020, prior to Medicare Cap is estimated to be in the range of 5% to 7%.
Our Average Daily Census in 2020 is estimated to expand approximately 2% to 4%.
And our full-year adjusted EBITDA margin prior to Medicare Cap is estimated to be 19% to 20%.
We are currently estimating $17 million for Medicare Cap billing limitations for the calendar year 2020.
We also anticipate the $80.2 million of CARES Act funds that Chemed just -- Kevin described earlier that our formulaically calculated by the federal government based upon our 2019 Medicare fee-for-service revenue will be adequate to cover our increased costs specifically related to operating our healthcare unit during the pandemic, as well as any incremental Medicare Cap billing limitations that are triggered from declines in Medicare admissions.
I should also note that Chemed's full year adjusted earnings per share guidance eliminate any financial benefit from the CARES Act funds that relate to lost revenue.
We anticipate returning any unused CARES Act to the federal government at the end of the pandemic measurement period.
Roto-Rooter is forecasted to achieve the full year 2020 revenue growth of 9% to 10%.
Adjusted EBITDA for Roto-Rooter for 2020 is estimated to be in the range of 23% to 25%, Based upon this discussion, our full-year 2020 adjusted earnings per diluted share, excluding non-cash expense for stock options, tax benefits from stock options, cost related to litigation, CARES Act funds used for lost revenue and other discrete items is estimated to be in the range of $16.20 to $16.40.
This 2020 full year, calendar year guidance assumes an effective corporate tax rate of 25.2% and as a comparison Chemed's 2019 reported adjusted earnings per diluted share were $13.96.
The interdisciplinary team approach that is the foundation of the hospice benefit has never been more evident for our organization across the country, then through this entire pandemic.
Coordination of our entire team from our sales team providing pandemic relevant education to our disrupted healthcare partner through our admissions teams responding to referrals, enabling our clinical care teams to provide care around the clock with the support of our care coordination centers, home medical equipment division and back office support has been remarkable.
All of this enabled us to care for 19,185 patients each day within the quarter, while bringing on the service 16,822 patients who needed high quality hospice care during this pandemic.
We lived our internal model that we've been sharing during the pandemic, which is, yes, we can, and together we will.
Now let's discuss our second quarter 2020 operating metrics.
As I mentioned in the second quarter, our average daily census was 19,195 patients, an increase of 2.8% over the prior year.
Total admissions in the quarter were 16,822.
This is a 3.8% decline in admissions when compared to the second quarter of 2019.
Admissions performance in the quarter was primarily impacted by the level of disruption, which occurred at each of our referring partners across the healthcare continuum.
For example, admissions from hospitals were pressured due to the reduction in available bed capacity and elective procedures, resulting in fewer patients accessing and subsequently being discharged from hospitals.
Admissions from physician offices, whom were disrupted but were able to remain operational through telehealth interactions saw an increase due to the number of patients choosing to access the disrupted healthcare system through their primary or specialty physician practice along with medical offices.
Lastly, placement of admissions in the nursing homes and assisted-living facilities were significantly impacted due to the barriers and the restriction of access toward new residents.
These types of admission difficulties are reflected in our actual admission results based upon our patient's pre-admit location.
In the second quarter, our admissions increased 7.1% in our home-based preadmit locations.
However, this admission group -- admission growth was more than offset by the combination of hospital admissions declining 4%, nursing home management's decreasing 22.8% and assisted living facility admissions declining 10.2% when compared to the prior year quarter.
Our average length of stay in the quarter was 90.9 days.
This compares to 91.1 days in the second quarter of 2019, in 90.7 days in the first quarter of 2020.
Our median length of stay was 14 days in the quarter, which is two days less than the 16 day median in the second quarter of 2019 and equal to the first quarter of 2020.
Median length of stay is a key indicator of our penetration into the high acuity sector of the market.
First, we will continue to prioritize the safety of our employees, patients and their families as we have successfully done since March.
We have and will continue to source PPE and we are comfortable with the inventory levels to sustain employee need based upon patient and local circumstances.
Additionally, we will continue to utilize the infrastructure we lifted up to manage testing requirements for certain facilities across the country to allow us to safely access our partners' facilities to care for existing patients and placement of new patients when appropriate.
Our entire team will continue to collaborate safely with our local healthcare partners to successfully navigate patients and their families on to the hospice benefit during this unique time.
Lastly, and most importantly, our team will stay committed to persevere and provide care to all the patients and families in need in the communities we serve.
I will now open this teleconference to questions.
| sees fy 2020 adjusted earnings per share $16.20 to $16.40 excluding items.
roto-rooter is forecasted to achieve full-year 2020 revenue growth of 9% to 10%.
|
I'd like to take this opportunity to introduce Randy, who some of you may not know.
Randy was promoted to Chief Operating Officer in August of this year.
He has been with Lindsay for 12 years and most recently was the President of our Irrigation business.
He brings a wealth of experience to this role.
And with him focused on running the business, this change provides me the opportunity to focus more on growth and M&A activities.
After I make some opening comments, Randy will provide a business update and Brian will update us on the quarter's financial results.
I will start with addressing the impact of COVID-19 on our employees and business.
Our highest priority continues to be our employee health and safety.
We continue to proactively implement safety measures according to health organization recommendations, and local government regulations.
At our sites, key actions that continue are, ensuring employees are practicing social distancing, use of face coverings, enhance clean and sanitation efforts and staggered work schedules.
We continue to offer work from home for roles that can be done outside of a Lindsay site.
Our businesses are all classified as business essential.
And I'm pleased to say that all nine manufacturing plants are operational and running according to the local demand level.
In terms of business impact related to COVID-19 in the fourth quarter, the primary impact continues to be some project delays, but not cancellations.
The rapid response team structure across the company that was put in place to address COVID-19 related issues and mitigate potential risk to the business continues to operate.
I'd now like to share with you a few highlights from fiscal year '20.
The first dates go back to a commitment that was made in early 2018.
At that time, we announced that through the efforts of the foundation for growth initiatives, we would achieve 11% to 12% operating margins in fiscal year '20.
Our caveat to that commitment was that we would achieve this goal in a market environment similar to fiscal year 2017.
When we set that commitment, we did not foresee an ag market that would become more challenging, and a global pandemic all occurring at the same time.
I'm very proud of the Lindsay team to say that we achieved our fiscal year '20 goal reaching 11.4% operating margin, especially given the challenging environment in which we were operating in.
In addition to the operating margin goal, we also focused on culture in our foundation for growth initiative.
We established a baseline back in February 2018 through the support of a major consultants employee survey to help us understand where we had opportunities to improve our organizational health and align our culture with our strategy.
Our goal was to achieve first quartile status in the comparison against approximately 2,000 companies that are used in their benchmarking exercise.
We have conducted an annual employee survey every year since fiscal year 2018.
And I'm very pleased to say that we have achieved first quartile status in this year survey that was conducted in the July timeframe.
This survey focuses on organizational health, and this result gives me the confidence to say our culture has now transformed into a strength for the company.
These two achievements are significant for our company.
Meeting our operating margin goal was not the only key financial achievement this fiscal year, and looking as far back as when Lindsay became a publicly traded company, this is the highest gross margin percent result for the company.
In addition, the Infrastructure business in fiscal year '20 achieved the highest revenue, operating income and operating margin, since Lindsay acquired this business in 2006.
And Brazil achieved its highest revenue in local currency in fiscal year '20, since this business was established in 2002.
One last achievement I want to mention, in fiscal year '20, our South Africa plant ran almost exclusively on rainwater, furthering our global focus on sustainable practices in water conservation.
Regarding our foundation for growth initiative, we continue to see that the margin improvement projects we implemented are delivering as expected.
To go even beyond that statement, the approach taken in this initiative is rapidly becoming part of the company's culture.
Focus on continuous improvement has become established throughout the company.
The fourth quarter is generally a seasonal low period in the North American Irrigation business.
Storm damage becomes more of a market driver during the summer months.
This year storm volume was down slightly from prior year, but more than 10% below the five-year average for the quarter.
Supply and demand fundamentals saw lots of movement in the quarter.
Most of this volatility was bullish for commodity prices and farm income.
So our customers were pessimistic due to low commodity prices.
Early in the quarter, we did see a steady improvement of customer sentiment as we approached the end of the fiscal year.
Government support in the US was visible for the 2019 harvested crop with the $16 billion Coronavirus Food Assistance Program or CFAP announced earlier this year.
But for most of the quarter growers dealt with uncertainty regarding additional support for the 2020 harvest.
That was addressed with the announcement of the second round of CFAP payments in mid-September, when a further $14 billion in government aid was announced.
We continue to see strong growth in technology penetration.
New subscription volume for the 2020 season, inclusive of the Net Irrigate acquisition was up 174% versus prior year.
We've also seen renewal rates approaching 97%, so we're successfully retaining customers in addition to attracting new ones.
In international irrigation we continue to see strong results in most mature markets, including Brazil, where as Tim mentioned, we had a record year for revenue in local currency.
Market conditions in Australia have also continued to improve with recent rains and our new expanded regional distribution center is performing very well there.
International project activity remains robust.
Several projects and tenders are currently visible across multiple regions.
Although timing is uncertain, many of these are across the Mid East and Africa where we continue to see irrigation projects supporting food security investments.
We continued shipment of our large Mid East project in Q4 and had our largest shipping quarter ever from our Turkey facility.
In the Infrastructure business, we saw generally flat results globally and road safety products for the quarter.
We continue to see adoption of the MASH compliant product line where sales were up more than 120% versus prior year.
The ABSORB-M in particular is doing very well due to its rapid deployment capabilities, which increase worker safety and efficiency.
We are also pleased to see that the President signed the Continuing Appropriations Act, which extended the FAST Act by one year.
In addition to the extension the Highway Trust Fund was infused with $13.6 billion to continue funding for important road infrastructure projects.
Road Zipper project sales were a significant contributor to the quarter.
On a year-over-year basis, we completed delivery of the large Highways England project in the UK.
We were able to support our client's aggressive timeline and leverage our global manufacturing footprint to fulfill the project on time, while also pulling ahead barrier shipments to Japan to meet customer requests.
These accelerated shipments allowed us to offset the impact of COVID related project deferrals in the quarter.
Our Road Zipper project funnel remains robust due to the successful implementation of our shift-left strategy that provides earlier visibility of project demand.
Well, timing of project deliveries is always difficult to predict, we have seen some plan projects get pushed out of Q1 due to uncertainty regarding the pandemic.
We are also seeing construction delays continue into the first quarter as regional and local governments manage their COVID response plans.
In some cases, deliveries will be moved and others orders could be canceled.
As previously communicated, we are working to reduce the lumpiness of our Road Zipper business by maintaining and growing a strong funnel, in addition to increasing the lease portion of this business, and we are pleased with progress in both areas.
No adjustments were made to current year results.
Total revenues for the fourth quarter of fiscal 2020 increased 26% to $128.4 million, compared to $101.9 million in the same quarter last year.
Net earnings for the quarter were $14.7 million, or $1.35 per diluted share compared to net earnings of $5.8 million or $0.54 per diluted share in the prior year.
Total revenues for the full year of fiscal 2020 increased 7% to $474.7 million, compared to $444.1 million in the prior fiscal year.
Net earnings for fiscal 2020 were $38.6 million, or $3.50-$3.56 per diluted share compared to net earnings of $15.6 million, or $1.45 per diluted share in the prior fiscal year.
Irrigation segment revenues for the fourth quarter increased 9% to $75.6 million, compared to $69.5 million in the same quarter last year.
North America irrigation revenues were $39.8 million, compared to $41.5 million in the same quarter last year.
The decrease resulted primarily from lower engineering services revenue related to a project in the prior year that did not repeat.
Irrigation equipment unit volume and sales of replacement parts were higher in the quarter compared to the prior year.
But this was offset by the impact of lower average selling prices.
In the international irrigation markets, revenues of $35.8 million increased $7.8 million, or 28% compared to last year's fourth quarter.
Higher sales volumes in Brazil, Australia and the Middle East were partially offset by the effect of differences in foreign currency translation rates compared to the prior year of approximately $3.4 million.
Total irrigation segment operating income for the fourth quarter was $5.8 million, compared to $6.3 million in the same quarter last year.
And operating margin was 7.7% of sales, compared to 9% of sales in the prior year.
Operating margin in the current quarter was negatively impacted by expenses of approximately $1.6 million related to an increase in the environmental remediation liability, as well as severance costs.
Environmental remediation liability was increased by $1 million in connection with a revised plan to remediate environmental contamination at our Lindsay Nebraska site that was submitted to the EPA in August.
Excluding the effect of the increase in the environmental remediation liability and severance costs, operating income for the quarter was $7.4 million and operating margin was 9.8% of sales.
For the full fiscal year, total irrigation segment revenues were $343.5 million, compared to $351.5 million in the prior fiscal year.
North America irrigation revenues of $219 million were essentially flat compared to the prior year.
International irrigation revenues for the year were $124.6 million, compared to $132.9 million in the prior fiscal year.
After considering the unfavorable effect of differences in foreign currency translation rates of approximately $8.6 million, international irrigation revenues were also assessed-essentially flat compared to the prior fiscal year.
Irrigation operating income for the full fiscal year was $40.2 million, or 11.7% of sales, compared to $33.3 million, or 9.5% of sales in the prior fiscal year.
Operating Income and margin expansion resulted primarily from improved cost and pricing performance attributed to the foundation for growth initiatives.
Infrastructure segment revenues for the fourth quarter increased 63% to $52.8 million, compared to $32.4 million in the same quarter last year.
The increase resulted from higher Road Zipper system sales compared to the prior year.
As Randy mentioned in his remarks, we were able to complete our deliveries for the Highways England project, as well as the Japan order during the quarter.
Infrastructure segment operating income for the fourth quarter was $20.1 million, an increase of 115% compared to $9.3 million in the same quarter last year.
Infrastructure operating margin for the quarter was 38% of sales, compared to 28.8% of sales in the prior year.
This improvement resulted from an increase in higher margin Road Zipper system sales and from improved cost and pricing performance.
For the full fiscal year, infrastructure segment revenues increased 42% to $131.2 million, compared to $92.6 million in the prior fiscal year.
Infrastructure operating income for the full fiscal year was $43.8 million, compared to $16.8 million in the prior fiscal year.
Operating margin for the year was 33.4% of sales, compared to 18.1% of sales in the prior fiscal year.
Turning to the balance sheet and liquidity.
Lindsay is well positioned with a strong balance sheet and sufficient liquidity as we continue to face the uncertainty presented by the global Coronavirus pandemic.
We are also well positioned to invest in growth opportunities that we identify.
Our total available liquidity at the end of the fiscal year was $190.9 million, with $140.9 million in cash, cash equivalents and marketable securities, and $50 million available under our revolving credit facility.
Our total debt was $115.9 million at the end of the fiscal year, of which $115 million matures in 2030.
At the end of the fiscal year, we were well within the financial covenants of our borrowing facilities, including a funded debt to EBITDA leverage ratio of 1.5 compared to a covenant limit of 3.0.
| q4 earnings per share $1.35.
q4 revenue $128.4 million versus refinitiv ibes estimate of $117.4 million.
expect growth in international irrigation led by continued momentum in brazil and other markets.
|
Live music roared back over the past quarter, driving all our business stipends to positive AOI for the first time in two years with companywide AOI of $306 million.
The 2021 summer concert season rebounded quickly, with 17 million fans attending our shows in the quarter has returned to live, reflected tremendous pent-up demand.
Festivals were large part of our return to live this summer with many of our festivals selling out in record time, and then overall ticket sales for major festivals was up 10% versus 2019.
Then we had a number of our tours are already sell over 500, 000 tickets for tours this year, including sellout tours by Harry Styles, Chris Stapleton, and others.
In addition to increasing attendance, strong demand also enabled improving pricing with average amphitheater and major festival pricing up double-digits relative to 2019, and at our shows, fans spend at record levels with onsite spending per fan up over 20% in both amphitheaters and festivals compared to 2019.
We delivered these results with an operating environment that required us to wrap up quickly it's new health and safety protocols, and staff our frontline in a tight labor market.
On the health and safety front, we set the industry standard by requiring proof of vaccine or testing for our shows, with no change in fan purchase behavior.
More importantly, our protocols proved effective at mitigating major COVID disruptions to our business in the U.S. and UK, and allowed us to work in conjunction with local health officials to mitigate transmission risks from our events.
On the labor front, we were able to set staffing requirements for our peak outdoor season without any show disruptions.
We also saw strong fan demand in our Ticketmaster results.
We delivered its highest AOI quarter ever.
Q3 was Ticketmaster's fourth highest fee-bearing GTV quarter excluding refunds, led by sports legs restarting and concert on-sales for 2022 ramping up.
In addition, Ticketmaster's secondary business delivered its highest GTV month in September, showing continued growth in the segment, even as artists and content owners continue shifting more of the value to primary sales.
And as the fans came back, so did our brand partners who continue to seek to connect to the live music fan.
As a result, our sponsorship and advertising business delivered over $100 million in AOI for the quarter, the first time at this level since Q3 of 2019.
Return of sponsorship and advertising has been largely driven by historic major partners, along with the addition of new brands, including Truly Hard Seltzer, as well as Coinbase and Solana in the Fintech segment.
As we look forward to 2022, we are encouraged by all our leading indicators across each business.
Through October our confirmed show count across amphitheaters, arenas, stadium shows are up double-digits, relative to the point in 2019 to 2020 shows.
And through mid-October, we have already sold 22 million tickets for our shows in 2022 and demand has been stronger than ever for many of these on sales, with a million tickets sold for each of the Coldplay and Red-Hot Chili Peppers tours, and several other tours already selling over 500,000 tickets.
Ticketmaster is on sale for 2022 also reinforcing this demand, as we expect Q4 transacted fee-bearing GTV to be at record level, even after already selling 65 million fee-bearing tickets for events next year.
Ticketmaster also added clients represented in over 14 million net new fee-bearing tickets so far this year, further accelerating its growth on a global basis.
And our Sponsorship and Advertising business had similar success, with confirmed pipeline for 2022 up double-digits relative to this time in 2019 to 2020.
At the same time, we are continuing our cost focused deliver $200 million in structural savings from our pre -pandemic 2020 plan, making us nimbler and better positioned to invest for future growth.
As we get close to turning the page in 2021, I remain more convinced than ever in the power and potential of live entertainment, and the strength of our position.
No industry was more impacted by the pandemic over the last two years, and no industry has so proven the durability of its demand in the face of such disruption.
I fully expect we will continue to have bumps in the road in the coming months.
And it will take some time for international artists maturing on a truly global basis.
But the fundamental strength of live entertainment and Live Nation has proven out and expect we will only continue to grow from here.
With that, I will let Joe take you through more details on our results.
Before getting into the detail on each business, a few points of context for the quarter, first, this is primarily a U.S. and UK driven quarter.
These markets accounted for 95% of our fans in Q3 versus 75% in Q3 of 2019.
And they represented 90% of fee-bearing GTV in Q3 versus 80% in Q3 of 2019.
Second, our concerts activity primarily ramped up in August with 90% of our attendance for shows occurring in August and September.
Let me now go into more detail on the divisions.
First concerts, as Michael noted, pricing and onsite spending was up for both our amphitheaters and our major festivals in the U.S. and UK.
With almost 1200 amphitheater shows played off, these shows give us the best data set for comparing to 2019.
So, give you more detail on trends for these shows, and in general, the same trends also hold for our festivals.
On pricing, average ticket pricing at our amphitheaters was up 17% to $63.
There are two primary drivers to this.
First, ticket pricing, including more platinum and VIP tickets for shows this year, increased average ticket pricing by $7.
Secondly, our concert week promotion and other promotions were smaller-scale this year, which had an impact of $2 per ticket.
Then for onsite spending, average fan spending was up 25% to $36.
This growth came from a combination of more orders per fan, more items per order, and higher average spend per order.
Many of our fans shifted to buying higher-priced products, which was part of our higher spend per order.
And the shift to cashless also helped as card transactions have historically been larger than cash transactions, and this has held up as we shifted to 100% cashless.
Finally, operating costs, including labor costs were up.
These higher labor costs are driven by several factors, fewer shows per building, our accelerated ramp up to open the buildings this summer, new health and safety protocols and a generally tightened labor market.
At the same time as noted with increased average ticket price and higher onsite spending, we increased the contribution margin per fan and did so to such a level that our profitability per fan, net of operating expenses rose double digits.
Turning now to Ticketmaster, as Michael said, Ticketmaster had a record AOI of a $172 million for the quarter, driven by its fourth highest fee-bearing GTV quarter excluding refunds, and lower cost structure from its reorganization.
Along with lower ramp-up labor costs as we accelerated activity faster than the return of staff.
Primary ticketing was driven substantially by concerts, which accounted for over 70% of fee-bearing GTV, while sports was the second largest category, and together they represented approximately 90% of all fee-bearing GTV.
Geographically, North America accounted for 80% of fee-bearing GTV as activity remained limited internationally outside the UK.
In secondary ticketing, we similarly saw concerts and sports account for over 90% of fee-bearing GTV, though in this case, sports were the primary driver with the launch of new football and basketball seasons.
Another contributor to our growth in ticketing is the continued signing of new clients with over 14 million net new fee-bearing tickets added this year through the third quarter.
These new client additions have been particularly strong internationally, accounting for 2/3 of our new client tickets.
Finally, sponsorship AOI surpassed a $100 million in the quarter for the first time in two years as it again had available ad units at scale, both on-site and online.
Like our other businesses, it was largely U.S. and UK driven together accounting for approximately 90% of total activity.
And as activity resumed, we were also able to engage new sponsors, adding eight new strategic sponsors in the quarter.
As we look to Q4, we see a continuation of the same trends we had in Q3.
With concerts, we expect North America and the UK to continue ramping toward historical activity levels.
While the rest of Europe and other international markets have limited activity given the lead time to plan concerts.
With ticketing we expect a broader recovery as most European markets put stadium and arena tours on sale in Q4, enabling GTV levels that could approach Q4 2019 levels, despite 65 million fee-bearing tickets already being sold for 2022 events.
And while Q4 is typically a seasonally slower period for sponsorship, it too should benefit from concerts and ticketing sales ramping up.
Let us now turn to our cash and cost management.
We have free cash at $1.7 billion at the end of the quarter, which includes $450 million earmarked for the OCESA acquisition.
This was our first quarter since 2019 where our cash contribution margin was higher than our cash burn, contributing a net $166 million in free cash.
We also added $850 million in cash in the quarter through our $400 million drawdown of our Term A loan and $450 million equity raise for ASESA, mentioned previously.
We then had free cash reduced by $370 million, largely resulting from long-term deferred revenue shifting into short-term for show's next summer as we previously indicated would be happening.
This improved cash position was also helped by our ongoing cost and cash management program as this year, we expect to reduce costs by $900 million and cash spend by $1.5 billion relative to pre -pandemic plans and on the cash, side excluding ASESA.
As we prepare for 2022 plans, we remain confident that we have structurally reduced our operating costs by $200 million relative to our pre -pandemic 2020 plans.
A few other balance sheet items.
Our deferred revenue at the end of the quarter was $1.9 billion.
This is compared to $950 million at the end of Q3 of 2019, which gives us the best like for like view of the demand pipeline already in place.
And then a reminder on our debt, that we continue with our liquidity covenants until we report Q4 this year, at which point we switch to a more traditional leverage test.
Given our current liquidity and expected Q4 and 2022 activity levels, we do not anticipate any covenant issues through next year, and expect to continue investing in growth.
| through mid-october, we have already sold 22 million tickets for our shows in 2022.
|
During this conference call, we may refer to certain non-GAAP or adjusted financial measures.
These statements reflect management's reasonable judgment with respect to future events.
A list of these risk factors can be found on Kirby's Form 10-K for the year ended December 31, 2020.
Earlier today, we announced adjusted earnings of $0.17 per share for the 2021 third quarter, which excludes a onetime noncash charge totaling $4.58 per share related to our coastal marine business.
On a GAAP basis, we reported a net loss of $4.41 per share.
Overall, our quarter was messy, with the onetime charge in coastal, a devastating hurricane, which significantly impacted our inland marine business and increased issues related to COVID-19.
We'll talk more about each of these, including the onetime charge in a few moments.
But first, I'll discuss our key markets.
In Marine Transportation, our inland business started the quarter with improving customer demand.
In August, however, barge volumes declined as the cases of the COVID-19 Delta variant increased, which slowed the pace of the economic recovery and reduced demand for refined products and crude.
Vehicle miles traveled in the U.S. declined, including an overall 4.4% decline in August, with all regions of the U.S. impacted.
In our operations, we experienced a meaningful rise in positive cases among our mariners.
As a result, we incurred increased costs to charter additional horsepower during the quarter to ensure our operations were seamless.
Our inland business was also materially impacted by Hurricane Ida, a significant category four storm, which made land fall near New Orleans in late August.
This storm left a widespread path of destruction, which led to prolonged shutdowns of many customer plant as well as significant damage to marine equipment and waterway infrastructure.
As this storm approached, all refineries and chemical plants in the New Orleans, Baton Rouge corridor were forced into shutdowns.
The storm damage was so significant that many remain closed or operating at reduced production levels through September and, in some cases, well into October.
At the height of the storm, more than two million barrels of refinery capacity per day was offline, reducing PADD three refinery utilization from 93% in August to 79% in September.
In the petrochemical sector, with nearly the entire complex shut down operating rates at nameplate ethylene plants in the Southeast -- excuse me, in Southeast Louisiana declined from 89% in August to 24% in September, and production fell as much as 75% compared to August.
From a Marine Transportation perspective, the storm surge was so significant, the Mississippi River flow backwards, causing many industry barges to break free and resulting in damage to numerous vessels, customer docks and waterway infrastructure.
It's been estimated that as many as 2,000 dry cargo and tank barges were damaged during the storm, which included 30 Kirby tank barges.
All of this resulted in a full closure of the Mississippi River for about a week and a lengthy closure of parts of the Gulf Intercoastal Waterway, which remains in effect today.
This closure has resulted in lengthy alternative routes and significant lock delays throughout September and October.
Overall, we estimate the damage caused by the hurricane on our equipment directly contributed to lost revenue and additional costs totaling approximately $0.08 per share during the third quarter.
The market remained challenging during the third quarter, but we did experience some increases in spot market demand, which contributed to modest increases in barge utilization and reduced operating losses.
More importantly, we took significant actions to improve our coastal business, including the sale of our Marine Transportation assets in Hawaii and the retirement of 12 laid-up wire tank barges and four tugboats in the coastal fleet.
These actions resulted in a onetime noncash impairment charge in the third quarter.
However, there are significant positives, and it positions the coastal business for success going forward.
First, our risk profile is greatly reduced by exiting Hawaii, which is a remote market that has generated poor returns for many years.
The retirement of our outdated and laid-up coastal wire barges and tugboats improves our cost structure and materially reduces future capital outlays.
Frankly, many of our customers view the old wire tow technology as less safe and less reliable when compared to newer ATBs.
Overall, going forward, we expect our smaller fleet will allow us to focus on attractive markets and more efficient, safe and cost competitive equipment will ultimately generate improved earnings and favorable returns.
In Distribution and Services, momentum continued to build with improved activity levels contributing to significant sequential and year-on-year increases in revenues and operating margins.
In commercial and industrial, the timing of major backup power installations and seasonal utilization improvements in the rental fleet led to strong sequential activity in power generation.
Increased demand for Thermo-King product sales and service also contributed favorably to the quarter's results.
These gains were partially offset by modest activity reductions in marine repair primarily due to major -- excuse me, due to reduced major overhauls and temporary facility closures following Hurricane Ida.
In oil and gas, increasing U.S. rig counts and completions activity drove strong incremental demand for new transmissions, parts and service from major oilfield customers.
This growth contributed to 25% sequential growth in oil and gas revenues and positive operating margins for the first time in more than two years.
In manufacturing, although supply chain constraints delayed the deliveries of several orders and led to a sequential reduction in revenues, our backlog grew meaningfully with significant new demand for our environmentally friendly pressure pumping and electric power generation equipment.
In October, Kirby acquired a small energy storage systems manufacturer based in Texas, which has been a key partner in the development of our new power generation solutions for electric fracturing equipment.
This acquisition will be important to the development of future energy storage solutions for the oilfield as well as industrial and Marine Transportation applications.
In summary, our third quarter results reflected a challenging environment as well as key operating decisions in coastal marine.
The good news is that we have seen a significant improvement in inland market fundamentals in recent weeks, with increasing customer demand and higher barge utilization in the high 80% range.
Distribution and Services also continues to improve with the economy.
In a few moments, I'll talk more about these developments as well as the rest of our outlook.
Before I review our segment results, I want to provide a little more detail on the onetime charge in coastal marine.
During the third quarter, we sold our coastal Marine Transportation assets in Hawaii, including four tank barges and seven tugboats for cash proceeds of $17.2 million.
We also retired 12 wire tank barges and four tugboats, which had limited customer acceptance and low utilization.
These events resulted in a noncash impairment charge of $121.7 million.
As a result, the company concluded that a triggering event had occurred and performed interim quantitative impairment test on coastal goodwill, which resulted in a noncash impairment charge totaling $219 million.
In total, the company recorded a noncash impairment related to coastal marine equipment and associated goodwill totaling $340.7 million before tax, $275 million after tax or $4.58 per share.
Looking at our operating segments.
In the third quarter, Marine Transportation revenues were $338.5 million with an operating income of $16.9 million and an operating margin of 5%.
Compared to the 2020 third quarter, marine revenues increased $17.9 million or 6%, primarily due to higher fuel rebuilds in inland and coastal as the average cost of diesel fuel had increased 76%.
Improved barge utilization in inland is offset by lower pricing on term contracts that had renewed during the last year.
Operating income declined $15.5 million primarily due to Hurricane Ida, lower term contract pricing and increased maintenance.
Compared to the 2021 second quarter, marine revenues increased $5.6 billion or 2% due to modest improvements in coastal barge utilization and increased fuel rebuilds.
Operating income declined $1.6 million as a result of sales mix, increased horsepower costs and the impact of Hurricane Ida.
During the quarter, the inland business contributed approximately 76% of segment revenue.
Average barge utilization was in the low 80% range, which was slightly down compared to the second quarter, but improved compared to the low 70% range in the 2020 third quarter.
Barge utilization during the quarter was heavily impacted by reduced volumes as a result of COVID-19 Delta variant and customer shutdowns following Hurricane Ida.
Long-term inland Marine Transportation contracts or those contracts with a term of one year or longer contributed approximately 65% of revenue, with 56% from time charters and 44% from contracts of affreightment.
With respect to pricing, average spot market rates were stable compared to the second quarter and the 2020 third quarter.
Of the few term contracts that renewed during the third quarter, average rates were down in the low to mid-single digits.
Compared to the 2020 third quarter, inland revenues were up 3% due to significant increases in fuel rebuilds and improved barge utilization, offset by lower average pricing on term contracts.
Compared to the second quarter, inland revenues were stable.
Overall, the inland market represented 76% of segment revenues and had an operating margin in the mid- to high single digits.
In coastal, spot market conditions improved modestly, resulting in barge utilization in the mid-70% range during the quarter.
Average spot market rates and renewals of term contracts were stable.
During the third quarter, the percentage of coastal revenues under term contracts was approximately 80%, of which approximately 85% were time charters.
Revenues in coastal increased 4% sequentially and 13% compared to the 2020 third quarter, primarily due to higher fuel rebuilds and modest increases in spot market activity.
Overall, coastal represented 24% of Marine Transportation segment revenues and at a negative operating margin in the low single digits.
Moving to Distribution and Services.
Revenues for the 2021 third quarter were $260.4 million, with an operating income of $11 million and an operating margin of 4.2%.
Compared to the 2020 third quarter, Distribution and Services revenue increased $84.4 million or 48%, and operating income improved $9.9 million.
Compared to the 2021 second quarter, revenues increased $33.7 million or 15%, and operating income increased $4.9 million.
These improvements are primarily due to a significant increase in demand for our oil and gas products and services as well as the improved economic conditions across the U.S., which has raised demand for equipment, parts and service in the commercial and industrial markets.
In commercial and industrial, increased economic activity contributed to the increased sequential and year-on-year demand for equipment, parts and service in on-highway, Thermo King and power generation.
The power generation rental fleet also benefit from increased utilization during the summer storm season, including Hurricane Ida.
Marine repair revenues were down sequentially and year-on-year due to reduced major overhauls as well as activity reductions at our Louisiana facilities following Hurricane Ida.
During the third quarter, commercial and industrial revenues increased 9% sequentially and 20% year-on-year.
Overall, the business represented approximately 59% of segment revenue and had an operating margin in the mid-single digits.
In oil and gas, favorable commodity prices and increased activity in the oil field contributed to significant sequential and year-on-year increases in revenues and operating income.
The most significant increase was in our distribution business, with better demand for new transmissions, parts and service from major oilfield customers.
Our manufacturing businesses also experienced substantial increases in new orders for pressure pumping and frac-related power generation equipment.
While manufacturing revenues increased sharply year-on-year, the business was negatively impacted by the timing of deliveries and OEM supply chain issues.
During the third quarter, oil and gas revenues increased 25% sequentially and 120% year-on-year.
Overall, the oil and gas-related businesses represented approximately 41% of segment revenue and had an operating margin in the low to mid-single digits.
Turning to the balance sheet.
As of September 30, we had $54 million of cash and total debt of $1.21 billion, with a debt-to-cap ratio of 29.8%.
Since the Savage acquisition of April 1, 2020, we have repaid nearly $500 million in debt.
During the quarter, we generated strong cash flow from operations of $83 million, net of capital expenditures of $34 million.
Free cash flow was $49 million.
We also sold assets with net proceeds of $22 million during the quarter, primarily composed of coastal marine assets in Hawaii.
At the end of the quarter, we had total available liquidity of $908 million.
As of this week, our net debt has been further reduced to $1.2 billion.
For the full year, we expect capital spending to be approximately $120 million to $130 million, which represents more than a 15% reduction compared to 2020 and is primarily composed of maintenance requirements for our marine fleet.
We also expect to generate free cash flow of $250 million to $290 million for the full year.
Lastly, from a tax perspective, we expect an effective tax rate of approximately 29% in the fourth quarter.
Although the third quarter certainly had its challenges, we are very encouraged by the improving market fundamentals across our businesses, which are setting the stage for materially improved earnings in the coming year.
In the near term, for the fourth quarter, we expect a sequential improvement in overall revenues and earnings driven by increased volumes and more favorable market conditions in Marine Transportation, offset in part by nominal and normal [Technical Issues] and continued supply chain issues in Distribution and Services.
In the inland market, although some issues associated with Hurricane Ida have carried over, including extended customer shutdowns, barge repairs and waterway closures, our outlook remains very positive.
During October, our barge utilization has been in the mid-80% to high 80% range, with recent utilization at the high end of that and in the high 80s.
Some of this increase can be attributed to waterway closures in Louisiana, which have extended transit times.
However, turnarounds and pent-up demand are also driving up barge volumes.
While the waterways are expected to fully reopen soon, we expect barge utilization levels will be minimally impacted due to the ramping up of Hurricane Ida affected plants, economic improvements, new chemical plants coming online and the onset of winter weather.
With increased inland activity levels, minimum new barge construction and continued retirements, we expect further improvements in the spot market going forward.
During the fourth quarter and into next year, term contracts that renewed lower during the pandemic are expected to reset and gradually reset to reflect the improved market conditions.
Overall, inland revenues are expected to sequentially increase in the fourth quarter, with operating margins improving to around 10%.
In coastal, we expect the market will continue to recover, with modest demand improvement for refined products and black oil transportation.
The recent retirement of the wire barge marine equipment will result in coastal barge utilization being around 90% for the fourth quarter.
Although the Hawaii equipment has been sold, we will continue to operate the assets under a charter agreement through the end of the year when our existing customer contracts expire.
In the fourth quarter, we do anticipate some elevated shipyard activity on several of our larger capacity barges, and that will result in a coastal revenue reduction in the mid-single digits compared to the third quarter.
Coastal operating margins are expected to be at or slightly below breakeven for the fourth -- in the fourth quarter.
Looking at Distribution and Services, favorable commodity prices and increasing rig counts as well as well completions are expected to yield continued strong demand in our oil and gas distribution business.
In manufacturing, activity levels are also expected to remain strong driven by new orders and our growing backlog of environmentally friendly pressure pumping equipment and frac-related power generation equipment as well as some modest remanufacturing of conventional equipment.
However, the OEM supply chain issues are expected to persist throughout the fourth quarter, and they will delay sales -- some sales and project deliveries into 2022.
As a result, we expect our oil and gas businesses will experience a modest sequential reduction in revenues and operating income in the quarter.
In commercial and industrial, despite improving economic activity, there will be normal seasonality in marine repair, Thermo King and power generation, resulting in sequential reductions in revenue and operating income in the fourth quarter.
Overall, compared to the 2021 third quarter Distribution and Services revenues are expected to decline modestly, with operating margins in the low to mid-single digits.
Now to wrap things up, although the third quarter's results were disappointing, we see improved results in the fourth quarter, despite planned shipyards and coastal and seasonality and supply chain issues in Distribution and Services.
More importantly, we see strong momentum building across our businesses, which we will believe -- which we believe will drive increased revenues and meaningful earnings growth in the coming years.
In inland, our barge utilization has recently touched 90%, with October averaging in the mid- to high 80% range.
With the world economy beginning to emerge from the pandemic, low inventories of refined products and oil demand expected to meet or exceed pre-pandemic levels in 2022, we believe inland has turned the corner.
With minimal new barge supply, we expect our inland business will steadily move higher with improved pricing, earnings and returns going forward.
In coastal, although market conditions remain challenging, recent improvements in the spot market should lead to barge utilization around 90%.
Our difficult but necessary decisions to exit the Hawaii market and retire unutilized assets are long-term positives that will allow this business to focus on its best assets and markets to generate positive earnings as the market improved.
In Distribution and Services, economic growth will benefit our commercial and industrial businesses in the coming quarters.
In oil and gas, with strong commodity prices and expectations for increased U.S. gas-directed drilling, we are increasingly optimistic about enhanced demand for our products and services.
Further, a heightened customer focus on low carbon solutions, including friendly -- environmentally friendly pressure pumping equipment and our power generation solutions for e-frac, has translated into significant growth in our backlog.
These increasing levels of activity will lead to improved profitability in 2022.
And finally, our strict capital discipline and intense focus on cash flow generation throughout the pandemic has enabled us to significantly reduce our debt and increase our liquidity.
As a result, we are very well positioned to act on future strategic opportunities to increase our earnings potential going forward.
We are now ready to take questions.
| q3 adjusted earnings per share $0.17.
q3 gaap loss per share $4.41 including items.
compname says expects 2021 capital spending to range between $120 to $130 million.
|
I hope everyone is staying healthy and safe.
Joining me on the call today is Walter Ulloa, chairman and chief executive officer; and Chris Young, chief financial officer.
We appreciate you joining us for Entravision's first-quarter 2021 earnings call.
Entravision posted strong results for the first quarter with net revenue of $148.9 million, up 132% year over year.
On a pro forma basis including Cisneros Interactive revenue in our prior-year results, revenue increased 43% over the first quarter of 2020.
Growth during the quarter was driven by our core broadcasting businesses excluding political, along with the continued strong performance of our digital segment.
We are pleased to see our underlying businesses continue on an upward course, since a pandemic-driven lows in 2020.
Each of our businesses is now firmly on the path to recovery.
And our first-quarter results give us confidence and an optimistic outlook for the balance of 2021.
Adjusted EBITDA totaled $14.2 million for the quarter, which is up 47% from the prior-year period.
On a pro forma basis, accounting for Cisneros Interactive, adjusted EBITDA increased a solid 35% year over year.
From an expense management perspective, we continue to operate as a much more efficient business.
Our lean cost structure is helping propel our company forward as macroeconomic conditions continue to improve.
Chris Young, our CFO will speak further about our first-quarter expenses later in today's call.
Now let's take a look at our segment performance for the quarter.
Our television division generated $36.1 million for the first quarter, down 8% compared to the prior year, primarily due to lack of non-returning political revenue compared to the first quarter last year, excluding $5.3 million of non-returning television political spend in the first quarter of 2020.
Core television advertising increased by 3%.
With national advertising revenues increasing by 4% and local advertising revenues up 1%.
Strength in core television revenues in the first quarter was driven by growth in services, up 13%, healthcare improved 23% and groceries and finance were up 11% compared to the prior-year period.
Auto, our largest television advertising category decreased 1% year over year.
Although the auto category did face some supply chain issues during the quarter.
With more Americans heading back on the road, we anticipate this to be a short-term disruption to our auto performance.
Approximately 16 million cars are forecasted to be sold in the United States this year, which equals an increase in cars sold off almost 10% over the last year.
Consumer demand for auto definitely remained strong.
In terms of television ratings for winter 2021 or Univision television stations finished ahead of or tied with their Telemundo competitor among adults 18 to 49 for early local news in 12 of the 17 markets where we have head-to-head competition with Telemundo.
For late local news, we finished ahead of our or tied our Telemundo competitors in 11 of the 17 markets where we have head-to-head competition.
During a full week, our Univision and UniMás television stations have a cumulative audience of 4.4 million people ages two-plus across all of our markets, compared to Telemundo 3.5 million people ages two-plus.
We have 26% more viewers in Telemundo, in our Univision and UniMás television footprint, which is 4% higher than the November 2020 range release.
Turning to our digital operations, digital revenues total $101.5 million for the first quarter, compared to $13.3 million in the prior-year period, an increase of 661%.
Digital revenues represented 68% of total revenues for the company in the first quarter.
The primary driver of this growth was our acquisition of majority interest in Cisneros Interactive in the fourth quarter of 2020.
On a pro forma basis, our digital revenues increased 90% compared to the prior-year period.
Other drivers of growth for our digital unit in the first quarter were our U.S. local advertising solutions business, up 21% and Smadex are global programmatic and performance product grew its revenue 21% compared to the first quarter of 2020.
Entravision continues to provide our clients, brands, and marketers, the best platforms, the strongest reach, and complete advertising campaign transparency.
Our highly proficient digital sales operation now serves more than 4600 clients each month in 21 countries.
Now let's turn to your audio segment.
Our audio revenues for the first-quarter 2021 totaled $11.3 million, a decrease of 4% year over year.
Local audio revenues decreased 10% year over year, while national audio revenues were up 9% year over year, excluding radio political spending $1.1 million the prior-year period, core radio revenues increased 6% versus the first quarter of 2020.
In the 12 markets where we subscribe to Miller Kaplan Data for total spot revenue, we outperformed the market by 13 points in total revenue combined.
We outperform the total market in 10 of the 12 markets to which we subscribe.
This includes exceptional performance in three of our top radio markets.
Our Los Angeles radio cluster beat the market by 23 points.
Our Phoenix radio stations outperformed the market by 15 points, and our McAllen radio cluster surpassed the market in total spot revenue by 31 points.
These three markets are all Top 10 U.S. Hispanic markets.
In terms of advertising categories, services remain our largest category representing 42% of total audio revenue.
Services improved 22% year over year.
Auto, our second-largest ad category declined 36% for the quarter as compared to the first quarter of 2020.
As with television, radio, auto ads were impacted by supply chain issues during the quarter, which had a larger impact on tier two and tier three auto dealer spending across all our radio markets.
Our audio division rates remain very strong, and as more people increase their driving time, we should see these rates improve even more.
to 7 p.m. for the winner measurement period among Hispanic adults 18 to 49 and Hispanic adults 25 to 54, including ties.
Overall, we have an outstanding 2021 first-quarter performance.
We believe that our first-quarter earnings results will provide strong momentum for renovations throughout the year.
As Walter discussed revenue for Q1 2021 totaled $148.9 million, an increase of 132% from the first quarter of 2020.
When comparing on a pro forma basis and including Cisneros Interactive's revenue in 2020.
results, revenues were increased 43% year over year.
For our TV division, total ad and spectrum-related revenue was $26.4 million, down 11% at year over year, excluding political core ad and spectrum-related revenue was up 9% year over year.
Retransmission revenue totaled $9.6 million and was up 1% year over year.
For our digital division, digital revenues totaled $101.5 million, up 661% year over year.
When comparing on a pro forma basis and including Cisneros Interactive's revenue in our 2020 results, digital revenues increased 90% year over year.
Lastly, for our audio division revenues totaled $11.3 million, down 4% over the prior-year period, excluding political core audio revenue was up 6% over Q1 of last year.
As we spoke to our last quarters call during the second half of 2020, we took strategic steps to limit our expenses due to market conditions.
Following a strong finish to the year we were pleased to fully reinstate all employee salaries to pre COVID levels.
And while salaries have been reinstated, we were able to maintain most of the remaining expense guts in 2021.
SG&A expenses were $13.9 million for the quarter, an increase of 2%, compared to the $13.6 million in the year-ago period.
Excluding the Cisneros acquisition SG&A expenses were down 19%.
Direct operating expenses totaled $26.6 million in Q1 of 2021, down slightly from $26.7 million in Q1 of 2020.
Excluding the Cisneros acquisition direct operating expenses were down 9% year over year.
Finally, corporate expenses for the quarter increased 5% to a total of $7.2 million, compared to $6.8 million in the same quarter of last year.
The primary driver of corporate expense was audit-related expense and salary expense.
During the first quarter, our share buyback remained on hold.
We also maintained a dividend at $0.250 and continue to eliminate expenses at the operating and corporate level been secondary to serving our core media businesses.
We will continue to evaluate our buyback and dividend each quarter, which will be at the discretion of our board of directors.
Looking forward, we expect that our operating expenses excluding the digital cost of goods sold and corporate will be up approximately 3% in the second quarter as compared to the first quarter of this year.
Excluding expenses related to Cisneros, operating expenses are expected to be approximately flat compared to the first quarter of this year.
Consolidated adjustment EBITDA totaled $14.2 million for the first quarter, up 47% compared to the first quarter of last year.
On a pro forma basis, accounting for the Cisneros acquisition, adjusted EBITDA was up 35% year over year.
This was a strong quarter of EBITDA generation despite the lack of political revenue.
Entravision's 51% portion of Cisneros interactive adjusted EBITDA represented a $3 million contribution to our total EBITDA in the first quarter.
Strong free cash flow has been a cornerstone of Entravision's business and supported our ability to grow both organically and through acquisitions without the need to take on leverage.
We expect this high free cash flow conversion rate to continue for the foreseeable future.
Earnings per share for the quarter in 2021 were $0.06, compared to a loss of $0.42 per share in the same quarter of last year.
Net cash interest expense was $1.4 million for the first quarter compared to $1.9 million in the same quarter of last year.
Cash capital expenditures for Q1 totaled $1.8 million compared to $2.7 million in the prior year.
Capital expenditures for the year are expected to be approximately 8 million.
Turning to our balance sheet, which remains very strong.
Cash and marketable securities as of March 31, totaled $165.7 million, total debt was $214.5 million, net of $75 million of cash and marketable securities on the books are total leverage as defined in our credit agreement was 2.15 times at the end of the first quarter.
Net of total accessible cash and marketable securities, our total net leverage was one turn of EBITDA.
Turning to our pacings for the second quarter of 2021.
As of today, our TV advertising business is pacing 44% over the prior-year period with core TV, excluding political pacing at a plus 55%.
Our digital business, including revenue from Cisneros Interactive is pacing plus 900%, factoring in Cisneros revenue generated in Q2 of last year, our digital business on a pro forma basis is pacing plus 115%.
Lastly, our audio business is pacing plus 84% with core audio, excluding political pacing plus 103%.
All-in our total revenue compared to last year is pacing at a plus 360%, pro forma on Cisneros acquisition, our total revenue is currently pacing at a plus 87%.
A majority investment in Cisneros Interactive has performed strongly since the closing of the acquisition in the fourth quarter of last year.
And we are excited to continue to expand and enhance our digital offerings.
We're also very optimistic about Entravision's continued growth given the overall improvement of macroeconomic conditions.
With a more streamlined cost structure, we will continue to operate our businesses more efficiently while at the same time delivering high-quality and dynamic services, content, and products to our customers.
We appreciate your continued support of Entravision.
| q1 revenue rose 132 percent to $148.9 million.
qtrly net income per share attributable to common stockholders, basic and diluted$0.06.
|
We have slides for our conference call.
You can find them in the Investor Relations section at our website at www.
Bfore I provide an overview of our business in the third quarter.
I do want to introduce Andy Tometich, who will become CEO on December 1 Andy joined Quaker Houghton on October 13 and we are in the midst of a detailed transition process over the seven week period until we become CEO.
Andy has over 30 years of experience in the specialty chemicals industry with a strong track record of accomplishments and a passion for the customer intimate business model.
Andy, please feel free to say a few words.
I'm very pleased to now be a Quaker Houghton and to be with you here today.
Over Mike's very successful tenure, he and the Quaker Houghton team have developed a business model with customer experience as it's true differentiator and that truly resonates with me.
After three decades and specialty chemical companies that focused on customer-based solutions, I'm really looking forward to building on the strong foundation at Quaker Houghton.
Especially as we look to grow in areas where our model add sustainable value for our customers and our stakeholders.
For now, I'll just wrap up my brief comments by saying, I'm excited about the opportunities for Quaker Houghton, Mike.
I really appreciate everything you are doing to support our seamless transition including your continuation as Chairman and I look forward to working with our analysts, investors and stakeholders, including those who are with us on the call today.
Mike back to you.
And I'm highly confident Andy will take Quaker Houghton to new heights.
And now onto the quarter, our results for the third quarter where we were, where we expected in the base.
Although how we got there was different than our original expectations.
The major headwind for the quarter was raw material costs.
They increased nearly 10% from the second quarter to the third quarter, which was considerably higher than our expectations.
However, we also had good sales growth and continued our efforts around cost control, which helped offset the raw material headwinds.
Let me now dive deeper into our performance and I'll start with sales.
Overall, our topline revenue was up percent from the prior year, with all segments showing strong growth.
We saw good organic volume growth between 7% and 9% for our three largest segments, which was the Americas, EMEA and Asia Pacific.
Higher prices of around 10% were also a major factor in our sales growth.
In addition, we saw a benefit from acquisitions of 4% and from foreign exchange of 2%.
On a sequential basis, our sales volumes were relatively flat.
While we did see growth in some of our end markets, sequential growth was muted by both seasonality and certain segments as well as the semiconductor shortage which we estimate cost us approximately 2% points of growth in the quarter.
I also want to point out that our ability to gain new piece of the business and take market share continued to contribute to our strong performance as we estimate total organic sales growth due to net share gains was approximately 3% in the third quarter of 2021 versus the third quarter of 2020.
So we continue to feel good about our ability to deliver on our historical performance of consistently growing 2% to 4% points above the market due to share gains and looking forward, we continue to feel good about delivering these levels given the opportunities we have recently won or are actively working on.
So in summary, the big picture on organic volume growth for us was approximately 3% was due to market share gains.
About 4% due to growth in our underlying markets, which we estimate would have been 2% higher, if it wasn't for the semiconductor shortage.
While sales were a positive for us in the quarter, a clear negative was the continued increase in our raw material costs.
While we knew raw materials were trending up, the last time we talked, the increases have continued longer and at a higher level than we expected.
Overall, our cost of raw materials have increased nearly 10% sequentially in the third quarter.
Further, the availability of raw materials has impacted us at times, but I'm proud to say that we've navigated this so far and have ensured that all our customers have continue to operate their business.
The increase in raw material costs did put downward pressure on our gross margins in the third quarter and the increases in raw materials will continue into the fourth quarter, although at a slower projected rate.
We have, continue to implement price increases and we will be implementing more of the next two months.
Our expectation is that we will see sequential improvement in our product margins in the fourth quarter as we make strides to offsetting raw material increases.
For the fourth quarter, we should start to see some improvement in our product margins, but we expect to have a larger improvement in the first quarter of 2022.
Our goal still remains to exit the year with enough price increases in place that we will offset raw material inflation from 2021 as we enter into 2022 and we believe this is achievable.
So overall we are pleased with the quarter, especially considering the challenges we faced with raw material pricing as well as the headwinds from the semiconductor shortage.
Our trailing 12 months adjusted EBITDA of $279 million is an all-time high as 25% higher than our $222 million from last year.
So we are experiencing a step change in our profitability that we projected as we entered into the year.
Related to our liquidity, our net debt in the quarter was relatively flat due to increases in our working capital, primarily related to raw material cost increases and availability.
However, our leverage ratio of net debt to adjusted EBITDA continues to be at 2.7 which is the low point since the combination two years ago, and down from 3.4 one year ago.
Each of them expands our technology capabilities and our geographic expansion in certain product lines.
In total, they're adding 15 million in revenue and $2 million in EBITDA.
While maybe not that meaningful given the size each provide another building block in our strategic portfolio.
This also continues our trend of buying smaller companies for an attractive multiple of approximately seven to eight times EBITDA.
As we look forward to the fourth quarter, we expect short-term headwinds from high higher raw material costs.
The power restrictions in China and the continued impact from the semiconductor shortage on the global automotive market.
But as I mentioned earlier, we expect to see some sequential improvement in our product margins.
Overall, we expect our adjusted EBITDA in the fourth quarter to be similar to the third quarter and be somewhere in the '60s.
And stepping back and looking at the year as a whole, I am more optimistic about our business now than I was at the beginning of the year.
While we will likely end up with our profitability in 2021 in the same place as we originally expected.
The way we are getting there is different.
Essentially, we are seeing higher demand in our products in most end-markets.
But at the same time this higher demand was largely offset by the very large rising input costs, which negatively impacted our margins due to the lag effect of getting price increases.
However, we are making headway in our price increases, and as I mentioned before, we remain committed to our goal of exiting the year with product margins back to our targeted levels.
So as to recover the past years raw material inflation as we enter into next year.
I believe this scenario was better than we expected entering the current year as we will exit with better demand in our end markets, coupled with getting our margins and a better place going into 2022.
As we enter 2022, the headwinds in the fourth quarter caused by high raw material costs and the semiconductor shortage, as well as the power restrictions in China are likely to last into the first part of the year, but become less of a headwind over time.
For the full year, we believe 2022 will be a strong year for us with net sales and earnings growth to be above our long-term trends.
We expect this to be driven by one good growth in our end markets as our markets continue to rebound.
Two continued market share gains and three sequential improvement in our product and gross margins over the course of the year as we recapture the raw material inflation from 2021.
I am so proud of how our team has performed in servicing our customers, meeting their needs and successfully continuing with our integration execution, which is both critical and difficult for us given the conditions we faced this year.
People are everything in our business and by far our most valuable asset and ensuring their safety and well-being is and will continue to be a top priority for us.
So I can't help but emphasize my pride in our Quaker Houghton team and what we have and will be able to accomplish for our customers and investors both now and going forward.
And also there are reconciliations between US GAAP measures and non-GAAP measures provided in our call charts on pages 11 to 22 for reference.
Getting into our third quarter performance, the story was pretty consistent with our previous quarters this year, and that it was really a tale of a positive solid top-line performance tempered by a negative higher input costs due to the global supply chain disruption that we and the rest of the world are currently facing.
As I begin to discuss our quarterly performance, I'll point you to slide six, seven and eight in our call charts, which provide a further look into our financials.
Our record net sales of $449.1 million increased 22% from the prior year, driven by 6% organic volumes, 10% from our pricing initiatives, 4% percent from acquisitions and 2% from foreign exchange.
When looking sequentially, we were up 3% from the second quarter, largely due to increases from our pricing initiatives on flat volumes.
Turning to our gross margin trend.
Our third quarter margin ended at 32.3%, given the upward trend of generally all input costs in the world, we knew this quarter would declined compared to the 35.5% level we had in second quarter and also signaled that this quarter would be the lowest of the year.
That said, the pace of the raw material cost increases were more than we expected and our sequential gross margin declined as such.
Looking ahead to the fourth quarter, margins, as Mike mentioned, we expect to see sequential increases in our product margins on a dollar profit basis.
However, the impact of the price increases to our top line will naturally impact our overall gross margin level on a percentage basis, as we are putting in price increases to offset raw material inflation initially and retain our product margins on a per kilo basis to ensure we maintain our levels of gross profit in dollars.
We expect to achieve this by the end of the year on a going forward basis once our price increases offset raw material inflation and we protect our gross profit dollars going forward, we will then begin to put in place additional initiatives to return our gross margin more to targeted levels over time.
SG&A was up $7 million compared to the prior year, as we add additional direct selling costs due to our increase in sales and related margin higher labor and other costs that were directly impacted by COVID last year and additional costs associated with our recent acquisitions.
Sequentially, we benefited from $5 million of lower SG&A costs, which were primarily due to lower incentive compensation and some lower professional and other similar fees.
The Company also benefited from other higher income due to FX transaction gains in the current quarter compared to losses in the prior year, which was partially offset by lower performance from our equity investments, primarily in Korea.
The net of this performance resulted in adjusted EBITDA of $66.2 million for the quarter, which was up 3% compared to the prior year of $63.9 million.
As you can see in chart nine, this increased our trailing 12 month adjusted EBITDA to a record $279 million.
From a segment effective, these results were driven by significant net sales increases in each of the Company's segments year-over-year, while gross margins and higher SG&A negatively impacted all segments.
The net of these impacts resulted in a 16% increase in EMEA earnings compared to prior year generally flat performances in Americas and GSP and a decline in Asia-Pacific earnings which was due to a solid performance last year as China was less impacted by COVID 19 in the prior year, as well as a decline in gross margin in the current quarter due to the continued increases in raw material costs.
When looking at our segments sequential performance, each segment's topline was other above the second quarter, a relatively consistent, largely due to global pricing initiatives on flat volumes, which were offset by lower gross margins in all segments.
Due to continued increases in raw material costs that exceeded our pricing initiatives.
From a tax perspective, we had low effective tax rates in the current and prior year quarters of 2.6% and 8.1% due to various one-time non-cash related items.
Excluding these items in each period, our tax rate would have been relatively consistent at 25% for the current quarter compared to 24% in the prior year.
To note, we expect our fourth quarter effective tax rate to be a little higher in the range of 26% to 28%.
But our full year effective tax rate will be more consistent with past estimates in the range of 24% to 26%.
Our non-GAAP earnings per share of $1.63 grew 5% compared to the prior year as our solid adjusted EBITDA coupled with over a million of interest savings due to lower borrowing rates and average borrowings were partially offset by a slightly higher tax expense.
As we look to the company's liquidity summarized on chart 10, our net debt of $759 million was flat compared to the second quarter.
This was primarily driven by $12 million of operating cash flow, offset by $7 million of dividends paid and $6 million of additional investments in normal capital expenditures.
The quarter's low operating cash flow was driven by further investment in the company's major cash requirement, working capital.
Specifically the company, continue to see cash outflows from accounts receivable due to higher net sales and also had considerable increases in inventory, which were due to higher raw material costs, as well as restocking and bulk purchases to ensure safety stock given the disruption in the global supply chain.
The company's liquidity and leverage still remain healthy with a reported leverage ratio at 2.7 times as of the third quarter compared to 3.2 times entering the year.
I want to emphasize we are committed to prudent allocation of our capital and remain committed to reducing leverage to our target of 2.5 times, which we still are targeting to be near by year-end.
This commitment includes prioritizing debt reduction, but also continuing to pay our dividends as well as investing in acquisitions that provide growth opportunities which makes strategic sense.
This is evidenced by our most recent tuck-in acquisitions of [Indecipherable] and industries, which were acquired for 13 million or a rough multiple of seven times EBITDA and bring with them a wealth of opportunity in technology and product reach.
So to summarize Quaker Houghton had a solid quarter, that was relatively consistent with our expectations but a little different than initially expected due to continued strength in demand and good market share gains, which were partially offset by higher input costs.
Our liquidity remains very healthy, and we remain committed to our overall capital allocation and deleveraging strategy.
Before I conclude my remarks.
I just wanted to take a moment to note that this is the last call for Mike during his incredibly successful tenure as CEO.
Under his guidance Quaker Houghton has reached new heights and grown in areas that some believe could never been achieved.
And I appreciate those remarks, it's really been an honor and a privilege to work for Quaker Houghton for 23 years and to work with such a great people throughout this company that really deliver solutions for our customers every day and really make this a very special place to work.
| compname says recent acquisitions to add fy sales about $15 million .
q3 non-gaap earnings per share $1.63.
q3 sales rose 22 percent to $449.1 million.
|
Joining me on the call today is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, Senior VP.
We had an outstanding record-setting quarter, highlighted by a 71% increase in new contracts, a 29% increase in homes delivered and a 94% increase in net income.
For the quarter, we sold 2,949 homes.
Year-to-date through September, we have sold 7,299 homes, 43% better than last year and more than we sold all of 2019.
Our sales were strong across the board and throughout all of our markets.
Our absorption pace improved significantly to 4.6 sales per community per month compared to 2.6 a year ago.
A number of factors contributed to our strong sales performance: low interest rates, low inventory levels, a shift in buyer preference toward single-family homes and an increasing number of millennials opting for homeownership.
All of these are fueling a robust housing market.
In addition, we continue to gain market share in most of our markets based upon the strength and quality of our communities, the quality of our online marketing execution and generating online leads and converting those online leads into sales and the continued strong market acceptance of our most affordably priced Smart Series line of homes.
Our Smart Series sales comprised nearly 36% of total companywide sales during the quarter compared to 28% a year ago.
We are now selling our Smart Series homes in all 15 of our divisions.
And on average, our Smart Series communities produce better sales pace, better gross margins, better cycle time and better returns.
We delivered 2,137 homes in the quarter.
Year-to-date through September, we have now delivered 5,467 homes, which is 25% more than last year.
Our backlog sales value at September 30 equaled $1.8 billion, an all-time record, and units in backlog increased 54% to a record 4,503 homes.
Our margins and returns during the quarter were also very strong.
Gross margins during the third quarter improved by 240 basis points to 22.9%, and our SG&A expense ratio improved by 60 basis points to 11.6%, and our pre-tax income percentage significantly improved to 11.2%.
All of this resulted in a greater than 90% improvement in both pre-tax and net income for the quarter.
Our financial services business also had a record quarter, highlighted by strong income and excellent capture rate and very solid across-the-board execution.
Now I will provide some additional comments on our markets.
As you know, we divide our 15 markets into two regions.
The Northern region consists of six of our 15 markets: Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis and Detroit.
Our Southern region consists of the remaining nine markets: Charlotte and Raleigh, North Carolina, Orlando, Tampa and Sarasota, Florida and Houston, Dallas, Austin and San Antonio, Texas.
As I indicated earlier, we experienced strong sales performance in the third quarter across all of our markets.
New contracts in the Southern region increased 63% for the quarter while new contracts in the Northern region increased 85%.
Our deliveries increased by 27% over last year in the Southern region to 1,269 deliveries or 59% of company total.
The Northern region posted 868 deliveries, an increase of 33% over last year and 41% of total.
We also had substantial income contributions from most of our markets led by Orlando, Dallas, Minneapolis, Columbus, Charlotte, Tampa and Cincinnati with Indianapolis, Houston and Austin also having a very strong third quarter.
Our controlled lot position in the Southern region increased by 49% compared to a year ago and increased by 17% in the Northern region.
While we are selling through a number of our communities faster than anticipated, we are nonetheless very well positioned to handle demand.
35% of our owned and controlled lots are in the Northern region with a balance roughly 65% in the Southern region.
We have an outstanding land position companywide.
In total, we own and control approximately 40,000 lots or about a 4.5- to five year supply.
Importantly, roughly 60% of our lots are controlled under option contracts, which, with more than half of our lots controlled by option, gives us tremendous flexibility to react to changes in demand or individual market conditions.
We had 121 communities in the Southern region at the end of the quarter, which is down from 132 a year ago and also down from 126 at the end of this year's second quarter.
We had 86 communities in the Northern region at the end of the third quarter, down slightly from a year ago and down from 94 at the end of this year's second quarter.
The pandemic continues to affect our operations, though our teams have managed through it very well.
We continue to focus on building and selling quality homes, and we continue to manage our operations and our business with the highest standards for our employees, customers and their accompanying work environment.
Finally, let me conclude by saying that in addition to having a record-shattering quarter, our company is in the best shape ever.
Our financial condition is strong.
Our balance sheet is healthy.
We have meaningful operating momentum and are poised to have an outstanding year.
As far as financial results, new contracts for the third quarter increased 71% to 2,949, an all-time quarterly record compared to 1,721 for last year's third quarter.
Our new contracts were up 75% in July, up 94% in August and up 44% in September.
Our sales pace was 4.6 in the third quarter compared to last year's 2.6.
Our cancellation rate for the third quarter was 10%.
As to our buyer profile, about 53% of our third quarter sales were to first-time buyers compared to 50% in the second quarter.
In addition, 40% of our third quarter sales were inventory homes compared to 45% in the second quarter.
Our community count was 207 at the end of the third quarter compared to 221 at the end of '19 third quarter.
The breakdown by region is 86 in the Northern region and 121 in the Southern region.
During the quarter, we opened 12 new communities while closing 25, and we opened 51 new communities during the nine months ended 9/30 this year.
We delivered a third quarter record 2,137 homes, delivering 58% of our backlog, which was the same percentage as a year ago.
And revenue increased 30% in the third quarter, reaching a third quarter record of $848 million.
Our average closing price for the third quarter was $380,000, a 1% decrease when compared to last year's third quarter average closing price of $382,000.
Our backlog sales price is $404,000, up from $390,000 a year ago, and the backlog average sales price of our Smart Series is $315,000.
Our third quarter 2020 operating gross margin was 22.9%, up 240 basis points year-over-year and up 100 basis points from the second quarter.
And our third quarter SG&A expenses were 11.6% of revenue, increasing -- improving 60 basis points compared to 12.2% a year ago, reflecting greater operating leverage.
Interest expense decreased $3.4 million for the quarter compared to last year.
Interest incurred for the quarter was $10 million compared to $12.9 million a year ago.
The decrease is due to lower outstanding borrowings in this year's third quarter as well as a lower weighted average borrowing rate.
During the third quarter, we generated $111 million of EBITDA compared to $67 million in last year's third quarter.
We have $22 million in capitalized interest on our balance sheet, which is about 1% of our total assets.
Our effective tax rate was 23% in the quarter compared to last year's 24% in the third quarter.
Our third quarter rate benefited from energy tax credits that were retroactive to 2019, and we estimate our annual effective rate this year to be around 23%.
And our earnings per diluted share for the quarter increased to $2.51 per share from $1.32 last year.
Now Derek will cover our mortgage company results.
Our mortgage and title operations achieved record third quarter results in pre-tax income, revenue and number of loans originated.
Revenue was up 115% to $28.9 million due to a higher volume of loans closed and sold along with significantly higher pricing margins.
For the quarter, the pre-tax income was $19.2 million, which was a 241% increase compared to 2019's third quarter.
76% of the loans closed in the quarter were conventional and 24% FHA or VA compared to 78% and 22%, respectively, for 2019's third quarter.
Our average mortgage amount increased to $314,000 in 2020 third quarter compared to $312,000 last year.
Loans originated increased to a third quarter and all-time record of 1,636 loans, 32% more than last year, and the volume of loans sold increased by 39%.
Our borrower profile remains solid with an average down payment of over 15%.
And for the quarter, the average credit score on mortgages originated by M/I Financial was 747, up slightly from 745 last year.
Our mortgage operation captured over 85% of our business in the third quarter, which was in line with last year.
We maintained two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to the sale to investors.
At September 30, we had $136 million outstanding under these facilities.
We extended our repo line this month through October of 2021 and increased the commitment amount from $65 million to $90 million.
Both facilities are typical 364-day mortgage warehouse lines that we extend annually.
As far as the balance sheet, our total homebuilding inventory at 9/30 was $1.8 billion, an increase of $16 million over last year.
Our unsold land investment at 9/30/20 is $762 million compared to $821 million a year ago.
At September 30, we had $362 million of raw land and land under development and $400 million of finished unsold lots.
We own 4,942 unsold finished lots with an average cost of $81,000 per lot, and this average lot cost is 20% of our $404,000 backlog average sale price.
Our goal is to maintain about a one year supply of finished lots and to own a two to three year supply.
Lots owned and controlled as of 9/30/20, totaled 39,600 lots, 15,100 of which were owned and 24,500 under contract.
We own 6,900 lots in our Northern region and 8,200 lots in our Southern region.
A year ago, we owned more than 14,800 lots and controlled an additional 14,200 lots for a total of more than 29,000 lots.
And during this year's third quarter, we spent $107 million on land purchases and $89 million on land development for a total of $196 million.
Year-to-date, we have spent $267 million on land purchases and $222 million on land development for a total year-to-date land spend of $489 million, and about 48% of our purchase amount was raw land.
At the end of the quarter, we had 266 completed inventory homes, about one per community, and 1,113 total inventory homes.
And of the total inventory, 550 are in the Northern region and 563 are in the Southern region.
At September 30, '19, we had 531 completed inventory homes and 1,513 total inventory homes.
We'll now open the call for any questions or comments.
| q3 earnings per share $2.51.
new contracts increased 71% to 2,949 contracts in quarter.
backlog units increased 54% to 4,503 in quarter.
backlog sales value reached $1.8 billion in quarter.
homes delivered in 2020's q3 increased 29% to a record 2,137.
|
Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.
Fortive.com, under the heading, Investors Quarterly Results.
We completed the separation of our prior Industrial Technologies segment through the spin-off of Vontier Corporation on October 9, 2020.
And have accordingly included the results of the Industrial Technologies segment as discontinued operations.
All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis.
Early in the third quarter, Fortive celebrated its fifth anniversary as an independent public company.
This quarter, we continue to demonstrate the success of the strategy we outlined in 2016 to enhance growth and margins across our businesses through the successful execution of the Fortive Business System, the acceleration of innovation and the impact of disciplined capital allocation.
Our third quarter results were highlighted by 32% growth in adjusted earnings per share.
We continue to generate significant revenue momentum throughout the quarter, realizing 9.1% core revenue growth and order growth of just over 20% against the backdrop of strong broad-based demand.
Strong execution and application of FBS helped to generate 325 basis points of core operating margin expansion, along with very strong free cash flow despite widespread supply chain disruption.
In the third quarter, our software businesses grew by low-double-digits, supported by strong demand and improving net dollar retention.
In total, we now have almost $750 million of annualized software revenue across the portfolio with double-digit organic growth profile as well as a high share of recurring revenue and high operating margins.
In August, we closed the acquisition of service channel, adding another differentiated high growth software asset to our Intelligent Operating Solution.
The service channel acquisition significantly enhances our strategic position in the facility and asset lifecycle market, extending our leading suite of offerings for facility owners and operators and providing a variety of potential avenues to deliver unique value added solutions in combination with Gordian and Accruent.
As you can see on slide four, across Fortive, we continue to invest in product development to drive organic growth and enhance our competitive position.
Many of our investments in organic innovation are focused on enabling digital transformation across our customer base.
This includes vertically tailored software offerings at Tektronix and Fluke Health, emerging IoT solutions in sensing as well as early progress with new tools for improved workforce management at TeamSense.
In addition, our investment can afford continue to drive data analytics and machine learning opportunities across all of our businesses.
Our success and accelerating the pace of innovation across our portfolio is demonstrated by example, such as the Fluke ii900, a groundbreaking product which was recently recognized as test measurement inspection product of the year at the 2021 electronics industry awards.
We continue to build the strength of our talent base to accelerate progress across Florida.
This quarter, we announced a number of important additions and promotions to the senior leadership team, including the appointment of Olumide Soroye as President and CEO of Intelligent Operating Solutions, the promotion of Tami Newcombe to President and CEO of Precision Technologies and the promotions of Justin McElhattan and Bill Pollak to Group President roles within iOS.
These moves highlight how we are building leadership capacity through a combination of internal development and external hires aimed at adding differentiated skill sets and experiences to our senior team.
With Olumide and Tami as well as Pat Murphy now leading advanced healthcare solutions, we have significantly increased the depth of our leadership within all three of our segments.
Turning to a quick summary of the results in the quarter on slide five.
We generated year-over-year total revenue growth of 12%, core growth of 9.1% and orders growth of just over 20% with backlog increasing by 40% year-over-year.
Adjusted operating margin was 22.8%, while adjusted earnings per share with $0.66, representing a year over year increase of 32%.
The strong adjusted operating margin performance helped us to deliver $252 million of free cash flow, which represented 105% conversion of adjusted net earnings.
On slide six, we take a closer look at the intelligent operating solution segment.
iOS posted total revenue growth of 16.6% in the third quarter with core growth of 13.1%.
This included low teens growth in North America, high teen's growth in Western Europe and mid single digit growth and China.
Fluke's core revenue increased by mid teens with very strong demand trends continuing across its end markets and major geographies.
Fluke's performance was highlighted by high teen's revenue growth at Fluke industrial, which also generated order growth of greater than 20%.
Fluke's industrial imaging business continues to perform well paced by momentum from innovation across its acoustic imaging product lines, which doubled year-over-year in the third quarter.
Fluke Network had a very strong quarter driven by innovation such as Link IQ product line.
Fluke's efforts to expand its recurring revenue base sought further progress in Q3, including strong performance across both its service offerings and an email which generated high teens growth in revenue and fast bookings for the quarter.
The combination of robust order growth and supply chain constraints in Q3 led to strong backlog that we're carrying into the fourth quarter and 2022.
Industrial scientific revenue increased by mid teens, as instruments and rental business continued their strong recovery.
The ISC team has done an excellent job using FBS tools to accelerate product redesign initiatives, which have helped alleviate component supply challenges and limit impact on delivery times to customers.
Intelex grew by mid teens and posted another record revenue quarter.
Intelex is seeing solid FPS driven improvements in its upsell process to support higher net dollar retention.
Also in Q3 intellect signed an exclusive partnership deal with data Moran [Phonetic], which enables Intelex customers to manage their full lifecycle of their ESG strategy including materiality analysis and risk identification.
Accruent grew by low single digits in the third quarter while seeing strong bookings greater than 20%.
This booking strength was paced by continued demand for occurrence Meridian engineering, document management, and maintenance connection CMF offerings.
Accruent also continues to see strong demand for its EMS event, workspace and resource scheduling solution to support emerging hybrid office models as customers execute their return to work plans.
Among the notable new customer wins for the EMS solution in Q3 were several leading global financial services providers.
Accruent and also continue to see improve performance in its professional services business, which generated low double digit growth.
Gordian increased by mid teens with strong growth in procurement and in estimating in the third quarter Gordian continued to see increasing project volume as well as higher average dollars per project.
Gordian has also seen success from its expansion into healthcare with significant demand for its facility solutions from hospital customers.
After completing the acquisition of service channel at the end of August, we are obviously early in our ownership but we're very pleased with what we've seen thus far and are excited to have them join Florida.
Specifically service channel continues to demonstrate strong momentum in its large enterprise retail business, with several large customer wins in Q3, including Walgreens, which will roll out automation software across their more than 10,000 locations, and the third largest mobile carrier in North America as they transform their facility management program.
Moving to slide seven.
The Precision Technology segment posted a total revenue increase of 8.9% in the third quarter, with core growth of 7.7%.
This included high single digit growth in North America and high teens growth in Western Europe.
China grew low single digits but saw strong continued momentum and demand with double digit order growth in the quarter.
Tektronix through high single digits with strong demand trends across its product portfolio and double digit order growth.
Growth was led by the performance of its mainstream oscilloscope, with a greater than 30% increase supported by new extensions to the six series MSO product line.
Tektronix continued to see traction from its efforts to expand in data centers and other related wired communications applications, delivering a number of key customer wins, including Lenovo and Ericsson.
Throughout the third quarter, Tektronix did an excellent job deploying FBS countermeasures to navigate sustained supply chain challenges while also delivering significant price realization.
Even with the strong execution, given the continued robust pace of demand from its customers, Tektronix increased its backlog by more than 70% versus a year ago.
Sensing Technologies increased by low double digits in the third quarter.
Sensing reported strong growth across each of its major regions with robust order momentum across its key end markets.
Setra registered additional market share gains with its HVAC offerings in Q3 and continues to generate strong growth across a range of critical environment applications, including hospital isolation rooms and pharmaceutical manufacturing.
Pacific Scientific EMC grew by mid-single digits, including improved momentum across its commercial customer base.
Pay continues to see significant growth opportunities in its aircraft and space end markets with strong momentum across its critical safety technology offerings.
Moving to Advanced Healthcare Solutions on slide eight, total revenue increased 9.3%, while core revenue increased 4.7%.
This included mid-single-digit growth in North America and low single-digit growth in China.
Western Europe saw high-teens decline based on a difficult prior year comp at Invetec, partially offset by strong growth at ASP and Fluke Health.
ASP grew by low single-digits in the third quarter, highlighted by a strong capital equipment performance, including low double-digit growth in terminal sterilization capital.
ASP continues to benefit from the solid sales execution driving the consistent expansion of its global installed base.
Consumables revenue grew by low single-digits, led by high single-digit increase across all geographies outside of the United States.
In the U.S., the spike in COVID-related hospitalizations, led to a notable decline in elective procedure volumes toward the end of the quarter, resulting in global electric procedures at approximately 88%, of pre-COVID levels for the period.
While we expect only nominal improvement in electric procedure volume in Q4, longer term, we expect ASP's consumable revenue will benefit from procedure volume normalization and growth in its global installed base.
Census increased in the low 40% range, highlighted by very strong growth in professional services and related hardware.
It CensiTrac SaaS offering, grew mid-teens as it continued to benefit from new customer additions as well as good momentum with up-selling and cross-selling to existing customers.
Censis continues to have open access to customer sites.
And saw strong sustained order growth throughout the quarter.
Fluke Health Solutions increased by high single-digits with continued strength in North America and Western Europe, tied to market share gains with OEM customers through the continued deployment of FBS growth tools.
FHS executed very well throughout the quarter, driving significant price realization and managing through supply chain constraints to open new market opportunities.
FHS continues to benefit from partnership efforts with the Ford, driving lower customer churn at Landauer using the Ford's predictive modeling tools.
The company continues to see good early traction from software innovation efforts with 30% growth year-over-year in Q3.
Invetech declined by mid-single digits, which was better than expected against the tough prior year comp that included significant COVID-related tailwinds.
The company continues to see strong demand across the diagnostics and life science verticals.
And expect to end the year with significant order momentum and a healthy backlog to carry into 2022.
With that, I'll pass it over to Chuck, who will take you through some additional details on our margins, free cash flow and balance sheet.
We delivered another quarter of strong margin performance in Q3, using FBS tools to deliver strong pricing and successful value engineering to implement component substitutions across a variety of hardware businesses.
This FBS execution and the continued strength of our software businesses helped deliver adjusted gross margins of 57.3%, in Q3.
This reflects 90 basis points of expansion on a year-over-year basis, as we accelerated to 220 basis points of total price realization.
Q3 adjusted operating profit was 22.8%, reflecting solid execution across the portfolio, including counter measures enacted in the face of ongoing supply chain challenges.
We had strong margin performance across all of our segments, resulting in 325 basis points of core operating margin expansion.
On slide nine, you can see that in the third quarter, we generated $252 million of free cash flow, representing a 105% conversion of adjusted net income.
Free cash flow over the trailing 12 months increased 22% to $991 million.
Our current net leverage is approximately 1.6 times and we expect net leverage to be around 1.3 times at year-end, excluding any additional M&A.
Turning now to the guide on slide 10, we are raising the low end of our full year 2021 adjusted diluted net earnings per share guidance to $2.70, resulting in a range of $2.70 to $2.75 for the year.
This represents a year-over-year growth of 29% to 32% on a continuing operation basis.
This assumes that total revenue growth of 14% to 14.5%, adjusted operating profit margins of 23% to 23.5%.
And an effective tax rate of approximately 14%.
We continue to expect free cash flow conversion to be approximately 105% of adjusted net income for the full year.
We are also initiating fourth quarter adjusted diluted net earnings per share guidance of $0.74 to $0.79, representing year-over-year growth of 6% to 13%.
This assumes total revenue growth of 6.5% to 8.5%, adjusted operating profit margin of 23.5% to 24.5% and an effective tax rate of approximately 15%.
The adjusted diluted net earnings per share guidance also excludes, approximately $12 million of anticipated investments in strategic productivity initiatives that we expect to execute before the end of the year.
For the fourth quarter, we expect free cash flow conversion to be approximately 125% of adjusted net income.
With that, I'll pass it back to Jim for some closing.
We're very pleased with our performance in Q3.
We worked diligently to countermeasure supply chain challenges, that persisted throughout the quarter and which we expect to continue into 2022.
Our teams are doing an excellent job, deploying FBS to navigate those headwinds, while also delivering strong margin performance and free cash flow generation.
Looking across our end markets, the demand backdrop we're seeing is very strong with significant momentum in our order flow, driving continued growth in our backlog and double-digit growth across our software businesses.
While continuing our focus on execution, we're investing in innovation, expanding our base of leadership talent and pursuing additional capital deployment opportunities, as we look to enhance our competitive advantage and pave the way for consistent double-digit earnings and free cash flow growth in the years to come.
That concludes our formal comments.
| sees fy adjusted earnings per share $2.70 to $2.75 from continuing operations.
sees q4 adjusted earnings per share $0.74 to $0.79 from continuing operations.
q3 revenue rose 12 percent to $1.3 billion.
qtrly adjusted earnings per share from continuing operations $0.66.
|
Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.
fortive.com, under the heading Investors quarterly results.
We completed the separation of our prior Industrial Technologies segment through the spin-off of Vontier Corporation on October 9, 2020.
And have accordingly included the results of the Industrial Technologies segment as discontinued operations.
All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis.
We were very pleased with our second quarter results.
As you can see on slide three, our performance once again highlighted the benefits of our strategy to provide differentiated connected workflow solutions for our customers, creating a portfolio with enhanced resilience and long-term earnings power.
During the quarter, we capitalized on accelerating point-of-sale trends across a number of our larger businesses, continued growth from our software offerings and improving conditions across our key end markets.
Against this backdrop, we delivered core revenue growth and adjusted operating profit margins that exceeded the high end of our guidance, driving exceptional earnings growth and free cash flow conversion.
As we highlighted at our Investor Day on May 19, we are building on the foundation of our advantaged hardware positions and expanding our software capabilities to address our customer's critical workflow needs and accelerate their ongoing digital transformation.
In the second quarter, our SaaS offerings delivered low double-digit growth, and we also drove significant improvement across our professional services offerings.
We continue to see strong momentum at eMaint, including increasing demand from its expansion into the food and beverage, pharmaceutical and healthcare verticals.
Gordian and Accruent both had strong quarters as they executed on opportunities provided by increasing demand from facility owner operators and improvements in access to customer sites.
Both companies are well positioned to capitalize as customers focused on post-COVID return to work challenges and digital transformation priorities.
Centers also performed very well in the quarter as access to hospital customers improved, executing on strong demand for its SaaS offerings among existing and new independent delivery network customers.
Looking across the portfolio, we continue to be excited about our expanding offering of EHS workflow solutions, which are well positioned to meet the significant long-term sustainability requirements of our customers.
ISC and Intellect performed well, capitalizing on strong broad-based growth across end-markets and key geographies.
At the same time, we are excited with the early progress at ehsAI where the company closed its largest deal to-date in its first joint marketing campaign with Intelex and generated strong growth in its sales pipeline.
Throughout the second quarter, we continue to apply the Fortive Business System across the portfolio to drive innovation, growth and share gains.
Deployment of our lean portfolio management toolset, which significantly accelerates the efficiency and impact of R&D investments, achieved a greater than 40% increase in our on-time program delivery.
The application of FBS and digital analytics and search optimization generated 25% growth in digital traffic, from pre-pandemic levels across the portfolio.
Meanwhile, the use of FBS growth tools has accelerated innovation at Fluke Health Solutions over the past 18 months and continues to drive excellent top line performance.
We have created good early momentum in our partnership with Pioneer Square Labs including the recent spin-in of TeamSense, a provider of innovative workflow solutions to streamline communications with hourly workers.
This marks the first business incubated at Pioneer Square Labs to be integrated into the Fortive portfolio.
While still very early, we are pleased with the progress thus far at TeamSense and are excited to develop additional technologies that accelerate safety and productivity solutions for customers within our core markets.
In early July, we announced the acquisition of service channel.
The transaction brings a differentiated high-growth software business with an integrated service provider network and significant proprietary data assets to the portfolio, enhancing our ability to meet the evolving needs of facility owners around the world.
Following the expected closing of the acquisition in Q3, we will have significant balance sheet capacity supported by our strong and resilient free cash flow generation.
As we highlighted at our Investor Day, we see substantial runway across our $40 billion served market for disciplined capital allocation to accelerate our strategy.
Turning to a quick summary of the results in the quarter on slide four, we generated year-over-year total revenue growth of 26.7% as revenue strength exceeded the high end of our guidance.
Adjusted operating margin was 22.2% while adjusted earnings per share was $0.66, representing a year-over-year increase of 53.5%.
Given the outperformance for both top line and our adjusted operating margin we delivered $282 million of free cash flow, which represented 118% conversion of adjusted net income.
On slide five, we take a closer look at the Intelligent Operating Solutions segment.
iOS posted total revenue growth of 31.2% in the second quarter.
This included mid-20% core growth in North America, low 30% core growth in Western Europe and low 20% core growth in China.
Fluke's core revenue increased in the mid-30% range.
Fluke also grew by mid-single digits on a sequential basis as we continue to see robust demand across its businesses, highlighted by growth at Fluke Industrial.
Fluke Industrial generated share gains across a range of key channel partners and retail accounts as point-of-sale accelerated through the quarter.
Fluke's broader ii900 Acoustic Imaging product line also continues to perform very well, as revenue approximately doubled in the quarter on strong growth across both Western Europe and North America.
Fluke Networks also performed well, driven by the recent launch of its LinkIQ product line, which continues to exceed initial expectations tied to office reopenings and network modifications.
In Fluke reliability, our efforts to accelerate performance of Pruftechnik are gaining traction as we took advantage of increasing demand for alignment and other services, while eMaint also delivered another strong quarter.
With the accelerated pace of orders at Fluke, we did see some backlog build due to supply chain responsiveness.
Industrial Scientific increased by mid-teens, driven by strong execution in instruments and rental as demand from oil and gas markets rebounded and the business continued its expansion into new end markets.
The company's iNet offering remained resilient, increasing by mid single-digits with net retention solidly above 100%.
Intelex grew by high single-digits in Q2, reporting a record revenue quarter.
Intelex continues to leverage FBS and has driven improvements in lead generation and funnel conversion.
Also in the second quarter, Intelex disclosed multiple deals for its enhanced ESG platform to help customers launch, scale and optimize their sustainability programs and meet increasing demand for transparency on a growing set of critical non-financial reporting metrics.
Accruent grew by mid single-digits in the second quarter with low double-digit growth in its SaaS business.
Accruent generated strong sales and bookings for its Meridian solution for engineering document management and its maintenance connection, CMMS offerings.
The business also capitalized on the strong demand for its EMS event, workspace and resource scheduling offerings as companies plan and execute their return-to-work strategies.
The company continues to generate new customer logo wins and improving growth in recurring bookings.
Importantly, Accruent also delivered improved performance in its professional service business, which generated mid single-digit growth as customer site access continue to improve.
Gordian increased by mid-teens, driven by low 20% growth in the procurement business and high teens growth in estimating.
Gordian generated a record month for procurement revenue in June with accelerating time lines for key projects across a number of large customers.
This included increased project spend by the New York City Department of Education and School Construction Authority.
Moving to Slide six.
Precision Technologies segment posted a total revenue increase of 25.1% in the second quarter.
This included low 20% growth in North America, mid-20% growth in Western Europe and mid-teens growth in China.
Tektronix increased by approximately 30%, with another quarter of strong demand across its product businesses, including accelerating point-of-sale trends in each of its major regions.
Both mainstream and performance of oscilloscopes had a strong quarter with high demand for semiconductor, industrial manufacturing and communications applications.
Tektronix service business again showed its stability and resilience increasing by low teens.
Tektronix continues to benefit from the accelerated focus on driving innovation with Q2 new product introductions performing very well, including its family of automated test solutions for high-speed data transfer.
In the second quarter, Tektronix held six regional innovation form events, which stimulated the adoption of its tech scope platform, resulting in accelerated funnel creation for the company's broader hardware and software offerings.
Sensing Technologies increased by low teens in the second quarter with growth driven by continuation of the broad market recovery.
Sensing performed very well in China with another quarter of mid-teens growth, driven by demand for factory automation solutions.
Elsewhere, Anderson-Negele continues to make progress with its approval of its paperless process recorder IoT solution aimed at the dairy industry with broader commercial rollout expected in the second half of the year.
Sensing also continues to drive market share gains elsewhere across its portfolio, particularly etc.
, led by its differentiated critical environment solution and strong demand across its HVAC customers.
PacSci EMC grew in the low 20% range, with the business seeing some alleviation of the COVID-related shutdowns and approval delays that impacted shipments in previous quarters.
PacSci EMC continues to see good growth in the commercial space market with the resumption of launches by OneWeb providing recurring revenue for smart controllers and initiators.
Also on July 20, we were excited to watch the company's mission-critical technology, ensure safe and reliable separation of Blue Origin's new Shepherd capsule from its booster during its maiden voyage.
Moving to Advanced Healthcare Solutions on Slide seven.
Total revenue increased 21.8%, including 11% core growth.
This included high single-digit core growth in each of North America, Western Europe and China markets.
ASP grew by high single digits in the second quarter, led by strong growth in Western Europe and China.
ASP also realized improved growth in North America, highlighted by high single-digit growth in the US.
Overall, ASP grew its consumable revenue high teens as the rate of elective procedures across most geographies continue to improve.
While elective procedure volumes increased on a year-over-year basis, Q2 volumes came in a bit lower than expected at approximately 93% of pre-COVID levels, which was consistent with the Q1 exit rate.
ASP also continued to expand its global installed base of terminal sterilization capital equipment, which grew at a 3.5% annualized rate in Q2.
We expect this continued installed base expansion to provide an additional tailwind to consumable revenue as procedure volumes normalize going forward.
Censis increased in the mid-20% range with mid-teens growth in its CensiTrac SaaS offering as well as strong growth in its professional services business.
Many hospital customers are now allowing access to vendors which resulted in a significant increase in activity in the second quarter, particularly with integrated delivery networks.
Fluke Health Solutions increased by low double digits even as it lapped a sizable COVID-related revenue tailwind in the prior year.
FHS saw high-teens growth from its Optimize and OneQA software solutions, which benefited from accelerated growth investments over the last 18 months.
With that, I'll pass it over to Chuck, who will take you through some additional details on our margins, free cash flow and balance sheet.
We delivered solid margin performance in Q2 and driven primarily by strong fall-through on our revenue outperformance.
Adjusted gross margins were 57.3%, up 100 basis points on a year-over-year basis.
This increase reflected 130 basis points of price realization as we delivered another quarter of solid performance managing price cost across the portfolio.
Q2 adjusted operating profit margin was 22.2%, 170 basis points above the high end of our guidance, also driven by stronger volume and high associated fall-through.
We reported 240 basis points of core operating margin expansion, including 570 basis points of core OMX at the iOS segment.
Both Fluke and Tektronix delivered strong core operating margin expansion through disciplined option of FBS to drive sales conversion as demand accelerated across their end markets.
At the same time, strong contributions from some of the acquired pieces of our portfolio, including ISC, Gordian, Censis and LANDAUER also contributed to the margin outperformance across the segments.
On Slide eight, you can see that in the second quarter, we generated $282 million of free cash flow, representing a 118% conversion of adjusted net income.
Free cash flow over the trailing 12 months increased 15% to $943 million.
Today, our net leverage is approximately 1 time and we expect net leverage to be around 1.2 times at year end, including the funding of the acquisition of the service channel, but excluding any additional M&A.
This gives us significant capacity to continue to deploy toward our key capital allocation priorities.
Turning now to the guide on slide nine.
Given the strong performance in the second quarter and the improvement in our outlook for the rest of the year, we are once again raising our 2021 guidance.
For the full year, we now expect adjusted diluted net earnings per share to be $2.65 to $2.75, representing a year-over-year growth of 27% to 32% on a continuing operations basis.
This assumes total revenue growth of 13.5% to 15%, adjusted operating profit margins of 22.5% to 23.5%, and an effective tax rate of 14% to 14.5%.
It also assumes total revenue growth of 8.5% to 11% in the second half of 2021.
We continue to expect free cash flow conversion to be approximately 105% of adjusted net income for the full year.
We are initiating third quarter adjusted diluted net earnings per share guidance of $0.62 to $0.66, representing year-over-year growth of 24% to 32%.
This assumes total revenue growth of 11.5% to 14.5%, adjusted operating profit margin of 21.5% to 22.5% and an effective tax rate of 14% to 14.5%.
For the third quarter, we expect free cash flow conversion to be approximately 105% of adjusted net income.
With that, I'll pass it back to Jim for some closing remarks.
Before I move to questions, I want to provide a quick update on our sustainability and inclusion and diversity efforts, which is shown on slide 11.
During our Investor Day program on May 19, we introduced an accelerated greenhouse gas reduction goal, which now targets a reduction of 50% in greenhouse gas intensity for Scope 1 and Scope 2 emissions by 2025 relative to our 2017 base year.
During the second quarter, we also issued our 2021 sustainability report, which included Fortive's second annual GRI index, first annual SASB index and the 2017 to 2020 greenhouse gas emissions profile.
During the quarter, we also became a signatory to the UN Global Compact, committed to alignment with the task force and climate-related financial disclosure by 2022 and announced our 2025 aspirational inclusion and diversity goals.
We continue to make significant strides and are highly committed to accelerating our sustainability and inclusion and diversity progress in the coming years.
Across all three of our strategic segments, we are expanding on strong established positions with offerings that address the critical workflow needs of our customers and markets with attractive long-term growth drivers.
Our strong earnings and free cash flow performance in the first half of this year clearly demonstrated the benefits of this strategic focus and the momentum building in our portfolio.
As we look ahead, we will continue to invest and expanding the capabilities of the Fortive Business System as we accelerate operating improvements and innovation to increase the value we offer to our customers.
With strong free cash flow and significant M&A capacity we are well-positioned to pursue the key organic and inorganic growth initiatives that will drive consistent double-digit earnings and free cash flow growth in the years to come.
That concludes our formal comments.
| sees fy adjusted earnings per share $2.65 to $2.75 from continuing operations.
sees q3 adjusted earnings per share $0.62 to $0.66 from continuing operations.
|
This conference call also contains certain non-GAAP financial measures.
Definitions, as well as reconciliation schedules for these non-GAAP measures to comparable GAAP measures can be found on our website at www.
EOG is focused on improving returns.
Results from the first half of the year are already reflecting the power of EOG shift to our double-premium investment standard.
Once again, we posted outstanding results in the second quarter.
We delivered adjusted earnings of $1.73 per share and nearly $1.1 billion of free cash flow, repeating the record level of free cash flow we generated last quarter.
Our outstanding operational performance included another beat of the high end of our oil production guidance, while capital expenditures and total per-unit operating costs were below expectations.
We are delivering exceptional well productivity that continues to improve.
In addition, even though the industry is in an inflationary environment, EOG continues to demonstrate the company's unique ability to sustainably lower cost.
Our performance clearly proves the power of doubling our reinvestment hurdle rate, double premium requires investments to earn a minimum of 60% direct after-tax rate of return using flat commodity prices of $40 oil and $2.50 natural gas.
I'm confident our reinvestment hurdle is one of the most stringent in the industry and a powerful catalyst to drive future outperformance across key financial metrics, including a return on capital employed and free cash flow.
As double premium improves our potential to generate free cash flow, we remain committed to using that cash to maximize shareholder value.
The regular dividend, debt reduction, special dividends, opportunistic buybacks and small high-return bolt-on acquisitions are our priorities.
In the first half of this year, we reduced our long-term debt by $750 million and demonstrated our priority to returning cash, significant cash to shareholders with a commitment of $1.5 billion in regular and special dividends.
We also closed on several low-cost, high potential bolt-on acquisitions in the Delaware Basin over the last 12 months.
Year-to-date, we have committed $2.3 billion to debt reduction in dividends, which is slightly more than the $2.1 billion of free cash flow we've generated.
Looking ahead to the second half of the year and beyond, our free cash flow priorities and framework have not changed.
As we generate additional free cash, we remain committed to returning cash to shareholders in a meaningful way.
We are focused on doing the right thing at the right time in order to maximize shareholder returns.
Over the last four years, we've made huge progress reducing our GHG and methane intensity rates, nearly eliminating routine flaring and increasing the use of recycled water in our operations.
We are focused on continued progress toward reducing our GHG emissions in line with our targets and ambitions.
This quarter, we announced a carbon capture and storage pilot project, which we believe will be our next step forward in the process of reaching our net-zero ambition.
Ken will provide more color on this and other emission reduction projects in a few moments.
Driven by EOG's innovative culture, our goal is to be one of the lowest costs, highest return and lowest emission producers playing a significant role in the long-term future of energy.
Now, here's Ezra to talk more about how our returns continue to improve.
While we announced our shift to the double-premium investment standard at the start of this year, the shift has been underway since 2016 when we first established our premium investment standard of 30% minimum direct after-tax rate of return using a conservative price deck of $40 oil and $2.50 natural gas for the life of the well.
In the three years that followed, our premium drilling program drove a 45% increase in earnings per share, a 40% increase in ROCE in an oil price environment nearly 40% lower compared to the three-year period prior to premium.
In addition, premium enabled this remarkable step change in our financial performance, while reinvesting just 78% of our discretionary cash flow on average, resulting in $4.6 billion of cumulative free cash flow.
The impact from doubling our investment hurdle rate from 30% to 60% using the same conservative premium price deck is now positioning EOG for a similar step change to our well productivity and costs, boosting returns, capital efficiency, and cash flow.
Double premium wells offer shallower production declines and significantly lower finding and development costs, resulting in well payouts of approximately six months at current strip prices.
The increase in capital efficiency resulting from reinvesting in these high-return projects is increasing our potential to generate significant free cash flow.
This year, we are averaging less than $7 per barrel of oil equivalent finding cost.
Adding these lower-cost reserves is continuing to drive down the cost basis of the company, and when combined with EOG's operating cost reductions is driving higher full-cycle returns.
Looking back over the last four quarters, EOG has earned a 12% return on capital employed with oil averaging $52.
We are well on our way to earning double-digit ROCE at less than $50 oil, and it begins with disciplined reinvestment in high-return double-premium drilling.
While EOG has 11,500 premium locations, approximately 5,700 are double-premium wells located across each of our core assets.
We are confident we can continue to grow our double-premium inventory through organic exploration, improving well cost and well productivity and small bolt-on acquisitions, just like we did with the premium over the last five years.
In the past 12 months, through eight deals, we have added over 25,000 acres in the Delaware Basin through opportunistic bolt-on acquisitions at an approximate cost of $2,500 per acre.
These are low-cost opportunities within our core asset positions, which, in some cases, receive immediate benefit from our existing infrastructure.
Premium and now double premium established a new higher threshold for adding inventory.
Exploration and bolt-on acquisitions are focused on improving the quality of the inventory by targeting returns in excess of the 60% after-tax rate of return hurdle.
EOG's record for adding high-quality, low-cost inventory predominantly through organic exploration is why we do not need to pursue expensive large M&A deals.
2021 is turning into an outstanding year for EOG.
Our exceptional well level returns are translating into double-digit corporate returns and our employees continue to position EOG for long-term shareholder value creation.
Here's Billy with an update on our operational performance.
Our operating teams continue to deliver strong results.
Once again, we exceeded our oil production target, producing slightly more than the high end of our guidance, driven by strong well results.
In addition, capital came in below the low end of our guidance as a result of sustainable well cost reductions.
We have already exceeded our targeted 5% well cost reduction in the first half of 2021.
We now expect that our average well cost will be more than 7% lower than last year.
As a reminder, this is in addition to the 15% well cost savings achieved in 2020.
We continue to see operational improvements outpace the inflationary pressure in the service sector.
Average drilling days are down 11%, and the feet of lateral completed in a single day increased more than 15%.
We are utilizing our recently discussed super-zipper completions on about one third our well packages this year and expect that percentage to increase next year.
In addition, our sand costs are flat to slightly down year-to-date.
We have line of sight to reduce the cost of sand sourcing and processing and expect to start realizing savings in the second half of 2021 and into 2022.
Water reuse is another source of significant savings, and we continue to expand reuse infrastructure throughout our development areas.
Finally, we have renegotiated several of the expiring higher-priced contracts for drilling rigs and expect to see additional savings the remainder of this year and next.
We also use the strength of our balance sheet to take advantage of opportunities to reduce future costs in several areas.
As an example, last summer, we prepurchased the tubulars needed for our 2021 drilling program when prices were at their lowest point.
EOG is not immune to the inflationary pressures we're seeing across our industry.
As a reminder, 65% of our well costs are locked in for the year, and the remaining costs we are actively working down through operational efficiencies.
As usual, we have begun to secure services and products ahead of next year's activity, with the goal of keeping well cost at least flat in 2022.
But as you can rest assured that with our talented and focused operational teams, our ultimate goal is to always push well cost down each year.
The same amount of air freight is being placed on reducing our per-unit operating cost, with the results showing up in reduced LOE, driven mainly by lower workover expense, reduced water handling expense and lower maintenance expenses.
Savings are also being realized from our new technology being developed internally to optimize our artificial lift.
We have several new tools that help us reduce the amount of gas lift volumes required to produce wells without reducing the overall production rate.
These optimizing tools not only reduce costs, but also help reduce the amount of compression horsepower needed, which ultimately reduces our greenhouse gas footprint as well.
These and other continual improvements are a great testament to our pleased but not satisfied culture.
This quarter, we can also update you on our final ESG performance results from last year.
We reduced our greenhouse gas intensity rate 8% in 2020, driven by sustainable reductions to our flaring intensity.
Operational performance in the first half of this year indicates promise for future -- further improvements to our emissions performance in 2021, putting us comfortably ahead of pace to meet our 2025 intensity targets for GHG and methane and our goal to eliminate routine flaring.
Achieving these targets is the first step on the path toward our ambition of net-zero emissions by 2040.
Water infrastructure investments also continue to pay off.
Nearly all water used in our Powder River Basin operations last year was sourced from reuse.
For companywide operations in the U.S., water supplied by reuse sources last year increased to 46%, reducing freshwater to less than one-fifth of the total water used.
These achievements and other, along with the insight into ongoing efforts to improve future performance will be detailed in our sustainability report to be published in October.
We are starting to fill in the pieces on the road map to get to net-zero by 2040.
Here's Ken with the details.
Earlier this year, we announced our net-zero ambition for our Scope 1 and Scope 2 GHG emissions by 2040.
Our ambition is aggressive but achievable and we expect it will be an iterative process requiring trial and error.
This approach mirrors how we develop an oil and gas asset.
We pilot creative applications of existing and new technologies to determine the most effective solutions to optimize efficiencies by minimizing costs and maximizing recoveries of oil and natural gas.
Here, we are aiming to maximize emissions reductions.
We then apply the successful technologies and solutions across our operations where feasible.
Our net-zero strategy generally falls into three categories: reduce, capture or offset.
That is, we are focused on directly reducing emissions from our operations, capturing emissions from sources that can be concentrated for storage and offsetting any remaining emissions.
Reducing emissions intensity from our operations is a direct and immediate path to reducing our carbon footprint.
Our approach is to invest with returns in mind and seek achievable and scalable results.
We made excellent progress in the last four years through initiatives to upgrade equipment in the field, invest in pilots using existing and new technologies and leverage our extensive big data platform to automate and redesign processes to improve emissions efficiencies.
As a result, since 2017, we have reduced our GHG intensity rate 20%, our methane emissions percentage by 80% and our flaring intensity rate by more than 50%.
We recently obtained permits to expand the successful pilot of our closed-loop gas capture project, which prevents flaring in the event of a downstream interruption.
We designed an automated system that redirects natural gas back into our infrastructure system and injects the gas temporarily back into existing wells.
The project requires a modest investment to capture a resource that would have otherwise been flared and stores it for further -- for future production and beneficial use.
The result is a double-premium return investment that reduces flaring emissions.
Our wellhead gas capture rate was 99.6% in 2020 and roll-out of additional closed-loop gas capture systems will help capture more of the remaining 0.4%.
Turning to our efforts to capture CO2.
We are launching a project that will capture carbon emissions from our operations for long-term storage.
This project is designed to capture and store a concentrated source of EOG's direct CO2 emissions.
We believe we can design solutions to generate returns from carbon capture and storage by leveraging our competitive advantages in geology, well and facility design and field operations.
Our CCS efforts are directed at emissions from our operations, and we are not currently looking to expand those efforts into another line of business.
We will provide updates on our pilot CCS project as it progresses.
EOG is also exploring other innovative solutions for GHG emissions reductions.
Over the past 18 months, we have deployed capital into several fuel substitution projects to power compressors used for natural gas pipeline operations and natural gas artificial lift.
Compressors are the largest source of EOG's stationary combustion emissions.
By replacing NGL-rich field gas with lean residue gas, EOG can reduce the carbon intensity of the fuel which lowers CO2 emissions and improves engine efficiency.
Using lean residue gas also earns a very favorable financial return by recovering the full value of the natural gas liquids versus using those components as fuel.
Another fuel substitution test we conducted recently was blending hydrogen with natural gas.
While it is still in the early stages, we are analyzing the test data to evaluate the emissions reductions that would be possible from this blended fuel at an operational and economic scale.
We're very excited about this part of the business, just like cost reductions, well improvements or exploration success.
This is a bottom-up-driven initiative.
EOG employees thrive on this type of challenge.
We create innovative solutions and apply technology to solve problems, improve processes and optimize efficiencies while generating industry-leading returns.
The EOG culture has embraced our 2040 net zero ambition, and we are focusing our efforts to minimize our carbon footprint as quickly as possible.
Now, here is Bill to wrap up.
In conclusion, I'd like to note the following important takeaways.
First, by doubling our reinvestment standard, the future potential of our earnings and cash flow performance are the best they've ever been.
Results from the first half of this year demonstrate the power of double premium and the beginning of another step change in performance.
Second, EOG is not satisfied.
We are committed to getting better.
Sustainable cost reduction and improving well performance are driving returns and free cash flow potential to another level.
At the same time, the same innovative culture that is driving higher returns is also improving our environmental performance.
Third, our commitment to returning cash to shareholders has not changed.
As we have already demonstrated, returning meaningful cash to shareholders remains a priority.
And finally, as Ezra transitions into the CEO role, I could not be more excited about the future of the company.
The quality of our assets and the quality of this leadership team are the best in company history, all supported by EOG's talented employees and unique culture that continues to fire on all cylinders.
The company is incredibly strong and our ability to get stronger has never been better.
The future of EOG is in great hands.
Now, we'll go to Q&A.
| q2 adjusted earnings per share $1.73.
increased full-year well cost reduction target to 7% from 5%.
overall crude oil equivalent prices increased slightly in q2 versus q1.
|
These results were above our internal expectations for the current quarter and align with our ability to achieve our 2021 full year earnings guidance range of $3 to $3.30 per share.
In a few minutes, Steve and Bob will provide additional information on the quarter and insights in the key financial drivers for the remainder of the year.
First, I'd like to highlight ALLETE sustainability and action strategy, a strategy we developed to address the effects of climate change.
As many of you know, ALLETE was an early mover to significantly decarbonize its energy sources.
And as a result, we have been recognized as a leader in our nation's transition to a carbon-free energy future.
At ALLETE, we're committed to answering our nation's call for clean energy with all of our stakeholders in mind: our customers, our communities, our employees, and our shareholders.
We couldn't be more excited about the future as we successfully position our businesses to continue to thrive and grow.
We'll begin with an update on our largest business Minnesota Power, which has made significant progress on key initiatives foundational to ALLETE's sustainability and action strategy.
In late October, Minnesota Power filed its second ever integrated distribution plan.
This IDP details Minnesota Power's five-year investment plan and 10-year outlook for its distribution system.
The clean energy transition requires investment in infrastructure and related technology to ensure continued reliability of our essential services.
Our plan focuses on creating a more resilient grid to ensure the safe and reliable delivery of energy to our customers, and advances new technologies that will provide customers with even more control over their energy use.
The comment period will begin in the coming weeks and we expect to receive final approval later next year.
Similar to the IDP but with a broader scope, Minnesota Power filed its Integrated Resource Plan with the Minnesota Public Utilities Commission in February of this year.
The IRP outlines our plans to further transform Minnesota Power's energy supply to 70% renewable by 2030 and to be coal-free and 80% lower carbon by 2035.
All of these plans lay the strong foundation for our vision to provide 100% carbon-free energy to customers by 2050.
Just last week, the Minnesota Department of Commerce requested a three-month extension on initial IRP comments.
And assuming the MPUC approves, comments will be due March 1st of next year.
Throughout this process, we will continue our close and transparent engagement with our many stakeholders and we anticipate the commission's decision later in 2022.
These important milestones are a key part of Minnesota Power's Energy Forward Initiative, a journey of thoughtful positioning in a transforming energy landscape to ensure safe, reliable, and affordable service to our customers.
We know that this service comes at a cost.
And to achieve the best outcomes for all, we've worked closely with our regulators and other stakeholders emphasizing that a constructive rate review environment is critical to our ability to continue our energy transformation.
Throughout its clean energy transition, Minnesota Power has maintained residential electric rates that are among the lowest in the state of Minnesota.
Our Minnesota Power team has worked thoughtfully with low-income customer advocates to provide affordability discounts through our care program, energy efficiency support through our Energy Partners program and a special rate for qualified low-income customers that will continue to support our most economically vulnerable customers with some of the lowest monthly bills in the state.
While we advance our vision of a carbon-free energy supply by 2050, we will continue to make affordability a priority.
At the same time, a reasonable rate of return is essential to keeping our company financially healthy and ensuring value for our shareholders.
To that end, on November 1st, Minnesota Power filed a general rate case supporting an increase in base retail electric rate.
This request is important to Minnesota Power's financial health and ability to continue its clean energy transformation while delivering the safe, resilient, and reliable service that powers people's lives and businesses throughout northern northeastern Minnesota.
Minnesota Power has completed only three rate cases in the past 25 years, with our last completed rate case back in 2016, five years ago.
The core of our current request is simple, recovery of prudent costs and investments that support our clean energy transition, a more resilient grid, and our customer's desire to control their energy use.
Our request also reflects the risk and volatility that come with our unique customer mix and allows the opportunity for our investors to earn a reasonable rate of return.
Steve will share more details on the rate case filing in a moment.
In a creative effort to help customers, Minnesota Power filed a petition with the Minnesota Public Utilities Commission for approval to sell land surrounding several reservoirs on its hydro electric system.
The land is not required to maintain operations and has an estimated value of approximately $100 million.
So Minnesota power proposed to give the net proceeds from the land sales to our customers either through a credit in a future rate case or through the renewable resources rider to help mitigate future rate increases.
At a hearing last month, the MPUC approved the methodology to allow the land sales to begin with certain conditions and required compliance filing.
We are pleased to offer this innovative and meaningful rate mitigation for our customers and we appreciate the MPUC's approval.
The MPUC also recently approved a new demand response product for Minnesota Power's large industrial customers that facilitate those customers making their capacity available in exchange for fair compensation.
The additional capacity these large customers make available can be critical to maximizing the efficiency and ensuring the resiliency of our overall system during extreme weather events such as the polar vortex earlier this year.
Turning to our second largest business in the ALLETE family, ALLETE Clean Energy with 100% renewable generation is making progress on its multifaceted strategy focused on portfolio optimization, new projects, and plans for expanding service offerings beyond wind to include solar and storage solutions.
In addition, the company is executing on plans to optimize its existing PTC safe Harbor turbine inventory and enhancing the returns of its existing projects.
The renewables industry continues to grow rapidly, attracting significant capital and investor interest, as well as strong bipartisan policy support in Congress.
ALLETE Clean Energy is well positioned to capitalize on customer's desire to expand renewable energy as the economy decarbonizes and the focus on sustainability accelerates.
The ALLETE Clean Energy team is deep into the evaluation of avenues to add renewable capabilities beyond wind and we anticipate sharing more information on our expansion into solar and storage in the coming quarters.
Today, ALLETE reported third quarter 2021 earnings of $0.53 per share on net income of $27.6 million.
Earnings in 2020 were $0.78 per share and net income of $40.7 million.
The third quarter results for 2021 did exceed our internal expectations by approximately 25%.
The third quarter is typically the lowest quarter for consolidated earnings.
A few details from our business segments.
ALLETE's regulated operations segment, which includes Minnesota Power, superior water light and power, and the company's investment in the American Transmission Company recorded net income of $32.9 million compared to $42.4 million in the third quarter of 2020.
Third quarter 2021 earnings reflected lower net income at Minnesota Power, primarily due to increased operating and maintenance and property tax expenses.
In addition, the recording of income tax expense resulted in a negative impact of approximately $5 million or $0.10 per share for the quarter as compared to 2020.
The accounting for income taxes varies quarter to quarter based on an estimated annual effective tax rate.
Results in 2021 reflected higher kilowatt hours sales to residential commercial and municipal customers and higher industrial sales, partially offset by lower sales to the idled Verso Paper facility.
ALLETE Clean Energy recorded a net loss of $800,000 in the third quarter of 2021, compared to net income of $1.1 million in 2020.
Net income in 2021 reflected lower wind resources and availability than our internal expectations.
As foreshadowed in the second quarter disclosures, ALLETE Clean Energy's wind facilities continued to be impacted by lower wind resources than expected and were 7% below expectations for the quarter.
The impact of lower wind resources was partially offset by lower operating costs resulting from ALLETE Clean Energy's expense management efforts.
Keep in mind that although seasonal wind patterns can vary throughout the year, wind production is typically the lowest in the third quarter and at the highest in the first and fourth quarters of the year.
Our corp and other businesses, which includes BNI Energy and ALLETE properties recorded a third quarter net loss of $4.5 million in 2021, compared to a net loss of $2.8 million in 2020.
The increased net loss is primarily due to higher expenses.
I'll now turn to our 2021 earnings guidance, which remains unchanged from our original range of $3 to $3.30 per share.
Consistent with our disclosures in the second quarter, we anticipate our regulated operations segment will be at the higher end of our guidance range of $2.30 to $2.50 per share.
This is primarily driven by Minnesota Power's tack and a customer's operating at higher levels than our original projections, and is expected to remain at near full production levels throughout the fourth quarter.
We continue to expect that ALLETE Clean Energy and our corporate other businesses to be at the lower end of our guidance range of $0.70 to $0.80 per share.
This is primarily due to the negative impacts of the extreme winter weather event in the first quarter of 2021 at the Diamond Spring wind energy energy facility of approximately $0.10 per share and lower than expected wind resources and availability throughout 2021.
These negative impacts are partially offset by a 16% after tax gain recorded in the fourth quarter of 2021 for the sale of a portion of the Nemadji Trail Energy Center by South Shore Energy, ALLETE's non-rate regulated Wisconsin subsidiary.
The sale, which closed on October 1, 2021 was reflected in our second quarter guidance as we had anticipated the closing of the transaction in the second half of the year.
As noted in previous quarters, the timing of income tax expense has negatively impacted year-to-date results compared to internal expectations.
We estimate that approximately $3 million or $0.6 per share is expected to reverse in the fourth quarter.
On November 1st, Minnesota Power filed the retail rate increase request with the MPUC seeking an increase of $108 million in total additional annual revenue.
The filing seeks a return on equity of 10.25% and a 53.81% equity ratio.
Interim rates of $87 million would begin January 1, 2022, with approval by the MPUC.
Interim rates are subject to refund.
At this time, we anticipate final rates would be implemented sometime in late 2023.
The rate case assumes taconite production of approximately 34 million tonnes, which is in alignment with the long-term average production levels for taconite.
In addition, Minnesota Power has included a proposal to address and mitigate the financial impacts related to operational volatility of its large-power customers.
This proposal includes a sales true-up mechanism offering a simple and balanced method to align risks and benefit of large-power load volatility that can occur between rate cases.
We will share procedural updates as the filing progresses in future quarterly updates.
I'm pleased to report that our trajectory for improved earnings per share growth remains on track and I'm confident in our ability to achieve our long-term annual average earnings-per-share growth objective of within a range of 5% to 7%.
This growth will come from a continued disciplined focus on efficient operations and high quality clean energy investments with strong operating cash flow characteristics, further supporting our strong credit ratings and future dividends.
As we have consistently characterized throughout the year, 2021 has been a transitional year and I'm particularly pleased about the progress we have made around initiatives that are aimed at improving our business unit returns at both our rate regulated and non-regulated business segments while ensuring we provide an excellent value proposition for our customers.
In terms of new investments, we have been busy planning and planting seeds for advancing our clean energy sustainability and action strategy, which will translate into some exciting new opportunities as we go forward.
Indeed in our year-end conference call in February, we will be providing our 2022 guidance, along with enhanced visibility into investment opportunities across our business platforms.
These updates will reflect our latest views on the IRP, the IDP, ACE clean energy expansion into the solar storage segments and transmission development opportunities.
In addition, we expect that developments around federal spending and tax reform, including clean energy tax incentives, will be better known.
In terms of current initiatives, perhaps one of the most important is our recently filed November 1 general rate case proceeding.
As Bethany noted earlier, this rate case is critical to ensure the company is able to recover costs associated with our ongoing safe, reliable operations, clean energy transition, and to ensure we earn a reasonable rate of return required to maintain our credit ratings and attract investment capital.
In terms of our continued clean energy transition, perhaps one of the most exciting opportunities lies in the transmission and distribution areas.
As we have been highlighting for several years, transmission and delivery needs are accelerating and the needed infrastructure to accommodate the clean energy buildout is greatly lagging across the entire country, especially in the upper Midwest.
Specifically our Mysore region includes key corridors that are not currently sufficient to handle the rapid expansion of renewable energy on the grid.
Our planned expansion of our 550 megawatt DC transmission line, participation in the grid North partners initiative, and our increasing investment in the American Transmission Company are clearly of significant strategic value to ALLETE.
In aggregate, we believe this part of our business will be ALLETE's second fastest growing segment in the next decade.
In addition to strategic position in initiatives gaining traction at our regulated business, ALLETE Clean Energy is on the verge of completing its construction of Caddo wind project located in Oklahoma, which will serve additional Fortune 500 customers under long-term contracts, and is comfortably on track to be online before the end of this year.
This is the second large scale wind facility built and placed and serviced by ALLETE Clean Energy in just two years.
In total, Oklahoma-based Caddo and Diamond Spring projects represent over $800 million of investment and will provide its large C&I customers with over 2.1 million megawatt hours of carbon-free wind generation.
ALLETE Clean Energy's investment and safe harbor wind components remains a competitive advantage in the development of new wind projects such as Caddo and Diamond Spring, and in further optimization efforts of its existing wind portfolio.
Regarding optimization initiatives underway, the 92 megawatt Red Barn build order transfer project with Wisconsin Public Service Corporation and Madison Gas and Electric will utilize some of our Safe Harbor turbines while expanding our customer base and presence in another geographic region of the country.
ALLETE Clean Energy is finalizing development and plans to begin a complete construction of this facility in 2022.
An extension of this project and a testimony to our strong relationships with optionality to serve the C&I and/our utility space, the approximately 68 megawatt whitetail development project is advancing with its advanced transmission Q position, landowner relationships, and for either a long-term PPA or build order transfer project.
Speaking of strengthening our development pipeline to leverage is ACE's safe harbor turbines, we continue to advance the 200 megawatt [Inaudible] wind project in North Dakota and are working with state regulators and the Federal Aviation Administration on permitting and siting for this facility.
We are encouraged by North Dakota Governor Burgum's call for the state to be carbon neutral by 2030.
And this and additional clean energy projects are part of this ambitious vision.
Regarding the up to 120 watt -- megawatt Northern Wind project with Xcel Energy, construction will begin upon receiving permitting approval from the MPUC.
This project involves a repowering expansion and planned sale of our Chanarambie and Viking wind facility.
This project also remains on track to advance with completion expected in late 2022.
We were pleased that Xcel Energy received MPUC approval to acquire the project from ALLETE Clean Energy earlier this year.
Cash received from these optimization efforts will be deployed into new opportunities related to our solar and storage expansion strategy, reducing the potential for future equity needs.
In summary, ALLETE's sustainability and action strategy remains on track and we anticipate sharing more successes in the near future as we execute our clean energy growth initiatives.
This multifaceted unique clean energy strategy is well on its way to providing a differentiated value proposition to investors while serving the needs of many other stakeholders with strong metrics on the environmental, social, and corporate governance front.
I'll now hand it back to Bethany.
As demonstrated by ALLETE's significant clean energy projects, transformational decarbonization efforts, and development and expansion of infrastructure that's critical to the transmission and delivery of carbon-free energy, we are actively addressing climate change in all the right spaces.
We are a company and a team that cares for our customers, our communities, our employees, and our shareholders.
We have a well-earned reputation of being on the forefront with transforming clean energy investments and we anticipate significant investments in ALLETE's regulated and non-regulated businesses in the coming years.
We believe we will be well aligned with still to be finalized national and state clean energy goals.
Our sustainability and action strategy is a balanced approach that moves the needle while allowing time for advances in technology and an equitable transition to a secure and carbon-free energy economy.
On Slide 9, there are several links to important information about our company, especially the second linked document, ALLETE's corporate sustainability report.
A guiding principle of ALLETE's sustainability and action strategy is communication and transparency.
And we've updated our corporate sustainability report to include 2020 data that was unavailable at the time of the initial march publication as well as updates on climate policy and ALLETE board composition.
I encourage you to review our CSR in its entirety as it describes ALLETE's accomplishments and our strong commitment to sustainability in all its forms.
We'll continue to track industry, political, and regulatory trends to ensure our future reports consider any evolving climate-related risks and opportunities.
We're focused on meeting our nation's accelerating needs for cleaner, more efficient, and more resilient energy.
Our strategy sets ALLETE apart and we're committed to continue on this journey as a strong steward of all of our stakeholder's interests.
Doing the right things in the right way is nothing new here at ALLETE, and we are proud of the progress our company is making.
It's also important to note that ALLETE sustainability commitments align with the commitments our customers are making.
For example, all of Minnesota Power's largest customers have now committed to reduce carbon emissions in their products and their operation.
The fact that Minnesota Power serves these customers with 50% renewable energy today directly contributes to the sustainability of their current operations.
And our carbon-free energy vision for the future also supports these customer's longer term goal.
As a result of this focus on sustainability, we've seen Minnesota Power's largest mining customers invest in new ways of utilizing the abundant iron resource in our region to support continued sustainability improvements for what is already some of the cleanest steelmaking in the world.
In addition, in the forest products sector, we are looking forward to a new customer that is investing in an idled paper plant to utilize recycled fiber for tissue production and another new customer that will leverage sustainably harvested Minnesota timber to produce advanced building panels.
These are just a few examples of how our ALLETE companies and our customers are aligned in our commitments and are actively advancing sustainability in many ways, building an even better and brighter future for us all.
| qtrly diluted earnings per share $0.53.
sees fy 2021 earnings per share to be in range of $3.00 to $3.30.
|
Joining in the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group.
You will find the most directly comparable GAAP financial metrics and reconciliations on our website.
Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months.
Also as announced, we will hold our virtual Investor Day in a few weeks on December 9th.
We look forward to having you join us on December 9th.
Today, I want to get straight to our quarterly results, because they tell a very compelling story.
The Agilent team delivered a very strong close to 2020.
We posted revenues of $1.48 billion during the quarter.
Revenues are up 8% on a reported basis and up 6% core.
Operating margins are a healthy 24.9%.
EPS of $0.98 is up 10% year-over-year.
These numbers tell the story of a strong resilient company that is built for continued growth.
Our better-than-expected results are due to the strength of our core business, along with signs of recovery in our end-markets.
Geographically, China continues to lead the way with double-digit growth.
From an end-market view, both our pharmaceutical and food businesses grew double-digits.
In addition, our chemical and energy business grew after two quarters of declines, exceeding our expectations.
We also saw a rebound in U.S. sales during the quarter.
Overall, COVID-19 tailwinds contributed just over 2 points of core growth.
Achieving these results in the face of a global pandemic is a tribute to our team and the company we've built over the last five years.
I couldn't be more pleased with the way the Agilent team has performed over the last quarter and throughout 2020.
We have again proven our ability to work together and step up to meet any challenge that comes our way.
During the quarter, all three of our business groups grew high-single digits on a reported basis.
Our Life Sciences and Applied Markets Group generated $671 million in revenue, up 8% on a reported basis and up 4% core.
LSAG growth is broad based.
The cell analysis and mass spec businesses both grew at double-digit rates.
In terms of end markets, chemical and energy returned to growth, food grew double-digits and pharma high-single digits.
LSAG remains extremely well positioned and is outperforming the market.
The Agilent CrossLab Group came in with revenues at $518 million.
This is up a reported 9% and up 7% core.
ACG's growth is also broad based across end-markets and geographies.
Our focus on on-demand service is paying off as activity on our customer labs continues to increase.
The ACG team continues to build on its already deep connections with our customers, helping them operate through the pandemic and continue to drive improved efficiencies in lab operations.
For the Diagnostics and Genomics Group, revenues were $294 million, up 9% reported and up 7% core.
Growth was broad based, with NASD oligo manufacturing revenues up roughly 40%.
The genomics and pathology businesses continued to improve during the quarter.
I'm also very proud of our NASD team for successfully ramping production at our new Frederick site this year.
We have built a very strong position in this attractive market with excellent long-term prospects for high growth.
Let's now shift gears and look at our full-year fiscal 2020 results.
Despite the disruption, uncertainty and economic turmoil of dealing with the global pandemic, the Agilent team delivered solid results.
We generated $5.34 billion in revenue, up 3% on a reported basis and up nearly 1% core.
To put this in perspective, it's helpful to recall the progression of our growth.
In Q1, we delivered 2% core growth, as you saw the first impact of COVID-19 in our business in China.
Both Q2 and Q3 declined low-single digits as the pandemic spread across the globe and governments instituted broad shutdowns.
With 6% core growth, 8% reported in Q4, we're seeing business and economies start to recover.
As a result, we are clearly exiting 2020 with solid momentum.
Our recurring types of businesses represented by ACG and DGG proved resilient, growing low-to-mid single digits for the year.
In a very tough capex market, our LSAG instrument business declined only 2% for the year and returned to growth in the final quarter.
China led the way for our recovery with accelerating growth as the year progressed.
In our end-markets, pharma remained the most resilient and food markets recovered most quickly.
Full-year earnings per share grew 5% during fiscal 2020 to $3.28.
The full-year operating margin of 23.5% is up 20 basis points over fiscal 2019.
As we head into 2021, we do so with tremendous advantage.
Our diverse industry-leading product portfolio has never been stronger.
Our building and buying growth strategy with a focus on high-growth markets continue to deliver.
Our ability to respond quickly to rapidly changing conditions is also serving us well.
The way our sales and service teams have been able to quickly pivot to meet customer requirements during the pandemic has been nothing short of remarkable.
Our approach is focused on delivering above market growth while expanding operating margins along with a balanced deployment of capital.
We prioritized deployment of our capital, both internally and externally, on additional growth.
A few proof points on our growth-oriented capital deployment strategy.
A year ago, we spoke about recently closing the BioTek acquisition and the promise of growth that BioTek represented.
Today, BioTek is no longer a promise but a driver of growth.
In total, the cell analysis business generated more than $300 million in revenue for us during the year, with double-digit growth in Q4 and continued strong growth prospects.
Similar to last year, I was talking about ramping up our new Frederick site facility, a $185 million capital investment.
In addition to successfully ramping Frederick as we planned, we did so with an expanding book of business.
We also recently announced additional $150 million investment to our future manufacturing capacity.
We are aggressively adding capacity to capture future growth opportunities in this high-growth market.
Even in the face of the pandemic, we stayed true to our build and buy strategy.
We have clearly seen the advantages of our approach.
I'm confident our strategy will tend to produce strong results for us.
The strength of our team and resilience of our business model has served us well, and as you can see from the numbers, our growth strategy is producing outstanding results for our customers, employees and shareholders.
While uncertainties remain, as we begin fiscal 2021, we're operating from a position of strength.
Because of this, we're cautiously optimistic about the future.
We have built and will sustain our track record of delivering results and working as a one-Agilent team on behalf of our customers and shareholders.
As I noted earlier, I couldn't be more pleased with the results the Agilent team delivered in the fourth quarter and throughout the year.
I will now hand the call off to Bob.
In my remarks today, I will provide some additional revenue detail and take you through the fourth quarter income statement and some other key financial metrics.
I'll then finish up with our outlook for 2021 and the first quarter.
We are very pleased with our fourth quarter results as we saw strong growth exceeding our expectations, especially considering the ongoing challenges associated with COVID-19.
For the quarter, revenue was $1.48 billion, reflecting core revenue growth of 5.6%.
Reported growth was stronger at 8.5%.
Currency contributed 1.7%, while M&A added 1.2 points to growth.
From an end-market perspective, pharma, our largest market, showed strength across all regions and delivered 12% growth in the quarter.
Both small and large molecule businesses grew, with large molecule posting strong-double-digit growth.
We continue to invest and build capabilities in faster growth biopharma markets and offer leading solutions across both small and large molecule applications.
The food market also experienced double-digit growth during the quarter, posting a 16% increase in revenue.
While our growth in food business was broad based, China led the way.
And as Mike noted earlier, our chemical and energy market exceeded our expectations, growing 3% after two quarters of double-digit declines.
While one quarter does not a trend make, we are certainly pleased with this result, and the growth came primarily from the chemical and materials segment.
Diagnostics and clinical revenue grew 1% during Q4, led by recovery in the U.S. and Europe.
We continue to see recovery in non-COVID-19 testing, as expected, although the levels are still slightly below pre-COVID levels.
Academia and government was flat to last year, continuing the steady improvement in this market, and revenue in the environmental and forensics market declined mid-single digits against a strong comparison from last year.
On a geographic basis, all regions returned to growth.
China continues to lead our results with broad-based growth across most end-markets.
For the quarter, China finished with 13% growth and ended the full year up 7%.
Just a great result from our team in China.
The Americas delivered a strong performance during the quarter, growing 5% with results driven by large pharma, food, and chemical and energy.
And in Europe, we grew 2% as we saw lab activity improved sequentially, benefiting from our on-demand service business in ACG, as well as from a rebound in pathology and genomics as elective procedures and screening started to resume.
However, while improving, capex demand still lags our service and consumables business.
Now turning to the rest of the P&L.
Fourth quarter gross margin was 55%.
This was down 150 basis points year-over-year, primarily by a shift in revenue mix and an unfavorable impact of FX on margin.
In terms of operating margin, our fourth quarter margin was 24.9%.
This is down 20 basis points from Q4 of last year, as we made some incremental growth-focused investments in marketing and R&D, which we expect to benefit us in the coming year.
The quarter also capped off in full-year operating margin of 23.5%, an increase of 20 basis points over fiscal 2019.
Now wrapping up the income statement, our non-GAAP earnings per share for the quarter came in at $0.98, up 10% versus last year.
Our full-year earnings per share of $3.28 increased 5%.
In addition, our operating cash flow continues to be strong.
In Q4, we had operating cash flow of $377 million, up more than $60 million over last year.
And in Q4, we continued our balanced capital approach, repurchasing 2.48 million shares for $250 million.
For the year, we repurchased just over 5.2 million shares for $469 million and ended the fiscal year in a strong financial position with $1.4 billion in cash and just under $2.4 billion in debt.
All in all, a very good end to the year.
Now let's move on to our outlook for the 2021 fiscal year.
We and our customers have been dealing with COVID-19 for nearly a full year and are seeing our end-markets recover.
Visibility into the business cadence is improving.
And as a result, we are initiating guidance for 2021.
There is still a greater than usual level of uncertainty in the marketplace across most regions, and so while we're providing guidance, we're doing so with a wider range than we have provided historically.
It is with this perspective that we're taking a positive but prudent view of Q1 in the coming year.
For the full year, we're expecting revenue to range between $5.6 billion and $5.7 billion, representing reported growth of 5% to 7% and core growth of 4% to 6%.
This range takes into account the steady macro-environment we're seeing.
It does not contemplate any business disruptions caused by extended shut downs like we saw in the first half of this year.
In addition, we're expecting all three of our businesses to grow, led by DGG.
We expect DGG to grow high-single digits, with the continued contribution of NASD ramp and the recovery in cancer diagnostics.
We believe ACG will return to its historical high-single-digit growth, while LSAG is expected to grow low-to-mid single digits.
We expect operating margin expansion of 50 basis points to 70 basis points for the year, as we absorb the build out costs of the second line in our Frederick, Colorado NASD site.
And then helping you build out your models, we're planning for a tax rate of 14.75%, which is based on current tax policies and 309 million of fully diluted shares outstanding, and this includes only anti-dilutive share buybacks.
All this translates to a fiscal year 2021 non-GAAP earnings per share expected to be between $3.57 and $3.67 per share, resulting in double-digit growth at the midpoint.
Finally, we expect operating cash flow of approximately $1 billion to $1.05 billion and an increase in capital expenditures to $200 million, driven by our NASD expansion.
We have also announced raising our dividend by 8%, continuing an important streak of dividend increases, providing another source of value to our shareholders.
Now let's finish with our first quarter guidance.
But before we get into the specifics, some additional context.
Many places around the world are currently seeing renewed spikes in COVID-19 that could cause some additional economic uncertainty.
And while we're extremely pleased with the momentum we have built during Q4, we are taking a prudent approach to our outlook for Q1, because of the current situation with the pandemic.
For Q1, we're expecting revenue to range from $1.42 billion to $1.43 billion, representing reported growth of 4.5% to 5.5% and core growth of 3.5% to 4.5%.
And first quarter 2021 non-GAAP earnings are expected to be in the range of $0.85 to $0.88 per share.
To be where we are now after knowing where we stood in March is truly remarkable.
Add to this, the strong momentum we saw in Q4, I truly believe we are well positioned to accelerate our growth in fiscal 2021.
With that, Ankur, back to you for Q&A.
David, let's provide the instructions for Q&A.
| q4 non-gaap earnings per share $0.98.
q4 revenue $1.48 billion versus refinitiv ibes estimate of $1.4 billion.
sees q1 revenue $1.42 billion to $1.43 billion.
sees fy 2021 revenue $5.6 billion to $5.7 billion.
sees q1 non-gaap earnings per share $0.85 to $0.88.
sees q1 revenue up 4.5 to 5.5 percent.
|
We appreciate your joining us today for Gartner's fourth quarter 2020 earnings call and hope you are well.
With me on the call today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer.
All growth rates in Gene's comments are FX-neutral, unless stated otherwise.
Reconciliations for all non-GAAP numbers we use are available on the Investor Relations section of the gartner.com website.
Finally, all contract values and associated growth rates we discuss are based on 2020 foreign exchange rates, unless stated otherwise.
I encourage all of you to review the risk factors listed in these documents.
2020 was an extraordinary year.
The COVID-19 pandemic, global macroeconomic conditions, social unrest and geopolitical changes, all pose significant challenges to enterprises around the world.
In this context, Gartner delivered a strong performance across contract value, revenue, EBITDA and free cash flow.
As many of you know, we entered 2020 with a financial plan to align cost with revenues.
By executing this plan and taking swift cost actions when the pandemic first began, we quickly stabilized our financial position.
We maintained discipline cost management throughout the year over strong investments to support future growth.
We've successfully pivoted our global workforce to operate effectively in a remote environment.
We grew our capability and key functions across our business.
We drove strong operational execution and we were extremely agile in serving our clients.
Pivoting our content to address critical contemporary issues such as the pandemic, remote work environments, cost optimization and business continuity.
We are well positioned to spring back quickly as the macroeconomic environment improves.
Our performance improved in Q4 compared to earlier in 2020.
We delivered strong performances in GBS contract value, research revenues, EBITDA and free cash flow.
Research is our largest and most profitable segment.
This is a vast market opportunity across all sectors, sizes and geographies.
Our research segment serves executives and their teams across all major enterprise functions in every industry around the world.
We are uniquely positioned to support leaders enterprisewide on hundreds of critically important topics.
Topics with the highest interest during Q4 included data and analytics, cost optimization and talent management.
Global Technology Sales or GTS, serves leaders and their teams within IT.
For the full year 2020, GTS contract value grew 4%.
Our key underlying metrics have improved each quarter since Q2.
Fourth quarter 2020 contract value from new logos was up from a year ago, while cancels were about the same.
Our existing clients continued to increase their spend, however it was a slower pace than in 2019.
This was the biggest factor impacting our growth in the quarter.
Client engagement continue to be strong with both content and analyst interactions up 30% versus 2019.
We saw strong performances across several regions and industries, including tech, retail and services.
Some of the topics with the highest interest included digital transformation, application development, cloud management and the digital workplace.
We expect GTS contract value growth to accelerate in 2021 and return to double-digit growth in the future.
Global Business Sales or GBS, serves leaders and their teams beyond IT.
This includes HR, supply chain, finance, marketing, sales, legal and more.
GBS contract value continued to perform well throughout the year with contract value growth of 7%.
New business growth was a very strong 26% in the quarter, driven by our GxL product line.
The sales, finance and HR practices all ended Q4 with double-digit growth rates.
And all practices, with the exception of marketing, contributed to GBS's growth.
Across our entire research business, we've practiced relentless execution of proven practices, and we're seeing the results of our efforts.
Our research business is well positioned to return to sustained double-digit growth over the medium term.
As many of you know, our conferences segment had great momentum coming out of 2019, but was hard hit in 2020 by the global pandemic.
To replace our traditional in-person destination conferences, which were no longer possible in 2020, we pivoted to virtual conferences.
The performance of these conferences exceeded our expectations in 2020.
And now with several months experience under our belt, we've got a set of best practices that will continue to refine.
Our value proposition for virtual conferences remains the same as for in-person conferences.
We deliver extraordinarily valuable insights to an engaged and qualified audience.
Beyond personal conferences, operationally, we are preparing to return to in-person conferences in the second half of 2021.
Gartner Consulting is an extension of Gartner Research and helps clients execute their most strategic initiatives through deeper extended project-based work.
Our consulting segment was also impacted by the pandemic with revenues down 12% in Q4 and 5% for the full year 2020.
Over the past several years, we've made great progress in our consulting business, and it will continue to serve as an important complement to our IT research business.
Companywide, we continued to strengthen our stance against racism and discrimination.
We appointed a new leader of diversity, equity inclusion.
We established a Center of Excellence dedicated to improvement in this area.
And we strengthened our employee resource groups, which help remove barriers for diverse populations and support associate engagements.
Sustainability is an important factor in how we manage our business.
For example, we've signed contracts for our Stamford headquarters and our U.K. hub to be powered by 100% renewable energy.
We'll be eliminating single-use plastics across our offices.
And finally, we're benchmarking our environmental footprint and development programs to minimize it over time.
Summarizing, we've performed well in the context of a pandemic.
Looking ahead, we are well positioned for sustained growth.
We expect to return to revenue growth in 2021 and are on track to return to double-digit CV and revenue growth thereafter.
We expect to deliver 2021 EBITDA margins, up 2019 and to further expand margins over time.
We've generated significant free cash flow in excess of net income, which will deploy to return capital to our shareholders through share repurchases and make strategic tuck-in acquisitions.
With that, I'll hand the call over to Craig.
I hope everyone remain safe and well.
Fourth quarter results were ahead of our expectations, headlined by a strong performance in GBS, better than planned cost management and outstanding free cash flow generation.
As our 2021 guidance highlights, we expect total revenue to increase versus 2020, while also positioning Gartner for a return to strong growth.
Looking out over the medium term, we continue to expect double-digit CV and revenue growth, modest margin expansion and strong free cash flow generation.
Because we can fund growth investments, we have ample capital to return to shareholders and to deploy to strategic tuck-in acquisitions when we find the right opportunities.
Our board authorized an additional $300 million for repurchases, bringing the total available to around $860 million.
Reviewing our year-over-year financial performance, for the full year 2020, total contract value increased 4%, total FX-neutral revenue was down 3%, FX-neutral adjusted EBITDA increased 20%, diluted adjusted earnings per share was a strong $4.89 and free cash flow was $819 million, up almost 100% from 2019.
We did see some timing benefits, which I will discuss a bit later.
Fourth quarter revenue was $1.1 billion, down 8% as reported and 9% FX-neutral.
Excluding conferences, our revenues were up 2% year-over-year FX-neutral.
In addition, total contribution margin was 68%, up more than 580 basis points versus the prior year.
EBITDA was $245 million, up 13% year-over-year and up 10% FX-neutral.
Adjusted earnings per share was $1.59, and free cash flow in the quarter was a robust $237 million.
Research revenue in the fourth quarter grew 5% year-over-year as reported and 4% on an FX-neutral basis.
Fourth quarter research contribution margin was 72%, benefiting in part from the temporary cost avoidance initiatives we put in place starting in the first quarter of 2020.
Total contract value grew 4% FX-neutral to $3.6 billion at December 31.
This was the highest contract value in Gartner history, a notable achievement in a challenging year.
For the full year 2020, research revenues increased by 7%, both on a reported and FX-neutral basis.
The gross contribution margin was 72%, up about 240 basis points from the prior year.
Global Technology Sales contract value at the end of the fourth quarter was $2.9 billion, up almost 4% versus the prior year.
The selling environment continued to improve in the fourth quarter, but we are still seeing less upsell with existing clients than normal.
Our clients are staying with us, but not adding as much incremental CV as we've historically seen given the challenging economic environment.
Moving forward, we expect win backs and a return to more expansion with existing clients to contribute to growth in 2021 consistent with our experience coming out of the last downturn.
By industry, CV growth was led by technology, retail and services.
While retention for GTS was 98% for the quarter, down about 600 basis points year-over-year, a majority of our industry groups saw retention improve from the third quarter.
GTS new business declined 5% versus last year, an improvement from both the second and third quarters.
Our regular full set of metrics can be found in our earnings supplement.
Global Business Sales contract value was $696 million at the end of the fourth quarter.
That's about 20% of our total contract value.
CV increased 7% year-over-year.
CV growth was led by the healthcare and technology industries.
The sales, finance and human resources practices, all recorded double-digit CV growth for the year.
All practices contributed to the 7% CV growth rate for GBS with the exception of marketing, which was impacted by discontinued products.
That said, our marketing business saw improving retention rates and a return to year-over-year new business growth in the fourth quarter.
Wallet retention for GBS was 101% for the quarter, down 43 basis points year-over-year.
GBS new business was up 26% over last year, led by very strong growth in HR, finance and legal.
As with GTS, our regular full set of GBS metrics can be found in our earnings supplement.
Overall, GBS continue to demonstrate its resilience and strength as we exited 2020.
The conferences segment was materially impacted by the global pandemic, as you know.
During the year, we pivoted to producing virtual conferences with the focus on maximizing the value we deliver for our clients.
We held 13 virtual conferences in the fourth quarter.
We also held a number of virtual Evanta meetings, shifting these one day local conferences online due to the pandemic.
Conferences revenue for the quarter was $93 million.
Contribution margin in the quarter was 78%.
Our fast transition to virtual conferences has been positive for the overall business.
As we discussed last quarter, virtual conferences offer significant value to our research clients and prospects.
And while we've shown that we can run virtual conferences profitably, it is important to recognize the different economics associated with virtual versus in-person conferences.
Similar to last quarter, I'd highlight two primary differences.
First, our mix of revenue from attendees and exhibitors has essentially flipped, with the in-person format approximately two-thirds of revenue comes from exhibitors and one-third from attendees.
In the virtual format, we've seen about two-thirds of revenue come from attendees.
Second, the vast majority of our attendee revenue has continued to come from research contract entitlements as opposed to incremental tickets.
I'd also highlight that our fourth quarter destination conferences have historically been our largest most profitable conferences.
In 2020, we held our biggest most highly anticipated conferences of the year in the fourth quarter in a virtual format.
For the full year 2020, revenue decreased by 75%, both on a reported and FX-neutral basis.
Gross contribution margin was 48%, down about 290 basis points from 2019 as we maintained some of our cost of service as well as SG&A despite the lower revenue.
We did this to ensure we were in a position to execute our new virtual conferences and to resume in-person conferences when it is safe and permitted.
Lastly, the timing of receiving conference cancellation insurance claims remains uncertain, so we will not record any recoveries in excess of expenses incurred until the receipt of the insurance proceeds.
Fourth quarter consulting revenues decreased by 10% year-over-year to $94 million.
On an FX-neutral basis, revenues declined 12%.
Consulting contribution margin was 26% in the fourth quarter, down about 160 basis points versus the prior year quarter due to lower contract optimization revenue, which usually flows through at high margins.
Labor-based revenues were $73 million, down 10% versus Q4 of last year or 12% on an FX-neutral basis.
Labor-based billable headcount of 730 was down 10%.
Utilization was 63%, up about 300 basis points year-over-year.
Backlog at December 31 was $100 million, down 14% year-over-year on an FX-neutral basis.
Our backlog provides us with about four months of forward revenue coverage.
Our contract optimization business was down 9% on a reported basis versus the prior year quarter.
As we have detailed in the past, this part of the consulting segment is highly variable.
Full year consulting revenue was down 4% on a reported basis and 5% on an FX-neutral basis and its gross contribution margin of 31% was up 68 basis points from 2019.
SG&A decreased 6% year-over-year in the fourth quarter.
SG&A as a percentage of revenue was up year-over-year as we restored certain compensation and benefit costs and had significantly less revenue from conferences.
For the full year, SG&A decreased 3% on a reported and FX-neutral basis.
EBITDA for the fourth quarter was $245 million, up 13% year-over-year on a reported basis and up 10% FX-neutral.
As we have seen improvements in the macro environment, we have resumed growth spending and started to restore some of the compensation and benefit programs, which we'd put on hold when the pandemic first hit.
Fourth quarter EBITDA benefited from several factors.
First, we've continued to maintain very strong cost discipline across the company.
Second, we had better than planned revenue performance in research and conferences, which flowed through with very strong incremental margins.
Third, we had planned for an increase in certain costs, such as travel, which didn't materialize due to pandemic-related shutdowns.
And finally, we have been conservative in our implied fourth quarter guidance given the geopolitical uncertainty due in part to the U.S. election, rising COVID counts and a still recovering global economy.
Depreciation in the quarter was up approximately $4.5 million from last year, including expense acceleration from facilities-related charges.
Amortization was down about $800,000 sequentially.
Net interest expense, excluding deferred financing costs in the quarter was $26 million, flat versus the fourth quarter of 2019.
The Q4 adjusted tax rate, which we use for the calculation of adjusted net income, was 25% for the quarter.
The tax rate for the items used to adjusted net income was 28.4% in the quarter.
The adjusted tax rate for the full year was 21%.
Adjusted earnings per share in Q4 was $1.59.
For the full year, adjusted earnings per share was $4.89.
EPS growth for the year was 25%.
Note that about $7 million of equity compensation expense, which we normally would have incurred in the fourth quarter, has shifted into the first quarter of 2021.
That was a benefit to fourth quarter adjusted earnings per share of about $0.07.
Operating cash flow for the quarter was $260 million compared to $83 million last year.
The increase in operating cash flow was primarily driven by cost avoidance initiatives, improved collections and timing of tax payments.
Capex for the quarter was $23 million, down 57% year-over-year.
Lower capex is largely a function of lower real estate expansion needs due to the pandemic.
We define free cash flow as cash provided by operating activities less capital expenditures.
Free cash flow for the quarter was $237 million, which is up about 700% versus prior year.
Free cash flow as a percent of revenue or free cash flow margin was 20% on a rolling four quarter basis, continuing the improvement we have been making over the past few years.
Free cash flow was well in excess of GAAP and adjusted net income.
Adjusted for timing and one-time benefits, 2020 normalized free cash flow margin is around 13%.
We had a fantastic year for free cash flow, driven by the resiliency of the business, continued strong collections, disciplined cost and cash management and lower cash taxes and deferrals of certain tax payments.
We took a number of actions in 2020 to further strengthen our balance sheet.
We had two successful bond offerings and amended and extended our credit facility.
We reduced our maturity risk and our annual interest expense will be lower starting in 2021.
Our December 31 debt balance was $2 billion.
At the end of the fourth quarter, we had about $1 billion of revolver capacity.
Our reported gross debt to trailing 12 month EBITDA is about 2.5 times.
At the end of the fourth quarter, we had $713 million of cash.
We resumed our share repurchases after pausing earlier in the year, buying back $100 million in stock at an average price of $156 per share.
The board recently increased our share repurchase authorization by $300 million because we have significant capacity for buybacks from cash on hand and expected free cash flow.
As of February 8, we have around $860 million available for open-market repurchases.
We expect the board will refresh the repurchase authorization as needed going forward.
We will deploy excess cash for share repurchases and strategic tuck-in acquisitions.
Before providing the 2021 guidance details, I want to discuss our base level assumptions and planning philosophy for 2021.
For research, most of our 2021 revenue is determined by our year end 2020 contract value.
As we move through the year, we will revisit the research revenue outlook.
Operationally, we are planning to relaunch in-person one day events in the third quarter and in-person destination conferences starting in September.
Our guidance includes fixed costs, primarily people and marketing, related to both the full year of virtual and in-person conferences.
We've excluded the variable costs, primarily venue-related, associated with the in-person conferences from our guidance.
We've been able to run profitable virtual conferences in 2020, and that is reflected in our 2021 guidance.
If we are able to run in-person conferences, we expect incremental upside to both our revenue and profitability for 2021.
The economics in 2021, even in a partial in-person year, won't be fully back to normal.
As we get closer to the go-no-go decision point, we'll provide additional insight to sizing the incremental revenue and profits.
For consulting revenues, the compares get easier as we move through the year.
We have more visibility into the first half based on the composition of our backlog and pipeline as usual.
For expenses, we have planned for the full reinstatement of benefits that were either canceled or deferred in 2020.
This includes our annual merit increase and certain other benefits.
We are also returning to growing our sales forces, with planned quota-bearing headcount growth in the high-single-digits for both GTS and GBS.
We have also planned for several additional programs, including technology investments.
The impact of most of these expense restorations or investments impact our P&L, starting in the second quarter.
As you know, travel expense was close to zero from April through December.
Our current plans assume a modest ramp up in travel-related expenses over the course of 2021.
Most of this ramp is built into the second half of the year.
If travel restrictions remain in place for longer than we've assumed, we'd see expense savings.
Our guidance for 2021 is as follows.
We expect research revenue of at least $3.815 billion, which is growth of at least 5.9%.
We expect conferences revenue of at least $160 million, which is growth of at least 33%.
We expect consulting revenue of at least $390 million, which is growth of at least 3.6%.
The result is an outlook for consolidated revenue of at least $4.365 billion, which is growth of 6.5%.
Based on current foreign exchange rates and business mix, the consolidated growth includes an FX benefit of about 200 basis points.
We expect full year adjusted EBITDA of at least $760 million, which is a decline of about 7% and reported margins of at least 17.4%.
This is based on conferences running virtual only.
We expect our full year 2021 adjusted net interest expense to be $102 million.
We expect an adjusted tax rate of around 22% for 2021.
We expect 2021 adjusted earnings per share of at least $4.10.
For 2021, we expect free cash flow of at least $630 million.
This is before any insurance proceeds related to 2020 conference cancellations.
It is also important to note that we have revalued our contract value at current year FX rates, which had a modest overall impact.
Our 2020 ending contract value at 2021 FX rates is $2.9 billion for GTS and $706 million for GBS.
Details are included in the appendix of the earnings supplement.
All the details of our full year guidance are included on our Investor Relations site.
Finally, we expect to deliver at least $200 million of EBITDA in Q1 of 2021.
In summary, despite an unfavorable economic environment, we delivered better than planned financial results in 2020.
We had outstanding free cash flow and strong EBITDA.
We strengthened our balance sheet and moved quickly to implement cost avoidance initiatives, while still investing for future growth.
While there is still uncertainty in the macro outlook, our contract value held up better than in the last downturn.
We were able to launch and monetize virtual conferences and virtual Evanta meetings.
We will continue with targeted investments and restoration of certain expenses to ensure we are well positioned to rebound when the economy recovers.
As I mentioned at the start of my remarks, looking out over the medium term, we continue to expect double-digit CV and revenue growth, modest margin expansion and strong free cash flow generation.
Because we could fund growth investments, we have ample capital to return to shareholders through our buyback programs and to deploy to strategic tuck-in acquisitions when we find the right opportunities.
| compname posts q4 adjusted earnings per share $1.59.
q4 revenue $1.1 billion versus refinitiv ibes estimate of $1.07 billion.
q4 adjusted earnings per share $1.59.
|
In the third quarter, Cullen/Frost earned $106.3 million or $1.65 per share compared with earnings of $95.1 million or $1.50 per share reported in the same quarter of last year.
And this compared with $116.4 million or $1.80 per share in the second quarter.
We continue to focus on our organic strategy while the economy works to move past supply chain issues and other lingering effects of the pandemic.
Average deposits continued their strong increase in the third quarter and were $39.1 billion, an increase of 19% compared with $32.9 billion in the third quarter of last year.
Overall, average loans in the third quarter were $16.2 billion compared with $18.1 billion in the third quarter of 2020, but this included the impact of PPP loans.
Excluding PPP loans, third quarter average loans of $14.8 billion were essentially flat from a year ago but up an annualized 6% on a linked quarter basis.
And looking forward, we're very encouraged about the outlook for loan growth.
New loan commitments booked through the third quarter excluding PPP loans were up by 11% compared to the first nine months of last year.
For the quarter, new loan commitments were up by 6% on a linked quarter basis.
We were especially pleased that the linked quarter increase was due primarily to C&I commitments, which were up 30%.
Our current weighted pipeline is 41% higher than one year ago and 22% higher than last quarter.
The increases are in both C&I, up 22%; and CRE, up 28%.
The market continues to be very competitive.
In the third quarter, 69% of the deals we lost were due to structure compared to 50% in the quarter before.
We also continue to add to our commercial customer base, and we recorded 619 new commercial relationships during the quarter.
And while this was down from the same quarter a year ago when we were experiencing incredible PPP success, it is 2/3 higher than the quarter immediately before the PPP program.
As with the second quarter, we did not report a credit loss expense in the third quarter.
Our asset quality outlook is stable and in general, problem assets are declining in number.
New problems have dropped to pre-pandemic levels.
Net charge-offs for the third quarter totaled $2.1 million compared with $1.6 million in the second quarter.
Annualized net charge-offs for the third quarter were five basis points of average loans.
Nonaccrual loans were $57.1 million at the end of the third quarter, a slight decrease from the $57.3 million at the end of the second quarter.
Overall, delinquencies for accruing loans at the end of the third quarter were $95.3 million or 60 basis points of period-end loans, and these are manageable pre-pandemic levels.
What started out as $2.2 billion in 90-day deferrals granted to borrowers early in the pandemic were completely gone as of the end of the third quarter.
Total problem loans, which we define as risk grade 10 and higher, were down slightly to $635 million at the end of the third quarter compared with $666 million at the end of the second quarter.
In the third quarter, we continued making progress toward our goal of mid-single-digit concentration level in the energy portfolio over time, with energy loans falling to 6.5% of our non-PPP portfolio at the end of the quarter.
Our teams continue to analyze the nonenergy portfolio segments that we considered the most at risk from pandemic impacts.
As of the third quarter, those segments are represented by restaurants, hotels and entertainment and sports.
The total of these portfolio segments excluding PPP loans represented $695 million at the end of the third quarter, and our loan loss reserve for these segments was 8.8%.
The credit quality of individual credits in these segments is currently most stable -- mostly stable or better compared to the end of the second quarter.
We reported in the second quarter that we had completed our 25-branch Houston expansion initiative, and we're very pleased with the results.
We've identified eight more locations to open in the coming months, and that process is underway.
Let me update you where we stand through the third quarter with the Houston expansion excluding PPP loans.
Our numbers of new households were 134% of target and represented more than 12,200 new individuals and businesses.
Our loan volumes were 177% of target and represented $371.4 million in outstandings, and about 80% of this represents commercial credits with about 20% consumer.
Deposits surpassed $0.5 billion and were 111% of target.
Commercial deposits accounted for 2/3 of the total.
In the meantime, we're also preparing for our upcoming 28-branch expansion project in the Dallas region, which will kick off with the first new financial center opening early next year and continuing into 2024.
The Dallas expansion will follow our Houston model, and we will employ the lessons learned during our team's successful rollout.
I'll continue to emphasize that the business we are generating through our expansion strategy is consistent with the overall company.
Its profitability is weighted toward small and midsized businesses, but it also has complemented wealth management, insurance, and of course, consumer banking, which continues to see tremendous growth.
For example, through the first six months of this year, we had already surpassed consumer banking's all time annual growth for new customer relationships, which was 12,700 in 2019.
At the end of the third quarter this year, this had risen to 19,974 net new checking customers.
That's already more than 150% of our previous annual record.
We've worked hard to lower barriers to entry for potential customers with improved product offerings and physical distribution.
For example, besides overdraft grace which we introduced in April and Early Pay Day which we announced in July, we also recently established an ATM branding partnership with Cardtronics that resulting -- resulted in us having by far the largest ATM network in the state.
In addition, after over two years of study, we've begun the process of putting in place the infrastructure to add residential mortgages to our suite of consumer real estate products in late 2022.
HELOC, home improvement and purchase money second loans, which has steadily grown to in excess of $1.3 billion.
Utilizing best-in-class technology will allow us to provide Frost level of world-class customer service as we build this portfolio over time in response to customer demand.
Finally, I want to commend our team working on PPP loans.
Nearly 90% of the 32,500 loans or $4.7 billion have already been helped with the loan forgiveness process.
That includes upwards of 97% of the first-round loans from 2020.
Our team continues to put in outstanding work to execute our strategies, whether it's PPP, our expansion projects, or the enhancements we've made to our customer experience.
I believe we've got the best team in the financial services industry.
They are why I continue to be optimistic about our company and our prospects for success.
Looking first at our net interest margin.
Our net interest margin percentage for the third quarter was 2.47%, down 18 basis points from 2.65% reported last quarter.
The decrease was primarily the result of a higher proportion of earning assets being invested in lower-yielding balances at the Fed in the third quarter as compared to the second quarter, and to a lesser extent, the impact of a lower PPP loan volumes and their related yields compared to the prior quarter.
Interest-bearing deposits at the Fed averaged $15.3 billion or about 35% of our average earning assets in the third quarter, up from $13.3 billion or 31% of average earning assets in the prior quarter.
Excluding the impact of PPP loans, our net interest margin percentage would have been 2.27% in the third quarter, down from an adjusted 2.37% for the second quarter, with all of the decrease resulting from the higher level of balances at the Fed in the third quarter.
The taxable equivalent loan yield for the third quarter was 4.16%, down 12 basis points from the previous quarter.
Excluding the impact of PPP loans, the taxable equivalent loan yield would have been 3.74%, down six basis points from the prior quarter.
To add some additional color on our PPP loans, total PPP loans at the end of September were $828 million, down from $1.9 billion at the end of June.
Forgiveness payments received during the third quarter were higher than we had projected, resulting in an acceleration in the recognition of the net deferred fees during the quarter.
At the end of the third quarter, we had only about $11.5 million in net deferred fees remaining to be recognized, and we currently expect about 75% of that to be recognized in the fourth quarter.
Looking at our investment portfolio.
The total investment portfolio averaged $12.5 billion during the third quarter, up about $209 million from the second quarter.
The taxable equivalent yield on the investment portfolio was 3.35% in the third quarter, down one basis point from the second quarter.
The yield on the taxable portfolio which averaged $4.1 billion was 2.03%, up two basis points from the second quarter.
Our municipal portfolio averaged about $8.4 billion during the third quarter, up $230 million from the second quarter, with a taxable equivalent yield of 4.04%, down five basis points from the prior quarter.
At the end of the third quarter, 78% of the municipal portfolio was pre-refunded or PSF-insured.
The duration of the investment portfolio at the end of the third quarter was 4.5 years, up slightly from 4.4 years in the second quarter.
We made investment purchases toward the end of September of approximately $1.5 billion, consisting of about $900 million in MBS agency securities with a yield of about 2%, about $500 million in treasuries yielding 1.07% with the remainder in municipal securities.
Regarding noninterest expense, looking at the full year 2021, we currently expect an annual expense growth rate of around 3% over our 2020 total reported noninterest expenses, which is consistent with our previous guidance.
Regarding the estimates for full year 2021 earnings, given our third quarter results and the recognition of lower PPP fee accretion for the fourth quarter, we currently believe that the current mean of analyst estimates of $6.48 is reasonable.
| q3 earnings per share $1.65.
|
Angela Kleiman and Barb Pak will follow me with comments, and Adam Berry is here for Q&A.
I will provide an overview of our third quarter results, our initial operational outlook for 2022, apartment market conditions and then conclude with the regulatory environment.
Our third quarter results exceeded expectations, reflecting substantial improvement in West Coast economic conditions and housing demand.
Net effective market rents are now 6.4% above pre-COVID levels and it's notable that we've exceeded pre-COVID market rents despite having recovered only about 63% of the jobs lost during the pandemic.
As a result of improving market conditions, we reported quarterly core FFO of $3.12 per share, $0.08 per share above both our sequential results and guidance provided last quarter.
This is the first of likely many quarterly sequential improvements in core FFO.
Southern California continues to deliver the strongest growth with net effective rents up 17.2% compared to pre-COVID while Northern California is still down 5.2%.
Return to office delays at many tech companies and slower job growth compared to other West Coast areas were factors in the pace of recovery for Northern California.
Overall, September job growth in the Essex markets was 5.2%, substantially above the U.S. average of 4%.
Turning to our outlook for 2022.
We published our initial market rent estimates on page S-17 of our supplemental package.
We are expecting 7.7% net effective rent growth on average in 2022 with Northern California the notable laggard in 2021 forecasted to lead the portfolio average in market rent growth next year.
A key assumption driving our outlook for 2022 is the return to a predominantly hybrid office environment occurring over the first half of the year, supporting our 2022 job growth outlook and our expectation that the West Coast markets will resume their long-term outperformance versus U.S. averages.
Our confidence in the Bay Area recovery next year is partially driven by rental affordability following a year of solid income growth, lower effective rents and exceptional growth in single-family home prices.
Median for-sale home prices are up 17% in California and almost 16% in Seattle, making for-sale housing more costly relative to rental housing and often impeding the transition from renter to homeowner.
Finally, despite large increases in for-sale housing prices, our expectation for the production of for-sale housing in 2022 remains very muted at only 0.4% of the single-family housing stock.
We previously noted that many large tech companies in our markets have delayed their office reopenings as a result of the Delta variant this fall, which we believe is the primary factor in the slow recovery of Northern California compared to other Essex markets.
Nevertheless, recent tech company announcements regarding office expansion, open positions in the Essex markets and new commitments to office space all support our belief that the leading employers remain fully committed to a hybrid office-centric environment on the West Coast.
Page S-17.1 of our supplemental highlights recent investments by large tech companies which have continued throughout the pandemic and include Apple's 550,000 square foot recent expansion in Culver City, their new 490,000 square foot tech campus that will soon begin construction in North San Jose and a recent acquisition of five office buildings with a total of 458,000 square feet in Cupertino.
Google last quarter received needed approvals for its planned 80-acre campus near Downtown San Jose and YouTube's 2.5 million square foot campus in San Bruno was just approved by the city last week.
We continue to track the large tech companies hiring in terms of open positions and job locations, giving us confidence that we continue to grow alongside the most dynamic sector of the U.S. economy.
Our most recent survey of open positions indicates 38,000 job openings in the Essex markets for the 10 largest tech companies, up 9,000 jobs or 26% as compared to the first quarter of 2020.
Strong economic growth on the West Coast is further supported by venture capital investments which achieved new highs in Q3 '21 of $72 billion, of which 44% was directed to organizations in the Essex markets.
Turning to our supply outlook for 2022, we are expecting 0.6% housing supply growth for the full year, including 0.9% growth for the multifamily stock which is manageable relative to our expectations for job growth of 4.1% in 2022.
Overall, our West Coast markets will remain well below the national rate of new housing supply growth and especially compared to the rapid accelerating pace of housing deliveries across many low-barrier markets next year.
Longer term, residential building permits in Essex markets saw a modest 3.5% increase on a trailing 12-month basis, which is favorable compared to the U.S. where permits have increased 13.6% compared to one year ago.
While our markets often temporarily underperform the national averages during recessions, we remain disciplined in our approach to capital allocation, including the cadence of housing supply deliveries with permitting data supporting our West Coast thesis.
Turning to the apartment transaction market.
We continue to see strong demand from institutional capital to invest in the multifamily sector along the West Coast as evidenced by increasing transaction volume and cap rates in the mid-3% range.
Apartment values across our markets are up approximately 15% on average compared to pre-COVID valuations.
The company has recently seen more development opportunities, and we were able to purchase two commercial properties in the third quarter, one located in South San Francisco that we expect to become a near-term apartment development opportunity and another in Seattle that we will begin to entitle for apartments while earning an attractive 6% going-in yield with a high-quality tenant.
Barb will discuss a new co-investment program in a moment, which is strategically important given our preference not to issue common stock at the current market price.
Finally, the California statewide eviction moratorium ended September 30.
However, a few meaningful local jurisdictions have extended their separate eviction prohibitions.
The net result is that a significant portion of our portfolio remains subject to eviction moratoria and other regulations that will slow the pace of scheduled rent growth in 2022.
Fortunately, the Federal tenant relief program has come to the aid of many of our residents, although the reimbursement process continues to be slow and requires a significant coordination and support from the Essex team.
I am grateful for this extensive team effort.
First, I'll start by expressing my appreciation for our operations team as we are in the midst of a strong recovery, our team has been busier and working harder than ever.
Our third quarter results reflect a combination of the operating strategy implemented early in the pandemic and a healthy recovery in net effective rents that began in the second quarter as California and Washington finally reopened from the pandemic shutdowns.
As you may recall, in the second quarter of 2020 when the pandemic-mandated shutdowns halted our economy, Essex quickly pivoted to a strategy that focused on maintaining high occupancy and coupon rents with the use of significant concessions.
Now over a year later, as our markets recover, we are starting to see the benefits of this strategy flow through our financial results.
In the third quarter, same-property revenue -- same-property revenues grew by 2.7%, which is primarily attributable to a reduction in concessions compared to the previous period.
By primarily utilizing concessions last year, we were able to limit the in-place rent decline to only 1.1% in the third quarter.
The benefit of this strategy is also coming through our sequential revenue growth, which increased 3.2% this quarter from the second quarter.
With the market volatility we experienced over the past year, this is an extraordinary result and positions the company well going forward.
From a portfoliowide perspective, market conditions remain strong compared to a year ago as demonstrated by the 12.6% blended net effective rent growth in the quarter.
In addition, rents relative to pre-COVID levels have continued to improve, further enhanced by a delay to the typical seasonal slowdown in all our markets.
Turning to some market-specific commentary from north to south.
Rents and jobs in the Seattle region have had a strong recovery with net effective rents up 8.3% compared to pre-COVID levels and year-over-year job growth of 5.5% in September.
New supply continues to be largely concentrated in the CBD, which is less impactful to Essex because 85% of our Seattle portfolio is located outside of CBD.
Looking forward to 2022, as outlined in our S-17 of the supplemental, total housing supply deliveries for the region is expected to decline compared to 2021, and we anticipate job recovery to continue, led by Amazon, which recently announced plans to hire over 12,000 corporate and tech employees in Seattle.
As such, we are forecasting market rent growth of 7.2% in 2022.
Moving down to Northern California, which is our only region where net effective rents remain below pre-COVID levels.
Greater job loss and apartment supply deliveries caused net effective rents to fall further in Northern California since the onset of the pandemic.
In addition, the job recovery in Northern California has been at a slower pace than our other regions, with only 4.4% year-over-year improvement compared to a 5.2% for the entire Essex portfolio as of September.
We believe this is partly driven by the more owner mandates delaying normal business activities.
Apartment supply, particularly in San Mateo and Oakland CBD are also presenting challenges for nearby properties, leading to financial concessions for stabilized properties for -- of over a week in these markets in September.
On the other hand, we anticipate that Northern California will be our best-performing region in 2022, with market rent growth forecast of 8.7% on our S-17.
As Mike discussed, we expect hybrid office reopenings to continue, which will drive additional job growth and healthy demand for apartment units.
With similar level of supply delivery expected in 2022 as this year, we are optimistic that Northern California is in its early stages of its recovery.
Lastly, on Southern California.
Rent growth has continued to improve in the third quarter, and net effective rents in September are 17.2% above pre-COVID levels.
As we have mentioned in the past, Southern California is a tale of two markets, the urban areas in the downtown L.A. versus the more suburban communities, which have generally outperformed.
In June, L.A. rents were still below pre-COVID levels, but as of September, they are now 6.8% above.
While Orange County, San Diego and Ventura have achieved rents between 17% to 30% above pre-COVID levels.
Job growth in Southern California continues to progress well, up 5.9% in September as the region's economy continues to reopen and recover.
With the exception of the Downtown L.A. area where concessions averaged one week in September, the rest of our Southern California market has demonstrated solid fundamentals with no concessions recognized in September.
We expect Southern California strong rent growth to continue in 2022, led by Los Angeles, which has just begun to recover the jobs lost during the COVID recession.
Apartment supply in the region is forecasted to increase next year compared to this year and could present pockets of interim softness counterbalanced by a continued favorable job to supply ratio across the region.
As you can see on our S-17 market rent growth for Southern California of 7.1%, we anticipate this region to perform at a comparable level as Seattle.
With this backdrop of stable occupancy amid a favorable supply demand relationship, our portfolio is well positioned for the continued growth.
I'll start with a few comments on our third quarter results, discuss changes to our full year guidance, followed by an update on investments and the balance sheet.
I'm pleased to report core FFO for the third quarter exceeded the midpoint of our guidance range by $0.08 per share.
The favorable outcome was due to stronger operating results at both our consolidated and co-investment properties, higher commercial income and lower G&A expense.
During the quarter, we saw an improvement in our delinquency rate, which declined to 1.4% of scheduled rent on a cash basis compared to 2.6% in the second quarter.
The decline is attributable to an increase in income from the Federal tenant relief programs that were established to repay landlords for past due rents.
Year-to-date through September, we have received $11.6 million from the various tenant relief programs, of which $9.5 million was received in the third quarter.
Given the increased pace of reimbursement, we began to reduce our net accounts receivable balance in order to maintain our conservative approach to delinquencies and collections.
As a result of the strong third quarter results, we are raising the full year midpoint for same-property revenues by 20 basis points to minus 1.2%.
As should be noted, this was the prior high end of our range.
There are two factors I want to highlight as it relates to our fourth quarter guidance.
First, as Angela discussed, we are seeing strong rent growth in our markets.
While there will be a small benefit to the fourth quarter, the vast majority of the benefit from higher rent growth won't be felt until 2022 when we have the opportunity to turn more leases.
Second, our fourth quarter guidance assumes we continue to receive additional government reimbursements for past due rents and contemplates a continued reduction in our net accounts receivable balance.
Thus, we expect our reported delinquencies as a percent of scheduled rent to be above our cash delinquencies, which is consistent with the third quarter reported results.
As it relates to full year core FFO, we are raising our midpoint by $0.11 per share to $12.44.
This reflects the better-than-expected third quarter results and changes to our full year outlook.
Year-to-date, we have raised core FFO by $0.28 or 2.3% at the midpoint.
Turning to the investment markets.
During the quarter, we raised a new institutional joint venture to fund acquisitions as we believe this is the most attractive source of capital today to maximize shareholder value.
The new venture will have approximately $660 million of buying power, a portion of which is expected to be invested by year-end.
As I discussed on our last call, we are seeing an elevated level of early redemptions of our preferred equity investments due to strong demand for West Coast apartments and inexpensive debt financing, which is leading to sales and recapitalization.
For the year, we expect redemptions to be around $290 million.
Roughly 40% of these redemptions are expected to occur in the fourth quarter.
Given the current environment, we could see continued elevated levels of early redemptions in 2022.
In terms of new preferred equity and structured finance commitment, we are on track to achieve our 2021 objectives as outlined at the start of the year.
Year-to-date, we have closed on approximately $110 million of new commitments.
As a reminder, it typically takes three to six months post closing to fund our commitments given they tend to be tied to development projects.
Moving to the balance sheet.
As we expected, we are starting to see an improvement in our financial metrics, driven by a recovery in our operating results.
In the third quarter, our net debt-to-EBITDA ratio declined from 6.6 times last quarter to 6.4 times.
We believe this ratio will continue to decline through growth in EBITDA over the next several quarters.
With limited near-term debt maturities and ample liquidity, we remain in a strong financial position.
| q3 core ffo per share $3.12.
|
Actual results could differ materially due to the factors noted on these slides and in our periodic SEC filings.
We'll also refer to some non-GAAP financial measures today, which we believe help to facilitate comparisons across periods and with our peers.
For any non-GAAP measures we reference, we provide a reconciliation to the nearest corresponding GAAP measure.
Let me start out by saying that the third quarter was a clear demonstration of us walking the talk.
Top-line production exceeded recently increased guidance with productivity gains from both new and existing wells in the Permian Basin.
This outperformance dropped directly to strong bottom-line free cash flow as operating expenses and capital continue to benefit from our focus on best practices and realized efficiencies.
Capital spending for the quarter came in at $115 million, below the bottom end of guidance, which was also lowered with the recent guidance update.
Our operations team made strides on numerous project fronts, lowering our overall LOE run rate while also reducing our environmental footprint.
Our near-term focus is simple: employ a scaled co-development model across a diversified portfolio of core investment opportunities to drive rapid deleveraging from leading cash margins.
This focus is best exemplified by an expected reduction in our net debt-to-EBITDA to under two and a half times by year-end.
This progress reflects a leverage improvement of two turns since the first quarter, which is among the best rates of change in the industry.
Importantly, through thoughtful co-development of our resource base, we maintain a life-of-field development view that preserves longer-term inventory quality and depth, supporting capital efficiency and free cash flow sustainability over time.
We recently completed a strategic consolidation transaction in the Delaware Basin, increasing our footprint to 110,000 net acres in the basin.
The acquisition of the Primexx assets, which we announced along with our second quarter earnings, closed at the beginning of October, and we are well on our way with the integration process.
We have been very pleased with recent results from the properties as activity resumed at the beginning of the year, targeting two primary zones with new generation completion designs and refined landing zones.
Early time productivity has been evident with average peak oil rates of over 1,200 barrels of oil per day across 19 wells in the Wolfcamp A and B, and longer-term performance has also been attractive with 180-day average cumulative oil production of approximately 120,000 barrels of oil, which represents over 72% of the hydrocarbon mix on a two-stream basis.
While we won't have the chance to incorporate Callon's completion designs into new wells until later this year, we've been able to use our more conservative flowback strategy on a recent three-well project in the area.
The combined well package is responding favorably to the modification with all three wells performing ahead of the project type curve through the first 20 days online.
In addition, we are currently transitioning development on the acquired assets to the Callon philosophy of scaled co-development.
This transition is currently focused on building an inventory of drilled wells to support larger average project sizes with our initial three projects in 2022 slated to average six wells a piece.
As we look a little deeper into 2022, the large majority of our development program will focus on both the Delaware and Midland Basins, with the Eagle Ford returning to more of a supporting role.
We've talked at length about the optionality that our diversified portfolio offers in terms of cash conversion cycles and returns on capital.
But we were unable to fully optimize investment in the Delaware Basin over the last two years as we focused on shorter cash conversion cycle projects.
The scale and scope of our Permian position and associated core inventory of over 1,100 locations in the Delaware alone enable us to establish a durable program that builds on substantial project-level returns on capital to support a robust free cash flow profile through mid-cycle commodity pricing.
Despite the significant uplift we have seen in the forward curve for oil, we intend to maintain our capital reinvestment framework based on more conservative planning prices that reflect a longer-term outlook and focus on continued simplification of the capital structure and deleveraging on both the net debt-to-EBITDA and absolute-debt basis.
Since the second quarter of 2020, we have laid out plans and consistently executed on strategic financial initiatives that have dramatically changed our outlook and allowed us to get back on our front foot.
As part of that execution, multiple noncore monetizations have produced cash proceeds of roughly $210 million in 2021.
We expect that these last few transactions announced since early October, including a smaller monetization of select water disposal assets, to close by year-end, which will put us near the top end of our guidance range of $125 million to $225 million of proceeds for the year.
These proceeds, combined with our 2021 free cash flow generation expectations have established a tangible path to bring leverage under two times by mid-2022 and subsequently drive to our next round of targets of debt-to-EBITDA below one and a half times and absolute leverage of under $2 billion.
Given this trajectory, in addition to our focus on sustainability and the importance of controlling critical operations in our core areas, we believe that retaining our larger portfolio of water gathering, recycling and disposal assets provides the greatest value proposition for our shareholders.
As such, we are not pursuing additional monetizations related to water assets at this time.
| on november 1, 2021, callon completed fall redetermination for its senior secured credit facility.
|
In the second quarter, Cullen/Frost earned $116.4 million or $1.80 a share compared with earnings of $93.1 million or $1.47 a share reported in the same quarter last year and compared with $113.9 million or $1.77 a share in the first quarter.
In the current environment, our company is in a strong position to benefit from the rebound in economic activity, and we will continue our organic growth strategy while taking steps to enhance Frost's experience for our customers and our employees.
As expected, economic conditions have continued to weigh on conventional loan demand.
Overall, average loans in the second quarter were $17.2 billion, a decrease of 1.7% compared to $17.5 billion in the second quarter of last year.
Excluding PPP loans, second quarter average loans of $14.6 billion represented a decline of 3% compared to second quarter of 2020.
However, we're seeing evidence of loan growth beginning to materialize as non-PPP loans trended up in the month of June, and that upward trend has continued into July.
Average deposits in the second quarter were $38.3 billion, an increase of more than 22% compared with $31.3 billion in the second quarter of last year.
Our return on average assets and average common equity in the second quarter were 1.02% and 11.18%, respectively.
We did not report a credit loss expense for the second quarter.
Our asset quality outlook is stable.
And in general, problem assets are declining in number.
New problems have dropped significantly and are at pre-pandemic levels.
Net charge-offs for the second quarter totaled $11.6 million compared with $1.9 million in the first quarter.
Annualized net charge-offs for the second quarter were four basis points of average loans.
Nonaccrual loans were $57.3 million at the end of the second quarter, a slight increase from $51 million at the end of the first quarter and primarily represented the addition of three smaller energy loans, which had previously been identified as problems.
A year ago, nonaccrual loans stood at $79.5 million.
Overall delinquencies for accruing loans at the end of the second quarter were $97.3 million or 59 basis points of period-end loans and were at manageable pre-pandemic levels.
We've discussed in the past $2.2 billion in 90-day deferrals granted to borrowers earlier in the pandemic.
As of the end of the second quarter, there were no active deferrals.
Total problem loans, which we define as risk grade 10 and higher were $666 million at the end of the second quarter compared with $774 million at the end of the first quarter.
I'll point out that energy loans declined as a percentage of our portfolio, falling to 6.98% of our non-PPP portfolio at the end of the second quarter as we continue to make progress toward a mid-single-digit concentration level of this portfolio over time.
Our teams continue to analyze the non energy portfolio segments that we considered most at risk from pandemic impacts.
As of the second quarter, those segments are restaurants, hotels and entertainment and sports.
Those of these portfolio segments, the total, excluding PPP loans, represented $675.1 billion at the end of the second quarter, and our loan loss reserve for these segments was 8.6%.
The credit quality of these individual credits in these segments is currently mostly stable or better compared to the end of the first quarter.
We also continue to add to our customer base.
Through the midpoint of this year, we added 7% more new commercial relationships than we did in 2020, which included the outsized second quarter of 2020 when PPP activity was so strong.
Looking at recent trends, our new commercial relationships were 511 in the fourth quarter of 2020, 554 in the first quarter of this year and 643 in our most recent quarter.
So we're seeing good momentum in this area.
We're also seeing good momentum in the insurance business, particularly in the benefits and property and casualty segment.
Were up about 6% in both of those in terms of new customers.
And also, as many others, we're seeing good growth in wealth management from assets under management with these good markets, but have also seen an increase of around 3% in new customers.
In the time since we began our PPP efforts, just under 1,000 new commercial relationships identified our assistance in the PPP process as a significant reason for moving to Frost.
New loan commitments booked during the second quarter, excluding PPP loans, were up by 9% compared to the second quarter last year and up by 45% on a linked quarter basis.
Our current weighted pipeline is 12% higher than one year ago, 17% higher than last quarter and 38% higher than the same time in 2019.
The increases are mostly due to C&I.
Our current weighted pipeline is as high as it's ever been, so we hope this points for a good third quarter for booking new loans.
At the same time, it has to be said that competition is intense.
In total, the percentage of deals lost to structure of 56% was down from the 75% we saw this time last year, but that's really more a factor of the increase in price competition rather than more market discipline around structure.
We were extremely proud to have completed our 25 branch Houston expansion initiative in the second quarter, and we continue to be very pleased with the results.
It represents a tremendous achievement for our outstanding staff.
Let me update you where we stand through the second quarter, and it excludes PPP loans.
Our numbers of new households were 141% of target and represents almost 11,000 new individuals and businesses.
Our loan volumes were 215% of target and represented $300 million -- $310 million in outstandings and about 80% represented commercial credits with about 20% consumer.
Regarding deposits, at $433 million, they represent 116% of target, and they represent about 2/3 commercial and 1/3 consumer.
Once again, I hope that we've shown that the character of the business we're generating through the expansion is very consistent with the overall company.
And its profitability is weighted toward small and midsized businesses and complemented by consumer as well as other lines of business including wealth management and insurance.
Consumer banking also continues to see outstanding growth.
In just the first six months of this year, we've already surpassed our all-time annual growth for new customer relationships.
This represents about 13,500 net new checking customers.
Our previous high was 12,700 for full year 2019 and it's all organic growth.
We worked hard to lower barriers to entry for potential customers with improved product offerings and our geographic expansion.
Houston accounts for about 1/3 of this relationship growth.
Their annual growth rate for consumer customers is up over 13%.
That compares to 4% in 2018 before we started the expansion.
We were excited to announce this month that we launched a new feature called Early Pay Day, which gives customers access to direct deposits up to two days before the money arrives in their account.
And we put this in place in time for customers to see the effect from the IRS Child Tax Credit payments, and we've already heard great comments from customers who've used Early Payday to pay bills.
This makes a difference in the lives of people who live paycheck to paycheck, and that was on top of our $100 overdraft grace feature that we rolled out in April.
Also, earlier this month, we reached an ATM branding partnership with Cardtronics that will result in us having more than 1,725 ATMs in our network across Texas.
That is, by far, the largest ATM network in the state.
But just as important, it gives us the largest ATM network in the Dallas-Fort Worth region as we began our expansion in Dallas early next year.
I mentioned PPP earlier and how our efforts helped thousands of small businesses, and we closed out the second round of PPP with more than 13,000 loans for $1.4 billion.
And combined with the first round, that gives us a PPP program total of more than 32,000 loans and $4.7 billion in deposits -- $4.7 billion in outstandings.
The historic effort that Frost Bankers put into helping borrowers get PPP loans has now shifted to the forgiveness process.
Because borrowers for the first round are approaching payment dates, if they don't apply for forgiveness, we've increased our communication to them and worked on ways to make the forgiveness application process simpler.
We've already submitted 21,000 forgiveness applications and received approval on nearly 19,100 of them for $3 billion.
That's close to the entire first round total.
We continue to be optimistic about the economy and what lies ahead.
Looking first at our net interest margin.
Our net interest margin percentage for the second quarter was 2.65%, down seven basis points from the 2.72% reported last quarter.
The decrease was impacted by a higher proportion of earning assets being invested in lower-yielding balances at the Fed in the second quarter as compared to the first quarter, partially offset by the positive impact of the PPP loan portfolio.
Interest-bearing deposits at the Fed averaged $13.3 billion or 31% of our earning assets in the second quarter, up from $9.9 billion or 25% of earning assets in the prior quarter.
Excluding the impact of PPP loans, our net interest margin percentage would have been 2.37% in the second quarter, down from an adjusted 2.59% for the first quarter with all of the decrease resulting from the higher level of balances at the Fed in the second quarter.
The taxable equivalent loan yield for the second quarter was 4.28%, up 41 basis points from the previous quarter and was impacted by an acceleration of PPP forgiveness during the quarter which accelerated the recognition of the associated deferred fees.
Excluding the impact of PPP loans, the taxable equivalent loan yield would have been 3.80%, up three basis points from the prior quarter.
To add some additional color on our PPP loans, forgiveness payments received accelerated during the quarter, totaling $1.3 billion compared to the $580 million received in the prior quarter.
As a result of the accelerated forgiveness, interest income, including fees on PPP loans totaled about $45 million in the second quarter, up significantly from the approximately $30 million recorded in the first quarter.
Given our current projections on the speed of forgiveness of the remainder of our PPP loans, we currently expect that the interest income on PPP loans recognized in the third quarter would be less than 1/2 of the $45 million recorded in the second quarter.
Total forgiveness payments through the second quarter were approximately $2.7 billion.
And total PPP loans at the end of June were $1.9 billion, down from the $3.1 billion at the end of March.
At the end of the second quarter, we had approximately $38 million in net deferred fees remaining to be recognized, and we currently expect a little over 70% of that to be recognized this year.
Looking at our investment portfolio.
The total investment portfolio averaged $12.3 billion during the second quarter, up about $46 million from the first quarter.
The taxable equivalent yield on the investment portfolio was 3.36% in the second quarter, down five basis points from the first quarter.
The yield on the taxable portfolio, which averaged $4.2 billion was 2.01%, down five basis points from the first quarter as a result of higher premium amortization associated with our agency MBS securities, given faster prepayments.
Our municipal portfolio averaged about $8.1 billion during the second quarter, down $104 million from the first quarter, with a taxable equivalent yield of 4.09%, flat with the prior quarter.
At the end of the second quarter, 78% of the municipal portfolio was pre-refunded or PSF-insured.
The duration of the investment portfolio at the end of the second quarter was 4.4 years, in line with the first quarter.
Investment purchases during the quarter were approximately $680 million and consisted of about $400 million in municipal securities with a TE yield of about 2.30% and about $190 million in 20-year treasuries with the remainder in MBS securities.
Regarding noninterest expense, looking at the full year 2021, we currently expect an annual expense growth rate of around 3% from our 2020 total reported noninterest expenses.
And regarding income tax expense, the effective tax rate for the quarter was 11.3%, up from the 6.4% reported in the first quarter as a result of higher earnings, but also impacted by lower tax benefits realized from employee stock option activity in the second quarter as compared to the first.
We currently are projecting a full year 2021 effective tax rate in the range of 9% to 9.5%.
Regarding the estimates for full year 2021 earnings.
Given our second quarter results and recognition of lower PPP fee accretion for the remainder of the year, we currently believe the current mean of analyst estimates of $6.33 is reasonable.
| q2 earnings per share $1.80.
|
I'll also discuss the status of reopening the West Coast economies and related factors concluding with an overview of the West Coast apartment transaction markets and investments.
Our second quarter results were ahead of our initial expectations entering the year, as the economic recovery from the pandemic occurred faster than we expected.
With a strong economy and high vaccination rates, we are now confident that the worst of the pandemic-related impacts are behind us.
As noted on previous calls, our strategy during the pandemic was to maintain high occupancy and scheduled rent, both necessary for rapid recovery.
To that end, net effective rent surged during the second quarter, along with year-over-year improvement in occupancy, other income and delinquency.
The recovery and net effective rents continued unabated in July and we are now pleased to announce that July net effective rents for the Essex portfolio have now surpassed pre-pandemic levels with our suburban markets leading the way.
While the downtowns are improving, but still generally below pre-pandemic levels.
Obviously these higher rents will be converted into revenue as leases turn and Angela will provide additional details in a moment.
Having passed the midpoint of 2021 and looking forward, we made a second set of positive revisions to our West Coast market forecast, which can be found on page S-17 of the supplemental.
Driving the changes is an increase in 2021 GDP and job growth estimates to 7% and 5%, up from 4.3% and 3.2% respectively from our initial forecast.
As a result, we now expect our average 2021 net effective rent growth to improve to minus 0.9% from minus 1.9% from the beginning of the year.
To put this into perspective, consider that our net effective rents were down about 9% year-over-year in Q1 2021.
Given our current expectation of minus 0.9% rent growth for the year, year-over-year net effective market rents are now forecasted to increase about 6% in the fourth quarter of 2021.
Cash delinquencies were up modestly on a sequential basis at 2.6% of scheduled rent for the quarter and well above our 30-year average delinquency rate of 30 to 40 basis points.
The American Rescue Plan of 2021 provides funding for emergency rental assistance, which was allocated to the stage for distribution to renters for pandemic-related delinquencies.
During the second quarter, collections of delinquent rents from the American Rescue Plan were negligible as the pace of processing reimbursements has been slow, since the program launched in March.
We expect that to improve in the coming months.
We expect delinquency rates to return to normal levels over time as more workers enter the workforce and eviction protections labs on September 30 in both California and Washington.
Only about $7 million of the $55 million in delinquent rent shown on page S-16 of the supplemental has been recorded as revenue.
Given uncertainty about the timing of collections, no additional revenues are contemplated in our financial guidance.
Even with the approved job and economic outlook, the reopening process was gradual through the second quarter, with full reopening declared in mid-and late June for California and Washington respectively.
The unemployment rate was still 6.5% in the Essex markets as of May 2021 underperforming the nation.
Through Q2 we have regained about half of the jobs lost in the early months of the pandemic.
Employment in the Essex markets dropped over 15% in April 2020 and while job growth in our markets outpaced the nation in the second quarter, we are still 7.9% below pre-pandemic employment, compared to 4.4% for the U.S. overall.
We see the gap is an opportunity for growth to continue in the coming months, as we benefit from the full reopening of the West Coast economies.
We believe that many workers that exited the primary employment centers during pandemic-related shutdowns and work from home programs, will return as businesses reopen and resume expansion that was placed on hold during the pandemic.
As we proceed through the summer months, we edge closer to the targeted office reopening dates set by most large tech employers in early September.
As recent reports about Apple and Google suggest, the COVID-19 Delta variant could lead to temporary delays in this reopening process.
Our survey of job openings in the Essex markets for the largest tech companies continues to be very strong as we reported 33,000 job openings as of July, a 99% increase over last year's trough.
New venture capital investment has set a record pace this year with Essex markets once again leading with respect to funds invested providing growth capital that supports future jobs.
Generally economic sectors that sell before this during the pandemic, are now positioned for the strongest recovery and the reopening process led by restaurants, hotels, entertainment venues, travel and so many.
Return to office plans, which remain focused on hybrid approaches will continue to draw employees closer to corporate offices.
Given that many workers won't be required to be in the office on a full-time basis, we expect average new distances to increase.
As we highlight on page S-17.1 of our supplemental, this transition has already started in recent months as our hardest hit markets in the Bay Area once again experienced net positive migration from beyond the NorCal region.
In particular, since the end of Q1, the submarket surrounding San Francisco Bay have seen positive net migration that represents 18% of total move-outs over the trailing three months compared to minus 8% a year ago.
These inflows are led by residents returning from adjacent metros, such as Sacramento and the Monterey, Peninsula as well as renewed flow of recent grads -- graduates arriving from college towns across the country, a notable positive turnaround from last year.
In Seattle CBD, we've seen similar or even stronger recent inflows and we're likewise experiences -- experiencing a strong market rent recovery.
On the supply outlook, we provided our semi-annual update to our 2021 forecast on S-17 of the supplemental with slight increases to 2021 supply as COVID-related construction delays shifted incremental yields from late 2020 into 2021.
We expect modestly fewer apartment deliveries in the second half of 2021 with more significant declines in Los Angeles and Oakland.
While it is still too early to quantify recent volatility in lumber prices and shortages for building materials may impact construction starts and the timing of deliveries in subsequent years.
Multifamily permitting activity in Essex markets also continues to trend favorably, declining 200 basis points on a trailing 12 month basis as of May 2021 compared to the national average, which grew 230 basis points.
Median single family home prices in Essex markets continued upward in California and Seattle, growing 18% and 21% respectively on a trailing three-month basis.
The escalating cost of homeownership combined with greater rental affordability from the pandemic have increased the financial incentive to rent.
We suspect these trends will continue given muted single family supply and limited permitting activity and I believe these factors will be a key differentiator for our markets in the coming years compared to many U.S. markets with greater housing supply.
Turning to apartment transactions, activity is steadily accelerated since the start of the year, with the majority of apartment trades occurring in the low-to-mid 3% cap rate range based on current rents.
Generally investors anticipate a robust rate recovery, especially in markets where current rents are substantially below pre-pandemic levels.
With the recent improvement in our cost to capital, we have turned our focus once again to acquisitions and development while remaining disciplined with respect to FFO accretion targets.
With respect to our preferred equity program, we continue to see new deals, although the market is becoming more competitive.
Lower cap rates from pre-pandemic levels have produced higher-than-anticipated market valuations, which in turn has resulted in higher levels of early redemption.
That concludes my comments.
My comments today will focus on our second quarter results and current market dynamics.
With the reopening of the West Coast economy, the recovery has generated improvements in demand and thus pricing power.
Our operating strategy during COVID to favor occupancy while adjusting concessions to maintain scheduled rents enabled us to optimize rent growth concurrent with the increase in demand resulting in same-store net effective rent growth of 8.3% since January 1 and most of this growth occurred in the second quarter.
A key contributor of this accomplishment is the fantastic job by our operations team in responding quickly to this dynamic market environment.
While market conditions have improved rapidly, during our second quarter -- driving our second quarter results to exceed expectations.
I would like to provide some context for why sequential same-property revenues declined by 90 basis points compared to the first quarter.
The two major factors that drove the decline were 50 basis points of delinquency and 50 basis points in concessions.
Delinquency in the first quarter was temporarily lifted by the one-time unemployment disbursements from the stimulus funds.
As expected in the second quarter, delinquency reverted back to 2.6% of scheduled rent versus the 2.1% in the first quarter.
On concessions, the nominal amount increased from higher volume of leases in the second quarter relative to the first quarter of this year.
To declare concessions in our markets have declined substantially and are virtually none existent except for select CBD markets.
Our average concession for the stabilized portfolio is under one week in the second quarter compared to over a week in the first quarter and over two weeks in the fourth quarter.
Although concessions have generally improved in the second quarter, they remain elevated ranging from 2.5 to 3 weeks in certain CBDs such as CBD, LA, San Jose and Oakland.
Given the extraordinary pandemic-related volatility in once in concessions over the past year and a half.
I thought it would be insightful to provide an overview of the change in net effective rents compared to pre-COVID levels.
As of this June, our same-store average net effective rents compared to March of last year was down by 3.1%.
Since then, we have seen continued strength and based on preliminary July results, our average net effective [Indecipherable] are now 1.5% above pre-COVID levels.
it is notable that this 1.5% portfolio average diverged regionally with both Seattle and Southern California up 5.8% and 9.3% respectively while Northern California has yet to fully recover with net effective rents currently at 8% below pre-COVID levels.
On a sequential basis, net effective rents on new leases have improved rapidly throughout the second quarter and preliminary July rent increased 4.7% compared to the month of June, led by CBD San Francisco and CBD Seattle, both up about 11%.
Not surprisingly, these two markets were hit hardest during the pandemic, and are now experiencing the most rent growth.
Moving on to office development activities, which we view as an indicator of future job growth and accordingly housing demand.
In general, the areas along the West Coast with the greatest amount of office developments have been San Jose and Seattle.
Currently San Jose has 8.1% of total office stock under construction and similarly Seattle has 7.7% of office stock under construction.
Notable activities include Apple leasing an additional 700,000 sqft and LinkedIn announced recent plans to upgrade our existing offices in Sunnyvale.
In the Seattle region, Facebook expanded their Bellevue footprint by 330,000 sqft and Amazon announced 1400 new web services jobs in Redmond.
We expect in the long-term areas with higher office deliveries such as San Jose and Seattle will have capacity for greater apartment supply with our impacting rental rates.
While these normal relationships were disrupted during the pandemic, we anticipate conditions to normalize in the coming quarters.
Lastly, as the economic recovery continues to gain momentum, we have restarted both our apartment renovation programs and technology initiatives including actively enhancing the functionality of our mobile leasing platform and smart rent home automation.
I'll start with a few comments on our second quarter results, discuss changes to our full year guidance, followed by an update on our investments and the balance sheet.
I'm pleased to report core FFO for the second quarter exceeded the midpoint of the revised range we provided during the NAREIT conference by $0.08 per share.
The favorable results are primarily attributable to stronger same property revenues, higher commercial income and lower operating expenses.
Of the $0.08, the $0.03 relates to the timing of operating expenses and G&A spend, which is now forecasted to occur in the second half of the year.
As Angela discussed, we are seeing stronger rent growth in our markets than we expected just a few months ago.
As such, we are raising the full year midpoint of our same-property revenue growth by 50 basis points to minus 1.4%.
It should be noted, this was the high end of the revised range we provided in June.
In addition, we have lowered our operating expense growth by 25 basis points at the midpoint, due to lower taxes in the Seattle portfolio.
All of this resulted in an improvement in same property NOI growth by 80 basis points at the midpoint to minus 3%.
Year to date, we have revived our same-property revenue growth at the midpoint, up 110 basis points and NOI by 160 basis points.
As it relates to full year core FFO, we are raising our midpoint by $0.09 per share to $12.33.
This reflects the stronger operating results, partially offset by the impact of the early redemption of preferred equity investments, which I will discuss in a minute.
Year-to-date we, have raised core FFO by $0.17 or 1.4%.
Turning to the investment markets.
As we've discussed on previous calls, strong demand for West Coast apartments and inexpensive debt financing has led to sales and recapitalization of several properties underlying our preferred equity and subordinated loan investments resulting in several early redemptions.
During the quarter, we received $36 million from an early redemption of a subordinated loan, which included $4.7 million in prepayment fees, which have been excluded from Core FFO.
Year-to-date, we have been redeemed on approximately $150 million of investment and expect that number to grow to approximately $250 million by year-end.
This is significantly above the high end of the range we provided at the start of the year.
However, this speaks to the high valuation apartment properties are commanding today which is good for Essex and the net asset value of the company.
As for new preferred equity investments, we have a healthy pipeline of accretive deals and we are still on track to achieve our original guidance of $100 million to $150 million in the second half of the year.
As a reminder, our original guidance assumed new investment would match redemptions during the year.
However, the timing mismatch between the higher level of early redemptions coupled with funding of new investments expected later this year has led to an approximate $0.10 per share drag on our FFO for the year.
Moving to the balance sheet, we remain in a strong financial position due to refinancing over 1/3 of our debt over the past year and a half taking advantage of the low interest rate environment to reduce our weighted average rate by 70 basis points to 3.1% and lengthening our maturity profile by an additional two years.
We currently have only 7% of our debt maturing through the end of 2023.
Given our laddered maturity schedule, limited near term funding needs and ample liquidity, we are in a strong position to take advantage of opportunities as they arise.
| essex increases full-year 2021 guidance.
raised midpoint of full-year same-property revenues to high-end of prior guidance range.
|
The slides that accompany today's call are also available on our website.
We'll refer to those slides by number throughout the call today.
This cautionary note is also included in more detail for your review in our filings with the Securities and Exchange Commission.
We also have other company representatives available for a Q&A session after Lisa and Steve provide updates.
Slide four shows our quarterly financial results.
IDACORP's 2021 first quarter earnings per diluted share were $0.89, an increase of $0.15 per share from last year's first quarter.
Today, we also affirmed our full year 2021 IDACORP earnings guidance to be in the range of $4.60 to $4.80 per diluted share, with our expectation that Idaho Power will not need to utilize in 2021 any of the additional tax credits that are available to support earnings in Idaho under its regulatory settlement stipulation.
These are our estimates as of today, and those estimates assume normal weather conditions over the balance of the year and include customer usage returning closer to pre-COVID-19 levels as we progress through the year.
However, as you would expect, it is difficult to predict the full impact of evolving economic conditions on Idaho Power's customers and suppliers and how that could affect the upper end of the earnings guidance range or the use of tax credits.
We have had a great start to 2021.
As our customers and employees move closer to a more normal work environment, we are looking forward to reconnecting with many of you in person over the next year when possible.
Our company has begun to resume some normal work operations in a phased, carefully planned manner, and we are hopeful health trends will continue to allow our working conditions to normalize in the coming months.
For Idaho Power, as noted on Slide 5, the first quarter of this year saw a continuation of the strong customer growth.
In March alone, we saw an annualized customer growth rate of 3.5%.
This accelerated growth rate is challenging as we keep up with service connections, but our employees continue to prove that they are up for the task.
Looking ahead, we expect robust growth to continue as Idaho's quality of life and business-friendly environment remain attractive.
Other factors such as inquiries for large load projects suggests demand for our energy in our service area remains strong.
On Slide 6, you'll see highlighted a few publicly announced large load expansions and projects.
The economy within Idaho Power's overall service area continues to outperform national trends.
Unemployment within Idaho Power's service area is now down to 3.7%, remaining well below the 6% rate reported at the national level, and total employment in our service area declined a modest 0.3% since March of last year.
Moody's has strengthened its predictions for our service area, now projecting robust economic growth going forward even after our service area experienced a modest GDP decline in 2020 relative to the national average.
The Moody's forecast now calls for growth of 8% in 2021, 8.1% in 2022 and continued strong growth of 6.8% in 2023.
We expect that existing and sustained future customer growth will cause the need for Idaho Power to continue to enhance and expand its distribution and transmission system infrastructure, including the Boardman to Hemingway project.
That growth may also result in the need for Idaho Power to procure other new sources of energy and capacity to serve growing loads as well as to maintain system reliability.
We are in the process of analyzing options for the potential energy and capacity resource procurement while, at the same time, working on our 2021 integrated resource plan.
We are seeing early model results in our 2021 IRP planning process showing declining length in our system in the near term.
It's a little too early to tell us -- to tell what that will mean for the timing of early exit of Jim Bridger coal-fired plant unit, the timing of the exit for the second unit at North Valmy, high-voltage transmission line expansion project and for other general system upgrades.
While there are many factors that can impact the ultimate results, there is a possibility that the capital expenditures that we shared in February could grow beyond the estimate to meet the required projected energy and capacity needs.
You'll see some of the items I mentioned highlighted on Slide 7.
We have many exciting challenges ahead as we work hard to ensure there is sufficient energy and capacity supply for our customers while balancing the critical need for reliability, resilience and affordability with our clean energy goals.
Last quarter, we stated Idaho Power does not plan to file a general rate case in Idaho or Oregon in the next 12 months.
That remains true today as we look at the next 12 months.
Customer growth, constructive regulatory outcomes, major project completion dates such as the relicensing of Hells Canyon, the timing of resource acquisitions and effective cost management all play significant roles as we look at the need and timing of a future general rate case.
As part of our overall regulatory strategy, I'll briefly highlight an update that Idaho Power received in its case with the Idaho Public Utilities Commission.
We requested authorization to defer the Idaho portion of O&M expenses, including vegetation management, specified insurance costs and depreciation expense for certain capital investments expected to be necessary to implement its recently enhanced Wildfire Mitigation Plan or WMP.
The comments published earlier this month were generally supportive of our efforts to enhance and protect our infrastructure from some of the devastation that has been prevalent in other Western states in the past few years.
As a reminder, we expect to spend approximately $47 million in incremental O&M and $35 million in incremental capital expenses for wildfire-related infrastructure work over the next five years.
The case is still pending at the IPUC, and we are currently awaiting a commission order.
As you all know, weather is an important factor in wildfire risk as well as in other aspects of Idaho Power's overall operations.
We rely on a healthy snowpack to meet our customers' needs reliably and affordably.
This winter, our mountains accumulated below-average precipitation.
However, we entered the upcoming spring and summer seasons with strong reservoir storage so we expect relatively healthy water conditions for irrigation customers, though it is likely that hydropower generation will be lower than our 30-year average.
You will see on Slide eight that the most recent projections from the National Oceanic and Atmospheric Administration suggest dry and hot conditions from May through July.
Preparations for summer readiness, when our system is most stretched, are under way, and we expect to be able to balance the reliable system and to meet customer demands.
As a reminder, our power cost adjustment mechanisms in Idaho and Oregon significantly reduce earnings volatility related to changes in our resource mix and associated power supply costs that can fluctuate greatly due to weather.
And with that, I will hand things over to Steve for an overview of the first quarter's financial performance.
Let's now move to Slide 9, where you'll see our first quarter 2021 financial results as compared to the same period in 2020.
Overall, we had a strong start to the year with accelerating customer growth and positive impacts from transmission revenues.
Altogether, IDACORP's first quarter 2021 net income was higher by $7.3 million.
On the table of quarter-over-quarter changes, you'll see customer growth added $3.7 million to operating income.
Lower usage per commercial customer down 2%, partly due to COVID-19 impact, was largely offset by higher residential usage due to colder weather this year versus last.
The net result was a relatively modest $1.3 million decrease in overall usage per customer.
The next change on the table shows that transmission wheeling-related revenues increased $4.1 million.
This was partly due to a 20% increase in wheeling volumes as well as a 10% increase in Idaho Power's open access transmission tariff rate last October to reflect higher transmission costs.
Colder winter weather in the Southwest U.S. contributed to the increased wheeling volumes this quarter.
Next on the table, other operating and maintenance expenses decreased by $4.2 million.
This was primarily due to the timing of cloud-seeding activities and cost-saving initiatives at our jointly owned coal plant.
A portion of the savings also related to Idaho Power's exit from the Boardman plant in 2020 as both O&M costs and corresponding revenues were reduced due to the regulatory mechanism in place that's associated with its shutdown.
We continue to see decreases in employee travel and training costs related to COVID-19 while our allowance for bad debt remains above recent levels and will likely take longer to collect.
Our net deferral impact, however, remained nominal.
We will continue to monitor the impacts by state to determine whether we ultimately seek recovery for any net increased cost.
Finally, our higher pre-tax earnings led to an increase in income tax expense of $1.5 million this quarter.
The changes collectively resulted in an increase to Idaho Power's net income of $7.6 million.
IDACORP and Idaho Power continue to maintain strong balance sheets, including investment-grade credit ratings and sound liquidity, which enables us to fund ongoing capital expenditures and distribute dividends to share owners.
IDACORP's operating cash flows along with our liquidity positions as of the end of March are included on Slide 10.
Cash flows from operations were about $50 million higher than last year's first quarter.
The increase was mostly related to working capital fluctuations, the timing of pension contributions and the timing of net collections of regulatory assets and liabilities.
The liquidity available under IDACORP's and Idaho Power's credit facilities is shown on the middle of Slide 10.
At this time, we do not anticipate raising any equity capital in 2021.
While cash flows have been minimally affected by the pandemic thus far, our combined liquidity, along with expected regulatory support from our annual adjustment mechanisms, is a substantial backstop to our expected capital and operating needs.
Slide 11 shows our affirmed full year 2021 earnings guidance and our current year financial and operating metrics estimates.
We continue to expect IDACORP's 2021 earnings to be in the range of $4.60 to $4.80 per diluted share as we assume normal weather and operating conditions for the remaining nine months of the year.
We also assume pandemic impact continue to moderate as the year progresses.
Our guidance still assumes Idaho Power will use no additional tax credits in 2021.
Of course, our guidance could be negatively impacted if the economy or the pandemic worsens significantly or for other reason.
Our expected full year O&M expense guidance remains in the range of the $345 million to $355 million, so we're off to a good start.
It's fair to say that this goal to keep O&M relatively flat for the ninth straight year is being challenged by the level of growth we are expecting.
We also affirm our capital expenditures forecast for this year, which we increased a bit in February to the range of $320 million to $330 million.
Our expectation of hydro generation has softened somewhat given the conditions Lisa presented earlier and is now expected to be in the range of 5.5 million to 7.5 million megawatt hours.
| sees fy earnings per share $4.60 to $4.80.
q1 earnings per share $0.89.
|
As a reminder, today's discussion may include forward looking statements as defined by United States securities laws in connection with future events, future operating results or financial performance.
We undertake no obligation, except as legally required, to publicly update or revise any forward looking statements whether resulting from new information, future developments or otherwise.
Ward and I will begin today's earnings call with a discussion of our third quarter operating performance and our recently completed acquisition of Lehigh Hanson's West Region.
Jim Nickolas will then review our financial results.
After which, Ward will discuss market trends as we look ahead to 2022.
A question-and-answer session will follow.
Martin Marietta's continued growth and record results demonstrate our industry leading performance and disciplined execution of our proven strategic operating analysis and review, or SOAR plan.
And with fewer reportable and lost time incidents than this time last year, our company wide safety incident rates are surpassing world class levels.
I'm proud to report that we're on track to deliver the most profitable and safest year in our company's history.
We're also excited by the progress we're making on our SOAR 2025 initiatives to further position our company for sustainable, long term operational and financial success.
With this outstanding team, strong business and key assets now are part of our offering.
We're well positioned to benefit from favorable market dynamics and accelerating public and private construction activity in important California and Arizona regions, including San Francisco, Los Angeles, San Diego and Phoenix.
It also provides new growth platforms for our continued geographic expansion.
I'm grateful to our colleagues for their dedication and perseverance in their efforts to complete the acquisition, the second largest in our company's history.
We look forward to working together to seamlessly integrate the Lehigh West operations, quickly realize synergies and deliver significant stakeholder value.
Integration activities are progressing as planned from both an operational and customer-facing perspective.
As highlighted in today's release, we once again established record results for revenues and gross profit for both the quarter and year-to-date.
To recap, for the first nine months of 2021, our adjusted EBITDA increased 7% to a record $1.1 billion.
Both our Building Materials and Magnesia Specialties businesses continue to capitalize on the ongoing economic recovery.
During the quarter, organic shipment and pricing growth combined with value enhancing acquisitions more than offset higher than expected energy related costs and contributed to our record-setting results.
Specifically, on a consolidated basis, Products and Services revenues increased 18% to $1.5 billion.
Adjusted gross profit increased 11% to $450 million.
Adjusted EBITDA of $490 million increased 13% on a comparable basis, and adjusted diluted earnings per share of $4.25 grew 11% on a comparable basis.
As a reminder, the prior year quarter included $70 million or $0.87 per diluted share of non recurring gains on surplus land sales and divested assets that affect quarter over quarter comparability.
Now for a review of our third quarter operating performance.
We continue to experience growing product demand across our three primary end use markets.
Organic aggregate shipments increased 6%, notwithstanding contractor capacity constraints and wet weather in several markets that govern the overall pace of construction activity.
Notably, all divisions contributed to this solid growth, demonstrating our ability to capitalize on the strong underlying demand trends across our geographic footprint.
Total aggregate shipments, including shipments from acquired operations, increased 10%.
Organic aggregates average selling price increased 2%, reflecting a higher percentage of lower-priced base stone shipments during the quarter.
Additionally, our East division, which has selling prices in excess of our corporate average, had the opportunity to meet customer needs with a low priced excess fuel product that had we not shipped we otherwise would have incurred costs to relocate.
We expect shipments of this excess fill material, which are profitable and not a substitute for higher value products, to continue through the remainder of the year.
That's why we updated our full year 2021 organic pricing growth guidance to now range from 2.5% to 3.5%.
To be clear, aggregates pricing fundamentals remain very attractive.
In fact, supported by strong underlying demand and rapid cost inflation in the broader economy, we successfully implemented midyear price increases in the Carolinas and Texas.
These actions, combined with overall customer confidence and demand visibility, bode well for meaningful pricing acceleration in 2022.
Our Texas Cement business established a new quarterly record for shipments, which increased 4% to over one million tonnes.
Large and diversified projects, recovering energy sector activity and incremental pull through from our internal downstream customers, supported record monthly shipment levels in both August and September.
Cement pricing increased 8% as the second round of price increases this year went into effect on September first.
Turning to our targeted downstream businesses.
Ready mixed concrete shipments increased 23%, driven by large nonresidential projects and operations acquired late last year in Texas.
Concrete pricing grew 2% following the implementation of midyear price increases in Texas.
Additionally, we've announced a third price increase in the Dallas/Fort Worth market effective October first.
Asphalt shipments increased 116% overall, driven by contributions from our Minnesota based operations acquired earlier this year.
Our Colorado asphalt and paving business experienced shipment declines and supply disruptions from mid-summer liquid asphalt allocations throughout the Rocky Mountains.
This circumstance has now been resolved.
Despite these short-term issues, market fundamentals remain strong across the Colorado front range.
Organic asphalt pricing improved modestly.
Both the Building Materials and Magnesia Specialties businesses contributed to our double digit growth in product revenues and increased profitability.
That said, increased energy expense continues as a headwind, temporarily pressuring margins.
For the third quarter alone, total energy costs increased $28 million or nearly 50% company wide as compared with last year.
Absent this headwind, our consolidated adjusted gross margin would have outpaced the record set in the prior year quarter.
Aggregates product gross margin of 34.2% included higher diesel and other production costs as well as a $6 million negative impact from selling acquired inventory that was marked up to fair value as part of acquisition accounting.
Excluding the acquisition impact, adjusted aggregates product gross margin was 34.9%, a 150 basis point decline versus prior year.
Cement product gross margin declined 250 basis points driven by higher raw material cost and a $6 million increase in natural gas and electricity costs.
Ready-mixed concrete product gross margin improved modestly to nearly 10% as shipment and pricing gains offset higher costs for raw materials and diesel.
Magnesia Specialties continued to benefit from improving domestic steel production and global demand for magnesia chemical products, generating product revenues of $72 million, a 30% year over year increase.
Revenue growth more than offset higher costs for energy and contract services, driving a 100 basis point improvement in product gross margin to 39%.
As part of our long-standing capital allocation priorities, we continue to balance value enhancing acquisitions with prudent capital spending and returning cash to shareholders while preserving a healthy balance sheet, financial flexibility and investment-grade credit rating profile.
Consistent with SOAR 2025, we acquired a crushed concrete aggregates producer in the Houston area in late July.
These acquired aggregates operations expand our customer base and product offerings in one of the nation's largest addressable markets.
We have raised our full year capital spending guidance to $475 million to $525 million to include anticipated Lehigh West region capital expenditures.
We continue to prioritize high return capital projects, focused on growing sales and increasing efficiency to drive margin expansion.
Additionally, our Board of Directors approved a 7% increase in our quarterly cash dividend paid in September, underscoring its confidence in our future performance and a resilient and growing free cash flow generation.
Our annualized cash dividend rate is now $2.44.
Since our repurchase authorization announcement in February 2015, we have returned nearly $2 billion to shareholders through a combination of meaningful and sustainable dividends as well as share repurchases.
In early July, we issued $2.5 billion of senior notes with a weighted average interest rate of 2.2% and a weighted average tenor of 15 years, primarily to finance Lehigh West region transaction.
Our net debt to EBITDA ratio was 1.9 times as of September 30.
Leverage on a pro forma basis, inclusive of reach acquisitions, is modestly above 3 times debt to EBITDA.
Consistent with our practice of repaying debt following significant acquisitions, we are committed to return into our target leverage range of two to 2.5 times within the next 18 months.
As detailed in today's release, we have updated our full year 2021 guidance to reflect our year to date results that factor in higher energy costs and the fourth quarter contribution from the newly acquired Lehigh West business.
We now expect full year adjusted EBITDA to range from $1.500 billion to $1.550 billion.
Looking beyond 2021, Martin Marietta remains well positioned to capitalize on attractive market fundamentals and secular demand trends across our geographic footprint, expanded federal and state level infrastructure investment, single family housing strength, heavy industrial projects of scale and like nonresidential recovery should support growing construction activity and contribute to attractive pricing acceleration for heavy side building materials for years to come.
Importantly, we have both the ability and the capacity to supply these needed products and supported by our locally led pricing strategy will do so in a manner that emphasizes value over volume.
While navigating an imperfect legislative process, our nation is nonetheless on the cusp of achieving the most significant infrastructure action of this century.
The Infrastructure Investment and Jobs Act, which contains a five year surface transportation reauthorization and provides $110 billion in new funding for roads, bridges and other hard infrastructure projects passed the United States Senate in August with 69 bipartisan votes.
Though the United States House of Representatives did not take up the bipartisan infrastructure bill last week before the then current short term extension of the federal highway and public transportation programs expired on October 31, The House and Senate did approve a short-term program extension, keeping surface transportation funds flowing to the states through December 3.
The consensus opinion with which we strongly agree is that this important legislation will be signed into law before year end.
Aside from the overall economic growth, we expect to occur with the increased federal transportation investment, the steps we've taken over the past decade to responsibly grow and expand our footprint will also benefit Martin Marietta's near and long term outlook.
Project lettings for our company's top five states Department of Transportation, or DOTs, continue to positively trend.
Texas, Colorado, North Carolina, Georgia and Florida, which accounted for over 70% of our 2020 Building Materials revenues, are well positioned from both the DOT funding and resource perspective to efficiently deploy increased federal and state transportation dollars in advance the growing number of projects in their backlogs.
Notably, California, the nation's most popular state and the world's fifth largest economy becomes a top state for Martin Marietta, following the Lehigh West acquisition.
Caltrans, California's Department of Transportation, manages a $17 billion annual budget.
Additionally, the Road Repair and Accountability Act of 2017, commonly referred to as Senate Bill one or SB1, provides $54 billion or approximately $5 billion annually through 2030 to fund state and local road, freeway and rail projects.
For reference, aggregate shipments to the infrastructure market accounted for 36% of third quarter organic shipments, showing sequential growth since this year's second quarter, but still well below our 10 year historical average of 43%.
Nonresidential construction continues to benefit from increased investment in aggregates intensive heavy industrial warehouses and data centers.
We've also seen early signs of recovery in light commercial and retail sectors, notably in key markets such as Atlanta, Denver and the Texas triangle.
Like nonresidential activity should be a more significant demand driver in 2022, given that it typically follows single family residential development.
Aggregate shipments to the nonresidential market accounted for 35% of third quarter organic shipments.
Across our coast to coast footprint, single family residential starts are expected to remain robust despite higher home prices and longer material delivery times.
Significant underbuilding in commensurate with notable population gains over the past decade and accelerated the organization to support these trends.
Importantly, single family housing is two to three times more aggregates intensive than multifamily construction given the ancillary nonresidential and infrastructure needs to build out new or expanding suburban communities.
Aggregates to the residential market accounted for 24% of third quarter organic shipments.
In summary, we believe our industry is about to see public and private sector construction activity coalesce for the first time since its most recent 2005 peak, supporting both increased shipments and an attractive pricing environment for construction materials.
For 2022, our preliminary view anticipates organic aggregate shipments will increase in the low to mid-single digits as contractor labor shortages and logistics challenges continue to impact an otherwise robust demand environment.
Underpinned by our value over volume pricing strategy, we anticipate mid to high single digit growth in 2022 organic aggregates pricing.
To conclude, we're extremely proud of our record setting safety, operational and financial performance and look forward to continuing to build on that momentum into the fourth quarter and 2022.
As a result of our thoughtfully developed and consistently executed strategic priorities, our company's future is bright.
With our steadfast commitment to employee health and safety, commercial and operational excellence, sustainable business practices and store execution, Martin Marietta intends to build the safest, best performing and most durable aggregates led public company poised to deliver attractive growth and superior value for all of our stakeholders.
| qtrly total revenues $1,557.3 million versus $1,321.4 million.
qtrly adjusted earnings per diluted share $4.25.
|
If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the Investors section.
On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer; Jim Sheehan, Executive Vice President and Chief Financial Officer; and Jacinth Smiley, Group Vice President of Corporate Strategy.
Jacinth becomes, Executive Vice President and Chief Financial Officer on January 1.
Jim Snee will provide a review of the Company's current and future operating condition and a perspective on fiscal 2022, Jim Sheehan will provide detailed financial results and commentary in the fourth quarter and Jacinth Smiley will provide commentary on the Company's fiscal '22 outlook.
As a reminder, the fourth quarter of fiscal 2021 contained an extra week compared to fiscal 2020.
As a courtesy to the other analysts, please limit yourself to one question with one follow-up.
It will also be posted on our website and archived for one year.
Before we get started, I need to reference the Safe Harbor statement.
It can be accessed on our website.
Additionally, please note the Company uses non-GAAP results to provide investors with a better understanding of the Company's operating performance.
These non-GAAP measures include organic volume, organic sales and adjusted diluted earnings per share.
Jim will be retiring as CFO at the end of the calendar year, so this will be his last earnings call.
Jim has over four decades with our Company and under his tenure has built a world-class finance accounting and technology organization.
Jim was the guiding force behind Project Orion, an initiative that will benefit our Company for decades to come.
For over 43 years, with the last five years as CFO, Jim has been a trusted partner to me and many of my predecessors.
Jim helped complete over $5 billion in strategic acquisitions, including Justin's, Fontanini, [Indecipherable] Columbus, Sadler's, and our largest acquisition ever, Planters.
Equally impressive with Jim's contribution to reshaping our portfolio, as he was was also a guiding force behind many of the divestitures we made to transform our Company.
Jim's oversight to our evolution puts us on a solid foundation for the future growth of our Company.
Additionally, Jim has overseen the distribution of over $2 billion in dividends to our shareholders.
In addition to his business accolades, Jim was the key voice behind our game-changing Inspired Pathways program, which provides free college education for children of our team members.
Jim will be missed, and we wish him well in retirement along with his wife, Jean.
Jacinth Smiley succeeds Jim, and brings a wealth of experience from outside Hormel Foods, she has deep and broad domestic and international experience in areas such as corporate finance, public accounting and compliance.
Most recently, she served as the Group Vice President of Corporate Strategy.
Hormel Foods is fortunate to have Jacinth as CFO, and I'm looking forward to her leadership in her new role.
My sincere congratulations to both Jim and Jacinth.
In an incredibly difficult and rapidly changing operating environment, our team delivered outstanding top line results.
We achieved record sales in fiscal 2021, exceeding both $10 billion and $11 billion in sales for the first time.
For the full year, sales were $11.4 billion, representing 19% sales growth.
On an organic basis, sales increased 14%.
Our top line growth was incredibly balanced as each of our go-to-market sales channels and business segments posted strong double-digit sales gains, underpinned by value added volume growth, pricing and a better mix.
Adjusted diluted earnings per share for the full year increased 4% to $1.73, in spite of inflationary pressure and supply chain challenges.
Diluted earnings per share was $1.66.
We had an excellent fourth quarter and posted numerous records, including a fourth consecutive quarter of record sales, record diluted earnings per share and record cash flow from operations.
I want to commend our entire team for delivering this impressive performance and the numerous fourth quarter records.
Sales increased 43% and organic sales increased 32%.
Volume increased 14% and organic volume increased 8%.
We grew sales in every segment and every channel for the quarter.
Compared to pre-pandemic levels in 2019, all channels grew by over 25%, driven by strong demand and pricing action in almost every category.
It's all time record performance was led by further acceleration in our foodservice businesses.
Our foodservice teams across the organization posted 72% sales growth for the quarter, 33% higher than pre-pandemic levels.
This followed second quarter growth of 28% and third quarter growth 45%.
Strength was broad-based with significant contributions from Refrigerated Foods, Jennie-O Turkey Store and MegaMex.
We also saw a strong recovery in our noncommercial segments, including college and university and K through 12 institutions.
Our foodservice portfolio remains perfectly positioned to meet the needs of today's foodservice operators with labor and time saving products.
I believe our growth in foodservice is a function of our differentiated value proposition in the industry, as well as our dedication during the pandemic.
We have grown with our distributor and operator partners during the recovery, strengthening many of our partnerships and decades long relationships.
The top line performances from our other channels were equally impressive, retail, deli and international each delivered a second consecutive year of growth.
Retail and international sales both increased 34% and deli sales increased 24%.
On an organic basis, each channel posted strong double-digit growth.
Growth came from numerous brands across all areas of our portfolio, including SPAM, Applegate, Columbus, Hormel Black Label, Wholly, Hormel Complete Gatherings and many more.
We continue to see very positive trends for consumer takeaway at retail.
According to IRI, key metrics for our brands such as buy rate and trips per buyer remain favorable, which indicates elevated consumer spending on our products has remained.
We also continue to grow share in many important categories, including Hormel Gatherings, party trays, Hormel pepperoni, SPAM luncheon meat and Hormel Chili.
Our One Supply Chain team has done an excellent job operating in and navigating constant supply chain disruptions.
We've also seen the positive impact of their strategic actions, namely, we're starting to see an increasing number of our open positions being filled, more automation being implemented in our facilities and a more simplified product portfolio.
In total, these actions are allowing us to maximize our throughput to meet the continued strong demand of our customers.
From a bottom line perspective, fourth quarter earnings were a record $0.51 per share, a 19% increase compared to 2020, an acceleration in our top line results and the addition of the Planters business led to the earnings growth.
As we said in the third quarter, we expected margins to improve as pricing actions took effect.
Indeed, margins improve sequentially in all four segments.
Pricing actions, improved promotional effectiveness and a more profitable mix, all contributed to the improvement.
We started to see relief in key raw materials in the fourth quarter compared to prior quarters.
However, labor rates, freight, supplies and raw material costs remain above year-ago levels and in the case of freight, increased further.
Looking at the segments, Grocery Products, Refrigerated Foods and International segments, each posted double digit segment profit growth.
Jennie-O Turkey Store profits declined due to higher feed costs.
A few highlights from the quarter includes the following.
Refrigerated Foods delivered strong volume sales and profit growth.
The team was able to leverage the numerous capacity expansion projects since the start of the pandemic for categories such as pizza toppings, bacon and dry sausage.
Within Grocery Products, our simple meals and Mexican portfolios generated excellent growth, in addition to contributions from the Planters snacks nuts business.
Notably, the SPAM brands delivered its seventh consecutive year of record growth, and we recently announced plans for additional capacity to support future growth.
Our international team achieved a seventh consecutive quarter of record earnings growth with strong results from all of their businesses.
The momentum this business has generated over the last two years supports our plans to aggressively expand internationally.
Lastly, Planters made a positive impact, especially in the fast growing snacking and entertaining space and within the convenience store channel.
This quarter's results were outstanding and we intend to build on this momentum going into 2022.
Over the past decade, Hormel Foods has deliberately evolved from a meet centric commodity-driven company with a heavy focus on retail pork and turkey to a global branded food company with leading brands across numerous channels.
Our Company today is more food forward than ever, with a sharp focus on the needs of our customers, consumers and operators.
As we begin fiscal 2022, we plan to continue our evolution.
First, we will complete the full integration of the Planters business across all functions.
The first of three production facilities was successfully integrated in the fourth quarter and the remaining two facilities are scheduled to be fully integrated in our first quarter.
Since acquiring Planters six months ago, our sales, marketing, innovation and R&D teams have been hard at work, developing new and innovative products and flavors, many of which will be rolled out this coming year.
They've also been working on refreshing the branding and packaging, which will also be launched in 2022.
Seeing the great work of our teams has been even more confident about where we are able to take this brand in the future and further strengthen our conviction of the potential for Planters.
From a financial standpoint, the Planters business is performing at the top end of our expectations and we expect that trend to continue in fiscal '22.
Second, we are also taking a series of actions at Jennie-O Turkey Store.
Over time, we expect these actions to result in a more demand oriented and optimize turkey portfolio that is better aligned to the changing needs of our customers, consumers and operators that will result in long-term growth, improved profitability and lower earnings volatility.
The transformation starts with accelerating our efforts to shift from commodity to branded value-added products.
This is a similar to the successful strategy we have executed in Refrigerated Foods over the past 15 years.
As a result, we will close the Benson Avenue plant located in Willmar, Minnesota in the first half of fiscal 2022.
This plant is an older inefficient facility which produces numerous commodity items.
Value-added products will be consolidated into multiple other facilities.
Team members will transition to our newer and larger facility also located in Willmar, which will supplement staffing levels.
Finally, we will continue to integrate business functions into the Hormel Foods parent organization.
Over the past two years, we have successfully integrated IT services, finance and accounting and HR into the Hormel organization through Project Orion, and we will continue these efforts for other functions.
By doing so, we will bring the Turkey expertise and competitive advantages of the Jennie-O team to the broader organization.
I want to be very clear that Turkey will continue to play an important role in our Company for many brands, including Columbus, Applegate, Hormel Natural Choice, in addition to Jennie-O.
Turkey is vital to our balanced business model, serves to diversify our portfolio and it's important to consumers who are looking for high protein, lean and versatile offering.
We will provide further update and details on the financial components and timing on our first quarter call.
Finally, we made additional progress on optimizing our pork supply chain by signing a new five-year raw material supply agreement with our supplier in Fremont, Nebraska.
This new agreement more closely matches our pork supply with the needs of our value-added businesses, while simultaneously reducing the amount of commodity pork lease out.
Similar to the rationale for selling the Fremont plant in 2018, this new agreement further diversifies us away from commodity sales, increases our flexibility within our supply chain and decreases our earnings volatility.
This agreement should result in a reduction of approximately $350 million of commodity fresh pork sales at very low margin.
The impact is split between the Refrigerated Foods and International segment.
The contract will be effective at the start of calendar year 2022.
The success we are having with the Planters, the actions we are taking at Jennie-O Turkey Store and the continued progress we are making in our pork supply chain, all provide greater insights into how we are continuing to evolve Hormel Foods for next year and beyond.
And not only have we evolved our portfolio, but we will continue to evolve how we operate as a company with initiatives such as One Supply Chain, Project Orion and our Digital Experience group.
Looking at fiscal 2022, we expect net sales to be between $11.7 billion and $12.5 billion, and for diluted earnings per share to be between a $1.87 and $2.03 per share.
We expect growth in excess of our long-term goals due to organic growth across each of our segments and strengthen our Planters business.
I have confidence in our ability to achieve our guidance with all four segments delivering growth.
Jacinth Smiley will provide more color regarding key drivers to our fiscal 2022 outlook.
The company achieved record fourth quarter and full year sales of $3.5 billion and $11.4 billion respectively.
Organic sales increased 32% for the quarter and 14% for the full year.
Planters contributed $411 million in sales for the full year.
Earnings before taxes increased 26% for the fourth quarter, strong results in Refrigerated International and the inclusion of Planters led to the strong finish to the year despite ongoing inflationary pressures.
Earnings before taxes increased 1% for the full year compared to fiscal 2020.
Diluted earnings per share of $0.51 was a record.
This was a 19% increase over last year.
Adjusted diluted earnings per share for the full year was $1.73, a 4% increase from last year.
Diluted earnings per share was $1.66.
SG&A as a percentage of sales was 7.5% compared to 7.9% last year.
Strong sales growth and disciplined cost management contributed to the improvement.
Advertising investments increased 12% compared to last year.
As anticipated, operating margins in the fourth quarter increased compared to the third quarter as a result of effective pricing action.
Segment margins expanded from last quarter by 136 basis points to 10.7% with increases in each segment.
In 2021, inflation, labor shortages in the Planters deal cost all negatively impacted margins.
The fourth quarter results, including the continued strong demand of our products are an indication of improved market conditions as we exit the year.
Net unallocated expenses in 2021 increased primarily as a result of one-time acquisition costs for Planters and higher interest expense.
The effective tax rate for the year was 19.3% compared to 18.5% last year.
Operating cash flow for the fourth quarter was a record, resulting from strong earnings and disciplined working capital management.
Our balanced business model and consistent cash flow provided protection against the complex and challenging business dynamics we navigated during the year, allowing us to invest in numerous capital projects, acquired Planters and grow the dividend.
We paid our 373rd consecutive quarterly dividend effective November 15th at an annual rate of $0.98 per share.
We also announced a 6% increase for 2022, marking the 56th consecutive year of dividend increases.
During 2021, the Company repurchased 500,000 shares for $20 million.
Capital expenditures were $232 million.
The Company ended 2021 with $3.3 billion in debt or approximately 2.5 times EBITDA, although no mandatory debt repayments are required until 2024.
Based on our strong cash flow, we expect to make incremental payments as soon as the second half of 2022.
We remain committed to maintaining our investment grade rating and deleveraging to 1.5 times to 2 times EBITDA by 2023.
Market conditions for pork input cost remained elevated during the fourth quarter.
The USDA composite cut out averaged 33% higher compared to last year, supported by strong demand for pork and historically low cold storage levels.
Hog prices averaged 62% higher than last year, but were down 27% compared to the third quarter.
Belly, pork trim and beef trim markets were also significantly higher for the quarter compared to last year.
The latest estimates from the USDA indicate pork production for the year to decreased 2% compared to 2020, and remain relatively flat in 2022.
Labor shortages may continue to be a significant factor affecting industry production.
Turkey industry fundamentals were strong.
The Whole Turkey and thigh meat markets reached all time highs during the fourth quarter with breast meat prices above a year ago.
Supporting these prices were historically low cold storage levels, lower poult placements and decline in egg sets.
Higher feed cost and labor shortages continue to negatively impact Jennie-O.
The cost increased over 60% from last year in the fourth quarter.
In 2022, we anticipate pork, beef, turkey and feed prices to remain above historical levels.
We delivered strong results in the fourth quarter as the team overcame challenging operating conditions and volatile markets.
The performance is a testament to the strength of our brands, pricing power, balanced model and the team's ability to execute in a dynamic market environment.
I appreciate the support of Jim Snee, the Board of Directors and my team over my tenure as CFO.
I take great pride in the evolution and accomplishments of the Company during my career and leave with the greatest confidence in the future.
I've enjoyed my interactions with the shareholders and analyst community and I wish you will.
I know the Company is an excellent hands with Jacinth, and you will have an opportunity to get to know her better in the coming months.
Jacinth will provide an overview of the fiscal 2022 guidance and further context on our expectations for next year.
For analysts and the investment community on the call, I look forward to meeting you in the coming weeks and months.
I'm excited to be stepping into the Chief Financial Officer role at Hormel Foods, a Company known for its financial strength, it's powerhouse brand and its commitment to employees and communities.
In the time I've been at the Company, I have found that the Hormel Foods is innovative and has a results driven focus for all stakeholders.
As Jim mentioned, allow me to share a bit more commentary regarding key drivers to our fiscal 2022 outlook.
Building on the momentum we established during the second half of the year and the strategic investments we have made throughout the pandemic, we expect to generate sales and earnings growth in fiscal 2022 above the long-term goals we announced at our Investor update in October.
We anticipate growth from all four segments, driven by continued elevated demand for our products, the impact from our pricing actions, improve production throughput, new capacity for key categories such as pizza toppings and dry sausage, and the full-year contribution of the Planters business.
We also expect operating margins to show improvement throughout the year similar to the dynamic, we experienced in the fourth quarter.
It is important to note that rapid changes in raw material input costs can shift profitability between quarters.
In addition to generating strong sales and earnings growth, we will continue to invest in our leading brands through increases in strategic marketing and advertising, capacity expansions for, for high growth platforms and capabilities to drive industry leading innovation.
The Company's target for capital expenditures in 2022 is $310 million.
We are scheduled to open a pepperoni expansion to our newest facility in Omaha during the second quarter, which will provide the needed capacity to meet growing demand in our retail and foodservice businesses.
We are also beginning work on another expansion for the SPAM family of products, scheduled to be operational in 2023.
In addition to these larger projects, we are continuing to invest in cost savings, technology and automation projects to drive long-term savings and efficiency.
Pivoting to innovation, we achieved our 15% goal in 2021.
We have strong innovation platform for brands such as Planters, SKIPPY, Justin's, Herdez, and Hormel Black Label and Retail as well as the Jennie-O and Happy Little Plants brands in the foodservice channel.
In addition to our continuous process and product improvement initiatives give us the confidence going forward to consistently achieve our stated innovation goal.
I want to speak for a moment about the complexities of our operating environment.
The operating environment is expected to remain complex in fiscal 2022 and our guidance accounts for the near-term impacts from labor shortages, higher costs and supply chain disruption.
Our entire team has done an excellent job executing our business strategies in this dynamic environment.
In many ways, we have enhanced our competency for solving the day to day challenges inherent to our industry.
We have increased our efforts higher and maintain team members and have developed many strategies to mitigate the effect of labor shortages to meet elevated demand.
This includes maximizing our flexibility to produce the items that are most in demand and leveraging our manufacturing partnerships to increase throughput wherever possible.
Our One Supply Chain team allows us to continue to actively manage our raw material procurement, logistics network and supply partnerships to minimize the impact of further inflation and supply chain disruption.
We will also benefit from our expanded logistics network which has added capacity for both the Refrigerated and Grocery Products business.
As a result of these actions, we expect improved fill rate and load factors in fiscal 2022.
The announcement of the Jennie-O Turkey Store transformation is another step in our evolution to become and stronger global branded food Company.
Consistent with our long-term strategy, we are continuing our efforts to actively shift away from commodity businesses toward branded, value-added businesses.
We expect our strategic and intentional actions to create a better, more profitable and sustainable business model.
Taking all of these factors into account, as Jim has mentioned, we are setting our full year sales guidance at $11.7 billion to $12.5 billion and our diluted earnings per share guidance at $1.87 to $2.03.
Additionally, this guidance reflects the Benson Avenue facility closure, our a new pork raw material supply agreements and and effective tax rate between 20.5% and 22.5%.
Fiscal 2022 will be 52 weeks.
As we move forward to execute against our strategic imperatives.
In 2022 and beyond, I'm pleased to be with a Company that continues to evolve as a global branded food Company.
Jim often says, we are uncommon.
I have seen that first time in my time with the Company thus far.
This starts with our unwavering commitment to employee safety and remaining an employer of choice in the communities we live and work.
We're taking purposeful actions to transform our Company as we embark on our most ambitious corporate responsibility journey yet, our 20 by 30 challenge, which is certainly important from an ESG standpoint.
Our experienced management team, the tireless work of our team members around the world and the progress made to implement the Project Orion and One Supply Chain initiative, gives us added confidence in our ability to deliver growth in fiscal 2022 and beyond.
I am excited to be with Hormel Foods and be part of this -- its continued success.
| qtrly net sales of $3.5 billion, up 43%.
qtrly diluted earnings per share of $0.51.
expect all four segments to deliver sales and earnings growth in fy22.
qtrly operating margin of 10.4% compared to 11.4% last year.
expects to close benson avenue facility, located in willmar, minn.
, in first half of fiscal 2022.
have signed a new five-year raw material supply agreement with our supplier in fremont, neb.
sees 2022 diluted earnings per share guidance $1.87 - $2.03.
sees 2022 net sales guidance (in billions) $11.7 billion - $12.5 billion.
hormel foods - new material supply agreement will result in a reduced supply of commodity fresh pork.
company expects a $350 million sales reduction in fiscal 2022.
|
Our second quarter results were strong across the board and we are especially pleased with the top-line performance considering the complicated operating environment.
The demand environment in the quarter was robust and continued the momentum from the first quarter and despite posting a 30% organic top-line growth, we exit Q2 with a sequentially higher order backlog.
I'll focus on the bigger picture here and highlight again what we believe is underappreciated aspect of our portfolio, it's organic growth potential.
Our revenue in the second quarter was above the pre-pandemic comparable quarter in 2019 and resulted in the highest revenue first half of the year in recent Dover history, meaning that the majority of our markets are not simply recovering but are operating in a growth environment.
New order bookings remain robust with all segments posting book-to-bill above one [Phonetic], resulting in sequential comparable growth in backlog as I mentioned earlier.
Operating margin conversion was solid for the quarter as a result of good execution at the operating level on healthy mix of products delivered in the quarter.
All of this is well and good, but make no mistake, the operating environment remains very challenging.
It's been 90 days since the last time we were asked the question about the duration of "transitory inflation".
As we've discussed after the first quarter, we had some line of sight of raw materials cost trajectory coming into the year, which allowed us to get in front from a price cost perspective.
We have also proactively given our operating companies some leeway on working capital decisions to build inventories based on the backlog trajectory.
What we underestimated was the -- was the total cost impacts of a strained logistics system and tight labor market that shows no signs of abating.
This has had two knock-on effects on our results.
First, the absolute costs of inbound and outbound freight were materially higher, and second and more important, the costs associated with production line stoppages due to lack of labor and components caused by trends and time uncertainty and overall supply chain tightness.
Our teams have done a commendable job navigating these choppy waters and continue shipping products and driving robust margin conversion and strong cash flow.
Overall, we believe that our operating model has been an advantage to us as we are largely a localized producer and are not overly reliant on extended supply chains.
This is clearly reflected in our top-line performance in the quarter.
As we look to the second half of the year, our order backlogs make us confident in our top-line trajectory.
Our forecast do not incorporate much in the way of an improvement nor deterioration of the operating challenges that we've witnessed during the first half.
We're just going to have to power through and work with our suppliers and customers to adapt to the prevailing conditions.
We are raising our annual revenue growth guidance to 15% to 17%, and our adjusted earnings per share guidance to $7.30 a share to $7.40 a share.
We also expect stronger cash flow as a result of the improved margin performance.
Skip to Slide 4, which provides a more detailed overview of our results in the quarter.
Engineered Products revenue was up 25% organically.
Vehicle services which is strong across all geographies and product lines and had record bookings during the quarter.
Industrial automation demand was strong across the automotive sector and in China.
Aerospace and defense posted an all-time record revenue during the second quarter.
Waste hauling was flat year-over-year as the business continues to wrestle with component and labor availability issues that are constraining product shipments.
Importantly, waste handling bookings were robust and the backlog was up nearly 75% versus the prior year.
Engineered Products is our most exposed segment to input and logistics cost inflation due to materials intensity, contractual pricing dynamics and relatively higher share of international sourcing in vehicle services.
You can see it in the margin -- the segment's margin was flat year-over-year as strong volume leverage and pricing increases were offset by input cost and freight inflation, as well as labor and component availability challenges.
Fueling Solutions was up 25% organically in the quarter on the strength of the above ground and below ground retail fueling globally, including some remaining tailwinds from the EMV opportunity in the U.S. following the April deadline.
Vehicle wash has had -- has been strong this year and our recent ICS acquisition integration and performance is ahead of plan.
Activity in China in fuel transport remains subdued, but there are signs of Chinese operators reopening their tendering activity.
Order backlogs were up 29%, and we expect our software and service business hanging hardware, vehicle wash and compliance-driven underground product offerings to help offset the anticipated headwinds from the EMV roll-off.
The segment posted another strong sequential margin performance on higher volumes, strategic pricing initiatives, productivity actions and mix.
Sales in Imaging & ID improved 20% organically.
The core marking & coding business grew well on strong printer demand across all geographies with China and India driving particularly strong performance.
Serialization software also grew ahead of expectations.
The digital textile [Phonetic] printing business was up significantly against the comparable quarter when much of their operations were locked down in Northern Italy last year, but nevertheless, the business remains impacted though we are beginning to see growth in demand for large printers, particularly in Asia and continued growth in ink consumable volumes.
Margins improved by 420 basis points on volume leverage, pricing and productivity initiatives.
Pumps & Process Solution posted another banner quarter at 34% organic growth on improved volumes across all businesses except Precision Components.
Demand for biopharma connectors and pumps are intended to be -- to be strong driven by vaccine and non-COVID related pharmaceutical tailwinds.
Industrial pumps grew by over 20% on robust end customer demand with particular strength in China.
Polymer processing shipments grew year-over-year and continued strength in Asia and is gaining momentum in the U.S. market.
Precision Components was slightly down in the quarter though demand conditions have stabilized and are recovering well in some end markets and geography giving us confidence in the second half trajectory.
Margins in the quarter expanded by 910 basis points on strong volumes, favorable mix and pricing.
Top-line growth in Refrigeration & Food Equipment continued its impressive clip posting a 44% organic growth.
Revenue in the beverage can making doubled in the quarter and bookings nearly doubled as well.
The business is now booked into late 2022.
Food retail saw broad-based growth across its product lines, door cases are now booking into 2022, and the demand for natural refrigerants is driving outside growth in our systems business in the U.S. and in Europe.
Backlog in food retail is now double where it was last year.
The heat exchanger business grew on robust demand in all geographies with rebounding order rates and commercial HVAC in North America and record order intake in EMEA extending lead times for heat pumps and boilers.
Foodservice equipment was up in the quarter on a tough comp, chain -- no, actually on an easy comp, and chain restaurant demand is robust, but the institutional market is still recovering.
Margins in the segment improved by 580 basis points, driven by strong volumes and productivity actions partially offset by availability issues with installation raw materials and labor and food retail operations, we expect -- which we expect to subside in the second half.
And I'll pass it on to Brad here.
Our top-line organic revenue increased by 30% in the quarter with all five segments posting growth with particular strength in our Pumps & Process Solutions and Refrigeration & Food Equipment segments.
FX benefited the top-line by about 5% or $68 million.
Acquisitions added $19 million of revenue in the quarter.
There were no year over impacts from dispositions.
The revenue breakdown by geography reflect strong growth in North America, Europe and Asia, our three largest regions.
The U.S., our largest market posted 25% organic growth in the quarter on solid trading conditions in retail fueling, marking & coding, biopharma, food retail and can making.
Europe grew by 30% on strong shipments in vehicle aftermarket, biopharma and industrial pumps and heat exchangers.
All of Asia was up 38% organically on growth in biopharma, marking & coding, plastics and polymers, heat exchangers and retail fueling demand outside of China.
China, which represents a little over half of our business in Asia was up 33% organically in the quarter.
Moving to the bottom of the page, bookings were up 61% organically, reflecting continued broad-based momentum across the portfolio.
In the quarter, we saw organic growth across all five segments.
Going to the earnings bridges now on Slide 7.
On the top of the chart, adjusted EBIT was up $173 million and margin improved 400 basis points, as improved volumes, continued productivity initiatives and strategic pricing offset input cost inflation.
Adjusted segment EBITDA was up 350 basis points.
Going to the bottom of the chart.
Adjusted net earnings improved by $135 million as higher segment EBIT more than offset higher taxes, as well as higher corporate expenses primarily relating to compensation accruals and deal expenses.
The effective tax rate excluding discrete tax benefits was approximately 21.7% for the quarter compared to 21.6% in the prior year.
Discrete tax benefits were $11 million in the quarter or $9 million higher than 2020 for approximately $0.07 of a year-over-year earnings per share impact.
Rightsizing and other costs were $11 million in the quarter or $8 million after-tax.
Now, on Slide 8.
We are pleased with the cash performance thus far this year, with free cash flow of $364 million, a $96 million increase over last year.
Free cash flow conversion stands at 9% of revenue for the first half of the year, 80 basis points higher than the comparable period last year, despite a significant investment in working capital and the impact of prior year tax deferrals that did not repeat this year.
Also as we discussed last quarter, we remain focused on delivering against our customers' strong order rates and build inventory to ensure we can meet the current demand in the second half of the year.
Let's try to pause here for a moment, because this is a complicated slide, but I think it's a transparent view of what we think is going to happen over the second half of the year and includes our current view of the outlook of the second half by segment provides context of how we are thinking about full-year guidance, which I'll get to shortly.
Remember, the demand environment is strong across the portfolio, so let's not try to get overexcited about headwinds or mix commentary.
We managed it in H1 and we will do it again in H2, but this is the reality of the situation in terms of the dynamic of the business.
We expect top-line growth -- top-line in Engineered Products to remain robust through the remainder of the year based on solid backlog and good bookings trajectory.
Momentum in the vehicle aftermarket, industrial automation should continue, while we expect the improved order rates and backlogs and solid waste handling and industrial winches to drive solid year-over-year growth in the second half.
Aerospace and defense is expected to be modestly down largely as a result of a difficult year-over-year comparison on -- on project deliveries.
Supply chain constraints and cost inflation are expected to continue to have a material impact on the segment.
Waste handling and automotive aftermarket businesses are our largest business exposed to the trifecta of raw materials inflation, extended supply chains and a larger proportion of assembly labor.
Our management teams are winning in the marketplace considering the headwinds which is reflected in the growth rate and order books.
But we are clearly at the point of having defend our market position at the expense of the price cost dynamic, which will be detrimental to near-term margins, but not material, slightly detrimental.
And we expect Fueling Solutions to provide organic growth for the full-year above our initial expectations on the back of growth in systems and software, recovering underground demand and vehicle wash.
Recall that above ground business as a tough second half due to the North American EMV volumes.
Margins in Fueling Solutions will be up for the full-year, though we expect modest margin compression in the second half relative to the first half on slightly lower volumes and negative product and geographic mix, which I think that we covered at the end of Q1 as with less North America volume due to EMV and more international volume that's slightly dilutive.
Trading conditions in Imaging & ID are expected to continue their positive trajectory for the remainder of the year.
Our core marking & coding business is expected to maintain its growth trajectory with services and serialization products positively impacting performance.
Digital textile printing is recovering, and we expect the end of the year, we will well above 2020, but below its 2019 high watermark.
We expect operating margins to remain stable in the second half.
Pumps & Process Solutions should see a solid second half.
Demand for biopharma and hygienic applications remain robust with customers now placing orders into 2022.
We are strategically investing an additional clean room capacity for this platform to support its growth.
Trading conditions in industrial pumps are strong and driven by robust and customer demand as opposed to channel stocking.
Plastics and polymers is expected to be steady though this business faces a difficult comparable period due to a strong performance last year.
Precision Components will return to growth in the second half as OEM new-builds will supplant increased activities at refineries and petrochemical plants.
We expect margins to remain strong in the segment, but we may see some minor dilution due to mix on the back half as our Precision Components business recovers, but the absolute profit trajectory of this segment is in very good shape.
With its large backlog and high sustained order rates, Refrigeration & Food Equipment will finish the year strong, with double-digit growth expected for all operating businesses.
New orders in core food retail business have been healthy across the product segments and the tailwinds from our leadership position and natural refrigerants are driving outside growth for our systems business.
We expect to begin to significantly ramp up shipments of our new digital door product.
Belvac continues to work through its record backlogs.
They are now taking orders for late 2022 and even into 2023.
Heat exchanger business is positioned well as they are seeing strong order rates across all verticals and geographies.
We have been investing in capacity and new capabilities in these two businesses and are well positioned to capture the growth.
Foodservice equipment demand is normalized and returned to growth at restaurant chains and institutional business continues to improve.
We expect this business to post solid growth in the second half albeit against a low comparable.
We expect margins to continue their seasonally adjusted upward trajectory for the remainder of the year.
Improved volume leverage, productivity gains and positive product mix and business mix should more than offset operational challenges related to component and labor shortages, increased logistics costs and input cost inflation.
Moving to Slide 10.
We remain on the front foot investing behind our business to support the growth, productivity and long-term portfolio enhancement.
Organic high return on investment projects remain our top priority for capital allocation.
On the left hand, you can see a sample of the current growth and productivity capex projects that we are working on, that add up to $75 million of spend.
The project mix is balanced between growth and productivity with a skew toward new capacity and supporting long-term growth in key priority portions of our portfolio.
Our next priority in capital allocation is strategic bolt-on acquisitions and enhance the long-term growth profile and attractiveness of our portfolio.
You can see that with that all four of our recent acquisitions were in either digital or high growth single use pumps markets.
These are small additions, but we are very excited about scaling up these highly innovative technologies as part of our G&A [Phonetic] portfolio.
We remain on the hunt for acquisitions, have a solid M&A pipeline as we enter the second half.
Our current dry powder on a full-year '21 basis is approximately $3.3 billion.
Our revised annual guidance is on Page 11.
We are increasing our top-line forecast to reflect the durability and demand trends that we are seeing.
We now expect to achieve 15% to 17% all-in revenue growth this year.
On the bottom of the page, we show our expected '21 performance in a multi-year perspective.
We remain on track to deliver strong returns through a combination of robust organic revenue growth, strong margin expansion and disciplined capital allocation.
And with that Andrey, we'll open it up to Q&A.
| sees fy adjusted earnings per share $7.30 to $7.40.
guidance for full year 2021 revenue growth was raised to 15% to 17%.
|
Let's go to Page 3.
Dover Corporation and its operating companies had a solid quarter.
The performance stats indicate that our product strategies, coupled with our ongoing productivity initiatives, continued to deliver top line growth, margin accretion and attractive cash flow to our investors.
Our revenue and bookings growth continued to outpace our pre-pandemic levels and we exited the quarter with a record high and sequentially increased backlog while posting top line growth of 15% over the comparable period.
Demand strength was broad based as each segment posted year-over-year growth in bookings and a book to bill above 1.
Revenue growth, product -- positive product mix and ongoing productivity initiatives drove comparable operating margins up resulting in a 31% increase in US GAAP diluted earnings per share [Technical Issues].
Our free cash flow performance was strong with an 18% year-over-year increase despite significant investments we've made in inventory as we begin to reap the benefits of investments in the centralization of financial processing activities.
We continued to enhance and improved our portfolio with several acquisitions completed in the last three months and the divestiture of our commercial foodservice business announced last week.
Our organic investments in capacity expansions and productivity projects are on track, providing us the building blocks for the future top line growth and margin expansion.
As one of the first multi-industrials to report each quarter and because of our wide end market exposures, we have the pleasure to be the operating environment bellwether.
So let's get on the front foot here by providing some color on inflationary inputs, labor and supply chain challenges so that we have time to discuss the constructive demand environment for 2022 in the Q&A.
Let me start by saying that we're particularly concerned that there have been no discernible policy changes, particularly in the US to deal with these headwinds.
And in fact, many proposed policies run the risk of extending their duration.
We take no satisfaction in the fact that we've been telegraphing these issues all year and incorporating them into our forecast of the businesses that bear the brunt of these challenges, which I'll expand upon during the segment review.
We have taken the appropriate actions to offset these headwinds, moving into 2022 and we are comforted by the fact that we've been given the opportunity to demonstrate the resilience of our business model and the strength of the breadth of our product and geographic market exposures that are ultimately reflected in these quarterly results.
To be clear, we are very constructive about 2022 demand for our products and services and remain optimistic that there will be a recognition that protecting the duration of the current strong economic demand environment needs proactive policy decisions.
We are raising our full year earnings per share guidance as the result of our strong year-to-date performance.
Our updated forecast do not incorporate any material improvement nor deterioration of the challenging operating environment in the fourth quarter.
Our priorities remain the same, supporting our customers with products and services for the long term and the health and welfare of our employees.
I'll skip to Slide 4, which provides a more detailed review of our results for the third quarter.
So let's move to Slide 5.
Engineered Products revenue was up 14% organically with a significant portion of the growth from pricing actions.
Vehicle services posted a strong top line quarter and market indicators remain positive with vehicle miles driven recovering and average vehicle age continuing to increase.
Industrial automation demand was up double digits with strong activity in Americas and China.
Environmental Services Group revenue was up year-over-year and its backlog remains strong moving into 2022.
Aerospace and defense posted a decline year-over-year largely a result to changes in programmed shipment timing.
The margin performance in the quarter was unfortunately what we expected to occur as we progressed through the year.
Our Engineered Products segment, as we've discussed previously, has the largest exposure to raw materials, assembly labor as a percentage of cost of goods and supply chain complexity.
As such, it is more than just a price cost issue where even in equilibrium drives negative margin performance.
It is exasperated by numerous component supply issues that necessitated us to intermittently curtail production to stabilize the manufacturing system in the quarter.
Our management team is doing exactly what we would expect of them to protect profitability in the short term while managing the relationships with our strategically important customers.
I have absolute confidence that the profit margin of the segment will bounce back as we move into '22 as a result of actions already taken in price and as raw materials and supply chain constraints moderate as can be seen in the raw materials futures and stabilizing container shipping rates.
Fueling Solutions was up 3% organically in the quarter on solid demand in North America for above ground and below ground retail fueling.
We believe our production schedule and delivery times are driving share gains, particularly in the above ground category.
Vehicle wash posted another strong quarter with some encouraging customer conversion and cross-selling benefits from our recent ICS acquisition.
Activity in China remains subdued driven by the lasting impacts of COVID and near-term uncertainty related to energy supply.
Fuel transport components were negative for the quarter, but we believe that this is expected to [Phonetic] improve moving forward.
Margins in the segment declined 150 basis points in the quarter as productivity headwinds from supply chain constraints in sub components and negative mix more than offset higher volumes and pricing.
We have taken the appropriate actions on pricing to counter these headwinds going forward.
Sales in Imaging & Identification grew 7% organically.
The core marking and coding business grew well on good demand for printers and consumables.
Serialization software also grew ahead of expectations and we are working to add additional resources here as we integrate the recently acquired Blue Bite brand management software into our solutions.
The digital textile printing business was up significantly year-over-year against a low bar comparable quarter and is continuing its gradual recovery.
Margins in Imaging & ID improved by 250 basis points as volume leverage, pricing and productivity initiatives more than offset input cost inflation.
Pumps & Process Solutions posted another solid quarter of 25% organic growth.
Demand for biopharma connectors and pumps continued to be strong.
We continue to expand clean room capacity for our biopharma connectors and single use pumps in the period and we are encouraged by specification wins in Em-tec biopharma flow meters, which we acquired last year.
Industrial pumps were up based on broad based end customer demand with particular strength in China.
Precision Components was up year-over-year as compression OEM and aftermarket businesses continued their recovery.
Polymer processing was down in the quarter due to a combination of shipment timing and a very strong third quarter from the prior year, though new order rates remained strong and outlook is positive moving into 2022.
Margins in the quarter expanded by a robust 630 basis points on strong volume, fixed cost absorption, favorable product mix and pricing.
Top line results in Refrigeration & Food Equipment remained strong posting 16% organic growth.
Revenue in beverage can making equipment doubled during the quarter.
The business is booked into late '22 and is taking orders for '23.
The heat exchanger business grew on robust demand in all geographies led by residential heating and industrial end markets and a recovery in the global commercial HVAC demand.
Order intakes continue to exceed our ability to ship.
So we are adding additional capacity in two geographies to ensure that we can meet forecasted demand in 2022.
Demand in food retail remains robust with elevated bookings and backlogs across all our product lines.
However, much like our Engineered Products business, we have a difficult time with labor constraints and, in particular, sub component supply which has necessitated significant operational costs in logistics, intermittent production curtailments and, in one case, the deferment of a delivery into 2022.
Again management is straddling cost recovery actions and meeting demands of our customers, but it clearly comes with a cost.
Margins were largely flat in the quarter as excellent operating performance in SWEP and Belvac offset refrigeration headwinds despite their smaller revenue base.
I'll pass it to Brad here.
Let's go to Slide 6.
On the top is the revenue bridge.
Our top line organic revenue increased by 13% in the quarter with all five segments posting growth with strong demand in our Engineered Products, Pumps & Process Solutions and Refrigeration & Food Equipment segments.
FX benefited the top line by about 1% or $21 million.
Acquisitions added $18 million of revenue in the quarter.
There was no year-over-year impacts from dispositions.
The revenue breakdown by geography reflects strong growth in North America and Europe, our two largest regions, and modest growth across Asia and the rest of the world.
The US, our largest market, posted 16% organic growth in the quarter on solid trading conditions in retail fueling, industrial automation, biopharma and can making.
Europe grew by 16% in the quarter on strong shipments in marking, coding, biopharma and industrial pumps, can making and heat exchangers.
All of Asia was up 5% organically on growth in biopharma and industrial pumps and heat exchangers, partially offset by year-over-year declines in polymer processing, below ground retail fueling and fuel transport.
China, which represents approximately half of our business in Asia, was up 8% organically in the quarter.
Moving to the bottom of the page.
Bookings were up 25% organically, reflecting the continued broad based momentum across the portfolio.
In the quarter we saw organic growth across all five segments.
Let's go to the earnings bridges on Slide 7.
On the top of the chart, adjusted segment EBIT was up $64 million and adjusted EBIT margin improved 80 basis points as improved volumes, continued productivity initiatives and strategic pricing offset cost inflation and production stoppages.
Going to the bottom of chart, adjusted net earnings improved by $57 million as higher segment EBIT and lower corporate expenses more than offset higher taxes.
Deal expenses in the quarter were $3 million.
The effective tax rate for the third quarter, excluding tax discrete benefits, was approximately 21.8% compared to 21.5% in the prior year.
And our effective tax rate estimate pre-discrete for Q4 and the full year remains unchanged at 21% to 22%.
Discrete tax benefits were $8 million for the quarter or $4 million higher than in 2020 for approximately $0.03 of year-over-year earnings per share impact.
Rightsizing and other costs were a $2 million reduction to adjusted earnings in the quarter as a one-time recovery related to a cancellation settlement more than offset our ongoing productivity and rightsizing initiatives.
Now on Slide 8.
We are pleased with the cash performance thus far this year with cash -- with free cash flow of $667 million, a $104 million increase over last year.
Free cash flow conversion stands at 11% of revenue year-to-date despite a nearly $250 million investment in working capital.
As we discussed last quarter, we remain focused on delivering against our customers' strong order rates and we are carrying high inventory levels to ensure we can meet current demand for the rest of the year and into next year.
I'm on Slide 9, which is a familiar format we used during the Investor Day in 2019 to describe our inorganic growth priorities.
I'm pleased to report that our activity since then has aligned well with those priorities and we remain busy adding logical synergistic bolt-ons that will support the long-term growth of our core businesses.
As you can see there we are investing in the highest-priority platforms with an emphasis on high growth, high gross margin products and solutions.
We remain disciplined in our approach to acquisitions.
And despite the challenging asset prices in today's environment, we have acquired seven bolt-on acquisitions year-to-date that meet our investment return criteria, including two in the third quarter and one that closed last week.
The most recent deals highlighted in green were CDS, an industrial 3D visualization software, which we expect to grow in third party revenues and also adopt across the Dover portfolio in our journey toward digitizing the front end of our businesses, lowering our transaction costs, Espy which complements our aerospace and defense business, the software-driven signal intelligence solutions, and LIQAL, which is an emerging leader in LNG and hydrogen dispensing solutions.
Each transaction is modest addition to our aggregate portfolio.
We are very excited about scaling up these innovative and strategic technologies over time and the positive impact to earnings per share as these investments mature.
We remain on the hunt for acquisitions and have a solid M&A pipeline that aligns well with our portfolio of priorities.
We also took advantage of recent market activity in the food equipment sector to sell Unified Brands, our professional cooking equipment business for commercial foodservice operators.
The deal was announced in early October and is expected to close in the fourth quarter.
Unified Brands represents less than 2% of our overall revenue and its sale will have negligible impact on our '21 adjusted EPS.
As we look to the end of the year demand outlook remains favorable across the majority of the portfolio, backlogs and bookings remain robust and we expect to post strong organic growth in Q4.
Overall, we remain on track to deliver strong returns this year through a combination of robust growth in revenue, operating profit and cash flow, coupled with disciplined capital allocation.
We also look forward to closing out this year and laying the foundation for what we believe to be a positive demand environment in 2022.
We have clarity about the nature of the inflationary input and supply disruption costs that we have incurred in Q3 and expect to queue [Phonetic] in Q4 due to the challenging operating environment.
And we have conviction that we can turn them into profitability tailwinds as conditions improve and the calendar progresses from here.
And with that let's turn to Q&A.
| dover corp - do not anticipate challenges from q3 to abate and therefore remain focused on operational execution to deliver against robust demand.
|
I am Patrick Suehnholz, Greenhill's Head of Investor Relations.
And joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer.
These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm's control and are subject to known and unknown risks, uncertainties and assumptions.
For a discussion of some of the risks and factors that could affect the firm's future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
We reported second quarter revenue of $43.2 million and a loss per share of $0.45.
For the year-to-date, we had revenue of $112.2 million and a loss per share of $0.34.
Revenue for the year-to-date was 2% lower than our figure from last year when we had a slow first half that was followed by a strong second half.
Industry data makes clear that global M&A activity has been very strong for the year-to-date, we see that in what has been a significant increase versus last year and the year before in the number of new assignments we are winning.
We also see the result of a more active market in the number of deal announcements we are associated with, as shown on the transaction list we regularly update on our website.
This past quarter, we announced the second highest number of transactions in any quarter in our history and on a trailing four quarters basis, our number of transaction announcements is at the highest level ever by a meaningful margin.
Many of those transactions have been for major companies but for the year-to-date, the sizes of deals that have completed have skewed toward the smaller end of the scale, resulting in soft year-to-date revenue.
In the second half, we expect the size of completed deals and related fee events to significantly increase such that we should get to a full-year revenue outcome that shows improvement over what was a respectable year for our firm in 2020.
We saw the first versus second half play out similarly to the way I'm describing both last year and the year before.
On a regional basis, for the full year we expect to show a stronger year than last year in the US and Canada and a much stronger year in Australia, offset by reduced revenue in Europe where we had a particularly strong revenue year last year.
By type of advice, M&A is where we are seeing the greatest opportunity.
Restructuring activity is materially lower given the strength in credit markets, but we are making progress in our strategic initiative to be more active in financing advisory assignments of various kinds.
In the private capital advisory area, we continue to be busy with secondary transactions in Europe and Asia, including an increasing number of complex fund restructuring transactions, led by fund general partners.
In addition, over the course of the year-to-date, we've succeeded in building out a global primary fundraising team and we expect to start seeing revenue from that group already in the current quarter.
In all our businesses, we are making progress on our strategic initiative to do more business with financial sponsors.
In addition to two more recruits in the private capital advisory area.
We have other recruits in progress.
We already see this year as an important one in terms of recruiting and we should see more success in that regard in the second half.
Now turning to costs, our compensation costs were lower than last year in absolute terms, given our objective to bring quarterly compensation more in line with quarterly revenue but our compensation ratio was still higher than our target range.
Our objective is to bring the ratio down to our target range for the full year, while still paying our team increased compensation in absolute dollars.
Where we end up in terms of compensation cost and expense ratio for the year depends as always on our revenue outcome for the year.
Our non-compensation costs were materially lower than last year and are running at a rate slightly better than our target.
Our interest rate expense continues -- interest expense, rather, continues to trend lower given declining debt levels and continued low short-term interest rates.
We continue to estimate our annual tax rate will be in the mid-20% range after adjusting for the impact of charges relating to the vesting of restricted stock, which is consistent with our prior guidance.
We ended the quarter with $92.5 million of cash and $306.9 million of debt and we paid down another $15 million of that debt after quarter end.
We also declared our usual $0.05 quarterly dividend.
And lastly as of quarter end, we have bought back 1.5 million shares and share equivalents for a total cost of $23.8 million and had an additional $26.2 million of repurchase authority available for the year ahead through next January.
As I said last quarter, our principal focus is on deleveraging but we also intend to continue to purchase shares in a prudent manner to further enhance the upside potential for continuing shareholders.
Our employees currently own about half of the economics of the firm through stock and restricted stock and are thus fully aligned in trying to drive shareholder value in the quarters and years to come.
To sum up, we recognize that our first half is an outlier relative to peers in what is a strong M&A market.
At our smaller scale, the random timing of deal completions has a large impact and can result in a weak quarter or even multiple quarters.
Last year, we saw that same phenomenon, yet with the help of a record quarter at year-end got to a very respectable full year result.
This year, we have the benefit of what is a significantly higher pace of new assignments and of deal announcements.
Looking beyond this year, the same smaller scale that today results in greater quarterly volatility is what creates future upside potential for our shareholders.
First, the strategic moves we are making should reduce future quarterly volatility as well as increase annual revenue.
The effort to develop a financing advisory business and to devote more resources to serving financial sponsors should be particularly important in diversifying and growing our revenue base.
Second, the successful rebuilding and expansion of our Private Capital Advisory business should also add to revenue diversity and scale starting later this year.
And lastly, with our lower cost, declining debt and interest expense and much reduced share count, the benefits of increased revenue would be magnified in terms of net income and shareholder value creation.
With that, I will take any questions.
| compname reports q2 revenue of $43.2 mln.
q2 revenue fell 10 percent to $43.2 million.
q2 loss per share $0.45.
|
Let's begin with the summary of results on Page 3.
As we guided back in September.
July August trends were positive and we are exceeding our internal forecast.
This dynamic continued through September.
In addition to the improving demand environment, we are very encouraged by our manufacturing operations and supply chain performance in the quarter.
This solid operation execution had two tangible benefits in Q3.
First, it increased our capacity to deliver a higher volume than expected from the backlog in our long cycle businesses, and as you see the positive impact to the top line.
And second, through a combination of mixed and fixed cost absorption, it drove a robust margin performance for the quarter.
Demand trends continued to improve sequentially across most of the portfolio.
The trajectory continues to vary by market, and I'll talk more about that, but our diverse end market and geographic exposure is clearly an asset to us in the downturn.
Revenue declined 5% organically and bookings were flat, with a third of our operating companies posting positive year-over-year bookings for the quarter, and more than half posting positive comparable growth in the month of September.
We are not out of the woods yet, but the trajectory is encouraging and we continue to carry a healthy backlog going into the fourth quarter and into next year.
We delivered strong margin performance in the quarter and year-to-date.
We achieved margin improvement in the quarter despite lower revenue, driven by our operational multiyear efficiency initiatives gaining further traction and by improved business mix, some of which we highlighted at our recent Investment Day, focused on the Pumps & Process Solutions segment and biopharma business in particular.
With the strong results to date, we expected to over deliver on our full-year conversion margin target and are now driving toward achieving a flat consolidated adjusted operating margin for the year.
Cash flow in the quarter was strong at 17% of revenue and 127% of adjusted net earnings.
Year-to-date, we have generated $117 million more in free cash flow over the comparable period last year, owing to a robust conversion management and capital discipline.
As a result of our performance in the first three quarters of the year and a solid order backlog, we are raising our annual adjusted earnings per share guidance to $5.40 to $5.45 per share.
We are not in the clear on the macro backdrop and performance remains uneven between markets, but we believe that our performance to date and the levers we have in our possession will enable us to absorb any possible dislocations in the fourth quarter should they materialize.
Let's move to Slide 4.
General industrial capital spending remains subdued in Q3, resulting in a 10% organic decline for an Engineered Products, driven by softness in capex levered industrial automation, industrial winches and waste handling.
Additionally, our waste handling business had the largest quarter ever in the comparable period last year, making it a challenging benchmark.
On the positive side, aerospace and defense grew double digits on shipments from a strong backlog and we've seen robust recovery in our vehicle aftermarket business after a difficult couple of quarters.
Productivity actions, cost actions and favorable mix minimize margin erosion in the quarter, nearly offsetting the impact of materially lower volumes.
And Fueling Solutions saw continued albeit sequentially slower growth in above-ground equipment in North America on EMV compliance and regulatory activity, whereas national oil companies in China continued to defer capital spending amid ongoing uncertainty.
Demand for below-ground equipment has improved sequentially as construction activity restarted, but remain subdued globally.
And in China, we are still weathering the roll off of the double-wall replacement mandate.
Margin performance in the segment was very good and a testament to the operational focus and capability of the management team and was achieved through productivity improvements, cost controls and favorable regional mix, more than offsetting volume under-absorption.
Sales in Imaging & Identification declined 8% organically due to continued weakness in digital textile printing.
We've seen improving demand for textile printing consumables, reflecting recovering in printing volumes, however, has been insufficient to prompt fabric printers to invest in new machinery.
We expect conditions to remain challenged for the balance of the year.
Marking and coding was flat on strong demand for consumables and overall, healthy activity in the US and Asia despite lingering difficulties with customer site access and service delivery.
Despite segment margins being down relative to the comparable quarter driven by digital printing volume and fixed cost absorption, margin improved in marking and coding on flat revenue was a result of the mix of effect on consumables and operational initiatives undertaken in prior periods, which also provide a solid base for incremental margins in 2021 as textiles recover.
Pumps & Process Solutions continued to demonstrate the resilience of its product portfolio, some of which we highlighted in last month's Analyst and Investor Day.
Strong growth continued in biopharma, medical and hygienic applications.
Plastics and polymers shipped several large orders from its backlog, which were initially slated to ship in Q4, getting it to a slightly positive revenue performance year-to-date.
Compression, components and aftermarket continue to be slow on weaker activity in US upstream and midstream.
Industrial pumps activity remained below last year's volumes, but has improved sequentially.
This was another quarter of exemplary margin performance in the segment, with more than 300 basis points of margin expansion driven by broad based productivity efforts, cost controlled and impacted businesses, favorable mix and pricing, which more than offset lower volume and some of the portfolio.
Moreover, the recovery was broad based.
Our food retail business, the largest in the segment, grew organically and restarted remodeling activity in supermarkets.
Belvac, our can making business began shipping against its record backlog, which we believe is in the early innings of a secular growth trend.
Heat exchangers were approximately flat with continued weakness in HVAC, offset by strength in residential and industrial applications, including semiconductor server and medical cooling.
Commercial food service improved, but margins remain impacted due to continued weakness and institutional demand from schools and similar venues, while activity and large chains have slowly recovered.
Cost actions taken earlier this year, as well as improved efficiency in volume more than offset the demand headwinds in food equipment, resulting at appreciable margin accretion.
We expect to continue delivering improved comparable profits in the segment in line with our longer term turnaround plan.
I'll pass it to Brad from here.
Let's go to Slide 5.
On the top is the revenue bridge.
Several of our businesses, including plastics & polymers, beverage can making and food retail returned to positive organic growth in the third quarter, while biopharma continued its strong growth trajectory from prior quarters.
FX, which had been a net revenue headwind for us since mid-2018, flipped in the quarter and benefited top line by 1% or $12 million, driven principally by strengthening of the euro against the dollar.
Acquisitions more than offset dispositions in the quarter by $3 million.
We expect this number to grow in subsequent quarters.
The revenue breakdown by geographic area reflects sequential improvement in each major geography, but particularly encouraging is the trajectory in North America and Europe.
The US, our largest market, declined by 4% organically due to softness in waste handling industrial winches and precision components, partially offset by a strong quarter in our above-ground retail fueling, marking and coding, beverage can making, and food retail businesses among others.
Europe declined by 4% organically, a material improvement compared to a 19% decline in Q2, driven by constructive activity in our pumps, biopharma and hygienic, and plastics and polymer businesses.
All of Asia declined 10% organically, while China representing approximately half of our business in Asia, posted an 8% year-over-year decline.
We continue to face headwinds in China in retail fueling due to the expiration of the underground equipment replacement mandate and slower demand from the local national companies [Phonetic].
Outside of retail fueling, we saw a solid growth in China.
Moving to the bottom of the page.
Bookings were nearly flat, down 1% organically year-over-year, compared to a 21% decline in Q2, reflecting continued momentum across our businesses.
In the quarter, we saw organic declines across four segments, but sequential improvement across all segments, and a particularly strong booking quarter for our Refrigeration & Food Equipment segment, driven primarily by record order intake in our can making business.
These orders relate to large projects that are mostly projected to ship in 2021 and 2022.
Overall, our backlog is currently approximately $200 million or 14% higher compared to this time last year, positioning us well for the remainder of the year and into 2021.
Note that, a material portion of the backlog increase was driven by orders in our can making business, which I mentioned above.
Let's go to the earnings bridges on Slide 6.
On the top of the chart, despite a $77 million revenue decline in the quarter, we were able to keep our adjusted segment earnings approximately flat year-over-year, a testament to our proactive cost containment and productivity initiatives that help drive 100 basis points of adjusted EBITDA margin improvement.
Some of the recent initiatives will continue supporting margins into 2021.
Going to the bottom chart.
Adjusted net earnings declined by $3 million, principally driven by higher corporate costs related to deal fees and expense accruals, partially offset by lower interest expense and lower taxes on lower earnings.
The effective tax rate excluding discrete tax benefits is approximately 21.5% for the quarter, substantially the same as the prior year.
Discrete tax benefits quarter-over-quarter were approximately $2 million lower in 2020.
Right sizing and other costs were $6 million in the quarter relating to several new permanent cost containment initiatives that we pulled forward into this year.
Now on Slide 7.
We are pleased with the cash performance, with year-to-date free cash flow of $563 million, a $117 million or [Indecipherable] over last year.
Our teams have done a good job managing capital more actively in this uncertain environment, and with the improving sequential revenue trajectory in the third quarter, we rebuilt some working capital to support the businesses and our customers.
Free cash flow now stands at 11.5% of revenue year-to-date, going into the fourth quarter, which traditionally has been our strongest cash flow quarter of the year.
I'm on Page 8.
Let's go segment by segment.
In Engineered Products, we expect similar performance as the third quarter.
Vehicle aftermarket had a very good Q3, as the business is able to deliver on pent up demand.
Notably, we have a tough comp in Q4 due to some promotional campaigns, but this is a business which has excellent prospects for 2021.
Activity in waste handling is picking up with private haulers, but orders placed are mostly for 2021.
We expect municipal volume to remain subdued for the balance of the year.
Demand is reaccelerating for digital solutions in the space and overall, we are constructive on the outlook for this business into 2021.
We are seeing some encouraging signs in industrial automation and automotive OEM markets, in particular, in October.
Aerospace and defense continues to be steady, most of what we plan to deliver in the next quarter is in the segment's backlogs.
We don't expect material upside and/or downside from our forecasts.
We expect margin to be modestly impacted by volume and negative mix relative to Q3, largely due to demand seasonality.
Fueling Solutions remain constructive finishing the year and into 2021.
As we've been guiding all year, we have a tough comp in Q4 due to record volumes in the comparable period.
Despite the top line headwinds, we expect to hold year-over-year absolute adjusted operating profit as a result of our efforts done on product line harmonization, productivity and pricing discipline.
We expect 2021 to be a good year as demand trends remain constructive for our above-ground and software solution businesses and we turn the corner on below-ground, fluid transfer and vehicle wash.
Imaging & ID should remain steady.
We saw robust activity in marking and coding exiting the third quarter and the backlog in the business is higher than last year.
Activity in serialization software space is also picking up nicely.
In digital print, demand for inks has picked up, which is a sign of improving printing volumes.
We are seeing a pickup in quotations for new machines, but we expect a few more quarters before we return to normal levels in this market.
In Pumps & Process Solutions, we expect current trends to continue for biopharma, plastics and processing, continuing the robust trajectory in pumps recovering to more normal levels, particularly in defense and select industrial applications.
Compression product lines within the precision components exposed to mid-and-downstream are likely to see continued weaknesses in Q4 as projects and maintenance continue to be deferred.
Overall, the Pumps & Process Solutions outlook is supported by segment backlog that is aligned with what we had at this point last year.
Let's get on to the last segment, Refrigeration & Food Equipment.
First, as I said, we were in the early innings of what we believe to be a multi-year secular build-out of can making capacity, as evidenced by our backlog, driven by the transition from plastic to aluminum containers and also the spike in demand for cans at home consumption of food and beverages.
In food retail, we delivered low teens margin for Q3, converting on our backlog, providing us a baseline to reach our 2021 margin aspirations.
Our backlog is beginning to build moving into 2021.
As you all know, this is a seasonal business, so Q4 volume and fixed cost absorption declines in Q4.
And frankly, it's all about 2021 from here and Q3 was a sign of good progress.
We have a robust backlog in heat exchanges and are constructive in this market.
Our capacity expansion projects are being completed and we have some interesting new products in the pipe.
Finally, in commercial food service, large chain should continue to support activity, but will not fully offset weakness on the institutional side.
Overall, for the segment, comparable profits and margins for the segment are forecasted to be up in Q4 to the comparable period.
With strong margin performance to date, we intend to deliver approximately flat year-over-year adjusted margin this year, despite a lower revenue base.
As you may recall, we entered the year with a program entailing $50 million in structural cost reductions as part of our multi-year program highlighted at our 2019 Investor Day.
We actioned more structural initiatives, which resulted in approximately $75 million of permanent cost reduction in 2020, leaving a $25 million annualized carryover benefit into 2021.
We view this as a down payment on the 2021 portion of our multi-year margin improvement journey.
And we'll update that with more to come on 2021 when we report the fourth quarter.
We expect robust cash flow this year on the back of solid year-to-date cash flow generation and target free cash flow margin at the upper end of our guidance between 11% and 12%.
Capital expenditures should tally up to approximately $159 for the year, with most of the larger outlays behind us.
In summation, we're raising our adjusted earnings per share guidance to $5.40 per share to $5.45 per share for the full year, above the top end range of our prior guidance.
We remain on the front foot in capital deployment posture with several bolt-ons closed last quarter.
We have multiple opportunities in the hopper, and we hope to report on those soon.
And with that, Andrey, let's go to the Q&A.
| sees fy 2020 non gaap earnings per share $5.40 to $5.45.
trajectory of new orders continued to improve through q3 resulting in approximately flat bookings.
cautiously optimistic about balance of year and set-up for 2021.
|
I am Patrick Suehnholz, Greenhill's Head of Investor Relations.
Joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer.
These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm's control and are subject to known and unknown risks, uncertainties and assumptions.
For a discussion of some of the risks and factors that could affect the firm's future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
We reported third quarter revenue of $88.6 million and earnings per share of $0.85.
For the year-to-date, we had revenue of $200.8 million and earnings per share of $0.55.
Revenue for the year-to-date is up 17% from the same period last year.
Industry data makes clear that we continue to be in a very strong M&A market globally.
For our firm, that is evident in the significant increase in new client assignments we have won this year relative to last year and the year before.
It is also evident in the fact that on a trailing four quarters basis, the number of deal announcements, with which we are associated, is at an all-time high.
While many of those transactions were for large companies, for the year-to-date, the sizes of deals we have completed have skewed toward the smaller end of the normal spectrum, resulting in a year-to-date revenue increase smaller than that of our peers.
Nonetheless, we are pleased with the progress we made in the third quarter, continue to expect a strong finish to the year and are confident that our revenue going forward will benefit from a reversion to the norm in terms of deal sizes and commensurate fees.
On a regional basis, for the year, we expect to show a stronger year than last year in the U.S. and Canada and a much stronger year in Australia, offset by reduced revenue in Europe, where we had a particularly strong revenue year last year.
By type of advice, M&A continues to be the area in which we see the most opportunity.
Restructuring remains relatively slow given the strength of credit markets, but we are pleased with the progress of our new initiative to win more financing advisory assignments.
In the private capital advisory area, we've made great progress in building out our global team for both primary fundraising and secondary sale transactions, and both of those businesses now have strong assignment backlogs.
Across all our businesses, we are pleased with the progress in our new initiative to do more business with financial sponsors.
We are pleased with what we have accomplished in recruiting this year and remain focused on adding more senior talent in the months to come.
Now turning to costs.
Our compensation costs have been lower than last year in absolute terms given our objective to bring quarterly compensation more in line with quarterly revenue.
Our compensation ratio of 50% for the quarter brought down the year-to-date ratio to 65%, and our objective is to bring that ratio down further by year-end, while still paying our team increased compensation in absolute dollars.
Where we end up in terms of compensation costs and expense ratio for the year depends as always on our revenue outcome for the year.
Our non-compensation costs were materially lower than last year and are running at the low end of our target range for the year-to-date.
Our interest expense continues to trend lower given a declining debt level and continued short -- lower short-term interest rates.
We continue to expect our annual tax rate to be in the mid-20% range before adjusting for charges relating to changes in the value of restricted stock upon vesting.
We ended the quarter with $100.4 million in cash and $291.9 million of debt.
And after the quarter end, we made an additional voluntary debt repayment of $10 million.
During the quarter, we repurchased more than 637,000 shares and share equivalents for a total cost of $9.5 million.
And in October, we repurchased an additional 194,000 shares for a cost of $3.1 million.
For the year-to-date, we've used our cash flow to repay $45 million of debt and repurchased $36.4 million of shares and share equivalents.
In addition, we declared our usual quarterly dividend of $0.05 per share.
As I said last quarter, our principal focus is on deleveraging, but we also intend to continue to purchase shares in a prudent manner to further enhance the upside potential for continuing shareholders.
Our employees currently own about half of the economics of our firm through stock and restricted stock and thus, are fully aligned in trying to drive shareholder value creation in the quarters and years to come.
To sum up, we are pleased with our revenue growth and profitability this quarter, and we are also pleased with our progress on our strategic initiatives.
Our goal is to both increase our total revenue and to reduce our quarterly revenue volatility, and we aim to do that by expanding our client base to serve more financial sponsors and expanding our service offering to include more financing roles and more private capital advisory transactions.
If we succeed, our reduced cost, declining debt and interest expense and much reduced share count should together result in significantly greater earnings and shareholder value creation.
And with that, I'll be pleased to take any questions.
| greenhill & co q3 earnings per share $0.85.
q3 revenue rose 58 percent to $88.6 million.
q3 earnings per share $0.85.
|
chubb.com for more information on factors that could affect these matters.
First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Peter Enns, our Chief Financial Officer.
As you saw from the numbers, Chubb had an outstanding quarter, highlighted by record operating earnings and underwriting results, expanded margins and double-digit premium revenue growth globally, the best in over 15 years, powered by commercial P&C and supported by continued robust commercial P&C rate movement.
Chubb was built for these conditions.
We have averaged double-digit commercial P&C growth over the past 10 quarters.
The breadth of our product and reach, combined with our execution-oriented underwriting culture and our reputation for service and consistency enable us to fully capitalize on opportunity globally.
And conditions such as these size and scale are our friend.
Core operating income in the quarter was $1.62 billion or $3.62 per share, again, both records.
On both the reported and current accident year ex-cat basis, underwriting results in the quarter were simply world-class.
The published P&C combined ratio was 85.5% and current accident year was 85.4% compared to 87.4% prior year.
The two percentage points of margin improvement were almost entirely loss ratio related.
Current accident year underwriting income of $1.2 billion was up 27%.
While on the other side of the balance sheet, adjusted net investment income of $945 million, also a record, was up nearly 9.5% from prior year.
Peter will have more to say about cats and prior period development, investment income and book value.
Turning to growth and the rate environment.
P&C premiums were up 15.5% globally, with commercial premiums, excluding agriculture, up nearly 21%.
The 15.5% growth for the quarter and 12.6% for the first six months were the strongest growth we have seen since 2004.
Growth in the quarter was extremely broad-based, with contributions from virtually all commercial P&C businesses globally, from those serving large companies, to midsized and small and most regions of the world and distribution channels.
We continue to experience a needed and robust commercial P&C pricing environment in most all important regions of the world, with continued year-on-year improvement in rate to exposure on the business we wrote, both new and renewal.
Based on what we see today, I'm confident these conditions will continue.
In North America, Commercial P&C net premiums grew over 16%.
New business was up 24%, and renewal retention remained strong at 96.5% on a premium basis.
In our North America major accounts and specialty commercial business, net premiums grew over 13%, with each division, major accounts, Westchester and Bermuda having its largest quarter in history in terms of written business.
And the standout was our middle market and small commercial division, which had the biggest quarter in about 20 years, driven by record new business growth and strong retentions.
Overall rates increased in North America commercial by a strong 13.5%, which is on top of a 14.7% rate increase last year for the same business, making the two-year cumulative increase over 30%.
And remember, in North America, rates have been rising for almost four years.
However, they have exceeded loss costs for only about two years now.
Loss costs are currently trending about 5.5% and vary up or down depending upon line of business.
General commercial lines loss costs for short-tail classes are trending around 4%, while long-tail loss costs, excluding comp, are trending about 6%.
Let me give you a better sense of the rate increase movement by division and line in North America.
In major accounts, rates increased in the quarter by about 16% on top of almost 18% prior year for the same business, making the two-year cumulative increase over 36%.
Risk management-related primary casualty rates were up almost 9%.
General casualty rates were up 21% and varied by category of casualty.
Property rates were up nearly 12% and financial lines rates were up almost 20%.
In our E&S wholesale business, the cumulative two-year rate increase was 39%, comprised of an increase of circa 18% this quarter on top of 18% prior year second quarter.
Property rates were up about 16.5%.
Casualty was up about 21%, and financial lines rates were up over 21%.
In our middle market business, rates increased in the quarter over 9.5% on top of over 9% last year, making the two-year cumulative increase 20%.
Rates for property were up over 10.5%.
Casualty rates were up 11%, excluding workers' comp, and comp rates were down at about 0.5%.
Financial Lines rates were up over 17.5% in our middle market business.
Turning to our international general insurance operations.
Commercial P&C premiums grew an astonishing 33% on a published basis or 24% in constant dollars.
International retail commercial grew 27% and our London wholesale business grew 60%.
Retail commercial P&C growth varied by region, with premiums up 36.5% in our European division, with equally strong growth in both the U.K. and on the continent.
Asia Pacific was up over 29%, while our Latin America commercial lines business grew over 14.5%.
Internationally, like in the U.S., in those markets where we grew, we continued to achieve improved rate to exposure across our commercial portfolio.
In our international retail commercial P&C business, the two-year cumulative rate increase was 35% comprised of increases this quarter and prior year of 16% each.
Two territories in particular, the U.K. and Australia, stand out in terms of rate achievement.
In our U.K. business, rates increased in the quarter by 18%, on top of a 26% rate increase prior year for the same business, making the two-year cumulative increase 48%.
In Australia, the two-year cumulative rate was 42%, comprised of an increase of 23% this quarter, on top of 16% prior year.
In our London wholesale business, rates increased in the quarter by 13%, on top of a 20% rate increase prior year, so making the two-year cumulative 36%.
International markets began firming later than the U.S. And again, like with the U.S., rates has exceeded loss costs for about two years now.
Outside the U.S., loss costs are currently trending 3%, so that varies by class of business and country.
Consumer lines growth globally in the quarter continued to recover from the pandemic's effects on consumer-related activities.
Our international consumer business grew 13% in the quarter, and that's on a published basis.
It grew 5% in constant dollars.
Breaking that down for you, international personal lines grew 20% on a published basis, while our international A&H grew 6.5%, but it was essentially flat in constant dollar.
Within our A&H book, a nascent recovery in our leisure travel business outside of Asia is beginning to result in growth, although passenger travel activity is still well below pre-pandemic levels.
In both our group A&H business, with its employer-based benefits and our consumer-focused direct marketing business, premiums were up mid-single digits, still impacted by the pandemic but beginning to improve.
Net premiums in our North America high net worth personal lines business were up over 2.5%.
Nonrenewals in California and COVID auto-related renewal credits had almost one point of negative impact on growth in the quarter.
Our network client segment, the heart of our business, grew almost 8% in the quarter.
Overall retention remains strong at over 94%.
And we achieved positive pricing, which includes rate and exposure of 13% in our homeowners portfolio.
Loss cost inflation in homeowners is currently running about 11%.
Lastly, in our Asia-focused international life insurance business, net premiums plus deposits, were up 55% in the quarter, while net premiums in our Global Re business grew up -- grew over 32%.
In sum, we continue to capitalize on a hard or firming market for commercial P&C in most areas of the world.
Both growth and margin expansion are two trends that I am confident will continue.
Our organization is firing on all cylinders.
We're growing our business and our exposures, and we continue to expand our margins.
Our leadership employees are energized and driven to win.
I am confident in our ability to outperform and deliver strong, sustainable shareholder value.
I'm excited to be in my new position and build upon all that he has achieved -- all he has achieved under his leadership, and I'm honored to be leading the very strong team he has built going forward.
Turning to our results.
We completed the quarter in an excellent financial position and continue to build upon our balance sheet strength.
We have over $75 billion in capital and a AA-rated portfolio of cash and invested assets that now exceeds $123 billion.
Our record underwriting and investment performance produced strong positive operating cash flow of $3.1 billion for the quarter.
Among the capital-related actions in the quarter, we returned $2.3 billion to shareholders, including $1.9 billion in share repurchases and $352 million in dividends.
Through the six months ended June 30, we returned $3.1 billion, including $2.4 billion in share repurchases and dividends of $704 million.
We recently announced a onetime incremental share repurchase program of up to $5 billion through June 2022.
As Evan said, adjusted pre-tax net investment income for the quarter was a record $945 million, higher than our estimated range, benefiting from increased corporate bond call activity and higher private equity distributions.
We increased the size of our investment portfolio by $2.4 billion in the quarter after buybacks due to strong operating cash flow and high portfolio returns, including $694 million in pre-tax unrealized gains from falling interest rates.
At June 30, our investment portfolio remained in an unrealized gain position of $3.3 billion after tax.
During this challenging investment return environment, we will remain consistent and conservative in our investment strategy and do not expect to materially adjust the portfolio asset allocation over the near term.
We will be selective but active, and we'll continue to focus on risk-adjusted returns and we will not reach for yields.
There are a number of factors that impact the variability in investment income, including the amount of operating cash flow available to invest, the reinvestment rate environment and the assumed prepayment speeds on our corporate bond calls and variability around private equity distributions.
Based on the current interest rate environment and a normalization of bond calls and private equity distributions, we continue to expect our quarterly run rate to be approximately $900 million.
Our annualized core operating ROE and core operating return on tangible equity were 11.5% and 17.7%, respectively, for the quarter.
And as a reminder, we continue to present the fair value mark on our private equity funds outside of core operating income as realized gains and losses instead of net investment income as other companies do.
The gain from the fair value mark this quarter of $712 million after tax, we have increased core operating ROE by five percentage points to 16.5% and core operating income by $1.59 per share to $5.21.
Book and tangible book value per share increased by 4.2% and 5%, respectively, from the first quarter due to record core operating income and realized and unrealized gains of $1.4 billion after tax in our investment portfolio, which again primarily came from declining rates and mark-to-market gains on private equities.
The increase in book value per share also reflects the impact of returning over $2 billion to shareholders in the quarter.
Our pre-tax P&C net catastrophe losses for the quarter were $280 million, principally from severe U.S. weather-related events.
There was no overall change to our aggregate COVID-19 loss estimate.
We had favorable prior period development in the quarter of $268 million.
This included a charge from molestation claims of $68 million pre-tax compared with $259 million in the prior year.
Excluding this charge, we had favorable prior period development in the quarter of $336 million pre-tax, split approximately 30% in long-tail lines, principally from accident years 2017 and prior and 70% short-tail lines.
For the quarter, our net loss reserves increased $1.1 billion in constant dollars and our paid-to-incurred ratio was 80%.
Our core operating effective tax rate was 15.8% for the quarter, which is within our expected range of 15% to 17% for the year.
| compname reports strong second quarter net income per share of $5.06 and record core operating income per share of $3.62.
consolidated net premiums written up 14.3% globally, with commercial p&c lines up 19.9%; best organic p&c growth in over 15 years.
q2 core operating earnings per share $3.62.
qtrly p&c combined ratio was 85.5% compared with 112.3% prior year.
qtrly pre-tax catastrophe losses, net of reinsurance and including reinstatement premiums was $280 million.
p&c net premiums written were up 15.5% globally for quarter.
|
chubb.com for more information on factors that could affect these matters.
First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Peter Enns, our Chief Financial Officer.
We had a very strong third quarter, highlighted by outstanding P&C premium revenue growth globally of 17% and simply excellent underwriting results on both the calendar and current accident year basis, despite elevated catastrophe losses.
Our results were powered by double-digit commercial lines growth, strong continued underlying margin expansion, the strength of our reserves and our broad diversification of businesses.
Core operating income in the quarter of $2.64 per share was up 32% with $250 million over prior year to $1.2 billion, while net income of $1.8 billion was up 53% from prior year.
For the year on both a net and core operating income basis, we have produced record earnings.
Again, it was an active quarter for natural catastrophes.
Yet, with over $1.1 billion of cats, we reported a 93.4% combined ratio with P&C underwriting income up 58% to $617 million, which speaks to the underlying strength of our businesses, and again, broad diversification of our company's sources of revenue and earnings, both domestically and globally.
Year-to-date, we have produced $2.4 billion in underwriting income for a combined ratio of 90.4% and that includes $2.1 billion of cat losses, and what is shaping up to be another year of sizable weather-related loss events kind of the new normal brought on by climate change and other societal changes.
Speaking again to our underwriting health, on a current accident year ex-cat basis, underwriting income in the quarter was $1.4 billion, up 23% with a combined ratio of 84.8% compared to 85.7% prior year, a quarterly underwriting record.
If we exclude the one-time positive adjustment we took last year due to lower frequency of loss because of the COVID-related shutdown, our current accident year combined ratio unaffected improved 2 points.
The strength of our balance sheet and conservative approach to loss reserving was again in evidence this quarter as we reported $321 million in favorable prior period reserve development.
Net investment income in the quarter was $940 million, up 4.5%.
Peter is going to have more to say about cats and prior period development, investment income and book value.
Turning to growth in the rate environment.
As I said at the opening, P&C premiums were up nearly 17% globally or 15.5% in constant dollar with commercial premiums up 22% and consumer up 4%.
The 17% growth for the quarter and 14.2% for the first nine months, topped last quarters and was the strongest organic growth we have seen again since 2004.
Growth in the quarter was broad-based with contributions virtually all commercial P&C businesses globally from our agriculture business to those serving large companies to mid-sized and small and most regions of the world and distribution channels.
The robust commercial P&C pricing environment remains on pace in most all important regions of the world with continued year-on-year improvement in rate to exposure on the business we wrote, both new and renewal.
In North America, total P&C net premiums grew over 17% with commercial premium up about 22.5% excluding agriculture, which had a fantastic quarter in its own right with premium growth of over 40%, commercial P&C premiums were up over 16.5% in North America.
New business was up 13% for all commercial lines and renewal retention remained strong at over 97% on a premium basis.
The 16.5% commercial premium growth is a composite of 15.5% growth in our major accounts and specialty business and over 18% in our middle market and small commercial business, simply a standout quarter for this division.
Overall, rates increased in North America commercial lines by over 12%.
Once again, loss costs are currently trending about 5.5% and vary up or down, depending upon line of business.
And again, like last quarter, just to remind you, in general, commercial lines loss costs for short-tail classes are trending around 4% though we anticipated this to increase in the future while long-tail loss costs excluding comp are trending about 6%.
Let me give you a better sense of the rate increase movement in North America.
In major accounts, which serves the largest companies in America rates increased in the quarter by just over 13%.
Risk management-related primary casualty rates were up over 6%.
General casualty rates were up about 21% and varied by category of casualty.
Property rates were up 12% and financial lines rates were up 17%.
In our E&S wholesale business, rates increased by 16% in the quarter, property rates were up 13%, casualty was up 20% and financial lines rates were up about 21%.
In our middle market business, rates increased in the quarter nearly 9.5%.
Rates for property were up over 11%.
Casualty rates were up about 9.5% excluding workers' comp with comp rates down 2% and financial lines rates were up 18%.
Turning to our international general insurance operations.
Commercial P&C premiums grew 20.5% on a published basis or 16% in constant dollar.
International retail commercial P&C grew nearly 17% or 12% in constant dollar, while our London wholesale business grew over 31%.
Retail commercial P&C growth varied by region with premiums up almost 28% in our European Division, Asia Pacific was up 15.5%, while Latin America commercial lines grew about 6.5%.
Internationally, like in the U.S. in those markets where we grew, we continued to achieve improved rate to exposure across our commercial portfolio.
In our international retail commercial P&C business, rates increased in the quarter by 15%, property rates were up 11%, financial lines up 33% and primary and excess casualty up 7% and 11% respectively.
And in our London wholesale business rates increased in the quarter by 11%, property up 13%, financial lines up 14%, marine up 8%.
Outside North America, loss costs are currently trending about 3% though that varies by class of business and country.
Consumer lines growth globally in the quarter continue to recover from the pandemic's ongoing effects on consumer-related activities.
Our international consumer business grew almost 10% in the quarter on a published basis or 5% in constant dollar, and breaking that down a little further, international personal lines grew almost 11% on a published basis, while international A&H grew over 8.5% or just 5% in constant dollar.
Latin America had a particularly strong quarter in consumer with personal lines and A&H premiums up 18.5% and 17.5% respectively, powered by both our traditional and digitally focused distribution relationships.
Net premiums in our North America high net-worth personal lines business were up just over 1%, adjusted for non-renewals in California and COVID related auto-renewal credit, we grew 3% in the quarter.
Our true high net-worth client segment, the heart of our business, grew 11% in the quarter.
Overall, retentions remained strong at 95.7% and we achieve positive pricing, which includes rate and exposure of 14% in our homeowners portfolio.
The severity trends in personal lines in the U.S. remain elevated.
Lastly, in our Asia-focused international life insurance business, net premiums plus deposits were up over 52% in the quarter, while net premiums in our Global Re business were up over 22%.
In sum, we continue to capitalize on broad-based and favorable market conditions and improving economic conditions.
All of our businesses did well or are improving from agriculture to all forms of commercial P&C globally, both retail and wholesale, serving large companies to middle market and small to our improving global personal lines and A&H businesses to our Asia life businesses, to our Global Re business.
In one sentence, both growth and margin expansion are two trends that will continue.
In the quarter, as you saw, we announced the definitive agreement to acquire the life and non-life insurance companies that house the personal accident supplemental health and life insurance businesses of Cigna and Asia-Pacific for $5.75 billion in cash.
This highly complementary transaction advances our strategy to expand our presence in the Asia-Pacific region, including our company's Asia-based life company presence and add significantly to our already sizable global A&H business.
Upon completion of the transaction, which we expect during 2022, Asia Pacific share of Chubb's global portfolio will represent approximately 20% of the company.
For many years, we have admired Cigna's business in Asia including its people, product innovation, distribution and management capabilities.
The underlying economics and value creation of the transaction are very attractive, and these businesses will contribute to our company strategically for decades to come.
The transaction once again demonstrates our patience in advancing our strategies and confirms our consistent and disciplined approach to holding capital for risk and growth, both organic and inorganic.
Our company has considerable earning power and a patient hand to deploy capital effectively over time.
We return excess of what we need to shareholders in the form of dividends and share repurchases, while we continue to build future revenue and earnings generation capabilities.
In conclusion, this was another excellent quarter of growing our business and our exposures, expanding our margins and investing in our future.
All in a period with substantial cats, which are not unexpected.
My management team and I have never been more confident in our ability to continue to outperform and deliver strong sustainable shareholder value.
As you've just heard from Evan, our overall franchise continues to deliver outstanding top line growth, margin improvement and profit growth.
Now let me discuss our balance sheet and capital management.
Our financial position remains exceptionally strong, including our cash flow, liquidity, investment portfolio, reserves and capital.
It all starts with our operating performance, which produced $3.3 billion in operating cash flow for the quarter and $8.5 billion for the first nine months.
We continue to remain extremely liquid with cash and short-term investments of $5.1 billion at the end of the quarter even after our significant capital management actions.
Among the capital related actions in the quarter, we returned $1.9 billion to shareholders, including $1.5 billion in share repurchases and $346 million in dividends.
Through the nine months ended September 30th, we returned over $5 billion, including almost $4 billion in share repurchases or over 5% of our outstanding shares and dividends of over $1 billion.
The agreement to acquire Cigna's A&H and life insurance businesses in Asia-Pacific is not expected to impact our share repurchase and dividend commitments.
Our investment portfolio of $122 billion continues to be of a very high quality and we have not made any material changes during the quarter to our investment allocation.
The portfolio increased $759 million in the quarter and at September 30th our investment portfolio remained in an unrealized gain position of $2.9 billion after-tax.
Adjusted pre-tax net investment income for the quarter was $940 million similar to last quarter and $40 million higher than our estimated range benefiting from higher private equity distributions.
As I noted on the second quarter earnings call, our investment income is based on many factors, and notwithstanding our better than expected results over the last few quarters, we continue to expect our quarterly run rate to be approximately $900 million.
Pre-tax catastrophe losses for the quarter were $1.1 billion with about $1 billion in the U.S., of which $806 million was from Hurricane Ida and $135 million from international events, of which $95 million was from flood losses in Europe.
Our reserve position remains strong, with net reserves increasing $1.7 billion or 3.2% on a constant dollar basis reflecting the impact of catastrophe losses in the quarter and 2021 growth, in particular from our agricultural business which has a seasonality impact on reserves.
We had favorable prior period development of $321 million pre-tax which include $33 million of adverse development related to legacy environmental exposures.
The remaining favorable development of $354 million was split approximately 30% in long-tail lines, principally from accident years 2017 and prior and 70% in short-tail lines, principally from our 2020 North American personal lines.
Our paid-to-incurred ratio was 73% or a very strong 75% after adjusting for cats, PPD and agriculture.
Book value decreased by $744 million or 1%, reflecting $1.16 billion in core operating income and a net gain on our investment portfolio of $190 million, which was more than offset by foreign exchange losses of $305 million and the $1.9 billion of share repurchases and dividends.
Book and tangible book value per share increased 0.6% and 0.4% respectively from last quarter.
Our reported ROE for the quarter and year-to-date was 12.3% and 14.4% respectively.
Our core operating ROE and core operating return on tangible equity were 8.2% and 12.6% respectively for the quarter.
As a reminder, we do not include the fair value mark on our private equity funds in core operating income as many of our peer companies do.
For comparison purposes, our core operating ROE increases by 5 percentage points to 13.2% and our core operating income increases by a $1.61 per share to $4.25.
Year-to-date, our core operating ROE, including the fair value mark on our PE funds would be 13.8%.
| compname reports third quarter per share net income and core operating income of $4.18 and $2.64, up 59% and 32%, respectively.
consolidated net premiums written up 15.8%, with commercial p&c lines up 22%.
q3 core operating earnings per share $2.64.
qtrly p&c combined ratio was 93.4% compared to 95.2% prior year.
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Let me also remind you that CVR Partners completed a 1-for-10 reverse split of its common units on November 23, 2020.
Before I get into our results, I wanted to make a few comments about some exciting developments.
While we believe fossil fuels will certainly be necessary for many years to come, we recognize that renewable fuels are important part of the future.
For this reason, we've began exploring utilizing excess hydrogen capacity at our refineries for renewable diesel production nearly two years ago and have invested nearly $150 million since on those initiatives.
We believe we are uniquely positioned given our transportation logistical connection to the farm belt, and we intend to be in the forefront of this green revolution.
We have made progress on several fronts since our last call and are accelerating our efforts with the Board's recent approval of the feed pretreater at Wynnewood at an estimated cost of $60 million.
I'll provide more details later in the call.
Yesterday, we reported third quarter consolidated net income of $106 million and earnings per share of $0.83.
EBITDA for the quarter was $243 million.
Our facilities ran well during the quarter and continue to strengthen prices for refined products and Nitrogen Fertilizer led to both segments once again posting increases in EBITDA year-over-year.
For our Petroleum segment, the combined total throughput for the third quarter of '21 was approximately 211,000 barrels per day as compared to 201,000 barrels per day in the third quarter of 2020, which was impacted by some weather-related power outages.
Both refineries ran well during the quarter and we continue to process WCS at our Coffeyville refinery due to weak WCS prices in Cushing.
Benchmark cracks increased through the quarter despite elevated RIN prices.
The Group 3 2-1-1 crack averaged $20.50 per barrel in the third quarter as compared to $8.34 in the third quarter of '20.
Based on the 2020 RVO levels, RIN prices averaged approximately $7.31 per barrel in the third quarter, an increase of 177% from the third quarter of 2020.
The Brent-TI differential averaged $2.71 per barrel in the third quarter compared to $2.42 in the prior year period.
Light product yield for the quarter was 100% on crude oil processed.
We continue to optimize refinery operations to ensure maximum capture via maximizing production of distillate and higher margin products, LPG recovery and RINs generation.
In total, we gathered approximately 112,000 barrels per day of crude oil during the third quarter of '21 compared to 124,000 barrels per day in the same period last year.
We continue to see some declines in production across our system due to limited drilling activity, although our gathering rates of state of head of overall decline rates across the Anadarko Basin.
Some rigs were added in both Oklahoma and Kansas over the past few months, but drilling activity has been slower to increase than we would have expected.
In the Fertilizer segment, both plants ran well during the quarter with a consolidated ammonia utilization of 94%.
The rally in fertilizer prices that began earlier this year and continued to the third quarter with prices breaking normal seasonal patterns and continue to rise through the summer.
With low fertilizer inventories and continued strong demand for crop inputs, the outlook remains positive for our Fertilizer segment.
For the third quarter of 2021, our consolidated net income was $106 million, earnings per share was $0.83 and EBITDA was $243 million.
Our third quarter results include a positive mark-to-market impact on our estimated outstanding RIN obligation of $115 million, unrealized derivative gains of $22 million and favorable inventory valuation impacts of $8 million.
As a reminder, our estimated outstanding RIN obligation is based on the 2020 RVO levels and excludes the impact of any waivers or exemptions.
Excluding the above mentioned items, adjusted EBITDA for the quarter was $99 million.
The Petroleum segment's adjusted EBITDA for the third quarter of 2021 was $43 million compared to breakeven adjusted EBITDA for the third quarter of 2020.
The year-over-year increase in adjusted EBITDA was driven by higher throughput volumes and increased product cracks offset by elevated RIN prices and realized derivative losses.
In the third quarter of 2021, our Petroleum segment's reported refining margin was $15.03 per barrel.
Excluding favorable inventory impacts of $0.41 per barrel, unrealized derivative gains of $1.17 per barrel, and the mark-to-market impact of our estimated outstanding RIN obligation of $5.94 per barrel, our refining margin would have been approximately $7.51 per barrel.
On this basis, capture rate for the third quarter of 2021 was 37% compared to 55% in the third quarter of 2020.
RINs expense excluding mark-to -market impacts reduced our third quarter capture rate by approximately 26% compared to a 22% reduction in the prior period.
In total, RINs expense in the third quarter of 2021 was a benefit of $16 million or $0.81 per barrel of total throughput, compared to $36 million, or $1.96 per barrel of expense for the same period last year.
Our third quarter RINs expense was reduced by $115 million from the mark-to-market impact on our estimated RFS obligation, which was mark-to-market at an average RIN price of $1.31 at quarter end compared to $1.67 at the end of the second quarter.
Third quarter RINs expense excluding mark-to-market impacts was $99 million compared to $35 million in the prior year period.
Our estimated RFS obligation at the end of the third quarter approximates Wynnewood's obligations for 2019 through the first nine months of 2021 as we continue to believe Wynnewood's obligation should be exempt under the RFS regulation.
For the full year of 2021, we forecast an obligation based on 2020 RVO levels of approximately 270 million RINs, which does not include the impact of any waivers or exemptions.
Derivative losses for the third quarter of 2021 totaled $12 million, which includes unrealized gains of $22 million, primarily associated with crack spread derivatives.
In the third quarter of 2020, we had total derivative gains of $5 million, which included unrealized gains of $1 million.
As a September 30th, we have closed all of our outstanding crack spread derivative positions.
The Petroleum segment's direct operating expenses were $4.52 per barrel in the third quarter of 2021 as compared to $4.17 per barrel in the prior year period.
The increase in direct operating expenses was driven primarily by a combination of higher natural gas costs and higher stock-based compensation due to the increase in share price.
For the third quarter of 2021, the Fertilizer segment reported operating income of $46 million, net income of $35 million or $3.28 per common unit and EBITDA of $64 million.
This is compared to third quarter of 2020 operating losses of $3 million and net loss of $19 million or $1.70 per common unit and EBITDA of $15 million.
There were no adjustments to EBITDA in either period.
The year-over-year increase in EBITDA was primarily driven by higher UAN and ammonia sales prices.
The partnership declared a distribution of $2.93 per common unit for the third quarter of 2021.
As CVR Energy owns approximately 36% of CVR Partners' common units, we will receive a proportionate cash distribution of approximately $11 million.
Total capital spending for the third quarter of 2021 was $38 million, which included $12 million from the Petroleum segment, $7 million from the Fertilizer segment and $19 million on the renewable diesel unit.
Environmental and maintenance capital spending comprised $15 million, including $12 million in the Petroleum segment and $3 million in the Fertilizer segment.
We estimate total consolidated capital spending for 2021 to be approximately $208 million to $223 million, of which approximately $66 million to $73 million is expected to be environmental and maintenance capital.
Our consolidated capital spending plan excludes planned turnaround spending, which we estimate will be approximately $4 million for the year and preparation for the planned turnarounds at Wynnewood in 2022 and Coffeyville in 2023.
Cash provided by operations for the third quarter of 2021 was $139 million and free cash flow was $76 million.
During the quarter, we paid cash taxes of $67 million, which was partially offset by the receipt of a $32 million income tax refund related to the NOL carryback provisions of the CARES Act.
Other material cash uses in the quarter included $31 million for interest, $15 million for the partial redemption of CVR Partners' 2023 senior notes and $11 million for the non-controlling interest portion of the CVR Partners' second quarter distribution.
Turning to the balance sheet.
At September 30th, we ended the quarter with approximately $566 million of cash.
Our consolidated cash balance includes $101 million in the Fertilizer segment.
As a September 30th, excluding CVR Partners, we had approximately $680 million of look liquidity, which was primarily comprised of approximately $469 million of cash and availability under the ABL of approximately $370 million, less cash included in the borrowing base of $160 million.
Looking ahead to the fourth of 2021 for a Petroleum segment, we estimate total throughput to be approximately 210,000 to 230,000 barrels per day.
We expect total direct operating expenses to range between $90 million and $100 million and total capital spending to be between $26 million and $30 million.
For the Fertilizer segment, we estimate our fourth quarter 2021 ammonia utilization rate to be between 90% and 95%.
Direct operating expenses to be approximately $45 million to $50 million, excluding inventory in turn around impacts and total capital spending to be between $9 million and $12 million.
In summary, refinery market fundamentals have steadily improved since summer, and the cracks have responded accordingly.
We also saw some relief for the out-of-control prices for RINs, although prices have risen as the market continues to wait for EPA to act on settling and/or revising RVOs for 2021 and 2022, as well as issuing small refinery exemptions.
Looking at the current market remained cautiously optimistic based on the fundamentals we see.
Starting with crude oil, OPEC is clearly in the driver seat from a crude price standpoint, inventories have dropped in the US and across the world and backwardation is firmly in place around $12 a barrel over the next year.
While we expect to see shale oil production improving at $80 crude, additional Canadian production has been slow to develop despite additional takeaway capacity.
Recently, we've seen the tightening of the Brent-TI spread as Cushing inventories declined due to shale oil production declines in the Bakken, DJ.
Basin and the Anadarko Basin.
We continue to believe the redemption of shale oil production growth will be key to a sustained widening in the Brent-TI differential.
Moving to refined products.
Demand is largely returned to pre-COVID levels, including demand for jet fuel, which has improved significantly over the past month.
Refined product inventories are generally near five-year -- below five-year averages, partially due to some of the downtime on the Gulf Coast from Hurricane Ida.
Imports of gasoline and diesel remain high and gasoline exports are back above pre-COVID levels, although distillate exports remain low.
Looking at crack spreads, distillate cracks are finally coming back and the forward curve is in Contango despite backwardation of crude oil.
The question now is whether the benefits of IMO 2020 will come back into play.
And that ultimately depends on the shipping, which has been depressed.
One area of our business that generally does not get much attention, but is experiencing a significant improvement is our fertilizer business.
Fertilizer market this year is seeing a combination of supply and demand impacts that have had a tremendous effect on pricing.
On the demand side of the equation, low inventories for corn and soybeans have pushed grain prices higher this year and increased demand for crop inputs.
Meanwhile, domestic production of fertilizer has been lower than normal due to plant shutdowns during Winter Storm Uri, heightening turnaround activity in the summer and additional facility shutdowns during Hurricane Ida.
Meanwhile, the energy crunch in Asia and Europe have caused fertilizer facilities to shut-in further reducing available supplies across the globe.
As a result, we saw our third quarter sales price for ammonia and UAN more than doubled from a year ago levels, and the prices have continued to increase through the fall.
At this point, we think customers are not so concerned -- not so much worried about pricing as they are about actually being able to get supply.
The outlook for the nitrogen fertilizer market is very positive through the next year and we are happy to have our 36% ownership in CVR Partners common units.
Turning back to renewables.
As I mentioned earlier, we believe the location of our refineries and fertilizer facilities provide us with unique benefits and that we've made progress on several fronts since our last call.
First, we are ready to complete the final steps of the conversion of the Wynnewood hydrocracker to renewable diesel service.
Given the weakness in soybean oil-based renewable diesel margins over the summer, we elected to keep the unit in traditional petroleum service as refinery margins have been considerably higher.
With the recent increase in crude oil and diesel prices, the HOBO spread has improved and the basis for refined bleached and deodorized soybean oil and corn oil has subsided.
Our current plan is to move the planned turnaround at Wynnewood to the spring of next year, during which we will finish the hydrocracker conversion with completion and start-up of this renewable diesel unit expected in mid-April.
Second, we are progressing the development of our pre-treater unit at Wynnewood that should allow us to run a wider variety of lower carbon-intensity feedstocks that should generate additional low carbon fuel standard credits.
Long lead equipment for this pre-treater unit is on order and it is critical path for the project to be completed.
The Board has approved the project and we are currently estimating completion late in the fourth quarter of 2022 at a capital investment of approximately $60 million.
Third, on the Coffeyville project, Schedule A engineering is in process for the renewable diesel conversion with an expected annual capacity of approximately 150 million gallons of renewable fuel per year with an option of up to 25 million gallons of that amount to be sustainable aviation fuels should regulations support it.
And fourth, our fertilizer business is progressing its efforts toward monetizing 45Q tax credits for carbon capture and sequestration through enhanced oil recovery activities that are already taking place at its Coffeyville facility.
It also continues to explore the production of ammonia certified blue at both of its facilities.
In conjunction with all of this, we are currently evaluating breaking out the renewable business as a separate entity.
This could potentially provide us with more opportunity to access a greater pool of investors and financing or potentially position us to take advantage of changes in law that benefits renewable.
Although, we are still in the early innings of developing our renewable diesel business, we are taking a long-term view and want to prepare for the future as we look to scale up the business.
With the potential production of renewable diesel at both refineries, sustainable aviation production at Coffeyville, carbon capture opportunities and other potentials for blue hydrogen production, we believe we have a fairly long runway for developing an impactful business in the green energy space.
Our goal is to decarbonize our refining business by growing our renewables business while supplying our customers with competitive fuels they need.
Looking at the fourth quarter of 2021, quarter-to-date metrics are as follows: Group 3 2-1-1 cracks have averaged $19.24 with RINs averaging $6.77 on a 2020 RVO basis.
The Brent-TI spread has averaged $2.52 with the Midland Cushing differential at $0.31 over WTI and the WTI differential at $0.19 per barrel over Cushing WTI, and the WCS differential of $13.56 per barrel under WTI.
Forward ammonia prices have increased to over a $1,000 per ton, while UAN prices are over $500 a ton.
As of yesterday, Group 3 2-1-1 cracks were $15.65 per barrel, the Brent-TI was $0.66 per barrel and the WCS was $15.10 under WTI.
On the 2020 RVO basis, RINs were approximately $6.26 per barrel.
As I mentioned earlier, we saw some brief relief in RIN prices in September when rumors circulated about a potential reduction in the 2020 RVO and 2021 RVO that would be set below the original 2020 level.
The net effect of these actions if taken would decouple D6s and D4s RINs and immediately rebuild the RIN bank, which has been severely depleted.
We believe resetting the RVO at more realistic levels that deemphasizes D6 in favor of D4s, which actually goes much further to reducing carbon emissions is an appropriate step to make.
We also continue to believe that small refineries that face disproportionate economic harm in compliant with RFS are entitled to relief through small refinery exemptions.
We have submitted applications for Wynnewood for 2019, 2020 and 2021, and see no reason EPA should not grant those exemptions as they have in the past years.
| q3 earnings per share $0.83.
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Let me also remind you that CVR Partners completed a 1-for-10 reverse split of its common units on November 23, 2020.
Yesterday, we reported the second quarter consolidated net loss of $2 million and a loss per share of $0.06.
Adjusted EBITDA for the quarter was $66 million.
Our facilities ran well during the quarter, with both the petroleum and fertilizer segments posting increased in adjusted EBITDA year-over-year.
However, once again, rising RIN prices were considerable headwinds to our results, including a $58 million non-cash mark-to-market on our estimated outstanding RIN obligation.
In May, our Board of Directors approved a special dividend totaling $492 million, comprised of a combination of cash and our interest in Delek US Holdings.
As I have stated over the past few quarters, absent any material acquisitions, we had too much cash on the balance sheet that wasn't earning a return.
When we completed the senior notes offering in January of 2020, we evaluated a number of acquisitions -- we were evaluating a number of acquisition opportunities at the time and elected to raise additional cash to fund the potential transaction.
Since that time, the market has changed significantly.
The bid-ask spread for refinery acquisitions remained too wide.
The US and Europe are now in a position of excess refining capacity and we believe more refinery closures are needed.
And we are shifting our strategy to focus on -- more on renewables.
As a result, in accordance with the provisions of the senior notes, the Board elected to distribute the excess cash proceeds.
In addition to providing shareholders with nearly $5 per share of cash and Delek stock, this structure also allowed us to recognize a net gain of $87 million that we made on our Delek investment, while providing us with an efficient exit.
With the continued uncertainties around RINs and small refinery exemptions, the Board has elected not to reinstate the regular dividend.
We'll continue our discussions with the Board around the best uses of our cash and the appropriate level of cash to return to our shareholders.
For our petroleum segment, the combined total throughput for the second quarter of 2021 was approximately 217,000 barrels per day, as compared to 156,000 barrels per day in the second quarter of 2020, which was impacted by a planned turnaround at Coffeyville.
Both refineries ran well during the quarter.
And we resumed processing WCS at Coffeyville due to the weak WCS prices in Cushing.
Benchmark cracks have increased since the beginning of the year.
However, elevated RIN prices continued to consume much of that increase in cracks.
The Group three 2-1-1 crack averaged $19.15 per barrel in the second quarter as compared to $8.75 in the second quarter of 2020.
On a 2020 RVO basis, RIN prices averaged approximately $8.15 per barrel in the second quarter a 267% increase, from the second quarter of 2020.
The Brent-TI differential averaged $2.91 per barrel in the second quarter as compared to $5.39 in the prior year period.
The Midland Cushing differential was $0.24 over WTI in the quarter as compared to $0.40 per barrel over WTI in the second quarter of 2020.
And the WCS to WTI differential was $12.84 compared to $9.45 in the same period last year.
Light product yield for the quarter was 99% on crude processed.
We optimized crude runs to ensure maximum capture via maximizing premium gasoline production, light product yield, LPG recovery and RINs generation.
In total we gathered approximately 118,000 barrels a day of crude oil during the second quarter of 2021 compared to 82,000 barrels per day in the same period last year, when production levels were disrupted by low crude oil prices at the onset of the COVID pandemic.
We have seen some declines in production across our system due to limited drilling activity although, additional rigs were added in both Oklahoma and Kansas during the second quarter.
In the Fertilizer segment both plants ran well during the quarter with consolidated ammonia utilization of 98%.
The rally in crop prices has driven a significant increase in prices for nitrogen fertilizers this year and prices have remained firm through the spring planting season and into summer.
Domestic fertilizer inventories are low following the shutdown from Winter Storm Uri earlier this year.
And deferred turnaround activity from 2020, is now taking place.
USDA estimates for corn planting and yields continues to imply one of the lowest inventory carryouts in the last 10 years.
With low fertilizer inventories and continued strong demand for crop inputs, the setup remains positive for fertilizer demand as well as pricing.
Before I get into our results, I would like to highlight that during the second quarter of 2021 we revised our reporting to include adjusted EBITDA, which excludes significant non-cash items not attributable to ongoing operations that we believe may obscure our underlying results and trends.
For the second quarter of 2021, our consolidated net loss was $2 million loss per diluted share was $0.06 and EBITDA was $102 million.
Our second quarter results include a negative mark-to-market impact on our estimated outstanding rent obligation of $58 million, unrealized derivative gains of $37 million, favorable inventory valuation impacts of $36 million and a mark-to-market gain of $21 million related to our investment in Delek.
Excluding these items, adjusted EBITDA for the quarter was $66 million.
The Petroleum segment's adjusted EBITDA for the second quarter of 2021 was $18 million compared to negative $1 million in the second quarter of 2020.
The year-over-year increase in adjusted EBITDA was driven by higher throughput volumes and increased product cracks offset by elevated RINs prices and realized derivative losses.
In the second quarter of 2021 our Petroleum segment's reported refining margin was $6.72 per barrel.
Excluding favorable inventory impacts of $1.81 per barrel, unrealized derivative gains of $1.87 per barrel and the mark-to-market impact of our estimated outstanding RIN obligation of $2.92 per barrel, our refining margin would have been approximately $5.99 per barrel.
On this basis capture rate for the second quarter of 2021 was 31% compared to 75% in the second quarter of 2020.
RINs expense excluding mark-to-market impact reduced our second quarter capture rate by approximately 30%.
Derivative losses for the second quarter of 2021 totaled $2 million, which includes unrealized gains of $37 million primarily associated with crack spread derivatives.
In the second quarter of 2020, we had total derivative gains of $20 million, which included unrealized gains of less than $0.5 million.
In total RINs expense in the second quarter of 2021 was $173 million or $8.77 per barrel of total throughput compared to $16 million or $1.12 per barrel for the same period last year, an increase of over 680%.
Our second quarter RINs expense was inflated by $58 million from the mark-to-market impact on our estimated RFS obligation, which was mark-to-market at an average RIN price of $1.67 at quarter end.
Our estimated RFS obligation at the end of the second quarter approximates Wynnewood's obligations for 2019 through the first half of 2021 as we continue to believe Wynnewood's obligation should be exempt under the RFS regulation.
We have applications for small refinery exemptions for Wynnewood outstanding with the EPA for 2019 and 2020 and we'll soon submit for 2021.
For the full year 2021, we forecast an obligation based on the 2020 RVO levels of approximately 255 million RINs.
This includes RINs generated from internal blending and approximately 19 million RINs we could generate from renewable diesel production later this year, but does not include the impact of expected waivers.
The petroleum segment's direct operating expenses were $4.23 per barrel in the second quarter of 2021 as compared to $5.52 per barrel in the prior year period.
This decline in direct operating expenses was primarily driven by higher throughput volumes and our continued focus on controlling costs.
For the second quarter of 2021, the fertilizer segment reported operating income of $30 million, net income of $7 million or $0.66 per common unit and adjusted EBITDA of $51 million.
This is compared to second quarter 2020 operating losses of $26 million, a net loss of $42 million or $3.68 per common unit and adjusted EBITDA of $39 million.
The year-over-year increase in adjusted EBITDA was primarily driven by higher UAN and ammonia sales prices.
The partnership declared a distribution of $1.72 per common unit for the second quarter of 2021.
As CVR Energy owns approximately 36% of CVR Partners' common units, we will receive a proportionate cash distribution of approximately $7 million.
Total consolidated capital spending for the second quarter of 2021 was $83 million, which included $9 million from the petroleum segment, $4 million from the fertilizer segment and $69 million on the renewable diesel unit.
Environmental and maintenance capital spending comprised $12 million, including $8 million in the petroleum segment and $3 million in the fertilizer segment.
We estimate total consolidated capital spending for 2021 to be approximately $226 million to $242 million, of which approximately $83 million to $91 million is expected to be environmental and maintenance capital.
Our consolidated capital spending plan excludes planned turnaround spending, which we estimate will be approximately $7 million for the year in preparation for the planned turnaround at Wynnewood in 2022 and Coffeyville in 2023.
Cash provided by operations for the second quarter of 2021 was $147 million and free cash flow was $54 million.
Working capital was a source of approximately $100 million in the quarter due primarily to an increase in our estimated RINs obligation, partially offset by a decrease in derivative liabilities and increased crude oil and refined products inventory valuation.
Subsequent to quarter end, we received an income tax refund of $32 million related to the NOL carryback provisions of the CARES Act.
Turning to the balance sheet.
At June 30th, we ended the quarter with approximately $519 million of cash.
As a reminder the cash portion of the second quarter special dividend paid on June 10 was $242 million.
Our consolidated cash balance includes $43 million in the fertilizer segment.
As of June 30th, excluding CVR Partners, we had approximately $652 million of liquidity, which was comprised of approximately $483 million of cash and availability under the ABL of approximately $364 million less cash included in the borrowing base of $195 million.
Looking ahead to the third quarter of 2021 for our petroleum segment, we estimate total throughput to be approximately 190,000 to 210,000 barrels per day.
We expect total direct operating expenses to range between $75 million and $85 million and total capital spending to be between $18 million and $24 million.
For the fertilizer segment, we estimate our third quarter 2021 ammonia utilization rate to be greater than 95%, direct operating expenses to be approximately $38 million to $43 million, excluding inventory impacts and total capital spending to be between $9 million and $12 million.
While benchmark cracks increased nearly $3 per barrel during the second quarter, RIN prices increased by nearly the same amount, leaving the underlying margin available to refineries mostly unchanged.
Demand trends have been positive for gasoline diesel and jet fuel.
However, increasing the refinery utilization has driven an increase in product inventories as well.
We continue to believe further rationalization of refining capacity both in the US and Europe will be required to drive further inventory tidy and sustained rebound of crack spreads.
Looking at current market fundamentals adjusted for RINs, cracks have been generally flat since the spring.
RIN prices peaked in the second quarter and have declined since the favorable Supreme Court ruling.
However, RIN prices remained way too high.
Gasoline and diesel demand are within a few percentage points of pre-pandemic levels although jet remains well below, which continues to weigh on the distillate crack.
The return on international travel is key to increasing jet fuel demand and this should come along with continued growth in vaccinations and loosening travel restrictions although the recent uptick in COVID cases from the Delta variant may present a near-term risk.
However, we remain cautiously optimistic on market fundamentals that we see.
Starting with crude oil.
Crude oil inventory draws weak domestic production and strong exports of light crude have all caused the Brent-TI spread to narrow.
Sour and heavy crude spreads have improved, but are still weak especially for WCS in Canada.
We believe European refiners have come to appreciate the quality of -- quality advantage of the US shale oil and are playing more imports from the US further pressuring the Brent-TI spread.
Looking at refined products, markets are all oversupplied due to high runs in the face of weak jet demand.
Despite refinery closures in the US, global refining capacity has actually increased in 2020 and more capacity is preparing to start up in 2021 and 2022.
More closures are necessary in US and Europe as these new chemical integrated refineries come online.
RIN prices remain too high and continue to distort the crack spread for all refiners.
With the cost of RINs, cracks are weak at best considering the season.
Taking into account RIN costs, interest on debt, SG&A, sustaining capital and turnaround costs over the cycle most refineries in the US and Europe are not generating free cash flow at these levels.
Construction on the Wynnewood renewable diesel unit has been progressing as planned.
We have reached a point where we are ready to bring the hydrocracker down to complete the final steps of the conversion process.
However, renewable diesel feedstock prices have increased considerably, particularly for refined bleached and deodorized soybean oil to a level where the economics do not make sense for us to complete the conversion at this time.
We should be ready to take the unit down to complete the conversion in the September time frame.
However, the economics must be favorable based on available feedstocks before we proceed.
As we have continually stated, one of the key benefits of our project versus our peers is our ability to run the hydrocracker either renewable diesel service or traditional petroleum service.
Our current plan is to keep the unit additional petroleum service for now.
As we near the completion of Phase one of our renewable diesel strategy, we continue to develop Phase 2, which involves adding pretreatment capabilities for low-cost and lower-CI feedstocks.
We have started the process design engineering on the PTU, which will take approximately three months to complete.
We are also completing the process design of potential Phase three of developing a similar renewable diesel conversion project at Coffeyville.
The recent spike in renewable diesel feedstock prices, particularly for soybean oil, can likely be attributed to the recent start-up of two new renewable diesel plants in the US.
As more RD plants are constructed in the US, we expect the feedstock market to react to increasing demand and begin pricing according to low carbon fuel standard credit values and freight economics.
We believe RD producers with feedstock contracts expirations coming up will be forced to give up some of the margin they currently enjoy.
With the installation of a pre-treating unit, we should have the flexibility to run any type of feedstock that we can access and we are talking to a variety of feedstock suppliers that are in our backyard.
Looking at the third quarter of 2021, quarter-to-date metrics are as follows.
The Group 3 2-1-1 cracks have averaged $18.75 per barrel with RINs averaging $7.77 on a 2020 RVO basis; the Brent-TI spread has averaged $1.72, with the Midland Cushing differential at $0.14 under WTI and the WTL differential at $0.68 under Cushing WTI, and the WCS differential at $13.04 per barrel under WTI; ammonia prices have increased to around $600 a ton, while UAN prices are over $300 a ton.
As of yesterday, Group 3 2-1-1 cracks were $20.84 per barrel Brent-TI was $1.63 and the WCS differential was $14.45 under WTI.
On the 2020 RVO basis RINs were approximately $8.40 per barrel.
In June, the Supreme Court ruled to overturn the Tenth Circuit court ruling on small refinery exemptions related to continuity.
As we have previously stated, the Antenna Congress was that no small refinery should go bankrupt from the impact of RFS compliance and that small refineries like ours with high diesel output, remote location, and lack of meaningful retail and wholesale infrastructure are entitled to relief at any time.
The Wynnewood refinery was originally granted small refinery exemptions for 2017 and 2018, and we do not see any legal reason why its 2017 exemption should not be reinstated and why it should not be granted should why it should not be granted exemptions for 2019, 2020 and 2021.
In addition to failing to have timely rule on the pending small refinery exemption, EPA has yet to issue the renewable volume obligation for 2021, despite being more than nine months past their deadline.
The recent E15 ruling by the D.C. Circuit makes EPA's decisions around the RVO that much more important given the industry's inability to meet ethanol blending mandates and the pressure that puts on D6 RIN prices.
Of course, the best short-term outcome for CVI is for EPA to issue small refinery waivers for qualifying refineries now without reallocation.
Other alternatives are to issue a nationwide waiver to substantially reduce the RVO, or cap D6 RIN prices and place emphasis on D4 RINs.
I think the best long-term solution for all stakeholders is to decouple D6s RINs from D4s.
EPA should act now to reduce the ethanol mandate and increase the renewable diesel and biodiesel mandate.
It should also implement a 95 octane standard for all new ICE engines internal combustion engines.
And should harden all ICE, internal combustion engines vehicles for E30 or higher.
These actions would not only advance the reduction of carbon emissions now, but would also ensure the viability of liquid fuels in the future.
| compname reports q2 loss per share of $0.06.
q2 loss per share $0.06.
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Today's earnings call will begin with Ward Nye, whose remarks will focus on our second quarter operating performance, as well as current and emerging market trends.
Jim Nickolas will then review our financial results and liquidity position, and Ward will then provide some closing comments.
We sincerely hope that you and your families are remaining safe and healthy as we continue to manage through these unprecedented times.
This performance is a testament to our company's commitment to our values, the world-class attributes of our business and the disciplined execution of our strategic plan.
Martin Marietta established new profitability records for both the second quarter and the first half of the year, driven by favorable pricing and proactive cost management across the Building Materials business.
For the second quarter specifically, consolidated gross margin expanded 200 basis points despite slightly lower revenues as compared with the prior year period.
Selling, general and administrative, or SG&A, expenses as a percentage of total revenues improved 10 basis points to 5.6%.
Adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, increased 7.5% to $407 million.
And fully diluted earnings per share was $3.49, a 16% improvement.
In addition to record financial performance and despite the challenging conditions, we also achieved the best safety performance in our history.
Companywide, both our lost time and total injury incident rates are better than world-class safety levels.
These superior results are directly attributable to our dedicated and talented employees who've continued to demonstrate resiliency during these uncertain times.
I'm extraordinarily proud of how our team has adapted to our new health protocols, while remaining steadfastly focused on caring for one another, working safely and efficiently, and seamlessly meeting our diverse stakeholders' needs.
Though Martin Marietta, along with many of our customers, has operated as a designated essential business throughout the COVID-19 shutdowns and subsequent phases, we still experienced impacts from the macroeconomic slowdown.
Despite these challenges, second quarter product demand for our Building Materials business remained strong across a number of our key geographies, including North Texas and the Front Range of Colorado, two of our leading vertically integrated markets.
Contractors continued construction on projects already under way and have, in some instances, benefited from jobs that were accelerated to better leverage lower traffic volumes during shelter-in-place orders and new projects.
In addition, we saw aggregate shipments growth in Georgia and Florida, despite above average rainfall in these states during the quarter, and in Indiana.
Overall, quarterly aggregate shipments declined approximately 4% compared with near record prior year period volume.
As a reminder, our second quarter 2019 results benefited from weather-deferred carryover work, sizable energy sector projects and Midwest flooding repair activity.
Aggregates pricing improved 3.3%.
All divisions contributed to this growth, underscoring the health of our markets and the importance of our locally driven pricing strategy.
By region, the West Group posted a 5.5% increase, reflecting favorable product mix.
Pricing for the Mid-America Group improved 2%.
The Central Division, which has selling prices below the corporate average, contributed a higher percentage of the Mid-America Group's shipments, consistent with the first quarter trends.
Product mix limited Southeast Group's pricing growth, as a higher percentage of lower-priced fines and base stone were shipped.
Underlying demand for our Texas-based cement business remains largely stable.
However, second quarter cement shipments decreased 3%, driven primarily by the decline in energy sector activity that has resulted from lower oil prices.
West Texas oil well cement shipments were down over 75% from pre-COVID expectations, a trend expected to continue until oil prices stabilize at a level that fosters additional investment and drilling activity in the Permian Basin.
Throughout the quarter, we saw attractive and consistent pricing strength in our North and Central Texas cement operations.
Specifically, cement prices in Dallas and San Antonio, the markets most proximate to our Midlothian and Hunter facilities, were up 4%.
That said, notably, lower shipments of higher-priced oil well specialty cement products bound for West Texas limited overall pricing growth.
Turning to our targeted downstream businesses, the ready mixed concrete shipments increased nearly 9%, excluding prior year shipments from our Southwest Ready Mix Division's Arkansas, Louisiana and Eastern Texas business, known generally as ArkLaTex, which we divested earlier this year.
Overall, concrete pricing increased modestly, but was hindered by unfavorable product mix.
Our Colorado asphalt and paving business established a new quarterly record for asphalt shipments.
Shipments increased 35% to 1.1 million tons, benefiting from market strength and pent-up demand following a weather-challenged 2019.
Asphalt pricing declined 1% as customer segmentation was weighted more heavily toward publicly bid municipal projects as opposed to negotiated private work.
The Company's Magnesia Specialties business experienced the most pronounced COVID-19 headwinds during the second quarter.
Domestic and international chemicals demand declined as customers confronted COVID-19 related disruptions.
Demand for our lime and periclase products also slowed significantly, as steel producing customers temporarily idled their facilities in response to the COVID-19 induced shutdown of certain domestic auto manufacturers.
It is worth highlighting that the Enterprise achieved a second quarter adjusted EBITDA margin of 32%.
This is the highest EBITDA margin in the Company's history.
The driving force behind this accomplishment was the Building Materials, which achieved record second quarter products and services revenues of $1.1 billion, a 1% increase from the prior year quarter, and gross profit of $359 million, a 9% increase.
Notably, all of our Building Materials product lines contributed to this record profitability.
Solid pricing gains, production efficiencies and lower diesel fuel costs drove a 230 basis point improvement in aggregates product gross margin to 35.5%, also an all-time record.
This was accomplished despite lower volumes, demonstrating the cost flexibility and resiliency of our aggregates-led business.
Our Texas cement operations benefited from improved kiln reliability, as well as lower raw material and fuel costs.
Product gross margin of 39.7% expanded 210 basis points despite a nearly 3% decline in cement revenues.
As Ward mentioned, our targeted downstream businesses delivered outstanding operational performance during the quarter.
Ready mixed concrete product gross margin improved 270 basis point to 10.6%, driven by increased shipments, pricing improvement and lower delivery costs.
Equally impressive, our Colorado asphalt and paving business established second quarter records for both revenues and gross profit.
Product revenues for the Magnesia Specialties business decreased 31% to $49 million, reflecting lower demand for chemicals and lime products.
Lower revenues resulted in a 420 basis point reduction of product gross margin to 37.3%.
While we expect this business will face similar headwinds in the third quarter, a gross margin in the high-30s is impressive and indicative of superb cost management.
Consolidated SG&A expenses included $3 million for COVID-19 related expense, which included enhancements to cleaning and safety protocols across our over 100 sites.
Turning now to capital allocation and liquidity.
We continue to balance our long-standing disciplined capital allocation priorities to responsibly grow our business, while maintaining a healthy balance sheet and preserving financial flexibility to further enhance shareholder value.
Our priorities remain focused on value-enhancing acquisitions, prudent organic capital investment and a consistent return of capital to shareholders, while maintaining our investment-grade credit rating profile.
Full year capital expenditures are now expected in the range of $350 million to $375 million, a slight upward revision from the guidance provided last quarter, as US businesses were in the early stages of responding to the pandemic.
Our current prioritized projects are expected to improve efficiency, capacity and safety, all core principles and the foundation of our strong financial performance.
While we typically invest in the business, we also look for appropriate opportunities to divest non-operating assets to maximize value.
In this regard, earlier this month, we entered into an agreement to sell a depleted sand and gravel location in Austin, Texas for nearly $100 million.
Since our repurchase authorization was announced in February 2015, we have returned nearly $1.8 billion to shareholders through a combination of share repurchases and meaningful sustainable dividends.
Share repurchase activity remained temporarily paused during the quarter.
However, repurchases can resume at management's discretion.
In May, we repaid $300 million of floating rate notes that matured using proceeds from our first quarter bond issuance.
The Company has no additional bond maturities until July 2024.
We are confident in our balance sheet strength.
We have ample liquidity and financial flexibility to continue to profitably growing our business.
Net cash, combined with nearly $970 million available on our existing revolving facilities, provided total liquidity of $1 billion as of the end of the quarter.
Additionally, at a net debt to EBITDA ratio of 2.2 times, we remain well within our target leverage range as of the end of the second quarter.
With the successful completion of an outstanding first half of 2020, we remain laser focused on managing our business through the macroeconomic upheaval from COVID-19 and related governmental responses.
While July product demand and pricing trends across our markets remain broadly consistent with the second quarter, we feel it's premature to reinstate full year 2020 earnings guidance, given the uncertainty regarding the pandemic, potential Phase 4 stimulus and infrastructure reauthorization.
Nonetheless, we remain highly confident in the fundamental strength and underlying drivers of our business, guided by our Strategic Operating Analysis and Review, or SOAR, plan.
We expect pricing resiliency and disciplined cost management to continue supporting the Company's near-term performance.
As the economy resets from COVID-19, we believe favorable pricing trends for our products will continue, supported by our disciplined locally driven pricing strategy and attractive geographic footprint.
For aggregates specifically, we anticipate full year 2020 pricing will increase 3% to 4% from the prior year.
This range is slightly below our pre-COVID-19 expectations, given year-over-year geographic and product mix trends and slightly delayed price increases in certain markets.
Texas cement pricing is also expected to remain resilient due to the State's tight supply demand dynamics and the fact that our key markets are, by design, largely insulated from waterborne imports.
Healthy aggregates and cement pricing trends should benefit our targeted downstream operations.
Existing customer backlogs support the Company's shipment levels in the near term.
In certain regions where we operate, this year's weather has been more disruptive of construction activity and project cadence than the pandemic.
Yet, we believe the industry will likely see a gradual but not precipitous temporary slowing in product demand over the next few quarters, as businesses and governments address budget shortfalls resulting from COVID-19.
That said, the degrees of decline and recovery will vary by end-use market and geography and will be influenced by future governmental actions.
Infrastructure construction, particularly for aggregates-intensive highways, roads and streets, is expected to be the most near-term resilient, as contractors advance projects that have been awarded and funded.
However, state Departments of Transportation, or DOTs, may decrease the scale or postpone the timing of future construction as they balance lower revenue collections and other short-term funding needs relating to the COVID-19 impact, particularly if there is no near-term federal assistance.
These impacts will vary by state.
For example, Texas DOT scheduled lettings for fiscal year 2021, which began September 1, are currently planned at $7 billion, comparable to fiscal year 2020 lettings.
Earlier this month, Texas DOT also reiterated its $77 billion 10-year unified transportation planned [Phonetic].
To ease funding shortfalls to its DOT budget, Colorado will issue certificates of participation to advance planned projects, the majority of which are concentrated along the megaregion, following the I-25 corridor, which has been the strategic focus of our Rocky Mountain business.
Of our Top 10 states, North Carolina DOT faces the toughest near-term funding challenges.
As a reminder, NCDOT temporarily suspended awards for certain projects in response to pre-COVID-19 funding issues and other factors.
Since then, new contract advertisements have been further delayed.
In the near term, NCDOT will benefit from $700 million in Build NC Bond revenues to fund existing transportation programs.
Longer term, we anticipate additional transportation ballot initiatives, as well as new revenue-enhancing recommendations from the NC FIRST Commission, which is tasked with evaluating North Carolina's growing transportation investment needs and ensuring that critical financial resources are available.
Despite some near-term DOT headwinds, the passage of a reauthorized comprehensive federal infrastructure package will provide multi-year upside.
While it's unlikely a successor bill will be agreed upon and signed into law prior to the Fixing America's Surface Transportation Act's expiration on September 30, we feel confident new legislation will be enacted and provide the first sizable increase in federal transportation funding in more than 15 years.
When this occurs, it will be a big win for our industry and for Martin Marietta.
While nonresidential construction activity on existing projects has continued, some commercial and institutional projects in the design or planning stages are being delayed or canceled.
The Dodge Momentum Index, or DMI, a monthly measure of the first report for nonresidential building projects in planning, which has historically led construction spending for nonresidential building by a full year, is down 20% from its most recent peak in July 2018.
However, to contextualize the June reading, the Great Recession's peak to trough DMI decline was 62%.
Importantly, since the Great Recession, Martin Marietta has purposefully shifted our nonresidential exposure to be more heavy industrial-focused as we've expanded our geographic footprint along major commerce corridors.
Aggregates-intensive warehouses, distribution centers and data centers are expected to lead nonresidential activity as businesses increase capacity for e-commerce activity, secure regional supply chains and become more reliant on cloud and network services.
Further, large liquefied natural gas, or LNG, projects along the Texas Gulf Coast that are actively under way have broadly continued.
However, start dates for the next wave of projects have been postponed.
Longer term, we believe nonresidential construction activity could benefit from more companies streamlining their supply chains and repatriating manufacturing operations back to the United States, providing potential multi-year upside to heavy industrial construction.
Residential construction is rebounding more quickly than anticipated by homebuilders and third-party forecasters.
After decline in April, the National Association of Home Builders Housing Market Index, a widely recognized survey designed to measure sentiment for the US single-family housing market, returned to pre-pandemic levels in July, signaling that residential growth may lead to an overall economic recovery.
Consistent with recent homebuilder commentary, activity has strengthened as Martin Marietta states have reopened, demonstrating pent-up housing demand following the COVID-19 related pause in the spring selling season.
Nationally, housing starts remain below the 50-year annual average of 1.5 million despite notable population gains.
Freddie Mac estimates the 2.5 million housing units are needed to address the current nationwide housing shortage.
This situation is particularly evident in states with significant under-supply, including Texas, Colorado, North Carolina and Florida, which are all in our Top 10 states.
These trends, along with historically low mortgage rates, bode well for future expansion in single-family housing activity, which is two to three times more aggregates-intensive than multi-family housing, given the typical ancillary nonresidential and infrastructure construction activity.
Also, longer term, we expect Martin Marietta to benefit across all three of our primary end-users from accelerated deurbanization trends, as stay-at-home orders and the shift to remote work encourage more prospective homebuyers to move to smaller metro or suburban locations.
Our leading Southeastern and Southwestern footprint provides us a distinct competitive advantage in regions with diverse employment opportunities, land availability, favorable climates and a lower cost of living.
Moving forward, we are confident in Martin Marietta's opportunities to build on our successful track record of financial and operational outperformance.
SOAR 2025, our strategic plan for the next five years, will be finalized this year and provides the framework to support our capital deployment, price discipline, cost management, sustainable practices, talent development and succession planning initiatives.
We've already made great strides on these endeavors.
Earlier this month, we streamlined our business structure into five operating divisions: East, Central, Southwest, West and Magnesia Specialties.
This new structure better aligns our business product offerings and geographies, provides experienced executives with increased responsibilities and opportunities, strengthens our ability to provide outstanding customer service, and further enhances our industry-leading cost profile.
In closing, we're all living an unprecedented and dynamic times, and that will likely persist as the pandemic continues unabated.
Moving forward, our attractive underlying fundamentals, strategic priorities and world-class teams position Martin Marietta to responsibly navigate today's challenging environment and to drive sustainable long-term growth and shareholder value.
Overall, we continue to feel confident about the future and our plan to continue building on Martin Marietta's long track record of success in delivering sustainable value creation and superior returns for investors.
| martin marietta materials inc - qtrly earnings per diluted share $ 3.49.
martin marietta materials inc - will reinstate full-year earnings guidance when co has sufficient visibility.
martin marietta materials - believes co's industry will likely experience lower overall product demand over next few qtrs due to covid-19 pandemic.
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Effective July 1, in connection with us streamlining our operating structure, we also changed our reportable segments.
Our Building Materials business now consists of the East Group, whose operations were previously reported in the mid-America and Southeast groups.
And the West Group, which had no significant changes.
In addition, the Magnesia Specialties business comprises our third reportable segment.
Prior year results have been revised to conform with this new reporting structure.
Today's earnings call will begin with Ward Nye, who will discuss our third quarter operating performance and market trends as we move toward 2021.
Jim Nickolas will then review our financial results and liquidity position, and then Ward will provide some closing comments.
We sincerely hope that you and your families are safe and healthy.
Martin Marietta's strong business execution and commitment to operational excellence provide the foundation for our company to consistently deliver record financial, operational and safety performance.
As highlighted in today's release, we established new profitability and safety records for the first nine months of 2020.
Year-to-date, gross profit increased to $927 million and adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA surpassed the $1 billion mark.
We have also achieved the best safety performance in Martin Marietta's history with a companywide lost time and total entry incident rates exceeding world class levels.
For the third quarter, increased pricing across all product lines and disciplined cost management helped mitigate anticipated shipment declines driven by the COVID-19 pandemic.
Third quarter financial highlights as compared with the prior year period included consolidated gross margin increased 100 basis points to a record 30.6%, despite a 7% reduction in revenues, demonstrating the resiliency of our business and our focus on cost control.
Selling, general and administrative, or SG&A, expenses as a percentage of total revenues improved 10 basis points to an industry-leading 5.4%.
Adjusted EBITDA was $502 million, inclusive of $70 million of nonrecurring gains.
And diluted earnings per share was $4.71.
For clarity, the nonrecurring gains contributed $0.87 per diluted share.
These results are a testament to our dedicated and talented employees who are managing through today's challenging public health and economic environment as well as the proactive steps we have taken to adjust the company's cost profile.
Now for a review of our third quarter operating performance.
Aggregate shipments declined nearly 9% versus a robust prior year comparison.
As anticipated, given the widespread COVID-19 disruptions across the United States, shipment declines were experienced across our footprint, with the East Group down 9% and the West Group down 8%.
Additionally, the East Group shipments were impacted by weather delayed projects in the Carolinas, Georgia and Florida, anticipated lower infrastructure shipments in portions of North Carolina and reduced wind energy activity in Iowa.
Wet weather in Texas and lower energy sector demand negatively impacted West Group shipments.
In line with broader macroeconomic trends, aggregate shipments to both the infrastructure and nonresidential markets declined.
Shipments to the residential market improved modestly.
Aggregates average selling price increased 2.7% or 4% on a mix-adjusted basis, underscoring this product line's resilient pricing power.
By region, the East Group posted a 4.4% pricing increase with strength in our key geographies of North Carolina, Georgia, Iowa, Indiana and Maryland.
The West Group average selling price declined slightly, reflecting a lower percentage of higher price shipments from distribution yards.
We continue to see attractive pricing in both Texas and Colorado.
On a mix-adjusted basis, the West Group average selling price improved nearly 4%.
As a reminder, we anticipate overall full year 2020 aggregates pricing growth of 3% to 4%.
Underlying demand for our Texas-based cement business remains positive, supported by diversified customer backlogs and large project activity.
Third quarter cement shipments, however, decreased 4%, reflecting continued energy sector headwinds.
Reported cement pricing increased 1%.
While average selling prices for our core cement products, namely, type one and type two cement were up $4 over the prior year period.
Lower shipments of oil well and lightweight specialty cements bound for West Texas disproportionately impacted overall price and growth.
As a reminder, specialty cements can sell for over $200 per ton.
On a mix-adjusted basis, overall cement pricing increased 3.4%.
Turning to our targeted downstream businesses.
Ready-mixed concrete shipments decreased 4% and excluding acquired shipments and third quarter 2019 shipments from our Southwest division's concrete business in Arkansas, Louisiana and Eastern Texas, which we divested earlier this year.
Texas construction activity was hindered by wet weather.
By contrast, Colorado shipments benefited from favorable weather and continued activity on a large Amazon fulfillment center.
Favorable geographic mix from robust Colorado shipments was the primary driver of the 2% increase in third quarter concrete pricing.
Asphalt shipments for our Colorado asphalt and paving business decreased 3% following near record levels in the prior year period.
Asphalt pricing increased 6%, reflecting a higher percentage of attractively priced specialty asphalt mix sales.
For our Magnesia Specialties business, weakness in chemicals and lime demand began to moderate during the quarter as steel utilization rebounded from June's trough.
We expect continued improvement through the balance of the year.
For the third quarter, the Building Materials business delivered products and services revenues of $1.2 billion, a 6% decrease from the prior year period.
And product gross profit of $384 million, a 3% decrease.
Aggregates product gross margin expanded 130 basis points to 36.4%, an all-time record despite lower shipment volume.
Strong mix-adjusted pricing gains, disciplined cost management and lower diesel fuel costs contributed to the 6.5% growth in aggregates unit profitability.
These results demonstrate the cost flexibility and resiliency of our aggregates led business.
Cement product gross margin was 40.2%, a 40 basis point decline.
Despite lower revenues, the cement business benefited from lower fuel costs and prior year tail investments that have improved reliability and throughput.
For our downstream businesses, ready-mixed concrete product gross margin declined 90 basis points, 9.7%, attributable to higher costs for raw materials.
Asphalt and paving achieved record gross profit of $32 million and a 140 basis point improvement in margin despite lower revenues.
Magnesia Specialties' third quarter product revenues increased $10 million to $55 million, reflecting lower demand for chemicals and lane products.
Lower revenues and reduced fixed cost absorption resulted in a 240 basis point decline and product gross margin to 38%.
Our consolidated results included $7 million of gains on surplus, noncore land sales and divested assets.
These gains which were recorded in other operating income net are nonrecurring and should not be extrapolated in a run rate calculation.
As a reminder, surplus land sales were part of the value proposition of our TXI acquisition, and that's exactly what you're seeing this quarter.
Since 2016, we have sold nearly $200 million of excess land that was not used for operations and did not contain operating assets.
While we cannot predict the timing of any future land sales, we expect additional noncore real estate divestitures as favorable opportunities develop.
We achieved the highest adjusted EBITDA margin in Martin Marietta's history, both inclusive and exclusive of the previously discussed nonrecurring gains.
We anticipate adjusted EBITDA to range from $1.35 billion to $1.37 billion, inclusive of the $70 million of nonrecurring gains for full year 2020.
Now turning to capital allocation and liquidity.
We continue to balance our long-standing disciplined capital allocation priorities to responsibly grow our business while maintaining a healthy balance sheet and preserving financial flexibility to further enhance shareholder value.
Our priorities remain focused on value-enhancing acquisitions and prudent organic capital investment and a consistent return of capital to shareholders while maintaining our investment-grade credit rating profile.
In August, we acquired an exits and ready mixed concert company in Dallas/Fort Worth Metroplex.
These acquired operations complement our existing geographic footprint and expand our customer base.
They also enhance our aggregate and cement throughput to drive incremental upstream value.
We have widened our full year capital expenditures guidance and now expect it to range from $350 million to $400 million.
We are exploring additional life-kind exchange opportunities that would defer the package who would otherwise paid on this year's sizable land sales.
Since our repurchase authorization announcement in February 2015, we have returned $1.8 billion to shareholders through a combination of share repurchases and in meaningful, sustainable dividend.
Our Board of Directors recently approved a 4% increase in our quarterly cash dividend paid in September, underscoring its continued confidence in our future performance and cash generation.
Our annualized cash dividend rate is now $2.28.
Share repurchase activity remained temporarily paused during the quarter.
However, the purchases can resume at management's discretion.
With a debt-to-EBITDA ratio of 2 times, we are at the lower end of our target leverage range of two to 2.5 times.
We remain confident in our balance sheet strength, with $1.2 billion of total liquidity.
With our low leverage and ample liquidity to retain the financial flexibility to continue to profitably grow our business.
We're confident that our favorable pricing dynamics will continue and that attractive underlying fundamentals and long-term secular growth trends across our key geographies will remain intact.
To offer some specific color on how this is playing out, it's notable that both our upstream and downstream businesses have seen improvements in data shipment trends since July lows with October average daily shipments above prior year levels.
While we're cautiously optimistic about these trends, we believe COVID-19-related uncertainty will likely persist through the winter and spring seasons.
Keeping that in mind, we currently anticipate product demand will remain modest through the first half of 2021, and product pricing will remain strong.
As the U.S. economy resets from COVID-19 disruptions, the longer-term macroeconomic indicators, such as underbuild conditions, historically low interest rates and hourly workforce availability are favorable and should support a construction-led recovery.
We're seeing encouraging long-term trends across our three primary end-use markets and key geographies, including bipartisan support for a robust multiyear federal surface transportation reauthorization, heavy industrial activity to support e-commerce and remote work needs, and single-family housing expansion driven by accelerated de-urbanization.
We believe these trends bode well for a more aggregates intensive construction cycle than experience during the slow but steady recovery from the Great Recession.
Infrastructure activity, particularly for aggregates intensive highways, roads and streets, continues to be resilient.
With gas and tax sales revenue shortfalls less than originally anticipated, state departments of transportation, or DOT, budgets are in better condition than expected at the pandemic's onset.
For example, Texas DOT scheduled lettings for fiscal year 2021, which began September 1, and are currently planned at $10 billion, an increase of 35% over the comparable fiscal year 2020 lettings.
Updated Colorado DOT projections indicate relatively flat transformation spending levels for 2021.
And North Carolina DOT, which temporarily suspended awards for certain projects in response to pre-COVID-19 funding issues and other factors, recently revised its letting schedule upward and resume bidding for resurfacing work earlier this month.
As a reminder, these three key states represent over 60% of our Building Materials business revenues.
On the federal front, the President recently signed at the law, a continuing resolution that included a one-year extension of the Fixing America's Surface Transportation Act, or FAST Act, at current funding levels, which was consistent with our expectations.
In our view, this provides state and local governments the visibility needed to plan, design and let transportation projects through the 2021 construction season.
Over the medium to long-term future, we expect the industry to benefit from the passage of a reauthorized comprehensive federal surface transportation package, which we anticipate will be enacted by mid-2021.
Both the United States House and Senate of advanced federal highway legislation, underscoring bipartisan support to remedy the nation's crumbling surface transportation infrastructure.
Notably, both bills provide the first sizable increase in federal transportation funding in more than 15 years.
Regardless of the upcoming election outcomes, increased infrastructure investment should provide volumes stability and drive aggregate shipments closer to 45% of our total shipments, moving us toward our 10-year historical average.
For reference, aggregate shipments to the infrastructure market accounted for 38% of third quarter shipments.
Although certain sectors of nonresidential construction remain challenged in the near term, COVID-19 is driving a paradigm shift that should promote more diverse nonresidential demand than the previous cycle, fueling long-term aggregates growth.
Accelerating technology, e-commerce and remote work trends require increased investment in heavy industrial warehouses and data centers, which are generally more aggregates intensive than light commercial construction due to the size and scale of these projects.
Importantly, we have purposely shifted our nonresidential exposure over the last 10 years or so to be more heavily industrially focused as we've expanded our geographic footprint along major commerce carters.
Additionally, light commercial construction, despite its current weak demand, should benefit in the longer-term from the drag-along effects of strong single-family residential trends.
Aggregate shipments of the nonresidential market accounted for 33% of third quarter shipments.
Single-family housing is expected to lead this economic recovery as de-urbanization accelerates.
Prospective homebuyers are increasingly moving from large metropolitan cities to smaller metro or suburban areas amid the pandemic.
Recently, North Carolina, our third largest state by revenues, was identified as a top migration destination, ranking number seven among states that experienced the most inbound moves from March through August of this year, according to data from United Van Lines.
These trends extend beyond those moving from one state to another.
They also include existing residents opting to move farther out from city centers.
Across our Southeastern and Southwestern footprint, underbuilt conditions and favorable population and unemployment dynamics provide Martin Marietta with a distinct competitive advantage for outsized secular growth in single-family housing development.
Importantly, single-family housing is two to 3 times the aggregates intensity of multifamily housing given the ancillary nonresidential and infrastructure needs of new suburban communities.
Aggregate shipments to the residential market accounted for 24% of third quarter shipments.
In summary, as our third quarter and year-to-date results demonstrate, navigating challenging times and emerging from them stronger are hallmarks of our company.
We've executed a thoughtful strategy and taken deliberate steps to position Martin Marietta as a resilient, efficient and cash flow generative business that can consistently drive shareholder value creation.
We will continue to do what we do best: manage our business safely and responsibly, ensuring that we're prepared to seize profitable growth opportunities for the benefit of our stakeholders.
Martin Marietta remains well-positioned to capitalize on the emerging growth trends that are expected to support steady and sustainable construction activity over the long term.
With our attractive underlying fundamentals, strategic priorities and best-in-class teams, we're excited about our bright prospects for driving long-term sustainable growth and shareholder value in the fourth quarter, in 2021 and well into the future.
| qtrly earnings per share $4.71.
qtrly revenue $1,321.4 million versus $1,420.2 million.
remains confident that its favorable pricing trends are sustainable and durable.
|
Please be advised that the discussion of our financial results may include certain non-GAAP financial measures.
Each summer, as we prepare for the upcoming school year, we face operational and logistical demand to support the needs of millions of potential customers and thousands of teachers and support staff.
These past two summers have proven even more challenging, as a result of the ongoing global pandemic.
Our country has been facing disruptions in the supply chain, shortages of workers across industries, uncertainty in the workplace and renewed fears of inflation, among many other difficulties.
In spite of this, I have great faith in our country, our ability to persevere and create opportunities through adversities.
We are resilient, adaptive, innovative, compassionate, opinionated, proud and sometimes disagree, but we are always united, and as we navigate these recent challenges, we are evolving.
We're being forced to rethink certain norms, and one of those has been our approach to education.
I hope we now realize that there is no one size fits all solution to education, to training or to workforce development.
Certainly, some of the traditional methods work for many.
But we need to ensure we are providing choices for everybody.
Choices about how and where we learn, how employers recruit, how we educate and train the workforce and how we deliver opportunities for those seeking new paths.
Over 20 years ago, Stride was founded on the premise that students and families should have a choice in their education.
The pandemic has made this mission more critical than ever before.
We remain committed to ensuring that we are providing a best-in-class experience across the range of customers we serve, from early elementary to adult workforce solutions, and we want to make sure that these educational options are available to as many learners as possible.
The increasing demand for educational and training options continues to fuel our business.
The pandemic and the resulting disruption across schools and districts has led to a surge of support for School Choice.
Total support for School Choice has increased to almost 75% of the population.
The pandemic raised awareness for parents about their students' education, and many recognize, that they are not getting what they need from their existing school.
And that surge in interest spans private schools, voucher programs, virtual schools, and other similar programs, and specifically interest in virtual education has seen dramatic increases.
In large part, this was because so many were forced into it during the pandemic.
And while the experience was not always positive, it absolutely opened the eyes of many to the benefits of a virtual model.
And for us, this has translated into what we believe is a structural long-term increase in the demand for our products and services.
In fact, peak website traffic this year surpassed the traffic we saw last year at the height of the pandemic.
We are seeing well over 1 million unique visitors to our websites each month and growing.
and they are a more educated consumer.
Conversion rates for those who apply to our program are at a multiyear high.
We attribute this in large part to the increase in awareness.
Families that apply to our program know what they were looking for, and so they convert at higher rates.
This is an important trend for us over the longer term, and as families become more comfortable with virtual education and Stride's experience, it opens up other opportunities for us to offer other institutional and consumer offerings.
And while conversion rates have improved, so have conversion times.
Families both know what they want and we are also making it easier for them to enroll.
Our focus on the consumer experience and customer journey is just beginning, and if these early trends are any indication of what we can expect, we are going to deliver some really exciting customer experience improvements in the coming months and years ahead.
Our roadmap of new products and customer improvements is more robust, than it has been in the over eight years that I've been with the company.
Be on the lookout for some exciting new product announcements during the upcoming year.
However, this demand hasn't come without some additional challenges.
As many of you have likely experienced, there are labor shortages in many industries, and education is not immune.
Teacher shortages have been a real threat to the U.S. education system for many years, and the pandemic has only exacerbated this risk.
Given the dissatisfaction many teachers experience in traditional schools and high satisfaction rates we see for the teachers that we manage, we hope that they consider us as an option.
Particularly with vaccination requirements, accessibility in age restrictions, some teachers just don't feel comfortable in their current environment.
And so over time, we will be looking to shift more and more teachers to online programs, where they have greater flexibility, impact and reach than they have in their current roles.
Another trend that we see accelerating is the focus on career training and workforce development.
We desperately need skilled workers, and many high school students are realizing that their future success does not need to be tied to a four-year college degree.
This fall, our Stride career programs for middle and high school students enrolled 42,000 students, a 36% increase from last year.
It's also three times the level we were at, just two years ago.
And our surveys for Career Learning demand are even more positive than overall virtual education.
Even as interest in virtual options has increased, Career Learning interest continues to outpace it by multiples in the middle and high school space.
We think that this interest, coupled with the opening of new programs and new states, can sustain strong growth in this business over the long term.
I think the investment community was rightfully skeptical of our ability to grow, after last year's pandemic bump [Phonetic], and make no mistake, we continue to see a positive impact on our business from the ongoing pandemic uncertainty.
But we also believe, that there is an ongoing structural shift in education, and we are the digital leader in this space, and we believe that positions us to thrive over the long term, across a broad spectrum of product and service offerings.
For this year, that means we expect to grow both our top and bottom line and we believe we are on pace or better for the long-term goals we set out for ourselves just last November.
Tim will provide more details on this in just a minute.
I also wanted to highlight one of our new product offerings for this school year.
As many of you know, younger students were disproportionately impacted by the pandemic.
Younger students were less likely to attend school consistently, and were more likely to suffer from significant learning loss.
Additionally, supporting younger students during at-home learning can be a challenge for families.
We recognize the particular difficulties in this age group, even prior to the pandemic and have been working on an entirely new design for our K-5 course catalog.
Our new programs are built specifically to support more independent learning and allow parents and families to play a more supporting role in their child's education.
We believe these new courses will allow for deeper engagement and better academic outcomes.
And lastly, while COVID was rightfully receiving much of the attention over the last year, there have been other catastrophic disruptions.
For example, in September, Hurricane Ida hit the Gulf Coast.
A significant number of students were displaced from their homes and schools.
Our team quickly mobilized to offer a free private virtual program for these students, that is now serving hundreds of families.
Proud of the team for this effort.
It's doing what I call, absolute right, and is a core principle for Stride.
Now, I'll pass the call over to Tim Medina, to discuss our quarterly results and fiscal '22 guidance.
First, let me quickly recap our reported results.
Revenue for the quarter was $400.2 million, an increase of almost 8% over the same period last year.
Adjusted operating income was $4.5 million, down significantly compared to the prior year, which I'll discuss in few minutes, and capital expenditures were $15.4 million, an increase of $2.6 million over last year.
Driven by strong demand in Career Learning and a recovery and revenue per K-12 enrollment, we expect to grow revenue and profitability this year compared to prior year.
Our first quarter results and this guidance for the rest of the year, demonstrates the confidence we have about our ability to sustainably address the underlying demand for high-quality online educational options.
We believe this sets Stride up for continued long-term growth and expanding margins across our lines of revenue.
Q1 revenue from our General Education business decreased $7.5 million to $306.3 million.
This was due primarily to the expected decline in enrollments, partially offset by an increase in revenue per enrollment.
General Ed enrollments decreased to 147,600 from 164,600 last year, during the height of COVID.
As James discussed, we continue to see strong demand for our offerings, and we expect that over the coming years, this business will grow off this new baseline.
Revenue per enrollment in General Education increased 9.7% in Q1 compared to the same quarter last year.
We are seeing favorable funding impacts in many states, offset by some mix shift to lower funded states.
For the full year, we expect to see revenue per enrollment in line with or even better than our fiscal 2020 results.
Career Learning revenue grew to $93.9 million, an increase of 64.4%.
This was driven by continued strong growth in our Stride career prep enrollments and growth across our adult learning business.
Within our Career Learning business, our middle and high school Career Learning revenue was $71.4 million, up 46.4% from last year.
This was driven by 36.4% increase in enrollments, and an 8% increase in revenue per enrollment.
Like our General Education K-12 business, we expect revenue per enrollment and Stride career prep programs to improve significantly over last year.
Our adult learning business had another strong quarter, finishing with revenue of $22.5 million.
This puts us on a great trajectory for the full year and we expect adult learning to contribute almost $100 million in revenue during fiscal year 2022.
Gross margins for the quarter were 31.6%, down 340 basis points compared to the same period last year.
We returned to a more normal seasonal pattern in our materials and computer expenses this year.
Last year, we had a slower ramp in shipments to students, which pushed first quarter gross margins up.
Therefore, we expect our second quarter comparison to be more favorable, as spending this year is more in line with the normal seasonality we saw in years prior to last year.
We continue to feel confident in our ability to achieve the 2025 gross margin targets we laid out last November, and faster than we originally anticipated.
Selling, general and administrative expenses for the quarter were $133.4 million, up $15.6 million from the first quarter of fiscal 2021.
The increase in SG&A is primarily driven by higher costs associated with enrollment and onboarding and the annualization of expenses from our acquisitions.
Stock-based comp was $8.3 million for the quarter.
We anticipate that we will finish the year with stock-based compensation in the range of $29 million to $31 million.
Adjusted operating income for the quarter was $4.5 million, adjusted EBITDA was $25.5 million.
Both these metrics were impacted by the seasonality of costs that I outlined above.
The timing of our costs and income in fiscal year 2021 had timing anomalies, that we explained during our quarterly calls last year.
This year, we expect our seasonality of expenses will be more similar to the years prior to FY '21, and as you can see in our guidance, we think the second quarter will be very strong from a profitability standpoint.
Interest expense for the quarter was $2 million.
As we mentioned last quarter, we have adopted new accounting guidance that eliminates the non-cash interest expense related to the amortization of the debt discount from our convertible note, this results in lower interest expense.
It also means that we have increased the long-term debt recorded on our balance sheet, even though we have not taken on any additional debt.
For the year, we expect our quarterly interest expense to be fairly consistent with the first quarter.
Our effective tax rate came in at 33%.
For FY '22, we believe we will finish the year, with a tax rate in the 28% to 30% range, mostly due to an increase in non-deductible compensation, above FY '21.
Capital expenditures in the quarter totaled $15.4 million, up $2.6 million from the prior period last year.
This increase was expected, as we invest in more mainstream consumer facing products, expected to contribute to future financial performance, as well as ongoing investments in our high growth career and adult learning businesses.
Free cash flow in the first quarter, defined as cash from operations less capex, was negative $146.9 million as compared to the prior year's $127.3 million.
This normal seasonality of cash flows relates to school launch and the enrollment and on boarding of new students.
We expect to see positive cash flow for the next three quarters.
For fiscal year 2022, we expect to have significantly higher cash flow from operations than in fiscal year 2021.
We ended the quarter with cash and cash equivalents of $218.5 million.
Turning to our guidance; for the second quarter of fiscal year 2022, the company is forecasting revenue in the range of $390 million to $400 million, adjusted operating income between $55 million and $60 million, and capital expenditures between $14 million and $17 million.
For the full year, we are forecasting revenue in the range of $1.56 billion to $1.60 billion, adjusted operating income between $165 million and $180 million, capital expenditures between $65 million and $75 million, and lastly an effective tax rate between 28% and 30%.
Without the collective effort of thousands of Stride employees, we could not have achieved the strong results we saw this quarter, and that we expect to see for the full year.
| q1 revenue $400.2 million versus refinitiv ibes estimate of $359.5 million.
sees fy revenue $1.56 billion to $1.6 billion.
sees 2022 capital expenditures in the range of $65 million to $75 million.
|
Molly Langenstein, our CEO and president, also joins me today.
You should not unduly rely on these statements.
I'm excited to share our second-quarter results as they underscore the incredible progress we continue to make in our turnaround strategy despite pandemic challenges.
Our earnings per share of $0.21 is the best second-quarter performance we have posted since 2013.
This return to profitability was driven by our turnaround action plan that grew sales, expanded gross margin, and diligently controlled our expenses.
Our robust second-quarter sales growth of 54% was across all three brands and was propelled by our meaningful enhancements in product and marketing, which continues to significantly drive full-price selling, reduced markdowns, and increased gross margin.
Soma achieved the highest second-quarter sales results in the brand's history.
Not only did Soma post a 53% sales growth over last year's second quarter, comparable sales grew a remarkable 38% over the second quarter of 2019.
In fact, we have had four consecutive quarters of comp growth at Soma.
Congratulations to the Soma team.
Soma remains on track to delivering an incremental 100 million in sales this year.
According to NPD research data, Soma's growth outpaced the market in non-sports bras, panties, and sleepwear for the past 12 months compared to the same period in 2019.
In addition, as customers' preferences have shifted to comfort, soma strategically increased its wireless bra assortment, taking more market share than any other brand for the last 12 months compared to the same period in 2019.
We believe this data, along with our recent performance, is a strong indication that Soma is well-positioned to capture additional market share and explode into a billion-dollar brand by 2025.
The business strategies put in place in Soma around inventory, product, marketing and digital are working.
And we are confident applying this proven playbook at Chico's and White House Black Market will continue their sales momentum.
Exciting things are indeed happening at both Chico's and White House Black Market, as indicated by second-quarter sales growth of 59% and 48%, respectively.
At both apparel brands, customers are enthusiastically responding to our elevated quality and styling enhancements, which are leading to meaningfully faster sell-through rates, higher productivity and more full-price sales and better-maintained margins.
Our second-quarter results once again highlight the incredible progress we are making on our five strategic priorities.
So let me take a few minutes to update you on each.
Priority number one, continuing our ongoing digital transformation.
Over the last two and a half years, we have successfully transformed into a seamless digital-first, customer-led company, adding resources and making strategic investments in talent and technology.
We have been thrilled with the trajectory of our digital sales over this time frame.
As our store revenues continue to rebound, our second-quarter digital sales grew 23% over 2019 levels.
Style Connect and My Closet continue to gain traction.
And customers using this proprietary digital tools are more engaged and have our highest conversion rates, UPTs, and average order values.
These tools continue to drive new multichannel customer growth, and these customers are our most valuable, spending more than three times a single-channel customer.
Afterpay, the popular benefit launched in time for holiday last year, allowing for customers to pay for their purchases in installments, has also proven to be a terrific UPT and sales driver and is beating our expectations.
Priority two, further refining products through styling, fabric, and innovation.
At each of our brands, we are leveraging customer data and insights, and continually elevating our product to take market share and drive results.
Customers are clearly responding across all three brands.
Continual newness and creating comfortable, beautiful solutions are core to the Soma brand.
We are feeding a conveyor belt of innovation for wireless and sports bras, ensuring she has the absolute right bra for everything she does in her life.
Sleepwear and panties continue to be strong and drove double-digit growth over last year and 2019 levels.
Chico's customers are continually responding to our newness, comfort features, novel technology, and innovative fabrics with pronounced acceleration in the quarter in denim, pants, dresses, knits, and woven tops.
White House Black Market also continued to benefit from elevated styling and quality improvements, and customers responded to our new pants and short programs as well as knits and dresses.
Congratulations to the apparel teams for a great quarter.
Next, driving significant increased customer engagement through digital storytelling.
Through our enhanced customer data analytics and insights, we have elevated and targeted our marketing efforts, which are driving brand awareness, generating traffic, and acquiring new customers.
We continue to allocate more resources to digital storytelling, social influencers, and other social efforts.
Our social media customer engagement continues to grow and customers are responding to influencers and associates.
We continue to acquire new customers and their average age continues to trend younger than existing customers, which reinforces the runway for all three brands.
Priority four, maintaining our operating and cost discipline.
Our most meaningful second-quarter accomplishment was our gross margin performance.
In fact, we posted our highest gross margin rate in 13 consecutive quarters.
This was driven by strength in full-price sales and the corresponding reduction in promotions.
Our on-hand inventories remain strategically lean, down 27% versus last year's second quarter and down 20% compared to the second quarter of 2019.
Scarcity of products and social proofing continued to drive a sense of urgency for customer purchasing.
These factors should continue to strengthen gross margin performance.
However, we are facing certain headwinds in the back half of the year that will impact gross margin and sales, including cost pressures from logistics, sourcing, fulfillment, and the labor market.
These considerations are included in our guidance that David will cover later in the call.
And finally, our last priority, delivering higher productivity in our real estate portfolio.
We delivered strong store growth during the quarter, and stores continue to be an integral part of our overall strategy as data indicates that digital sales are higher in markets where we have a strong retail presence.
Prudent store growth makes sense where the investment delivers profitable returns.
We have successfully opened 47 Soma shop-in-shops inside Chico's stores, which are exceeding expectations, driving new customers to both brands, and further expanding our digital business.
More of these shop-in-shops are scheduled going forward with a total of 70 expected by first quarter of next year.
At the same time, we continue to rationalize and tighten our real estate portfolio for higher store productibility standard.
Accordingly, we will continue to shrink our store base, primarily as leases come due, lease kickouts are available or buyouts make economic sense.
We have lease flexibility with nearly 60% of our leases coming up for renewal or kick out available over the next two to three years.
We are still on track to close 13% to 16% of our remaining store fleet through the end of fiscal 2023, with 45 to 50 of those closures occurring this fiscal year.
During the quarter, we closed nine stores, bringing our year-to-date closings to 18, and we ended the quarter with 1,284 boutiques.
We are very pleased with our company's return to profitability, posting diluted earnings per share of $0.21 for the second quarter, compared to a $0.40 loss per share from last year's second quarter and a $0.02 loss per share for the second quarter of fiscal 2019.
Q2 is our best quarter earnings performance since 2013.
Second-quarter net sales totaled $462 million compared to $306 million last year.
This 54% increase reflects meaningful improvement in product and marketing, which drove full-price selling as well as a recovery in-store sales as our stores were temporarily closed or operating at reduced hours last year, partially offset by 29 net store closures in the last 12 months.
Looking at the second quarter compared to 2019, our comparable sales were basically flat, declining just 1.6% with Soma improving 38% and Chico's and White House Black Market declining 14% and 5%, respectively.
Total company on-hand inventories compared to 2019 declined 20%, with Soma up 19%; and Chico's and White House Black Market down 32% and 49%, respectively, illustrating that the strategic investments in Soma's growth and our turnaround strategy in Chico's and White House Black Market are working.
Second-quarter gross margin was 38.4% compared to 14.6% last year, which included the impact of significant non-cash inventory write-offs.
This year, we meaningfully expanded our margin rate as a result of disciplined inventory control, strategically reduced promotions, and more full-price selling.
This was our highest gross margin rate in 13 consecutive quarters.
SG&A expenses for the second quarter totaled $146 million or 30.9% of sales, an improvement of more than 400 basis points from last year's second quarter and nearly 300 basis points better than the second quarter of 2019.
We have continued our cost discipline and reduction initiatives, enabling us to realize leverage in the current year.
Regarding our financial position, we continue to build cash, and our balance sheet continues to strengthen.
We ended the quarter with over $137 million in cash and marketable securities, an increase of nearly $35 million over the first quarter.
Borrowings on our $300 million credit facility remained unchanged from fiscal year end at $149 million.
Our financial position liquidity continues to be bolstered by improving retail sales and a lean expense structure that better aligns cost with sales.
In addition, during the second quarter, we received a $16 million income tax refund related to the $55 million income tax receivable reported in the first quarter, and we expect to receive the balance of the $55 million in the third quarter.
We anticipate building cash throughout the remainder of fiscal 2021.
In the second quarter, we continued our lease renegotiation initiatives with A&G Real Estate Partners, securing year-to-date commitments of approximately $15 million, and incremental savings from landlords, the majority of which will be realized this fiscal year.
This is in addition to the $65 million in abatements and reductions negotiated last year for a total savings to date of $80 million.
Now turning to our outlook.
During the balance of fiscal '21, we expect improving year-over-year demand, but recognize that there is economic uncertainty as we continue to manage through the pandemic.
In addition, we are facing macro supply chain headwinds in the back half of the year that we expect will impact sales and gross margin, including higher freight cost, extended transit times, and product supplier handover delays driven by the pandemic.
Accordingly, given this uncertainty, we are not providing specific guidance, but instead offering high-level outlook expectations for the third quarter and fiscal year.
For the third quarter, we expect consolidated year-over-year sales improvement in the 18% to 22% range, gross margin rate improvement of 13 to 15 percentage points over third quarter last year, SG&A as a percentage of sales to improve 500 to 600 basis points year over year and an income tax rate of 34% to 35%.
For the full fiscal year, we expect consolidated year-over-year net sales improvement in the 32% to 35% range, gross margin rate improvement of 20 to 22 percentage points over fiscal 2020, SG&A as a percent of sales to improve 500 to 600 basis points year over year and an income tax rate of 34% to 35%.
| compname posts q2 earnings per share $0.21.
q2 earnings per share $0.21.
compname says consolidated year-over-year net sales improvement between 18% to 22% for q3.
compname says expects consolidated year-over-year net sales improvement between 32% to 35% for fy 2021.
|
Today, we will review the first quarter results of 2021.
With me on the phone today are Norman Schwartz, our Chief Executive Officer; Ilan Daskal, Executive Vice President and Chief Financial Officer; Andy Last, Executive Vice President and Chief Operating Officer; Annette Tumolo, President of the Life Science Group; and Dara Wright, President of the Clinical Diagnostics Group.
Our actual results may differ materially from these plans and expectations, and the impact and the duration of the COVID-19 pandemic is unknown.
We cannot be certain that Bio-Rad's responses to the pandemic will be successful, that the demand for Bio-Rad's COVID-19-related products is sustainable or that Bio-Rad will be able to meet this demand.
Our remarks today will also include references to non-GAAP net income and non-GAAP diluted income per share, which are financial measures that are not defined under generally accepted accounting principles.
Before I begin the detailed first quarter discussion, I would like to ask Andy Last, our Chief Operating Officer, to provide an update on Bio-Rad's operations in light of the current pandemic-related environment that we are experiencing globally.
As expected, COVID continues to have an impact on our operations, but as previously communicated, we have now adapted well to this environment, and our employees around the world continue to perform to the highest standards.
We continue our focus on the three areas previously communicated, the ongoing safety of our employees; continuing manufacturing operations to ensure product supply and support of our customers; and making sure we continue to make progress on our core strategies.
Overall, we continue to be very pleased with our employee safety despite the increases in COVID in some areas of the world.
Our internal COVID transmission rates remain extremely low, and we are starting to benefit from the vaccination programs.
In Q1, we have maintained the work from home policies we adopted in 2020 and are continuing to monitor the pandemic closely as we assess the right timing for a more general return to the workplace.
As we enter Q2, we expect to continue to experience the impact of the pandemic for at least the coming quarter, but are confident in our ability to meet customer demand while progressing our core strategies and new product development objectives.
And as the global economy trends toward recovery, we're also paying close attention to our supply chain as accelerated demand for raw materials has the potential to cause constraints and prolong higher-than-typical logistics costs.
Provided there is positive global progress on controlling COVID, we anticipate operations starting to return to more normal operating practice in the second half of the year.
Now I would like to review the results of the first quarter.
Net sales for the first quarter of 2021 were $726.8 million, which is a 27.1% increase on a reported basis versus $571.6 million in Q1 of 2020.
On a currency-neutral basis, sales increased 23.4%.
The first quarter year-over-year revenue growth was impacted by a tough compare of about $10 million revenue carryover to Q1 of 2020 related to the December 2019 cyber-attack.
On a geographic basis, we experienced currency-neutral growth across all three regions.
We continued to see strong demand for product associated with COVID-19 testing and related research.
Generally, we are seeing most academic and diagnostic labs now running about 90% capacity, which is an improvement to what we saw in Q4.
We estimate that COVID-19-related sales were about $94 million in the quarter.
Sales of the Life Science Group in the first quarter of 2021 were $366.5 million compared to $227.2 million in Q1 of 2020, which is a 61.3% increase on a reported basis, and a 56.9% increase on a currency-neutral basis.
The year-over-year growth in the first quarter was driven by the continued strength of COVID-19-related qPCR products.
In addition, we saw strong double-digit year-over-year sales growth in Droplet Digital PCR, Western Block and antibody products.
In addition, Process Media, which can fluctuate on a quarterly basis, saw strong double-digit year-over-year growth in the quarter over the same quarter last year.
Excluding Process Media sales, the underlying Life Science business grew 56.2% on a currency-neutral basis versus Q1 of 2020.
On a geographic basis, Life Science currency-neutral year-over-year sales grew across all regions.
In addition to continued adoption of Droplet Digital PCR in BioPharma, we also saw good demand for the QX ONE in wastewater testing applications for COVID, and we expedited the introduction of COVID variant assays, which are being well received.
Key opinion leaders continue to highlight the sensitivity advantage of Droplet Digital PCR.
Sales of the Clinical Diagnostics Group in the first quarter were $358.5 million, compared to $340.3 million in Q1 of 2020, which is a 5.4% growth on a reported basis, and a 2.2% growth on a currency-neutral basis.
During the first quarter, the Diagnostics Group posted solid growth in diabetes and in quality controls.
We started to see a recovery of market demand for non-COVID business, with diagnostics labs returning to about 90% of pre-COVID levels.
The recovery of routine testing and elective surgeries is still progressing.
On a geographic basis, the Diagnostics group posted growth in Asia.
The reported gross margin for the first quarter of 2021 was 55.1% on a GAAP basis, and compares to 55.5% in Q1 of 2020.
The current quarter gross margin percentage declined mainly due to expenses associated with the restructuring initiative that we communicated earlier this year, offset by better product mix, lower service costs and higher manufacturing utilization.
Amortization related to prior acquisitions recorded in cost of goods sold was $4.6 million compared to $3.9 million in Q1 of 2020.
SG&A expenses for Q1 of 2021 were $225.9 million or 31.1% of sales compared to $193.7 million or 33.9% in Q1 of 2020.
The year-over-year SG&A expenses increased mainly due to expenses associated with the restructuring initiative and higher employee-related expenses, and it was offset slightly by a $5 million cybersecurity insurance settlement related to the 2019 cyber-attack as well as lower discretionary spend.
Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2.4 million versus $2 million in Q1 of 2020.
Research and development expense in Q1 was $73.9 million or 10.2% of sales compared to $49.3 million or 8.6% in Q1 of 2020.
The year-over-year R&D expenses increased due to expenses associated with the restructuring initiative and increased project spend.
Q1 operating income was $100.9 million or 13.9% of sales compared to $74.4 million or 13% in Q1 of 2020.
Looking below the operating line.
The change in fair market value of equity securities holdings added $1.179 billion of income to the reported results, which is substantially related to holdings of the shares of Sartorius AG.
During the quarter, interest and other income resulted in net other income of $16.9 million compared to $3.3 million of expense last year.
Q1 of 2021 included $19 million of dividend income from Sartorius, which was declared this year in Q1.
In 2020, the Sartorius dividend was declared in the second quarter.
The effective tax rate for the quarter was 24.7% compared to 23.7% in Q1 of 2020.
The tax rates for both periods were driven by the large unrealized gain in equity securities.
The year-over-year increase in our effective tax rate was due to the restructuring initiative announced earlier this year.
Reported net income for the first quarter was $977.4 million, and diluted earnings per share were $32.38.
This is an increase from last year and is substantially related to changes in the valuation of the Sartorius holdings.
Moving on to the non-GAAP results.
Looking at the results on a non-GAAP basis, we have excluded certain atypical and unique items that impacted both the gross and operating margins as well as other income.
In cost of goods sold, we have excluded $4.6 million of amortization of purchased intangibles, $24 million of restructuring-related expenses and a small legal reserve benefit.
These exclusions moved the gross margin for the first quarter of 2021 to a non-GAAP gross margin of 59% versus 55.9% in Q1 of 2020.
Non-GAAP SG&A in the first quarter of 2021 was 25.4% versus 33.3% in Q1 of 2020.
In SG&A, on a non-GAAP basis, we have excluded restructuring-related expenses of $34.7 million, legal-related expenses of $4.4 million, and amortization of purchased intangibles of $2.4 million.
In R&D, we have excluded $16.9 million of restructuring-related expenses.
The non-GAAP R&D expense in Q1 was consequently 7.9%.
The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 13.9% on a GAAP basis to 25.8% on a non-GAAP basis.
This non-GAAP operating margin compares to a non-GAAP operating margin in Q1 of 2020 of 13.9%.
We have also excluded certain items below the operating line, which are the increasing value of the Sartorius equity holdings of $1.179 billion, and $1.8 million of loss associated with venture investments.
Our non-GAAP effective tax rate for the quarter was 23.6% versus 25.7% in Q1 of 2020.
The tax rate was impacted by changes in the geographic mix of earnings.
And finally, non-GAAP net income for the first quarter of 2021 was $157.4 million, or $5.21 diluted earnings per share compared to $57.6 million and $1.91 per share in Q1 of 2020.
Moving on to the balance sheet.
Total cash and short-term investments at the end of Q1 were $1.025 billion, compared to $997 million at the end of 2020.
During the first quarter, we purchased 89,506 shares of our stock for a total of $50 million at an average price of approximately $559 per share.
For the first quarter of 2021, net cash generated from operations was $114 million, which compares to $63 million in Q1 of 2020.
The improvement is mainly driven by higher operating profits.
The adjusted EBITDA for the fourth quarter of 2021 was $232 million or 31.9% of sales, and excluding the Sartorius dividend, was 29.3%.
The adjusted EBITDA in Q1 of 2020 was $107.4 million or 18.8% of sales, which did not include the 2020 Sartorius dividend.
Net capital expenditures for the first quarter of 2021 were $19.5 million, and depreciation and amortization for the first quarter was $32.7 million.
Moving on to the guidance.
We began the year with a projection of between 4.5% and 5% non-GAAP sales growth, and a non-GAAP operating margin of between 16% and 16.5%.
Even though we continue to be uncertain about the duration and impact of the COVID-19 pandemic, given the results of the first quarter and our current outlook, we are now guiding currency-neutral revenue growth in 2021 to be between 5.5% and 6%.
This includes COVID-related sales, which we estimate to be between $170 million and $180 million versus our prior estimate of about $150 million and $160 million.
We project most of the 2021 COVID-19-related sales to occur during the first half of the year, and we continue to assume a continued gradual return to pre-pandemic activity and a more normalized business mix.
Full year non-GAAP gross margin is now projected between 56.5% and 57% versus our previous guidance of 56.2% and 56.5%.
And full year non-GAAP operating margin to be about 17%, and full year adjusted EBITDA margin to be about 22% versus previous guidance of 21%.
| compname reports q1 non-gaap earnings per share of $5.21.
q1 non-gaap earnings per share $5.21.
q1 earnings per share $32.38.
q1 sales rose 27.1 percent to $726.8 million.
for full year 2021 anticipates non-gaap currency-neutral revenue growth of approximately 5.5 to 6.0 percent.
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You should not unduly rely on these statements.
He comes to us with a wealth of retail financial experience and we are pleased to have him on board and on the call today.
We achieved another great quarter and the momentum continues.
Third quarter earnings per share of $0.15 repr-+esent the companies best third quarter performance since 2016 and demonstrates the extraordinary progress we continued to make in our turnaround strategy.
The return to third quarter profitability was driven by healthy year over year comparable sales growth meaningful gross margin expansion.
In fact, the best third quarter gross margin performance since 2014 and continued diligence expense management.
The robust year-over-year third quarter comparable sales increase of 28% was driven by significant digital and store outperformance across all three brands propelled by the meaningful quality, fit, and fabrication enhancements in our products.
We have continued to significantly drive full-price selling, reduce markdowns and increase gross margin quarter-over-quarter.
Dramatic improvement is continuing at Chico's and White House Black Market as indicated by our third quarter comp sales increase of 23% and 33% respectively on significantly lower inventory levels.
Both apparel brands are driving meaningfully faster sell-through rates, higher productivity, more full-price sales, and better-maintained margins.
Existing and new customers are enthusiastically responding to our updated fabric, fit, and new product offering.
The apparel brands generated their best third quarter gross margin performance in more than five years.
Soma posted a 30% comp sales increase over last year's third quarter on top of an 11% comp sales increase in the third quarter of 2019.
Marking five consecutive quarters of comp sales growth.
To continue driving this business forward, we have invested in the necessary inventory capital and staffing.
Twelve months of trailing data from market research NPD Group shows that solid growth continues to outpace the market in non-sports bra, panties, and sleepwear.
We believe this data along with our recent performance is a strong indication that Soma is well-positioned to continue capturing additional market share on our journey to becoming a billion-dollar brand.
Our third quarter performance highlights the remarkable progress we are making on our five strategic priorities.
Let me take a few minutes to update you on each.
First, continuing our ongoing digital transformation.
Over the last two and a half years we have successfully transformed Chico's FAS into a seamless digital-first customer-led company as evidenced by the trajectory of our digital sales over this time.
Even as store revenues have continued to rebound.
Digital sales have remained very strong.
The investments we have made in talent and technology have paid off.
Our proprietary digital tools continue to gain traction.
And customers using these tools are more engaged and have higher conversion rates and average order value.
These tools continue to drive year-over-year new multi-channel customer growth and these customers are our most valuable spending three times a single-channel customer.
We continue to leverage our online outfitting experiences, style connect in my closet, and customer engagement growth every quarter.
Approximately 3 million customers representing nearly half of our active customer file are now enrolled in file connect.
My closet is a personalized experience enabling customers to augment their closet by coordinating their wardrobe for past purchases.
Generates conversion at four and a half times the site average and significantly higher average order value than those not using the feature.
We are continually enhancing our personalization efforts to drive engagement, conversion, and orders, including our Shop The Look feature launched last year.
After pay allowing for customers to pay for their purchases in installments has also proven to be a terrific UPT and sales driver.
Since it launched about a year ago.
It continues to exceed our expectations.
Buy Online Pick Up in the store has also remained popular and is still growing double-digit.
Second, further refining our product.
On the product front, we are doing two key things at each of our brands to take market share and drive results.
First, leveraging our customer data and insights.
And second, constantly innovating and elevating our assortment.
Customers are clearly responding across all three brands.
At Chico's, denim and our new pant selections are a big hit, which she is pairing with wovens, sweaters, and our great no-iron shirt to make a complete outfit.
She is responding to our elevated fabrics and new comfort features in bottoms.
White House black market continues to benefit from elevated styling and quality improvements as well.
We had an outstanding response to our new denim fit and fabric with year-over-year denim revenues nearly doubling for the quarter.
She is pairing denim with our three new key White House Black Market jackets silhouette that is versatile for every occasion.
Continually creating comfortable beautiful solutions are core to the Soma brand.
We offer a full broad menu of solutions so she can find the absolute right bra for all of her needs.
Year over year bra revenues was up 38% in the quarter boosted by the fact that our customers returned to the stores or in-person fittings.
Sleepwear and panties continue to be strong and drove double-digit growth over last year and 2019 levels.
Next driving customer engagement.
Through enhanced customer data analytics and insight, we have elevated and targeted our marketing efforts, which are driving brand awareness, generating traffic, and acquiring new customers.
We continue to allocate more resources to digital, storytelling influencers, and other social efforts.
We are elevating our content including using more organic and user-generated content.
Our social media customer engagement continues to grow and customers are responding.
For example, our weekly Facebook live selling events are engaging and continue to gain traction and generate sales.
In the third quarter, our apparel brand had over 2.3 million views in social selling live videos and real.
We continue to acquire new customers with the customer count up nearly 8% from the prior-year third quarter.
And their average age continues to trend younger than existing customers.
This data reinforces the runway for all three brands.
Priority for maintaining our operating and profit discipline.
One of our most meaningful third quarter accomplishments was our gross margin performance.
We achieved our highest third quarter gross margin rate since 2014, driven by strength in full-price sales and the corresponding reduction in the promotion, strategic inventory management, and improved leverage of occupancy cost on higher sales.
Continued cost discipline efforts and sales leverage resulted in the third quarter SG&A and rate lower than both the third quarters of 2020 and 2019.
In fact, we posted our best SG&A rate performance since 2018.
And finally, delivering higher productivity in our real estate portfolio.
Door traffic was very healthy and we delivered strong store sales growth during the third quarter.
Stores continue to be an integral part of our overall strategy as data indicates that digital sales are higher in markets where we have a strong retail presence.
Food and store growth for the portfolio brands makes sense where the investment delivers profitable returns.
We have successfully opened 64 Soma shop-in-shop inside Chico's stores, which are exceeding expectations, driving new customers to both brands, lifting store productivity, and further expanding our digital business.
We plan to open nine more shops-in-shop in the fourth quarter.
At the same time, we continue to rationalize and tighten our real estate portfolio as appropriate in order to deliver overall higher store profitability.
We will make decisions to close stores when it is accretive to the overall portfolio.
This remains a dynamic process.
For example, at the beginning of the year, we expected to close 45 to 50 locations.
This fiscal year but have reduced that number to 37 due to a combination of favorable store performance and successful lease negotiation.
I'm excited to be part of Chico's team and look forward to engaging with all of you in the investor and analyst community.
Our momentum continued in Q3 and we posted another quarter of profitable growth with diluted earnings per share of $0.15 for the quarter, compared to a $0.48 loss per share in last year's third quarter and a $0.7 loss per share for the third quarter of fiscal 2019.
I will note that on a non-GAAP basis before onetime charges diluted earnings per share for the quarter was $0.18.
This year's third quarter marks our best third quarter earnings performance since 2016 with all three brands leveraging a shared platform contributing meaningfully to sales growth, gross margin expansion, and significantly higher operating income.
Third quarter net sales totaled $453.6 million, compared to $351.4 million last year.
This 29% increase reflects a comparable sales increase of 28% and is driven by meaningful improvement in product and enhanced marketing efforts, which drove full-price selling partially offset by 31 net store closures in the last 12 months.
At the brand level, Chico's comparable sales grew 23%, White House Black Market comp sales grew 33.4%, and SOMA comp sales grew 30.2% over 2020.
Looking at the third quarter compared to 2019, our comparable sales continue to improve reaching close to 97% of pre-pandemic 2019 levels with Soma increasing 44% in Chico's and White House Black Market down 16% and 5% respectively.
I would note that this level of sales growth was achieved with much lower on-hand inventories compared to 2019 with Chico's inventories down 46% and White House Black Market inventory is down 39%.
Reinforcing the higher productivity achieved by managing inventory with a focus on overall profitability.
The third quarter gross margin was 40.7%, compared to 22% last year, and 35.3% in 2019.
The current year gross margin rate was our best performance in 18 consecutive quarters and reflected higher full-price sales and improved occupancy leverage.
This improvement was achieved despite supply chain challenges and related costs that continue to impact the retail sector.
Moving down the P&L, SG&A expenses for the third quarter totaled $162.5 million or 35.8% of sales, compared to 43.6% of sales in 2020, and 37.3% of sales in 2019.
Continued cross-discipline and expense reduction initiatives coupled with improving sales have enabled us to realize meaningful leverage that would give us more financial flexibility as we continue to grow all three brands.
On a year-to-date basis, I would like to highlight that both profitability and cash flow have improved significantly since last year and 2019.
In addition to giving us much more flexibility, higher free cash flow generation will provide us with fuel to invest behind a strategy that is working.
Fueling growth will be a key capital allocation priority going forward.
On a year-to-date basis, we generated $89 million of EBITDA through the third quarter, which is significantly higher than EBITDA of $65 million for all of fiscal 2019.
For the current year nine months, we posted earnings per share of $0.29, compared to a loss of $2.43 per share in the prior year nine months, and a loss of $0.7 for the same period in 2019.
Now let's shift to the balance sheet.
Our cash position and total liquidity remain strong.
Providing us with the flexibility to manage the business and make investments to further fuel our momentum.
We ended the quarter with cash and marketable securities of $137.5 million.
A slight increase over the second quarter balance even after reducing borrowings on our long-term credit facility by a third with a $50 million debt repayment.
On hand inventories for the quarter remain very lean down 13% relative to 2020 and down 19% relative to 2019.
Our inventory has never been more productive and delivered a very high gross margin for us especially in the apparel brands where on-him inventory was down 38% to last year and down 43% to 2019.
Turning to real estate.
In the third quarter, we continued our lease renegotiation initiative with A&G Real Estate Partners securing incremental commitments of $7 million bringing our total year-to-date commitments to $22 million in rent reductions from landlords.
This is in addition to the 65 million introductions negotiated last year for a total savings of $87 million since we commenced the renegotiation program in 2020.
These renegotiated store leases will provide an occupancy tailwind and further enhance store profitability going forward.
As Molly noted, we are continuing to right-size our store base.
Primarily at leases come due lease checkouts are available for buyouts make economic sense.
We have flexibility with approximately 60% of our leases coming up for renewal for kick-outs available over the next two to three years.
During the third quarter, we closed five stores bringing our year to date closing to 23 and we ended the quarter with 1,279 boutiques.
Going forward, we will continue to actively manage our real estate portfolio to enhance overall store profitability.
Now turning to our fourth quarter outlook, given the strength of customer demand for all three of our brands, we are confident that our momentum will be sustained as we get further into the quarter.
We expect fourth quarter total sales to continue to accelerate closer to 2019 and reach $495 million to $510 million.
We expect fourth quarter gross margin rate as a percent of sales to be a part of 2020 and 2019 and in the range of 33% to 34.5%.
This expectation incorporates continued inventory management with faster sell-through rates and higher full-price sales as well as higher supply chain costs.
We are continuing to manage our expense structure and expect that the SG&A rate as a percent of sales to be in the range of 32.3% to 32.8%.
We expect our effective tax rate to be approximately 33% for the quarter, which will give us a rate of 24% for the full year.
And we expect to deliver dilutive earnings per share a flat to $0.5 for the fourth quarter putting us well above 2020 and 2019 for both the quarter and the full year.
Before we go on to Q&A, I would like to leave you with three key thoughts.
First, our turnarounds have accelerated due to our strategic initiatives and continued cost discipline.
Second, all three of our brands are contributing meaningfully to sales growth and profitability.
And last, we have greatly improved the fundamental operating model of the business and have created a sustainable tailwind that will allow us to successfully navigate the current macro environment and continue on a path of profitable growth well into the future.
| compname reports q3 earnings per share of $0.15.
q3 earnings per share $0.15.
q3 adjusted earnings per share $0.18 excluding items.
q3 sales $453.6 million versus $351.4 million.
sees consolidated net sales of $495 million to $510 million in q4.
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In second quarter, Cullen/Frost earned $93.1 million or $1.47 per share compared with earnings of $109.6 million, or $1.72 per share in the same quarter of last year and $47.2 million or $0.75 a share in the first quarter of this year.
Beyond the financials, the second quarter was an extraordinary one for Frost.
To add our response to the COVID-19 pandemic, we've been continuing serving customers with appointments in our bank lobbies, to our motor banks, with our online and mobile banking service, to around the clock telephone customer service and at our network of more than 1200 ATMs. I'll talk in more detail about our Houston expansion and our Paycheck Protection Program loans.
But for now, I'd like to point out that we have been completing our organic growth initiatives and still achieving the same award winning level of customer service process known for, despite having more than two thirds of our employees working remotely.
In fact, during the second quarter, we learned that Frost had achieved its highest ever Net Promoter Score with a jump from 82 to 87.
And that's a score that would be the envy of many well known brands, and it's a testament to our core values and our ability to consistently take care of our customer's needs, especially during trying times.
More recently, we learned a process among the banks, that Greenwich and Associates has identified as standouts in their response to the pandemic based on customer surveys.
In fact, Frost was one of only two banks to be named a standout in both the small business banking and middle market banking categories.
I mentioned the Paycheck Protection Program.
As of June 30, when PPP loan applications were initially scheduled to end, we had helped nearly 18,300 of our customers get PPP loans, totaling more than 3.2 billion.
In the state of Texas, Frost was number three in PPP lending with 5% of the loans in San Antonio, Fort Worth and Corpus Christi, Frost was number one in terms of PPP loans approved and in San Antonio we had more PPP loans in Bank of America, Chase and Wells Fargo, combined.
We did well helping businesses of all sizes, but I'm particularly pleased that more than three quarters of our PPP loans were for $150,000 or less, and close to 90% were for 350,000 or less.
PPP applications have been extended into August and we're still taking anywhere from a few to 50 applications per day.
Through July, we've taken an additional 500 applications for over $22 million or an average size of about $45,000.
Meanwhile, we're setting up processes to help borrowers get their loans forgiven.
And the efforts of Frost bankers have helped save hundreds of thousands of jobs.
Those results are more reflective of our culture and our philosophy than even the numbers we're reporting today for the second quarter.
Average deposits in the second quarter were $31.3 billion, up by more than 20% from the $26 billion in the second quarter of last year, and the highest quarterly average deposits in our history.
We're grateful for the confidence our customers has placed in us during these times.
Average loans in the second quarter were $17.5 billion, up by more than 20% from the $14.4 billion in the second quarter of last year.
That includes our strong showing in PPP loans, but our loan total would have been up approximately 5% even without PPP.
In the second quarter our return on average assets was 0.99%, compared to 1.4% in the second quarter of last year.
Our credit loss expense was $32 million in the second quarter, compared to $175.2 million in this first quarter of 2020 and $6.4 million in the second quarter of 2019.
That first quarter provision was significantly influenced by our energy portfolio stress scenario of oil at $9 per barrel for the remainder of 2020.
Oil prices have since stabilized at levels well above that assumption, and the energy borrowing base redeterminations are 95% complete.
Net charge-offs for the second quarter were $41 million, compared to $38.6 million in the first quarter and $7.8 million in the second quarter of last year.
Annualized net charge-offs for the second quarter were 0.94% of average loans.
Second quarter charge-offs were related to energy borrowers that have been discussed for several quarters.
Non-performing assets were $85.2 million at the end of the second quarter compared to $67.5 at the end of the first quarter, and $76.4 at the end of the second quarter last year.
At the current level, non-performing assets represent only 22 basis points of assets which is well within our tolerance level and our level lower than our average non-performing assets over the past nine quarters.
Overall delinquencies for accruing loans at the end of the second quarter were $91 million, or 51 basis points of period end loans.
Those numbers remain within our standards and comparable to what we've experienced in the last -- past several years.
The payment deferrals, we have extended to customers due to the pandemic related slowdown have had some impact on delinquencies.
To the end of the second quarter, we granted 90 day deferrals, totaling $2.2 billion.
Of loans whose deferral period has now ended, which is about $1.1 billion, only $72 million worth have requested a second deferral.
Total problem loans, which we define as risk grade 10 and higher were $674 million at the end of the second quarter, compared to $582 million at the end of the first quarter, which happened to be a multi year low.
A subset of total problem loans, those loans graded 11 and worse, which is synonymous with the regulatory definition of classified totaled $355 million or only 12% of Tier 1 capital.
Energy related problem loans were $176.8 million at the end of the second quarter, compared to $141.7 million for the previous quarter, and $93.6 million in the first quarter of last year.
To put that into perspective, the year in 2016 total problem energy loans totaled nearly $600 million.
Energy loans in general represented 9.6% of our non-PPP portfolio at the end of the second quarter, if you include PPP loans, energy loans were 7.9%.
As a reminder, the peak was 16% back in 2015, and we continued to diversify our loan portfolio and to moderate our company's exposure to the energy segment.
As expected, and as we discussed in the first quarter call, the pandemics economic impacts on our portfolio have been negative, but manageable.
During our last conference call, we discussed portfolio segments that have had increased impact from economic dislocations brought on by the pandemic.
Besides energy, we've narrowed these down to restaurants, hotels, aviation, entertainment and sports, and retail.
The total of these portfolio segments, excluding PPP loans, represented almost $1.6 billion at the end of the second quarter.
Like the energy portfolio, we continually review these specific segments, and we have frequent conversations with those borrowers to assess how they're handling current issues.
Combined with our risk assessments, these conversations influence our loan loss reserve to these segments, which is 2.52% at the end of the second quarter.
Overall, our focus for commercial loans continues to be on consistent balanced growth, including both core loan component, which we define is lending relationships under $10 million in size, as well as larger relationships, while maintaining our quality standards.
We're hearing from customers in all segments that economic impact of the pandemic, as well as the uncertainty ahead and those factors have had an impact on our results.
New relationships are up by about 28%, compared with this time last year, largely because of our strong efforts in helping small businesses get PPP loans.
When we ask these businesses why they came to Frost, 340 of them told us that PPP was a key factor.
The dollar amount of new loan commitments booked through June dropped by about 3%, compared to the prior year.
Regarding new loan commitments booked, the balance between these relationships went from 57% larger and 43% core at the end of the first quarter to 53% larger and 47% core so far in 2020.
And that's about where it was this time last year.
The market remains competitive.
For instance, the percentage of deals lost to structure increased from 61% this time last year to 75% this year.
Our weighted current active loan pipeline in the second quarter was up 24%, compared with the end of the first quarter.
The first quarter numbers were low and reflected the uncertainty about the pandemic's effect.
On the consumer side, we continue to see solid growth in deposits and loans, despite the impact from the pandemic, and the reduction in customer visits to our financial centers.
Overall, net new consumer customer growth rate for the second quarter was 2.2%, compared to the second quarter of 2019.
Same-store sales, however, is measured by account openings were down by 30% through the end of the second quarter, as lobbies were opened only for -- by appointment only and through driving [Indecipherable].
In the second quarter 59% of our account openings came from our online channel, which includes our Frost Bank mobile app.
Online account openings in total were 72% higher, compared to the second quarter of 2019.
The consumer loan portfolio was $1.8 billion at the end of the second quarter, and it increased by 4.3%, compared to last year.
Overall, Frost Bankers' have risen to the unique challenges presented by the pandemic and its results in shutdowns with a mix of keeping our standards and sticking to our strategies, along with a truly remarkable amount of flexibility and adaptability.
Our Houston expansion continues on pace, with four new financial centers opened in the second quarter and two more opened already in the third quarter for a total of 17 of the 25 planned new financial centers.
Those new financial centers include our location in the Third Ward, where customer response has been enthusiastic.
Even though our lobbies are open for appointment only.
Our employees manage those new financial center openings, while most of them are working remotely due to the pandemic, and also while non-stop -- working non-stop to help our business customers stay with PPP loans.
And that commitment and dedication is what Frost workforce philosophy and culture is all about.
As I mentioned earlier, we've gained a lot of new business relationships through our PPP efforts.
And customers that are new to us are learning what a longtime customer has always done, that Frost is a source of strength for customers and our communities and also a source and force for good in people's everyday lives.
I've told our team that their efforts are historic and heroic, and I'm extraordinarily proud of our company and we've been able to help so many small businesses get through these extraordinary times.
It's clear that many pandemic challenges remain, particularly here in Texas, we're seeing the spirit and dedication of Frost employees, who live our philosophy and culture every day, gives me optimism that we will help our customers find a way through this situation and come out stronger.
I want to start out by giving some additional financial information on our PPP loan portfolio.
As Phil mentioned, we generated over $3.2 billion in PPP loans during the quarter.
Our average fee on that portfolio was about 3.2% and translates into about $104 million.
Our direct origination costs associated with these loans totaled about $7.4 million, resulting in net deferred fees of about $97 million, about 20% of the net fees were accreted into interest income during the second quarter.
Looking at our net interest margin, our net interest margin percentage for the second quarter was 3.13%, down 43 basis points from the 3.56% reported last quarter, excluding the impact of our PPP loans, the net interest margin would have been 3.05%.
The 43 basis point decrease in our reported net interest margin percentage, primarily resulted from lower yields on loans and balances at the Fed, as well as an increase in the proportion of balances at the Fed, as a percentage of earning assets, partially offset by lower funding cost.
The taxable equivalent loan yield for the second quarter was 3.95%, down 70 basis points from the previous quarter, impacted by the lower rate environment with the March Fed rate cuts and decreases in LIBOR during the quarter.
The yield on PPP loan portfolio during the quarter was 4.13% and had favorable 3 basis point impact on the overall loan yields for the quarter.
Looking at our investment portfolio, the total investment portfolio averaged $12.5 billion during the second quarter, down about $463 million from the first quarter average of $13 billion.
The taxable equivalent yield on the investment portfolio was 3.53% in the second quarter, up 7 basis points from the first quarter.
Our municipal portfolio averaged about $8.5 billion during the second quarter, flat with the first quarter with the taxable equivalent yield also flat with the first quarter at 4.07%.
At the end of the second quarter over 70% of the municipal portfolio was pre-refunded or PSF insured.
The duration of the investment portfolio at the end of the second quarter was 4.4 years, compared to 4.6 years last quarter.
Looking at our funding sources, the cost of total deposits for the second quarter was 8 basis points, down 16 basis points from the first quarter.
The cost of combined Fed funds purchased and repurchase agreements, which consists primarily customer repos decreased 80 basis points to 0.15% for the second quarter from 0.95% in the previous quarter.
Those balances averaged about $1.3 billion during the second quarter, up about $36 million from the previous quarter.
Looking to non-interest expense, total non-interest expense for the second quarter decreased approximately $3.5 million, or 1.7%, compared to the second quarter last year.
The expense decrease was impacted by the $7.4 million in PPP loan origination costs that were deferred and netted against the PPP processing fee, which were amortized into interest income as a yield adjustment over the life of those PPP loans.
Excluding the favorable impact of deferring those origination fees related to PPP loans, total non-interest expenses would have been up $3.8 million, or 1.9%, compared to the second quarter last year.
In addition to the reduced expense run rate during the second quarter, due to the pandemic effect on the business environment, we continue to focus on managing our discretionary spending and looking for ways to operate more efficiently.
As we look out for the full-year, adding back to $7.4 million in deferred expenses related to the PPP loans I mentioned previously, we currently expect annual expense growth of something around 6%, which is down 2.5 percentage points from the 8.5% growth guidance we gave last quarter.
Regarding income tax expense, we did recognize a $2.6 million one-time discrete tax benefits during the quarter related to an asset contribution to a charitable trust during the second quarter.
Excluding the impact of that item, our effective tax rate on a year-to-date earnings would have been about 3.1%.
| compname posts q2 earnings per share $1.47.
q2 earnings per share $1.47.
|
I'm here with James Quincey, our chairman and chief executive officer; and John Murphy, our chief financial officer.
Before we begin, please note we've posted schedules under the financial information tab in the investors section of our company website at www.
You can also find schedules in the same section of our website that provide an analysis of our gross and operating margins.
After a strong first half of the year, we saw continued momentum in our business in the third quarter.
While the global recovery remains asynchronous, our people and our systems are leverage the learnings to deliver good results and emerge stronger.
And while markets are at different stages of reopening around the world, our local businesses have been increasingly resilient through restrictions and lockdowns.
As a result, our underlying volumes have accelerated on a two-year basis with quarterly growth versus 2019 for the first time since the pandemic began.
This improvement has been supported by our transformation agenda, which set us on a path to more efficient and effective marketing, as well as more disciplined and intelligent innovation.
We're investing accordingly behind our portfolio of loved brands and are seeing signs of early traction.
Given strong results year to date and increased visibility into the rest of the year, we expect to deliver organic revenue at the high end of our previously provided range and are raising bottom line and cash flow guidance for the full year.
Then John will discuss our financials and raised guidance and some early considerations for 2022.
In the first half of 2021, mobility and business levels improved in many markets as lockdowns eased and vaccinations increased.
The recovery has not been a straight line and continues to be uneven around the world.
But despite the asynchronous recovery, in the third quarter, our volumes surpassed 2019 levels for the first time since the pandemic began.
Although not yet back to 2019 levels as a percent of our business, we saw sequential improvement in away-from-home volumes on a two-year basis as consumers returned to many of their former routines.
At-home volumes also showed ongoing strength even as away-from-home channels improved.
The quarter was off to a promising start in July, but the Delta variant impacted several markets, resulting in a softer August, followed by improvement in September as the variant began to lessen in some of our key markets.
The pandemic continues to be a key factor across our operating environment, in addition to the ongoing pressure points in our supply chain.
However, our network system is leveraging the learnings from the past 18 months, sharing best practices and skillfully executing by applying revenue growth management and working our supply chain levers to capitalize on the strengths of our brands and mitigate disruptions.
The industry is growing, and we continue to gain share.
Our overall value share improved year on year and remains above 2019 levels.
We are pleased to report gains across categories, as well as both within at-home and away-from-home channels.
Our operating units are combining the power of scale with the deep knowledge required to win locally in an environment that remains dynamic.
So, diving a little into the key drivers across our geographies, starting with Asia Pacific.
In China, media investments across categories are yielding promising signs.
Results in the quarter reflect strict COVID lockdowns and some weather-related disruption in August while September marked sequential improvement.
Japan's state of emergency was lifted at the end of the quarter after consumers spent the majority of 2021 in lockdown.
Strengthened execution across our teams and innovation have helped lessen impacts, and our consumer base has grown beyond 2019 levels.
In India, we participated strongly in the recovery by focusing on affordability and omnichannel growth through eB2B.
We grew both Trademark Coke and local icon, Thums Up, using effective marketing activations.
We had share gains in ASEAN and the South Pacific operating units despite pandemic-related restrictions in all of its top markets.
Our investments behind sparkling flavors and Coca-Cola Zero Sugar will continue to create value when lockdowns are lifted.
In EMEA, in Europe, we gained value share across nearly all categories as restrictions eased.
While weather, a slower recovery in tourism and the Delta surge had an impact, our global campaigns for key brands, including Coca-Cola Zero Sugar, Sprite, and Fanta, helped drive sparkling's share.
As vaccinations accelerated in Eurasia and the Middle East, we maintained momentum through effective revenue growth management initiatives, resulting in top line that expanded faster than the macro environment in those top markets.
Our results in Africa were balanced across regions and categories during this quarter despite a third wave of the pandemic that resulted in targeted lockdowns.
Vaccination rates remain on the low side relative to the rest of the world, and our focus remains on affordability and single-serve packs as mobility increases in countries like Egypt and Nigeria.
We maintained strong momentum in North America despite a COVID resurgence in many states, leading to stalling consumer sentiments and supply chain challenges that resulted in both missed opportunities and incremental costs.
The at-home channel remains healthy.
And although away-from-home growth accelerated early in the quarter, labor shortages have constrained capacity with some on-premise customers.
Recent price actions to offset higher input costs have been effective with lower-than-expected price elasticities to date, and promotional levels remain below 2019.
In Latin America, successful commercial initiatives, including affordability packs, increased availability of our key products and strong customer execution in both modern and traditional trade, drove volume growth across all major markets amid an improving COVID environment.
Improvement in single-serve mix, some pricing actions and connecting brand strategies to on-premise customers to drive further recovery in the away-from-home channel all contributed to strong price/mix.
Within global ventures, Costa benefited from retail store recovery as the U.K. reopened with improved reach and frequency from its enhanced loyalty program.
Costa continues to expand across platforms into new markets in partnership with our bottlers, resulting in growing brand awareness.
Our bottling investments group performance was driven by India and the Philippines.
BIG saw strict lockdowns in several markets, as well as rising inflation but has continued to see share gains year to date in South Africa.
Adverse impacts have been well managed through package and category mix improvements along with cost controls, preserving progress on our operating margin during the pandemic.
Global category teams are working with our operating units to build an engine to drive effective marketing at scale and innovation which can be amplified across the world.
Highlights from this quarter include Coca-Cola Zero Sugar's new recipe has rolled out in more than 50 countries and has had accelerated growth in the last three months.
In September, Trademark Coca-Cola's new global brand philosophy, Real Magic, was unveiled, featuring a refreshed look for our iconic logo, the Hug.
The Real Magic platform takes a digital-first approach, and our execution feature a range of experiences that are tailored to Gen Z and leverage passion points like gaming and music to attract the new generation of drinkers.
Sparkling flavors gained share in the quarter driven by investments in targeted brand-country combinations with a focus on occasions and zero sugar offerings.
In China, Sprite volume growth was accelerated by leveraging the global Let's Be Clear campaign during summer music festivals.
Similarly, the #WhatTheFanta campaign focuses on snacking and is driving growth across all key metrics in Europe.
The hydration, sports, tea, and coffee categories are seeing a good return on spend behind global brands.
AHA's expansion into new markets this year has shown flexibility to adapt to local customer and consumer needs.
In advanced hydration, functional benefits have helped to stretch brand power and drive share for Aquarius as it becomes more of a global brand.
Tea and coffee have had success with Fuze Tea in Europe and both Ayataka and Costa ready-to-drink in Japan.
There is an opportunity to recover share in Georgia Coffee as the at-work occasion returns.
Our juice portfolio gained share this quarter, helped by Minute Maid Pulpy performance in China, Del Valle growth in Latin America and strong results across brands in Africa.
In dairy, fairlife is set to become the first billion-dollar brand in our dairy portfolio and has recently launched its joint venture in China.
Our experimentation with Topo Chico Hard Seltzer is expanding, and we're gathering valuable insights globally, including the importance of building the category in regions where it is nascent.
We are seeing encouraging performance where the flavored alcoholic beverage category is growing rapidly, and we have on-shelf presence.
Molson Coors recently announced the national rollout of Topo Chico Hard Seltzer in the US with new Margarita flavors.
We also recently announced the expansion of our relationship with Molson Coors to bring the brand into Canada.
As the pandemic recovery has progressed, we've seen challenges and disruptions in many parts of the world, in addition to inflationary forces that could persist.
We have years of experience in dealing with these types of environments and are enhancing our strong capabilities that enable us to do so.
We are using the crucial tool of revenue growth management and its many forms and are executing in collaboration with our bottling partners.
We continue to refine our ability to optimize price and package offerings according to occasions, brands and channels, striking the right balance between premiumization and affordability.
In addition to streamlining our portfolio, targeting more disciplined innovation, intelligent experimentation and transforming our marketing model, we're also building strong digital capabilities.
We have taken an enterprise approach and are progressing on the rollout of multi-category eB2B platforms with our bottlers globally.
As an example, Wabi is seeing strong growth outside its home market of Latin America has more than 50 categories contributing meaningfully to its sales on the platform.
Additionally, we are delivering outsized growth through a powerful and growing omnichannel presence across regions.
We're driving incremental incidents with partners like foodservice aggregators.
North America, for example, has grown attachment rates by mid-single digits with third-party and restaurant-owned platforms.
And we're gaining share in e-commerce with significant wins in Eurasia and hitting record levels in Latin America this quarter.
I'd also like to reiterate that sustainability is an integral part of our business strategy and is a key driver of future growth.
From 2018 when we launched World Without Waste through today, we've made much progress against our pillars to design, collect and partner to deliver against our goals.
Our commitment to reduce waste globally is also closely connected to our climate ambitions because collecting more empty packages, using more recycled material, lightweighting our bottles and using plant-based materials are all ways we are embracing the collective effort to decarbonize the global economy.
We strive to provide stakeholders with clear progress against our goals through our annual business and ESG report and our World Without Waste reports, including using the Global Reporting Initiative, SASB, and TCFD reporting framework, as well as disclosures through other publicly available avenues like CDP and the Ellen MacArthur Foundation.
We continuously revisit our ESG reporting and disclosures to ensure our leadership position.
We do not take our responsibility lightly, and we carefully and thoroughly vet long-term objectives with our system partners and only commit new goals with a clear, actionable plan.
As we look at our year-to-date performance as a system, it's clear that we are emerging stronger from the pandemic, delivering solid results under a more network structure.
In the third quarter, we delivered another set of strong results, building on the momentum we've seen this year.
Our Q3 organic revenue was up 14% with concentrate shipments up 8% and price/mix up 6%.
Price/mix was led by strong pricing in North America and Latin America and further improvement in away-from-home channels in many markets.
Unit case growth was 6% with absolute unit cases ahead of 2019 levels for the first time this year and a sequential improvement versus the second quarter on a two-year basis.
Concentrate shipment outpaced unit cases in the quarter due to inventory build by some of our bottling partners to manage through near-term disruption.
Comparable gross margin for the quarter was up approximately 160 basis points versus prior year, driven by pricing in the market, positive mix and timing of shipments.
Despite some pressure points in the supply chain, we're successfully pulling the levers at our disposal to mitigate impacts to the best of our ability.
We continued to invest as many markets reopened during the quarter and significantly stepped up our marketing dollars versus prior year.
As a result, our comparable operating margin compressed by 40 basis points year over year, more than offsetting the flow-through from the strong top line.
Below operating income, we saw some leverage come through from the other income line and a lower tax rate for the quarter that was driven by our updated effective tax rate for the full year to 18.6% from 19.1% previously.
Putting all of this together, third-quarter comparable earnings per share of $0.65 was an increase of 18% year over year, including a three-point benefit from currency.
We also delivered strong year to date free cash flow of $8.5 billion.
Given our strong results and with one quarter remaining, we have good visibility and are raising guidance for the full year.
We now expect to deliver organic revenue growth of 13% to 14%, which is at the high end of our previously provided range, and comparable earnings per share growth of 15% to 17% in 2021.
Our updated guidance for free cash flow of approximately $10.5 billion represent significant progress over the past few years and particularly during the COVID era.
This progress is further dimensionalized as follows: We expect to achieve this year a dividend payout ratio below our long-term target of 75% of free cash flow for the time since 2015.
We anticipate delivering another year of free cash flow conversion above 100%.
And finally, our expected free cash flow has almost doubled since 2017.
Our improving cash flow position will allow us to be even more vigorous in pursuit of our capital allocation priorities.
First and foremost, to invest in our business.
Secondly, continuing our track record to grow our dividend.
Thirdly, to seek opportune M&A.
And finally, with excess cash to repurchase our shares.
So, as we think about Q4, a few things to keep in mind.
One, the recovery phase looks different around the world, and we expect that to continue.
Two, we continue to see a minimal commodity impact due to hedges we have in place for the remainder of the year.
Three, from a marketing perspective, we expect to increase consumer-facing marketing spend toward levels similar to 2019 while improving the quality of that spend and allocating it in a more targeted manner.
Four, our currency outlook continues to contemplate a tailwind of 1% to 2% to the top line and approximately 2% to 3% to comparable earnings per share in 2021 based on current spot rates and our hedge position.
Last but not least, our current full-year guidance has built in the leveling out of our concentrate shipments that are running ahead year to date due to timing considering that we have six fewer days in the fourth quarter.
It's not typical for us to provide commentary on the year ahead at this stage, but I would like to highlight a few points regarding 2022 given the dynamics we are already seeing.
While there are puts and takes to consider from the pandemic looking into next year, we're confident in the underlying top line trajectory, supported by our transformation work, our innovation agenda and a more efficient and effective approach to marketing.
Along with this ongoing momentum in revenues, we also expect to see some higher costs.
We are not immune to the commodity inflation that has been impacting the world for the better part of 2021 nor the rapidly changing environment.
We've been successful with hedges that were put in place to mitigate the impact of input cost inflation, and those will begin to roll off in 2022.
Based on current rates and hedge position, we'd expect commodity inflation to have a mid-single-digit impact on our cost of goods sold in 2022.
We've been proactively accelerating our revenue growth management and productivity levers to offset some of this pressure as we look out to next year.
And we're closely monitoring the moving parts in the supply chain to ensure we are well positioned to meet demand.
Moving to marketing dollars.
We'll continue to invest purposefully in our brands and markets to support top line growth with spend more heavily weighted toward consumer-facing activity.
Regarding currency, if we were to assume current rates and our hedge position, there would be an approximate two to three-point currency headwind to revenue and a two to three-point headwind to earnings for the full-year 2022.
Of course, volatility remains, and several factors could have an impact on our currency outlook between now and February.
Overall, as vaccinations continue to progress globally, we are in a better position today to navigate this environment, and we feel good about the potential for our business.
We look forward to coming back with more specific items after the fourth quarter.
The alignment of our system and its deft navigation through a challenging supply environment and an asynchronous pandemic recovery have been key enablers to emerging stronger.
We're confident in our updated guidance and our ability to further leverage our strong capabilities to drive sustainable top line growth and maximize returns.
With that, operator, we are ready to take questions.
| q3 non-gaap earnings per share $0.65.
raises full-year guidance.
qtrly organic revenues (non-gaap) grew 14%.
expects to deliver organic revenue (non-gaap) growth of 13% to 14%.
expects to deliver comparable earnings per share (non-gaap) growth of 15% to 17% in fy.
comparable earnings per share (non-gaap) is expected to include an approximate 2% currency tailwind for q4.
qtrly global unit case volume grew 6%.
expects to generate fy free cash flow (non-gaap) of approximately $10.5 billion.
comparable net revenues (non-gaap) are expected to include an approximate even currency impact for q4.
qtrly revenue performance included 8% growth in concentrate sales and 6% growth in price/mix.
expects elevated commodity inflation in fy 2022.
net revenues (non-gaap) are expected to include an approximate 2% to 3% currency headwind in 2022.
comparable cost of goods sold (non-gaap) is expected to include a mid single-digit percentage commodity headwind in fy 2022.
comparable earnings per share (non-gaap) is expected to include an approximate 2% to 3% currency headwind for fy 2022.
|
I'm here with James Quincey, our chairman and chief executive officer; and John Murphy, our chief financial officer.
Before we begin, please note that we posted schedules under the financial information tab in the Investors section of our company website at www.
You can also find schedules in the same section of our website that provide an analysis of gross and operating margin.
Please limit yourself to one question.
And if you have more than one, please ask your most pressing ones first and then reenter the queue.
As we continue to deliver on our transformation, we are encouraged by our results and are raising our top line, bottom line and cash flow guidance even as we are accelerating investments for the future.
At the same time, we also recognize the trajectory may be dynamic and understand that we must remain flexible to respond to changes in the environment.
Then I'll hand the call over to John to discuss our financial update, including our improved outlook for the year.
Last year, in the face of a global pandemic, we laid out a path to emerge stronger from across five strategic priorities.
We are delivering against those priorities, and this quarter demonstrates the power of our system.
We started 2021 with promising results.
Mobility and business levels improved in the first quarter, and this trend continued in the second.
Consumer mobility increased in markets where vaccination rates are reaching meaningful levels.
And our business has recovered as we're lapping last year's biggest lockdown impacts and see our strategies in motion.
Consumers have started to return to many prior routine.
And as a result, our away-from-home volumes steadily improved as a percent of our business this quarter, driving strong price mix and margin acceleration across the enterprise.
However, the recovery remains asynchronous.
And several parts of the world have dealt with further waves of infections, leading to delayed openings and in some cases, heightened restrictions.
India and Southeast Asia were our only areas that did not see sequential volume acceleration on a two year basis this quarter.
Despite the asynchronous recovery, our revenues and earnings in the second quarter surpassed our 2019 results.
We also made progress on share this quarter.
We said many times that gaining share is a key objective in our emerging stronger agenda.
And I'm pleased to report that we have achieved that objective with broad-based share gains across categories as well as in both our at-home and away-from-home channels in the quarter.
And importantly, despite away-from-home channels not having fully recovered, our value share today is higher than the 2019 levels, confirming that our effective brand building and innovation along with our advanced revenue growth management and market execution capabilities are working.
So let me dive a bit deeper into the key drivers across our geographies.
In Asia Pacific, China saw continued momentum across categories driven by both volume and improved mix with Trademark Coca-Cola.
We outpaced the overall macroeconomic recovery, led by strong performance in away-from-home channels and business-to-consumer e-commerce.
Australia and New Zealand were bright spots, performing at or close to 2019 levels, but they are currently seeing renewed lockdowns.
While Japan is struggling to come out of lockdown, there have been tangible successes with consumer-led innovation, small-pack initiatives and improved customer execution of key initiatives.
As I mentioned earlier, in India and across much of Southeast Asia, resurgence in the virus impacted further recovery.
As India's restrictions have eased a bit, we're encouraged by the level of resilience in both the business as well as our system associates as they have navigated this resurgence.
In EMEA, Europe is still being impacted by some level of restriction, but vaccination rates and consumer confidence are improving.
Because of this and our strong bottle alignment and marketing investments, we are seeing a much improved away-from-home mix even as at-home volumes continue to grow.
Great Britain and Russia, where mobility was at the highest, show notable volume outperformance relative to 2019 and sparkling soft drinks gained or maintained share in most of the top 10 markets in Europe.
Eurasia and the Middle East are performing well despite a diverse recovery landscape.
In Turkey and Pakistan, strong execution during the key Ramadan holiday and emphasis on snacking and meal occasions drove new consumers to the Coke brands.
Africa delivered a strong first half performance with affordability packages delivering good results despite tightened restrictions heading into the winter season and vaccination rates that are behind the rest of the world.
In North America, the consumer environment improved through the quarter as many states lifted restrictions and consumer mobility increased.
More frequent social gatherings and rising travel and event activity drove significantly higher demand for our brands in away-from-home channels, while at-home volumes remained robust, leading to broad-based share gains in the quarter.
Within away-from-home, eating and drinking was the strongest performing channel with travel, hospitality and at-work trailing.
In Latin America, lockdowns eased as vaccination programs rolled out in countries such as Mexico and Argentina.
And stimulus programs in Brazil and Chile also helped drive recovery.
Our results and year to date share gains in the region continue to be driven by commercial initiatives to improve execution as well as a focus on affordable packs like refillables.
Costa's U.K. coffee shop revenues recovered almost entirely to 2019 levels through the reopening phase despite ongoing capacity restrictions.
Increased consumer traffic and digital momentum are also supporting recovery as restrictions eased in other countries where we have a retail presence.
Our bottling investments group faced pandemic-related challenges, particularly in India and Southeast Asia, but managed to sequentially improve or gain share in India, Vietnam, the Philippines and South Africa.
BIG also made great progress against its growth and productivity agenda, increasing year-to-date comparable operating margin, approximately 300 basis points from the 2019 levels.
Our category teams are collaborating with a global lens, enabling us to move even faster toward our Beverages for Life ambition; are continuously engaging consumers around their passion points and testing ideas in a coordinated and, increasingly, digital way.
We are getting even better at what we've all always done best, building love brands around the world.
For a few examples.
The Coke trademark portfolio is experiencing robust growth, led by brand Coke and driven in part by Coca-Cola Zero Sugar, which has contributed double-digit growth in value and volume year to date.
The new Coca-Cola Zero Sugar recipe has already launched in nearly 50 markets across six of our operating units, including last week's announcement in the U.S. with more to come this year.
Early results indicate the recipe and simplified packaging design are resonating strongly with consumers.
In sparkling flavors, we are accelerating our Zero Sugar offerings and executing global campaigns that focus on key occasions.
Sprite has done well globally, benefiting from the Let's be Clear campaign, which has led to improved share gains.
Likewise, the #WhatTheFanta mystery flavor campaign in Europe drove accelerated growth and improved share.
Dairy remains an opportunity for the overall portfolio with premium offerings in key brands like Hollandia drinkable yogurt and Santa Clara's flavored milk showing healthy growth.
We continue to leverage fairlife's great success in the U.S. with a recent expansion in Canada.
There are many bright spots in hydration, sports, tea and coffee.
We see momentum across brands in the U.S., including good results from our renewed focus on smart water, a new brand bundle from Gold Peak Tea, exciting flavor innovations in Dunkin' Coffee and continued growth from expanded distribution of Topo Chico sparkling mineral water.
We've had early success with Costa ready-to-drink launches in Asia with meaningful share gains in key markets in China and was already voted a hit product in Japan.
The rapid consumer traction and attractive proposition of healthy indulgence by AHA, which began as an intelligent local experiment in the U.S., led us to believe it can transition to be a bigger bet and travel internationally.
The recent launch in China with the local name of little universe has been encouraging with meaningful value share gains in a short period of time.
We continue to build on momentum with the launch of AHA's first 360-degree marketing campaign with a significant digital emphasis titled, can I get an AHA.
Finally, last summer, we announced more exploration in the dynamic flavored alcoholic beverage category with the launch of Topo Chico Hard Seltzer.
Topo Chico Hard Seltzer is now in 17 markets worldwide, and we've authorized Molson Coors the right to produce and sell Topo Chico Hard Seltzer in the United States.
Launching a global brand in markets where the category is at different stages of development comes with many learnings, and our local knowledge allows us to adapt with speed to win or, in some cases, develop this new category.
From strong performance in Europe, where available, to top two position in Mexico, to the U.S., where velocity is robust and the product has enjoyed positive consumer reactions, we are encouraged by recent trends and are gaining valuable insights along the way.
We continue to make progress with our consumer-facing digital propositions.
Internally, we were building out our platform services organization to support the enterprise as we have a sizable opportunity to become as a holistic digital leader.
Digital is of the utmost importance, and we're also building an integrated ecosystem of platforms that create value across the digital and physical worlds.
We are partnering with our bottlers to leverage the power of the system's physical footprint online, creating enhanced value for customers across the globe through a best-in-class eB2B platform.
With pockets of excellence in many regions, we are working with our bottling partners to evolve and streamline our approach.
Working together as a system allows us to improve distribution economics, solve unmet needs of outlet owners and opens new revenue streams by providing other CPG brands access to our deep customer relationships and global distribution network.
We are building a digital one-stop shop for customers, seamlessly offering most of the products they need to stock their shelves and operate their daily business.
We're also ensuring consumers get the frictionless experience they demand with more availability and assortment of the products they need and love.
On top of the initiatives discussed today, we also continue to work with our bottlers to embed RGM principles and integrate execution capabilities into our processes to continue driving basket value and incidents as the world reopens.
Through enhanced execution, we have an opportunity to win with more consumers and grow share by having the right products in the right channel at the right price, supported by the right activations.
We also continue with our sustainability agenda to create shared value for our stakeholders and the communities we serve.
In addition to integrating ESG considerations into our daily business decisions, during the second quarter, we released our business and ESG report, highlighting progress across all our goals as well as our World Without Waste report, which focuses exclusively on our work to create a circular economy for our packaging materials.
Highlights include the continued rollout of a 100% recycled PET with 30 markets representing approximately 30% of our total sales offering at least one brand in a 100% rPET packaging.
We've continued the expansion of refillables and dispense packaging and ultra-lightweighting technologies, and we delivered a 60% global collection rate for packaging in 2020.
We are proud of these achievements, and we know there is more work to be done.
Recently, we announced that we've become a global implementation partner for The Ocean Cleanup's river project, supporting the deployment of cleanup systems across 15 rivers across the world.
We will embed our marketing capabilities into this partnership to create consumer awareness of the issues and the actions we're all taking.
Putting it all together, we realize there's a range of possible outcomes when it comes to the pandemic in the second half of the year, given the asynchronous recovery.
While we overdelivered relative to our expectations in the first half and have raised guidance for 2021, we are biased toward a growth mentality, and we'll invest behind this momentum going into the rest of the year.
Our network organization is beginning to help us move faster to capture opportunities and create value for our stakeholders.
As a system, we are increasingly equipped to win and we're excited about the future.
In the second quarter, we built on the momentum from the beginning of the year, and our business mix improved as consumer mobility increased across many markets.
Our Q2 organic revenue was up 37%, comprised of concentrate shipments up 26% and price mix improvement of 11% as we lapped the biggest pandemic impacts of 2020.
Unit case growth was 18%.
Our shipments outpaced unit cases in the quarter and year to date due to cycling the destocking we experienced last year and certain timing impacts this year, including five additional days in the first quarter.
Improvement in the away-from-home channels and positive segment mix from higher growth in our finished goods businesses positively impacted our price mix.
Channel and package mix also affected comparable gross margin, which showed significant improvement relative to last year, even with certain inflationary costs like transportation coming through.
As we said throughout the pandemic, our goal is to emerge stronger, and we are investing ahead of recovery as markets reopen.
As a result, we have doubled our marketing dollars year over year, cycling the significant pullback from the same period last year.
Even with the step-up in those investments, we delivered a 170-basis-point improvement in comparable operating margins driven by the strong top line.
Below operating income, we saw a benefit from improvement in our equity income as our bottling partners also emerged stronger, as well as reduced interest expense on a comparable basis.
As a result, second quarter comparable earnings per share of $0.68 was an increase of 61% year over year.
We also delivered strong year-to-date free cash flow of approximately $5 billion, double last year's results.
Our cash flow performance has also driven the return of our leverage to within the targeted range of two to two and a half times.
Since we reiterated guidance last quarter, the operating environment and our business have clearly improved.
Given the improvement year to date and the increased visibility, we are raising our outlook for the full year.
We now expect to deliver year-over-year organic revenue growth of 12% to 14% and comparable earnings per share growth of 13% to 15% in 2021.
Our steady focus on cash generation continues to yield progress, and our updated guidance for free cash flow of at least $9 billion implies a dividend payout ratio significantly improved from where we began the year and is edging closer to our targeted level of 75% over the long term.
So as we think about the remainder of the year, a few things to keep in mind.
The recovery phase continues to be asynchronous, creating a dynamic demand environment, in addition to causing many parts of the supply chain to experience tightness as a result.
While experiencing some isolated pressure points, our team is navigating the challenges well through supplier diversification and inventory management.
Despite recent upward pressures in many commodities driven by the pandemic-related disruptions, we feel good about the rest of the year.
And as we anticipate hedges rolling off in 2022, we are working with our system to take appropriate action in the back half of this year to manage the ongoing volatility using revenue growth management capabilities and supply chain productivity levers.
With regard to marketing investment, we have three priorities, increase consumer-facing marketing spend toward levels similar to 2019, improve the quality of that spend and allocate the spend in a more targeted manner.
Our currency outlook continues to contemplate a tailwind of 1% to 2% to the top line and approximately 2% to 3% to comparable earnings per share in 2021 based on current spot rates and our hedge positions.
That said, the currency markets remain volatile and dependent on recovery from the pandemic as well as macroeconomic factors.
We will also have some additional timing considerations with the leveling out of our concentrate shipments that are running a bit ahead year to date as well as six fewer days in the fourth quarter.
With our network organization up and running, we're on a path to operate more efficiently and effectively and to unlock the enormous potential we have in our brands and across our markets.
As James mentioned earlier, we remain clear-eyed as we look at the rest of the year with many markets continuing to face obstacles, such as the spread of the COVID-19 Delta variant, while others continue to see the benefits of reopening.
Overall, we are pleased with our progress in the first half of the year, and we're grateful for the commitment from the stakeholders across our ecosystem that contributed to our results.
With that operator, we are ready to take questions.
| compname reports q2 non-gaap earnings per share of $0.68.
q2 non-gaap earnings per share $0.68.
qtrly global unit case volume grew 18%.
qtrly organic revenues (non-gaap) grew 37%.
company expects to deliver organic revenue (non-gaap) growth of 12% to 14% in 2021.
sees q3 2021 comparable earnings per share (non-gaap) to include an approximate 3% to 4% currency tailwind.
q3 comparable net revenues (non-gaap) expected to include about 2% currency tailwind based on current rates, incl.
impact of hedged positions.
expects to deliver comparable earnings per share (non-gaap) growth of 13% to 15% in 2021 versus $1.95 in 2020.
coca-cola - qtrly global unit case volume benefited from recovery in many markets, partially offset by impact of resurgence of coronavirus in several markets.
coca-cola - markets such as china, brazil and nigeria grew volume in quarter ahead of 2019 levels.
coca-cola - other markets, including india, continued to be under pressure in quarter versus 2019.
|
This is Anvita Patil, Hecla's assistant treasurer.
With that, I will pass the call to Phil Baker.
Referring to Slide 4, we had a very strong first quarter, very good operational and financial performance.
We recorded quarterly adjusted EBITDA that was a record for the company.
It was $12 million higher than our previous record.
We had the highest cash gross margin.
And we had the second-highest revenues in our 130-year history.
And all of this was driven primarily by the strong production results and cost performance at all of our operations.
At Greens Creek, we're lowering our cash cost and all in sustaining cash cost guidance for the year, and Lauren is going to speak more about that in a minute.
The fundamentals of our balance sheet reflect these successive quarters that we've had of improving performance by Hecla.
So our balance sheet is in very good shape.
One of the things I want to point out is that typically our first quarter is one of our smallest cash flow quarters.
I went back and looked at the last 30 years, and about 20 of the 30 were the lowest.
There were about 10 where the first quarter wasn't the lowest cash flow for the year.
And when it wasn't the lowest, it was always the second lowest.
So when we consider our operating plans and when we consider the reversal that we'll have of the working capital buildup, we're anticipating this significant free cash flow generation over the rest of the year.
So as good as the first quarter was, we think the rest of the year will be stronger.
And as a result of that, the board has announced an increase to our dividend policy.
Our silver-linked dividend payment that occurs at $25 will be increased by 50% to $0.03 per share annually, and Russell's going to speak more about that.
We're returning about 28% of our free cash flow in the first quarter to shareholders.
And as silver prices increase, shareholders will have the ability to participate in incremental free cash flow generation that we'll have.
We also had a very strong operating performance.
And despite the good performance, we were able to maintain our low all-in frequency rate about 1.71 for the first quarter.
In addition, our sustainability report, which we're going to release in May, with the annual meeting, highlights our ESG performance that we've had.
The report focuses -- in fact, the title of the report is something like Small Footprint, Big Benefit.
Because we have these underground mines that have an extraordinarily small footprint.
And they're largely energized by alternative power, making our greenhouse gas emissions per ounce probably the lowest or among the lowest in the industry.
And we've also focused on policies and activities that really make Hecla a uniquely positive ESG investment.
So we're going to focus a lot of attention on that at the annual meeting.
And also at the annual meeting, we're going to update exploration.
So we're going to wait for now.
We'll wait till the annual meeting.
But, let me just say that we've had some of the best drilling results in the history of the company.
And as you're going to see, in a few weeks, we're in the early days of some of these programs.
But, they have the potential to be extraordinarily accretive.
I really look forward to the rest of the year.
And with that, I'm going to pass the call to Russell.
Turning to Slide 6.
Hecla continued to strengthen its balance sheet as we ended the first quarter with $140 million in cash aided by record margins from higher prices and strong operating performance.
With cash almost doubled since the second-quarter 2020 from consecutive quarters of strong free cash flow, we delivered a net debt to adjusted EBITDA ratio of 1.4 times, well below our target of two times, while providing the liquidity position at $390 million.
Looking at Slide 7, our realized silver margins have continued to increase as costs stay low and silver prices increase with every dollar in margin, translating to free cash flow.
If you look at the gold portion of the bar, you see that our margin this quarter was about double the second and fourth quarter of last year, and about 50% more than the third quarter.
And it gets only partially reflected in our free cash flow, because of working capital changes.
First-quarter free cash flow was $16.5 million after negative working capital changes of $29.3 million using interest payments of $18.4 million and the timing of incentive compensation payments related to 2020 performance and higher accounts receivables from timing of concentration.
But maybe more important is the trailing 12 months free cash flow $121 million.
We see the future 12 months of having the same or better free cash flow the current prices.
Moving to Slide 8 with the growth anticipating our free cash flow over the remainder of the year, the board has approved an increase to our silver-linked dividends of $0.01 per share.
This equates to a 50% increase in the dividend rate at the $25 per ounce threshold to $0.03 per year.
This increase to the silver-linked dividend reflects our confidence in Hecla's free cash flow generation.
At $25 per ounce realized price, the enhanced dividend policy has an implied yield of 7.4% to the silver price.
The return from this dividend policy, which is tied to the price of silver, distinguishes Hecla from investing in an ETF for that matter and is unique for the industry.
Continued strong operational performance and higher silver pricing drive our 2021 free cash flow expectations, which should continue to grow from our first-quarter performance.
I'll start on Slide 10.
First and foremost is our focus on safety.
Our teams continue their exemplary safety performance, and our all injury frequency rate in the first quarter was 1.71, which is a reduction of 72% since implementing a revised safety and health management system in 2012.
Our operations teams have done an outstanding job of improving this aspect of the business.
While we are a little higher than our 2020 full-year results, we are focused on reducing it further.
On slide 11, at the Green Creek mine, we produced 2.6 million ounces of silver and 13,200 ounces of gold at an all-in sustaining cost of $1.59 per ounce for the quarter.
We're lowering the cash cost and all-in sustaining costs guidance, due to the higher byproduct credits, more favorable smelter terms and lower treatment charges, and the reclassification of mine license tax to income tax.
While smelter terms will be better for all of 2021, in the first quarter, we realized another benefit due to a customer meeting prior purchase obligations.
This benefit will not recur later in the year.
With these changes, updated cash cost guidance for Greens Creek is lowered to $1.50 to $2.25 per ounce and all-in sustaining cash costs are lowered to $6.50 to $7.25 per ounce.
Greens Creek's consistent delivery and low cost combined with high silver prices generate very strong free cash flow.
Going to slide 12, the Lucky Friday achieved full production in the fourth quarter of 2020 and produced 0.9 million ounces of silver in the first quarter of 2021.
Production at the mine is expected to exceed 3.4 million ounces this year.
We anticipate the grades to improve as we mine deeper, increasing the projected production to around 5 million ounces annually by 2023.
No significant planned outlay of capital is required to achieve these goals.
In addition, we are testing and optimizing various mining method changes and other initiatives to improve safety while increasing the productivity of the mine.
We've made no change to our outlook at the Lucky Friday.
Unlike Greens Creek, the Lucky Friday produces a relatively small amount of zinc.
The dramatic improvement in zinc concentrate treatment charges as compared to last year, therefore, has less impact.
At the Casa Berardi mine, shown on slide 13, we had a strong first quarter with production of 36,200 ounces of gold at an all-in sustaining cost of $1,272 per ounce.
Our investments in the mill to improve reliability and recovery are yielding great results.
And the mill has maintained greater than 90% availability since October of 2020.
Our business improvement activities will continue in 2021 and are expected to reduce costs further and to increase cash flow generation from the mine.
Our ongoing focus to improve productivity and to reduce costs are underpinned by multiple factors, and we're starting to see a downward trend in AISC.
All these efforts together with others in the pipeline are positioning Casa Berardi to deliver consistent production at lower costs.
Our 2021 guidance for Casa Berardi remains unchanged and production is expected to exceed 125,000 ounces at all-in sustaining costs of $1,185 to $1,275 per ounce.
Moving to Slide 14, at the Nevada Operations, we produced about 2,500 ounces of gold from a stockpiled bulk sample of refractory ore that was processed at a third-party roaster.
For the rest of the year, production is expected to be in the range of 17,000 to 19,000 ounces of gold, from the processing of oxide ore at the Midas mill and an additional 22,000 tons of refractory ore through third-party facilities.
Roughly 12,000 tons will be sent to a roaster and about 10,000 times to an autoclave.
We expect the Fire Creek mine and the Midas mill will be placed on care and maintenance by the end of second quarter.
We remain very excited about our Nevada properties.
And in addition to the exploration spend in Nevada, we'll be investing in other $5 million in pre-development activities this year at Hollister to access the Hatter Graben.
Let's go to Slide 16.
And this shows our consolidated production guidance for 2021 through 2023.
And at this point, nothing has changed in that guidance.
So, let's focus on where the slide shows our cost outlook.
And you can see there that we've significantly lowered our silver cost outlook, primarily because of the byproduct credits and the lower treatment charges at Greens Creek that Lauren talked about.
Now this new guidance, if you look at this, it adds about $3 an ounce to our expected margin.
So at current prices, we think we have about $10 an ounce of free cash flow generation just from the silver operations.
The other thing to point out is that with the consistency that we have at Greens Creek and Lucky Friday at full production, and the increasing grade that we see at Lucky Friday that our U.S. silver production's expected to reach about 15 million ounces by 2023.
And this is double what we had in 2018.
And if you look at Slide 17, I want to do this because this time is really like no other for silver.
If you think about it, the photographic demand decline, which was a governor on total demand over the last 20 years is now long over.
Industrial demand has been growing at a 2% growth rate for the last decade.
And it's continuing to grow, and we think will be fueled even more by the same factors that are fueling copper, this energy transformation.
Industrial demand has generally been strong for the last 20 years and looks to be even stronger with the current fiscal and monetary policies.
And then, finally, miners are challenged to substantially reverse a five-year annual decline in mined silver production.
We actually mined 110 million ounces less than the high of 2016.
So, getting back to where we were is going to be hard.
Now it's just industrial demand continues to grow at the same rate as the last decade so that 2% growth rate.
And we think this is going to understate it, because of the energy demand we're going to have.
The world's going to need 70 million more ounces of silver per year.
Now this doesn't sound like much, because it's only 7% of the current market, until you realize that to meet that demand, even if no mines are exhausted, you need seven new mines a year that are the size of Greens Creek, which is the United States largest silver mine or you needed to produce about 150% more or you need Codelco who has a substantial byproduct of silver production to produce three times as much silver.
And so our view is it's not likely that even combining all the different companies that are in the industry that are trying to grow their silver production that we're going to be able to produce silver that is equivalent to seven Greens Creek mines.
But if we do, they're going to be in riskier jurisdictions.
And we believe that over the next decade, we are in a market that's well-positioned for a silver squeeze to happen.
Now this is not the sort of silver squeeze the Reddit investors were thinking about, but it's a squeeze nonetheless, because it's just that demand has already risen faster than supply, and it's positioned to continue to do so.
The result of this squeeze and -- prices will rise and the shortfall is going to be met by above-ground stocks.
And I'm struck, if you look at what happened in 2020, when ETF and coin demand rose dramatically, prices rose 50% over the roughly average silver price of 2018 and 2019.
So what do we think the high end and low silver price will be over the coming decade?
Let's first give you the lows.
We think we'll have higher lows.
We don't think we'll have lows for any significant period of time to be below $18 to $20 an ounce.
And for the highs, there's no reason, silver highs will not do what gold and copper have done.
They both either exceeded or have just come in just below their all-time highs.
So to see a $50 plus silver price is not unreasonable.
So one final thought on how you should think about silver.
What it has become is the precious copper or the industrial gold.
And the reason I say that is there's really no metal quite like silver.
It's needed an application similar to copper, but unlike copper, it's an investable metal with lots of investment options.
You have the above-ground stocks, you have ETFs, you have coins.
And silver is like gold, but unlike gold, only about 20% of the demand for silver is an investment.
And for gold, only about 10% is industrial demand.
So think of silver as precious copper or industrial gold.
And, of course, Hecla is in a unique position as the largest silver producer in the U.S.
We produce a third of all the silver produced in the United States, and that production is growing.
We're the oldest silver mining company.
And we have a history of outperforming silver and every other mining company when the silver prices went up, which obviously we think that's what's going to happen over the course of the coming decade.
| qtrly diluted earnings per share $0.03.
|
Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different.
Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's Annual Report on Form 10-K and its most recent Quarterly Report on Form 10-Q, both of which are filed with the Securities and Exchange Commission.
drhorton.com and we plan to file our 10-Q early next week.
The D.R. Horton team delivered an outstanding third quarter, highlighted by a 78% increase in earnings to $3.06 per diluted share.
Our consolidated pre-tax income increased 81% on a 35% increase in revenues to $7.3 billion and our pre-tax profit margin improved 490 basis points to 19.4%.
Our homebuilding return on inventory for the trailing 12-months ended June 30 was 34.9% and our consolidated return on equity for the same period was 29.5%.
These results reflect our experienced teams and their production capabilities, our ability to leverage D.R. Horton scale across our broad geographic footprint and our product positioning to offer homes at affordable price points across multiple brands.
Housing market conditions remained very robust, and we are focused on maximizing returns and increasing our market share further.
However, multiple disruptions in the supply chain, combined with the improvement in economic conditions and strong demand for new homes have resulted in shortages in certain building materials and tightness in the labor market, which has caused our construction time to become less predictable.
As our top priority is to consistently fulfill our commitments to our homebuyers, we have slowed our home sales pace to more closely align to our current production levels and are selling homes later in the construction cycle, when we can better ensure the certainty of home close date for our homebuyers.
We expect to work through these issues and increasing our production capacity.
We started construction on 22,600 homes this quarter and our homes in inventory increased 44% from a year ago to 47,300 homes at June 30, 2021, positioning us to finish 2021 strong and to achieve double-digit growth again in 2022.
We believe our strong balance sheet, liquidity and low leverage positioned us very well to operate effectively through changing economic conditions.
We plan to maintain our flexible operational and financial position by generating strong cash flows from our homebuilding operations and managing our product offerings, incentives, home pricing, sales pace and inventory levels to optimize the return on our inventory investments.
Earnings for the third quarter of fiscal 2021 increased 78% to $3.06 per diluted share compared to $1.72 per share in the prior year quarter.
Net income for the quarter increased 77% to $1.1 billion compared to $630.7 million.
Our third quarter home sales revenues increased 35% to $7 billion on 21,588 homes closed, up from $5.2 billion on 17,642 homes closed in the prior year.
Our average closing price for the quarter was $326,100 and the average size of our homes closed was down 2%.
The value of our net sales orders in the third quarter increased 2% from the prior year to $6.4 billion, while our net sales orders for the quarter decreased 17% to 17,952 homes.
Our average number of active selling communities increased 1% from the prior year quarter and was down 3% sequentially.
Our average sales price on net sales orders in the third quarter was $359,200.
The cancellation rate for the third quarter was 17%, down from 22% in the prior year quarter.
As David described, in this very strong demand environment, our local teams are restricting the sales order pace in each of their communities based on the number of homes in inventory, construction time and lot position.
They continue to adjust sales prices to market on a community-by-community basis, while staying focused on providing value to our buyers.
Based on the stage of completion of our current homes in inventory, production schedules, and capacity, we expect to continue restricting the pace of our sales orders during our fourth fiscal quarter.
As a result, we expect our fourth quarter net sales orders to be lower than the third quarter.
However, we are confident that we will be well-positioned to deliver double-digit volume growth in fiscal 2022 with 32,200 homes in backlog, 47,300 homes in inventory, a robust lot supply and strong trade and supplier relationships.
Our gross profit margin on home sales revenue in the third quarter was 25.9%, up 130 basis points sequentially from the March quarter.
The increase in our gross margin from March to June exceeded our expectations and reflects the broad strength of the housing market.
The strong demand for a limited supply of homes has allowed us to continue to raise prices or lower the level of sales incentives in most of our communities.
On a per square foot basis, our revenues were up 4.7% sequentially, while our stick and brick cost per square foot increased 3.5% and our lot cost increased 1.7%.
We expect both our construction and lot costs will continue to increase on a per square foot basis.
However, with the strength in today's market conditions, we expect to offset any cost pressures with price increases.
We currently expect our home sales gross margin in the fourth quarter to be similar to or slightly better than the third quarter.
We remain focused on managing the pricing, incentives and sales pace in each of our communities to optimize the return on our inventory investments and adjust to local market conditions and new home demand.
In the third quarter, homebuilding SG&A expense as a percentage of revenues was 7.1%, down 80 basis points from 7.9% in the prior year quarter.
Our homebuilding SG&A expense, as a percentage of revenues, is lower than any quarter in our history and we remain focused on controlling our SG&A, while ensuring that our infrastructure adequately supports our business.
We have increased our housing inventory in response to the strength of demand and we expect the current constraints on our supply chain to ultimately subside.
This quarter, we started 22,600 homes, up 33% from the third quarter last year, bringing our trailing 12-month starts to 94,500 homes.
We ended this quarter with 47,300 homes in inventory, up 44% from a year ago.
15,400 of our total homes at June 30 were unsold, of which 500 were complete.
At June 30, our homebuilding lot position consisted of approximately 517,000 lots, of which 24% were owned and 76% were controlled through purchase contracts.
25% of our total owned lots are finished and at least 44% of our controlled lots are or will be finished when we purchase them.
Our growing and capital efficient lot portfolio is a key to our strong competitive position and it'll support our efforts to increase our production volume to meet homebuyer demand.
Our third quarter homebuilding investments in lots, land and development totaled $1.8 billion, of which $910 million was for finished lots, $540 million was for land development and $350 million was to acquire land.
$300 million of our total lot purchases in the third quarter were from Forestar.
Forestar, our majority owned subsidiary, is a publicly traded well-capitalized residential lot manufacturer operating in 55 markets across 22 states.
Forestar is delivering on its high-growth expectations and now expects to grow its fiscal 2021 lot deliveries by approximately 50% year-over-year to a range of 15,500 to 16,000 lots with a pre-tax profit margin of 11.5% to 12%, excluding their $18.1 million loss on extinguishment of debt recognized during the quarter.
At June 30, Forestar's owned and controlled lot position increased 91% from a year ago to 96,600 lots.
61% of Forestar's owned lots are under contract with D.R. Horton or subject to a Right of First offer under our master supply agreement.
Forestar is separately capitalized from D.R. Horton and had approximately $470 million of liquidity at quarter end with a net debt-to-capital ratio of 37.8%.
With a strong lot supply, capitalization and relationship with D.R. Horton, Forestar plans to continue profitably growing their business.
Financial Services pre-tax income in the third quarter was $70.3 million with a pre-tax profit margin of 37.3% compared to $68.8 million and 43.9% in the prior year quarter.
The year-over-year decline in our Financial Services pre-tax profit margin was primarily due to lower net gains on loans originated this quarter caused by market fluctuations and increased competitive pricing pressure in the market.
For the quarter, 98% of our mortgage company's loan originations related to homes closed by our homebuilding operations and our mortgage company handled the financing for 66% of our homebuyers.
FHA and VA loans accounted for 45% of the mortgage company's volume.
Borrowers originating loans with DHI Mortgage this quarter had an average FICO score of 721 and an average loan-to-value ratio of 89%.
First-time homebuyers represented 58% of the closings handled by the mortgage company this quarter.
At June 30, our multi-family rental operations had 11 projects under active construction and an additional four projects that are completed and in the lease-up phase.
Based on leased occupancy in our marketing process, we expect to sell two or three of these projects during the fourth quarter of fiscal 2021.
Our multi-family rental assets sold $458.3 million at June 30.
Last year, we began constructing and leasing homes as income-producing single-family rental communities.
After these rental communities are constructed and achieve a stabilized level of leased occupancy, each community is marketed for sale.
During the third quarter, we sold our second single-family rental community for $23.1 million in revenue and $11.4 million of gross profit.
At June 30, our homebuilding inventory included $303.1 million of assets related to 44 single-family rental communities, compared to $87.2 million of assets related to 10 communities at the beginning of the fiscal year.
We are pleased with the performance of our single and multi-family rental teams and we look forward to their growing contributions for our future profits and returns.
Our balanced capital approach focuses on being disciplined, flexible and opportunistic.
During the nine months ended June, our cash provided by homebuilding operations was $276 million even while we have reinvested significant operating capital to expand our homebuilding inventories in response to strong demand.
At June 30, we had $3.7 billion of homebuilding liquidity, consisting of $1.7 billion of unrestricted homebuilding cash and $2 billion of available capacity on our homebuilding revolving credit facility.
We believe this level of homebuilding cash and liquidity is appropriate to support the increased scale and activity in our business and to provide flexibility to adjust to changing market conditions.
Our homebuilding leverage was 16% at the end of June with $2.5 billion of homebuilding public notes outstanding and no senior note maturities in the next 12 months.
At June 30, our stockholders' equity was $13.8 billion and book value per share was $38.54, up 27% from a year ago.
For the trailing 12-months ended June, our return on equity was 29.5% compared to 19.9% a year ago.
During the quarter, we paid cash dividends of $72.1 million and our Board has declared a quarterly dividend at the same level as last quarter to be paid in August.
We repurchased 2.6 million shares of common stock for $241.2 million during the quarter for a total of 8.1 million shares repurchased fiscal year-to-date for $661.4 million.
Our remaining share repurchase authorization at June 30 was $758.8 million.
We remain committed to returning capital to our shareholders through both dividends and share repurchases on a consistent basis and to reducing our outstanding share count each fiscal year.
In the fourth quarter of fiscal 2021, based on today's market conditions, we expect to generate consolidated revenues of $7.9 billion to $8.4 billion and our homes closed to be in a range between 23,000 and 24,500 homes.
We expect our home sales gross margin in the fourth quarter to be in the range of 26% to 26.3% and homebuilding SG&A, as a percentage of revenues, in the fourth quarter to be approximately 7%.
We anticipate our Financial Services pre-tax profit margin in the range of 40% to 45% and we expect our income tax rate to be approximately 23.5%.
For the full fiscal year of 2021, we now expect consolidated revenues of $27.6 billion to $28.1 billion and to close between 83,000 and 84,500 homes.
This year, we have prioritized reinvestment of our operating capital to increase our housing and land and lot inventories to support higher demand.
Our other cash flow priorities remain balanced among increasing our investment in our multi and single-family rental platforms, maintaining conservative homebuilding leverage and strong liquidity, paying a dividend and repurchasing shares to reduce our outstanding share count by approximately 2% from the beginning of fiscal 2021.
In closing, our results reflect our experienced teams and production capabilities, industry-leading market share, broad geographic footprint and diverse product offerings across multiple brands.
Our results also illustrate the growth opportunity in front of us as we increase production capacity in response to homebuyer demand.
Our strong balance sheet, liquidity and low leverage provide us with a significant financial flexibility to capitalize on today's robust market and to effectively operate in changing economic conditions.
We plan to maintain our disciplined approach to investing capital to enhance the long-term value of the company, which includes returning capital to our shareholders through both dividends and share repurchases on a consistent basis.
As a result of these efforts, we are incredibly well-positioned to continue growing and improving our operations.
We will now host questions.
| d r horton q3 earnings per share $3.06.
q3 earnings per share $3.06.
qtrly homes closed increased 35% in value to $7.0 billion on 21,588 homes closed.
qtrly consolidated revenues increased 35% to $7.3 billion.
qtrly net sales orders increased 2% in value to $6.4 billion on 17,952 homes sold.
homebuilding revenue for q3 of fiscal 2021 increased 35% to $7.1 billion from $5.2 billion in same quarter of fiscal 2020.
at june 30, 2021, company had 47,300 homes in inventory.
housing market conditions remain very robust.
have slowed our home sales pace to more closely align to our current production levels.
homebuyer demand exceeding our current capacity to deliver homes across all of our markets.
are also selling homes later in construction cycle when we can better ensure certainty of home close date for our homebuyers.
sees 2021 consolidated revenues of $27.6 billion to $28.1 billion.
|
I am Dorian Hare.
Today's call is being recorded.
An archive of the recording will be available later today in the Investor Relations section in the About Equifax tab on our website at www.
Certain risk factors that may impact our business are set forth in our filings with the SEC under our 2020 Form 10-K and subsequent filings.
Also, we will be referring to certain non-GAAP financial measures, including adjusted earnings per share attributable to Equifax and adjusted EBITDA, which will be adjusted for certain items that affect the comparability of our underlying operational performance.
We continue to make the health and safety of our employees a top priority, and I hope that you and those close to you remain safe.
Turning to Slide 4, and as I will cover in a moment, Equifax delivered an outstanding first quarter with record revenue and strong sequential growth versus fourth quarter.
The tremendous progress we have made, executing against our strategic priorities and building out our Equifax Cloud capabilities is allowing us to outperform our underlying markets and deliver outstanding revenue growth and margin expansion.
In U.S., where the economy is still recovering from the COVID pandemic more rapidly than we anticipated, we continue to outperform the overall mortgage market, which remains strong in the first quarter.
We're also seeing a real recovery and strong growth across our core banking, auto, insurance, government and talent business segments.
First quarter was a great start to 2021.
We are energized by our strong momentum in pivoting to our next chapter of growth with the launch of EFX2023, our new strategic growth framework that will serve as our companywide compass over the next three years.
With our new Equifax Cloud foundation increasingly in place, we're focused on leveraging our new Equifax Cloud data in technology infrastructure to accelerate innovation, new products and growth.
Innovation in new products will fuel our growth in 2021 and beyond as we leverage our new EFX cloud capabilities to bring new products and solutions and multidata insights to customers faster, more securely and more reliably.
As you know, we ramped our investments in product and innovation resources over the past 12 months to accelerate our new product roll outs, leveraging the new Equifax Cloud.
Our highly unique and diverse data assets are at the heart of what creates Equifax's differentiation in the marketplace.
We have data assets at scale that our competitors do not have, including TWN, NCTUE, DataX, IXI and more, and we are committed to expanding and deepening these differentiated data assets through organic actions, partnerships and M&A.
We are also relentlessly focused on a customer first mentality, which moves us closer to our customers, with a focus on delivering solutions to help their -- help solve their problems and drive their growth.
Another critical lever of our strategy is to reinvest our accelerating free cash flow in smart, strategic and accretive bolt-on acquisitions, that both, expand and strengthen our capabilities with a goal of increasing our revenue growth by 1% to 2% annually from M&A.
And data security is deeply embedded in our culture.
We have clearly established Equifax as an industry leader in data security.
Working together as one aligned global Equifax team, where we leverage our commercial strengths, our new products, and our capabilities across our EFX cloud global platform, will allow us to deliver solutions that only Equifax can bring to the marketplace.
We're energized around our new EFX2023 strategic priorities that will serve as our guide post over the next three years and support our new long-term growth framework that we plan to put in place later this year.
Turning now to Slide 5, Equifax performance in the first quarter was very strong.
Revenue at $1.2 billion was the strongest quarterly revenue in our history.
In first quarter, constant currency revenue growth was a very strong 25% with our organic growth at 23%, which was also an Equifax record.
As a reminder, we're coming off a solid 13% growth in first quarter last year.
All business units performed -- outperformed our expectations and we are seeing positive signs of a COVID recovery beginning to accelerate, particularly in the U.S.
Our growth was again powered by our two U.S. B2B businesses, Workforce Solutions and USIS, with combined revenue up a very strong 38%.
Mortgage-related revenue remained robust, and importantly, our non-mortgage-related verticals grew organically by a very strong 16%.
The adjusted EBITDA margins of our U.S. B2B businesses were 52%, up 400 basis points with EWS delivering close to 60% margins.
As a reminder, Workforce Solutions and USIS are over 70% of Equifax revenue and 80% of Equifax business unit EBITDA.
First quarter Equifax adjusted EBITDA totaled $431 million, up 36% with over 250 basis points of expansion in our margins to 35.6%.
This margin expansion was delivered while including all cloud technology transformation costs in our adjusted results, which negatively impacted first quarter adjusted EBITDA margins by over 300 basis points.
Excluding cloud transformation costs, our margins would have been up over 500 basis points.
We are clearly getting strong leverage out of our revenue growth.
Adjusted EBITDA -- adjusted earnings per share at a $1.97 per share was up a very strong 37% from last year, which was also impacted by the inclusion of cloud transformation costs.
Adjusted earnings per share would have been $2.20 and up 54%, excluding these costs.
We continue to accelerate our EFX Cloud data and technology transformation in the quarter, including migrating an additional 2,000 customers to the cloud in the U.S. and approximately 1,000 customers Internationally.
Leveraging our new EFX cloud infrastructure, we also continue to accelerate new product innovation.
In the first quarter, we released 39 new products, which is up from 35 launched a year ago in the first quarter, continuing the momentum from 2020 where we launched a record 134 new products.
And we're seeing increased revenue generation from these new products, leveraging our new EFX Cloud.
For 2021, we expect our vitality index defined as revenue from new products introduced in the last three years to exceed 8%.
This is a 100 basis point improvement from the 7% guidance we provided on our vitality index back in February.
And in that first quarter, we completed five strategic bolt-on acquisitions with a focus on identity and product capability through our acquisition of Kount and accelerating growth in Workforce Solutions with the acquisitions of HIREtech and i2Verify.
Acquisitions that will broaden strength in Equifax are a strong lever for continuing to accelerate our growth and a big focus.
We're energized by our fast start to '21 and are clearly seeing the momentum of our only Equifax model leveraging our new EFX Cloud capabilities.
Our first quarter results were substantially stronger than the guidance we provided in February with over 90% of the revenue outperformance delivered in our two U.S. B2B businesses, Workforce Solutions and USIS.
Importantly, as we'll discuss in more detail shortly, over 60% of this outperformance in the U.S. B2B revenue was in our non-mortgage segments in both USIS and Workforce Solutions.
Non-mortgage revenue strengthened consistently during the first quarter with March revenue up significantly versus February in both USIS and EWS.
This broad-based strength was above our expectations and gives us confidence about further strengthening in the second quarter and second half as the COVID recovery unfolds.
Mortgage revenue was also stronger than we expected despite the growth in U.S. mortgage market at 21% being slightly below our expectations from a slowing -- from slowing mortgage inquiries in late March, which have continued into April.
Our continued strong mortgage results and outperformance was driven by Workforce Solutions with stronger market penetration, record growth and positive impact from new products.
USIS mortgage revenue also exceeded expectations slightly.
This stronger revenue delivered strong operating leverage with substantial improvement in our EBITDA margins and adjusted EPS.
The strength of our first quarter results in Workforce Solutions and in U.S. non-mortgage revenue across USIS and Workforce Solutions broadly gave us the confidence to substantially raise our 2021 guidance for both revenue and adjusted EPS.
We're increasing our revenue guidance by $225 million to a midpoint of $4.625 billion and increasing our adjusted earnings per share guidance by $0.55 a share to a midpoint of $6.90 per share.
This includes our expectation that the U.S. mortgage market for 2021 as measured by credit inquiries will decline more in our February guidance of down 5% to a decline of approximately 8%.
Our framework assumes that the mortgage market slows primarily in the third and fourth quarter, which is consistent with our prior guidance.
And John will discuss our mortgage assumptions in more detail in a few minutes.
Turning to Slide 6, our outstanding first quarter results were broad-based and reflect better than expected performance from all four business units.
Workforce Solutions had another exceptional quarter, delivering 59% revenue growth and almost 60% adjusted EBITDA margins.
Workforce Solutions is now our largest business, representing almost 40% of total Equifax revenue in the fourth quarter and is clearly powering our results.
Verification Services revenue of $385 million was up a strong 75%.
Verification Service mortgage revenue again more than doubled for the fourth consecutive quarter, growing almost a 100 percentage points faster than the 20% underlying growth we saw in the mortgage market credit inquiries in the first quarter.
Importantly, Verification Services non-mortgage revenue was up over 25% in the quarter.
This segment of Verification Services continues to expand its market coverage and benefit from NPIs, new records, new use cases and is a long-term growth lever for Workforce Solutions.
Talent Solutions, which represents over 30% of verifier non-mortgage revenue almost doubled, driven by both new products and a recovery in U.S. hiring.
Government solutions, which represents almost 40% of verifier non-mortgage revenue also returned to growth driven by greater usage in multiple states of our differentiated data.
As a reminder, we continue to work closely with a social security administration on our new contract that we expect to go live in the second half and ramp to $40 million to $50 million of incremental revenue at run rate in 2022.
Our non-mortgage consumer business, principally in banking and auto, also showed strong growth in the quarter as well, both from deepening penetration with new lenders and from some recovery in those markets that I'll cover more fully in the discussion of USIS.
Debt management, which now represents under 10% of verifier non-mortgage revenue was, as we expected, down versus last year, but is stabilized and we expect to see growth in that vertical as we move through 2021.
Employer Services revenue of $96 million increased 17% in the quarter, driven again by our unemployment claims business which add revenue of $47 million, up around 47% compared to last year.
In the first quarter, Workforce Solution processed about $2.8 million UC claims, which is up from $2.6 million in the fourth quarter.
EWS processed roughly one in three U.S. initial unemployment claims in the quarter, which was up from one in five that they had been processing in recent periods, reflecting the growth in Workforce Solutions UC market position.
As a reminder, we continue to expect UC claims revenue to decline sequentially in the second quarter and throughout the balance of 2021 as the U.S. economy recovers and job losses dissipate.
We currently expect a decline in the second quarter UC revenue of about 45% versus last year and a full year 2021 decline in UC claims revenue of just under 30%.
Employer Services non-UC businesses had revenue down slightly in the quarter.
Our I-9 business driven by our new I-9 Anywhere solution continued to show very strong growth with revenue up 15%.
Our I-9 business is expected to continue to grow substantially to become our largest Employer Services business in 2021 and represent about 40% of non-UC revenue.
Reflecting the growth in I-9 and the return to growth of workforce analytics, we expect Employer Services non-UC businesses to deliver organic growth of over 20% in 2021.
The HIREtech and i2Verify acquisitions that we closed in March had a de minimis impact on revenue in the quarter, but will add -- will further add to Workforce Solutions growth during the rest of '21.
I'll discuss both HIREtech and i2Verify a little bit later.
Reflecting the power and uniqueness of TWN data, strong verifier revenue growth and operating leverage resulted in adjusted EBITDA margins of 59.3% and almost 800 basis point expansion from last year in Workforce Solutions.
Rudy Ploder and the Workforce Solutions team delivered another outstanding quarter and are position to deliver a strong 2021.
Workforce Solutions is clearly Equifax' largest and fastest growing business.
USIS revenue was up a very strong 19% in the quarter with organic growth also a strong 17%.
Total USIS mortgage revenue growth of $177 million was up 25% in the quarter, while mortgage credit inquiry growth up 21%, was slightly below the 24% expectation we shared in February.
As I mentioned, John will cover our updated view of the mortgage market for 2021 in a few minutes.
USIS mortgage revenue outgrew the market by 500 basis points in the quarter, driven by growth in marketing and new debt monitoring products.
Non-mortgage revenue performance was very strong with growth of 15% and organic growth of 11%, which is a record for USIS, and off a fairly strong first quarter last year.
We view this outperformance by U.S. as meaningful and a reflection of the competitiveness and commercial focus of the USIS team.
Importantly, non-mortgage online revenue grew a very strong 16% in the quarter with organic growth of almost 11%.
We saw non-mortgage revenue growth accelerate in February and March as vaccine rollouts increased and financial institutions gain confidence in the consumer and the economy.
Banking, auto, ID and fraud, insurance and direct to consumer all showed growth in the quarter which is encouraging as move into second quarter and the rest of 2021.
Commercial was about flat, while only telco was down in the quarter as we expected.
Financial Marketing Services revenue, which is broadly speaking our offline or batch business was $53 million in the quarter, up almost 12%, which is also very positive.
The performance was driven by marketing related revenue, which was up over 20% and ID and fraud revenue growth of just under 10% as consumer marketing and originations ramped up.
In 2021, marketing-related revenue is expected to represent about 45% of FMS revenue with identity and fraud about 20% and risk decisioning about 30%.
This strong growth across our non-mortgage businesses, including strong growth in marketing-specific offline revenue is very encouraging for both the recovery of our underlying markets and our non-mortgage performance as we move into second quarter and the rest of 2021.
The USIS team continues to drive growth in their new deal pipeline with first quarter pipeline up 30% over last year, driven by growth in both the volume and the size of new opportunities and NPI roll outs.
First quarter win rates were also higher than levels seen in 2020.
Sid Singh and as USIS team continue to be on offense and are competitive in winning in their marketplace.
In addition to driving core business growth in the first quarter, USIS achieved an important strategic milestone in closing the acquisition of Kount, an industry leader in providing AI-driven fraud prevention and digital identity solutions.
Integration efforts are now under way with a key focus on technology and product, leveraging the joint Equifax and Kount data and capabilities.
Kount's technology platform will migrate to the Equifax Cloud in the next 12 to 18 months, which will allow for the full integration of Kount and Equifax capabilities for new solutions, new products and market expansion in the fast growing identity and fraud marketplace.
USIS adjusted EBITDA margins of 42.9% in the first quarter were down about 180 basis points from last year.
About two-thirds of the decline was due to the inclusion of tech transformation costs in our adjusted EBITDA in 2021.
The remainder of the decline was principally driven by the higher mix of mortgage products and redundant system costs from our cloud transformation.
Moving now to International, their revenue was up 3% on a constant currency basis in the quarter, which is the second consecutive quarter of growth in our global markets, but are still very challenged by COVID lockdowns and slow vaccine roll outs.
Revenue growth improved significantly in Canada, Asia Pacific, which is our Australian business and Latin America.
This was partially offset by revenue declines in the U.K., principally due to continued U.K. lockdowns in response to the COVID pandemic.
Asia-Pacific, which is principally our Australia business had a very good performance in the first quarter with revenue of $87 million, up 7% in local currency.
Australia consumer revenue continues to improve relative to prior quarters and was down only about 2% versus last year compared to down 5% in the fourth quarter.
Our Commercial business combined online and offline revenue was up a strong 9% in the quarter, a solid improvement from fourth quarter.
And fraud and identity was up 15% in the quarter following strong performance in the fourth quarter.
European revenues of $69 billion were down 5% in local currency in the first quarter.
Our European credit business was down about 5% in local currency.
Spain revenue was down about 1%, while the U.K. was down about 6% in local currency similar to the fourth quarter from continued challenging COVID environments.
Our European debt management business revenue declined by about 4% in local currency in the quarter.
Both, the CRA and debt management businesses were impacted in the quarter by actions taken by the U.K. government to curtail debt placements in response to the pandemic resurgence in the United Kingdom.
As the lockdown and other actions lift in April and May, we anticipate improvements in U.K. CRA revenue in the second quarter and improvements in debt management revenue in the second half of 2021 as collection activity restarts in the latter part of the second quarter.
Latin American revenues of $42 million grew about 1% in the quarter in local currency, which was an improvement from the down 1% we saw in the fourth quarter.
These markets also continue to be heavily impacted negatively by continued COVID lockdowns and slow vaccine rollouts.
We continue to see the benefit in LatAm of strong new product introductions over the past three years, which is benefiting their top line.
Canada delivered record revenue of $44 million in the quarter, up about 13% in local currency.
Consumer online was up about 3% in the quarter, an improvement from the fourth quarter.
Improving growth in commercial, analytical and decision solutions and ID and fraud also drove growth in Canadian revenue in the first quarter.
International adjusted EBITDA margins at 28.2% were down 30 basis points from last year.
Excluding the impact of the tech transformation cost that we've included in adjusted EBITDA, margins were up about 200 basis points.
This improvement was principally due to revenue growth and operating leverage, partially offset by redundant system costs from our cloud transformation.
Global Consumer Solutions revenue was down 16% on a reported basis and 17% on a local currency basis in the quarter and slightly better than our expectations.
We saw better than expected performance in our global consumer direct business, which sells directly to consumers through equifax.com and myEquifax and which represents about half of total GCS revenue.
Direct-to-consumer revenue was up a strong 11% in the quarter, the third consecutive quarter of growth.
Decline in overall GC revenue in the quarter was again driven by our U.S. lead generation partner business, which has been significantly impacted from COVID beginning in mid-2020.
As we discussed, we expect a decline in total GCS revenue from our partner vertical to moderate substantially as we move into the second quarter and return to growth in the fourth quarter of 2021.
GCS adjusted EBITDA margins of 24.6% were up about 150 basis points.
We expect margins to be pressured to around 20% in the second quarter, reflecting planned cost to complete the migration of our consumer direct business, cloud transformations in the U.S., U.K. and Canada through our new Equifax cloud platform.
Moving to Slide 7, this chart provides updated view of Equifax core revenue growth.
As a reminder, core revenue growth is defined as Equifax revenue growth excluding number one, the extra revenue growth in our UC claims business in '20 and '21, and number two, the impact on revenue from U.S. mortgage market activity as measured by changes in total U.S. mortgage market credit inquiries.
Core revenue growth is our attempt to provide a more normalized view of Equifax revenue growth excluding these unusual UC and U.S. mortgage market factors.
In the first quarter, Equifax core revenue growth, the green section of the bars on Slide 7, was up a very strong 20%, reflecting the broad-based growth across Equifax and this is up significantly from the 11% core revenue growth we delivered in the fourth quarter and well above our historic core growth rates.
Workforce Solutions and USIS have continue to strongly outperform the mortgage market.
The 16% organic growth in U.S. B2B non-mortgage revenue also drove our core revenue growth.
Importantly, our core revenue growth has accelerated over the past five quarters from 5% in first quarter of 2020 to 11% in the fourth quarter of last year and to 20% this quarter, reflecting the strength and resiliency of our broad-based business model, power of Workforce Solutions, the market competitiveness of USIS and benefits from our cloud Equifax -- our cloud data and technology investments and our increasing focus on leveraging the cloud for innovation in new products.
As you know, the strong growth is in the midst of a global market that is still recovering from the COVID pandemic.
Turning to Slide 8, Workforce Solutions continues to power Equifax and clearly is our strongest and more valuable and largest business.
Workforce Solutions revenue grew a very strong 59% in the first quarter with core revenue growth accelerating to 46%.
As a reminder, the 59% growth is of 32% growth in first quarter of 2020.
The strong outperformance and sequential improvement reflects the power of the unique TWN database and Workforce Solutions business model.
At the end of the first quarter, the TWN database reached 115 million active users and 90 million unique records, an increase of 9% or 10 million active records from a year ago.
And as a reminder, over 60% of our records are contributed directly by employers that Workforce Solution provides employer services like, UC claims, W-2 management, I-9, WOTC, and other solutions too.
And we've built these relationships over -- with these -- with our customers and contributors over the past decade.
The Remaining 35% are contributed through partnerships, most of which were exclusive.
The major payroll processor agreement that we announced on our February call is still on track to go live later this year, which will add to our TWN database.
And we have a dedicated team, as you know, focused on growing our TWN database, with an active pipeline of record additions to continue to expand our TWN database.
The Workforce Solution team continues to focus on expanding the number of mortgage companies and financial institutions with which we have real time, system- to-system integrations, which, as you know, drives increased usage of our TWN data.
The team is also focused on extending our offerings into card and auto verticals, as well as across our growing government vertical.
And as I mentioned earlier, we continue to work closely with the SSA, and expect to go live with our new solution in the second half of this year, which will deliver $40 million to $50 million of incremental revenue and run rate in 2022.
The Workforce Solutions new product pipeline is also rapidly expanding as our teams leverage the power of our new Equifax Cloud infrastructure.
We are anticipating new products in mortgage, talent solutions, government, and I-9 in 2021.
New product revenue will increase in '21 and '22, as we begin to reap the benefits of our new products introduced to the market during last year and in 2021.
Rudy Ploder and the Workforce Solutions team have multiple levers for growth in '21, '22 and beyond.
Workforce Solutions are most -- Workforce Solutions is our most valuable business and will continue to power our results in the future.
Slide 9 highlights the ongoing exceptional core growth performance in mortgage for our U.S. B2B business -- mortgage businesses Workforce Solutions and USIS.
Workforce and USIS outgrew the underlying U.S. mortgage market again in first quarter, with combined core growth of 48%, up from 37% in 2020, and in line with the 49% growth they delivered in the fourth quarter -- 49% core growth.
This outperformance was driven strongly by Workforce Solutions with core mortgage growth of 99%.
Consistent with past quarters, Workforce Solutions outperformance was driven by new records, increased market penetration, larger fulfillment rates, and new products, proof that lenders are increasingly becoming reliant on the unique TWN income and employment data when making credit decisions.
USIS delivered 5% core mortgage revenue growth in the quarter, driven primarily by new debt monitoring solutions with further support from marketing.
Our ability to substantially outgrow all of our underlying markets is core to our business model and core to our future growth.
As Mark referenced earlier, U.S. mortgage market inquiries remained very strong in 1Q '21 and up 21%, but that growth was slightly lower than the 24% we had expected when we provided guidance in early February.
As shown in the left side of Slide 10, as mortgage rates increased over the past few months and refinancing activity continues, the number of U.S. mortgages that could benefit from a refinancing has declined to about $30 million.
Although, still very strong by historic standards, this is down from the levels we saw in 4Q '20 and early 1Q '21.
Based upon our most recent data from 4Q 2020, mortgage refinancings were continuing at about $1 million per month.
As shown on the right side of Slide 10, the pace of existing home purchases continues at historically very high levels.
This strong purchase market is expected to continue throughout '21 and into '22.
Based on these trends and specifically the reduction in the pool of mortgages that would benefit from refinancing, we are reducing our expectation for the mortgage market financing activity in 2021.
As shown on Slide 11, we now expect mortgage credit inquiries to be about flat in 2Q '21 versus 2Q '20, and to be down about 25% in the second half of '21 as compared to the second half of '20.
Overall, for 2021, we expect mortgage market credit inquiries to be down approximately 8%.
This compares to the down approximately 5% we discussed with you in February.
Slide 12 provides our guidance for 2Q '21.
We expect revenue in the range of -- revenue in the range of $1.14 billion to $1.16 billion, reflecting revenue growth of about 16% to 18%, including a 2.1% benefit from FX.
Acquisitions are positively impacting revenue by 2%.
We are expecting adjusted earnings per share in 2Q '21 to be $1.60 to $1.70 per share compared to 2Q '20 adjusted earnings per share of $1.63 per share.
In 2Q '21, technology transformation costs are expected to be around $44 million or $0.27 per share.
Excluding these costs that were excluded from 2Q '20 adjusted EPS, 2Q '21 adjusted earnings per share would be $1.87 to $1.97 per share, up 15% to 21% from 2Q '20.
This performance was being delivered in the context of the U.S. mortgage market, which is expected to be flat versus 2Q '20.
Slide 13 provides the specifics on our 2021 full year guidance.
We are increasing guidance substantially, despite the expectation of a weaker U.S. mortgage market.
2021 revenue of between $4.575 billion and $4.675 billion reflects revenue growth of about 11% to 13% versus 2020, including a 1.4% benefit from FX.
Acquisitions are positively impacting revenue by 1.7%.
EWS is expected to deliver over 20% revenue growth with continued very strong growth in Verification Services.
USIS revenue is expected to be up mid to high single-digits, driven by growth in non-mortgage.
International revenue is expected to deliver constant currency growth in the upper single-digits and GCS revenue is expected to be down mid-single-digits in 2021.
2Q '21 revenue was also expected to be down mid-single-digits for GCS.
As a reminder, in 2021, Equifax is including all cloud technology transformation costs and adjusted operating income, adjusted EBITDA and adjusted EPS.
These one time costs were excluded from adjusted operating income, adjusted EBITDA and adjusted earnings per share through 2020.
In 2021, Equifax expects to incur one-time cloud technology transformation costs of approximately $145 million, a reduction of about 60% from the $358 million incurred in 2020.
The inclusion in 2021 of this about $145 million in one-time costs would reduce adjusted earnings per share by $0.91 per share.
This is consistent with our guidance for 2021 that we gave in February.
2021 adjusted earnings per share of $6.75 to $7.05 per share which includes these tech transformation costs is down approximately 3% to up 1% from 2020.
Excluding the impact of tech transformation costs of $0.91 per share, adjusted earnings per share in 2021 which show growth of about 10% to 14% versus 2020.
2021 is also negatively impacted by redundant system costs of about -- of over $65 million relative to 2020.
These redundant system costs are expected to negatively impact adjusted earnings per share by approximately $0.40 a share.
Slide 14 provides a view of Equifax total and core revenue growth from 2019 through 2021.
Core revenue growth excludes the impact of movements in the mortgage market on Equifax revenue as well as the impact of changes in our UC claims business within our EWS Employer Services business, and also the employee retention credit revenue from our recently acquired HIREtech business.
Employee retention credits are specific U.S. government incentives for companies to retain their employees in response to COVID-19 and the associated revenue is not expected to continue into 2022.
The data shown for 2Q '21 and full year 2021 reflects the midpoint of guidance ranges we provided.
In 1Q '21, we delivered very strong core revenue growth of 20% and expect to continue to deliver strong core revenue growth in 2Q '21 of about 20%,and 16% for all of 2021.
This very strong performance, we believe, positions us well entering 2022 and beyond.
And now I'd like to hand it back over to Mark.
Turning to Slide 15, this highlights our continued focus on new product innovation, which is a critical component of our next chapter of growth as we leverage the Equifax Cloud for innovation in new products and growth.
We continue to focus on transforming Equifax into a product-led organization, leveraging our best-in-class Equifax Cloud Native Data and Technology to fuel top-line growth.
In the first quarter, we delivered 39 new products, which is up from the 35 we delivered last year.
We are encouraged by this continued strong performance, especially following the record 135 new products we delivered last year.
We wanted to highlight some of these new products, which we expect to drive revenue in '21 and beyond.
First, Insight Score for credit card launched by USIS provides the credit card industry with a specific credit risk score created using credit and alternative data that predicts a likelihood of a consumer becoming 90 days past due or more within 24 months of origination.
USIS also launched a new commercial real estate tenant risk assessment product suite, which provides real time and unmatched data analytics and risk assessment or tenants buildings in portfolio strength delivered through an interactive Ignite Marketplace app or as a stand-alone report.
And Workforce Solutions continues to expand its suite of products focused on the government vertical.
Their government enhanced solutions social, Social Services Verification product gives the ability for the customer to choose the desired period of employment history with options ranging from three months, six months, one year or three years or the full employment history.
These products help government agencies quickly and efficiently administer federally -- federal supplement -- supplementary nutrition, child health insurance, medicaid, Medicare benefits, many child support and ensure program integrity.
In the first quarter, over two-thirds of our new products launched or in development leveraged our new Equifax cloud-based global product platforms.
This enables significant synergies and efficiencies in how we build the new products, our speed to bring the products to market and our ability to move the new products easily to our global markets.
Our new cloud-based Luminate platform for fraud management is a great example which is launching in Canada and the U.S. simultaneously and will soon launch in the United Kingdom, Australia and India.
This would have taken much longer and been much more expensive in a legacy environment.
We're also rolling out our Equifax cloud-based Interconnect and Ignite platforms for marketing and risk and decisioning and management products throughout Latin America, Europe, Canada as well as the United States.
As we discussed on our call in February, we're focused on leveraging our new cloud capabilities to increase NPI rollouts and new product revenue growth in '21 and beyond.
As a reminder, our NPI revenue is defined as the revenue delivered by new products launched over the past three years and our vitality index is defined as the percentage of current year revenue delivered by NPI revenue.
As I mentioned earlier, we've increased our 2021 vitality index guidance from 7% by a 100 basis points to 8% as you can see from the left side of the slide is significant is a significant increase from about 500 basis points in 2020.
NPIs are a big priority for me and the team as we leverage the Equifax Cloud for innovation, new products and growth.
Turning to Slide 16, M&A plays an important role in our growth strategy and will be central to our long-term growth framework.
Our team is focused on building an active pipeline of bolt-on targets that will both broaden and strengthen Equifax.
Our M&A strategy centers on acquiring accretive and strategic companies that add unique data assets, new capabilities, deliver expansion into identity and fraud or expand our geographic footprint.
In the first quarter, we closed five acquisitions totaling $866 million across strategic focus areas of identity and fraud, Workforce Solutions, open data and SME.
We discussed three of these transactions with you in February which were the acquisitions of Kount, AccountScore and Creditworks.
As I just discussed earlier, we're excited excited about expanding opportunities we see from the combined Kount and Equifax in the fast growing identity and fraud marketplace.
In March, we closed two Workforce Solutions bolt-on transactions HIREtech and i2verify, which will further broaden and strengthen our Workforce Solutions business.
HIREtech is a Houston-based company that provides employee-related tax credit services as well as verification services.
HIREtech also has unique channel relationships to provide these services through payroll providers, consulting firms and CPA firms.
I2verify is a Newburyport Massachusetts-based company that provides secure digital verifications of income and employment services.
The company has a unique nationwide set of record contributing employers with concentrations in the healthcare and education sectors.
i2verify also brings unique records to the TWN database, which are contributed by direct relationships.
You should expect Equifax to continue to make acquisitions in these strategic growth areas that offer unique data and analytics to our customers with the goal of increasing our top line by 100 to 200 basis points annually from M&A.
Before wrapping up, I want to speak to you about an area of significant focus at Equifax and importance to me personally.
Slide 17 provides an overview of Equifax's ESG strategy and how it helps position us for long-term sustainability.
I hope you saw and had a chance to read our annual report letter that highlighted our increased focus on ESG.
First, Equifax plays an important role in helping consumers live their financial best.
A primary example of this is that our alternative data assets such as utility and phone payment data provide lenders with a better picture of the approximately 30 million U.S. individuals who do not have traditional credit files or access to the formal financial system.
I've also made advancing, inclusion and diversity, a personal priority since I joined Equifax.
Believing that diversity of thought leads to better decisions, we're taking clear steps to broaden diversity at Equifax, including the last three directors added to our Board are diverse and all seven individuals who have added to my senior leadership team since I joined three years ago have also been diverse.
We're carrying out this focus on inclusion and diversity across Equifax.
We're also focused on environment -- on our environmental impact in our greenhouse gas print.
Our cloud transformation will move our existing legacy technology infrastructure to the cloud which will dramatically reduce our environmental impact as we leverage the efficiencies and carbon-neutral infrastructure at our cloud service providers.
Over the course of this year we -- over the course of last year we decommissioned six data centers, over 6,800 legacy data assets and over 1,000 legacy applications.
We have a detailed program under way to baseline our energy usage and benefits from our cloud transformation as we work toward a commitment regarding carbon emissions and a net-zero footprint.
We're also committed to be an industry leaders regarding security.
With the leadership of our CSO, Jamil Farshchi, our culture puts security first.
All employees are required to take a mandatory security focused training sessions every year.
And all of our 4,000 bonus eligible employees have a security goal in their annual MBOs.
We believe -- we also believe in sharing our security protocols and strategies with our partners, customers and competitors to collaborate to keep us all safe.
In 2020, we hosted our inaugural Customer Security Summit where we detailed our progress on security transformation and discussed advancements in supply chain and security.
As threats continue to involve, we remain highly focused on continuing to advance our security efforts.
Wrapping up on Slide 18, Equifax delivered a record setting first quarter and we have a strong momentum as we move into second quarter in 2021.
Our 27% overall and 20% core growth in first quarter reflects the strength and resiliency of our business model, while still operating in a challenging COVID environment.
We've now delivered five consecutive quarters of sequentially improving double-digit growth.
We're confident in our outlook for 2021.
And as John described, are raising our full year midpoint revenue by 500 basis points to $4.625 billion and our earnings per share midpoint by 9% to $6.90 a share.
Our revised revenue estimate of 12% growth in 2021 at the midpoint of the range off a very strong 17% in 2020, reflects the resiliency, strength and momentum of the EFX business model.
Our increased 2021 growth framework incorporated our expectation as John discussed that the U.S. mortgage market will decline about 8% in 2021 and while operating in a still recovering COVID economy.
Our expectation for core revenue growth of 16% in 2021 reflects how our EFX 2023 strategic priorities are delivering.
Workforce Solutions had another outstanding quarter of 59% growth and will continue to power Equifax operating performance throughout 2021 and beyond.
The Work Number is our most differentiated data assets and Workforce Solutions is our most valuable business.
Rudy Ploder and his team are driving outsized growth by focusing on their key levers, new records, new products, penetration and expansion in the new verticals with our differentiated TWN database.
USIS also delivered an outstanding quarter of 19% growth, highlighted by non-mortgage revenue growth of 15% and 11% organic non-mortgage growth.
We expect our non-mortgage growth to accelerate as the U.S. economy recovers.
The acquisition of Kount is providing new opportunities and products in the rapidly expanding identity and fraud marketplace and USIS continues to outperform the mortgage market from new products, pricing and increased penetration.
USIS is clearly competitive and winning in the marketplace and will continue to deliver in '21 and beyond.
International grew in the first quarter for the second consecutive quarter, overcoming economic headwinds from significant COVID lockdowns and slower vaccine rollouts in our global markets.
Our expectations are high for ongoing sequential improvement in International during 2021 and for accelerating growth as their underlying markets recover from the COVID pandemic.
We're also making strong progress rolling out our new EFX Cloud technology and data infrastructure and remain confident as John described in the significant top line cost and cash benefits of our new EFX Cloud capabilities.
These financial benefits will ramp as we move through 2021 and continue to grow in 2022 and are enabled by our always on stability, speed to market and ability to rapidly build new products around the globe.
Our strong performance -- operating performance is allowing us to continue to accelerate investments in new products, leveraging our new Equifax Cloud capabilities.
And we're off to a strong start in 2021 with 39 NPIs in the first quarter, on top of the record 134 we launched in 2020.
And our strong outperformance is fueling our cash generation, which is allowing us to reinvest in accretive and strategic bolt-on acquisitions.
As discussed earlier, we closed five acquisitions in strategic growth areas in the first quarter and we have an active M&A pipeline.
We look for bolt-on acquisitions that will strengthen our technology and data assets and that are financially accretive with the goal of adding 100 to 200 basis points to our top line growth rate in the future.
I'm energized about what the future holds for Equifax.
We have strong momentum across all of our businesses as we move in the second quarter.
We're on offense and positioned to bring new and unique solutions to our customers that only Equifax can deliver, leveraging our new EFX Cloud capabilities and our strong results and the increased guidance that we provided reflect that.
| compname posts q1 adjusted earnings per share $1.97.
q1 adjusted earnings per share $1.97.
reported revenue of $1,213.0 million in q1 of 2021, up 27 percent compared to q1 of 2020.
sees q2 2021 adjusted earnings per share $1.60 -$1.70.
sees fy 2021 adjusted earnings per share $6.75 to $7.05.
sees fy 2021 revenue $4.575 billion to $4.675 billion.
|
Earlier today, we published our results for the second quarter of 2021.
This includes, without limitation, statements regarding our future operations and performance, revenues, operating expenses, stock-based compensation expense and other income and expense items.
These statements and any projections as to the company's future performance represent management's estimates for future results and speak only as of today, August 5, 2021.
In addition, certain financial measures we may be using during the call, such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes and adjusted pre-tax return on equity are non-GAAP measures.
This release can be found in both the Investors and Press section of our website at www.
Unauthorized recording of this conference call is not permitted.
Since our last call with you, the recovery of air travel has varied significantly by geography based on the status of the pandemic in each location, vaccine availability and travel restrictions.
In other countries including many in Asia, there remain headwinds to recovery with lower vaccination rates and more aversion to opening borders.
Overall, given the Delta variant surge, we intend for you to hear from us today as always our balanced view on the state of the industry.
Our optimism is rooted by the rebound in air travel we've all seen and the conversations we have with our airline customers, who are adjusting to and planning for ongoing revival of passenger traffic.
At the same time, given COVID-19 complexities and uncertainties, which vary by country, we are realistic that we do have airline customers continuing to struggle with the most prolonged downturn in our industry's history, and that has continued to impact our results.
For the second quarter of 2021, we're reporting $492 million in total revenues and diluted earnings per share of $0.75 a share, down 6% and 41%, respectively, compared to the prior year's second quarter, which, for the most part, was a pre-pandemic quarter.
Our results this quarter were primarily impacted by approximately $87 million of rental revenues we did not recognize in the quarter due to cash versus accrual basis revenue recognition and lease restructurings.
I'll discuss this more momentarily.
While we took delivery of about $1 billion in new aircraft in the second quarter, that was $200 million less than we originally anticipated, and 50% of these deliveries took place in the month of June, providing a minimal contribution to the full quarter, but providing long-term rental contribution thereafter.
We're pleased that our collection rate improved in the second quarter to 87% as compared to 84% in the first quarter and our lease utilization rate was strong at 99.7%.
Importantly, our net deferrals balance continues to decline to $115 million today -- as of today from $131 million as of early May when we last spoke, with now more than half of the deferrals granted to date having been repaid.
The decline in our deferrals balance contributed to the increase in our operating cash flow, which is up nearly 30% for the first six months of 2021 versus 2020.
Now as I highlighted earlier, revenues were impacted by $87 million from cash basis accounting and lease restructuring agreements.
$42 million of this quarter came from lessees on a cash basis where the lease receivables exceed the security package, and collection was not reasonably assured.
It's important to note that approximately 2/3 of the $42 million is attributable to one customer, Vietnam Airlines, where we have 12 young A321neos and four 787-10s on lease with one of those Neos being owned by one of our management vehicles.
While we did receive a subsequent payment from Vietnam in July, we expect reduced level of rental payments to continue during 2021 as we work through these matters with the airline.
We believe the country of Vietnam and the airline have a bright future despite the significant impacts that pandemic has had on them to date, and that is in the best long-term interest of ALC for us to continue working with the airline toward payment and resolution.
The remaining $45 million of the $87 million was related to lease restructurings.
As I said in my initial comments, the recovery and health of our airline customers vary significantly by country and region.
And as such, we expect that we may need to continue working with our airline customers on accommodation requests, including restructurings.
However, as I told you last quarter, the frequency of these requests is declining meaningfully.
We're very pleased to report that in the second quarter, we successfully sold our unsecured claim in the Aeromexico bankruptcy.
Now Greg will elaborate further on this in his remarks.
But consistent with the original expectations we shared with you months ago, our 737 and 787s remain at Aeromexico as these young aircraft combine the backbone of the airline fleet.
In fact, we have three more 737-9s yet to go in future delivery to Aeromexico.
As in this case, with others and many in our customer profile, our relationship with the airline and modern aircraft that they have on lease from ALC remains a key differentiator.
Our lease placements remained strong with 90% -- 93% excuse me, of our order book placed on long-term leases for aircraft delivering through 2022 and 80% through 2023.
And our order positions continue to position us very well for the future.
I want to remind all of you that ALC has $27.1 billion in rental commitments on our current fleet and forward order book placements.
We're having robust discussions with our airline customers on new aircraft placements.
Specifically, we've seen increased interest in our new single-aisle aircraft, including the A321neo, and now placements of our A220s.
In addition, we're seeing additional demand for the MAX, and in fact, have reinstituted previously canceled MAX aircraft for a few of our customers.
Importantly, lease rates for new single aisles are showing improvements.
Many of you probably read, in fact, about the European Green Deal Legislative Package known as "Fit for 55", which aims to cut 2030 net greenhouse gas emissions by 55% compared to 1990 levels.
An important proposal within this package is the integration of advanced sustainable aviation fuels, which can reduce emissions by up to 80% as compared to traditional jet fuel.
Our young modern aircraft are equipped to handle sustainable aviation fuels.
And when combined with the benefits already achieved by operating new aircraft, including lower maintenance costs, lower fuel burn, lower NOx emissions, smaller noise footprint.
These elements only further aid an airline's business case to operate a young, modern aircraft like those in our fleet and order book.
Looking ahead, although we have OEM contractual commitments to take delivery of 52 aircraft in the second half of 2021, you're all aware of Boeing's delivery pause on the 787.
As the commitment table in our 10-Q shows, we were scheduled to take delivery of 10 787s through the end of the year.
It is unclear at this juncture how many 787s we will take for the remainder of this year.
But our best estimate today is approximately three of these aircraft.
Furthermore, we have recently been notified by Airbus of some slippage in our A321neo deliveries attributable to COVID or supply chain issues.
Given these OEM delays, we currently expect to take delivery of approximately 36 aircraft out of the 52 contracted aircraft stream, and that translates to approximately $1 billion of deliveries to occur in the third quarter and $1.6 billion to occur in the fourth quarter of 2021.
Given these OEM delivery delays, we will significantly scale back our aircraft sales for the remainder of this year, and possibly into early 2022.
And for our growth and to help fill this shortfall in aircraft investments, we see the current environment continuing to favor buying attractive assets versus selling them.
I want to end my comments as I begin by saying that we are encouraged by the resurgence in air travel occurring throughout many parts of the world, and believe the aviation industry is well set for ongoing recovery.
We will continue to work through any customer challenges, which are to be expected, given that the Delta variant may temporarily dampen or prolong the recovery and many countries are still battling through this pandemic.
However, we strongly maintain our long-term view that international air traffic will follow the lead we've seen from domestic travel recovery and that over time, global air travel will recover back to levels witnessed pre-pandemic driven by the need and desire of people to travel around the world.
Reflecting this continued confidence, our Board of Directors has declared another dividend of $0.16 per share for the second quarter of 2021.
We're all encouraged by what we've witnessed over the last several months, which indicates that the traveling public is eager to get back in the air once they feel safe and they're allowed to do so with minimum limitations.
As we look around the world, there seems to be very much a 2-tier recovery occurring.
The first is in the developed versus emerging markets, with countries and regions with the highest incomes getting vaccinated as much as 30 times faster than those with the lowest income brackets.
As the vaccination rates across the globe increase, we should see a steady reopening of air travel.
IATA has cited research for medical organizations around the world, which has shown that vaccinated travelers pose less risk to local populations, and data shows that pre-flight testing can help reduce risks associated with unvaccinated travelers.
In a study also conducted by IATA, 85% of the respondents agreed in some regard that they will not travel if there's a chance of quarantine at their destination.
Yet at the same time, 86% said we're willing to undergo COVID-19 test as part of the overall travel process.
So to the extent governments can further move past broad border closures and quarantines and allow vaccinated travelers or those with a negative test, this could significantly benefit the further rebound in air travel.
We are hopeful that increased vaccination rates in key markets will ultimately drive reopening in other locations even if the vaccination rates in those areas are lower than in the most developed countries.
The second recovery tier is domestic versus international travel with domestic travel improving more quickly and international travel growth is lagging.
Domestic travel has certainly been afforded the opportunity of late to capture demand that international travel has not as many travel restrictions remain in place.
And we have seen proof of that in the latest travel data for the last two or three months.
Per IATA's latest release for June 2021, traffic industrywide domestic RPKs were down only 22% as compared to June of 2019.
Whereas international, they were down 81% versus June of 2019.
If we look at even more information from EUROCONTROL, the same trend exists.
For example, in the United States, one of the most recently reported week, U.S. domestic passenger airline departures were down only 18% as compared to 2019 levels, whereas international was down 37%.
Similarly, in China, domestic traffic recorded an increase of 7% above January 2020 levels, whereas international flights were suppressed at nearly 70% below January 2020 levels.
In Europe, domestic demand is driving traffic volumes within countries, including Spain, France and several others.
Obviously, we're eager to see how the progress, as the summer comes to an end, will develop.
And we would be naive to think that recovery will not continue to go on waves depending on the evolution of COVID variants and government policies impacting reopenings.
However, these data points reinforce our views that there is significant pent-up demand for air travel seen via domestic travel recovery.
For the year 2019, global scheduled airline passengers were over four billion, one-way trips.
And IATA forecasts that by the end of '23, we should be -- or could be at 105% of 2019 levels.
We believe that the rebound in passenger traffic will ultimately be driven by continued vaccine rollout and the continuous removal of travel barriers and that we could see this forecast ultimately surpass perhaps even more quickly.
Our airline customers are witnessing the same trends as we are.
And as a result, we are having productive discussions with them on new lease placements, and our deliveries are ongoing.
In the second quarter, we delivered new single-aisle 737 and A320, A321neo aircraft in Europe, Middle East and Latin America, and new wide-body aircraft to China, Europe and the United States.
We also continue to lease used aircraft.
These are the aircraft we agreed to purchase from Alaska Airlines when we placed the new MAX aircraft contract with Alaska in late 2020.
We leased them back to Alaska, and the young A320s will become a meaningful component of Allegion's fleet in 2022 and 2023.
Airlines are continuing to choose to operate younger aircraft like those in ALC fleet, and delivering from our order book.
In fact, as of the end of June, industry information indicates that 88%, I repeat, 88% of the aircraft under the age of five years were back in service.
And 78% of aircraft in the age range of five to 15 years old were in service, whereas only 63% of aircraft over the age of 15 were back in service.
As John mentioned earlier, with sustainability initiatives front and center, we believe operation of modern, fuel-efficient aircraft will continue to be the trend on a global scale.
You are seeing this with announcements from airlines throughout the world.
United Airlines recently placed an order for over 270 Boeing MAX and Airbus A321neo aircraft, which will replace older aircraft in their fleet and lead to significant improvement in fuel efficiencies, reduction in carbon emissions as they strive to reduce greenhouse gas emissions, 100% by 2050.
You have also seen similar announcements on the tackling of sustainability initiatives by the utilization and purchase of new aircraft from airlines, including Korean Airlines, which committed to reducing greenhouse gas by introducing new generation aircraft like the 787-10.
Korean has a number of 787-10 aircraft delivery from ALC over the next several years.
Alaska Airlines also recently placed a direct order for a substantial number of new 737 aircraft to achieve better fuel efficiency, and the airline is also leasing 13 new 737-9 MAX aircraft from ALC with deliveries beginning in the fourth quarter of this year.
While the pandemic to some degree, temporarily overshadowed the industry's commitment to advancing sustainability initiatives, it is still very much in the forefront in the minds of our airline customers making our young fleet and order book of modern technology aircraft even more critically needed than ever before.
I believe, over time, our industry will continue to evolve to tackle the critical changes we need in terms of fleet modernization, infrastructure investment, etc, to better our environmental footprint, lower aircraft operating costs and increase overall operating efficiency.
I want to expand on the details, underlying our financial results for the second quarter.
And I would like to remind everyone that for comparative purposes, the second quarter of last year was not fully impacted by the pandemic.
Over the past year, despite the pandemic, we have made over $3 billion in aircraft investments, which has benefited our revenue line.
However, as John mentioned, revenues in the quarter were negatively impacted by $87 million from lease restructuring agreements and cash basis accounting, of which $42 million came from lessees on a cash basis.
This compares to $49 million in the first quarter and $21 million in the fourth quarter of last year.
Hopefully, we'll have a favorable resolution with Vietnam and other cash basis lessees by the end of the year.
But until then, we expect that our cash basis numbers will remain under pressure.
In total, our cash basis lessees represented 10.9% of the net book value of our fleet as of June 30, which compares to 15.3% in the first quarter of '21 with improvements stemming from the resolution we reached with Aeromexico.
I think it's important to expand upon John's commentary on the sale of our Aeromexico bankruptcy claim.
The sale represents a full recovery of our past due receivables.
So while our earnings were negatively impacted in prior periods, we were able to recoup these losses through the sale.
It is important to note that not all situations will end in this result, but we are pleased with this outcome.
Additionally, I want to highlight our rationale behind keeping customers on cash accounting instead of rushing to enter into restructuring agreements, while the earnings impact in a given quarter would be reduced if simply -- if we simply accepted a lower restructured lease rate and return to accrual accounting.
But that would typically come at the cost of lower economic returns over the life of the new agreement.
We prefer to negotiate rather than to settle, which we believe gives us a better chance at a higher financial outcome in the restructuring process, but this typically takes more time.
So while cash accounting has been a meaningful drag on results.
We are, in effect, taking short-term pain for the long-term gain and preserving economic returns and maximizing shareholder value.
As John mentioned, rental revenues were negatively impacted by $45 million in the second quarter, much of which was attributable to restructuring that took place in prior quarters.
Finally, as of today, our total deferrals net of repayments are $115 million, which is a 12% decline from $131 million we reported on our last call.
Repayment activity has continued with the total repayments aggregating $127 million or 52% of the gross deferrals granted.
These receipts are reflected in our operating cash flow, which has increased significantly and reflects the continued recovery of our airline customers.
Looking at aircraft sales, trading and other activity, you will recall that we noted -- that we were not going to sell any aircraft in the second quarter.
This compares to $18.5 million in gains recognized from the sale of four aircraft and repurchase of $185 million in short-term debt maturities below par in the second quarter of 2020.
Interest expense increased year-over-year, primarily due to the rise in our average debt balances driven primarily by the growth of our fleet, partially offset by the decline in the composite cost of funds.
Our composite rate decreased to 2.9% from 3.2% in the second quarter of 2020.
Depreciation continues to track the growth of our fleet, while SG&A remained largely flattish compared to last year.
Overall, I think it's important to note that despite the continued challenges, we are generating positive margins and returns on equity, which should improve as our customers come off cash accounting as the world continues to recover from the pandemic.
Finally, I want to touch on financing, which continues to provide us a significant competitive advantage over our peers.
We are dedicated to maintaining a investment-grade balance sheet, utilizing unsecured debt as a primary source of financing, and have over $24 billion in unencumbered assets at quarter end.
We ended the period with a debt-to-equity ratio of 2.5 times on a GAAP basis.
We raised $1.8 billion in debt capital during the second quarter, beginning with a $1.2 billion senior unsecured issuance at 1.875%, which represents a record low for our company for a 5-year issuance.
Additionally, we raised another $600 million of floating rate senior unsecured notes at LIBOR plus 35 basis points, which represents another record low for ALC.
We anticipate maintaining elevated levels of liquidity until the broader aviation market recovers.
This concludes management's remarks.
| air lease q2 earnings per share $0.75.
q2 earnings per share $0.75.
|
To access the call on the internet, please log on to Capital One's website at capitalone.com and follow the links from there.
With me this evening are Mr. Richard Fairbank, Capital One's chairman and chief executive officer; and Mr. Andrew Young, Capital One's chief financial officer.
In the fourth quarter, Capital One earned 2.4 billion or $5.41 per diluted common share.
For the full year, Capital One earned 12.4 billion or $26.94 per share.
On an adjusted basis, full year earnings per share were $27.11.
Full year ROTCE was 28.4%.
Included in the results for the fourth quarter was an upgrade to a legacy rewards program, which increased our rewards liability and decreased noninterest income by $92 million.
Both period end and average loans held for investment grew 6% on a linked-quarter basis.
Ending loans grew 10% in domestic card, 7% in commercial, and 1% in consumer banking.
Revenue in the linked quarter increased 4%, driven by the loan growth I just described, while total noninterest expense increased 12% in the quarter, driven by increases in both operating and marketing expenses.
Provision expense in the quarter was 381 million and net charge offs of 527 million were partially offset by a modest allowance release.
Turning to Slide 4, I will cover the changes in our allowance in greater detail.
For the total company, we released 145 million of allowance in the fourth quarter, bringing the total allowance balance to 11.4 billion.
The total company coverage ratio now stands at 4.12%.
Turning to Slide 5, I'll discuss the allowance of each of our segments in greater detail.
As you can see in the graphs, our allowance coverage ratio declined in each of our segments.
In domestic card, the allowance balance remained flat at $8 billion.
The decline in card coverage was driven by the impact of balanced growth that I highlighted earlier.
In our consumer banking segment, continued strength in auto auction values drove a decline in both the allowance balance and the coverage ratio.
And in commercial, the decline in allowance balance was driven by modest credit improvement in the existing portfolio.
In addition to the allowance decline, the coverage ratio was also aided by growth in lower loss segments.
Turning to Page 6, I'll now discuss liquidity.
You can see, our preliminary average liquidity coverage ratio during the fourth quarter was 139%.
The LCR remains stable and continues to be well above the 100% regulatory requirement.
We continue to gradually run off excess liquidity built during the pandemic.
Relative to the prior quarter, ending cash and equivalents were down about $5 billion.
And investment securities were down about $3 billion as we used our liquidity to fund loan growth and share buybacks.
Turning to Page 7, I'll cover our net interest margin.
You can see that our fourth quarter net interest margin was 6.6%, 25 basis points higher than Q3 and 55 basis points higher than the year-ago quarter.
The linked-quarter increase in NIM was largely driven by balance sheet mix as we had a reduction in cash and securities, as well as a higher amount of card loans.
Outside of quarterly day count effects, the NIM from here will largely be a function of the change in card balances, cash and securities levels, and interest rates.
Turning to Slide 8, I will end by discussing our capital position.
Our common equity Tier 1 capital ratio was 13.1% at the end of the fourth quarter, down 70 basis points from the prior quarter.
Net income in the quarter was more than offset by share repurchases and growth in risk-weighted assets.
We continue to estimate that our CET1 capital need is around 11%.
In the fourth quarter, we repurchased $2.6 billion of common stock, which completed our $7.5 billion board authorization.
Our board of directors has approved an additional repurchase authorization of up to $5 billion of the company's common stock.
I'll begin on Slide 10 with our credit card business.
Accelerating year-over-year growth in purchase volume and loans, coupled with strong revenue margin, drove an increase in revenue compared to the fourth quarter of 2020.
Credit card segment results are largely a function of our domestic card results and trends, which are shown on Slide 11.
As you can see on Slide 11, our domestic card business posted strong growth in every top-line metric in the fourth quarter.
Purchase volume for the fourth quarter was up 29% year over year and up 30% compared to the fourth quarter of 2019.
The rebound in loan growth accelerated, with ending loan balances up $10.2 billion or about 10% year over year.
Ending loans also grew 10% from the sequential quarter, ahead of typical seasonal growth of around 4%.
Ending loan growth was the result of the strong growth in purchase volume, as well as the traction we're getting with new account origination and line increases, partially offset by continued high payment rates.
And revenue was up 15% year over year, driven by the growth in purchase volume and loans.
Domestic card revenue margin increased 123 basis points year over year to 18.1%.
Two factors drove most of the increase: revenue margin benefited from spend velocity, which is purchase volume and net interchange growth outpacing loan growth; and favorable year-over-year credit performance enabled us to recognize a higher proportion of finance charges and fees in fourth quarter revenue.
Credit results remain strikingly strong.
The domestic car charge-off rate for the quarter was 1.49%, a 120-basis-point improvement year over year.
The 30-plus delinquency rate at quarter-end was 2.22%, 20 basis points better than the prior year.
On a linked-quarter basis, the charge-off rate was up 13 basis points and the delinquency rate was up 29 basis points.
Noninterest expense was up 24% from the fourth quarter of 2020.
The biggest driver of noninterest expense was an increase in marketing.
Total company marketing expense was $999 million in the quarter.
Our choices in domestic card marketing are the biggest driver of total company marketing trends.
We continue to see attractive opportunities to grow our domestic card business, and our growth opportunities are enhanced by our technology transformation.
We continue to lean into marketing to drive growth and build our domestic card franchise.
At the same time, we're keeping a watchful eye on the competitive environment, which is intensifying.
Pulling up, our domestic card business continues to deliver significant value as we invest to grow and build our franchise.
Moving to Slide 12, strong loan growth in our consumer banking business continued in the fourth quarter.
Driven by auto, fourth quarter ending loans increased 13% year over year in the consumer banking business.
Average loans also grew 13%.
Fourth quarter auto originations were up 32% year over year.
Our digital capabilities and deep dealer relationship strategy continued to drive year-over-year growth in our auto business.
In the fourth quarter, we saw a pickup in competitive intensity in the marketplace.
On a linked-quarter basis, auto originations were down 16%.
Fourth quarter ending deposits in the consumer bank were up $6.6 billion or 3% year over year.
Average deposits were up 2% year over year.
Consumer banking revenue grew 7% from the prior-year quarter, driven by growth in auto loans, partially offset by declining auto loan yields.
Noninterest expense increased 15% year over year.
Fourth quarter provision for credit losses improved by $58 million year over year, driven by an allowance release in our auto business.
The auto charge-off rate and delinquency rate remains strong and well below pre-pandemic levels.
On a linked-quarter basis, the charge-off rate for the fourth quarter was 0.58%, up 40 basis points; and the 30-plus delinquency rate was 4.32%, up 67 basis points.
Slide 13 shows fourth quarter results for our commercial banking business, which delivered strong growth in loans, deposits, and revenue in the quarter.
Fourth quarter ending loan balances were up 12% year over year, driven by growth in selected industry specialties.
Average loans were up 8%.
Ending deposits grew 13% from the fourth quarter of 2020 as middle market and government customers continued to hold elevated levels of liquidity.
Quarterly average deposits also increased 14% year over year.
Fourth quarter revenue was up 19% from the prior-year quarter, with 29% growth in noninterest income.
Noninterest expense was up 17%.
Commercial credit performance remained strong.
In the fourth quarter, the commercial banking annualized charge-off rate was a negative 2 basis points.
The criticized performing loan rate was 6.1%, and the criticized nonperforming loan rate was 0.8%.
Our commercial banking business is delivering solid performance as we continue to build our commercial capabilities.
I'll close tonight with some thoughts on our results and our strategic positioning.
Growth momentum is evident throughout our fourth quarter results.
In the quarter, we drove strong growth in domestic card revenue, purchase volume, and loans.
We also posted strong auto and commercial growth.
Credit remains strikingly strong across our businesses, and we continue to return capital to our shareholders.
As we enter 2022, we continue to see attractive opportunities to grow our businesses and build our franchise.
We will continue to lean into marketing to capitalize on these opportunities and drive growth.
For years, we've talked about how sweeping digital change and modern technology are changing the game in banking.
Last quarter, I noted that the stakes are rising faster than ever before.
The investment flowing into fintech is breathtaking, and it's growing.
Also, many legacy companies are embracing the realization that technology capabilities may be an existential issue for them and are increasing technology investments.
The war for tech talent continues to escalate, which is driving up tech labor costs even before any headcount increases.
All these developments underscore the significant opportunity for players who have modern technology and who are in a position to drive growth.
Capital One is very well positioned to do that.
We've spent years driving our technology transformation from the bottom of the tech stack up.
We were an original fintech, and we have built modern technology infrastructure and capabilities at scale.
And we're investing to leverage these capabilities to grow and to realize the many benefits of our digital transformation.
We have been on a long journey to drive our operating efficiency ratio down.
We expect that the striking rise in the cost of modern tech talent, on top of our growth investment, will pressure annual operating efficiency in the near term.
But these pressures do not change our belief in the longer-term opportunity to drive operating efficiency improvement powered by revenue growth and digital productivity gains.
Pulling way up, we're living through an extraordinary time of digital change.
Our modern technology stack is powering our performance and our growth opportunity.
It's setting us up to capitalize on the accelerating digital revolution in banking.
And it's the engine that drives enduring value creation over the long term.
We'll now start the Q&A session.
As a courtesy to other investors and analysts who may wish to ask a question, please limit yourself to one question plus a single follow-up question.
And if you have follow-up questions after the Q&A, the investor relations team will be available after the call.
Justin, please start the Q&A.
| compname reports fourth quarter 2021 net income of $2.4 billion.
q4 revenue rose 4% to $8.1 billion.
qtrly net interest margin of 6.60%, up 25 basis points versus q3.
compname reports fourth quarter 2021 net income of $2.4 billion, or $5.41 per share.
compname says common equity tier 1 capital ratio under basel iii standardized approach of 13.1 percent at december 31, 2021.
qtrly earnings per share $5.41.
qtrly provision for credit losses increased $723 million to $381 million versus q3 2021.
|
Both of these documents are available in the Investor Relations' section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
We appreciate you joining us and hope your new year is starting well.
I'll begin today with some perspective on our second quarter results, current industry conditions and our position going forward.
Dave will follow with a summary of our financials and some specifics on our second quarter and outlook, and then I'll close with some final thoughts.
We're pleased to report a solid and productive quarter for Applied, along with positive momentum building as we enter the second half of our fiscal year.
Our team executed extremely well during the second quarter and we saw a sustained sequential improvement in customer demand following the initial recovery highlighted last quarter.
We are leveraging our industry position and generating incremental traction from our strategic growth initiatives.
These include addressing customer's early cycle, technical MRO needs, as well as playing a vital role in supporting efficiency and performance initiatives across their critical industrial infrastructure.
We believe these customer initiatives will be increasingly relevant giving a greater focus on operational risk management and supply chain considerations.
We are capturing these initial tailwinds while remaining disciplined with controlling cost as sales continue to recover.
Cost accountability and execution have always been key to our culture and remain integral to our operational focus going forward.
This is supplemented by operating efficiencies gained from optimizing processes, systems and talent across the organization in recent years.
While additional expense restoration will occur in the second half of our fiscal year, we expect these counter elements to provide further balance to our cost trajectory near-term and support our long-term EBITDA margin expansion potential as the demand recovery continues to unfold and we leverage our operational network.
I'm also encouraged by the strong cash generation we continue to see across the business.
Year-to-date, free cash is up over 60% from prior-year levels and over 200% of adjusted net income.
While influenced by the counter-cyclical nature of our model, cash flow is ahead of our expectations and up meaningfully from prior-year levels.
This highlights the progress we continue to make with regard to expanding our market position while optimizing our margin profile and working capital management.
Our first-half cash generation and balance sheet flexibility leave us well-positioned entering the second half of our fiscal year.
As it relates to the broader demand environment, underlying trends remain below prior-year levels during our fiscal second quarter, but continue to improve sequentially despite the recent rise in COVID rates.
We saw greater break-fix and maintenance-related demand across our service center network on rising production activity, greater spending authorizations and enhanced sales momentum across strategic accounts.
Customers are remaining productive in the current environment as established safety protocols are proving effective and providing support.
Demand across our Fluid Power and Flow Control segment was also encouraging, with order activity and backlog momentum building.
This partially reflects firm demand from our leading service and engineered solutions capabilities as secular growth tailwinds continue across various industries.
Combined, the year-over-year organic sales decline of 10.5% in the quarter, improved from 13.5% decline last quarter.
Year-over-year trends improved each month, while sequential trends in daily sales rates were seasonally strong.
Areas such as food and beverage, aggregates, technology, lumber and wood, chemicals, and pulp and paper continue to show positive momentum.
And while year-over-year weakness remains greatest across heavy industries such as machinery, metals and oil and gas, demand within these verticals continues to gradually improve and related indicators suggest further recovery could emerge in the coming quarters.
The positive sales momentum has continued into the early part of fiscal third quarter with organic sales through the first 17 days of January down a mid-single digit percent over the prior year.
It's important to note that visibility remains limited and uncertainty persists as customers continue to manage through a challenging macro and pandemic outlook near-term.
Like many, we are hopeful the business environment continues to recover as vaccines are deployed further in coming months, but we remain cognizant of the potential impact from research and COVID cases, timing of mass vaccine distribution and possible fiscal policy changes from the new administration.
As we have shown in recent quarters, we know how to manage and execute in this uncertain business environment.
In addition, I firmly believe our value proposition and company specific growth potential is the greatest in Applied's history.
There is evidence of this emerging across the organization.
For example, we're playing a key part in the recent vaccine rollout and related COVID-19 response.
Our flow control offering and support team are providing critical products and solutions for vaccine production.
This includes hygienic diaphragm valves, water for injection pumps, and cleaning place flows systems used to clean and regulate material flow and temperature as the vaccine is manufactured.
We're proud and grateful to be participating in this historic moment which highlights our expanding position and capabilities across essential industries.
We're also seeing positive momentum across our fluid power operations as more customers integrate new technologies into their equipment and critical assets in order to optimize productivity, safety and energy costs, while reducing broader business and supply chain risk.
In addition, demand tailwinds tied to 5G infrastructure, cloud computing and other growing technologies are driving demand for pneumatic and electronic automation systems.
Our leading fluid power service and engineered solutions capabilities provide us a strong position to capture these growth opportunities, as reflected in our growing backlog in recent months.
Our technical position and long-term opportunity is further supplemented by the progress we are making in expanding our next-generation automation solutions following three acquisitions in the past 16 months.
This includes our recent acquisition of Gibson Engineering in late December.
Our growing automation footprint and offering focused on robotics, machine vision, motion control and digital technologies is being recognized across our industries and presents a significant growth opportunity longer-term, as we address customers' operational technology, needs in an improving industrial sector.
Overall, from critical break-fix MRO applications to emerging technologies and specialized engineering services, our value proposition is evident, and we continue to see greater demand as industrial production ramps.
These are positive developments and we are benefiting as customers themselves benefit from the value we bring to these opportunities.
Unusual items in the quarter include a $49.5 million pre-tax non-cash impairment charge on certain fixed, leased and intangible assets, as well as non-routine costs of $7.8 million pre-tax related to an inventory reserve charge, facility consolidations and severance.
These charges are the result of weaker economic conditions and resulting business alignment initiatives across a portion of our Service Center segment locations exposed to oil and gas end markets.
We remain focused on appropriately aligning cost and resources with current demand levels across our organization, following a pandemic-driven downturn over the past year.
These business alignment actions are consistent with our internal initiatives and strategic focus going forward and will drive additional cost savings in the back half of our fiscal year.
Now turning to our results, absent these in our non-routine charges during our second quarter, consolidated sales decrease 9.9% over the prior year quarter.
Acquisitions contributed a half point of growth and foreign currency was favorable by 0.1%.
Netting these factors, sales decreased 10.5% on an organic basis with a light number of selling days year-over-year.
While still down as compared to the prior year quarter, sales exceeded our expectations with average daily sales rates at nearly 3% sequentially on an organic basis and above the normal seasonal trends for the second straight quarter.
Following a slow start to the quarter in early October, sales activities strengthened sequentially and remained firm late in the quarter, despite typical seasonal slowness and rising COVID cases across the U.S. Comparative sales performance was relatively consistent across both segments as highlighted on slide 6 and 7.
Sales in our Service Center segment declined 10.4% year-over-year or 10.5% on an organic basis when excluding the modest impact from foreign currency.
The year-over-year organic decline of 10.5% improved notably relative to the mid-teens to low 20% declines we saw of the prior two quarters, while the segment's average daily sales rates increased nearly 4% sequentially from our September quarter and over 8% from the June quarter.
The sequential improvement primarily reflects greater customer maintenance activity and break-fix demand across our core U.S. service center network.
Positive momentum has been relatively drive-based, though end markets such as food and beverage, aggregates, pulp and paper, lumber and forestry, and rubber our leading to recovery.
Heavier industries are also starting to show positive signs while ongoing growth across our Australian operations has provided additional support.
Within our Fluid Power and Flow Control segment, sales decreased 8.5% over the prior year quarter, with our recent acquisition of ACS contributing 1.6 points of growth.
On an organic basis, segment sales declined 10.1%, reflecting lower demand across various industrial, off-highway mobile and process-related end markets.
This was partially offset by firm demand within technology, life sciences, transportation and chemical end markets.
In addition, as Niel mentioned, we are seeing encouraging demand for fluid power solutions tied to electronic control integration, equipment optimization and pneumatic automation.
This is supporting backlog, which was up both sequentially and year-over-year at the end of the quarter.
Moving to gross margin performance, as highlighted on Page 8 of the deck, adjusted gross margin of 28.9% declined 8 basis points year-over-year, or 19 basis points when excluding non-cash LIFO expense, $0.9 million in the quarter and $1.9 million in the prior year quarter.
On a sequential basis, adjusted gross margins were largely unchanged.
Overall, adjusted gross margin trends were in line with our expectations and continue to reflect some volume-driven headwinds year-over-year, as highlighted last quarter, which were partially offset by the ongoing benefit from our internal initiatives.
Turning to our operating costs.
On an adjusted basis, selling, distribution and administrative expenses declined 11.2% year-over-year or approximately 12% when excluding incremental operating cost associated with our ACS acquisition.
The year-over-year decline reflects the ongoing benefit of cost actions taken in recent quarters to align expenses with volume.
As discussed in prior calls, this includes a mix of both structural and temporary actions.
While we have restored a portion of the temporary cost actions, our team continues to demonstrate great discipline in controlling cost.
These results highlight the resiliency of the Applied team and our operating model as well as efficiency gains from operational excellence initiatives, leverage of our shared services model and technology investments made in recent years.
Year-over-year comparisons also benefited from this amortization expense, following the asset impairment charge we took during the quarter.
For your reference, our second quarter depreciation and the amortization expense of $13.5 million is a good quarterly run rate to assume going forward.
Overall, our strong cost control combined with improving sales trends during the quarter resulted in mid-single digit decremental margins on adjusted operating income or high-single digit decrementals when excluding depreciation and amortization expense.
Going forward, we will remain prudent and disciplined in managing our cost structure as we continue to roll off temporary cost actions to align with our recent performance and a more constructive outlook.
Since the start of our fiscal year, we have gradually eliminated the temporary cost actions as the business environment has slowly recovered and expect to discontinue the vast majority of the remaining temporary cost actions during this current fiscal third quarter.
Adjusted EBITDA in the quarter was $68.3 million, down 8.4% compared to the prior year quarter, while adjusted EBITDA margin was 9.1%, up 14 basis points over the prior year or virtually flat when excluding non-cash LIFO expense in both periods.
On a GAAP basis, we reported an operating loss of $0.14 per share, which includes the previously referenced non-cash impairment and non-routine charges.
On a non-GAAP adjusted basis, excluding these items, we reported earnings per share of $0.98, which compared to $0.97 in the prior year quarter.
Our adjusted tax-rate during the quarter of 18.6% was below prior year levels of 23%, as well as our guidance of 23% to 25%.
The adjusted tax rate during the quarter includes several discrete benefits related to income tax credits and stock option exercises.
We believe the tax rate of 23% to 25% for the second half of fiscal 2021 is appropriate assumption near-term.
Moving to our cash flow performance and liquidity.
Cash generated from operating activities during the second quarter was $77.5 million, while free cash flow totaled $72.7 million or approximately 190% of adjusted net income.
This was up from $55 million and $48 million respectively, as compared to the prior year quarter and represents record second quarter cash generation.
Year-to-date, free cash generation of $151 million is up over 60% for prior year levels and represents a 206% factor of adjusted net income.
The strong cash performance year-to-date reflects solid operational execution, significant ongoing contribution from our working capital initiatives and that counter-cyclical cash flow profile of our business model.
Given the strong free cash flow performance in the quarter, we ended December with approximately $289 million of cash on hand.
Of note, this is after utilizing cash during the quarter with two acquisitions.
Net leverage stood at 2.1 times adjusted EBITDA at quarter-end, consistent with the prior quarter and below the prior year level of 2.5 times.
In addition, our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million accordion option.
Combined with incremental capacity under our uncommitted private shelf facility, our liquidity remains strong.
This provides flexibility to fund incremental working capital requirements in coming quarters as customer demand continues to improve as well as to pursue strategic M&A and fund other growth initiatives.
Our M&A focus near-term remains on smaller bolt-on targets that align with our growth priorities, including additional automation and fluid power opportunities.
This represents the 12th dividend increase since 2010 and under-stores our strong cash generation and commitment to delivering shareholder value.
Transitioning now to our outlook.
Based on month-to-date trends in January and assuming normal sequential patterns, we would expect fiscal third quarter 2021 organic sales to decline by 3% to 4% on a year-over-year basis.
This includes an assumption of low-single digit organic declines in our Service Center segment and mid-single digit organic declines in our Fluid Power and Flow Control segment.
Again, this direction is meant to provide a starting framework on how third quarter sales could shape up if trends follow normal seasonality going forward.
In addition, we expect our recent acquisitions at ACS and Gibson Engineering to contribute approximately $10 million to $11 million in sales during our fiscal third quarter.
We expect gross margins to remain relatively unchanged sequentially into the second half of fiscal 2021.
We continue to see some incremental price announcements from suppliers, so the magnitude of the increases are not materially different from what we've seen over the past year.
Our history highlight strong management of supplier inflation and price cost dynamics reflecting our industry position, internal initiatives and positive mix opportunities.
As it relates to operating costs, based on the 3% to 4% organic sales decline assumption, we would expect selling, distribution and administrative expense of between $170 million and $175 million during our fiscal third quarter.
In addition, if sales follow normal sequential patterns for the balance of the year, we would expect a similar to slightly higher SD&A range in our fiscal fourth quarter.
This represents an increase from second quarter levels and partially reflects the ongoing roll off of temporary cost actions.
As indicated, we will continue to take a mindful and balanced approach to managing our operating costs going forward.
We were encouraged by our cost and margin execution year-to-date, which is providing a strong position to further discontinue temporary cost actions as we take an offensive approach to an emerging recovery and our strategic growth targets.
Lastly, from a cash flow perspective, we expect free cash to moderate in the second half relative to first half levels.
Working capital will likely become a use of cash as their level start to cyclically build, and we begin to replenish inventory in support of our growth opportunities, and the recovery as the year moves forward.
We remain confident on our cash generation potential and reiterate our normalized annual free cash target of at least 100% of net income over a cycle.
Approximately three quarters ago, during the initial weeks of the pandemic, I stated my belief that Applied has never been in a better position to manage through the current environment and exit the pandemic-driven downturn in an even stronger position.
Our performance since then provide strong confirmation of disposition, the tremendous team we have at Applied, and the earnings potential that lies ahead.
This includes record cash generation and a 30% reduction in our net debt, our strong cost execution supporting relatively stable EBITDA margins despite the meaningful end market slowdown.
During this time, we also completed two acquisitions, supplementing our long-term growth profile, while advancing other key growth initiatives, including optimizing our cross-selling opportunity and strategic end-market positioning.
We are delivering on our requirements and commitments while moving the organization toward our longer-term next milestone financial objectives of $4.5 billion of revenue and 11% EBITDA margins.
We remain cognizant of ongoing end-market uncertainty, but we're eager to demonstrate what we're fully capable of in the years ahead as we continue to leverage our differentiated industry position as the leading technical distributor and solutions provider across critical industrial infrastructure.
| q2 adjusted non-gaap earnings per share $0.98 excluding items.
q2 loss per share $0.14.
would project fiscal 2021 q3 sales to decline 3% to 4% year over year on an organic basis.
|
We will start by going through some of the highlights of the third quarter, then Jack will go through the operating results and the segments, our balance sheet and cash flow and guidance for the fourth quarter.
I will then share some concluding thoughts, before we start our Q&A session.
Before we proceed, Jack will now cover the safe harbor language.
These statements are based on management's current expectations or beliefs.
Since our last earnings call in July, much has happened in the world, and I'm pleased to say that we see the early shoots of a global recovery taking hold during the third quarter.
And our results reflect the stronger market environment than we anticipated a few months ago.
As a result of the COVID-19 pandemic, we're seeing some of the fastest changes to the global economy with industries like retail, hospitality and aviation previously more resilient than others impacted in ways never seen before.
Other industries, such as tech, e-commerce and logistics are benefiting from new ways of working and new consumer preferences.
At the same time, job protection initiatives have been implemented worldwide and have helped support jobs, livelihoods and households.
As a result of the learnings from the first waves of the pandemic, we do not anticipate a repeat of the widescale and sudden shutdowns that we saw in the first phase.
However, recent increases in COVID-19 cases in many parts of the world will force countries to implement new restrictions to mitigate the spread of COVID-19, this time more targeted and localized than prior lockdowns.
These factors will make the recovery uneven and our experienced management team is prepared to confidently manage the volatility as circumstances dictate.
In fact, we are leveraging the opportunity in this rapidly changing environment to reaffirm our commitment to our strategy of growth through diversification, digitization, and innovation and are continuing to fund investments in these areas.
At the same time, we continue to exercise cost controls and drive further efficiency through restructuring actions.
We are also continuing to adjust our geographic footprint.
We are proud of our transformative shift during this crisis and are now even more ambitious about the speed of our future transformation given the lessons we have learned during the pandemic.
In the third quarter, revenue was $4.6 billion, down 14.5% year-over-year in constant currency.
On a same day organic basis, our underlying constant currency revenue decreased 15%, a significant improvement from the 27% decline in the second quarter on the same basis.
On a reported basis, we recorded an operating profit for the quarter of $62 million.
Excluding restructuring charges and a special item consisting of impacts from divesting select small country operations, operating profit was $117 million, down 38% in constant currency, excluding the prior year special item.
Reported operating profit margin was 1.3%, down 280 basis points from the prior year and, after excluding the restructuring and other special items, operating profit margin was 2.6%, down 100 basis points from the prior year.
Reported earnings per diluted share of $0.18 reflects the impact of restructuring charges, the loss on dispositions and a discrete tax item.
Excluding the restructuring and other special items, our earnings per diluted share was $1.20 for the quarter representing a decrease of 39% in constant currency.
Based on the many conversations I am having with our clients and insights from our thought leadership and proprietary data, I will take a few minutes to share my perspective on what is happening in the labor markets right now and as we look ahead in the near term.
Earlier this year we asked more than 30,000 employers across 40 plus countries when they predicted hiring would return to pre-pandemic levels.
At that point, most were anticipating a sharp shock and swift return to normal, the V shaped recovery.
The same survey we conducted three months later shows that 60% now think it will take even longer, toward the end of '21, the much talked about U shaped recovery.
With our global perspective across industries, we see more of a two-speed recovery, some industries and in-demand roles bouncing back faster than others, like technology, some manufacturing, professional services and construction, while others including aviation, travel and hospitality impacted for the medium to long-term.
For example, we are seeing manufacturing ramp up again yet shipping and ports still causing a lag, and in light manufacturing, especially related to healthcare and PPE products, demand for staff is at a peak.
In retail we would be usually expecting the traditional seasonal holiday demand, but with restrictions and shutdowns, retailers are taking a wait and see approach to shopper behavior this season.
Our logistics clients plan to grow as e-commerce retail growth continues at pace and the demand for cyber security, data analysts and cloud-native software developers is consistently high.
Looking at labor demand, we believe we'll see a two-speed recovery also here, with the higher skilled workforce recovering quicker than the lower and unskilled workforce, exacerbated by the impact of COVID-19 pandemic has had on some industries that employ lower skilled service workers.
We are seeing an accelerated pace of transformation and the trends we have anticipated for some time are happening at a scale and speed we might not have previously thought possible.
Clients in all industries are continuing to deal with this current crisis, responding right now to shifting demand and challenging supply chains, together with technology transformation at rates that they were not prepared for, all while planning for 2021.
We believe employers will look for operational and strategic flexibility in an uneven economic recovery, and that policy makers will be focused on measures encouraging jobs markets to rebound as quickly as possible.
In this current climate especially, we are confident that our strategy of digitization, diversification and innovation is the right one.
Our investment to grow Experis, our professional resourcing and IT expertise sets us up for even stronger growth following the pandemic as companies continue to accelerate technology investments.
Talent Solutions, the brand we launched in January combining our higher value, global market-leading offerings, RPO, Right Management and TAPFIN MSP continues to help clients with customized workforce solutions in this downturn while preparing them for future growth.
We are proud of our global leadership in this space.
In August our TAPFIN MSP offering was the only company in our industry to be recognized by the Everest Group as both a Star Performer and Global Leader in its Contingent Workforce Management Index, scoring highly for vision, strategy and innovation.
This impressive accolade also recognizes TAPFIN's analytics platform IntelliReach, part of ManpowerGroup's best-in-class tech stack PowerSuite, which offers advanced data analytics and benchmarking to provide clients with talent attraction, retention and development for both contingent and permanent talent.
Our Manpower brand's market leading footprint will enable many organizations to leverage operational and strategic workforce flexibility as they navigate the short and long-term effects of the pandemic.
We are also continuing to make good progress in our technology roadmap and the scaling at speed of our Top Down and Bottom Up Innovation initiatives.
One of our main innovation initiatives is our MyPath program which is now scaling to 14 markets this year and next across both our Manpower and Experis brands.
The data and learnings to date on how to identify adjacent skills, assess, coach and upskill have allowed us to shift and reskill people at speed from declining to high demand sectors during this pandemic.
We have also upskilled more than 2,000 of our own Talent Agents to be expert in assessment and data-driven recruitment and continue to improve on reassignment rates, improved utilization rates and increased satisfaction levels with those clients and candidates that engage in MyPath.
We also continue to invest in our Center of Excellence in People Analytics and Assessment, led by our Chief Talent and Data Scientist and a 40 plus strong global innovation team.
We are accelerating the deepening, widening and refining of our proprietary data.
We know data on its own does not bring value.
We also know that our vast access to people, workers, clients and jobs together with our aggregate data around interactions, experiences and outputs, combined with our meaningful interpretations are what create the insights and actions that can bring data-driven changes in behavior.
This is how we are accelerating our progress around AI-driven recruitment and skilling up, to ensure our recruiters can use data-based decision-making for the best match, to help clients better predict performance and to support our candidates by knowing more about their skills and potential.
Revenues in the third quarter came in above our constant currency guidance range.
Our gross profit margin also came in above our guidance range.
On a reported basis, our operating profit was $62 million.
Excluding special items consisting of restructuring charges and a loss on dispositions, our operating profit was $117 million, representing a decline of 37%, or a decline of 38% on a constant currency basis.
This resulted in an operating profit margin of 2.6% before restructuring charges and other special items, which was above the high end of our guidance.
I will cover the restructuring charges and the dispositions in more detail by segment.
Breaking our revenue trend down into a bit more detail, after adjusting for the positive impact of currency of about 2%, our constant currency revenue declined 14.5%.
The impact of acquisitions and billing days were minor resulting in an organic days adjusted revenue decrease of 15%.
This represented a significant improvement from the second quarter revenue decline of 27% on a similar basis.
This also represents five consecutive months of improvement beginning in May when governments began lifting countrywide lock-down requirements.
On a reported basis, earnings per share was $0.18, which included the restructuring charges of $50 million which represented a negative $0.72, certain discrete tax charges of $12 million and a loss from dispositions of $6 million which combined had a $0.30 negative impact.
Excluding the restructuring and other special items, earnings per share was $1.20, which exceeded our guidance range.
Included within this result was improved operational performance of $0.47, $0.03 on better than expected foreign currency exchange rates before restructuring and other special items, $0.04 on an improved effective tax rate and $0.03 on improved interest and other expenses.
Looking at our gross profit margin in detail.
Our gross margin came in at 15.8%.
Underlying staffing margin contributed to a 20 basis points reduction and a lower contribution from permanent recruitment contributed to a 30 basis point reduction.
This was offset by 20 basis points of increased gross profit margin from career transition growth within Right Management.
Other and accrual adjustments include about 20 basis points of favorable direct cost adjustments in France partially offset by decreased margin in our Proservia managed services business.
Next, I'll review our gross profit by business line.
During the quarter, the Manpower brand comprised 65% of gross profit, our Experis professional business comprised 20%, and Talent Solutions brand comprised 15%.
During the quarter, our Manpower brand reported an organic constant currency gross profit decrease of 17%.
This was a significant improvement from the 37% decline in the second quarter.
Gross profit in our Experis brand declined 19% year-over-year during the quarter on an organic constant currency basis which represented a slight improvement from the 20% decline in the second quarter.
Although Experis revenues were only down in the very low double-digits percentage range during the quarter, the lower contribution from perm gross profit combined with a higher mix shift to enterprise clients and lower utilization of consultants within our Germany IT end-user support business drove a more significant gross profit decline.
Talent Solutions includes our global market leading RPO, MSP and Right Management offerings.
Organic gross profit growth in the quarter decreased 2% in constant currency year-over-year which is a significant improvement from the 12% decline in the second quarter.
This was primarily driven by our career transition activity within our Right Management business which increased double-digit percentages year-over-year during the quarter and our MSP business which grew mid-single-digit percentages while our RPO business improved the rate of revenue decline significantly during the third quarter from the second quarter trend.
Our reported SG&A expense in the quarter was $664 million including the restructuring charges of $50 million and the loss on dispositions of $6 million.
Excluding the special items, SG&A of $608 million represented a decrease of $46 million from the prior year after excluding the prior year gain on the China IPO.
This underlying decrease was driven by $60 million of operational cost reductions offset by an increase of $12 million from currency changes and $2 million from acquisitions.
On an organic constant currency basis, excluding special items, SG&A expenses decreased 9% year-over-year.
SG&A expenses as a percentage of revenue in the quarter represented 13.3%, excluding restructuring and other special items, which continued to reflect the significant deleveraging on the material drop in revenues year-over-year.
As a result of strong cost management actions across all of our businesses, the impact of the revenue and gross profit declines was significantly offset by SG&A decreases.
The Americas segment comprised 20% of consolidated revenue.
Revenue in the quarter was $929 million, a decrease of 11% in constant currency.
Including restructuring costs, OUP equaled $32 million and OUP margin was 3.4%.
Excluding restructuring costs, OUP was $48 million and OUP margin was 5.2%.
Of the $17 million of restructuring costs, $15 million related to the US primarily representing the closure of real estate as we eliminate fixed costs based on accelerated digitization activities.
The balance of the restructuring costs related to Canada and were real estate related.
The US is the largest country in the Americas segment, comprising 62% of segment revenues.
Revenue in the US was $579 million, representing a decrease of 13% compared to the prior year.
Adjusting for billing days and franchise acquisitions, this represented a 16% decrease which is an improvement from the 23% decline in the second quarter.
During the quarter, OUP for our US business decreased 14% to $34 million, excluding restructuring charges.
OUP margin was 5.9%, excluding restructuring charges, and reflected the benefit of higher margin career transition activity within Right Management.
Within the US, the Manpower brand comprised 33% of gross profit during the quarter.
Revenue for the Manpower brand in the US was down 21% when adjusted for days and franchise acquisitions.
The Experis brand in the US comprised 30% of gross profit in the quarter.
Within Experis in the US, IT skills comprise approximately 80% of revenues.
Revenues within our IT vertical within Experis US declined 15% during the quarter and total Experis US revenues declined 16.5% as the Finance and Engineering verticals experienced more significant decreases.
Talent Solutions in the US contributed 37% of gross profit and experienced revenue growth of 7% in the quarter.
Within Right Management in the US, revenues increased 30% year-over-year driven by significant career transition activity during the quarter.
The US MSP business continues to perform very well in the current environment and again experienced year-over-year increased revenues during the third quarter.
The US RPO business experienced a significant improvement in the rate of revenue decline during the third quarter moving to low double-digit declines in the third quarter and also recently added new RPO clients which we expect will drive further improvement in future periods.
Provided there are no significant reversals of reopening activity across the US, in the fourth quarter we expect ongoing improvement and an overall rate of decline in the US of minus 8% to minus 13%.
Our Mexico operation experienced a revenue decline of 9% in constant currency in the quarter representing a slight improvement from the 10% decline in the second quarter.
The business environment in Mexico continues to be challenging as a result of the COVID-19 crisis.
Revenue in Canada declined 10% in constant currency during the quarter.
Adjusting for billing days, this represented a 11% decrease which was a further decrease from the second quarter and reflected the exit of certain lower margin enterprise clients during the quarter.
Revenue in the Other Countries within Americas declined 6% in constant currency.
Southern Europe revenue comprised 46% of consolidated revenue in the quarter.
Revenue in Southern Europe came in at $2.1 billion, a decrease of 15% in constant currency.
This is a significant improvement from the second quarter trend driven by France and Italy.
OUP including restructuring costs and the loss on dispositions equaled $72 million.
Excluding restructuring costs and the loss on dispositions, OUP decreased 30% from the prior year in constant currency and OUP margin was down 90 basis points.
The dispositions represent the sale of our Serbia, Slovenia, Bulgaria and Croatia businesses to a franchisee which should be beneficial for the profit margin of the region going forward.
Of the $8 million of restructuring costs in the region, just under half relates to Spain for real estate optimization and streamlining of operations, about a quarter relates to Italy for real estate optimization, about 20% relates to Switzerland for real estate optimization and the small remaining balance related to streamlining in other Southern Europe countries.
France revenue comprised 57% of the Southern Europe segment in the quarter and was down 17% from the prior year in constant currency.
This reflects a progressive improvement over the course of the quarter.
OUP was $51 million in the quarter and OUP margin represented 4.3%.
As I mentioned earlier, France benefited from direct cost accrual adjustments in the quarter which improved their OUP by approximately $10 million.
Although improvement has been steady in France, the rate of improvement in the revenue trend has slowed in recent weeks.
We are cautiously estimating a gradual improvement in the rate of decline for the fourth quarter of between minus 10% to minus 15% on a constant currency basis.
Revenue in Italy equaled $351 million in the quarter representing a decrease of 12% in constant currency after adjusting for billing days.
This reflects a progressive improvement over the course of the quarter.
Excluding restructuring charges, OUP declined 29% year-over-year in constant currency to $17 million and OUP margin decreased 130 basis points to 4.9%.
We estimate that Italy will continue to see gradual improvement in the rate of revenue decline during the fourth quarter with a decline within a range of minus 7% to minus 12%.
Revenue in Spain decreased 6% on a days-adjusted constant currency basis from the prior year in the quarter.
This represents a significant improvement from the 13% decrease in the second quarter.
Revenue in Switzerland decreased 13% on a days-adjusted constant currency basis from the prior year in the quarter.
This represents a significant improvement from the 19% decrease in the second quarter.
Our market leading Swiss business has been performing well in a challenging environment.
Our Northern Europe segment comprised 21% of consolidated revenue in the quarter.
Revenue declined 22% in constant currency to $948 million.
OUP including restructuring costs represented a loss of $23 million.
Excluding restructuring costs, OUP was $2 million and OUP margin was 20 basis points.
Of the $24 million of restructuring costs, two-thirds relates to Germany where we have streamlined our operations, notably within our Proservia business, and have taken additional actions to reduce finance and shared services back office costs, about a quarter related to the Netherlands where we have streamlined our operations, and the balance relates to the UK and Sweden where we have also streamlined operations.
Our largest market in the Northern Europe segment is the UK, which represented 34% of segment revenue in the quarter.
During the quarter, UK revenues decreased 22% in constant currency which was unchanged from the second quarter trend.
We are cautious in our outlook for the UK business and estimate a slight improvement in the rate of revenue decline in the fourth quarter.
In Germany, revenues declined 32% on a constant currency adjusted for billing days basis in the third quarter which was unchanged from the second quarter trend.
The restructuring actions we took in the third quarter will improve the profitability of this business in future periods.
We remain very cautious on our Germany business in the near term and only expect a very slight improvement in the revenue trend in the fourth quarter.
In the Nordics, revenues declined 15% on a days-adjusted constant currency basis.
The two primary businesses in the Nordics are Norway and Sweden.
On a days-adjusted constant currency basis, Norway experienced a decline of 11% and Sweden declined 21%.
Both countries experienced a significant improvement in the rate of decline from the second quarter trend.
Revenue in the Netherlands decreased 23% in constant currency which represents a very slight improvement from the second quarter trend on a days-adjusted basis.
Belgium experienced a days-adjusted revenue decline of 29% in constant currency during the quarter which reflects significant improvement from the second quarter trend.
Other Markets in Northern Europe had a revenue decrease of 5% in constant currency.
This reflects significant improvement from the second quarter.
The Asia Pacific Middle East segment comprises 13% of total company revenue.
In the quarter, revenue decreased 6% in constant currency to $596 million.
The APME region continues to perform relatively well during this crisis.
Excluding restructuring charges and prior year gain on the China IPO, OUP margin decreased 90 basis points.
All of the $1.5 million of restructuring costs involve Australia where we continue to simplify the business after exiting certain low margin staffing clients.
Revenue growth in Japan was up 5% on a constant currency basis and, after adjusting for billing days, this represented a 6% growth rate which was equal to the growth rate in the second quarter.
Our Japan business continues to perform very well and we expect a revenue trend of flat to low single-digit growth in the fourth quarter.
Revenues in Australia declined 7% in constant currency on a days adjusted basis.
This represented a significant improvement from the 21% decline in the second quarter as we anniversaried the exiting of certain low margin business.
Revenue in Other Markets in Asia Pacific Middle East declined 10% in constant currency.
I'll now turn to cash flow and balance sheet.
Free cash flow equaled $685 million for the first nine months of the year.
This compared to underlying free cash flow in the prior year of $356 million after excluding the sale of the France CICE receivable.
During the third quarter, free cash flow equaled $108 million compared to $206 million in the prior year quarter.
At quarter end, days sales outstanding decreased by about three days.
Collection activities continue to be one of our top priorities.
Capital expenditures represented $31 million during the first nine months of the year.
We did not purchase any shares of stock during the third quarter and our year-to-date purchases stand at 871,000 shares of stock for $64 million.
As of September 30, we have 5.9 million shares remaining for repurchase under the 6 million share program approved in August of 2019.
Our balance sheet was strong at quarter-end with cash of $1.59 billion and total debt of $1.09 billion, resulting in a net cash position of $500 million.
Our debt ratios remain comfortable at quarter-end with total gross debt to trailing 12 months EBITDA of 2.21 times and total debt to total capitalization at 29%.
Our debt and credit facilities did not change in the quarter and the earliest Euro note maturity is not until September of 2022.
In addition, our revolving credit facility for $600 million remained unused.
Next, I'll review our outlook for the fourth quarter of 2020.
Our guidance continues to assume no material lockdowns impacting economic activity in any of our largest markets.
On that basis, we are forecasting earnings per share for the fourth quarter to be in the range of $1.06 to $1.14, which includes a favorable impact from foreign currency of $0.03 per share.
Our constant currency revenue guidance range is between a decline of 10% to a decline of 12%.
The mid-point of our constant currency guidance, a decline of 11%, also reflects the organic days-adjusted rate of decline as billing days for Q4 are only very slightly higher year-over-year and the impact of net dispositions is also very slight.
This represents an improvement of about 4% from the organic days adjusted constant currency decline of 15% in the third quarter.
We expect our operating profit margin during the fourth quarter to be down 130 basis points compared to the prior year.
This reflects continued strong cost actions but at lower levels of year-over-year SG&A reductions as activities levels progressively increase.
We expect our income tax rate in the fourth quarter to approximate 39% which continues to reflect an outsized impact of the French Business Tax effect that I discussed in previous quarters.
Late September, the government of France issued their preliminary budget for 2021.
France is planning to reduce the French Business Tax, known as CVAE, by 50% in 2021.
If the budget is approved as drafted, this would improve our pre-crisis level global effective tax rate by 3% to 3.5%.
This improvement in the effective tax rate would be partially offset by higher compensation costs attributed to profit sharing schemes in France.
Additionally, France has indicated that they will continue with their multi-year corporate tax reform schedule which is expected to separately reduce the France corporate tax rate by about 3% next year and the impact to the consolidated effective tax rate is a reduction between 50 and 75 basis points.
I will give a further update on the anticipated impacts from these items at our fourth quarter earnings call after the French budget is formally approved by their government.
As usual, our guidance does not incorporate restructuring charges or additional share repurchases and we estimate our weighted average shares to be 58.6 million.
We are very well-positioned to leverage the lasting legacy of the pandemic, new work models with more flexible and remote work, more focus on health and wellbeing, greater use of technology and faster changing skill shifts, and the need for strategic and operational workforce transformation, at scale and speed.
Let me also say how incredibly proud I am of the critical work our talented teams have provided by helping people and companies around the world respond and reset following these unprecedented crises.
From redeploying and reskilling catering and hospitality workers to new roles in in-demand sectors like logistics, virtual customer service and pharmaceuticals, to redeploying financial programmers to install and program COVID testing robots, and providing the skilled IT talent, lab technicians, and skilled workers for PPE production.
We have remained steadfast in our purpose and committed to providing our clients, candidates and our communities around the world with skilled talent and meaningful employment, all with health and safety at the center.
We can be certain too, that helping people adapt from declining industries and jobs to growth sectors and future proof roles will be critical in this next normal.
And it will be the responsibility of business, government and educators to support people with swift, targeted upskilling programs so that value creation is shared with the many, not just the few, for the benefit of us all.
At ManpowerGroup we are fully committed to being part of the solution and the actions we are taking to digitize, diversify and innovate will position our company for further success in 2021 and beyond.
I would now like to open the call for Q&A.
| manpowergroup sees q4 total revenue down 8-10%.
manpowergroup - sees q4 total revenue down 8-10%, down 10-12% in constant currency - presentation.
|
Hope you're all doing well.
Both of these documents are available in the Investor Relations section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
We appreciate you joining us, and hope you're doing well.
I'll start today with some perspective on our third quarter results, current industry conditions and our position going forward.
Dave will follow with a summary of our most recent quarter performance as well as some specifics on our forward outlook, and then I'll close with some final thoughts.
Overall, we had a strong third quarter.
That highlight solid execution and a number of positive trends developing across the business.
I want to recognize the entire Applied team through the foundation of the strong results you see materializing across our company today.
Their perseverance and operational focus over the past year reflects our one Applied culture and puts us in a great spot entering a period of significant potential for the company.
As it relates to the quarter's performance, I want to emphasize four key points that stand out.
First, we saw a sustained recovery in demand that accelerated into March.
Secondly, our technical and solutions focused value proposition is driving incremental growth opportunities.
Third, we are managing supply chain and channel dynamics very well.
And our final key point, we are benefiting from a leaner cost structure.
With regard to the broader demand recovery, underlying trends improved across the business as the quarter progressed, driving daily sales above normal seasonal patterns and our expectations.
Combined with the initial lapping of prior year pandemic-related weakness, sales returned to modest year-over-year growth following double-digit declines over the past three quarters.
Trends were strongest in March and have sustained positive momentum into the early part of our fiscal fourth quarter with organic sales through the first 19 days of April up approximately 10% over the prior year.
So with the last quarter, we're seeing greater break fix and recurring maintenance activity across our Service Center customer base as production continues to ramp and capacity comes back online.
The rebound in activity is currently greatest among larger strategic accounts.
So we're seeing encouraging signs across local accounts as well.
Demand across our Fluid Power & Flow Control segment is also building, with orders and backlog up sequentially and year-over-year during the quarter.
When looking across our customer end markets, areas such as food and beverage, aggregates, technology, lumber and wood, chemicals and pulp and paper remain the strongest.
And we are seeing improved order momentum across heavy industries, including metals, mining and machinery, where sequential sales trends improved from last quarter.
Given the break-fix intensity and related service requirements of these heavier industries, the improvement is a favorable development.
We're also seeing greater growth opportunities tied to various secular trends in our technical position.
In our Service Center segment, we believe our local presence, scale and service capabilities are increasingly valuable post the pandemic as customers address their increasing production and labor requirements while adhering to new facility protocols and mitigating supply chain risk.
In our Fluid Power & Flow Control segment, we continue to see strong demand tailwinds tied to 5G infrastructure, cloud computing and other growing technologies, including providing solutions across the semiconductor manufacturing channel.
Customers are proactively investing in solutions that optimize the productivity, safety and efficiency of their production infrastructure and equipment.
This is driving demand for our leading Fluid Power service and engineered solutions capabilities as well as encouraging organic growth and backlog across our expanding automation business, focused on vision, robotics and digital solutions.
Our automation team is making solid early progress connecting their premier engineering and application expertise across our growing footprint and legacy customer base.
Overall, the current demand backdrop and forward indicators, including commentary from our sales teams, is encouraging and leaves us optimistic on the near-term outlook.
That said, inherent risks and uncertainties still exist as the recovery remains early, following in an unprecedented downturn.
We're keeping a close eye on emerging supply chain constraints across the industrial sector.
While consistent with typical early cycle dynamics, lead times are extending across certain product categories.
A greater number of suppliers are highlighting component delays, as broader production capacity and logistics catch up to the demand recovery.
The direct impact to our operations and performance has been modest to date.
However, we expect a tighter industrial supply chain to persist as industry capacity and labor adjust following the pandemic.
We believe our strong industry position, local presence, sourcing capabilities and strategic supplier relationships put us in a solid spot to manage these dynamics well and meet our customers' critical supply chain needs.
In addition to encouraging top line performance, the improving demand environment, combined with our strong channel execution, drove gross margin expansion during the third quarter.
We are seeing greater number of suppliers announced price increases in recent months.
To date, supplier price increases aligned with our broader early cycle expectations, though the backdrop remains fluid as suppliers deal with higher raw material and supply chain costs.
We have an established track record of effectively managing supplier inflation through the cycle.
This reflects our industry position, exposure to break-fix activity and engineered Solutions and systems mix as well as ongoing self-help gross margin opportunities.
We remain highly focused on our requirements as well as leveraging our channel position as we look to optimize with our suppliers and serve customers' growth and supply chain initiatives.
Our third quarter results also reflect emerging benefits from a leaner cost structure, following business rationalization in recent years and operational efficiencies gained from processes, systems and talent across the organization.
Combined with our cost discipline, we grew adjusted EBITDA firmly above the rate of sales growth and expanded margins in the quarter.
While growth requirements will influence our operating cost trajectory going forward, third quarter results are encouraging and provide insight into our operational leverage and EBITDA margin expansion potential as the demand recovery continues to unfold.
And then lastly, our balance sheet is in a very solid position, following record cash generation year-to-date.
We believe our margin expansion potential and ongoing working capital initiatives will allow us to drive stronger cash conversion through the cycle relative to history, enhancing our ability to accelerate growth and enhance stakeholder returns.
Our M&A pipeline remains active, and a primary focus for capital deployment as we look to further expand our automation, fluid power and flow control offerings.
Now turning to our results for the quarter.
Consolidated sales increased 1.2% over the prior year quarter.
Acquisitions contributed 1.8 points of growth, and foreign currencies increased quarter sales by 0.6%.
This was partially offset by one less selling day over the prior year period, typically impacted sales by 1.6%.
Net these factors, sales increased 0.4% on an organic daily basis.
Average daily sales rates increased over 8% sequentially on an organic basis versus the prior quarter, which was higher than our normal seasonal trends.
Excluding some weather-related disruption during February, underlying sales activity strengthened sequentially as the quarter progressed, including accelerating trends during March.
Sales performance was relatively consistent across both segments, as highlighted on Slides six and seven.
Sales in our Service Center segment increased 0.4% year-over-year on an organic daily basis when excluding the impact from foreign currency and one less selling day in the quarter.
This represents a notable improvement from the double-digit declines in the recent quarters and partially reflects easier comparisons as we begin to lap the onset of the pandemic in March.
The segment's average daily sales rate has now improved over 18% from the fiscal '20 June quarter.
Underlying demand improvement was broad-based during the quarter, though end markets such as food and beverage, aggregates, pulp and paper, lumber and forestry and chemicals remain most productive right now.
As Neil mentioned, we are also seeing improved sequential trends from heavier industries, while growth across our international operations has provided additional support.
Within our Fluid Power & Flow Control segment, sales increased 4.5% over the prior year quarter with our recent acquisitions of ACS and Gibson Engineering contributing 5.9 points of growth.
On an organic daily basis, segment sales increased 0.2%.
The segment benefited from favorable demand within technology, life sciences and chemical end markets as well as improving trends across off-highway mobile applications.
This benefit was partially offset by ongoing year-over-year declines across certain industrial and process-related end markets, albeit an improved rate.
We are seeing greater demand for our Fluid Power solutions tied to electronic control integration, equipment optimization and automation.
In addition, demand across our emerging automation platform is showing positive momentum with related organic sales, orders and backlog, all growing during the quarter.
Moving now to gross margin performance.
As highlighted on Page eight of the deck, gross margin of 29.4%, improved 43 basis points year-over-year or 29 basis points when excluding noncash LIFO expense of $0.8 million in the quarter and $2 million in the prior year quarter.
On a sequential basis, gross margins improved over 50 basis points.
The improvement primarily reflects strong channel execution, effective price cost management, the improving demand environment and the benefit of ongoing internal initiatives.
Turning to our operating costs.
On an adjusted basis, distribution and administrative expenses declined 3.4% year-over-year or approximately 6% when excluding incremental operating costs associated with our ACS and Gibson Engineering acquisitions.
Adjusted SG&A excludes $2.6 million of nonroutine income recorded in the third quarter of fiscal 2021 and $3.9 million of nonroutine expense in the prior year quarter.
The year-over-year decline primarily reflects our ongoing discipline and controlling cost as well as the benefit of a leaner cost structure following business rationalization executed over the past several years.
Another key driver of SG&A productivity is the efficiency gains we continue to realize from operational excellence initiatives, leverage of our shared services model and technology investments, while T&E, bad debt and amortization expense were also lower year-over-year.
These dynamics more than offset the elimination during the quarter of various temporary cost actions, which we had implemented this time last year in response to the pandemic.
Overall, our strong cost control, combined with improving sales and gross margin, drove favorable operating leverage in the quarter.
As a result, adjusted EBITDA grew over 14% year-over-year and 27% sequentially, while adjusted EBITDA margin was 10.3%, up 119 basis points over the prior year.
On a GAAP basis, we reported earnings per share of $1.42, which includes the previously referenced nonroutine income.
On a non-GAAP adjusted basis, excluding this item, we reported earnings per share of $1.37, which compared to $1.02 in the prior year quarter.
Our adjusted tax rate during the quarter of 18%, was below prior year levels of 23.3% and our guidance of 23% to 25%.
The adjusted tax rate during the quarter includes several discrete benefits related to income tax credits and stock option exercises.
Excluding this benefit, as we move into our fourth quarter, we believe a tax rate of 23% is an appropriate assumption near term.
Moving to our cash flow performance and liquidity.
Cash generated from operating activities during the third quarter was $44.1 million, while free cash flow totaled $40.3 million.
Despite emerging growth and related working capital investments, cash flow in the quarter exceeded our expectations, primarily reflecting ongoing benefits from our operating working capital management initiatives, including cross-functional inventory planning, enhanced collection standard work and leverage of our shared services model, all supported with recent investments in technology.
Year-to-date, we have generated record free cash of $191 million, which is up 25% from prior year levels and represents 150% of adjusted net income.
Given the strong cash flow performance of the quarter, we ended March with approximately $304 million of cash on hand.
Net leverage stood at 1.9 times adjusted EBITDA at quarter end below the prior year level of 2.5 times in fiscal '21 second quarter level of 2.1 times.
In addition, our revolver remains undrawn with approximately $250 million of capacity and additional $250 million accordion auction.
Combining with incremental capacity on our recently expanded AR securitization facility and uncommitted private placement shelf facility, our liquidity remains strong.
This provides flexibility to fund incremental working capital requirements in the coming quarters as customer demand continues to improve as well as pursue strategic M&A, fund other growth initiatives and pay down additional debt where appropriate.
In addition, given our improved outlook and solid liquidity position, we will look to deploy excess cash through opportunistic share buybacks and dividends as the cycle recovery continues to unfold.
Transitioning now to our outlook.
Based on month-to-date trends in April and assuming normal sequential patterns, we would expect our fiscal fourth quarter 2021 organic sales to increase by 12% to 13% on a year-over-year basis.
This includes an assumption of double-digit to low-teen organic growth in our Service Center segment and high single-digit to low double-digit organic growth in our Fluid Power & Flow Control segment.
As a reminder, we will be fully lapping prior year weakness from the pandemic, which resulted in an 18.4% organic sales decline in last year's fiscal fourth quarter.
In addition, this direction is meant to provide a starting framework on how fourth quarter sales could shape our trends followed almost seasonality going forward.
While year-to-date sales trends have exceeded normal seasonality as the recovery has unfolded, we believe a prudent approach remains warranted as we continue to recover from an unprecedented downturn.
In addition, as Neil highlighted earlier, we remain mindful of increasing supply chain constraints across the industrial sector, which could influence the cadence and trajectory of activity near term.
Based on the 12% to 13% organic sales growth assumption, we believe a low double-digit to mid-teen incremental margin is an appropriate benchmark to use for our fourth quarter.
This assumes gross margins moderate slightly on a sequential basis into the fourth quarter but continue to expand year-over-year.
The sequential moderation primarily reflects considerations throughout Service Center segment mix as sales from larger strategic accounts continue to recover at a faster pace as compared to local accounts near term as well as slightly higher LIFO expense.
We remain focused on our internal margin initiatives and deploying countermeasures, including pricing actions in response to increasing supplier inflation.
As it relates to operating expense, we expect SG&A to increase sequentially, reflecting higher incentive compensation, additional growth-related investment and the ongoing normalization of medical cost.
We also have one additional payroll day in our fiscal fourth quarter this year versus our recent third quarter.
We continue to take a balanced approach to managing our operating costs.
Our expense margin execution year-to-date is encouraging and provides strong indication of our potential going forward, including our target of mid- to high-teen incremental margins on average over an up cycle.
That said, keep in mind that our incremental margins could vary over the next several quarters and into fiscal 2022 as we look to support our growth initiatives and we face the ongoing normalization of medical and selling-related expenses.
Lastly, from a cash flow perspective, we expect free cash to moderate into the fourth quarter as AR levels cyclical build and we replenish inventory at a greater pace in support of our growth opportunities and the recovery.
We remain confident in our cash generation potential and reiterate our normalized annual free cash target reach to 100% of net income over a cycle.
As we close out fiscal 2021, I'm encouraged by what I see developing across our company.
Our value proposition, technical industry focus and expansion into emerging industrial solutions provides a clear path for favorable growth going forward.
We have the most comprehensive portfolio and technical service capabilities, premier engineered solution expertise and greatest track record of consistency and commitment to this vital space.
Our local presence and ongoing talent investment provides further support to this foundation.
Now more than ever, these attributes are critical to suppliers and customers as they accelerate growth investments and solidify supply chains ahead of a potential extended up cycle.
Emerging signs of reshoring and investment in industrial infrastructure are promising and could represent notable tailwinds for our business, if they fully materialize, while our expanding automation footprint is presenting new growth opportunities in faster-growing and higher-margin industrial applications.
And lastly, our cross-selling initiative remains in the early innings, but is gaining momentum with related business wins increasing and broader teams engaged.
Considering our embedded customer base, and addressable market exceeding $70 billion and growing, we believe this initiative represents a significant opportunity that should expand our share across both legacy and emerging market verticals in coming years.
Combined with our self-help margin initiatives and strong balance, we have great potential to accelerate our earnings power and stakeholder returns long term.
| q3 adjusted non-gaap earnings per share $1.37 excluding items.
q3 earnings per share $1.42.
q3 sales rose 1.2 percent to $840.9 million.
project fiscal 2021 q4 sales to increase 12% to 13% year over year on an organic basis.
|
Joining me on the call today is Bob Schottenstein, our CEO and President, Derek Klutch, President of our Mortgage Company, Ann Marie Hunker, VP, Chief Accounting Officer Controller and Kevin Hake, Senior VP.
We are pleased with our third quarter performance highlighted by the number of records including record revenue of $904 million, revised record third quarter pre-tax income of $116.2 million, 22% better than a year ago and a very strong return on equity of 27%.
We sold 1,964 homes during the quarter, a decline of 33% from the record sales reported during last year's third quarter.
Despite the decline in sales, housing demand throughout most of our markets remains very strong.
Our decline in sales is due to the fact that we are operating in 15% fewer communities than the year ago and we continue to limit sales in the majority of our communities in order to better manage deliveries and control costs.
Our third quarter monthly sales pace was 3.7 homes per community other than last year, this is the highest monthly per community sales pace we've seen in over 10 years and reflects the underlying strength of demand.
Year-to-date, we have sold 7,340 homes, 1% ahead of last year's record, despite as noted, community count being down 15% and continuing to limit sales in the majority of our communities.
We ended the quarter with 176 active communities.
We will be opening a record number of new communities in 2022.
Specifically, we expect to grow our community count next year by 15% or more and end 2022 with between 200 and 220 communities.
We closed 2,045 homes during the quarter, a 4% decrease from last year.
Clearly, our closings were negatively impacted by the well documented supply chain disruptions that continue to stretch our build times and impact the entire industry.
On average, it is taking us 45 days longer to get homes closed.
We have always been focused on achieving fast and efficient build times, while assuring that homes are properly complete and ready to be delivered.
We will continue to manage in this way.
Our backlog is very strong.
We ended the quarter with an all-time record backlog of $2.5 billion, 40% better than last year.
And units in backlog increased by 20% to a third quarter record of 5,407 homes with an average price and backlog of $471,000 which is 17% higher than a year ago.
In addition to reporting record third quarter income, our returns were also very strong.
Gross margins improved by 160 basis points year-over-year to 24.5%.
And our SG&A expense ratio improved by 90 basis points to 10.7%.
Excluding the one-time charge for debt extinguishment, our pre-tax income percentage improved from 11.2% last year to nearly 14%.
And as noted all of this resulted in a very strong return on equity of 27%.
Now I will provide some additional comments on our markets.
First, let me begin by stating that I'm very excited to announce that we are commencing homebuilding operations in Nashville, Tennessee, one of the nation's most dynamic and fastest growing housing markets, ranking 11th nationally in 2020 based on single-family permits.
Nashville continues to benefit from a very healthy economy, significant population growth and job growth and we look forward to building our competitive position in the market over the next few years.
As our 16th market, Nashville will for reporting purposes be included in our southern region together with Charlotte and Raleigh, our four Texas markets into our three Florida markets.
We experienced strong performance from our homebuilding divisions in the third quarter led by Orlando, Tampa, Minneapolis, Dallas, Chicago, Columbus and Charlotte.
In fact, all of our markets produced strong results.
Our deliveries decreased 8% from last year in the southern region to 1,169 deliveries or 57% of the total.
The northern region contributed 876 deliveries, an increase of 1% over last year.
Our owned and controlled lot position in the southern region increased by 11% compared to last year and increased by 5% in the northern region compared to a year ago.
34% of our owned and controlled lots are in the northern region, while the balance roughly 66% is in the southern region.
We have a very strong land position.
Companywide, we own approximately 22,700 lots, which equates to a roughly two and a half year supply.
On top of that we control the option contracts and additional 20,300 lots.
So in total, our owned and controlled lots are approximately 43,000 lots or about a five year supply.
Based on a record backlog, we expect to finish out the year with another very strong performance.
Our financial condition is strong with $1.5 billion of equity at September 30th and a book value of $53 per share.
We ended the quarter with a cash balance of $221 million and zero borrowings under our $550 million unsecured revolving credit facility.
This resulted in a net debt to net cap ratio of 24%.
Our company is in excellent shape, the best shape ever and we are poised to have an outstanding fourth quarter and an outstanding full year in 2021.
New contracts for the third quarter decreased to 1,964 compared to 2,949 for last year's third quarter.
And in last year's third quarter our new contracts were a record and we're up 71% from the prior year.
Our new contracts were down 32% in July down 41% in August and down 24% in September and our cancellation rate was 8% in the third quarter.
As to our buyer profile about 50% of our third quarter sales were the first time buyers compared to 51% in the second quarter.
In addition, 39% of our third quarter sales were inventory homes compared to 43% in the second quarter.
Our community GAAP was 176 at the end of the quarter, compared to 207 at the end of last year's third quarter and the breakdown by region is 85 in the northern region and 91 in the southern region.
During the quarter, we opened 26 new communities while closing 25 and during last year's third quarter we opened 12 new communities.
We have opened 63 new communities in the first nine months of this year compared to 51 last year.
We delivered 2,045 homes in the third quarter, delivering 37% of our backlog compared to 58% a year ago.
Year-to-date, we delivered 6,322 homes, which is 16% more than a year ago.
We now have 5,300 homes in the field, which is 20% more than the 4,000 we had this time last year.
Revenue increased 7% in the third quarter reaching a third quarter record $904 million.
Our average closing price for the quarter was $430,000, a 13% increase when compared to last year's third quarter average closing price at $380,000.
And our backlog average sale price is an all-time record of $471,000 up from $404,000 a year ago and our backlog average sale price for our smart series is $374,000.
Our third quarter gross margin was 24.5%, up 160 basis points year-over-year.
And our third quarter s SG&A expenses were 10.7 of revenue improving 90 basis points compared to 11.6 a year ago, this reflects greater operating leverage and it was our lowest third quarter percentage in our company history.
Interest expense decreased $1.3 million for the quarter compared to last year.
Interest incurred for the quarter was $9.3 million compared to $10 million a year ago.
This decrease is due to lower outstanding borrowings and higher interest capitalization due to higher levels inventory under development than last year.
And during the third quarter we issued $300 million of senior notes due 2030 and used the majority of the proceeds to redeem all of our $250 million of senior notes that were due in 2025.
This resulted in the $9.1 million loss on early extinguishment of debt.
We are very pleased with our returns for the third quarter.
Our pre-tax income was 13% and 14% excluding our debt charge versus 11% a year ago, and our return on equity was 27% versus 19% a year ago.
During the quarter, we generated $132 million of EBITDA compared to $111 million last year's third quarter.
And we used $34 million of cash flow from operations for the first nine months compared to generating $197 million a year ago, primarily due to our increased land purchases.
We have $23 million of capitalized interest on our balance sheet this is about 1% of our total assets.
And our effective tax rate was 22% in the third quarter compared to 23% in last year's third quarter.
We currently estimate our annual effective rate this year to be around 22%.
And our earnings per diluted share for the quarter increased to $3.03 per share from $2.51 per share last year.
During the quarter we repurchase 243,000 of our outstanding common shares for $16 million, and we have $84 million available under our current repurchase authority.
Our current plans based on the existing market conditions are to continue repurchasing our shares.
Our mortgage and title operations achieved pre-tax income of $9.9 million, compared with $19.2 million in 2020 third quarter.
Revenue decreased 28% from last year to $20.8 million.
This was due to a lower volume of loans closed and sold and due to more competitive market conditions significantly lower pricing margins than we experienced in last year's third quarter.
The loan to value on our first mortgages was 82% compared to 84% in 2020 third quarter, 81% of the loans closed were conventional and 19% FHA or VA compared to 76% and 24% respectively 2020 third quarter.
Our average mortgage amount increased to $349,000 compared to $314,000 last year.
However, loans originated decreased to 1,554 loans down 5% from last year and the volume of loans sold decreased by 8%.
Our borrower profile remains solid with an average down payment of almost 18% and an average credit score on mortgages originated by M/I Financial of 751 up from 747 last quarter.
Our mortgage operation captured 85% of our business in the third quarter, the same as last year.
We maintain two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to the sale to investors.
At September 30, we had $142 million outstanding under the M/I warehousing agreement which expires in May of 2022.
We also had $70 million outstanding under a separate $90 million repo facility which we recently extended through October 2020.
Both facilities are typical 364 day mortgage warehouse lines that we extend annually.
As far as the balance sheet we ended the third quarter with cash of $221 million and no borrowings under our unsecured revolving credit facility.
Total homebuilding inventory at 9/30/21 was $2.4 billion, an increase of $0.5 billion from September 30 of last year.
And our unsold land investment at 9/30/21 is $991 million compared to $762 million a year ago.
At 9/30, we had $663 million of raw land and land under development and $328 million of finished unsold lots.
We own 4,343 unsold finished lots with an average cost of $75,000 per lot and this average lot cost is about 16% of our $471,000 backlog average sale price.
Our goal is to own a two to three years supply of land and we now own 23,000 lots, which is about a two and a half year supply.
During the third quarter we spent $231 million on land purchases and $124 million own land development for a total of $355 million, which was up from $196 million in last year's third quarter.
And at the end of the quarter, we had 62 completed inventory homes and 1,042 total inventory homes.
And of the total inventory 658 are in the northern region and 384 in the southern region.
Last year at 9/30, we had 266 completed inventory homes and 1,113 total inventory homes.
| q3 earnings per share $3.03.
q3 revenue rose 7 percent to $904.3 million.
qtrly homes delivered decreased 4% to 2,045.
|
Brendan Coughlin, Head of Consumer Banking; and Don McCree, Head of Commercial Banking are also here to provide additional color.
We also reference non-GAAP financial measures.
With that, I will hand over to Bruce.
We are pleased with the financial performance that we delivered for the fourth quarter and for the full year as we proved adaptable and resilient given the unprecedented challenges of 2020.
We continue to demonstrate the diversification and resilience of our business model as our Mortgage and Capital Markets businesses delivered strong fourth quarter performance.
We remained highly focused on taking care of customers with our retail branches opened and our teams working on the next round of PPP loans.
We feel we're managing our risk well and we continue to make progress on our strategic initiatives, which will position us well for future growth and for franchise value.
I'll comment briefly on a few of the financial headlines and then I'll let John take you through the details.
Our underlying Q4 earnings per share was $1.04, our ROTCE was 12.9%.
Both are up from a year ago quarter, and we delivered 2% operating leverage year-on-year.
Note that the full-year operating leverage was 4% and our PPNR growth was 12%.
Q4 credit provision was $124 million versus $110 million a year ago on a pre-CECL basis as the normalization of provision to more front book origination levels helped drive our strong returns.
On the capital front, we maintained a strong ACL ratio of 2.24%, ex-PPP loans and our CET1 ratio was 10%.
This strong capital and reserve position gives us a great deal of capital management flexibility in 2021.
We announced a $750 million share purchase authorization today and we will commence activity during the quarter.
We also will look to put our capital and ample liquidity position to work in finding attractive opportunities for loan growth.
Our credit metrics all are trending favorable with NCOs, NPAs and criticized assets all lower in the quarter and a further drop in customers in forbearance.
We continue to allocate additional reserves to the industry segments most affected by the pandemic and lockdowns and we feel that our coverage overall is very strong.
With respect to our guidance for 2021, we assume a steadily improving economy and GDP growth of around 5%.
Relative to current consensus, we see slightly higher revenue, expenses and PPNR as well as much better performance on credit.
We see NCOs at 50 basis points to 65 basis points for 2021 which is relative to 56 basis points in 2020.
Provision will be less than charge-offs, so how big the reserve release will be is dependent on the path of economic recovery.
Big picture, we will transition to slightly lower PPNR in 2021 given our outperformance in mortgage in 2020, but this will be more than made up for by lower credit costs, as our earnings and returns bounce back toward pre-COVID levels.
So all in all, a very strong year of execution and delivery for all stakeholders by Citizens in 2020 and we feel we are well positioned to do well in 2021 and continue our journey toward becoming a top performing bank.
We know we can count on you again in the new year.
Let's start with a brief overview of our headlines for the quarter.
This was an outstanding quarter for Citizens with strong fee income, good expense discipline and prudent credit and continued steady execution against our strategic initiatives.
For the full year, we delivered record underlying PPNR, up 12% against the challenging backdrop, driven by record fee income, up 24% with record results across mortgage, capital markets and wealth.
We achieved the ambitious TOP6 goal to deliver approximately $225 million of run rate expense savings, including approximately $140 million of in year benefits which supported our ongoing investments in strategic initiatives and financial performance targets.
To this end, we improved our efficiency ratio over 200 basis points to 56% by delivering 4% positive operating leverage for the year.
We expect further expense benefit of approximately $205 million to $225 million in 2021, which puts the program on track to deliver our total pre-tax run-rate benefit of $400 million to $425 million by the end of 2021.
Strong loan growth of around 6% reflects increased demand in education and point-of-sale financing as well as PPP loans.
Average deposits grew even faster at 13%, a result of government stimulus impact on consumers and commercial clients building liquidity.
ROTCE for the full year was 7.5%, which includes a negative 5.4% impact associated with our reserve build under CECL.
Our ACL at year-end 2020 more than doubled compared with last year, but our year-end CET1 ratio of 10% was unchanged on the year.
Strong PPNR funded the ACL bill 6% loan growth and stable dividends.
And finally, our tangible book value per share was $32.72 at quarter end, up 2% compared with a year ago.
Next, I'll refer to just a couple of slides and give you some key takeaways for the fourth quarter and then outline our outlook for 2021 and the first quarter.
We reported underlying net income of $480 million, earnings per share of $1.04 and revenue of $1.7 billion.
Our underlying ROTCE was 12.9%, up around 400 basis points as a result of our strong revenue performance, expense discipline and improvements in credit as the economy recovers.
Net interest income on Slide 6 was down only 1% linked quarter due to lower commercial loan balances and lower NIM.
However, despite the challenging rate backdrop, our margin held up well with the 8 basis point decline in linked quarter, driven by 9 basis point impact from elevated cash balances and strong deposit flows.
Lower asset yields were offset by our improved funding mix as we grew low-cost deposits with DDA up 4% and we continue to lower interest bearing deposit costs down 8 basis points to 27 basis points.
Given the recent stimulus, we expect continued strong deposit flows in the first quarter.
So elevated cash will continue to impact margin in the near term.
We will remain proactive in pricing down deposits and pursuing attractive loan growth opportunities in areas like point-of-sale finance and education as well as in attractive commercial segments.
On Slide 7 and 8, we delivered solid fee results again this quarter reflecting our ongoing efforts to invest in and diversify our revenue streams.
Mortgage fees were down approximately 30% this quarter due to declines in margins and volumes from exceptional levels last quarter.
However, mortgage fees were nevertheless more than double the levels from a year ago, which continues to provide good revenue diversification benefit in this low rate environment.
Capital market fees hit record levels, up 52% linked quarter and 33% year-on-year, driven by strong results from M&A advisory and accelerating activity in loan syndications.
Foreign exchange and interest rate products revenue is also strong, up 30% linked-quarter with higher customer activity levels tied to increased variable rate loan originations.
We delivered positive operating leverage of 2% year-over-year and improved our efficiency ratio to 56.8% as expenses were well controlled.
Average core loans on Slide 10 were down 1% linked quarter reflecting commercial payoffs and decline in loan yields -- line utilization to about 32% versus a historical average of roughly 37%.
This was partially offset by growth in retail and in our education mortgage and point-of-sale finance portfolios.
Looking at year-over-year trends core loans were up approximately 4% due to PPP education and mortgage.
On Slide 11 deposit flows have been elevated especially in low-cost categories and our liquidity ratios remained strong.
Average deposits were up 3% linked quarter and 16% year-over-year as consumers and small businesses benefited from government stimulus and clients built liquidity.
We are very pleased with our progress on deposit costs, which declined 24% or 6 basis points to 19 basis points during the quarter.
Interest-bearing deposit costs were down 8 basis points to 27 basis points.
We continue to drive a shift toward lower-cost categories with average DDA growth of 4% on a linked quarter basis and 42% year-over-year.
We expect to drive interest bearing deposit costs down to the low to mid-teens by the end of the year as we execute our deposit playbook to manage costs down across all channels, while improving our overall funding mix.
Moving on to credit on Slide 12.
Our metrics were positive this quarter.
Net charge-offs were down 9 basis points to 61 basis points linked quarter.
This is at the lower end of our guidance given better than expected improvement in commercial.
Commercial charge-offs this quarter primarily from segments most impacted by COVID-19 such as retail, casual dining and energy.
Nonaccrual loans decreased 20% linked quarter with a $302 million decrease in commercial driven by charge offs, returns to accrual and repayment activity.
In addition, our commercial criticized loans decreased 18% from $5.7 billion in 3Q to $4.6 billion in 4Q.
Given the performance of the portfolio and improvement in the macroeconomic outlook, our reserves came down slightly, but remain robust ending the quarter at 2.24% excluding PPP loans compared with 2.29% at the end of the third quarter.
This primarily reflects net charge-offs exceeding reserving needs for new loan originations.
We have some detailed credit slides in the appendix for your reference.
But I'll note that our reserve coverage for commercial excluding PPP was 2.5% at the end of the year, slightly up from the third quarter.
And within that our coverage for identified sectors of concern increased to a prudent 8.2% at the end of the year from 7.7% at the end of the third quarter.
The benefit to reserves from an improving macroeconomic backdrop offset qualitative overlays and further built reserves on these areas of concern.
We maintained excellent balance sheet strength as shown on Slide 13.
Increasing our CET1 ratio from 9.8% in 3Q to 10% at the end of the year, which is at the top of our target operating range.
Given positive credit trends in capital strength, our Board of Directors has authorized the company to repurchase up to $750 million of common stock beginning in first quarter of 2021.
Before I move on to our outlook, let me highlight some exciting things that are happening across the company on Slide 15.
On the consumer side, we are focused on national expansion the Citizens Access integrating some of our lending businesses to further develop our national value proposition.
We recently announced the expansion of our national point-of-sale offering for merchants through our Citizens Pay offering and we are continuing to add new merchants to our point-of-sale platform as we expand into new verticals.
We are very excited about an announced expected next week with a major retailer to provide payment options for their customers who wanted transparent and predictable way to finance purchases through a fully digital experience.
In addition, we are making great strides in our digital transformation having launched our new mobile app on Android in the fourth quarter and iOS just this month.
We've seen our Active Mobile Households increased 15% year-over-year and the majority of our deposit transactions, continue to be executed outside of the branch.
In commercial, we have built out a robust corporate finance advisory model and we continue to rank near the top of our peers in customer satisfaction as we help our customers navigate this challenging environment.
And now for some high level commentary on the outlook for 2021 on Slide 16.
We expect NII will be down slightly given NIM expected to be down in the high single digits compared to 2020, which should be largely offset by loan growth.
Loans should be up mid to high single-digits on a spot basis with acceleration in the back half of the year with average loans, up approximately 2%.
Overall, interest earning assets should be up about 1.5% to 2%.
This assumes elevated cash levels come down gradually over the course of 2021.
Fee income is expected to be down high single-digits off the record 2020 level reflecting lower mortgage banking fees from 2020 record levels.
At the same time, we expect good performance in Capital Markets, Wealth and other categories that were impacted by COVID-19 last year.
Non-interest expense is expected to be up just 1.5% to 2% given benefits from our TOP program, partly offset by higher volume related expenses in mortgage and reinvestment in strategic initiatives.
We expect net charge-offs will be in the range of 50 basis points to 65 basis points of average loans with a meaningful reserve release to provision.
Now let's cover the outlook for the first quarter on Slide 17.
We expect NII to be down slightly due to day count.
Both earning assets and NIM are expected to be broadly stable.
Fee income is expected to be down high single digits reflecting lower mortgage banking fees as margins continue to tighten as far as seasonal impacts.
Non-interest expense is expected to be up 2% to 3%, reflecting seasonality and compensation.
We expect net charge-offs to be in the range of 50 basis points to 60 basis points of average loans.
We also expect another quarter with provisions less than charge-offs, based on expected loan growth levels and macroeconomic trends.
To wrap up, this was a strong quarter for Citizens and a good finish to the year as we continue to navigate successfully through the COVID-19 crisis and demonstrate the resilience of our franchise.
We are well positioned to have another strong year in 2021.
With that, I'll hand it back over to Bruce.
And operator, let's open it up to some Q&A.
| board of directors approves $750 million common stock repurchase program.
qtrly net interest income of $1.1 billion decreased 1%.
qtrly provision for credit losses of $124 million compares with $110 million in fourth quarter 2019.
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Today I'm joined by Bill Furman, Greenbrier's chairman and CEO; Lorie Tekorius, president and COO; Brian Comstock, executive vice president and chief commercial and leasing officer; and Adrian Downes, senior vice president and CFO.
Fiscal 22 is off to a good start, driven by strong commercial performance, disciplined management of our production capacity and continued growth of our railcar and lease fleet.
Momentum in our business is being sustained.
First quarter of fiscal 2022 continued our strong ordered trajectory.
As a result, Greenbrier posted its fourth consecutive quarter with book-to-bill ratio over one times.
New railcars orders and actually were at 1.5 for this quarter.
New railcar orders of 6,300 units were worth 685 million, were across a broad range of railcars.
We ended the quarter with a backlog of approximately three billion, the highest level about three years.
Our order intake for the first quarter alone represents 35% of new orders received during all of fiscal 2021.
Our recent partnership with U.S. Steel Corporation and Norfolk Southern Railway to design and launch new high strength steel gondolas having multiple environmental benefits demonstrates this momentum.
In addition, in a moment, our chief commercial and leasing officer, Brian Comstock will share more about this and some other exciting customer focused initiatives.
And I should mention in terms of backlog do we have booked another 200 million of rebody work which is sizable but not counted in our backlog.
We are now ramping up '21 active production lines in North America and approximately eight internationally.
Importantly, we are harnessing our flexible manufacturing footprint to extract more production from each line.
We expect this to increase in deliveries to increase over the course of the year.
Meat production requirements we recently expanded our global workforce by about 10%.
Intensive management of safety, hiring and supply chain issues continue.
Continued success in these areas is key to maintaining our strong start to the year, specifically on the supply chain, our global sourcing team continues to do an exceptional job of mitigating disruptions to support increased production.
Our wheels repaired parts business is now known as Maintenance Services.
The new name doesn't change the back of this business unit endured a challenging quarter.
Labor markets and supply chain direct disruptions have both impacted its profitability.
Naturally, this lowered our consolidated margins which were below our expectations to begin with.
As we speak to the changes, we're making to improve the performance of our Maintenance Services business unit.
Greenbrier leasing continues to perform very well.
Our investment activity has considerably outpacing initial targets.
Asset utilization, a key performance metric for the leasing business is high at 97.1% for the portfolio that is well-diversified across car types and strong lessee credits as well as maturity ladders.
Additionally, we exceeded the initial investment target for GBX leasing by $200 million to a portfolio of $400 million in only nine months of operations.
This reflects the strong momentum in the business and our core manufacturing markets in North America.
The Omicron variant of COVID-19 were suddenly following the end of the quarter.
As a result of well-established safety protocols, our operations have not been significantly impacted at present by the rising cases globally and in North America, but we are closely tracking the rapid community spread of this variant and we're taking all appropriate precautions.
We continue with safeguard protocols and we will enhance these as dictated by best practices as well as adhering to local health authority requirements in the locations where we operate.
In the U.S. and Europe, it appears this wave might peak in the coming months.
There are indications that the current variant carries milder symptoms than previous versions of the virus, particularly for those who are double vaccinated and those with boosters.
Nonetheless, we must remain vigilant.
After two years, the full contours of the pandemic remain dynamic and unpredictable.
Our resolver is effectively to manage Greenbrier through evolving COVID challenges and that resolver remains steadfast.
Our outlook remains unchanged except that we believe it is growing to be much more positive.
We maintain a positive outlook for the fiscal year for a variety of reasons.
These are supported by industry metrics as well as operating momentum, driven by a strong order book, demand backlog and manufacturing ramping.
For example, a portion of idle railcars in North America decreased to 32% in July to just below 20% by December.
Industry forecast for 2022 and 2023 are very encouraging, as Brian Comstock will share with you.
All this suggest that industry fleet utilization is nearing 80%.
And again, Brian Comstock will add more on these points in a minute and we can talk in questioning and answering.
Lorie Tekorius who will be Greenberg's CEO in March takes the helm in very important and exciting time in the long history of Greenberg.
I became the CEO, when we were founded, when my partner and I cofounded a small asset leasing business in 1981.
We entered manufacturing with the acquisition of Gunderson in 1985 and have continued to build on those two foundations.
Today's manufacturing is our largest unit, comprising about 80% of our total annual revenues.
But manufacturing is both driven and complemented by a robust commercial and leasing business, as well as asset management services.
Today, our asset management maintenance services touch about one-third in the North American fleet.
It's been a remarkable journey for me and for the company.
Greenbrier steadily grown industry footprint and today is the leading railcar manufacturer in North America, allowing us to operate and scale.
We also now operated in four continents serving global railcar markets worldwide, with similar market shares issue this.
All of this has been accomplished through the hard work of remarkable people without guidance through their capacity for innovation, discipline management, and unyielding focus on the needs of our customers, as well as our workforce, and other stakeholders.
We've purposely built the company to grow at scale across business cycles.
Under Lorie's administration, she plans to do more of that along with some new initiatives of row.
As global railcar markets emerge from a cyclical trough, one that was really exacerbated by the pandemic.
I'm proud of what the Greenbrier team has accomplished and the market leading positions we've achieved.
I'm also proud of the significant value we've created for our shareholders.
I expect that this will continue for many decades to come.
As Greenbrier continues to drive innovation as an industry, broaden its footprint globally and by product line and expand this leasing and services business.
I also would like to congratulate two directors who served throughout almost the last 18 years to 20 years on our Board, Duane McDougall and Donald Washburn.
Next week, we'll put out a brief congratulatory note marking this milestone, but I want to assure them that we remember them.
I no doubt the Greenbrier will flourish under her administration.
And before I get into the details on the quarter, you may have noticed and I think they'll reference that renamed two of our reporting segments.
We'll prepare in parts segment and now maintenance services and leasing and services is now leasing and management services.
The new names more closely reflect the customer solutions we provide and have no impact on the financial results.
Greenbrier's fiscal Q1 reflected continued labor challenges in the United States, competitive pricing from orders taken during the depths of the pandemic troughs, and production and efficiencies from line changeover and ramping of capacity.
I am proud of our employees around the world that continue to perform well, even as uncertainty about.
It is certainly an understatement to say that increasing headcount safely by several thousand employees, and increasing production rates by 40% to 50% is challenging.
So with an experienced leadership team, we'll meet this opportunity to scale our operations all up keeping our workforce healthy and safe.
Safety across our organizations has been and will continue to be our number one priority.
And the quarter just ended, we delivered 4,100 units, including 400 units in Brazil.
Deliveries decreased by about 9% sequentially, which primarily reflects the timing of syndication activity, and line changeovers in North America.
Our global manufacturing continues to take a measured approach to increasing production rates and activities as they work through orders taken during this process.
Our global sourcing team continues to perform minor miracles on a regular basis, ensuring we avoid significant production delays.
Our maintenance service business was significantly impacted by labor shortages exacerbated by the COVID pandemic.
These shortages impact throughput, billing efficiencies and profitability.
We've made a number of changes to our hiring and training practices, and we're seeing improved retention rate that maintenance cycle times can be 75 to 90 days.
So it takes some time for the benefits of these changes to flow through the operation.
Further, this business was impacted by lower real change our volume.
I do believe the team has made the necessary changes that will lead to positive results over the course of fiscal 2020 and our maintenance services.
Our leasing and management services group had a good quarter with strong fleet utilization and the integration of a previously disclosed portfolio purchased in September.
Between the portfolio assets and origination from Greenbrier, GBX leasing grew by approximately 200 million in the quarter.
And as of quarter end, that fleet is valued at nearly 400 million, nearly doubling in value across the quarter.
Importantly, this growth reflects a continued disciplined approach to portfolio construction, underwriting and credit quality standards.
We are not pursuing growth at all costs.
In addition to managing our lease fleet, our Management Services or GMS group continues to provide creative railcar assets solution for over 450,000 railcars in the North American freight industry.
When other positive developments subsequent to quarter end, is that our leasing team successfully increased the size of our 300 million nonrecourse railcar warehouse facilities by 50 million to 350 million.
Our capital markets team executed well this quarter, and we expect syndication activities to grow throughout the year, similar to our overall cadence of delivery.
Syndication remains an important source of liquidity and profitability for Greenbrier.
Looking ahead, we see strong momentum for fiscal 2022 and beyond.
We have talented employees and experienced management who are focused on driving results and shareholder value.
I'm very excited about the long-term opportunities for Greenbrier.
And now Brian Comstock will provide an update on the current railcar demand environment.
As mentioned in October, I remain excited about the momentum we are seeing in all of our markets globally.
In Greenbrier's first quarter, we had a book-to-bill 1.5 reflecting deliveries of 4,100 units and orders of 6,300 units.
This is the fourth consecutive quarter with a book-to-bill ratio exceeding one times and reflective of this strengthening environment.
New railcar backlog of 28,000 units with a market value of three billion provides strong multiyear visibility.
These are the type of demand environments where Greenbrier's flexible manufacturing is a vital differentiator.
In addition to new railcar orders, we recently received orders to rebody 1,400 railcars, as part of Greenbrier railcar refurbishment program.
This program is an important part of our growing partnership with our customers to sustainably repurpose North America's aging fleet, to ensure that rail remains the most environmentally friendly mode of surface transport.
As of November 30th, our modernization backlog included 3,500 units, valued at $200 million.
This is a valuable business that is additional to our new railcar backlog and absorbs production capacity.
Each gondolas unloaded weight is reduced by up to 15,000 pounds.
Norfolk Southern will initially acquire 800 of these Greenbrier engineered gondolas.
The work done by Greenbrier and our partner promises significant benefits to all three companies and the freight transportation industry as a whole, as we lead the way to a net zero carbon economy.
One item we are clarifying is the $800 gondolas will be part of the Q2 order activity.
In December, we also announced Greenbrier's joining of the RailPulse coalition.
I'm personally excited about the prospects of this technology with the goal to aggregate North American fleet data onto a single platform.
This has a potential to improve safety and operating efficiency, while providing enhanced visibility to customers, reinforcing rails competitive share of freight transportation.
Greenbrier's leased fleet utilization ended the quarter at over 97%.
We continue to see improved lease pricing in term on all new lease originations and lease renewals as well as continued strong demand for leased equipment.
North American industry delivery projections saw an increase in nearly 49,000 units in 2022 and over 60,000 units in 2023, given the strong reduction in railcars and storage that continue to congestion as the pores, which is impacting traffic and overall economic growth.
We believe, these projections are very reasonable and see similar dynamics in Europe.
As you can see from our recently announced initiatives, Greenbrier's global commercial and leasing team remains focused on providing innovative solutions to our customers.
Now over to Adrian for more about our Q1 financial performance.
I'll discuss a few highlights and I'll also provide an update to our fiscal 2022 guidance.
Highlights for the first quarter include revenue of $550.7 million, deliveries of 4,100 units which include 400 units from our unconsolidated joint venture in Brazil.
Aggregate gross margins of 8.6%, reflecting competitive new rail car pricing from orders taken earlier in the pandemic and labor shortages.
Selling and administrative expense of $44.3 million is down 20% from Q4, primarily as a result of lower employee-related costs.
Net gain on disposition of equipment was $8.5 million, like many leasing companies we periodically sell assets from our lease fleet as opportunities arise.
We had an income tax benefit of 1.4 million in the quarter primarily reflect the net benefits from amending prior year tax returns.
Non-controlling interest provides the benefit of 5.2 million, primarily resulting from the impacts of line changeovers and production ramping at our Mexico joint venture.
Net earnings attributable to Greenbrier of 10.8 million or $0.32 per diluted share and EBITDA of 42.2 million or 7.7% of revenue.
Moving to liquidity, Greenbrier has a strong balance sheet.
Liquidity of 610 million is comprised of cacheable reforms of the ten million and available borrowings of nearly 200 million.
We are well positioned to navigate any market disruptions we expect to persist into calendar 2022.
As mentioned last quarter, our cash receivable spends at 106 million as of November 30, and we expect to receive most of these refunds in the second quarter of fiscal 2022.
This refund is an addition to Greenbrier's available cash and borrowing capacity.
Liquidity is important to support the working capital needs of the business as we significantly increase new railcar production beginning in '21 and into 2022.
Liquidity also enables Greenbrier to invest in growth, as demonstrated by the railcar portfolio purchase in Q1 and the expansion of GBX leasing at a pace exceeding our initial announcement.
It has also allowed us to continue to pay dividends throughout pandemic during a time of economic uncertainty.
Greenbrier's board of directors remains committed to a balance to find the capital.
I believe that our dividends program enhances shareholder value and attracts investors.
Today, we announced the dividends are $0.27 per share, which is our thirty-first consecutive dividend.
As of yesterday's closing price, our annual dividend represents a yield of approximately 2.3%.
Since 2014, Greenbrier returns nearly 370 million of capital to shareholders through dividends and share repurchases.
Additionally, you may have noticed an increase of approximately 70 million and Greenbrier's notes payable balance, when compared to the prior quarter.
This non-cash increase is a result of Greenbrier adopting a new accounting standard, which simplified accounting for convertible notes and no longer requires the calculation of debt discount and associated equity components.
We believe the standard provides better transparency to how the convertible notes appear on our balance sheet.
And to be clear Greenbrier did not incur any impact of liquidity or cash flows as a result of this adoption.
Based on current business trends and production schedules, we're adjusting Greenbrier's fiscal 2022 outlook to reflect the following.
Increase deliveries by 1,500 units, now to a range of 17,500 to 19,500 units, which includes approximately 1,500 units from Greenbrier-Maxion in Brazil.
Selling and administrative expenses are unchanged and expect to be approximately 200 million to 210 million for the year.
Gross capital expenditures of approximately 275 million in leasing and management services, 55 million in manufacturing, and 10 million in maintenance services.
Gross margin percent is expected to steadily increase over the course of the year from high-single-digits in the first half to between low-double-digits and low-teens by the fourth fiscal quarter, as railcar's orders during the pandemic trough are delivered and conditions in the maintenance services business improve.
We expect deliveries to continue to be back half waited with a 45%, 55% split.
As reminders in fiscal 2022 approximately 1,400 units are expected to be built and capitalized into our lease fleet.
These units are not reflected in the delivery guidance provided.
We consider a railcar delivered on a lease Greenberg's balance sheet and is owned by an external third-party.
As mentioned in the commentary earlier on the call, momentum continues to build in our business.
And I'm excited about what the future holds for Greenberg.
| q1 earnings per share $0.32.
diversified new railcar backlog as of november 30, 2021 was 28,000 units with a value of $3.0 billion.
greenbrier companies - for 2022, expects increased deliveries of 17,500 - 19,500 units including about 1,500 units in greenbrier-maxion (brazil).
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on the call today is Bob Schottenstein, our CEO and President Derek Klutch, President of our Mortgage Company Ann Marie Hunker, VP Chief Accounting Officer.
and Kevin Hake, Senior VP.
First to address regulation fair disclosure.
We had a record setting second quarter highlighted by a 97% increase in net income, a 23% increase in homes delivered a 35% increase in revenue, and a return on equity of 27%.
All of this is a result of a high level of performance across all 15 of our housing operations, as well as from our mortgage and title business.
More our margins for the quarter were very strong.
Despite significant cost pressures.
Our gross margins improved by 320 basis points over last year, and improved sequentially by 70 basis points from the first quarter to a second quarter level of 25.1%.
Our overhead expense ratio improved by 110 basis points from a year ago to 10.4% of revenues, reflecting greater operating leverage.
And most importantly, our pre tax income percentage improved significantly to 14.7% versus 10% a year ago.
Record second quarter results continue our trend of strong growth in both revenues and earnings that we have achieved over the past decade.
Since 2013, our revenues have grown at a compounded annual rate of 19%.
And our pre tax income has grown at an even more impressive annual rate of 43%.
Demand for new homes continues to be very good.
And as reflected in our year to date new contracts increasing by 24%.
And our record set second quarter new contracts just slightly better than a year ago, with 2267 homes sold during the quarter.
We achieved record second quarter sales notwithstanding that we are operating in nearly 20% fewer communities than a year ago.
And we are intentionally limiting sales and majority of our communities to control margins and better manage delivery times.
Given the drop in our community count and the difficult sales comps posed by this quarter in particularly the next quarter the third quarter, I wanted to provide a little more color on our sales results.
Last year was to say the least a most unusual year for our industry.
No one could have predicted how our economy would fare when faced with one of the worst health crisis of our time.
Knowing what we know now, it is clear that comparisons between 2021 and 2020 need to be viewed carefully.
Our second quarter sales comps more quick, were clearly more challenging due to the unusually strong sales pace, which began in May and June of last year, as our industry as a whole experienced a dramatic rebound in sales after the extreme initial COVID related sales.
slowed down in March and April of last year.
For EMI homes, we sold 31% more homes and last year second quarter, aided by the strength of last May in June.
The increased sales pace continued and even got better.
As you all recall, as we moved into last year's third quarter, where our sales grew by 71% over 2019.
It was in the late stages of last year, third quarter and frankly, in all of the fourth quarter of last year, when we first began to limit sales in many of our communities.
And of course, we were raising our prices to try and meet the market demand.
Despite these efforts, we began to sell out of communities much faster than expected.
On top of that, new community openings within our industry occurred slower than expected, due in part to delays in the governmental approval and inspection process, largely because of COVID related work from home protocols.
Thus, a greater than anticipated drop in our community count.
Looking ahead, we are very well positioned to grow our communities.
We expect to open more new communities in the second half of this year than we did in the first half.
And importantly, we expect to open a record number of new communities in both the first half of 2022 and the second half of 2022.
All in support of our growth goals.
Finally, let me just say that our slowdown or decline in order growth is not indicative of demand.
These are perhaps the best housing conditions.
We've seen, considering demand, buyer demographics and buyer sentiment, and the very strong credit credit quality of our buyers.
We will continue to manage or limit sales in many of our communities on a go forward basis in order to control deliveries and maximize margins.
And today we've seen little if any evidence of pushback on price on all of our product lines from attached townhomes to our diverse single family lineup of homes, as well as our homes geared to empty nesters have performed at or above expectations.
Speaking of our product line, our smart series, which represents our most affordable line of homes, continues to perform at a very high level.
Smart Siri sales in the second quarter accounted for just under 40% of total company sales compared to about 35% a year ago.
We are selling our smart series homes and 35% of our communities compared to 30% of the communities a year ago.
The average price of our smart series Homes is now just under $350,000 compared to roughly $330,000 at the end of the first quarter.
As we've said repeatedly over the last several years when discussing our smart series line of homes.
On average, our smart series communities produce better sales pace, better margins, faster cycle time, and thus better returns.
Our backlog sales value at the end of the quarter was $2.5 billion and all time quarterly record and 70% better than last year.
units in backlog increased by 49%.
To an all time record 5488 homes with an average price of homes in backlog equal to $454,000.
This is 15% higher than a year ago.
Now I'd like to provide a few comments on our markets.
As I mentioned at the beginning of the call, we experienced strong performance from each of our 15 homebuilding divisions, with substantial income contributions for most of our markets led by Orlando, Tampa, Minneapolis, Dallas, Columbus, and Cincinnati.
Our deliveries increased by 18% over last year in our southern region, reminding you that our southern region consists of our four Texas markets, three Florida markets and two North Carolina markets.
Deliveries in the southern region increased to 1297 homes, or 57% of the total.
The northern region, which is the balance of our markets, six to be exact in Ohio, Indiana, Illinois minutes Soda in Michigan contributed 961 deliveries, which is roughly 31% better than a year ago.
new contracts in our southern region increased by 3% for the quarter and decreased by 4%.
In our northern region, our owned and controlled lot position in the nine markets representing our southern region increased by 35%, compared to last year, and increased by 15%.
And the six markets that comprise our northern region 34% of our owned and controlled lots are in the north, with the balance roughly 66%.
In the south, we have a very strong land position.
company wide, we own approximately 18,300 lots, which is roughly a two year supply.
On top of that, we control the option contracts, and additional nearly 26,000 lots.
So in total, are owned and controlled lots are slightly slightly more than 44,000 lots, which is just below a five year supply.
Perhaps most important 59% of those near 44,000 lots are controlled under an option contract, which gives me my home's significant flexibility to react to changes in demand or individual market conditions.
First, our financial condition is very strong with one and a half billion dollars of equity at June 30, and a book value slightly over $50 a share.
We ended the second quarter with a cash balance of $372,000,000.00 borrowings under our $550 million unsecured revolving credit facility.
This resulted in a very healthy net debt to cap ratio of 16%.
We believe our low leverage in substantial cash generation allows us to allocate capital to share repurchases, while also continuing to make significant investments in replenishing our land position for the continued growth of our company.
This replaces our existing $50 million share repurchase authorization which had roughly $17 million of remaining availability.
The $100 million share repurchase authorization reflects our expectation of the ongoing strength in our business and our commitment to creating long term shareholder value, while always maintaining low debt leverage.
Finally, in closing, our company is an actual is in excellent shape.
Given the strength of our backlog, as well as the strength of our land position, we are poised to have an outstanding 2021.
And with our planned new community openings, we are equally excited about our prospects for a strong 2022.
new contracts and second quarter increased to 2267.
A second quarter record 2261 for last year second quarter.
And last year second quarter was up 31% versus 2019.
Year today, we have so 5376 homes 24% better than last year.
Our new contracts were up 103% in April, down 11% in May and down 33% in June.
Our sales pace was 4.2 in the second quarter compared to last year is 3.4.
And our cancellation rate for the second quarter was 7%.
We continue to manage sales to closely align ourselves with our ability to start and deliver our homes along with focus on our margins, especially given our record backlog of 5500 houses.
As to our buyer profile.
About 51% of our second quarter sales were to first time buyers, compared to 56% in the first quarter.
In addition 43% of our second quarter sales for inventory homes, the same percentage as the first quarter.
Our community count was 175 at the end of the second quarter compared to 220 at the end of last year second quarter, and the breakdown by region is 79 in the northern region and 96 in the southern region.
During the quarter we opened 16 new communities while closing 20 During last year of second quarter we opened 22 new stores and close 25.
We delivered an all time quarterly record of 2250 and homes in the second quarter.
And year today we have delivered 4277 homes, which is 28% more than last year.
production cycle times continue to lengthen.
And we have started over 5000 homes in the first half of this year, which is 1500 more homes than the first half of last year.
revenue increased 35% in the second order, reaching an all time quarterly record of 961 million.
And our average closing price for the quarter was 411,008% increase compared to last year second quarter average of 379,000.
Our second quarter gross margin was 25.1%.
Up 320 basis points year over year.
Our construction and land development costs continue to increase.
Recently we have seen some we have seen lumber costs decline in some of our markets.
And our second quarter SG and a expenses were 10.4 revenue, improving 110 basis points compared to 11.5 a year ago.
This reflects greater operating leverage, and it was our lowest second quarter leverage in our company history.
Interest expense decreased 2.1 million for the quarter compared to last year.
Interest incurred for the quarter was 10 point 1 million compared to 10 point 3 million a year ago.
This decreases due to lower outstanding borrowings in the second quarter, and also higher interest capitalisation due to more inventory being under development.
We are very pleased with our improved returns for the quarter.
Our pre tax income was 14.7 versus 10 last year, and our return on equity was 27% versus 17%.
And during the quarter we generated 156 million of EBITDA compared to 86 million in last year second quarter.
we generated 174 million of positive cash flow from operations in the second quarter compared to generating 83 million a year ago.
And we have 22 billion in capitalized interest on our balance sheet about 1% of our assets.
And our effective tax rate was 24% in the second quarter, same as last year, second quarter, and we estimate our annual rate for the year to be around 24%.
And our earnings per diluted share for the quarter increased to $3.58 per share from $1.89 per share last year.
Our mortgage and title operations achieved record second quarter results in pre tax income, revenue and number of loans originated revenue was up 50% to $28.6 million due to a higher volume of loans closed and sold, along with higher pricing margins.
And we experienced in the second quarter of last year.
Pre tax income was $18 million, which was up 66% over 2000 and 22nd quarter.
The loan to value on our first mortgages for the second quarter was 84% compared to 83%.
78% of loans closed in the quarter were conventional, and 22%, FHA or VA.
This compares to 77% and 23%, respectively, for 2000 and 22nd quarter.
Our average mortgage amount increased to $336,000 in 2021 second quarter compared to $311,000.
Loans originated increased to a second quarter record of 1704 loans 24% more than last year, and the volume of loans sold increased by 48%.
Our borrower profile remains solid, with an average down payment of over 16% and an average credit score of 747 up from 746 last quarter.
Our mortgage operation captured over 84% of our business in the second quarter, compared to 83% last year.
Finally, we maintain two separate mortgage warehouse facilities that provide us with funding for mortgage originations.
Prior to the sale to investors.
at June 30, we had $134 million outstanding under the MIF warehousing agreement, which is a $175 million commitment that was recently extended and expires in May 2022.
And we also had $34 million outstanding Under a separate $90 million repo facility, which expires in October of this year.
Both facilities are typical 364 day mortgage warehouse lines that we extend annually.
As far as the balance sheet we ended the second quarter with a cash balance of 372 million and no borrowings under our unsecured revolving credit facility.
And during the second quarter, we extended the maturity of our credit facility to July 2025, and increased the total commitment to 550 million.
Total homebuilding inventory at June 30, was 2.1 billion, an increase of 250 million from last year, and our unsold land investment at June 37 or 82 million compared to 810 million a year ago.
We had 497 million of raw land and land under development, and 285 million of finished unsold lots.
We owned 3872, unsold finished lots, with an average cost of 74,000 per lot.
And this average lock cost is 16% of our Foreign Earned 54,000 backlog every sale price.
Our goal is to own a two to three year supply of land.
And during the second quarter, we spent 150 million on land purchases, and 87 million on land development for a total of 237 million, which was up from 156 million in last year, second quarter.
And in the second quarter, we purchased about 4000 lots of which 78% were all in 2,022nd quarter, we purchased about 2100 lots of which 67% were all in general, most of our smart series communities are rolling deals, and have above average company pace and margin.
And at the end of the quarter, we had 59 completed inventory homes, and 169 total inventory homes.
Another total inventory 498 are in the northern region in 371 are in the southern region.
And at the end of the first quarter, we had 98 completed inventory homes, and 708 total inventory homes.
We're now open the call for any questions or comments.
| compname reports q2 earnings per share of $3.58.
compname reports 2021 second quarter results and $100 million share repurchase authorization.
q2 earnings per share $3.58.
q2 revenue $961 million.
backlog units increased 49% to 5,488 in quarter.
backlog sales value reached $2.5 billion in quarter.
qtrly homes delivered increased 23% to 2,258.
also announced board has approved a $100 million share repurchase authorization.
|
We are also joined here in the room by our Vice President of Finance, Brian Hammonds.
The call today will focus on our financial results for the third quarter and provide you with other general business updates.
Going to our agenda for the call, we will provide you with a breakdown of our third quarter financial performance, discuss business development opportunities, and the latest developments with our government partners.
We will also provide you with an update on our capital allocation strategy and our continued response to the COVID-19 pandemic.
Our third quarter revenue of $471.2 million represented a 1% increase over the prior year quarter despite the sale of 47 non-core real estate assets within our property segment in multiple transactions between December 2020 and June 2021 and our decision to exit two managed-only contracts with local governments in the state of Tennessee during the fourth quarter of 2020.
And in the five quarters since we announced the change in our capital allocation strategy, we have substantially improved our credit profile, reducing our net debt balance by approximately $730 million during a time of unprecedented challenges.
We remain committed to reaching and maintaining a total leverage ratio or net debt to adjusted EBITDA of 2.25 times to 2.75 times.
Using the trailing 12-months ended September 30 of 2021, our total leverage ratio was 2.7 times.
Just one year ago, our total leverage ratio was at 4.0 time.
So, we have made significant progress.
And the last time our total leverage ratio was below 3 times was in 2012, nine years ago.
While we have touched the high end of our targeted leverage range, we remain committed to continuing to reduce debt to ensure we remain comfortably within the range.
Our EBITDA has shown to be durable since the beginning of the pandemic, but there are many other factors that could cause our net leverage ratio to fluctuate quarter-to-quarter such as changes in our net cash balance due to semi-annual interest payments on our debt, capital expenditures or changes in working capital.
We continue to believe our capital allocation strategy is the most prudent approach to positioning the Company to generate long-term value through a stable capital structure and continue to cost effectively meet the needs of our government customers with less reliance on outside partners.
I believe this is evidenced by our recent $225 million unsecured bond issuance which price nearly a 100 basis points lower than the bonds we issued back in April of this year.
However, within the next few quarters, we could also be in a position to shift our capital allocation strategy to one that once again returned a portion of our cash flows to our shareholders and less aggressively de-levers.
We believe the valuation of our equity remains well below its fair value and we feel strongly that once we achieve our debt reduction goals, we could create substantial value for our shareholders by repurchasing shares.
In 2009, one of my first acts as CEO was to seek authorization from our Board of Directors for an equity repurchase program.
So I have a full appreciation of the potential value creation that the current stock presents.
Fully appreciating the potential opportunity, we have further progress to make with our current debt reduction strategy.
We continue to see criminal justice related populations meaningfully below their pre-pandemic levels.
The declines have mostly been due to reduction in new intakes rather than early releases.
Governments have acted faster to transfer certain residents assigned to our reentry facilities to non-residential statuses such as furloughs, home confinement or early releases, to create additional space for enhanced social distancing within our facilities.
However, during the third quarter, we did see many of our state customers increase their utilization of our facilities, which contributed to modest increases in our occupancy compared with the prior year quarter.
Our Safety segment's occupancy was 73.2% in the quarter, an increase of 110 basis points compared with the prior year quarter and our Community segment's occupancy was 56.4%, up 180 basis points.
As court room operations gradually reopen and operations normalize, we anticipate this trend in utilization to continue.
And with that we are leaning way forward on increasing our staffing levels in anticipation of higher utilization rates of our partners.
This of course will likely have a material impact on margins as we go into 2022.
Normalized funds from operations or FFO for the third quarter was $0.48 per share, a decline of 8% compared with the third quarter of 2020.
However, this decline was primarily driven by our decision to convert to a taxable C corporation effective January 1st of 2021 from a REIT.
We have added disclosures in our third quarter supplemental financial information document available now on our website, which provides our pro forma results for 2020 reflecting income tax expense, by applying our estimated tax rate to pre-tax income in the prior year.
When compared to pro forma results for the third quarter of 2020, our adjusted earnings per share, normalized FFO per share and AFFO per share increased 33%, 9% and 15% respectively.
Our adjusted EBITDA of $100.9 million increased 7% compared to the third quarter of 2020, and again, this is after the sale of 47 non-core assets since the end of the third quarter of 2020.
Dave will provide greater details about our third quarter financial results, including reconciling between our GAAP and normalized results following the remainder of my comments.
We will start our operational and business development discussion with a brief update on the impact of the COVID-19 pandemic and our ongoing response.
While the rate of positive cases around the nation was significantly increasing due to the Delta variant during the third quarter, we only experienced a small temporary increase in positive cases at some of our facilities.
The most substantial impact of the emergence of the Delta variant was that it temporarily slowed the timeline for normalizing facility operations to remove various protocols that were enacted in response to the pandemic.
As we move toward normalizing operations, the most substantial challenge in today's environment is attracting and retaining qualified employees.
No different from our government partner's own correctional systems, the current employment market has caused staffing challenges for us at many locations across the country.
We have responded to the challenge by aggressively developing new and creative hiring and retention strategies.
And being in the private sector and a multi-state national employer, we have a lot of tools we can deploy in this environment.
These include increasing wages, sign on and retention bonuses and multiple other programs that can increase engagement, a sense of a shared mission, and overall job satisfaction.
Our government partners have been very collaborative in this effort by supporting our request for per diem increases that reflect above average wage inflation in current market.
Across the company this year, we have provided the large -- largest wage increases in my 12 years as CEO and we are committed to utilizing all necessary resources to address this challenge.
We are also following closely the recent vaccination mandates issued by various states and the federal government, including the September 9, 2021 executive order on ensuring adequate COVID safety protocols for federal contractors.
We are working diligently, evaluating the new guides being received from our government partners and ensure we are positioned to fully comply.
For our inmate, detainee and resident populations, we do not have the ability to mandate vaccinations.
Just as we've seen in our communities, there has been some hesitancy for many to accept the vaccine, so it should come as no surprise that the rate of vaccination acceptance is similar to that of the general public.
We continue to provide educational resources to all our residents in order to encourage more to get vaccinated.
I will move next to discuss some recent federal and state level business development updates.
We're continuing to evaluate the impact of the executive order signed by President Biden, issued in January that directed Attorney General to not renew Department of Justice contracts with privately operated criminal detention facilities.
As a reminder, the BOP takes custody of inmates who have been convicted for federal crimes and the USMS is responsible for prisoners who are awaiting trial in Federal Court.
The BOP has experienced a significant decline in inmate population since 2013 and simply does not have as much of a need for prison capacity from the private sector.
The decline in BOP population has intensified by COVID-19.
We currently have one prison contract with the BOP, accounting for approximately 2% of our total revenue.
Marshal Service populations have remained relatively consistent in recent years, so their capacity needs remain unchanged.
In fact, nationwide Marshal population has increased over the past year.
We continue to believe that the Marshals do not have sufficient detention capacity to satisfy their current needs without much of the capacity we provide.
We began the year with four contracts with the Marshals that expire in 2021.
In the first half of the year, we are able to enter into new contractual arrangements for our Northeast Ohio Correctional Center and Crossroads Correctional Center in Montana to remain operational and serve various government partners, where both facilities previously had direct contracts with the Marshals.
At the end of September 2021 our contract with the Marshals at our 600-bed West Tennessee Detention Facility expired and the federal detainee populations were transferred to alternative locations, including approximately 200 to our Tallahatchie County Correctional Facility in Mississippi.
We have elected to retain our staff from the West Tennessee Detention Facility as we pursue an active procurement for the facility with an existing government partner.
The only remaining Marshals contract I have yet to discuss is at our 1,033 bed Leavenworth Detention Center expiring in December of 2021.
Of note, we are currently in discussions with other potential government partners to utilize the Leavenworth Facility in the event that we are unable to reach a solution that enables the Marshals Service to fulfill its mission at this facility.
Our third federal partner is Immigration and Customs Enforcement or ICE, which is not impacted by the previously mentioned executive order.
They continue to be the government partner with the most significant impact from COVID-19 on their capacity utilization.
However, recent activity along the Southwest border has caused significant volatility in their utilization levels.
Nationwide, ICE detainee populations doubled during the first half of 2021 and we experienced a similar utilization increase at our facilities under contract with ICE.
During the third quarter of 2021, ICE detainee populations remained relatively flat.
As a result, our facility utilization levels continue to remain materially below historical averages.
The largest driver of their lower utilization levels has been the enactment of Title 42 since March of 2020, which prevents nearly all asylum claims at the country's borders and ports of entry in order to prevent the spread of COVID-19.
Instead, Title 42 allows individuals apprehended at the Southwest border to immediately be expelled to Mexico or the individual's country of origin.
Administrative changes and court decisions have occurred since the enactment of Title 42, which have enabled unaccompanied minors and some family units to enter and remain in the United States, while their immigration cases are adjudicated.
As I discussed last quarter, these changes essentially no impact on the demand for our services by ICE, because we do not house unaccompanied minors in any of our facilities and our one facility with family admission is provide to ICE on a fixed price basis.
We primarily provide ICE with detention capacity for adult populations and it is unclear when Title 42 will no longer be applied to adults.
Certain factors such as criminal histories or previous deportations may compel the government to keep individuals in custody instead of applying Title 42.
These situations appear to be the primary driver of the increase in ICE utilization we have experienced this year.
Whenever Title 42 is rescinded, we believe there will be a significant surge in the need for detention capacity.
Our facility support ICE for providing safe, appropriate housing and care for individuals as the agency works through the various processes associated with an individual's immigration case, deportation order or initial processing.
While we have no involvement or influence on anyone's immigration-related case, we know these matters are often quite complex and typically they take days or weeks to be adjudicated.
This results in a need for various solutions and a diverse portfolio of real estate across the country to provide housing and care for individuals while they're in ICE custody.
Our facility serve as a critical component of the real estate infrastructure needed by ICE to help them carry out their mission.
Finally, we know there has been a great deal of coverage of a minimum wage ICE detainee lawsuit faced by our largest competitor in Washington State.
We don't have a facility in Washington and so we aren't subject to litigation related to the Washington minimum wage statute.
We do have a pair of similar lawsuits in California, but those are both stayed while one of them is on appeal in the Ninth Circuit.
We don't have trial date scheduled for those and the timing of any future litigation activity is uncertain.
But as our competitor has pointed out, very similar litigation has been dismissed and that dismissal has been upheld on appeal by the Fourth Circuit Court of Appeals.
We also have other litigation around the U.S. related to the ICE voluntary work program or also known as VWP, but those lawsuits don't raise minimum wage claims.
The VWP is an ICE contract requirement and as the VWP's name suggests, it's voluntary.
Detainees aren't forced or coerced to participate in the VWP.
VWP assignments provide an opportunity to avoid idleness, improve morale, learn new skills, and earn money at or above the ICE prescribed minimum daily rate.
Moving now to state and local developments and opportunities, I'll first mention our new lease agreement with the state of New Mexico for our 596 bed Northwest New Mexico Correctional Center that we announced in September.
The new lease has an initial term of three years, but includes automatic extension options that could extend the lease term through 2041.
The new lease commenced on November 1 and we successfully transition operations at the facility to the state.
So you will see that property reclassified from our Safety segment to the Property segment during the fourth quarter.
We continue to pursue an opportunity with the state of Arizona, which adds an active procurement for up to 2,700 beds for medium and close security inmates.
The state intends to close its oldest prison facility in Florence due to its outdated condition, operational and maintenance cost concerns.
Instead of deploying taxpayer funds to build new capacity, the outstanding request for proposal will allow the state to evaluate alternative capacity available from the private sector.
We have responded to the procurement and believe the state's Department of Corrections, Rehabilitation and Re-entry is poised to move quickly on the procurement.
The only other opportunity I will mention is in Hawaii.
The state continues to determine the best approach to replace the Oahu Community Correctional Center, the largest jail facility in the state.
The existing facility has exceeded its useful life and the state is in need of a new, modern facility to meet its current and future needs.
We remain actively engaged with the state regarding various solutions we could deliver and we anticipate a competitive procurement in 2022 to replace the current facility.
First, Newsweek recently released their list of America's most responsible companies for 2021 and we were so very honored to learn of our placement on this list.
At the beginning of their report, they note and I quote "as this difficult year comes to an end, it's good to remember that we're all part of a community, neighbors, family, friends, first responders, we depend on, appreciate and hope to be helpful to each other.
Many corporations also step up, they care about being good citizens and give back to the communities they operate in".
Their ranking goes through a rigorous four-step process, starting with a review of the top 2,000 public companies based on revenue, then afterwards a detailed review of company ESG reports and the relevant KPIs along with a reputational survey to 7,500 U.S. resident.
This list is a who's who of companies I have long observed, admired, and have inspired to emulate and I am deeply grateful and proud of every single CoreCivic team member for their tireless passion for our mission that has allowed us to achieve this well-deserved recognition.
Finally, we shared last month that CoreCivic Co-founder in Industry Visionary T. Don Hutto passed away on October 22, 2021.
Known as a fierce advocate for correctional professionals and for the safety and well-being of Justice involved individuals, Don was instrumental in the creation and implementation of industry-recognized standards that greatly improved conditions for incarcerated people and those who care for them.
He will be missed by everyone who knew him and remembered truly as a hero in the field.
Prior to co-founding CoreCivic, then known as Corrections Corporation of America, with businessman Tom Beasley in 1983, Don had a long and prestigious career in the corrections industry, including as Commissioner of Corrections for the State of Arkansas and later the Director of Corrections for the Commonwealth of Virginia.
Don's rise to industry leader came through a time of uncertainty in America.
Not long before he began serving as the Commissioner of Corrections in Arkansas, the landmark hold for versus solver [Phonetic] decision declared the entire State of Arkansas' prison system unconstitutional.
At that time, there were over 40 states that had some level of control or oversight by the federal government due to inhumane conditions.
This need for higher standards is what sparked the birth of CoreCivic and assured an improved conditions across the country.
Don's experience gave him extensive insight into modernizing the systems to emphasize rehabilitation and education and he used that experience at CoreCivic.
Don was absolutely the right person at the right time to create a better way and lead our profession into the modern era.
And CoreCivic is so very grateful for his leadership, for our wonderful company.
But I am also personally grateful for his mentoring and friendship with me.
In the third quarter of 2021, we reported net income of $0.25 per share or $0.28 of adjusted earnings per share, $0.48 of normalized FFO per share and AFFO per share of $0.47.
Adjusted and normalized per share amounts exclude an impairment charge of $5.2 million for pre-development activities associated with the Alabama project that we are no longer pursuing, as disclosed last quarter.
Financial results in 2021 reflect a higher income tax provision under our new corporate tax structure compared with the prior year when we elected to qualify as a REIT.
For illustration purposes, in the supplemental disclosure report posted on our website, we present the calculations of adjusted net income, normalized funds from operations and AFFO for each quarter and full year of 2020 on a pro forma basis to reflect such metrics, applying an estimated effective tax rate of 27.5%.
Adjusted net income per share in the third quarter of 2021 of $0.28 compares to $0.21 on a pro forma basis, applying this estimated effective tax rate for the third quarter of 2020 while normalized FFO per share of $0.48 compares to $0.44 on a pro forma basis for the prior year quarter and AFFO per share of $0.47 compares to $0.41 on a pro forma basis for the prior year quarter.
Adjusted EBITDA, which is obviously before income taxes was $100.9 million in the third quarter of 2021 compared with $94.6 million in the prior year quarter.
The growth in adjusted EBITDA and the aforementioned per share metrics were achieved despite the sale of 47 properties since the end of the third quarter of 2020 and the execution of numerous refinancing transactions that were collectively dilutive for the quarter as we paid down low cost, short-term variable-rate bank debt with the proceeds from the property sales and issued new unsecured senior notes that have higher interest rates than the debt we repaid.
The property sales and refinancing transactions lowered our overall debt levels, extended our weighted average debt maturities and repositioned the balance sheet for long-term success.
The 47 properties that we sold accounted for $7.3 million of EBITDA in the prior year quarter.
Therefore, excluding these sales, adjusted EBITDA increased $13.6 million or 16% from the prior year quarter, demonstrating strong core operating results.
Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, but increased to 72.1% in the third quarter of 2021 from 70.9% in the prior year quarter, and increased from 71.6% in the second quarter of 2021.
The impact of COVID-19 began in the second quarter of last year as populations, primarily ICE, declined sequentially throughout 2020 as the Southwest border was effectively closed to asylum seekers and adults attempting to cross the Southern border without proper documentation or authority in an effort to prevent the spread of COVID-19.
As the federal and state court systems have begun to return to normal operations and as the number of undocumented people encountered at the Southern border has increased, the utilization of our facilities has increased.
Operating margins have trended similarly and was 27.2% in the third quarter of 2021 compared with 23.8% in the prior year quarter and 26.8% in the second quarter of 2021.
The increase in our operating margins reflects the continuation of lower cost trends combined with higher occupancies.
Many of our facilities continue to operate with pandemic related capacity and operating restrictions that are modifying the services that we are able to provide, impacting margins compared with normal operations.
Further, staffing in this challenging labor market has become increasingly difficult and we have provided annual as well as additional off cycle wage increases and special incentives to help address depressed staffing levels.
Conversely, our government partners are experiencing the same staffing challenges which has contributed to some of the per diem increases we were able to achieve as more budget dollars are allocated to help offset the wage increases.
Turning to the balance sheet.
As of September 30, we had $456 million of cash on hand and $786 million of availability on our revolving credit facility, which matures in 2023.
During the third quarter of 2021, we issued an additional $225 million aggregate principal amount of 8.25% senior unsecured notes due 2026.
The issuance constituted a tack on to the original 8.25% senior notes we issued in April 2020 of $450 million aggregate principal amount.
The additional 8.25% senior notes were priced at 102.25% of their face value, resulting in an effective yield to maturity of 7.65%.
While we believe this effective yield is still high relative to the stability of our cash flows and credit ratings, it compares favorably to the issuance in April when the notes were priced at 99% of face value, resulting in an effective yield to maturity of 8.5%.
As a reminder, the net proceeds from the April issuance were used to fully repay $250 million of 5% senior unsecured notes that were scheduled to mature in 2022 and to repurchase, in privately negotiated transactions, $176 million of the $350 million outstanding principal balance of our 4.625% senior unsecured notes that are scheduled to mature in 2023.
We continue to be steadfast on our debt reduction strategy, paying down $188 million of additional debt during the third quarter alone, net of the change in cash, including the $112 million outstanding balance on our revolving credit facility which remains undrawn today.
Subsequent to quarter-end, we repaid $90 million of the outstanding balance on our Term Loan B, reducing its outstanding balance to $133.4 million.
Including the repayments of the mortgage notes associated with the aforementioned sale of non-core assets, during the nine months ended September 30th, 2021, we have reduced our total net debt balance by over $500 million and our net recourse debt balance by $334 million.
Our leverage, measured by net debt to EBITDA was 2.7 times using the trailing 12 months, down from 4 times using the trailing 12 months at the end of the third quarter of 2020 when we announced our revised capital allocation strategy and decision to revoke our election.
As Damon mentioned, the last time our leverage was below 3 times was 2012, which was the last year we operated as a taxable C Corporation prior to our conversion to a REIT in 2013.
Notably, 2012 followed an aggressive stock repurchase program in 2009 through 2011 when we repurchased over $0.5 billion of stock or equal to half our market capitalization today.
As a REIT from 2013 through 2020, we cannot implement a meaningful share repurchase program.
It is possible we could slip slightly above our targeted leverage ratio of 2.25 to 2.75 times in the fourth quarter, when we are scheduled to make almost $40 million of semi-annual interest payments on our unsecured notes, about $15 million in social security payments that were deferred under the CARES Act, and capital expenditures consistent with our previous guidance.
But we expect to be sustainably within the range on a quarterly basis thereafter.
We have made great strides in enhancing our capital structure by accessing the debt capital markets, addressing near term maturities, selling non-core assets, reducing debt and positioning the balance sheet to enable us to take advantage of growth opportunities and return capital to shareholders.
These steps have enabled us to reduce our reliance on bank capital and we intend to address the 2023 maturity of our bank credit facility next in order to provide us with the clarity needed around our future liquidity and to ensure the implementation of our capital strategy remains on track.
Our intention is to reduce the size of our bank credit facility and extend the maturity yet enabling us to continue operating with optimal flexibility and cost efficiency.
We continue to get increasing clarity around many of the uncertainties that existed when we suspended our financial guidance and currently anticipate providing full year 2022 guidance in February when we report our financial results for the fourth quarter and full year 2021.
I've already highlighted some of the factors experienced in the third quarter that could have an impact on our financial results for the fourth quarter.
These include the anticipation of modestly higher occupancy levels as the country continues to emerge from the pandemic.
Higher demand for our detention facilities could also result from lifting Title 42 to healthcare policy causing the Southern border to remain effectively closed in an effort to prevent the spread of COVID-19.
However, the timing of when the federal government ends Title 42, which is evaluated every 60 days, is difficult to predict and therefore likely won't have a material impact in the fourth quarter.
We also anticipate higher staffing levels as we return our correctional detention and reentry facilities to normalized pre-pandemic operations.
Longer-term, as we look toward 2022, we will endeavor to hire in anticipation of increases in occupancy, which could have a negative impact on our margins at least until we experience further increases in occupancy.
We continue to anticipate a challenging labor market, which could require us to provide further wage increases and other incentives in certain markets necessary to attract and retain qualified staffing levels.
By signing a new contract with Mahoning County at our Northeast Ohio Correctional Center and expanding the contract with Montana at our Crossroads Correctional Center, we have successfully resolved two of the four 2021 contract expirations with the U.S. Marshal Service.
The contract with the U.S. Marshal Service at our 600-bed West Tennessee Detention facility expired September 30 and was not renewed.
As we previously disclosed, we responded to a request for proposal to utilize the West Tennessee facility and we remain optimistic in signing a new contract.
We have temporarily redeployed most of the staff at this facility to other facilities we operate, while we negotiate the contract in order to provide minimal disruption in ramping back up operations.
But depending on the outcome and timing of a decision as well as the pace of utilization, we could experience a reduction in earnings in the fourth quarter of up to $0.02 per share compared with the third quarter.
Our last contract with U.S. Marshals expiring in 2021 is at our 1,033 bed Leavenworth Detention Center in Kansas, which expires in December.
We are in discussions with other potential partners to utilize the Leavenworth facility in the event we are unable to reach a solution that enables the U.S. Marshals to fulfill its mission at this facility.
Since the contract doesn't end until the end of the fourth quarter, however, we don't expect a material impact in the fourth quarter even if the contract is not renewed.
During the third quarter, we responded to a request for proposal from the state of Arizona to care for up to 2,700 inmates the state plans to transfer from a facility owned and operated by the Arizona Department of Corrections, Rehabilitation and Reentry.
We are optimistic in a contract award near the end of the year, which would obviously be more impactful in 2022.
Compared with the third quarter, we expect higher interest expense as a result of the additional issuance at the end of September of $225 million of our 8.25% senior notes, somewhat offset by the $90 million repayment in October of our Term Loan B, which has a total effective rate of 7%.
We currently estimate our income tax expense to reflect a normalized effective tax rate of 27% to 28%, although we estimate our cash taxes to be approximately 20% for the year because of net deductions for special items.
| compname posts q3 revenue of $471.2 million.
q3 adjusted ffo per share $0.48.
q3 revenue $471.2 million.
expect to provide full year 2022 financial guidance in february 2022.
|
I'd like to take a few minutes to make some high-level comments about our business and how we performed last year.
We came into 2020 with great momentum and this continued into the first quarter, delivering 5.6% organic growth, then COVID-19 hit the US economy and things changed dramatically.
While there was significant uncertainty, we knew we had a great team and resilient responses and innovative with a focus on providing solutions to our customers.
In addition, we were able to move -- we were able to quickly transition over 10,000 teammates to a no working environment in less than a week.
So they could pivot and effectively serve our customers.
As you may remember, we didn't grow as quickly in the second quarter due to the impact of the pandemic on our new business and the recording of revenue adjustments for general liability policies, but we still expanded our margins.
And in the third quarter, we delivered outstanding results with strong organic growth and margin expansion.
The results of the fourth quarter were similar to the third quarter as we finished the year strong and with good momentum going into '21.
Based on what we were seeing, if you ask me, if it was likely that we would deliver full-year results with good organic growth and meaningful margin expansion, I would have said it was possible but unlikely that if you would ask me that in, let's say, April.
We are very pleased with our results for 2020.
We were able to deliver these results through the hard work of our teammates and their dedication to our customers.
2020 was a testament to our laser focus on delivering innovative risk solutions.
We also thought the M&A landscape would cool off for several quarters until there was some sort of economic stability.
The slowdown only occurred for about one quarter and the industrywide activity is now rebounded a pre-COVID-19 levels.
Even with the uncertainty this year, we're very pleased that completed 25 acquisitions and $197 million of acquired annual revenue.
I'd like to highlight two strategic acquisitions, CoverHound that we completed in the fourth quarter, and O'Leary Insurances that we announced in the fourth quarter and closed on the 14th of January.
Regarding CoverHound, this acquisition will help us in many ways.
First, it will help us further our investment in technology, drive our innovation agenda and improve our carrier connectivity.
Second, it enables us to more effectively and efficiently provide quotes and bond coverage for our National Programs segment.
Third, it enables us to better serve smaller customers within our retail segment.
Ultimately, these items are focused on enhancing the customer buying experience by delivering curated quotes that best meet the needs of our customers.
We believe these new capabilities are unique in the marketplace.
We started 2020 with the acquisition Special Risk in British Columbia and finished the year with our acquisition of O'Leary Insurances in Ireland.
O'Leary was the largest independently owned retail brokers serving the Irish marketplace.
This acquisition strengthens our European operations, which we look forward to further developing in the years ahead.
Our new teammates and capability to deliver many opportunities over the coming years.
We're extremely proud of our results in 2020 in the delivery of total shareholder returns in excess of 20%.
And Steve Boyd will become our President of Wholesale.
Steve's background in National Programs as an operator and in technology brings critical skills to the leadership team in Wholesale as we continue to grow this important business through innovative solutions.
I'm excited that Tony and Steve will be working together to further drive this growth in the future.
Now, let's transition to the results of the quarter and the full-year.
I'm on Slide number 3.
We delivered strong results again this quarter, total revenue of $642 million, growing 10.9% in total and 4.7% organically.
Again into more detail in a few minutes about the performance of our segments.
Our EBITDAC margin was 27.1%, which is up 10 basis points from the fourth quarter of 2019.
Please remember that the fourth quarter of '19 included a gain on sale of business that benefited the prior year margin by approximately 100 basis points.
Our net income per share for the fourth quarter was $0.34, increasing 25% on an as-reported basis.
On an adjusted basis, which excludes the change in estimated acquisition earn-out payables, our net income per share was $0.32, an increase of 14.3% over the prior year.
Our team did an outstanding job of continuing to profitably grow our revenue, as well as manage our expenses in response to the dynamics associated with COVID-19.
During the quarter, we completed another nine acquisitions with annual revenues of approximately $80 million.
For the year, we grew total revenues of 9.2% and delivered organic revenue growth of 3.8%.
This is an outstanding performance given the economic headwinds experienced for most of the year.
We improved our EBITDAC margin for -- by 110 basis points to 31.1%, compared to 2019 as we leverage the growth in organic revenue and managed our expenses in response to the pandemic.
Our net income per share for the full-year of '20 increased 20.7% to $1.69 from $1.40 in 2019.
On an adjusted basis, which excludes the change in acquisition earn-outs, net income per share increased 19.3%.
Lastly, we had another strong year of M&A activity, as I said earlier, closing 25 acquisitions with approximately $197 million of annual revenue, adding many excellent businesses and teammates.
Now, on Slide 5.
In prior calls, we talked about factors that would impact the economic recovery, which included the elections, the approval of the vaccine and the timing of the rollout, as well as how much additional stimulus will be approved.
The timing of the vaccine rollout and the approval of additional stimulus will have the largest impact upon the recovery of the economy will influence business leaders confidence about rehiring and investing in their businesses.
During the fourth quarter, we continue to see companies doing well and other struggling mightily.
We've seen improving new business and our retention remains good.
However, we continue to believe it will be choppy -- a choppy recovery through at least the end of 2021 and maybe into early 2022.
From a rate standpoint, the fourth quarter was very similar to the third quarter, most standard rates were up 3% to 7% with E&S rates up 10% to 25% as compared to the prior year.
As we've talked about before, the main driver of rate increases continues to be loss experience.
Commercial auto rates remain up 10% or more and workers' compensation rates are not declining as fast as they were in previous quarters, but they are still negative.
There has been a lot of talk over the past few quarters that workers' compensation rates are turning positive.
However, we're still not seeing it across the board yet.
For an E&S perspective, coastal property, both wind and quake are up 15% to 25%.
Professional liability is generally up 10% to 25%, depending on the coverage in the industry.
We continue to see outliers to be wanted to coverage.
Personal lines in California, Florida and the Gulf Coast states remain under intense pressure as carriers are seeking to reduce their exposure due to fires and tropical activity during 2020.
We expect the reduction in personal lines capacity continue throughout '21.
Placing coverage for many lines, certain industries or customers with significant losses continues to be challenging.
This includes excess or umbrella coverage, where a carrier or carriers will seek a combination of lower limit and higher premium rates.
We don't expect this trend to materially change in '21.
Now, on Slide number 6.
Let's discuss the performance of our four segments.
Our Retail segment, organic revenue growth grew by 1.5% for the fourth quarter.
As we mentioned in our third quarter earnings call, we had about a 100 basis points of timing items that benefited the growth in the third quarter and negatively impacted the growth in the fourth quarter.
Our fourth quarter performance was driven by new business, better customer retention and premium rate increases, but was impacted by lower exposure units resulting from the pandemic.
We view the performance for the fourth quarter as good, considering we delivered 7% organic growth in the fourth quarter of last year and taking into consideration the timing headwind mentioned earlier.
Organic revenue growth for the full-year was 2.4%, which we consider a good performance in light of the tough economic environment.
Our National Programs segment grew 14.1% organically, delivering another stellar quarter.
Our growth was driven by strong new business, retention and rate increases.
Some of the top performing programs were our lender place, commercial and residential earthquake, wind and personal property, just to name a few.
For the full-year, our National Programs segment grew organically, an impressive 12.3%.
Our Wholesale Brokerage segment grew 5.8% organically for the quarter.
We realized strong new business and continued rate increases for most lines of coverage.
Brokerage was the fastest-growing again this quarter, while we continue to experience headwinds in our binding authority and personal lines businesses due to the economy and carrier appetite we mentioned previously.
For the full-year, our Wholesale Brokerage segment grew 5.5% organically, delivering another good year.
The organic revenue for our Services segment decreased 50 basis points for the fourth quarter, representing good improvement from the last few quarters.
The main drivers depressing growth continue to be lower claims volume for our Social Security and Medicare Set-aside advocacy businesses.
The decline was substantially offset by revenue generated by processing claims for weather-related events that occurred in the third and fourth quarters.
For the full-year, organic revenue decreased by 10.9%, driven by lower claims for our Social Security Advocacy business, certain terminated customer contracts and the impact of the pandemic.
While not back in positive territory, we believe the fourth quarter was a turning point, and we anticipate delivering modest organic growth for 2021.
I'm moving on to Slide number 7.
Like previous quarters, I'm going to discuss our GAAP results, certain non-GAAP financial highlights, as well as our adjusted results, excluding the impact of the change in acquisition earn-out payables.
For the fourth quarter, we delivered total revenue growth of 61 -- $63.1 million, or 10.9% and organic revenue growth of 4.7%.
Our EBITDAC increased by 11.3%, growing slightly faster than revenues as we are able to leverage our expense base and further manage our expenses in response to COVID-19.
These both offset the headwinds associated with the gain on disposal recorded in the fourth quarter of 2019, an increase in non-cash stock-based compensation.
Our income before income taxes increased by 28.3%, outpacing EBITDAC growth.
This is primarily driven by the $15 million year-over-year decrease in the change of estimated acquisition earn-out payables.
On the next slide, we'll discuss our results excluding this adjustment.
Our net income increased by $20.8 million or 27.2% and our diluted net income per share increased by 25.9% to $0.34.
Our effective tax rate for the fourth quarter was 25.7%, substantially in line with the 25% we realized in the fourth quarter of 2019.
Our weighted average number of shares increased slightly compared to the prior year and our dividends per share increased to $0.093 or 9.4% compared to the fourth quarter of 2019.
Over on to Slide number 8.
This slide presents our results after removing the change in estimated acquisition earn-out payables for both years.
During the fourth quarter of 2020, the change in estimated acquisition earn-out payables was a credit of $9.5 million as compared to a $5.5 million charge in the fourth quarter of 2019.
The credit was primarily driven by the reduction in estimated earn-out payables for an acquisition within the National Programs segment.
Excluding the change in acquisition earn-outs in the fourth quarter of both years, our income before income tax grew $13.9 million or 12.9%.
Our net income on an adjusted basis increased by $9.7 million or 12% and our adjusted diluted net income per share was $0.32, an increase of 14.3%.
Overall, it was a great quarter.
We're moving over to Slide number 9.
This slide presents the key components of our revenue performance.
For the quarter, our total commissions and fees increased by 10.9% and our contingent commissions and GSCs was slightly down for the quarter.
Our organic revenues was exclude the net impact of M&A activity, increased by 4.7% for the fourth quarter.
Over to Slide number 10.
Our Retail segment delivered total revenue growth of 7.2%, driven by acquisition activity and organic revenue growth of 1.5%.
The timing discussed above negatively impacted organic revenue by 100 basis points for the quarter.
EBITDAC grew 5.3% due to leveraging organic revenue and cost savings achieved in response to the pandemic.
This growth was slower than the growth in total revenues, primarily due to a prior year gain on disposal that represented a negative year-over-year impact of approximately 150 basis points.
Our income before income tax margin increased 130 basis points and grew faster than EBITDAC, due primarily to the change in estimated acquisition earn-outs.
Moving on to Slide number 11.
Our National Programs segment increased total revenues by $25.3 million or 18.9% and organic revenue by 14.1%.
The increase in total revenue was driven by recent acquisitions and strong organic growth across many programs.
Due to that growth of 19% was in line with total revenue growth.
The leveraging of strong organic revenue in the management of variable cost was offset by higher intercompany IT charges and lower contingent commissions.
Income before income taxes increased by $20.3 million or 54% growing faster than EBITDAC due to decreased acquisition earn-out payables that was partially offset by higher intercompany interest expense.
Over to Slide number 12.
Our Wholesale Brokerage segment delivered total revenue growth of 19.2% and organic revenue growth of 5.8%.
Total revenues grew faster than organic revenue due to recent acquisitions with contingent commissions substantially flat year-over-year.
EBITDAC grew by 17.1% with a margin decline of 40 basis points as compared to the prior year, while we delivered good organic growth and reduced variable expenses in response to COVID-19.
These were more than offset due to changes in foreign exchange rates and to a lesser extent higher intercompany IT charges.
Our income before income taxes, grew by 6.2%, which was lower than total revenue growth, primarily due to higher intercompany interest expense.
Over to Slide number 13.
Total revenues and organic revenues for the Services segment both declined by about 50 basis points, driven by the items Powell mentioned earlier.
For the quarter, EBITDAC increased by 9.7% due to increased weather-related claims and was partially offset by higher intercompany IT expenses.
Income before income taxes decreased 23.6% due to a credit of $2.5 million in the quarters in the fourth quarter of 2019 for the change in estimated acquisition earn-out payables that did not recur or occurred in 2020.
Over to Slide number 14.
This slide presents our GAAP results for the full-year of 2020 and 2019.
For 2020, we delivered revenues of $2.6 billion, growing 9.2% and earnings per share of $1.69, growing 20.7%.
Our EBITDAC increased by 13.5% and our EBITDAC margin grew by 110 basis points.
For the year, our share count increased slightly as compared to the prior year and our dividends paid during 2020 as compared to 2019 increased by 7.1%.
Over to Slide number 15.
This slide presents our results excluding the change in estimated acquisition earn-out payables for both years.
For the full-year of 2020, on an adjusted basis, our income before income taxes grew 18.1%, which outpaced EBITDAC growth due to lower interest expense and our adjusted net income per share grew by 19.3%.
In addition to the strong income performance metrics, we also had another strong year for cash conversion due to the strength of our operating model and diversity of our businesses.
We delivered $721.6 million of cash flow from operations, representing a continued strong conversion rate of 27.6% as a percentage of revenue.
We also finished the year in a strong liquidity position, with $817 million of cash and cash equivalents, as well as $800 million of accessible capital on our revolver.
With this capital and the cash we will generate in 2021, we are in a good position to fund continued investment in our Company.
We got a few other comments regarding outlook for 2021.
During the third quarter, we were asked the question about our potential margins for 2021 in relation to the COVID-19 savings we had in 2020.
Now, with the year completed and a bit more visibility in 2021, we expect EBITDAC margins could be flat to up slightly considering our variable cost will more than likely increase as we're able to travel and see customers face-to-face.
As we've done in the past, our leaders will be focused on growing profitability.
Regarding contingents, we are anticipating them to be relatively flat or maybe down slightly in 2021.
As it pertains to taxes, we expect our effective tax rate for 2021 to be in the range of 23% to 24%.
This does not take into consideration any potential changes in the federal tax rates that are being discussed by the new administration.
For interest expense, we're anticipating a $7 million to $9 million increase as compared to 2020 driven by the new bonds we issued in September of 2020.
From a capital perspective, we are expecting our capex to decrease in 2021 to approximately $40 million to $45 million as we have substantially completed the development of our new Daytona Beach campus.
In my opening comments, I mentioned there are still a few items that need to be resolved over the coming quarters.
We will watch closely the successful rollout of the vaccine and additional stimulus to help those in need.
Both of these items will influence the pace of economic recovery over the coming quarters.
From a rate perspective, we expect increases for the first six months of '21 to be similar to those seen in '20.
Ultimately, the rating -- the rate of increases will be driven by losses sustained in 2020 from the record setting number of tropical storms in the millions of acres that were burned.
The question remains for how much longer and at what pace the rates need to achieve the targeted returns.
We think the market is getting near an inflection point over the coming year for certain lines and will drive some rate moderation.
The acquisition pace seems to be active as ever and competition between private equity and long-term strategics remains.
We continue to believe the aggressive pricing for deals by PE will not abate any time soon.
However, we're well positioned with our low leverage and the capital on our balance sheet, as well as access to additional capital to fund our M&A activity.
Our pipeline remains good and we will keep our disciplined approach to M&A as it's proven to be very successful.
But as you know, we don't count anything until it's closed.
Finally, technology innovation continue to be at the forefront regarding creation of new products and enhancing the experience of our customers.
We will continue to digitize our data, automate and prioritize technology investments around the following: optimizing and enhancing our data and analytics program; expanding our digital delivery capabilities around products and services; and engaging in initiatives designed to drive greater efficiency and velocity through our underlying processes.
As we deliver on these goals, we will see new opportunities for growth that will serve our customers even better.
We had a great 2020 on many fronts and have good momentum heading into '21.
I am extremely proud of how our team has served our customers through extremely challenging times.
We have a great team and a highly diversified business, both that performed very well in the past and we expect they will in the future.
Ultimately, our financial performance is only possible through the combined efforts of our nearly 11,000 teammates and our commitment to serve our customers.
| compname announces quarterly revenues of $642.1 million, up 10.9%.
compname announces quarterly revenues of $642.1 million, an increase of 10.9%, and diluted net income per share of $0.34.
q4 earnings per share $0.34.
qtrly adjusted earnings per share $0.32.
|
New factors emerge from time to time and it is simply not possible to predict all such factors.
On our call today, Allan will review highlights from the second quarter, and discuss the supportive macro environment.
He'll then provide a preview for the remainder of the year and outline our expectations for growth in fiscal 2022.
I'll then provide more details and our results projections and balance sheet.
We will conclude with a wrap up by Allan.
We had an extraordinary quarter, highlighted by an unprecedented increase in our sales pace, and significant growth in our gross margin, EBITDA and net income.
At the same time, we invested for the future, grew our share of lots, controlled by options and continued to reduce debt.
In some, we had a nearly perfect balanced growth quarter, with profitability growing faster than revenue, while operating from a less leveraged and more efficient balance sheet.
Perhaps the best news is that our team is poised to translate continuing strength and market conditions into even better results in the quarters ahead.
As I'm sure you've heard, the strength in new home demand has contributed to both longer cycle times and higher construction costs.
To-date, we have successfully adapted to this environment by raising prices, limiting sales paces and extending delivery dates on sold homes.
As we work through these issues, our objectives remain the same.
We expect to create value for customers, partners, employees and shareholders by delivering great homes on time and at the margin we intended when we made the sale.
Our commitment to creating value for our stakeholders can also be seen in our recent accomplishments and goals on the ESG front as summarized on slide five.
This quarters highlights included being named an ENERGY STAR Partner of the Year for the sixth consecutive year, representing another significant step toward our goal of having every home we build Net Zero Energy Ready by 2025.
We believe the strength in the housing market will prove to be pretty durable.
And the reasons are simple, strong demographic demand, exceptionally limited supply and the recovering economy.
On the demand side, we expect many of the COVID housing norms to be persistent, namely the desire for more space, better space and outdoor space, even as we return to offices and schools, our homes have clearly taken on new roles in our lives, couple that with a great awakening of Millennials to the benefits of homeownership and the desire of many boomers to simplify, you have a recipe for depth and breadth of demand that isn't likely to disappear anytime soon.
On the supply side, the shortage of owner occupied homes we described on our call in January turns out to be even more acute than we suggested.
On that call, we conservatively estimated that the deficit was more than one million homes.
In recent weeks, Freddie Mac published a deeply research report, which demonstrated the housing shortage is closer to four million homes.
There's simply no way for our industry to accelerate entitlement, development and construction to make a serious dent in that number anytime soon.
Finally, on the economy, while there are still many COVID related challenges, there's ample evidence about job growth and wage growth, which bode well for consumer spending and housing.
In sum, our industry is in a highly advantageous position, with demographically driven demand in a recovering economy, faced with seriously constrained supply beyond 2021.
Turning now to our expectations, with our sold and already started backlog up more than 50% and continuing strength in lead and traffic trends, our visibility and confidence in fiscal 2021 results is quite high.
Dave will provide details on our outlook for the third quarter and full-year.
But I'm happy to share that we're raising our expectations again.
The headline is that we now expect full-year earnings per share to be above $3.
Looking beyond this year, our balanced growth strategy is a longer-term approach to generating shareholder value while carefully managing risk.
Over the past several years, our strategy has yielded a big jump in profitability, even bigger improvements in our returns and a meaningful reduction in debt.
And we're not done.
Well, it's too early for us to give any type of detailed guidance for next year, there are three factors that give us confidence that we can again improve profitability and returns in fiscal 2022.
First, our current backlog already contains nearly 700 homes scheduled to close in the first quarter of next year, that's more than half of our typical first quarter closings.
With our normal cycle times, most of these homes would have closed this year.
But these aren't normal times.
So instead, we have a great start on next year.
Second, community count growth is coming.
Credibly strong sales over the past six months in the depth in our community count arrived a little sooner than we previously anticipated.
But next year, the positive progression in our community count will be evident.
And remember, these communities were tied up six to 12 months ago, before the recent run-up in home prices.
And third, we'll finally see real interest savings.
We have dramatically deleveraged our balance sheet in recent years, but haven't really benefited from a reduction in interest expense in our earnings.
That's because of the timing difference between the immediate cash benefit of much lower interest costs and the non-cash GAAP expense that arises from previously capitalized interest.
Next year, we expect to realize a multimillion dollar reduction in our GAAP interest expense based on actions we have already taken.
These factors and our confidence in the industry supply and demand equation should yield another successful year for our balanced growth strategy.
Before closing, I'd like to again express our appreciation for the scientists, doctors, first responders and essential workers who saw us through what appears to be the worst of the pandemic in a position to our country to begin to recover.
Looking at the second quarter compared to the prior-year, new home orders increased approximately 12% to 1,854 as our sales pace was up more than 40% to 4.7 sales per community per month.
Homebuilding revenue increased about 12% to $547 million on 9% higher closings.
Our gross margin, excluding amortized interest, impairment and abandonment was 22.2% up approximately 140 basis points.
SG&A was down 100 basis points as a percentage of total revenue to 11% as we benefited from improved overhead leverage.
Adjusted EBITDA was $64.2 million up over 45%.
Our EBITDA margin was 11.7%, the highest second quarter level in the past 10 years.
Interest amortized as a percentage of homebuilding revenue was 4.4% down 20 basis points, and that led to net income from continuing operations of $24.6 million, yielding earnings per share of $0.81, more than double the same period last year.
With the strength of our current backlog and positive macro outlook, we're in a position to once again increase our financial expectations for fiscal 2021.
We now expect EBITDA to be up over 20% or more versus the prior-year, a significant increase from the previous guidance.
This level of improvement implies EBITDA growth of more than 10% in the second half of this year, with greater year-over-year growth expected in the third quarter.
Our full-year EBITDA guidance equates to earnings per share above $3 up from last quarter's guidance of at least $2.50.
We now expect our return on average equity for the full-year to be approximately 14%.
If you exclude our deferred tax asset, which doesn't generate profits, our ROE would be over 20%.
The current production environment is going to impact both sales and closings in the third quarter as a second quarter progressed in the face of the elongating cycle times, we deliberately slowed home sales to provide a better experience for customers and increase the value of our communities.
Many of these restrictions remain in place and as such, we anticipate new homeowners to be down 10% to 20%.
On the closing side, because of the challenging production environment, it is difficult for us to predict the timing and mix of closings between the third and fourth quarter of this year.
We're focused on delivering great homes, not maximizing third quarter closings.
Even with this caution, we still expect closings to be up in the high single digits in the third quarter year-over-year.
Our ASP should be above $400,000 for the first time ever, gross margin should be up over 100 basis points.
SG&A as a percentage of total revenue should be down at least 20 basis points.
Our interest amortized as a percentage of homebuilding revenue should be around 4% and our tax rate will be about 25%.
Combined, this should drive a sequential increase in quarterly earnings per share.
We ended the second quarter with over $600 million of liquidity more than double this point last year, with unrestricted cash in excess of $350 million and no outstanding draws in our revolver.
During the quarter, we retired approximately $10 million of our senior notes.
And with two remaining terminal repayments, we're on a clear path to achieve our goal of bringing our total debt below $1 billion by the end of fiscal 2022.
During the quarter, we spent almost $100 million on land acquisition and development.
Based on land pipeline and approvals, we expect our land spend to accelerate in the remaining quarters of fiscal 2021, resulting in over $600 million of total land spend for the year.
We also increased our option percentage in the second quarter and now control more than 45% of our active lots or options up from less than 30% in the same period last year.
We still anticipate community count troughing around 120 later this year, but we expected to grow steadily from there in fiscal 2022 as we benefit from our increased land spending.
The second quarter of fiscal 2021 was very successful for us as we maintain the momentum of the last several quarters highlighted by very strong new home orders and substantially improved margins, while also improving the efficiency of our balance sheet.
These results and continued strength in the market have enabled us to raise our expectations for the year.
Perhaps more importantly, our performance should help investors understand the longer-term opportunity for value creation embedded in our balanced growth strategy and our ESG leadership.
I'm confident that we have the people, the strategy and the resources to create durable value over the coming years.
| compname reports q2 earnings per share of $0.81.
q2 earnings per share $0.81.
dollar value of homes in backlog as of march 31, 2021 increased 54.9% to $1,386.4 million.
|
New factors emerge from time to time and it's simply not possible to predict all such factors.
On our call today, Allan will review highlights from the third quarter, discuss our view of the current macroeconomic environment and outline how we have strategically positioned for continued growth in fiscal '22 and beyond.
I will cover our third quarter results in greater depth, our expectations for the fourth quarter and full fiscal year and update our expectation for continued growth in our land position followed by a wrap up by Allan.
We had a very successful third quarter, generating financial results that met or exceeded our expectations, positioning us for a strong end of the fiscal year.
Our sales pace in the third quarter was one of the highest levels that we've generated in the last five years.
And in fact, this pace would have been even higher if not for our deliberate efforts to proactively slow sales to align with our production capacity and limit our exposure to raw material price inflation.
We delivered substantial gains in operating margin, EBITDA and net income as we benefited from increased pricing and improved overhead leverage.
On the balance sheet, we expanded both our total lot position, share of lots controlled by option, while retiring $14 million in debt.
Together, these results perfectly demonstrate our long-standing balanced growth strategy, which is a multiyear plan to grow profitability faster than revenue from a less leveraged and more efficient balance sheet.
With these results and confidence in our expectations for the fourth quarter, we are once again raising full year guidance, highlighted by earnings per share of at least $3.25.
Collectively, these factors have led to significant home price appreciation, which has clearly outpaced wage and income growth.
In the coming quarters, we do not expect this level of price appreciation to continue.
Our view is that disciplined mortgage underwriting will effectively limit the extent of home price appreciation.
That's entirely healthy and gives us confidence that we won't experience the kind of pricing accesses about a painful correction in the future.
The demand and supply characteristics of our industry remain highly compelling.
Aspiration for homeownership among millennials and changing homeownership expectations among baby boomers provide a durable source of demand for new homes, particularly with enduring work from home expectations.
And the significant deficit of new homes simply can't be addressed quickly with the supply chain, land use and entitlement barriers that exist.
Ultimately, our industry's challenge will be to ensure that labor and material cost expectations in the supply chain remain tethered to affordable home prices.
That's where we believe our market positioning will prove advantageous.
With three strong customer-facing differentiators, we have a lot of tools to work with to enable us to deliver extraordinary value at an affordable price in a highly competitive environment.
Last quarter, we provided initial visibility into our expectations for profitability growth in fiscal '22, and our confidence has only increased since then.
First, at the end of our third quarter, we had more than 1,500 homes in backlog scheduled to close next year, nearly double the level at this time last year.
And importantly, these homes have higher prices and higher margins.
Second, even as our ASP has increased, we have remained focused on carefully managing our overhead costs.
This will drive SG&A leverage, pushing SG&A below 11% next year.
And finally, our deleveraging efforts continue to reduce our cash interest expense, setting us up for reductions in GAAP interest over time.
Next year, we expect at least $5 million in GAAP interest savings with further reductions in subsequent years.
Taken together, we're confident that these factors will allow us to achieve our goal of generating double-digit earnings-per-share growth in fiscal '22.
First, over the past six months, we've experienced exceptional demand in gatherings, our 55-plus active adult business.
While traffic and engagement among this buyer segment was particularly impacted during the early part of the pandemic, the strength in the resale market and the availability of vaccines have contributed to much higher sales activity.
This is a growing part of our business with communities underway in Atlanta, Dallas, Houston, Nashville and Orlando.
Second, the roll out of charity title, our title business committed to contributing 100% of its profits to charity continues to gain momentum.
In fiscal '21, we expect to provide title insurance for more than a third of our closings.
Next year, we expect to provide title for two-thirds of our customers, which should generate philanthropic resources of over $1 million a year on a run rate basis.
This will allow us to expand our efforts with Fisher House and support local charities in each of our markets.
I'm incredibly proud of our team's innovative strategy to develop a dedicated funding mechanism that aligns our customers, employees and partners in supporting our communities.
Looking at our third quarter results compared to the prior year, new home orders decreased approximately 13% to 1,199 as a higher sales pace helped to offset a reduction in average community count.
Homebuilding revenue increased nearly 7% to $567 million on 1% higher closings and a 6% higher average sales price.
Our gross margin, excluding amortized interest, impairments and abandonments was 24.2%, up approximately 300 basis points to the highest level in more than a decade.
SG&A was down 60 basis points as a percentage of total revenue to 11.1% as we benefited from improved overhead leverage.
Adjusted EBITDA was $78.8 million, up over 45%.
Our EBITDA margin was 13.8%.
Interest amortized as a percentage of homebuilding revenue was 4%, down 10 basis points.
And net income from continuing operations was $37.1 million, yielding earnings per share of $1.22, more than double earnings per share for the same period last year.
Given our continued performance and substantial backlog, we are able to increase our financial expectations for fiscal '21.
We now expect EBITDA to be over $250 million.
Our full year EBITDA guidance equates to earnings per share of at least $3.25, up from last quarter's guidance of above $3.
We now expect our return on average equity for the full year to be approximately 15%.
If you exclude our deferred tax asset, which doesn't generate profits, our ROE would be about 22%.
Turning now to our expectations for the fourth quarter.
We expect the sales pace of over three sales per community per month as we actively manage pace to ensure cost certainty and a positive customer experience.
This pace is higher than our historical average, but below the extraordinarily high base we experienced last year.
We expect backlog conversion to be in the mid-40s as we continue to manage through the challenging production environment.
Our ASP should be above $410,000.
Gross margin should be up more than 100 basis points year-over-year.
SG&A on an absolute dollar basis should be down about 10%.
Our interest amortized as a percentage of homebuilding revenue should be under 4%, and our tax rate will be about 25%.
Combined, this should drive earnings per share up over 20%.
In addition, we expect to repurchase over $55 million of debt, bringing our full year total to at least $80 million.
Our increased land spending in the quarter helped us grow our active lot count to over 19,000.
We also increased our option percentage in the third quarter and now control nearly half of our active lots through options, up from less than 30% in the same period last year.
Given our current pipeline of deals, we expect to continue to grow our land position to over 20,000 lots by the end of fiscal '21.
It's worth noting that most of these deals have been in our pipeline for many months and are under contract at favorable prices.
In addition, we remain focused on growing our position, while minimizing risk by maintaining our strict underwriting standards, focusing on products that we built before in some markets that we already know and relying on options to control around half of our lots.
So, while land prices have appreciated, we're still finding deals at pencil, allowing us to refill the pipeline and grow our business.
In the third quarter, we spent over $140 million on land and development and we expect to spend around $600 million for the full year, with higher land spending and a big increase in our option lot position, we're creating a framework to sustain profitable growth in the years ahead.
On Slide 12, we depict our expectations for near-term community count.
As you might expect, the supply chain issues so common in the home construction market have also impacted land development activities.
As such, predicting the timing of new communities has never been more difficult.
While we'll be actively opening communities every month, we don't expect sequential growth in community counts until next spring.
Fortunately,, we've concentrated our acquisition activities in established new home corridors, so many of our coming soon communities are already generating interest lists.
We ended the third quarter with over $600 million of liquidity, up about 50% versus the prior year, with unrestricted cash in excess of $360 million and nothing outstanding on our revolver.
During the quarter, we retired approximately $14 million of our senior notes.
And with two remaining term loan repayments, we're on a clear path to achieve our goal of bringing our total debt below $1 billion before the end of fiscal '22.
Our net debt to trailing 12-month adjusted EBITDA fell below 3 times, down from 8 times five years ago.
During the quarter, our corporate rating was upgraded by one of the rating agencies and we remain on positive outlook at both S&P and Moody's.
We had a terrific third quarter.
But instead of repeating the highlights, I'd like to close by putting this quarter in context.
We have been diligently and successfully executing against our balanced growth strategy.
Over the last five years, we've grown EBITDA by more than 60%, improved our return on assets by more than five percentage points and reduced debt by more than $300 million.
At the same time, we quietly demonstrated leadership in each of the ESG categories.
As satisfying as these results have been so far, we're even more excited about what's in front of us.
Industry fundamentals are solid and we're deliberately investing for future growth.
In the meantime, we'll have higher prices and gross margins and lower overheads and interest expense to sustain earnings growth.
And we aren't just succeeding for investors.
We have charted the most ambitious energy saving course in the industry with our path to net zero energy ready homes, and we've created a growing philanthropic platform to fuse the efforts of our employees with the resources provided by our customers.
I'm confident that we have the people, the strategy and the resources to create durable value in the coming years.
| q3 earnings per share $1.22 from continuing operations.
|
Many factors could cause future results to differ materially.
A more detailed description of such factors can be found in our filings with the Securities and Exchange Commission.
Joining us for today's call are Jerry Grisko, President and Chief Executive Officer; and Ware Grove, Chief Financial Officer.
Throughout the past year, I emphasized the fundamental characteristics of our business that I believe enable us to continue to perform well in both favorable and less favorable business climates.
As I described on our second quarter call, these characteristics include that approximately 70% of our revenue is generated from essential services, including our tax services, insurance services, payroll services and a host of others that we provide to our clients regardless of economic conditions in the market.
We generally retain approximately 90% of our clients from year-to-year.
We have a broad geographic footprint.
We serve a diverse client base in terms of size and industry.
We enjoy strong and constant cash flow and have a substantial amount of variable expenses in our business.
Our ability to grow throughout the challenging business climate that was 2020 is a testament to those characteristics, the strength of our business model and the agility and resilience of our team.
As expected and reflected in our results, some of our businesses performed better than others in more uncertain and volatile business environments.
Generally, the essential services described earlier tend to continue to perform well even in more challenging business climates while certain more discretionary services are less predictable.
Many of our more discretionary services are in higher demand when our clients are pursuing or making decisions around growth, such as acquisitions or significant expansion plans.
We saw much of this play out during 2020.
Within our Financial Services group, we experienced strong performance from our core tax & accounting business and our litigation support business and continued steady performance from our government healthcare consulting business.
We also experienced a slowdown in the second and third quarters in demand for certain of our more discretionary project-oriented services, such as our valuation business and portions of our private equity advisory practice.
However, demand for many of those services began to rebound in the fourth quarter, particularly for those services that are tied to supporting our clients' pursuit of acquisition opportunities.
One note on our government healthcare consulting practice.
On our last call, we discussed how the rate of growth had temporarily slowed during COVID due to restrictions of access to client facilities and delays in receiving client information.
In the fourth quarter, we were pleased to see the rate of growth for that business resume to more normal levels, and we expect demand for the services provided by that business to remain strong throughout 2021.
Turning to our Benefits and Insurance group.
We had a similar experience to our Financial Services group with strong performance from the essential services that we provide, including our employee benefits business, the commercial and personal lines portion of our property and casualty business, the advisory services we provide for our clients on the retirement plans and demand for our upmarket, more robust payroll platform.
From a consolidated view, the solid results that we experienced for those services were somewhat clouded by the softer results from a relatively small portion of our property and casualty business tied to the hospitality and adventure sports, a decline in the number of payrolls processed for some of our smaller clients, particularly those tied to the restaurant industry and a number of other more project-oriented service lines.
The encouraging note here is that we expect the portions of that business that were negatively impacted by the soft economic conditions to return to more normal growth levels once the economy improves.
One last note as it relates to our Benefits and Insurance business.
We have made substantial investments over the past several years in hiring, training and supporting new producers within this group.
Those investments are essential to drive sustained long-term organic revenue growth.
The early report card on those investments is very encouraging.
And as a group, the new producers that we brought into this program are outperforming our projections.
As a result, we are continuing to invest in our new producer program and to expand this program to other business lines.
Now looking forward, we enter into this year in a position of financial strength with a very strong balance sheet, low debt and ready access to capital.
As we demonstrated in 2020, we also have a significant amount of variable expenses and considerable discretionary spending items that we can manage to preserve liquidity, if economic conditions are worse than currently anticipated.
While much remains uncertain, we expect client demand for our core essential services to remain strong and for client interest in many of our more discretionary services to increase as business conditions continue to improve.
Based on our performance in 2020, the financial strength of the business, the cost control measures that we have at our command and our current view of the business climate for 2021, we have elected to reinstate guidance for this year.
I want to caution that while we are comfortable issuing annual guidance, we do expect more volatility than we ordinarily experience when comparing a given quarter to the same period in the prior year.
So we would caution against doing so.
These assumptions include the first six to nine months of 2021 will be similar to what we experienced in the second half of 2020, and we expect continued recovery in the M&A market, which impacts many of our more project-based and private equity services.
We saw improvement in the fourth quarter and expect this trend to continue throughout 2021.
The total revenue growing by 1.6% for the full year and margin on pre-tax earnings from continuing operations increasing by 90 basis points.
We were pleased to report earnings per share of $1.42 for the full year, up 11.8% over $1.27 reported a year ago.
To recap a few important points.
As the impact of the COVID pandemic unfolded, there was considerable risk and uncertainty everywhere.
We took a number of immediate actions to protect our liquidity, and we took measures to prudently control expenses with a view toward preserving our ability to serve clients in order that we could emerge as a strong and healthy business ready to resume growth.
We have not been completely immune, but with many actions we took, coupled with the dedication of our CBIZ team, we are pleased that our business model has weathered the storm, and we are now a stronger company for the experiences in 2020.
Our primary concern operating under the pandemic environment was to protect our liquidity.
Perhaps the best measure of our success in 2020 is the continuing nature of our strong positive cash flow.
We ended 2020 with $108 million of outstanding debt on our credit facility, increasing only $2.5 million from $105.5 million at year-end a year ago.
After an active first quarter in 2020, repurchasing 1.2 million shares and closing three acquisitions, we paused both acquisitions and share repurchase activity from mid-March through mid-September until we could develop more confidence with the stability of our cash flow trends.
For the full year of '20, we closed seven acquisitions and utilized $89.7 million of capital for acquisition activities.
We also deployed $57.6 million to repurchase approximately 2.3 million shares for the full year, including the repurchase of one million shares in the fourth quarter.
For the full year, with $147.3 million of capital used for these two purposes, our borrowing increased by only $2.5 million.
This results in a leverage ratio of approximately 0.8 times on adjusted EBITDA of $132.1 million, with $286 million of unused capacity.
Going into '21, this offers us great flexibility to continue to deploy capital for acquisitions and for continuing our share repurchase activity.
Through February 16 to date this year, we have repurchased an additional 600,000 shares, and we intend to continue to repurchase shares.
With this recent activity, when combined with shares repurchased in 2020, this has resulted in the repurchase of more than 5% of our shares outstanding.
When you also consider the 1.2 million shares repurchased in the prior year 2019, we have repurchased approximately 4.1 million shares or roughly 7.5% of shares outstanding within the past two years, and we've utilized nearly $100 million of capital for these activities.
Considering our strong balance sheet and cash flow attributes, we can repurchase this level of shares without compromising our capacity for acquisitions.
With the seven acquisitions closed in 2020, plus an eighth transaction we announced effective on January one this year, collectively these newly acquired operations will generate approximately $48 million of annualized revenue.
Strategically, these acquired operations will further strengthen Benefits and Insurance services.
We'll add an important component to our financial advisory services and we'll add capacity in order to accelerate the rollout of our integrated payroll services platform that focuses on upmarket clients.
Acquisition-related payments for earn-outs from previously closed transactions are estimated at $13.6 million in 2021.
In 2022, we estimate a use of approximately $15.4 million, approximately $9.1 million in 2023, $13 million in 2024 and approximately $800,000 in 2025.
For 2020, capital spending for the full year was $11.7 million, of which $2.2 million was in the fourth quarter.
We expect capital spending within a range of $12 million to $15 million, looking ahead into 2021.
Depreciation and amortization expense for the full year of '20 was $23.1 million, $9.6 million of depreciation with $13.5 million of amortization.
In the fourth quarter, depreciation and amortization expense was $5.9 million.
A major concern for us as the pandemic unfolded in 2020 was our clients' ability to pay receivables.
As we transition to remote work conditions at the end of the first quarter in 2020, our team did a great job refining and adopting new processes and digital tools for billing and management of receivables.
These tools are now a more permanent fixture in our workflow processes and in our communication with clients.
Days sales outstanding performance on receivables improved this past year despite the volatile conditions and financial stress throughout the economy.
At the end of the year, days sales outstanding stood at 72 days compared with 75 days a year earlier.
Although not completely immune to financial stress, this is also good evidence that with our diverse client base, there is no significant concentration of clients in the more severely impacted areas of the economy, such as hospitality, travel, restaurant or entertainment businesses.
At the end of the first quarter in 2020, we recorded an additional $2 million of reserve for bad debt.
With continuing uncertainty in the economy, although days sales outstanding performance has improved, we continue to carry that level of reserves for bad debt.
For the full year of '20, bad debt expense was 45 basis points of total revenue compared with 25 basis points of total revenue for 2019.
Total consolidated revenue for the full year was up 1.6%, with same unit revenue declining slightly by 0.4%.
In the fourth quarter, total revenue grew by 3.9% and same unit revenue grew by 1.1%.
Within Financial Services, total revenue for the full year was up 2.1%, with same unit revenue up 0.8%.
In the fourth quarter, total revenue in Financial Services was up 6.6% with same unit revenue up 3.3%.
Turning to Benefits and Insurance.
For the year, total revenue grew by 0.5%, with same unit revenue declining by 3%.
And in the fourth quarter, revenue declined by 0.8% and same unit revenue declined by 3.2%.
As I indicated in our third quarter conference call, revenue growth numbers were impacted by a relatively small number of our operations, where the nature of advisory or transactional services was more severely impacted by economic conditions.
For the full year, these businesses represented 16% of our total revenue, but collectively, these businesses declined by 12.8% in 2020 compared with the prior year.
Adjusting total revenue to exclude the impact of these businesses, the remaining core revenue would reflect growth of 4.9% rather than the 1.6% reported.
Same unit revenue would reflect growth of 2.5% rather than the 0.4% decline reported.
Fourth quarter revenue adjusted to exclude these businesses, grew by 8.3% versus the reported 3.9% and same unit revenue grew by 4.7% versus the reported 1.1%.
With pre-tax income margin improving by 90 basis points to 10.7% from 9.8% the prior year, we saw a favorable impact resulting from the cost control measures we took in deferring discretionary items, plus the favorable impact from the natural reduction in travel, entertainment expense and from the lower cost for our self-funded healthcare benefits.
Among other things, for 2020, T&E costs came in at approximately 30% of the prior year levels, and healthcare costs came in at approximately 85% of expectations as discretionary and elective medical procedures were deferred.
Adjusting the reported operating margin to remove the impact of accounting for gains and losses on assets held in the deferred compensation plan, operating income was 11.2% for the full year, up 70 basis points compared with 10.5% in 2019.
As Jerry outlined, we think business conditions in 2021 will look very much like the environment we experienced during the second half of 2020.
Of course, the timing and impact of a successful COVID vaccination rollout is very unclear, and there is still risk and uncertainty ahead.
Considering the stability and performance of our core businesses in 2020, together with the impact of recent acquisitions, we think revenue will continue to grow in a similar matter, as I just described.
We are projecting total revenue growth in 2021 within a range of 5% to 8%.
As a reminder, we do not provide guidance for quarterly results.
But as you think about the year ahead, bear in mind, the first quarter last year was a relatively strong quarter before we felt a COVID impact in the second half of March.
With the 5% to 8% revenue growth expectation, we are looking to increase earnings per share within a range of 8% to 12% over the $1.42 recorded for 2020.
Consistent with our longer-term goals, we can manage a number of discretionary items, and we expect to improve margin within a range of 20 to 50 basis points.
You will note the effective tax rate was 24.3% in 2020.
Aside from any change in tax law that may arise from the new administration, there are a number of variables that can impact our tax rate, either up or down.
But as we look ahead to 2021, we are projecting a 25% effective tax rate.
Ongoing share repurchase activity will impact the fully diluted weighted average share count.
At this time, we are estimated 54.5 million fully diluted shares for the full year, down from 55.4 million shares in 2020.
As I mentioned, we are continuing to repurchase shares, and we will update this estimate at the end of the first quarter and throughout the year.
Adjusted EBITDA for 2020 came in at $132.1 million or 13.7% of revenue, a 9.6% increase from the prior year, and we expect to further improve that margin in '21.
So in conclusion, we were pleased to see stability in client demand and cash flow as we progress through the year.
We have emerged from the challenge of 2020 as a stronger company with stronger processes.
Going into 2021, we think our business will continue to reflect the stability, evidenced by the performance this past year.
We recognize the uncertainty and risks ahead, and we will plan to update our expectations as conditions dictate throughout the balance of the year.
First, I would like to talk about our unique position in the market and how it allows us to provide solutions to our clients that are unmatched in our industries.
While we have a large number of very capable competitors for many of the services we provide, they are often not aligned and lack the ability to provide the holistic, multidisciplinary solutions that our clients need when analyzing decisions that relate to their most impactful opportunities or greatest challenges.
We witnessed the strength of our business model throughout 2020 as we move quickly to collaborate across businesses, service lines and geographies to bring CBIZ's resources and expertise to bear in coordinated services that were responsive to our clients' most pressing needs.
We are encouraged by the value that our holistic multidisciplinary solutions approach brings to our clients and are excited for the opportunities that it presents for CBIZ to further distinguish us from our competitors.
Next, relating to M&A.
The acquisition of BeyondPay brings additional implementation capacity to support sales of our upmarket payroll solution and follows another similar acquisition earlier in 2020.
We also acquired Borden Perlman Insurance Agency within our property and casualty business.
Based in New Jersey, Borden Perlman is a leading provider of property and casualty insurance with an over 100-year history of serving clients on the East Coast.
Both of these acquisitions provide strategic value, but are also strong cultural fits, which is the most important factor when we consider acquisition opportunities.
As Ware mentioned, overall, we completed seven acquisitions in 2020, all of which bring expertise, capacity, talent and a strong client base to our business.
As I mentioned earlier, in 2021, we've already completed one acquisition with our core accounting and tax practices with the addition of Middle Market Advisory Group in Denver, Colorado.
MMA provides tax complying and consulting services to middle market companies and family groups across a number of attractive industries and complements our rapidly growing Colorado practice.
Acquisitions continue to be an essential component of our growth strategy.
While the M&A market slowed in the second and third quarters of last year, we are seeing activity resume.
We are finding that our performance throughout the pandemic allows us to tell a compelling story when it comes to potential partners.
The challenges faced by many of our smaller competitors throughout COVID shined a light on the value that CBIZ can bring to our team members and our clients as a result of our scale, breadth and depth of services and expertise.
As a result, our pipeline of outstanding acquisition prospects is stronger than it has been in many years, and we have access to capital to be aggressive as we seek to take advantage of many of these opportunities as we can.
| sees 2021 total revenue up 5% to 8%.
sees 2021 earnings per share from continuing operations up 8% to 12%.
|
I'll start by talking a little bit about the environment, the economy then we'll get into our numbers.
Since we last talked to you three months ago really three big things have happened in terms of reducing uncertainty and reduced uncertainty is a good thing, always a good thing.
So the first and foremost and probably the biggest news of last year was the vaccine, which came out in November and is now being administered.
Obviously, we had the election uncertainty last time, we're past that now.
We also had the stimulus, which compared to the other two news is small news but nevertheless positive news.
We weren't expecting a stimulus to get done until the new administration takes over.
But I'm glad it was passed a few days -- a few weeks ago.
So with that as I look through 2021 it feels like a year with a very, very strong potential in the second half of the year possibly starting as early as second quarter.
But I do see a slow first quarter as all this good news is great but it actually has to get converted into reality.
The biggest risk obviously still remains vaccine distribution and to some extent a new variant of coronavirus.
There is still some uncertainty around it, but a hell of a lot less than this time 90 days ago.
So we're feeling very good as we put together our budget for the year.
We basically took assumptions that first quarter is always a slow quarter for us, but this year will be slow as well for all the reasons I just stated.
But then pipeline start to build up and we started executing on a growth strategy somewhere in the second quarter, but really bringing it in, in the second half of the year.
Quickly looking back to this quarter, I'm very happy with the results where we announced $0.89 per share or $85.7 million in earnings.
That compares to $0.70 last quarter.
And if you compare to the fourth quarter of 2019, which feels like a 100 years ago, it was $0.91.
So not bad for what we've gone through this year to come out just very close to where we were fourth quarter of 2019 from an earnings per share perspective.
Sorry, NII was $193 million and change, which was $6 million more than our last quarter, about $8 million more than fourth quarter of 2019.
PPNR was down by $10 million compared to the last quarter, but showed a little increase compared to the fourth quarter of a prior year.
Leslie will walk you through this, but there are some unique items in this in the expense category mostly having to do with compensation.
We had reduced our variable compensation accrual quite dramatically in the second and third quarter.
And we've adjusted that back up, not all the way back up, variable competition will still be much lower than in previous years, but just not at the rate as we were accruing in the second and third quarter.
That's one part of that adjustment.
There's some -- we made a change in policy to give rollover pay time off due to the circumstances wherein to our employees that costs a couple of million bucks and then there's an accounting thing, which Leslie will walk you through -- smart enough to walk you through that.
The big story obviously continues to be deposit generation as well as deposit costs.
We had another solid quarter.
Total cost of deposits declined by 14 basis points.
We were at 57 basis points last quarter.
This quarter we ended up at 43 basis points.
And if you look at our stock cost of funds at December 31, we were at 36 basis points.
So in other words we're starting this quarter already at 36 basis points and working our way down from there.
So I feel pretty good that this quarter will be another very strong quarter in terms of reducing cost of funds.
I think we'll end up in the low 30s and on a spot basis I feel pretty confident that we will end up with a two handle.
So that's sort -- the one side but also our average DDA -- non-interest DDA grew by $966 million, which is again very, very strong.
I will repeat what I've always said.
One quarter doesn't make anything.
You should always look at four quarter average or four quarter -- or last 12 month numbers to really get a feel for how the business is doing.
But no matter how you look at it this last four quarters or the last quarter has just been a very, very strong performance in the deposit side.
Our non-interest DDA now stands by the way at over 25%.
And I think a year ago we were at 18%.
Still more work to be done here.
We are expecting this trend to continue into next year and for us to slowly work our way toward 30% DDA.
As we had predicted, risk rating migration has slowed quite significantly.
I think for the first nine months of 2020 there was downward rating migration on $2.1 billion in loans.
This quarter it was $169 million.
Provisioning came down very, very materially.
In fact, we have a net recovery of a small number of $1.6 million.
Also we had reported back in the summer, $3.6 billion in loans that were on deferral, if you remember.
That number is now down to $207 million or about 1% of total loans.
We do have $587 million in loans that were modified under the CARES Act.
As you know, under the CARES Act, we don't -- these don't show up as TDRs.
But nevertheless these modifications by the way are mostly IL modifications or 9 months to 12 months.
A lot of these modifications are in the CRE, the hospitality portfolio, the hotel portfolio.
And we believe that most borrowers who are going to come to us for temporary relief or deferral have been identified at this point.
NPLs ticked up a little bit to $244 million, which is about 1.02% of loans but excluding the government guarantee sort of SBA loans that are in this bucket if you take that out, it's about 80 basis points.
In our C&I sub-segment, actually NPLs declined.
The net charge-off rate was stable at 26 basis points for the year.
Let's talk a little bit about NIM.
NIM was 2.33% for the quarter, I think last quarter was 2.32%, so 1 basis point improvement.
Total loans grew by $87 million and deposits grew $899 million total of which $219 million was non-interest DDA.
These are spot numbers.
What I gave you earlier was average DDA.
Book value is now up at $32.05, which is higher than what it was at this time last year, it was $31.33.
Capital position is strong.
The board met yesterday and reinstated our share buyback program.
If you remember when we started we still had about $45 million left.
So, that hardly has been unfrozen.
And then, the board wants us to get to this and then we'll meet again to talk about additional repurchases.
Capital is -- CET1 is at 12.6% at holdco, it's 13.9% at the bank, and we, of course, declared our usual $0.23 per share dividend.
Strategy for return to work; let me talk a little bit about this and going forward, not much has changed in terms of our positioning for return to what we still are working remotely and we expect to do that for at least the next two or three months and then make a decision beyond that at that time.
There have been multiple other cases in the company as you would expect in this quarter than in previous quarters, but none that are serious enough to have impacted any of our operations.
The strategy going forward again, we're waiting very anxiously for economic activity to pick up and for us to start participating in the next business cycle, which as we speak at the beginning right about now.
The focus will stay the same, which is to build a relationship-based commercial bank with a focus on small and middle market businesses, stay focused on building core business through non-interest DDA, identifying niche markets that the big guys don't pay much attention to, investing in technology and innovation and not just in branches and locations.
The game has really become about technology and solving customer pain points through innovation.
Also we haven't lost sight of all the initiatives we had in 2.0.
That was not just an exercise in time that you do and then forget about.
It really was about changing the culture and we will keep pushing forward on that front as well.
We did launch a new initiative earlier last year.
It's called iCARE, which stands for Inclusive Community of Advocacy Respect and Equality.
It is something that -- have been in the works since summer of last year, when we really announced it inside the company about two, two and a half months ago and gotten a very positive feedback.
It really is our effort as an organization to push and build a culture that celebrates and intentionally promotes diversity within the bank.
This is not just words.
This is, we're putting our money where our mouth is and taking on initiatives.
We think if we can do our bit and move things in the right direction by an inch and everyone does that, it will make a big difference in society.
So we're very excited about this.
Our employees are very excited about this and more to come on this in the future.
Let me see here.
Let me turn this over to Tom.
And he will walk you through a little more on the business side before Leslie gets into the numbers.
So let me start with deposits and a little bit more detail on the deposit book.
As Raj mentioned, total deposits grew by $899 million for the quarter and non-interest DDA grew by $219 million for the quarter.
So the deposit mix continues to improve.
We allowed higher cost deposits to run off this quarter, which we continued to do for the last few quarters as time deposits declined by $1.1 billion for the quarter.
A little bit more detail on cost of funds.
So the total cost of funds plus cost of deposits declined to 43 basis points this quarter.
On a spot basis, the APY on total deposits was 36 basis points at December 31, which was down from a spot of 49 basis points at September 30, when compared to last year at December 31 it was 142 basis points.
So they continued progress there.
The spot rate on interest bearing deposits was 48 basis points as of December 31 compared with 65 basis points at September 30 and 171 basis points a year ago.
So we're seeing reductions in cost of deposits across all lines of business across all products that continues to be a very broad-based trend.
As we think about December 31, 2020, we had $1 billion of CDs in the book at an average rate of 1.61% that had not yet repriced since the last Fed cut in March of 2020.
So in the first quarter of this year, we have a significant amount of that just under $800 million that will reprice in this quarter.
Additionally, some CDs that matured and repriced early in the cycle will also reprice down again at their next maturity date.
So there's a very significant difference between what these will reprice at our current rates or running about 25 basis points.
So we right now continue to see good healthy pipelines and opportunities for core deposit growth across all business lines.
It's always a little bit more difficult to size deposit pipelines and timing of treasury management relationships coming onboard, but we continue to expect growth in non-interest DDAs at the levels that we're seeing now.
It's likely we'll see more time deposits run off at the same time as the mix of the overall book will continue to improve.
We are seeing some of the maturing CDs move into money market category as well, but obviously at significantly lower rates.
Switching to the loan side, as Raj mentioned in aggregate, total loans grew by $87 million in the fourth quarter and operating leases declined by $13 million.
Just a little bit more detail on some of the segments, the residential portfolio grew by $408 million in the fourth quarter, of that $330 million was in the Ginnie Mae EBO segment.
Mortgage warehouse continued to perform well.
Total commitments grew by $90.5 million for the quarter and we ended the year at a little over $2.1 billion in mortgage warehouse commitments so the entire quarter and year was obviously very strong in the mortgage warehousing area.
In the aggregate, commercial real estate loans declined by $89 million for the quarter, multi-family declined by $171 million of which $151 million was in the New York market.
So beyond that, we had overall expansion in other segments of the real estate business, obviously.
If we look at loans and operating leases in aggregated BFG, including both franchise and equipment, we're down this year by -- down for the quarter by $124 million, given the COVID impact on the BFG portfolio in particular especially the franchise.
We've been focusing our efforts over the last couple of quarters really on portfolio management and exposure reduction versus new production.
So if we look into 2021 a bit and kind of break down sort of what we see happening in the different business lines.
We expect to see continued strong growth in the Ginnie Mae, EBO, and mortgage warehousing businesses.
We expect to see the C&I business start to return to a more normalized growth mode as the economy picks up and the vaccines and so forth are distributed.
We're seeing that as a high-single-digit growth for 2021 predominantly in the back end of the year.
We're forecasting a low-single-digit decline in CRE for 2021.
We continue to have some concerns about valuations in certain segments of the portfolio.
Clearly the hotel and retail segments will be challenged for a good portion of this year.
Small business lending is an area we expect to see good growth in 2021.
We've invested a lot of our technology and time and expanding small business area.
And in the franchise area, we expect to see that continue to run off probably in the 20% kind of range in 2021 as we continue to work through that.
Pinnacle is expected to decline slightly mid-single digits but that may turn around if there are changes in corporate tax rates with the competitive landscape right now from an interest perspective.
Switching a little bit to the -- give you an update on PPP, I think the overall PPP process is going well.
We're in the forgiveness stage of -- on 3,500 loans that we originally made in round one to PPP, that's going very smoothly.
We probably have about 700 loans so far that have been forgiven and we expect that to continue in the first quarter of 2021.
And we're participating in the Second Draw program to eligible businesses who were given First Draw PPP loans that just recently opened and we'll be open for clients in that phase.
We're expecting maybe a 50% to 60% Second Draw request from clients that we had in the First Draw.
So overall, I think PPP is going well.
Some additional comments around loans that we've granted deferrals and I'd refer you to slide 16 in the supplemental deck for more detail around this as well.
So starting commercial, only $63 million of commercial loans were still under short term deferral at December 31.
$575 million of commercial loans had been modified under the CARES Act.
So taken together this was $638 million or approximately 4% of the total commercial portfolio as of December 31.
Not unexpectedly the portfolio segment most impacted has been the CRE Hotel segment, where $343 million or 55% of the segment has been modified as of December 31.
I would remind you that the majority of our hotel exposure is in Florida.
The majority is in leisure properties.
And so those are the segments that we're expecting to see rebound a bit more.
And over the last few months, we've seen occupancy tick up to much better levels than we had seen a few months previous to that.
And so we see in that segment more travel and leisure coming up and we also see some surveys that we've read recently about companies returning more back to the business travel segment as well.
Our hotel book isn't really a business travel segment, but overall, we see the travel markets improving as we get into further deeper into 2021.
On the franchise side, 8% or $46 million of the franchise portfolio was on short-term deferral or had been modified as of December the 31 compared to $76 million or 12% that were on short-term deferrals as of September 30 and 74% that were granted initial 90-day payment deferrals.
$48 million or 67% of our cruise line exposure has been modified under the CARES Act of December 31.
Almost 80% of the total commercial deferrals and modifications and almost 60% of the total loans risk rated substandard or doubtful are from portfolio segments that we had initially identified as -- meeting of heightened monitoring due to potential impacts from the pandemic.
So it continues to be those same segments that we're seeing all of this activity and we don't at this point see really any level of difficulties coming from other segments than the ones that we had at first identified.
On the residential side, excluding the Ginnie Mae early buyout portfolio, $144 million of loans are on short-term deferral, an additional $12 million had been modified under a longer-term CARES Act repayment plan at December 31.
This totaled about 2% of the residential portfolio.
Of the $525 million in residential loans that were granted at initial payment deferral, $144 million or 27% are still on deferral, while $381 million or 73% of those loans have now rolled off.
Of those that have rolled off, $362 million or 95% are now making regular payments while only 5% or $19 million have not resumed a regular payment program.
Just as a reminder, when we refer to loans modified under the CARES Act we're referring to loans that have been excluded from modifications other than short-term deferrals and these are loans that if not for the CARES Act would likely to be classified as TDRs.
As Raj said most of these have taken the form of 9 to 12 months interest only deferrals.
Within the CRE portfolio we're still seeing overall good rent collections in the office market.
Depending upon the geography we're seeing 90% or so in the New York market, 97% in Florida.
So we think the office collection rate is still running very well.
Multi-family collections are running 90% in New York and about 96% in Florida and for our larger retail loans we're seeing -- sort of low 90% rates in the retail space.
Little bit more on what I mentioned earlier on hotel occupancy in the Hospitality segment.
All of our properties in Florida are now open.
And two of the three properties that we have in New York are open.
In Florida, we're continuing to see improvement in occupancy.
We saw about a 46% average occupancy rate for the quarter.
December is obviously a stronger travel month in Florida and we're coming into the better part of the season.
In December, we saw occupancy rates in some areas as high as the 60% range.
But generally we saw upper 40s to low 50s.
So the Hotel segment is gradually showing some improvement there.
A little bit more detail about what we're seeing in the franchise space and in the fitness space.
So as we've said before when we look at concepts where there's significant drive through delivery capability those tend to be doing well.
Things like pizza, chicken other more popular QSR concepts are doing very well.
Many are posting now double-digit same-store sales increases.
In-dining concepts are obviously still struggling a bit and that's where we see some softness.
Certain segments are a little bit divided depending upon whether those concepts in certain locations have delivery type economic models or whether they're in malls or things like that.
Those are a little bit up and down.
But overall we're seeing improvement within the franchise area.
Fitness has taken some steps forward, since our last call.
At this point all of our stores are open with the exception of those that are in California, particularly those around the Los Angeles area.
So basically 90% of our stores are open at this point.
They're not all operating in a 100% level, but this is the highest rate of openings that we have seen since the pandemic started.
So with the exception of just California, at this point of 280 stores that we have 90% of them are open.
So that gives you I think a good sense of what we're seeing in the restaurant and the fitness area.
So I'll start with everybody's favorite subject, CECL and the reserve.
Overall the provision for credit losses for the quarter was a net credit or recovery of $1.6 million compared to a provision of $29.2 million last quarter.
That $1.6 million consisted of a $1.2 million provision related to funded loans and a recovery of $2.9 million related to unfunded commitments.
The reserve, the ACL declined from 1.15% to 1.08% of loans this quarter primarily because of charge-off, which is exactly what we would expect to happen under CECL, less charge-offs are taken the reserve would come down.
Slide 9 through 11 of the supplemental deck provides some details on changes in the reserve and the composition of the provision and the allowance.
Charge-offs totaled $18.8 million for the quarter, which reduced the reserve.
$13.8 million of this related to the writedown to market of some loans that we sold during the quarter or that were moved to held for sale right at quarter end and those were sold in January.
A $34.1 million and all of the rest of the stuff that ran through the provision, the $34.1 million decrease in the reserve and provision related to the improvement in the economic forecast.
Offsetting that was a $32.8 million increase related to increases in some specific reserves and that risk rating migration.
We had an $11.4 million reduction in the amount of qualitative overlays.
This is exactly what we would expect.
We expect that qualitative overlay to come down as more facts are known about individual borrowers and more that gets captured in the quantitative modeling.
And then we also had an increase of $15.2 million related to more conservative modeling assumptions that we've made around behavior of certain residential borrowers that had been on payment deferral so all of that going in opposite directions kind of netted down to that provision of basically zero for the quarter.
The decrease in the reserve percentage also reflects the fact that Ginnie Mae EBO mortgages are a larger component of total loans and those carry basically no reserve.
Some of the key economic forecast assumptions and I'll remind you this is a really high level look.
The models are really -- processing literally hundreds if not thousands of regional and other economic data points.
But our forecast is for national unemployment at about 6.7% for the first quarter of '21, remaining stable through 2021 and then trending down to 5.4% by the end of 2022.
Real GDP growth reaching 4.1% in 2021 and 4.7% by the end of 2022 and S&P 500 Index remain relatively stable around 3,500 and stabilizing Fed funds rate staying at or near zero into 2023.
The franchise finance portfolio continues to carry the highest reserve level at 6.6%, followed by CRE at 1.5% and C&I at 1.3%.
The reserve on the residential portfolio remained relatively stable quarter-over-quarter.
Reductions resulting from the improved economic forecast were offset by changes in modeling assumptions.
As to risk rating migration on slides 23 through 26 in the deck, we have some detail around this not surprisingly as we continue to move through the cycle and get more detailed information about borrowers.
We did see some additional downward migration this quarter although as Raj pointed out the pace of this has slowed considerably as we would expect and we hope to see some positive tailwinds as the economy continues to improve as we move through 2021 as we're expecting it to.
In terms of migration to substandard accrual, the largest categories were in CRE and that would be in the hotel, multi-family New York and retail segments and we downgraded some of the cruise line credits this quarter.
Overall, in franchise the level of criticized and classified assets actually declined this quarter.
But we did see some fitness concepts move from special mention to substandard.
Non-performing loans increased by about $44 million this quarter, the largest increases being in multi-family.
Residential, as we had some loans come off of deferral and failed to resume a regular payment schedule and a little bit of franchise finance in the fitness segment.
As expected, we continue to see recovery in the fair value mark on the investment portfolio this quarter.
The portfolio is now in a net unrealized gain position of $85.6 million and we expect no credit losses related to any of the securities in that portfolio.
Consistent with the guidance we provided last quarter, the NIM increased by 1 basis point this quarter to 2.33%.
The yield on earning assets declined by 12 basis points and this was -- there's still pressure on asset yields, but this was a much lower -- a smaller decline than we had experienced the quarter before.
So that's good to see.
Obviously, this is just due to run off of higher yielding older assets that were put on in a higher prevailing rate environment.
Cost of deposits declined by 14 basis points quarter-over-quarter.
And as Tom pointed out, I'll remind you that almost $800 million of those time deposits are scheduled to mature and price down in Q1.
We did adjust our variable compensation accruals by $6.6 million as operating results in the back half of the year.
We're far better than we had initially expected.
I would call that a first world problem.
Glad to see those revenues up allowing us to do a little more for our employees in the way of variable compensation.
A $2.2 million accrual for some roll over vacation time that we made the decision to allow our employees due to the COVID pandemic and the difficulty people have had using their vacation time.
And we also had an increase in an accrual related to some RSU and PSU awards that resulted from the increase in the stock price, another first world problem.
So that's kind of what went on in compensation expense.
A little bit of guidance looking forward to 2021, I will preface my remarks by saying this is maybe the most challenging environment in which I've ever had to forecast what was going to happen over the course of the coming year.
So all of this guidance is predicated on a lot of assumptions about the economy, interest rates, tax rates, the competitive environment, the regulatory environment and any of that could change.
But as of now what we see is mid-single digit loan growth more of that concentrated in the back half of the year.
As Raj said, we don't expect much in the first quarter.
And that's excluding run-off of PPP loans by the way that mid-single digits excluding that run off of PPP loans.
Again mid-single digit a little bit higher than loan growth, mid-single digit deposit growth but double-digit mid-teens non-interest DDA growth as we continue to remix that portfolio and let those higher cost rate sensitive customers run off and grow non-interest DDA.
We expect the NIM to increase for the year and we would expect that PPP forgiveness to be largely a first quarter 2021 event so the NIM in the first quarter will get a lift from PPP forgiveness.
I think there's about $11 million worth of unrecognized fees still remaining to flow through that will come through in the first and maybe some in the second quarter.
The provisions, so under CECL in theory, the provision should be related only to new loan production and charge-offs should increase -- should reduce the reserves.
And if the world didn't change that's what would happen.
We have not attempted to forecast changes in the economic forecast but if the economic forecast doesn't change the provision for the year should be modest and it would be higher in the second half of the year as loan growth picks up and any charge-offs taken should reduce the allowance and we would expect net charge-offs to exceed the provision for the year and the reserves to come down.
If our prognostication about the economy is true, we would expect over time if we return to an environment similar to what we were in right before the time we adopted CECL, we would expect the reserve to return back to those levels.
Non-interest income for next year, we do expect to see some increase in deposit service charge and commercial card revenue materialize in 2021 and for lease financing income to stabilize after some decline in the first quarter.
Expenses, overall, in the aggregate we would expect probably a mid-single digit increase and that's going to come from two areas.
One is comp, part of that is just a natural normal merit increases and inflationary salary increases, which we think will resume.
We actually hope will resume in 2021 as the as the economy recovers.
But we do expect it to remain below 2019 levels.
And we also expect technology-related costs to increase as we continue to invest in some important initiatives that Raj alluded to.
Tax rate, we would expect to be around 25% excluding discrete items, if there's no change in the corporate tax rate.
The other -- the one other thing that I will point out to you, we had about 3 million dividend equivalent rights outstanding that expire in the first quarter of 2021.
And that'll add $0.02 to $0.03 per quarter to EPS.
So I just want to make you're aware of that.
There's so much information to give you these days that these calls end up taking way too much time in the first half.
I see a line already.
| compname posts q4 earnings per share $0.89.
q4 earnings per share $0.89.
|
On a per share basis, third quarter earnings were $1.52 compared with $2.52 last year and $1.16 for the third quarter of 2019.
During the third quarter of 2021, the Company recorded pre-tax adjustments to earnings, including a $30 million impairment in one of the company's minority investments, $13 million of costs related to the wind down of the Footaction banner, and $14 million of acquisition and integration costs related to WSS.
As a reminder, last year's third quarter included a pre-tax non-cash gain of $190 million related to the higher valuation of GOAT.
On a non-GAAP basis, earnings per share were $1.93 compared to $1.21 for the third quarter of last year, and $1.13 for the third quarter of 2019.
Andy Gray, Executive Vice President and Chief Commercial Officer will then provide color on the key product and customer engagement highlights from the quarter.
Andrew Page, Executive Vice President and Chief Financial Officer will then review our third quarter results and provide guidance for the current fiscal year.
We are pleased to report that the third quarter was another great performance for our company, as we comped a strong back-to-school season from last year, battled supply chain challenges and delivered impressive bottom line results.
We also successfully completed the WSS acquisition during the quarter and subsequent to the quarter end, closed the Atmos transaction as well, bringing both of these great companies into the Foot Locker family of brands.
As we begin the fourth quarter, in the all-important holiday season, we continued to see three macro trends working in our favor.
Number 1 is the democratization of sneaker culture, with more brands and more consumers participating in the ecosystem of sneaker culture.
With our position as a multi-branded retailer through Foot Locker, Kids Foot Locker, Champs Sports x Eastbay and now, WSS and Atmos, we have an incredible connection to the marketplace and consumers.
Second is the growing emphasis on fitness and self-care, as people look to offset stress and work-from-home conditions by getting up and staying active to maintain their physical and mental wellness.
Whether it's home fitness, running, training, hiking or any number of other sport fitness categories, we see consumers are turning to and returning to Foot Locker to meet their fitness needs, and we see this trend increasing.
And third is the overall athleisure trend and further casualization of society.
Some of this is aided by the continued work-from-home environment, some of it by the new return-to-work hybrid model.
But overall, people want to be more comfortable, and that certainly plays into our strengths, especially around footwear, but also in our apparel business, which has been performing extremely well this year.
All of this to say, consumer demand remains strong, driven by mega trends and consumer adoption and demand that favors the brands and the categories we sell.
Spending continues to be fueled by people wanting to look good as they venture out again.
In terms of the global supply chain, we're all aware of the challenges.
It's a fluid situation that we are making every effort to manage, and we do have a few advantages.
First, we are a truly multi-branded retailer, with a diversified product mix serving a broad range of consumer needs across price points.
We like our position in terms of our assortment of brands, and we benefit from the very strong partnerships we have built with them over many decades.
In times like these, our partnerships are mutually beneficial, enabling us to look together as far into the future as possible to plan, collaborate and be solution-oriented.
Second, carrier capacity is something we always keep a close eye on, and we are much better positioned this year than in the past with FedEx, UPS and our pool carriers and with the US Postal Service as another alternative.
We've got better visibility than we've ever had on where their hot spots are, so we can manage customer expectations appropriately.
Third, we feel good about our distribution center staffing and capacity levels.
We are building in some additional flex capacity for the fourth quarter to ensure we are doing everything we can to effectively mitigate any macro pressures.
And fourth, we are focused on leveraging the advantage that having approximately 3,000 stores globally offers us to serve our customers and deliver the types of diversified product offerings, inclusive of apparel, accessories and complementary products that our customers come to us for.
In the third quarter, we successfully launched our controlled brands.
We are especially excited about this offense.
Our teams have been working hard to bring it to life in a big way and we are poised to push these brands meaningfully forward in the coming seasons.
At the same time, we are expanding our range of brand partners using programs like our innovative greenhouse incubator and LEED initiative to invest in up-and-coming designers, new concepts, exclusive collaborations and curated partnerships, all of which will ultimately help us provide a broader range of product offerings to our consumers.
And finally, but perhaps most importantly, we are benefiting from great connectivity with our consumers.
Elevating the customer experience has long been one of our strategic pillars.
We have great brand awareness and consumers continue to come to Foot Locker first.
I believe we have the best team in retail, the best partners in the business and we feel very good about where we're headed for the upcoming holiday season and beyond.
Turning to our recent acquisition of WSS.
It's been a great start with our back-to-school and overall Q3 results.
Some of the early progress includes setting up our team addition offense for WSS, which we believe is a big operational opportunity to get speed-to-market to support their apparel business.
We have also looked at our supply chain, technology and other operating contracts, and we've been able to secure some wins here as well.
All that to say, the early integration work is off to a good start.
We are very bullish on WSS, driven in part by their strong connection to the Hispanic consumer and because it's very complementary to our existing portfolio from a consumer perspective, a merchandise assortment and pricing approach and the geography and real estate standpoint.
We are encouraged to see new WSS stores perform above their budgets, giving us confidence to continue to expand the store base in the coming year.
Texas is our next WSS growth market.
Plans are well underway for Dallas and Houston, and we also see some fill-in market opportunities.
We continue to open stores in Northern California.
Turning now to Atmos.
We are excited to have closed the acquisition earlier this month.
This premium globally recognized, digitally led brand sits at the center of sneaker culture.
We are thrilled to have Hommyo san and his talented team officially onboard.
Similar to WSS, we are bullish on this high-growth business and are well underway with the integration process.
Turning to Champs Sports x Eastbay.
It's been about 18 months since we combined these operating units.
And in late January, we will be opening our first home field store in South Florida, which is the new concept where these two banners come together bringing the best of what they do individually to one singular location.
Our first home field store will be the largest format we have in our global fleet at about 35,000 gross square feet.
We will have several features that drop on the equity and the DNA of Champs Sports and Eastbay, inclusive of the best global brands and sport lifestyle performance.
We'll also have a dedicated zone for Eastbay training and performance footwear and apparel.
It will feature an athlete fuel station for guests with protein shakes and smoothies, nutrition bars and post-recovery workout-type supplements that consumers can enjoy in the space itself or buy products to take home with them.
There will be several digital and interactive parts of the store, including an activation space where we will hold coaching clinics training sessions and skill development or yoga workouts.
We will be live and interactive in bringing sport into the space, and we are excited to be able to connect with the community through those experiences.
We'll also be able to leverage our Eastbay Team Sports division through existing and new relationships with key schools.
In fact, there are 12 high schools within a 10-mile radius of the home field location.
We will look to expand the relationships with those schools, building bridges and opportunities with the athletic directors, coaches and athletes themselves.
We are very excited to see this experience come together as we pilot this new concept.
Our team has done an incredible job executing on the wind down and transitioning some of the locations to other banners.
To date, we've converted 18 locations, and there are another nine under construction, with over half of them rebranding as Foot Locker.
About 40% is Champs Sports and the remaining 10% of Kids Foot Locker.
Without exception, we have seen encouraging productivity gains with these stores performing above expectations and well above their previous results.
We have negotiated or worked with our lease flexibility to close about 85% of the total fleet by year-end.
We are continuing our negotiations with landlords for the approximately 35 stores that will remain open into fiscal '22.
We've had a great partnership with our vendors and are pleased with the vendor community's reception to the Footaction transition.
We've been able to transfer not only inventory, but also access to some brands and concepts that will bode well for some of our go-forward banners, especially Champs Sports and Eastbay.
Yesterday, we announced some exciting organizational enhancements to advance Foot Locker's long-term growth in omnichannel objectives.
Frank Bracken, Executive Vice President and Chief Executive Officer, North America, has been named Chief Operating Officer effective immediately.
In his new role, Frank will oversee the company's global operating divisions, the omni customer experience, inclusive of global technology services and supply chain, and our global franchise JV partnerships.
Susie Kuhn, Senior Vice President, General Manager of Foot Locker Europe, has been named as President of EMEA and General Manager of Foot Locker Europe, also effective immediately.
Andy Gray, Chief Commercial Officer, will expand his responsibility by leading our global commercial unit including product, the powering up of our controlled brands, omni-marketing, membership and commercial development and the LEED initiative.
Together, the announced leadership appointments and organizational enhancements underscore our focus on aligning our commercial, operations and finance functions to drive organizational productivity.
With a more agile operational structure, we will be in an even stronger position to expand our customer base and grow our connectivity with sneaker culture and the communities we serve.
Overall, our financial position remains strong.
Our vendor relationships are very strategic in nature, and we continue to obsess around our customers, whether it's through our digital channels, social media, FLX or an in-store customer experience.
Our solid Q3 performance is why we remain optimistic about the strength of our portfolio, the power of our assortments and the loyalty of our customers.
We are confident that this positive momentum will continue into 2022 and beyond.
It is their dedication and hard work that made these outstanding results possible and will enable us to continue to drive our business forward and fulfill our purpose to inspire in a power youth culture.
Throughout the quarter, we remain laser-focused on continuing to strengthen our relationships with our existing consumers and bringing new ones into our business.
This enabled us to beat our results from last year and continued to outpace 2019.
To give you a breakdown of our performance, our footwear business decreased low single digits, while our apparel and accessory businesses were both up double digits.
All families of business were up relative to 2019.
While our total men's business was down slightly, we saw acceleration in women's and positive momentum in kids' driven by our success at drawing in more consumers and the expansion of our sneaker community.
Again, all areas were positive to 2019.
We often saw a great vendor diversity showcasing the health of our category and the expansion of our consumers' taste preferences as they fill their sneaker and apparel closet.
The majority of our top 20 vendors posted gains driving excitement in their respective categories, all of which helped to offset supply chain disruption that impacted the flow of some of our franchisees and launch products.
Another area of our business that continues to gain momentum is apparel, which was up double digits in men's, women's and kids' versus both LOI and 2019.
Our branded business remains strong across categories, and our own brand business has expanded and accelerated.
In addition to our CSG business, which is our Champs Sports private label offering, we reimagined our Eastbay performance wear in the third quarter with a cross-category launch featuring Jalen Hurts.
And we introduced our Locker brand for the first time to great reception from our customers.
This momentum continues into Q4.
We are launching more own brands, including Cozy, a new apparel brand tailored for our female consumer.
We just launched All City by Just Don, a lifestyle brand created with Don C rooted in basketball and sneaker culture that is inspired by the spirit of community.
Don C has been a part of the cultural vanguard for decades as a music executive, fashion designer, sneaker collaborator and brand storyteller and this launch immediately resonated with the next generation of streetwear enthusiasts.
And we have upcoming exclusive partnerships with more taste makers and celebrity curators like Melody Ehsani as we continue to add dimension to our apparel business.
Store retailing continues to evolve and enable us to connect with our consumers as we work with all of our partners to deliver a strong pipeline of exciting exclusive product concept that set us apart in the marketplace.
We delivered 15 exclusive concepts in the third quarter, which were significant in terms of scale and consumer engagement.
And our powerful consumer concept offense continues throughout the holiday season, including Alter and Reveal with Nike, Adidas and Trey Young, Crocs and AWAKE collaboration, Louis De Guzman and New Balance, and a whole host of excitement from PUMA, including LaMelo Ball, LOL surprise and Staple.
This offense, together with our positioning in the key footwear franchises, continued seasonal expansion with an increased focus on boots and fleece and a very strong pipeline of product and inventory in apparel, leaves us well positioned to delight the consumer in the holiday season.
Local areas of development for the team in the quarter included enhancing our mobile and app experience where we see 90% of our online traffic come from evolving our launch reservation process with new data algorithms to improve fairness and work toward ensuring unique individual winners and enhancing our buy online, pick-up in store experience, leading to greater adoption.
Lastly, the ongoing expansion of our community stores and geo offense is a critical component of our strategy.
During the quarter, Downey in LA and Brixton in London opened their doors to great reaction from our consumers.
We also continued to build community through the rollout and expansion of our FLX membership program.
We now have over 28 million enrolled members with over 3 million joining in this quarter alone.
We remain encouraged by the results and engagement of our members who spend more and shop more often than nonmembers.
And there's still a lot of opportunity ahead of us with the program recently launching in Italy, Germany and Spain.
As we push our consumer-led offense forward, it's a combination of product leadership and diversity, enhanced omni experiences and our focus on community and purpose that continues to drive our leadership in the industry and strengthen our relationship with our consumers.
Let me now pass the call over to Andrew.
As we navigate the ongoing supply chain challenges, our strong third quarter results demonstrate the resilience and flexibility that our diversified product mix and our strong vendor relationships afford us.
During my review of the results, I would like to note that in addition to comparing to last year, I will also reference comparisons to the third quarter of 2019 where it is helpful.
On a year-over-year comparable basis, our third quarter sales were up 2.2% and earnings per share grew almost 60%.
Impressively, this strong result was on top of the robust 7.7% comp gain in last year's third quarter and speaks to the strong connection we have built with our customer base.
This connection was apparent during the back-to-school period where we saw strong customer engagement in our stores, digital and social channels, and growing attachment to our key initiatives like our FLX membership program.
From a cadence perspective, with school openings on a more normal schedule, August led with a low double-digit comp gain, while September comps, which benefited last year from the later school openings, declined high single digits.
We then saw momentum turn meaningfully positive in October with comp sales up low single digits.
Total sales for the quarter rose to $2.2 billion or a 3.9% increase over the prior year and up 13.3% versus the third quarter of 2019.
This includes a $56 million contribution from WSS since the close of the transaction in mid-September.
For the third quarter, our global fleet was open for 97% of possible operating days with temporary closures in Australia, New Zealand, certain markets in Asia and Germany.
Our year-over-year comp sales through our store channel increased 4.2%.
Store traffic increased approximately 30% compared to fiscal 2020 as our customers continued to want an in-store experience with our multi-brand product assortment.
When compared to fiscal 2019, traffic was down high single digits, and conversion was up significantly.
In our digital channels, which continued to be an important connection point with our customers, sales were down 4.6% in the third quarter as we lapped an approximate 50% increase from last year.
Digital sales penetration rate was 19.8%.
While down 160 basis points in 2020, it was well above the 15.3% from 2019.
Our customers continued to overwhelmingly start their shopping journey with us digitally.
And as we continued to create a seamless omni experience, they can easily close their transactions through our apps, our websites or in our physical stores.
Turning now to some highlights of our three geographies.
In North America, our Champs Sports, Foot Locker Canada and Kids Foot Locker banners led the way with low single-digit comp gains, at the top of last year's double-digit increases.
The other North American banners posted comp declines with Foot Locker in the U.S. down low single digits, Eastbay down high single digits and Footaction in wind-down mode closed the quarter down over 20%.
In EMEA, pent-up demand continues to drive growth as stores reopened across all countries with strength across apparel, women's footwear and strategic brands like Converse and New Balance, leading to another double-digit comp gain at Foot Locker Europe and high teens comp gain at Sidestep.
Our EMEA fleet was opened 99% of possible operating days in the quarter compared to 96% in the third quarter of last year.
Our APAC region was down slightly due to ongoing challenges related to COVID.
The fleet was open approximately 55% of possible operating days, down from 82% in Q2 of this year.
Foot Locker Pacific leveraged strong demand through the digital channel to offset the impact of the store closures and finished with a low single-digit comp gain, while Foot Locker Asia was down mid-single digits.
We continued to make progress on our expansion strategy within Asia as we opened two new stores and sold during the third quarter.
And earlier this month, we completed the acquisition of Atmos giving us a strong presence in Japan, one of the key markets in sneaker culture.
Across our markets, regions and channels, the combination of more limited promotional environment, solid demand and a higher penetration in our stores led to a low single-digit increase in average selling prices while units were down slightly.
Moving down the income statement.
Gross margin was 34.7% compared to 30.9% last year and 32.1% in the third quarter of 2019.
The improvement in our gross margin was driven by many of the same trends from the first half of 2021 as the combination of robust demand and fresh and lean inventory drove meaningfully lower levels of promotional activity.
Our merchandise margin rate improved 470 basis points over last year and 80 basis points over 2019, driven primarily by the meaningful reduction in markdowns.
Looking into the holiday season and the fourth quarter, we expect the promotional activity to remain favorable relative to both 2020 and 2019.
As a percent of sales, our occupancy and bias compensation costs delevered 90 basis points over Q3 of 2020.
As a reminder, in last year's third quarter, we benefited from $32 million of COVID-related tenancy relief versus $3 million this year.
When compared to Q3 of 2019, we leveraged our occupancy expense by 180 basis points.
Our SG&A expense came in at 20.9% of sales in the quarter compared to 20.1% in the prior year period.
When compared to 2019, our SG&A rate improved by 40 basis points.
For the quarter, depreciation expense was $49 million, up from $44 million last year.
Interest expense rose to $4 million from $2 million in the prior year due to the incremental expense related to the company's new bond issuance.
Within other income, there was a benefit of $26 million or $0.18 per share from the mark-to-market of our investment in Retailers Limited.
As a reminder, Retailers Limited is our partner in the joint venture that manages our Foot Locker stores in select Eastern and Central European market and is also our franchise partner in Israel.
Our non-GAAP tax rate came in at 27.8% compared to last year's rate of 30.7%.
Turning to the balance sheet.
We ended the quarter with approximately $1.3 billion of cash, down $54 million from a year ago.
At the end of the quarter, inventory was up 9.1% to last year, driven by our supply chain and logistics team efforts to position us well for the upcoming holiday season combined with the inventory that was included in the WSS acquisition.
On a constant currency basis, inventory was up 8.5% and sales increased 3.6%.
In terms of capital expenditures, we invested $50 million in the quarter, bringing the year-to-date total to $137 million.
This funded the opening of 32 new stores, including new Foot Locker community stores in Downey, California and Brixton, UK.
Champs Sports Power stores in the Bronx, New York and Torrance, California; the expansion of Sidestep in Belgium; and the conversion of 18 Footaction stores.
We also relocated or remodeled 29 stores and closed 80 stores in the quarter, including 50 Footaction stores.
With the addition of WSS stores, we finished the quarter with 2,956 company-owned stores.
For the full year, we now expect to open approximately 144 stores, including eight new WSS stores, remodel or relocate 200 stores and close 370 stores, including about 205 Footaction doors.
Looking forward, we now expect to invest approximately $240 million in capital expenditures this year, lower than our prior guidance of $260 million due primarily to supply chain challenges with the balance shifting into 2022.
Turning to capital allocation.
We and our Board are confident in the financial position of the company and continue to believe that returning cash to our shareholders is an important aspect of the company's capital allocation strategy.
First, we returned $30 million to our shareholders through our quarterly dividend program.
Next, we saw opportunity given the value of the company's stock, and we repurchased 2.75 million shares of common stock for $129 million during the quarter.
In total, we have returned $242 million to shareholders through the first nine months of the year through share repurchases and dividends while continuing to make strategic investments to fuel our growth.
We also returned to the capital markets during the quarter, taking advantage of favorable market conditions to create more flexibility by issuing $400 million worth of 4% senior notes due in 2029.
Proceeds from the issuance will be used for general corporate purposes such as repaying $98 million of senior notes due in January 2022 and replenishing our inventory levels.
Of note, following the capital raise, our liquidity position is comparable to pre-pandemic levels.
In summary, we are still on track with our capital allocation program investing in our business first, with a continued focus on returning cash to shareholders through our dividend and opportunistic share repurchase programs.
Finally, turning to our full year outlook, which now includes the benefit from WSS and Atmos.
We believe we are well positioned for the holiday season in terms of both strong customer demand and inventory levels to support that demand.
Like other companies, we expect global supply chain constraints, including factory shutdowns and port congestion to continue to be a headwind through the fourth quarter and into 2022.
As such, we remain appropriately cautious in the near term.
Based on our current visibility, we expect to deliver sales growth in the high teens for the full year, with comp sales in the mid-teens.
We are expecting the gross margin rate to be up 540 basis points to 550 basis points for the full year versus 2020, mostly driven by a more rational promotional environment.
Our SG&A expense rate is expected to leverage between 40 basis points and 50 basis points year-over-year.
Moving down the income statement.
We expect depreciation and amortization expense to be approximately $190 million, interest expense of about $14 million and our year-over-year effective tax rate of around 28%.
We now expect our non-GAAP earnings range to be approximately $7.53 to $7.60 per share.
This guidance reflects our strong performance in the first nine months of the year and our increased visibility in the fourth quarter while recognizing the supply chain challenges that we discussed.
As we look ahead to fiscal 2022, powered by the strength of our portfolio, the breadth of our assortments and the loyalty of our customers, we look forward to providing our fiscal 2022 outlook on our fourth quarter earnings call.
In closing, we believe the combination of our financial strength, strategic relationships with our vendor partners and deep connection with our customers provide us with flexibility to maneuver in this rapidly evolving marketplace through the fourth quarter and beyond, executing toward our long-term strategic imperatives and driving shareholder value.
We remain very confident in our strategy, are pleased with the trajectory we are currently on, and we look forward to updating you on our progress in the coming quarters.
| q3 non-gaap earnings per share $1.93.
q3 earnings per share $1.52.
q3 same store sales rose 2.2 percent.
expect global supply chain constraints to persist throughout q4.
foot locker-as of oct 30,2021, co's merchandise inventories, which included addition of wss, were $1,301 million, 9.1% higher than at end of q3 last year.
believe we are positioned for holiday season, with positive momentum and inventory levels ready to meet customer demand.
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On the call are Jeff Mezger, chairman, president, and chief executive officer; Matt Mandino and Rob McGibney, executive vice presidents and co-chief operating officers; 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 had a remarkable year in 2021, producing revenue growth in excess of 35% and an increase in our earnings per share of more than 90%.
We achieved our objectives of expanding our scale and profitability, driving our return on equity up by over 800 basis points to 20%.
Our results are even more notable considering they were accomplished despite the supply chain challenges and municipal delays that were pervasive throughout the year as our teams have been successfully navigating these issues.
As we begin 2022, we are poised to continue delivering returns-focused growth.
Our backlog value of $5 billion, which grew 67% year over year provides a strong base to support our roughly $7.4 billion in expected revenues in 2022.
This represents substantial top-line expansion, which combined with our expectation of a dramatic increase in our gross margin to nearly 26% will drive our return on equity meaningfully higher.
With respect to the fourth quarter, we generated total revenues of $1.7 billion and diluted earnings per share of $1.91, representing a year-over-year increase of more than 70% on the bottom line.
We achieved an operating income margin approaching 12%, resulting in a 28% expansion in our operating profit per unit to over $56,000.
In addition to this significant profit growth, our business is generating a healthy level of cash flow, and we remain consistent in our balanced approach toward allocating this capital.
Disciplined investment in community count growth is our top priority.
And in 2021, we put over $2.5 billion to work in land acquisition and development.
We expanded our lot position to nearly 87,000 lots under control, which is almost 30% higher from year-end 2020.
Our lot position is diversified both across and within our regions, and we own all of the lots that we need for our anticipated 2022 delivery goals.
We also now own or control the lots that we need for sustained growth in 2023.
In addition to reinvesting in our business, we returned over $240 million in cash to stockholders through the share repurchases that we completed in our third quarter, along with our quarterly dividend, and we reduced our debt during the year by over $60 million.
Throughout 2021, we implemented price increases across nearly all of our communities, along with managing lot releases to balance pace, price, and production in order to optimize each asset.
Although costs rose as we move through the year, our pricing strength outpaced the rate of cost inflation, driving our backlog margins higher.
This dynamic continued in our fourth quarter contributing to a rise in our net order value of 12% year over year despite net orders decreasing 10%, a level similar to the decline in our community count.
This increase in net order value contributed to a backlog value that is more than 65% higher.
With the extension of our cycle times, most of the pricing power we experienced in 2021 will be reflected in our gross margin beginning in our 2022 second quarter.
In addition, our results will continue to benefit from structural tailwinds, including the performance of our more recently opened communities, where margins are running in excess of the company average.
The ongoing rotation into a higher quality mix of assets as the impact from reactivated communities continues to diminish, a reduction in amortized interest, and the impact that higher monthly deliveries per community has on field overhead.
All of these factors combined are driving our expectation of a gross margin of nearly 26% for this year.
We successfully opened 130 new communities in 2021, our largest number in many years, including 33 in the fourth quarter.
The higher lot count that I mentioned will enable us to accelerate our new community openings in 2022.
As a result, we now expect to end 2022 with about 265 communities, up over 20% year over year and ahead of our initial projection that we shared in September.
In addition of supporting our roughly 30% increase in revenue planned for 2022, our community count expansion will also contribute to our growth in 2023.
Our monthly absorption per community of 5.5 net orders during the fourth quarter, reflected a typical seasonal pattern sequentially.
For the year, our absorption pace averaged 6.3 net orders per community per month, the best annual rate we have seen in more than a decade.
Homebuyers value the choice and personalization inherent in our built-to-order model, which we believe is the primary reason that we have long generated among the highest absorption rates and the rates will rise this year.
And with the strong home price appreciation the market has experienced, it is appropriate to spend a moment addressing affordability.
Our strategy is to target the median household income of a submarket, positioning our homes to be attainable by the largest segment of buyers.
We strive to be below the median new home price and had a reasonable medium -- had a reasonable premium to the median resale price when we open a community and then be opportunistic in raising price based on demand at that location once opened.
Our average selling price on deliveries rose about 9% year over year in 2021, well below the reported increase for overall pricing levels nationally, highlighting the affordability of our locations and products.
As we have discussed on previous calls, we track a number of internal key indicators to gauge changes in consumer behavior that could signal affordability challenges, which we are not seeing at this time.
One of the most telling of these is the square footage of homes that buyers are selecting as they will typically rotate down to a smaller home if they need to in order to achieve homeownership.
Although we offer floor plans below 1,600 square feet in about 80% of our communities, buyers continue to choose larger footage homes.
Over the past year, our deliveries have averaged between 2,000 and 2,100 feet, consistent with our historical trend.
And our homes in backlog are slightly above that range.
We also look at our studio revenues and lot premiums, which we view as discretionary spending for our buyers.
We would expect to see a decline if buyers are stretched, but our studio revenues and lot premiums have increased even as base prices have risen.
On a combined basis, buyers spent about $48,000 per home in these two categories in the fourth quarter, a solid enhancement to our revenues.
Finally, and perhaps most importantly, is the credit profile of our buyers.
Their average FICO score in the quarter was 732, an all-time high.
In addition, about two-thirds of our buyers qualified for a conventional mortgage, and our buyers overall are averaging a down payment of over $67,000.
Taken together, these metrics illustrate our buyers' strong credit.
I'll also note that the recent increases in loan limits, both conventional and FHA should help with mortgage financing, provided an incremental benefit to the industry.
We started over 3,800 homes during the quarter as we worked to position our production for growth in 2022 deliveries.
At year-end, we had over 9,100 homes in production with 90% of these homes already sold.
Generally, our cancellation rate once we start the home is extremely low, and at 5% in the fourth quarter, it remains so.
We're reflecting our customers' strong desire to purchase their personalized homes.
As to build times, while they expanded about two weeks sequentially in the quarter, we are encouraged to see some signs of stabilization.
Construction times in November and December were consistent with September and October, pointing to a leveling out over the last four months.
Our projections for this year, assume that we hold at these levels, and depending on timing, any improvement in build times could increase our expected closings in the latter part of this year.
Our backlog is comprised of over 10,500 homes with a value of $5 billion, representing the bulk of our revenues expected for 2022.
One aspect of our built-to-order business model that tends to get overlooked is the dynamic between our revenue growth and community count.
In our count, we do not include communities that we consider to be sold out, meaning that they have less than five homes left to sell.
That doesn't mean the community has closed out and that those communities will continue to contribute to our revenues and profits.
In fact, our backlog includes almost 1,900 homes from 150 sold-out communities that will deliver approximately $1 billion in 2022 revenues.
While we have not seen a slowdown in demand across our geographic footprint in the past couple of months, and we foresee a strong spring selling season ahead, a combination of factors has resulted in a negative year-over-year net order comparison for the first six weeks of this quarter at 17%.
In the prior year, net orders throughout December and into 2021 were particularly strong creating a difficult comparison.
As the first quarter progresses, and we benefit from the additional community openings we have scheduled, along with easier weekly comparisons, we expect to end the quarter with net orders down about a mid-single-digit percentage year over year, similar to our anticipated decline in average community count for the quarter.
Market conditions remain very healthy as favorable demographics, low mortgage interest rates, and an extremely limited supply of homes, particularly for first-time buyers continue to drive demand.
Specific to KB Home, we believe the location of our communities, price point of our products, and the ability to choose and personalize homes in our built-to-order approach are compelling for buyers.
Shifting gears for a moment.
2021 was also marked by solid progress in our environmental, social, and governance initiatives.
KB Home was once again recognized with multiple honors from the U.S. Environmental Protection Agency, leading our industry with the ENERGY STAR Partner of the Year Award, a record number of ENERGY STAR Market Leader Awards and once again being the only homebuilder to receive the WaterSense Sustained Excellence Award.
Our environmental program is robust, and we are proud that our homes have the lowest national average HERS score among production builders with a long track record of annual improvement in this key metric, which we expect to continue in 2022.
Our ESG leadership is being recognized as KB Home is the only national builder named to Newsweek's list of America's most responsible companies for the second year in a row.
We've significantly increased our volume in 2021 amid the most challenging and fluid operating conditions that I have seen in my homebuilding career.
These results came about from the determined and relentless efforts of our entire team.
In closing, 2021 was a rewarding year for KB Home.
In addition to generating significant revenue and earnings growth, we also produced substantial increases in our book value per share and our return on equity.
Alongside these meaningful financial results, we maintain our leadership in providing the highest customer satisfaction levels among large production homebuilders and continue to drive innovation through the introduction of energy-efficient and healthier home features.
As a result of these and many other factors, KB Home was named to the list of the 250 most effectively managed companies in the U.S., a ranking that was developed by the Drucker Institute in conjunction with The Wall Street Journal.
As we look to the year ahead, during which we will celebrate our 65th anniversary, we anticipate another year of remarkable growth, which we expect will ultimately drive a return on equity of more than 26%.
We look forward to sharing our progress with you as 2022 unfolds.
I will now cover highlights of our financial performance for the 2021 fourth quarter and full year, as well as provide our outlook for the 2022 first quarter and full year.
We finished 2021 with strong fourth-quarter results, including significant year-over-year growth in revenues and a 310-basis-point expansion in our operating margin that drove a 71% increase in our diluted earnings per share.
While we faced supply chain issues that extended our cycle times, as well as construction cost inflation challenges during 2021, our exceptional portfolio of communities and solid operational execution, along with the strong housing market generated impressive full-year results that I will summarize in a few minutes.
With a robust 2021 ending backlog value of nearly $5 billion and 29% year-over-year expansion in the number of lots owned or controlled, we are well-positioned for continued meaningful growth in revenues, community count, earnings per share, and returns in 2022.
In the fourth quarter, our housing revenues of $1.66 billion were up 39% from a year ago, reflecting a 28% increase in homes delivered and a 9% increase in their overall average selling price.
Housing revenues were up significantly in all four of our regions, ranging from a 28% increase in the Central region to 114% in the Southeast.
Looking ahead to the 2022 first quarter, we anticipate housing market conditions will continue to be favorable with strong homebuyer demand while we navigate expected continued supply chain challenges.
For the 2022 first quarter, we expect to generate housing revenues in the range of $1.43 billion to $1.53 billion.
For the 2022 full year, assuming no change in supply chain dynamics, we are forecasting housing revenues in the range of $7.2 billion to $7.6 billion, up over $1.7 billion or 30% at the midpoint as compared to 2021.
Having ended our 2021 fiscal year with our highest year-end backlog level since 2005, along with our expectations for a higher community count and continued strong housing market conditions, we believe we are well-positioned to achieve this top-line performance for 2022.
In the fourth quarter, our overall average selling price of homes delivered increased to approximately $451,000.
Reflecting our higher average selling price per net order in recent quarters, we are projecting an average selling price of approximately $472,000 for the 2022 first quarter.
For the 2022 full year, we believe our overall average selling price will be in the range of $480,000 to $490,000.
Homebuilding operating income for the fourth quarter totaled $214.4 million, up 85% as compared to $115.7 million for the year-earlier quarter.
The current quarter included inventory-related charges of approximately $700,000 versus $11.7 million a year ago.
Our operating margin was 12.8%, up 310 basis points from the 2020 fourth quarter.
Excluding inventory-related charges, our operating margin was 12.9% as compared to 10.7% a year ago, reflecting improvements in both our gross margin and SG&A expense ratio.
We anticipate our 2022 first quarter homebuilding operating income margin, excluding the impact of any inventory-related charges, will be approximately 12%, compared to 10.4% for the year-earlier quarter.
For the 2022 full year, we expect this metric to be in the range of 15.7% to 16.5%, which represents a significant year-over-year improvement of 450 basis points at the midpoint, reflecting continued positive momentum in both our gross margin and SG&A expense ratio.
Our 2021 fourth-quarter housing gross profit margin improved 230 basis points from the year-earlier quarter to 22.3%.
Excluding inventory-related charges, our gross margin for the quarter reflected a year-over-year increase of 140 basis points to 22.4%.
The year-over-year improvement primarily reflected the impact of higher selling prices and lower amortization of previously capitalized interest, partly offset by higher costs for lumber and other construction materials and labor.
We are forecasting a housing gross profit margin for the first quarter in the range of 22% to 22.6%, representing the low point for the year.
We anticipate significant sequential expansion in quarterly gross margin during 2022, mainly driven by price increases that have outpaced cost pressures in our established communities, strong selling margins in our recently opened communities, and an expected reduction in amortization of previously capitalized interest.
For the full year, we expect this metric will be in the range of 25.4% to 26.2%, an increase of 400 basis points at the midpoint as compared to 2021.
Our selling, general, and administrative expense ratio of 9.8% for the fourth quarter improved 50 basis points from a year ago, mainly reflecting enhanced operating leverage due to higher revenues, partly offset by increased performance-based compensation expenses and costs to support our expanding scale.
We are forecasting our 2022 first quarter SG&A ratio to be approximately 10.4%, an improvement of 30 basis points versus the prior year as expected favorable leverage impact from an anticipated year-over-year increase in housing revenues are partially offset by increased investments in personnel and other resources to support a projected meaningful expansion in community count.
We expect that our 2022 full-year SG&A expense ratio will be in the range of 9.4% to 9.9%.
Our income tax expense of $49.7 million for the fourth quarter, which represented an effective tax rate of approximately 22%, was favorably impacted by $7 million of federal energy tax credits, reflecting another benefit of our industry-leading sustainability initiatives.
We currently expect our effective tax rate for the 2022 first quarter and full year to be approximately 25%, both excluding any favorable impacts from energy tax credits.
Federal legislation extending the availability of tax credits for building energy-efficient homes in 2022 has not yet been enacted.
If the Section 45L tax credit is extended at its current level, our 2022 effective tax rate would be favorably impacted by approximately 200 basis points.
Overall, we reported net income of $174.2 million or $1.91 per diluted share for the fourth quarter, a notable improvement from $106.1 million or $1.12 per diluted share for the prior-year period.
Reflecting on the full year, we are very pleased with our strong 2021 financial results.
We increased our housing revenues by 37% to nearly $5.7 billion, expanded our operating margin by 400 basis points to 11.6% with measurable improvements in both our gross margin and SG&A expense ratio, and reported $6.01 of diluted earnings per share, an increase of 92%.
We also completed $188 million of share repurchases, refinanced $390 million of our senior notes, resulting in annualized savings of $16 million of incurred interest, and improved our year-end leverage ratio by 380 basis points.
Turning now to community count.
Our fourth quarter average of 214 was down 9% from 234 in the corresponding 2020 quarter and up 4% sequentially.
We ended the year with 217 communities down 8% from a year ago and up 3% sequentially.
We expect our 2022 first-quarter ending community count to remain relatively flat sequentially and represents a low point for 2022.
On a year-over-year basis, we anticipate our 2022 first-quarter average community count will be down by a low single-digit percentage.
We expect our quarter-end community count to increase sequentially through the remainder of the year starting in the second quarter as openings each quarter are expected to outpace sell-outs.
We anticipate ending the year with a 20% to 25% increase in our community count, supporting additional top-line growth in 2023 and beyond.
During the fourth quarter, to drive future community openings, we invested $622 million in land and land development with $258 million or 41% of the total representing land acquisitions.
In 2021, we invested over $2.5 billion in land acquisition development, compared to $1.7 billion in the previous year.
At year-end, our total liquidity was approximately $1.1 billion including $791 million of available capacity under our unsecured revolving credit facility.
Our debt-to-capital ratio improved to 35.8% at year-end 2021, compared to 39.6% the previous year.
We expect to generate significant cash flow in the current year to fund land investments supporting our targeted 2022 and future years' growth in community count and housing revenues.
Our 2021 year-end stockholders' equity was $3.02 billion as compared to $2.67 billion a year ago, and our book value per share increased by 18% to $34.23.
Finally, one of the most notable 2021 achievements was our significant improvement in return on equity to 19.9% for the full year, a year-over-year expansion of over 800 basis points.
Given our current backlog and community opening plans and the expected continued strength in the housing market, we are confident that we will generate significant year-over-year improvements in our key 2022 financial metrics.
We plan to continue to execute on the principles of our returns-focused growth strategy with an emphasis on meaningfully improving our returns by increasing our community count and top line while producing further expansion in our operating margin.
In summary, using the midpoints of our guidance ranges, we expect a 30% year-over-year increase in housing revenues and significant expansion of our operating margin to 16.1% driven by improvements in both gross margin and our SG&A expense ratio.
These in turn should drive our return on equity of over 26% up and excess of 600 basis points from 19.9% in 2021.
This outlook reflects our view that with our returns-focused growth strategy, attractive business model, seasoned leadership team, and continued favorable housing conditions, we will be able to further and meaningfully enhance long-term stockholder value in 2022.
Alex, please open the lines.
| q4 earnings per share $1.91.
net order value for q4 expanded by $184.3 million, or 12%, to $1.77 billion.
ending backlog grew 35% to 10,544 homes at quarter-end.
qtrly homes delivered rose 28% to 3,679.
sees fy 22 average selling price in range of $480,000 to $490,000.
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I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier.
Todd will review key points for the quarter and Joe will take you through the company's financial performance and outlook for 2021.
To give everyone time to ask questions during the Q&A, please limit yourself to a couple of questions or follow-ups and requeue for any additional questions.
All comparisons mentioned today are against the prior year period.
For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC.
In the first quarter, we continued to see strong momentum in our Residential business, combined with strong improvement in Commercial and Refrigeration, as the overall company set new first quarter highs for revenue, profit and earnings per share.
Overall, for the company, revenue was up 29% to a new first quarter record of $931 million.
At constant currency, revenue was up 28%.
GAAP operating income was a first quarter record $114 million, up 213%.
GAAP earnings per share from continuing operations was a first quarter record $2.20, up 588%.
Total segment profit rose 208% to a first quarter record of $116 million.
Total segment margin expanded 720 basis points to 12.4%, and adjusted points to 12.4%, and adjusted earnings per share from continuing operations rose 305% to a first quarter record $2.27.
Looking at our business segments for the first quarter, we've realized double digit revenue growth and margin expansion in all three businesses.
In Residential, we set new first quarter highs for revenue and profit.
Residential revenue was up 37%.
Segment profit rose 197% and segment margin expanded 850 basis points to 15.9%.
Replacement business was up more than 40% and new construction was up more than 25%.
Breaking it down between our Lennox business and our Allied business, Lennox revenue was up about 25%, and Allied was up about 70%.
Let me take a moment to unpack the strength we saw in Residential in the quarter.
First, with strong operational execution, our Residential team is capitalizing on its ability to deliver to meet contractor and distributor demand and gain share.
Post the 2018 tornado and the initial 2020 pandemic impact, we are back on offense with production, distribution and executing our playbook for market share gains.
Second, Residential benefited from the colder winter weather with heating degree days up 13% from the first quarter last year.
You may recall, we had a soft first quarter in 2020.
Third, I'd like to note that we had -- I would like to note that we had a 6% benefit to revenue for more days in the quarter this year than last year.
That happens every four years as we reset the calendar.
Conversely, the fourth quarter will have a 6% headwind from fewer days in the quarter this year.
This applies to Residential as well as all our other businesses.
Adjusting for the days, Residential grew 31% with Lennox growing nearly 20% and Allied growing about 65%.
In addition, for Allied, we had approximately $25 million of pull-forward in the first quarter from different distributor loading patterns this year than last year.
Adjusted for both days and this pull-forward, Allied was up approximately 35% in the quarter.
Working through all this math I gave, adjusting for days and the pull-forward in our Allied business which sells to independent distribution, overall Residential segment revenue was up about 25%.
We believe this compares to mid-teen sell-through for the industry, driven in part by the favorable cold weather that I talked about.
Our performance that is above that is due to market share gains.
As I mentioned earlier, we are back on the offensive with production, distribution and executing our playbook for gaining share.
The team has had strong operational execution to drive this outperformance, and we are well positioned for the summer season and our largest season of quarters.
In Commercial, revenue, segment profit and margin were all first quarter records.
Revenue is up 12%.
At constant currency, revenue was up 11%.
Segment profit was up 47% and segment margin expanded 330 basis points to 13.8%.
In the first quarter, we saw broad strength in Commercial as year-over-year growth turned positive across all of our businesses.
At constant currency, Commercial equipment revenue was up mid-teens in the quarter.
Within this, replacement revenue was up mid-teens with planned replacement up mid-teens and emergency replacement up high teens.
New construction revenue was up high single digits.
Breaking out revenue another way, regional and local business revenue is up mid-teens, national account equipment revenue is also up mid-teens.
Our team won three new national account equipment customers in the quarter.
On the service side, the next National Accounts Services revenue was up mid-single digits.
VRF revenue was up mid-30s percentage.
Some highlights to mention for Commercial.
Schools continue to be an area of focus for us.
We have a dedicated sales force and product line that will drive a multiyear growth opportunity for us in this market.
Today, K-12 schools are just a little under 10% of revenue for this -- equipment revenue for this segment.
This business is up more than 20% for us in the first quarter.
And given the recent stimulus package that benefits HVAC, indoor air quality spending for schools, we expect K3 schools to be a growth vertical for us moving forward.
Indoor air quality continues to be an important focus for us with our building better air initiatives.
Most interest and activity we are seeing are in this K-12 school segment but conversations are taking place with many customers across many industry verticals.
We have launched our new Model L Rooftop unit as we continue to lead the field and energy efficiency.
The Model L features variable speed technology and an all-new advanced control system.
We're seeing high customer interest in this industry-leading product for 2021 and beyond.
Overall, for Commercial, entering the second quarter, momentum continues with backlog up double digits and strong order rates.
In Refrigeration for the first quarter, revenue was up 21%.
At constant currency, revenue is up 17%.
In North America, revenue was up more than 25%.
Europe Refrigeration revenue was up low single digits at constant currency, and Europe HVAC revenue was up mid-single digits at constant currency.
Refrigeration segment margin expanded 560 basis points to 6.3%.
The segment profit rose to $8 million from $1 million in the prior year quarter.
Like in Commercial, momentum continues for Refrigeration entering the second quarter with backlog up double digits and strong order flow led by North America.
The strong performance for the company overall in the first quarter and outlook for the second quarter and year, we are raising 2021 guidance.
We now expect 7% to 11% revenue growth and adjusted earnings per share from continuing operations of $11.40 to $12.
We are also raising free cash flow guidance to $375 million for the full year.
We now assume about 55% of earnings in the first half of the year compared to the prior guidance of about 50%.
This reflects the strong first quarter performance and second quarter outlook.
We repurchased $200 million of stock in the first quarter and plan on another $200 million for a total of $400 million in our guidance for the year.
I'll provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating & Cooling.
In the quarter, revenue from Residential Heating & Cooling was a first quarter record $606 million, up 37%.
Volume was up 32%.
Price was up 1% and mix was up 4%.
Foreign exchange was neutral to revenue.
Residential profit was a first quarter record $96 million, up 197%.
Segment margin expanded 850 basis points to 15.9%.
Segment profit was primarily impacted by higher volume, favorable price and mix, higher factory productivity, sourcing and engineering-led cost reductions, distribution and freight savings and favorable foreign exchange.
Partial offsets included higher commodity, warranty and other product costs and higher SG&A.
Now turning to our Commercial Heating & Cooling business.
In the first quarter, Commercial revenue was a first quarter record $199 million, up 12%.
Volume was up 15%.
Price was flat and mix was down 4%.
Foreign exchange had a positive 1% impact to revenue growth.
Commercial segment profit was a first quarter record $27 million, up 47%.
Segment margin was a first quarter record 13.8%, which was up 330 basis points.
Segment profit was primarily impacted by higher volume, lower material costs and lower SG&A.
Partial offsets included unfavorable mix.
In Refrigeration, revenue was $125 million, up 21%.
Volume was up 15%.
Price was up 1% and mix was up 1%.
Foreign exchange had a positive 4% impact to revenue growth.
Refrigeration segment profit was $8 million in the first quarter compared to $1 million in the prior year quarter.
Segment margin was 6.3%, up 560 basis points.
Segment profit was primarily impacted by higher volume, favorable price and mix, lower material costs and higher factory productivity.
Higher SG&A was a partial offset.
Regarding special items in the first quarter, the company had net after-tax charges of $2.7 million that included a $2 million net charge for other tax items, a $1.9 million net charge in total for various other items and a $1.2 million benefit for excess tax benefits from share-based compensation.
Corporate expenses were $16 million in the first quarter compared to $14 million in the prior year quarter.
Overall, SG&A was $145 million compared to $131 million in the prior year quarter.
SG&A was down as a percent of revenue to 15.6% from 18.1% in the prior quarter.
In the first quarter, the company used $18 million in cash from operations compared to a usage of $99 million in the prior year quarter.
Capital expenditures were approximately 25 -- $24 million in the first quarter and in the prior year quarter.
Free cash flow was a negative $42 million in the first quarter compared to a negative $123 million in the prior quarter.
The company paid approximately $30 million in dividends in the quarter and repurchased $200 million of stock.
Total debt was $1.17 billion at the end of the first quarter and we ended the quarter with a debt-to-EBITDA ratio of 1.8.
Cash, cash equivalents and short-term investments were $40 million at the end of the first quarter.
We now expect the industry to see high single-digit shipment growth in Residential, Commercial Unitary and Refrigeration markets in full year, up from our prior assumption of mid-single-digit growth in these end markets.
For the company, we are raising guidance for 2021 revenue growth from a 48% range to a new range of 7% to 11%, and we still expect foreign exchange to be neutral to revenue for the full year.
We are raising guidance for 2021 GAAP earnings per share from continuing operations from a range of $10.55 to $11.15 to a new range of $11.33 to $11.93, and we are raising our 2021 adjusted earnings per share from continuing operations from $10.55 to $11.15 to a new range of $11.40 to $12.
Now let me run through the key points in our guidance assumptions and the puts and takes for 2021.
First, for the items that are changing.
We have announced a second round of price increases and now expect a benefit of $90 million in price for the year, up from our prior guidance of $50 million.
We now expect residential mix of $10 million, up from our prior guidance for neutral mix.
We expect a benefit of $15 million from sourcing and engineering-led cost reduction actions, down from our prior guidance of $25 million.
And this change reflects inflationary pressures from suppliers.
For commodities, we now expect a $55 million headwind, up from our prior guidance of $30 million.
Corporate expenses are now expected to be approximately $95 million, up from prior guidance of $90 million, primarily due to higher incentive compensation.
And now for the guidance items that remain the same.
We still expect a $20 million benefit from factory productivity.
With 30 new Lennox Stores planned for this year, we will be at a more normal run rate with distribution investments compared to last year.
Freight is still expected to be a $5 million headwind and tariffs are also expected to be a $5 million headwind.
We are planning for SG&A to be up approximately 7% for the year or a headwind of about $45 million.
Now within SG&A, we are making investments in R&D and IT for continued innovation and leadership in products, controls, eCommerce and factory automation and productivity.
A few other guidance points.
We still expect neutral foreign exchange.
We still expect interest and pension expense to be approximately $35 million.
We continue to expect an effective tax rate of approximately 21% on an adjusted basis for the full year.
We are still planning capital expenditures to be approximately $135 million this year, about $30 million of which is for the third plant at our campus in Mexico.
We expect construction to be completed at the end of 2021 and have the plant fully operational by mid-2022, and we expect nearly $10 million in annual savings from the third plant.
Free cash flow is now targeted to be approximately $375 million for the full year, up from prior guidance of approximately $325 million on the strong earnings performance in the first quarter and our current outlook.
And finally, we still expect the weighted average diluted share count for the full year to be between 37 million to 38 million shares, which incorporates our plans to repurchase $400 million of stock this year.
And with that, let's go to Q&A.
| compname reports q1 adjusted earnings per share $2.27 from continuing operations.
q1 adjusted earnings per share $2.27 from continuing operations.
q1 revenue rose 29 percent to $931 million.
q1 gaap earnings per share $2.20 from continuing operations.
raising 2021 guidance for adjusted earnings per share from continuing operations from $10.55-$11.15 to $11.40-$12.00.
raising 2021 guidance for revenue growth from 4-8% to 7-11%.
raising 2021 guidance for gaap earnings per share from continuing operations from $10.55-$11.15 to $11.33-$11.93.
raising guidance for free cash flow from approximately $325 million to approximately $375 million for full year.
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