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These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainties.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
For the third quarter, Hilltop reported net income of $93 million or $1.15 per diluted share.
Return on average assets for the period was 2.1% and return on average equity was 15%.
These favorable operating results again demonstrate the strength of Hilltop's diversified model and our businesses and our people execute on their strategies and capabilities.
PlainsCapital Bank had another strong quarter with pre-tax income of $63 million and a return on average assets of 1.4%.
Income during the period included $4.6 million of PPP loan-related origination fees and a $5.8 million reversal of provision.
We have seen continued improvement in our asset quality, which is a reflection of both the bank's sound lending practices and the healthier economic outlook.
Total average bank loans declined $252 million or 4% versus Q2 2021 as PPP balances ran off.
Excluding PPP loans, average bank loans were stable in the quarter.
Although the lending environment is extremely competitive and many of our clients remain flush with liquidity, we have seen growth in our loan pipeline, which is at its highest level since the pandemic.
The current pipeline is heavily commercial real estate, specifically in residential lot development, industrial and multifamily across the major Texas markets.
Payoffs will remain a challenge though, as our quality real estate clients continue to find attractive opportunities for their projects in the permanent financing markets.
Total average deposits remain stable linked-quarter with average deposits excluding broker deposits increasing by $200 million or 2% from Q2 2021 and $1.9 billion or 16% from prior year.
We continue to see growth in both interest bearing and non-interest-bearing accounts since Q3 2020 we have run off almost $1 billion in broker deposits.
This was another strong quarter for PrimeLending generating $62 million in pre-tax income.
Although a decline from the astonishing levels in 2020 volumes and pricing held on longer than anticipated and as a result we were able to deliver favorable returns during the period.
PrimeLending originated $5.6 billion in volume in the quarter from its continued strength in home purchase volume.
Refinancing volume as a percent of total volume decreased to 29% from 35% during the same period in 2020.
If current mortgage rates remain relatively unchanged through the end of the year, we believe this downward trend of refinancing volumes will continue.
Gain on sale margin of loans sold to third parties declined by 17 basis points linked-quarter to the 359 basis points.
Margins remain pressured as we see competition reacting to the decline in refinancing volume.
And as our product mix has shifted where the relatively higher margin government product is lagging.
Our team at PrimeLending remains acutely focused on monitoring pricing and margins.
PrimeLending continues to recruit productive loan officers and has hired 127 year to date bringing total loan officer headcount to 1,314.
This is a primary focus as we target purchase oriented loan officers to help offset the lower margins we expect in the coming quarters.
We believe our exceptional team purchase orientation, technology investments and focus on customer experience will continue to drive attractive returns from the mortgage business.
During the quarter, HilltopSecurities generated $17.4 million of pre-tax income on net revenues of $127 million or a pre-tax margin of 13.8%.
This was a good quarter for the public finance business in particular with revenues up $12 million from prior year, predominantly from a few larger deals.
We are encouraged by the potential for growth in the municipal finance market with the healthy current pipeline and the anticipation of increased future infrastructure spending.
Revenues within the structured finance business decreased by $26 million from last year as the overall mortgage market has declined from the astonishing levels in 2020.
From a historical average perspective, volumes are still strong and revenues rebounded by $24 million linked quarter.
We continue to build on the structured finance business by solidifying existing relationships and adding new clients.
Within our fixed income business, customer demand weakened given expectations of higher interest rates on the horizon, a trend that has been seen across the industry.
While all product areas were challenged in the quarter HilltopSecurities has made several key additions in the business, including leadership for our middle market sales effort, which has been a strategic priority for several years.
Therefore, we remain focused on growing our market share and profitability in fixed income.
Overall, HilltopSecurities is well-positioned as we have added key infrastructure producers and leadership to broaden our core capabilities and customer penetration as a leading municipal investment bank.
Moving to page 4, as a result of strong and diversified earnings, we continue to grow our tangible book value while returning capital to shareholders.
Our capital levels remain very strong with the common equity Tier 1 capital ratio of 21.3% at quarter end, and we have grown our tangible book value per share by 18% over the last quarter to $27.77.
During the quarter, Hilltop returned $84 million to shareholders through dividends and share repurchases.
The $74 million in shares repurchased are part of the $150 million share authorization the board granted earlier this year.
This week, the Hilltop Board of Directors authorized an additional increase to the stock repurchase program of $50 million, bringing the total authorization to $200 million.
As a result of dividends and share repurchase efforts, Hilltop has returned $153 million in capital to shareholders year-to-date.
Additionally, we paid down $67 million in trust preferred securities during the quarter, which will reduce our annual interest expense by over $2 million going forward.
In conclusion, we are very pleased with the results for the quarter.
All businesses showed solid momentum going into the fourth quarter and are performing well against our strategic objectives.
We feel well-positioned with a team and capital in place to continue growing long-term shareholder value.
I'll start on page 5.
As Jeremy discussed, for the third quarter of 2021, Hilltop recorded consolidated income attributable to common stockholders of $93 million, equating to $1.15 per diluted share.
Included in the third quarter results was a net reversal of provision for credit losses of $5.8 million.
During the third quarter, Hilltop recorded a modest net recovery of charge-offs.
On page 6, we have detailed the significant drivers to the change in allowance for credit losses for the period.
The most significant drivers in the quarter were the positive migration of certain credits in the portfolio and the further improvement in the expected macroeconomic outlook.
These were somewhat offset by the increase in specific reserves taken against a small number of credits that experienced deterioration during the quarter.
First, related to the macroeconomic outlook, we leveraged the Moody's S7 scenario for our third quarter analysis, consistent with our second quarter outlook selection.
This scenario considered lower overall GDP rates, higher inflation and higher ongoing unemployment than other market consensus outlooks.
As said, the S7 scenario did improve from the prior period, and the impact of the improvement resulted in the release of $6 million of credit reserves during the third quarter.
Second key driver was the ongoing improvement in credit quality across the portfolio.
During the quarter, the portfolio experienced positive migration across a number of industries and geographies resulting from improving financial performance and more resilient outlook for future periods.
Further, the portfolio of loans that are currently under active deferral plan build a $17 million from $76 million at the end of the second quarter of '21.
The result of the improvements at the client level equated to a net release of credit reserves of $5 million during the third quarter.
The net impact of these changes resulted in an allowance for credit losses for the period ending September 30 of $109.5 million or 1.45% of total loans.
Further, the coverage ratio of ACL to total loans increases from 1.74% from loans that we believe have lower loss potential, including PPP broker-dealer and mortgage warehouse loans are excluded.
I'm moving to page 7.
Net interest income in the third quarter equated to $105 million, including $8.3 million of PPP-related interest and fee income, as well as purchase accounting accretion.
Net interest margin declined versus the second quarter of 2021 driven by lower PPP fee recognition, higher average cash balances, and continued pressure on loan HFI yields.
Somewhat offsetting these items were higher loans held for sale yield, resulting from higher overall mortgage rates, coupled with lower interest-bearing deposit cost, which have continued to trend lower finishing the quarter down 4 basis points versus the second quarter of '21 at 28 basis points.
We continue to expect that interest-bearing deposit costs will move modestly lower over the coming quarters as the consumer CD portfolio continues to mature and reset to lower yields.
As it relates to asset yields, the current competitive environment for commercial loans is resulting in substantial pressure on loan yields for new originations, which were 3.8% during the third quarter and is also challenging our ability to maintain current loan flow rates.
Given overall market and competitive conditions, we expect that NIM will remain pressured into the fourth quarter of '21 moving lower to between 240 basis points and 250 basis points by year end.
Turning to page 8, total non-interest income for the third quarter of '21 equated to $368 million.
Third quarter mortgage-related income and fees decreased by $114 million versus the third quarter of 2020 driven by lower origination volumes, declining gain on sale margins, and lower locked volumes.
As it relates to gain on sale margins, we noted in our key driver table in the lower right of the page the gain on sale margins on loans fell 18 basis points versus the prior quarter.
Further, we are providing the impact of gain on sale margin related to those loans that have been retained on the balance sheet, which for the third quarter equated to 13 basis points.
During the third quarter of 2021, the environment in mortgage banking remained resilient and is expected to continue to shift to a more purchase mortgage-centric marketplace with approximately 71% of our origination volumes serving as purchase mortgages.
During the third quarter, purchase mortgage volumes declined modestly to 3.95 billion, while refinance volumes declined 12% or $235 million versus the second quarter origination levels.
We expect this trend to continue for the more purchase-centric mortgage market over the coming quarters, and we continue to expect the gain on sale margins for the third-party sales will fall within a full year average range of 360 basis points to 385 basis points.
In addition, other income declined by $36 million, driven primarily by declines in TBA locked volumes, coupled with lower volumes and market depth in the fixed-income capital markets.
As we've noted in the past, the structured finance and fixed income capital markets businesses can be volatile from period-to-period, as they are impacted by interest rates, market volatility, origination volume trends and overall market liquidity.
Lastly, our public finance and retail brokerage businesses at the broker-dealer drove solid revenue growth as highlighted in the securities-related fee growth of $15 million versus the prior-year period.
This growth highlights the impact of our ongoing investments in enhanced products and service capabilities across HilltopSecurities, which has provided our bankers with additional tools and capabilities to support their clients.
Turning to page 9, non-interest expenses decreased from the same period in the prior year by $44 million to $355 million.
The decline in expenses versus the prior year was driven by decline in variable compensation of approximately $35 million at HilltopSecurities and PrimeLending.
This decline in variable compensation was linked to lower revenues in the quarter compared to the prior year period.
The bank continues to deliver improved efficiency, as highlighted in the sub-50% efficiency ratio.
This has been driven by lower overall headcount as well as benefits from strong mortgage production and the acceleration of PPP fees into current period income.
As we've noted in the past, we expect that over the longer term, the efficiency ratio at the bank will fall within a range of 50% to 55%.
Moving to page 10, in the period, HFI loans equated to $7.6 billion, relatively stable with the second quarter levels.
As we've noted previously, we've seen substantial increases in competition for funded loans across the Texas markets, which we expect will continue into 2022.
Further, the ongoing growth in available liquidity both on bank balance sheets and consumer balance sheets could further delay a return to more normal commercial loan growth rates for at least a few quarters.
We continue to expect that full year 2021 average total loan growth excluding PPP loans will be within a range of zero to 3%.
During the third quarter of '21, PrimeLending locked approximately $243 million of loans to be retained by PlainsCapital over the coming months.
These loans had an average yield of 2.95% and average FICO and LTV of 776% and 64%, respectively.
Moving to page 11, third quarter credit trends continue to reflect the slow but steady recovery in the Texas economy, which is supporting improved customer cash flows and fewer borrowers on active deferral programs.
As of September 30, we have approximately $17 million of loans on active deferral programs down from $76 million at June 30.
Further, the allowance for credit losses to period end loan ratio for the active deferral loans equates to 22.8% at September 30.
As is show on the graph at the bottom right of the page, the allowance for credit loss coverage including both mortgage warehouse lending as well as PPP loans at the bank ended the third quarter at 1.58%.
We continue to believe that both mortgage warehouse lending as well as our PPP loans will maintain lower loss content over time.
Excluding mortgage warehouse and PPP loans, the bank's ACL to end-of-period loans HFI ratio equated to 1.74%.
Tuning to page 12, third quarter end-of-period total deposits were approximately $12.1 billion, increasing by $398 million versus the second quarter of 2021.
Given our strong liquidity position and balance sheet profile, we are expecting to continue to allow broker deposits to mature and run-off.
At 09/30, Hilltop maintained $243 million of broker deposits that have a blended yield of 33 basis points.
While deposit levels remain elevated, it should be noted that we remain focused on growing our client base and deepening wallet share through the sales of our commercial treasury products and services and focused client acquisition efforts.
Turning to page 13, in 2021, we continue to remain nimble as the pandemic evolves to ensure the safety of our teammates and our clients.
Further, our financial priorities for 2021 remains centered on delivering great customer service to our clients, attracting new customers to our franchise, supporting the communities where we serve, maintaining a moderate risk profile, and delivering long-term shareholder value.
Given the current uncertainties in the marketplace, we're not providing specific financial guidance, but we are continuing to provide commentary.
This is the most current outlook for the remainder of 2021 with the understanding that the business environment, including the impacts of the pandemic could remain volatile.
That said, we will continue to provide updates during our future quarterly calls.
| q3 earnings per share $1.15 from continuing operations.
|
These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainty.
Please note that the information presented is preliminary and based upon data available at this time.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
For the second quarter, Hilltop reported net income of $99 million or $1.21 per diluted share.
Return on average assets for the period was 2.29% and return on average equity was 16.4%.
Despite certain headwinds in each business, our collective business model was able to generate strong earnings and grow capital, while at the same time returning capital to shareholders through dividends and share repurchases.
PlainsCapital Bank generated pre-tax income of $87 million compared to a pre-tax loss of $17 million in Q2 2020.
Improvements in the economic outlook and positive credit migration drove a $29 million reversal of provision, compared to a provision expense of $66 million in Q2 2020.
Outside of a few pockets of weakness such as business focused hotels, our borrowers generally are seeing improved results with the economy reopening and robust activity.
Strong deposit growth has continued with average interest-bearing deposits, excluding broker deposits and HilltopSecurities sweep deposits, increasing by 26% from Q2 2020.
This growth was partially offset by the planned run-off of approximately $858 million in broker deposits and the reduction in HilltopSecurities sweep deposits of approximately $690 million, as we optimize our liquidity sources and defend our net interest margin.
We attribute this core deposit growth primarily to increased liquidity in the market from government stimulus and the work our bankers have done to increase deposits from existing and new clients.
Total average bank loans declined modestly by 2% versus Q2 2020 as PPP loans have run off and commercial loan growth remains pressured.
Quality loan demand has been muted as our borrowers are flushed with liquidity, leading to pay-downs and payoffs or the use of elevated liquidity to fund capital expenditures and other investments before seeking bank debt.
However, the Texas markets we are in continue to experience significant activity from business and household migration, which should drive meaningful long-term opportunities for the bank, specifically in higher growth markets such as Austin and Dallas, with products like multifamily.
Importantly, our business model has allowed us to selectively retain high quality mortgages from PrimeLending to support loan balances and provide improved yield opportunities for our elevated liquidity and capital.
PrimeLending had another solid quarter, generating $49 million in pre-tax income.
While the mortgage market has begun to normalize compared with the frenzied activity in 2020, volumes and profitability still remain elevated relative to the historical levels.
PrimeLending originated $5.9 billion in volume with a gain on sale margin on loans sold to third parties of 364 basis points.
Although, average mortgage interest rates declined year-over-year, refinance volumes decreased to 32% of total origination compared to 47% in Q2 2020.
A decrease in mortgage interest rates typically leads to an increase in refinancing volume.
However, significant refinancing activity during 2020 has limited the population of loans eligible for refinance.
Importantly, our focus on home purchase mortgage origination should allow us to outperform the broader market.
As the third-party market for mortgage servicing has continued to improve, we have reduced our retained servicing to 25% of total mortgage loans sold during the quarter and executed an MSR sale of $32 million, reducing our MSR assets to $124 million.
In addition to rate, inventory and affordability are the main themes we are paying attention to in the mortgage industry.
With low inventory continuing to drive home prices higher, the properties that are available are increasingly getting out of reach for buyers.
This phenomenon affects both volume as well as gain on sale margins as certain products are more competitive in this environment.
Despite the ever-shifting mortgage landscape, PrimeLending continues to execute well on its growth strategy, primarily centered on hiring purchase-oriented loan officers.
In the second quarter, PrimeLending had a net gain of 11 loan officers that we believe could add incremental annual volume of nearly $300 million.
For HilltopSecurities, they generated $6.9 million of pre-tax income on net revenues of $94 million for a pre-tax margin of 7.3%.
This was a challenging quarter for the mortgage-centric and fixed income businesses.
Although these businesses have performed exceptionally over the past year, they are subject to volatility, which illustrates the importance of diversified revenue streams within HilltopSecurities.
The Structured Finance business was adversely impacted by mortgage market volatility in March and April and generated net revenue of $11.5 million, a decline of 75% from Q2 2020.
On a positive note, lock volumes remain relatively strong compared to pre-2020 historical level as we continue to add and maintain strong relationships with the existing clients.
Importantly, our Public Finance and Wealth Management businesses generated revenue and income growth and we are pleased with their positive momentum.
Moving to Page 4, Hilltop maintained strong capital with common equity tier 1 capital ratio of 20% at quarter end.
During the quarter, Hilltop returned $55 million to shareholders through dividends and share repurchases.
The $45 million in shares repurchased are part of the $75 million share authorization the Board granted in January.
This week, the Hilltop Board authorized an increase to the stock purchase program to $150 million, an increase of $75 million.
Factoring in shares repurchased made during the first half of 2021, Hilltop now has approximately $100 million of available capacity through the expiration of the program in January 2022.
Even with sizable capital distributions to shareholders over the past two years, including the opportunistic tender offer executed in 2020, our tangible book value per share has grown at a compound annual rate of 21%, because of the profitability of our unique business model.
We plan to continue to prudently distribute capital to our shareholders through dividends and share repurchases.
In closing, Hilltop's performance in the quarter highlights the versatility of our franchise and the value of our diversified operating model.
Although near term headwinds and volatility may occur, we believe each of our businesses are well positioned to take advantage of profitable growth opportunities and that we have the leadership, capital, and strategies in place to build on our franchise.
I'll start on Page 5.
As Jeremy discussed, for the second quarter of 2021, Hilltop reported consolidated income attributable to common stockholders of $99 million, equating to $1.21 per diluted share.
Included in the second quarter results was a net reversal of provision for credit losses of $28.7 million, which included approximately $500,000 of net charge-offs in the quarter.
On Page 6, we've detailed the significant drivers to the change in allowance for credit losses for the period.
The most significant drivers in the quarter were the positive migration of certain credits in the portfolio and the further improvement in the expected macroeconomic outlook.
First, related to the macroeconomic outlook, we leveraged the Moody's S7 scenario for our second quarter analysis.
This scenario highlights improving real GDP and unemployment trends coupled with increasing risk of higher inflation in future periods versus the economic scenarios selected for our first quarter assessment.
The impact of the improving economic outlook resulted in the release of $11 million of ACL during the second quarter.
The second key driver was the ongoing improvement in credit quality across the portfolio.
During the quarter, the restaurant portfolio experienced positive migration, resulting from improving financial performance and more resilient outlook for future periods.
Further, the business saw broader-based improvement across the served clients whereby their full-year 2020 results were not as severely impacted as was previously expected and their first half results were improving from prior risk rating assessment periods.
The result of the improvements at the client level equated with net release of ACL of $17 million during the second quarter.
The combination of improved client performance and the improving macroeconomic inbound [Phonetic] outlook which were only modestly offset by net charge-offs resulted in allowance for credit losses for the period ending June 30 of $115 million or 1.51% of total loans.
Further, the coverage ratio of ACL to total loans increases to 1.86%.
The loans that we believe have lower loss potential include PPP, broker dealer, and mortgage warehouse loans are excluded.
Turning to Page 7, net interest income in the second quarter equated to $108 million, including $12.4 million of PPP-related interest and fee income as well as purchase accounting accretion.
Net interest margin declined versus the first quarter of 2021 driven by lower PPP fee recognition, higher average cash balances, and continued pressure on loan held for investment yields.
Somewhat offsetting these items were higher loans held for sale yields resulting from higher overall mortgage rates, coupled with lower interest bearing deposit costs, which should continue to trend lower as expected, finishing the quarter down 9 basis points at 32 basis points.
We continue to expect that interest-bearing deposit cost will move modestly lower over the coming quarters as the consumer CD portfolio continues to mature and reset the lower yields.
As it relates to asset yields, the current competitive environment for commercial loans is resulting in substantial pressure on new business loan yields as well as our ability to maintain current floor rates.
Further, with funded loan growth continuing to be slower than we expected, we are increasing the level of one-to-four family loans we are retaining on the balance sheet to approximately $50 million to $75 million per month from the prior outlook of $30 million to $50 million per month.
As we've alluded in the past calls, we are using the one-to-four family loan retention approach to offset the slower growth in commercial lending environment.
While this does provide a high quality source of asset and net interest income, these loans generally carry a yield below that of our traditional commercial loans, and as a result, will put downward pressure on NIM.
To that end, we expect that NIM will maintain -- will remain pressured into the second half of 2021 moving lower toward 240 basis points and 250 basis points by year-end.
Turning to Page 8, total non-interest income for the second quarter of 2021 equated to $340 million.
Second quarter mortgage-related income and fees decreased by $99 million versus the second quarter of 2020, driven by lower origination volumes, declining gain on sale margins and lower lock volumes.
As it relates to gain on sale margins, we note in our key driver tables on lower right of the page, the gain on sale margin on loans fell 22 basis points versus the prior quarter.
Further, we are providing the impact on gain on sale margin related to these loans that have been retained on the balance sheet.
For additional clarity, the reported gain on sale is the margin reported by our mortgage origination segment and replaced all loans distributed and retained on the balance sheet.
Gain on sale of loans sold to third parties provides the margin on those loans that were distributed outside of Hilltop Holdings or purchased at market value.
During the second quarter of 2021, the environment in mortgage banking remained solid, and as expected, continued to shift to a more purchase mortgage-centric marketplace.
For the second quarter, purchase mortgage volumes increased by $1.1 billion or 38.5%, while refinance volumes declined 43% or $1.4 billion versus the first quarter origination level.
We expect this trend to continue toward a more purchase mortgage-centric market over the coming quarters, which should continue to pressure gain on sale margins into the future.
We continue to expect the gain on sale margins for third-party sales will fall within the full year average range of 360 basis points and 385 basis points.
Other income declined by $37 million, driven primarily by declines in TBA lock volumes, volatility in market rates and volatile trading and fixed income capital markets.
As we noted in the past, the structured financing fixed income to capital market businesses can be volatile from period to period and they are impacted by interest rates, market volatility, origination volume trend and overall market liquidity.
Moving to Page 9, non-interest expenses decreased from the same period in the prior year by $27 million to $343 million.
The decline in expenses versus the prior year was driven by decline in variable compensation of approximately $35 million at HilltopSecurities and PrimeLending.
This decline in variable compensation was linked to lower revenues in the quarter compared to the prior year period.
Looking forward, we continue to expect that our revenues will decline from the record levels of 2020, which will put pressure on our efficiency ratio.
That said, we remain focused on continuous improvement, leveraging the investments we've made over the last few years to aggressively manage fixed cost, while we continue to further streamline our businesses and accelerate our digital transformation.
Moving to Page 10, end of period HFI loan equated to $7.6 billion.
As we've noted on prior calls, we expected that loan growth will be challenging during the first half of 2021 and the results bear that out.
We've seen substantial increases in competition for quality loans across our Texas markets, which we expect will continue into 2022.
Further, the ongoing growth in available liquidity both on bank balance sheet and customer balance sheets could further delay a return to more normal commercial loan growth rates for at least a few quarters.
We continue to expect full year average total loan growth, excluding PPP loans, will be within a range of zero to 3%.
As noted earlier, we are increasing the level of retention of one-to-four family loans originated in PrimeLending to between $50 million and $75 million per month.
During the second quarter of 2021, PrimeLending locked approximately $176 million loans to be retained by PlainsCapital over the coming months.
These loans had an average yield of 3.11% and an average FICO and LTV of 780% and 64%, respectively.
Turning to Page 11, second quarter credit trends continue to reflect the slow but steady recovery in the Texas economy as the reopening of businesses continues to provide for improved customer cash flows and fewer borrowers on active deferral programs.
As of June 30, we have approximately $76 million of loan on active deferral programs, down from $130 million at March 31.
Further, the allowance for credit losses to end-of-period loan ratio for the active deferral loan equates to 16.8% at June 30.
As is shown in the graph at the bottom right of the page, the allowance for credit loss coverage ratio, including both mortgage warehouse lending as well as PPP loans at the bank ended the second quarter at 1.64%.
We continue to believe that both mortgage warehouse lending as well as our PPP loans will maintain lower loss content over time.
Excluding mortgage warehouse and PPP loans, the bank's ACL to end-of-period loans HFI ratio equated to 1.86%.
Turning to Page 12, second quarter end-of-period total deposits were approximately $11.7 billion and remained stable with the first quarter 2021 levels.
While the overall balances were relatively unchanged, the mix of deposits continues to improve as brokered deposits declined approximately $300 million and non-interest-bearing deposits rose by approximately $200 million versus the first quarter 2021 levels.
Given our strong liquidity position and balance sheet profile, we are expecting to allow brokered deposits to mature and run-off.
At 6/30/21, Hilltop maintained $268 million of brokered deposits that have a blended yield of 31 basis points.
While deposit levels remains elevated, it should be noted that we remain focused on growing our client base and deepening wallet share through the sales of our commercial treasury products and focused client acquisition efforts.
Turning to Page 13, in 2021, we continue to remain nimble as the pandemic evolves to ensure the safety of our teammates and our clients.
Further, our financial priorities for 2021 remains centered on delivering great customer service to our clients, attracting new customers to our franchise, supporting new communities where we serve, maintaining a moderate risk profile, and delivering long-term shareholder value.
Given the current uncertainties in the marketplace, we are not providing specific financial guidance, but we are continuing to provide commentary as to our most current outlook for 2021 with the understanding that the business environment, including the impact of the pandemic, could remain volatile throughout the year.
That said, we will continue to provide updates during our future quarterly call.
| hilltop holdings inc qtrly income from continuing operations of $1.21 per diluted share.
|
Following comments from Michael and Sachin, the operator will announce your opportunity to get into the queue for the Q&A session.
Both the release and the slide deck include reconciliations of non-GAAP measures to their GAAP reported amounts.
So let me start by giving you the highlights of the quarter.
Strong revenue and earnings growth continued.
The net revenue up 29% and earnings per share up 48% versus a year ago, as always, on a non-GAAP currency-neutral basis.
On this same basis, Quarter 3 net revenues are now 11% above pre-COVID levels in 2019.
We're seeing continued strength in domestic spending and overall cross-border volumes are now back at 2019 levels, though there still remains significant room for growth in cross-border travel.
We're continuing to execute against our strategic priorities with good progress on the product and deal fronts this quarter.
And we're excited about our acquisition of CipherTrace in the crypto services area and our planned acquisition of Aiia in open banking.
So those are the highlights.
Looking at the broader economy, domestic spending levels continue to improve, even though economies are facing supply chain constraints, rising energy prices and some other inflationary pressures.
retail sales ex auto, ex gas were up 5% versus a year ago and 12% versus 2019, reflecting the return to in-person shopping and the ongoing e-commerce strength.
SpendingPulse also indicated that the overall European retail sales in Quarter 3 were up 5% and 6% versus 2019.
As it relates to COVID specifically, the outlook continues to get better with case numbers generally improving, new therapeutics in the pipeline, progress on vaccinations and businesses becoming more agile in the face of remaining restrictions.
and some easing of restrictions in Asia.
Now, turning to our business.
While the pandemic is not fully behind us, we're now in the growth phase in most markets domestically and in many markets in cross-border spending as well.
We will, therefore, turn the page and move beyond the four-phased framework that guided us through the last 19 months and focus on managing the business for the growth opportunities ahead of us.
Looking at Mastercard's spending trends.
Switched volumes improved quarter over quarter.
We saw particular strength in consumer and commercial credit.
Debit spend remains elevated, although it has moderated in recent weeks in part due to waning stimulus benefits.
In terms of how people are spending, card-present volumes continue to improve as people are getting out and shopping more while we are still seeing sustained strength in card-not-present spend.
So regardless of whether people want to shop online or in-person, our solutions support that choice and position us well to participate in both trends.
Now, let's take a look at cross-border.
Overall, cross-border returned to 2019 levels in August, driven by improvements in consumer and commercial travel, as well as the ongoing strength of cross-border card-not-present spending ex travel.
Our cross-border travel improved from 48% of 2019 levels in the second quarter to 72% this quarter with substantial upside potential still remaining as and when borders open.
Against this backdrop, we're investing in the growth of our business, including the enhancing end of our leading technology capabilities, like expanding our network edge to connect directly with our customers through the cloud, providing faster and easier access to our products and services.
And of course, we remain focused on our strategic priorities: number one, rolling out core products while driving the shift to digital; two, differentiating and diversifying with our services; and three, leveraging our multi-rail capabilities to offer choice across payment applications.
Now, let's take them one-by-one and turn to how we're growing our core products and driving the shift through digital: through Mastercard Installments, by winning core deals and by continuing our momentum in the fintech space.
First, let me tell you about our recently announced Mastercard Installments, our scalable, open loop, buy-now-pay-later solution.
Mastercard Installments is differentiated in that it enables banks, lenders, fintechs and wallets to seamlessly bring buy-now-pay-later solutions to consumers and merchants at scale and in a secure, tokenized manner.
With little to no integration for merchants, our solution avoids the need for lenders to engage merchants one-by-one to roll this out, enables them to deliver more payment options to more consumers faster.
Our solution brings choice at scale, delivered through the Mastercard network.
Our consumers will be able to access buy-now-pay-later offers through their bank's mobile banking app at the point of checkout and soon directly through Click to Pay.
The embedded power of Finicity will help lenders with credit positioning and enable consumers to easily choose different repayment options.
Mastercard Installments will power our core payments and enable us to provide additional value through services, such as data analytics, loyalty and fraud tools.
We've seen strong interest from players on all sides of the ecosystem and look forward to growing our partnerships in this area.
As always, we remain focused on continuing to grow share.
And we've won deals across the globe this quarter.
In the U.K., we're partnering with Chase as the preferred debit partner of their new digital retail bank.
In Canada, we've extended our exclusive co-brand with Costco Canada.
And in Brazil, we signed a deal with Autopass to issue more than 10 million cards to mass transit users in the Sao Paulo area, and along with that, open, contactless acceptance across their subway trains and city buses.
We're also building our leading position with fintechs and mobile money providers.
Here are a few recent examples.
PayPal has extended its PayPal Business Debit card into our four markets in Europe.
PayPal will also directly leverage Mastercard Send for domestic wallet cash-outs and P2P transactions in the U.S. We're partnering with Vodafone in Egypt across all of their mobile money use cases, including cash-outs, P2P and bill payments.
We expanded our strategic partnership with Yandex in Russia and we'll be their preferred international partner for all of their fintech initiatives.
banks and fintechs to get cards and financial products into the market, will leverage our digital-first Finicity, Mastercard Send and cybersecurity assets.
Now, shifting to services.
Our services support and differentiate our core products and have played a critical role in enabling many of the wins I just mentioned.
They, of course, also diversify our business.
We had many wins in this area this quarter.
Starting with the cybersecurity space.
Ethoca is helping multiple players, including AT&T and Mercado Libre, reduce charge-backs through collaboration, thereby creating purchase transparency.
Banco de Bogotá is using our artificial intelligence capabilities to improve consumer experiences, increase profitability and identify new opportunities.
And in Europe, the term is leveraging NuData's behavioral biometrics to help thousands of new banks authenticate online transactions.
The tourism agencies in Greece, Hungary and elsewhere are using services like tourism insights and managed services to gather greater visibility of trends and drive deeper insights to support their tourism campaigns.
In the UAE, HSBC is leveraging our test-and-learn capabilities to innovate, experiment and roll out new products for better customer engagement.
And we're having success in the loyalty space with our innovative digital solutions, driving wins with players like the global fitness chain, Barry's and First and Saudi National Bank.
Now, let's turn to the progress we've made in offering choice to consumers across payment applications with our multi-rail capabilities, including open banking, B2B and crypto.
In open banking, we're happy about our planned acquisition of Aiia.
Aiia is a leading European open banking player, whose platform expertise, strong API connectivity and payment capabilities complement our existing open banking assets.
We will combine Aiia's European footprint with Finicity's connectivity in the U.S. and our expansion into other markets like Australia.
This will allow us to extend each organization's best-in-class capabilities, such as credit decisioning, credit scoring, account information services and payment applications across markets.
We continue to make progress with our open banking product in Europe with players like Entercard, one of Scandinavia's leading credit card companies.
And in the U.S., Finicity is working with UGO to enable account opening verifications, along with future plans to expand into payments.
We're also adding new functionality to Track DBS and are partnering with Demica to launch a supply chain finance capability.
This functionality empowers payment agents to provide their business customers with access to affordable working capital directly through the Mastercard Track DBS platform.
And in the U.K., HSBC will be the first to issue a Mastercard Track Card to Account Transfer product, an innovative B2B payment solution that allows businesses to use their commercial card program to make payments to any supplier, even if that supplier does not accept card payments.
Again, a true multi-rail offering.
And finally, in the crypto space, we're making it easier for crypto players to connect to our network.
We signed up a number of new crypto wallet providers and exchanges this quarter, including Bit2Me, [Inaudible], Kanga by ZEN.COM, Coinmotion and CoinJar.
Our crypto program, which is based on [Inaudible] principles of engagement, allows consumers to easily buy crypto assets with their Mastercard, spend their crypto balances wherever Mastercard is accepted, cash out their proceeds with Mastercard Send and earn rewards in the form of crypto or even NFT.
We're also seeing a growing services opportunity in this space.
Earlier this month, we acquired CipherTrace, a security and fraud monitoring company with expertise, technologies and insights into more than 900 cryptocurrencies.
Our recently announced agreement with Bakkt will also add to our expanding crypto services portfolio.
So let me sum this up one more time.
We delivered strong revenue, earnings growth this quarter.
We are seeing continued strength in domestic spending in most markets.
And while overall cross-border volumes are back at 2019 levels, there remains significant room for growth in cross-border travel.
We're executing against our strategic priorities with good progress on the product and deal front, as you heard, we're doing all of that while carefully managing our expenses.
That's it for me.
Sachin, over to you.
So turning to Page 3, which shows our financial performance for the quarter on a currency-neutral basis, excluding special items and the impact of gains and losses on our equity investments.
Net revenue was up 29%, reflecting the continued execution of our strategy and the ongoing recovery in spending.
Acquisitions contributed 3 ppt to this growth.
Operating expenses increased 23%, including an 8 ppt increase from acquisitions.
Operating income was up 34% and net income was up 45%, both of which include a 1 ppt decrease related to acquisitions.
Further, net income growth was also positively impacted by 6 ppt due to the recognition of higher one-time discrete U.S. tax benefits versus a year ago.
EPS was up 48% year over year to $2.37, which includes $0.02 of dilution related to our recent acquisitions, offset by a $0.04 contribution from share repurchases.
During the quarter, we repurchased $1.6 billion worth of stock and an additional $361 million through October 25, 2021.
So now, let's turn to Page 4, where you can see the operational metrics for the third quarter.
Worldwide gross dollar volume or GDV increased by 20% year over year on a local-currency basis.
We are seeing continued strength in both debit and credit.
U.S. GDV increased by 20% with debit growth of 9% and credit growth of 36%.
Outside of the U.S., volume increased 20%, with debit growth of 23% and credit growth of 16%.
To put this in perspective, as a percentage of 2019 levels, GDV is at 121%, up 2 ppt sequentially, with credit at 111%, up 4 ppt sequentially, and debit at 131%, flat quarter over quarter.
Cross-border volume was up 52% globally for the quarter with intra-Europe cross-border volumes up 47% and other cross-border volumes up 60%, reflecting continued improvement and the lapping of the pandemic last year.
In the third quarter, cross-border volume was at 97% of 2019 levels with intra-Europe at 112% and other cross-border volume at 83% of 2019 levels.
Notably, cross-border volumes averaged at or above 100% of 2019 levels in the months of August and September.
Turning now to Page 5.
Switched transactions grew 25% year over year in Q3 and were at 131% of 2019 levels.
Card-not-present growth rates remained strong and card-present growth continue to improve.
Card-present growth was aided in part by increases in contactless penetration in several regions.
In Q3, contactless transactions represented 48% of in-person purchase transactions globally, up from 45% last quarter.
In addition, card growth was 8%.
Globally, there are 2.9 billion Mastercard and Maestro-branded cards issued.
The increase in net revenue of 29% was primarily driven by domestic and cross-border transaction and volume growth, as well as strong growth in services, partially offset by higher rebates and incentives.
As previously mentioned, acquisitions contributed approximately 3 ppt to net revenue growth.
Looking quickly at the individual revenue line items.
Domestic assessments were up 21% while worldwide GDV grew 20%.
Cross-border volume fees increased 59% while cross-border volumes increased 52%.
The 7 ppt difference is primarily due to favorable mix as higher-yielding ex intra-Europe cross-border volumes grew faster than intra-Europe cross-border volumes this quarter.
Transaction processing fees were up 26%, generally in line with switched transaction growth of 25%.
Other revenues were up 35%, including a 10 ppt contribution from acquisitions.
The remaining growth was mostly driven by our cyber and intelligence and data and services solutions.
Finally, rebates and incentives were up 34%, reflecting the strong growth in volume of transactions and new and renewed deal activity.
Moving on to Page 7.
You can see that on a currency-neutral basis, total operating expenses increased 23%, including an 8 ppt impact from acquisitions.
Excluding acquisitions, operating expenses grew 16%, primarily due to higher personnel costs as we invest in our strategic initiatives, including -- sorry, increased spending on advertising and marketing and increased data processing costs.
Turning to Page 8.
Let's discuss the specific metrics for the first three weeks of October.
We are seeing continued strength in growth rates across our operating metrics versus 2020, in part due to the lapping effects related to the pandemic that began last year.
To provide you better visibility into current spending levels, we are, once again, showing 2021 volumes and transactions as a percentage of the 2019 amounts, when we were not experiencing the impact of the pandemic.
So if you look at spending levels as a percentage of 2019 for switched volumes, through the first three weeks of October, the recent trends have continued with overall switched volumes at 134% of 2019 levels, up 3 ppt versus Q3.
The U.S. has held steady with some moderation in growth from earlier levels due to the roll-off of stimulus.
And outside the U.S., we have seen continued improvement.
Trends in switched transactions remain steady and are generally tracking the trends we are seeing in switched volumes.
In terms of cross-border, as I noted earlier, spending levels as a percentage of 2019 were back to pre-pandemic levels, starting in August.
That improving trend has continued through the first three weeks of October.
And we are now at 105% of 2019 levels.
This improvement is driven by increases in both travel and non-travel cross-border volumes.
As it relates to travel, we have seen it picking up in all regions, notably within and to Europe and recently into Canada as well.
Turning to Page 9.
I wanted to share our current thoughts looking forward.
First off, our deal momentum and service lines continue to position us well for growth and diversify our revenues.
And we continue to make strong progress against our strategic objectives.
Domestic spending levels remain healthy.
And we are encouraged by the recent resurgence in international travel.
We are optimistic about the announced relaxation of border restrictions in places like the U.S. and the U.K., given that we have seen travel pickup when borders have opened in the past.
Further, the airlines have recently reported increased travel bookings, including long-haul travel.
With this as context, assuming domestic and cross-border spending trends relative to 2019 continue to improve, we would expect Q4 net revenues to grow at a low 20s rate year over year on a currency-neutral basis, excluding acquisitions.
As a reminder, spending recovered progressively in 2020, so we will be facing a more difficult comp of approximately 7 ppt in the fourth quarter relative to the third quarter.
It is also important to point out that this is just one potential scenario as the level of uncertainty remains related to the pandemic and therefore the pace of recovery may not be linear.
In terms of operating expenses for the fourth quarter, we expect operating expenses to grow at the low end of low double digits versus a year ago on a currency-neutral basis, excluding acquisitions.
This reflects our disciplined approach to expense management while advancing our innovation agenda across payments, services and promising new adjacencies and continued investment in brand and product marketing.
With respect to acquisitions, we are pleased to now have closed on the CipherTrace transaction.
And we expect acquisitions will contribute about 2 to 3 ppt to revenue and 8 ppt to operating expense growth in Q4.
This reflects the integration of several acquisitions in the open banking, digital identity and real-time payment areas.
Other items to keep in mind.
Foreign exchange is expected to be about 0.5 ppt headwind to both net revenue and operating expenses in Q4.
On the other income and expense line, we are at an expense run rate of approximately $120 million per quarter, given the prevailing interest rates.
This excludes gains and losses on our equity investments, which are excluded from our non-GAAP metrics.
And finally, we expect a tax rate of approximately 18% to 19% for the fourth quarter.
We look forward to discussing our future plans with you at that time.
| mastercard inc sees q4 forecasted growth for revenue of mid 20's.
mastercard inc - sees q4 forecasted growth for revenue of mid 20's.
mastercard inc - sees q4 forecasted non-gaap revenue growth, currency-neutral, excluding acquisitions of low 20's.
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With me on the call are Dr. Jeffrey Graves, our President and Chief Executive Officer; Jagtar Narula, Executive Vice President and Chief Financial Officer; and Andrew Johnson, Executive Vice President and Chief Legal Officer.
Actual results may differ materially.
At this time last year, we were seeing only the very beginning of what we all hoped would be a sustained recovery from the worst of the COVID pandemic.
At the same time, here at 3D Systems, we were in the midst of executing our four phased transformation journey.
We reorganized our company into two segments, Healthcare and Industrial Solutions.
We have restructured our organization to gain efficiencies.
And we had announced the first of our divestitures of non-core assets.
As we speak to you today, a year later, these first three phases are complete.
We are now a company that's singularly focused on additive manufacturing with a lean nimble operating structure, global reach and breadth of metal, polymer and biological technologies that's unparalleled in the industry.
These attributes brought together through an intense focus on our customers' most demanding applications has proven to be a powerful driver of value creation as reflected clearly in our organic growth rates, our profitability and our operating cash performance, all of which we will recap for you in a few moments.
While we're pleased with this performance, even more exciting is that we're now in the fourth and final stage of our transformation, namely, investing for growth.
Since last quarter, we completed the last of our divestitures, retiring our debt and stockpiling over $500 million of cash on the balance sheet.
We subsequently announced two acquisitions that embody our strategic focus on growth, which is to invest in businesses that drive the adoption of additive manufacturing, solve customers' most complex application needs and generate high margin recurring revenue streams that are critical to sustain value creation.
The first of these acquisitions was Oqton, a unique software company that's emerged as a recognized leader in the creation of a new breed of intelligent, cloud-based manufacturing operating system.
The driver for this acquisition is very simple; customers across our Industrial and Healthcare segments are now anxious to accelerate their adoption of additive manufacturing in full scale production environments.
But in doing so, they're facing significant challenges and how to incorporate these technologies into their existing enterprise systems.
To-date, they relied heavily on spreadsheets and highly skilled engineers to run production applications.
This is obviously too slow, too inefficient and too expensive to scale as production volumes ramp up.
While we and others have made strides in optimizing and to some extent automating the performance of single printer or even a collection of like-kind printers working in parallel, our customers' challenges extend well beyond this.
What they need is a manufacturing system that can easily and intelligently incorporate a mixed fleet of printers, often from a variety of manufacturers, and in addition, one that will incorporate all of the surrounding digital production systems on the shop floor such as post-print thermal and mechanical processing, robotic motion systems and automated inspection systems.
Oqton not only provides this linkage, it goes a step further in applying cloud-based AI to optimize the entire workflow then links this workflow to the customers' existing enterprise software such as those provided by Salesforce, Oracle, Microsoft or SAP.
The end result is that Oqton not only links, optimizes and tracks the customers' unique operational workflow at an individual component level from raw material to finished in respected parts, but it also builds in future flexibility to substitute new printing, finishing and automation technologies that will undoubtedly be introduced in the years ahead.
These attributes which are unique to the Oqton platform will remove a significant barrier to the large-scale adoption of additive manufacturing and production environments.
And for that reason, we've opened the system to the entire industry, which we hope will accelerate market growth for everyone.
In addition, for the first time in our history, we will now make available our full complement of market-leading metal and polymer printing software platforms to all others in the industry, which we hope will accelerate the introduction of new printing technologies to customers around the world.
Importantly, as with all software platforms, the span in entire industry, we are committed to Oqton continuing to operate in this model of independence with a supreme commitment to customer data protection and confidentiality.
I'm happy to tell you that we closed the Oqton acquisition on November 1, and the reception by our customers and partners alike has been very positive.
Before I move to our most recent and incredibly exciting acquisition, let me step back and explain how we look at our company holistically, which I believe is much different than others in this industry.
In the decade since 3D printing was invented, we and our competitors have routinely defined ourselves as hardware and material developers, with our products sold broadly to customers around the world.
While this is natural when any industry is young and when the product is mainly consumed in small quantities by labs or prototype facilities, as the industry now matures and production environments are targeted, successful companies will need to adapt their entire operating model to reflect their deepening integration with specific markets and customers.
If you don't, you will remain simply a vendor and not a true partner to your customers, which will ultimately be reflected in your organic growth rate and profit margins.
So with this in mind, at 3D Systems, beginning a year ago, we changed the way we defined ourselves by reorganizing our entire company around key markets, and within those markets, key vertical segments that we believe will drive the most value from their adoption of additive manufacturing.
We began with the creation of two business segments, Healthcare and Industrial Solutions.
Using a strong application focus, these two businesses each integrate our printer, material and software technologies in unique combinations to solve the customers' product need.
Once complete, our customers can then ask us to scale the process for them to a certain production level.
And then with increasing demand, they can elect to have us enable a manufacturer of their choosing to continue scaling to high volumes.
This transfer of the workflow involves providing printing systems, materials and software along with the process definition.
It results in a seamless transfer of capability to the chosen manufacturer whether it's the OEM themselves or a contract manufacturer of their choosing.
So fast forwarding to this year, with the acquisition of Oqton, we expanded our software capabilities into what we call broadly digital manufacturing software, which as we described earlier, enables a rapid and efficient adoption of additive manufacturing in high volume production environments.
This operating model has been very well received by our customer base and we expect it to fuel exciting organic growth in the years ahead.
Most recently, we've added a strong biotech organizational focus and invested significantly to bring our emerging biological technologies to laboratory and human applications, details of which we'll cover in a few moments.
So in short, these are our five core market segments that you'll hear us talk about moving forward.
While each of the five will adapt to the needs of their customers, each will also leverage our core technologies of hardware, software and materials in the unique manner needed to fulfill their customer application needs.
Let me illustrate this approach using our Healthcare business as an example.
In the mid-1990s, 3D Systems pioneered Medical Modeling, which is the printing of highly detailed anatomical models from digital images.
These models have proven instrumental in support of complex surgical procedures.
In a highly publicized application of our modeling technology, which was beautifully documented by CNN's Dr. Sanjay Gupta, we created a number of medical models to assist in the separation of conjoined twins, Jadon and Anias McDonald who were born with the extremely rare craniopagus condition, in which twins are joined at the head, sharing not only the skull and vasculature, but portions of the brain itself.
The modeling used for the surgical planning was vital to the success of Dr. James Goodrich and his team that they had in separating the twins, both of which are alive and living independently today many years later.
To date, our medical modeling technology has supported dozens of similarly complex operations around the world, along with hundreds of others, and it continues to expand each year.
Building upon this foundation and investing in point-of-care infrastructure that accompany this growth, we deepened our surgical support over the next decade.
And by 2005, we were working with surgeons to design and manufacture customized patient-specific surgical guides and instruments using 3D printing.
As this portion of the business in turn grew, we expanded our scope once again, this time to include actual patient-specific implants, which offered an even larger market opportunity.
Fast forwarding today, we offer the broadest range of FDA-cleared capabilities for modeling surgical planning and patient-specific medical implants, which inspires our customers to continue expanding their partnership with us year-after-year.
While we're very proud of our progress by now redefining ourselves as a healthcare business in this example and leveraging both our critical infrastructure and channel partner relationships, we can broaden our scope more aggressively to now include other parts of the human skeleton structure, and importantly, to advance these applications in parallel instead of in series as we have in the past.
This provides us the opportunity to bring benefits to a much larger patient population and at a much higher rate than ever before.
This is the power of redefining ourselves as a healthcare business and not simply a provider of printing technology to healthcare customers in the market.
Of note, our Healthcare business grew over 28% in our most recent quarter and over 44% on an organic basis, which is where we disregard the businesses that we have divested.
This remarkable growth rate is a testament to our increasing momentum in this exciting market.
So building upon this discussion of our Healthcare business, I would like to end my commentary for today on the remarkable emerging market of bioprinting in our announcement last week of our acquisition of Volumetric Biotechnologies.
This company, under the inspired leadership of Dr. Jordan Miller, brings specific expertise and biomaterials and regenerative medicine that combine synthetic chemistry, 3D printing, microfabrication and molecular imaging to direct culture human cells to form more organized complex organizations of living vessels and tissues.
3D Systems has been a pioneer in our industry by focusing resources on regenerative medicine since 2017.
And we began a joint development program with United Therapeutics Corporation to develop the capability to print scaffolds for human lungs using a process we call printer profusion.
Once developed, this bioprinting technology can be applied to other major organs in the human body as well as a wide range of other human and laboratory applications.
We've made significant strides in this unique technology.
And as a result, we recently announced an expansion of our development program with United Therapeutics, an expansion that includes increased funding and an extension to two additional organs.
This program expansion reflects the progress that our joint team has made in this groundbreaking endeavor.
By acquiring Volumetric, we're adding critical skill sets to our 3D Systems' team, which we feel are a perfect complement to ours, bringing strong biological expertise and cellular engineering skills along with highly creative bioprinting systems to our development group.
As I realize this is an entirely new area for many that have followed our company for some time, let me quickly recap our regenerative medicine strategy and the market opportunities that we're addressing through our unique bioprinting technology.
The first opportunity is the printing of human organs, beginning with the lung and expanding from there to two additional organs.
We're pursuing this as a joint program with our partner United Therapeutics.
The ambitious goals that we've set for this program are driving quantum advances in our technology and laying the foundation for the rest of our regenerative medicine efforts.
In our second regenerative medicine market opportunity, we're taking the core unique disruptive technologies developed for the bioprinting of human organs and applying it to other parts of the human body.
There are tremendous number of these applications ranging from the printing of human skin for burn victims to soft tissue for breast reconstruction and repair to critical blood vessel and bone replacements and many, many more.
We're now forming partnerships focused on each application area where we can combine our bioprinting expertise with the appropriate application experts to provide unique and highly impactful solutions for people in need.
We refer to this second market vertical within regenerative medicine as human non-organ bioprinting.
Our last but certainly not least market opportunity is to extend our bioprinting technologies into research labs, providing advanced printing systems and unique biological materials to those that study the basic science of regenerative medicine and in the pharmaceutical laboratories where the ability to print high precision, three dimensional vascularize cell structures can be used for the development of new, more effective drug therapies.
Our acquisition of Volumetric and their unique capabilities in combination with our own will allow us to expand the pace of our efforts in all three of our regenerative medicine markets.
It amazes me to think of these revolutionary applications enabled by our 3D printing technologies; applications that we are uniquely positioned to deliver with our extensive history in advanced 3D printing technologies, our material expertise, our application development expertise, our deep understanding of FDA and other regulatory processes and now our biological and cellular engineering capabilities.
We believe that in the years to come, bioprinting will take its place as a very significant business for our company, bringing critical relief to patients in need of life-saving procedures and great value to our company's employees and our shareholders alike.
Moving from our strategic growth investments to our most recent quarterly performance, I'm very pleased to say that we've continued to execute well on our core business.
With continuing strong demand, our operational challenges have largely centered around global supply chain and logistics issues, which are unfortunately continuing to plague most companies around the world.
Our solid execution in the face of these challenges in the third quarter resulted in strong double-digit growth with revenues increasing by 15% before adjusting for divestitures.
When these adjustments are made, which is a much better reflection of our core business performance, revenues were up over 36% versus 2020 and up over 20% versus our pre-pandemic 2019 third quarter, a benchmark we consider very important.
Looking at our major business segments, our Industrial Solutions segment is continuing its rebound, seeing strong performance particularly in jewelry, automotive and transportation and general manufacturing.
In Healthcare, we see continuing strong demand for personalized health services as well as solid performance in dental.
As Jagtar will discuss shortly, in addition to the strong revenue performance, our EBITDA climbed by over 125%.
We generated positive cash from operations for the fourth consecutive quarter, the first time this has happened in four years.
With our cash generation in addition with the proceeds from divestitures, we built a sizable cash balance by the end of Q3.
A portion of these funds will be used to fund the strategic growth initiatives I mentioned earlier, but we will still have be left with a significant amount of liquidity to pursue additional opportunities.
As I'm sure is clear to everyone, I am very excited not only about what we've accomplished this last year, but even more so about the future as our focus on growth in this final stage of our transformation has only just begun.
For the third quarter, we reported revenue of $156.1 million, an increase of 14.6% compared to the third quarter of 2020.
Our organic revenue growth, which excludes divestitures completed in 2020 and 2021, was 35.9% in Q3 2021 versus Q3 2020.
Since the third quarter of 2020 was beginning of the economic reopening from the COVID-related shutdowns, we think it is valuable to compare our results to Q3 2019, which was untainted by the pandemic.
Again, excluding divested businesses, we are comparing on an apples-to-apples basis.
Our revenue in the third quarter 2021 was 21.2% higher than pre-pandemic Q3 2019.
As we have discussed previously, with the completion of our Simbionix and on-demand manufacturing divestitures in Q3 2021, we have completed our planned divestitures and are now focused on the performance, growth and investment of our core additive manufacturing business.
I would like to note that our -- at post-divestitures, we continue to generate nearly two-thirds of our revenue from our recurring revenue streams.
These high margin lines of business highlight the strength and diversity of our core business, our ability to weather various economic cycles and around which we will continue to make strategic investments.
We reported GAAP net income of $2.34 per share in the third quarter of 2021 compared to a GAAP loss of $0.61 in the third quarter of 2020.
The year-over-year improvement was driven by gains on divested businesses as well as the goodwill impairment charge we took in the third quarter of 2020.
For our non-GAAP results, we reported non-GAAP income of $0.08 per share in the third quarter of 2021 compared to a non-GAAP loss of $0.03 per share in the third quarter of 2020.
The year-over-year improvement reflects higher revenue with lower non-GAAP operating expense as a result of the cost actions we took last year.
Now I will discuss revenue by market.
Healthcare grew 28.3% year-over-year and decreased 7.8% compared to the last quarter.
The decrease was primarily a result of the divestiture of the Simbionix medical simulation business during the quarter.
Adjusted for divestitures, Healthcare revenue increased 44.5% year-over-year as a result of strong demand for dental applications in both printers and materials.
In fact, the last four quarters have seen the highest level ever of dental material sales as compared to any prior four quarter period.
Our Industrial segment generated revenue growth of 4% to $79.7 million compared to the same period last year and was flat to last quarter, reflecting the divestiture of the on-demand manufacturing parts business during the quarter.
Adjusted for divestitures, Industrial revenue increased 28.1% year-over-year and 2.1% over the last quarter.
The increase was driven by higher demand in both printers and materials in a variety of sub-segments, most notably, jewelry, automotive and transportation and general manufacturing.
Now we turn to gross margin.
We reported gross profit margin of 41.2% in the third quarter of 2021 compared to 43.1% in the third quarter of 2020.
Non-GAAP gross profit margin was 41.5% compared to 43.2% in the same period last year.
Gross profit margin decreased primarily as a result of businesses divested in 2020 and 2021.
If we exclude the impact of those divestitures, gross profit -- gross margins increased 80 basis points in the third quarter of 2021 compared to the same period last year, driven by 2020 cost actions and the higher revenue, which resulted in better capacity utilization.
As evidenced by our strong performance this year, demand continues to be strong for both our -- for our products in both business segments.
The biggest challenge we've faced isn't unique to 3D Systems.
We are all aware of the supply chain issues that are affecting everyone, from multinational corporations to small businesses to individuals on Main Street.
In fact, our Q3 revenue, while strong, was impacted by supply limitations of certain products.
Consistent with last quarter, we continue to see a tightening of cost and availability for certain components that go into our product.
Our team is doing a heroic job as it manages through these challenges.
Supply chain and not end customer demand remains the key headwind in our business and is our strong focus as we finish out the year.
We have taken steps to mitigate the economic impact, such as adding alternative sources for key components where possible.
We have seen some cost impacts from the supply chain constraints, especially in increased freight charges and have instituted a temporary surcharge for our customers on certain types of purchases effective in the fourth quarter.
Year-to-date, our non-GAAP gross profit margin was 42.6% and we expect full year gross profit margins to be between 41% and 43%.
Operating expenses for the quarter were $81.5 million on a GAAP basis, a decrease of 35.4% compared to the third quarter of 2020.
This year-over-year decrease reflects a goodwill impairment booked in Q3 2020.
Our non-GAAP operating expenses in the third quarter were $54.1 million, a decrease -- an 8% decrease from the third quarter of the prior year.
Compared to the second quarter of 2021, non-GAAP operating expenses decreased 2%, primarily driven by lower R&D spend.
Adjusted EBITDA, defined as non-GAAP operating profit plus depreciation, was $16.3 million or 10.5% of revenue compared to $7.2 million or 5.3% of revenue in the third quarter 2020.
Our disciplined approach to growth, cost management and focus on our core business is resulting in continued strong adjusted EBITDA.
Turning to the cash flow statement and balance sheet.
We are pleased to show $502.8 million of cash on the balance sheet, an increase of $418.4 million since the beginning of the year.
The increase was primarily driven by proceeds from the divestitures of the on-demand parts business and our medical simulation business, but supported in no small part by our extremely strong cash generation from operations.
During the quarter, we generated $20.7 million of cash from operations, marking the fourth straight quarter of positive cash from operations.
This is the first time in four years the company has achieved four straight quarters of positive operating cash flow and reflects a strong transformation of our business.
Now that we have demonstrated consistent profitability and cash generation and post-divestiture $0.5 billion of cash on hand, we are in a prime position to continue growing the company by taking a disciplined approach to invest organic and inorganic solutions that will solve customers' complex needs, drive adoption of additive manufacturing and generate high margin recurring revenue streams.
We have previously announced some of those growth opportunities, namely our acquisitions of Oqton, which closed November 1 and Volumetric Biotechnologies, which is expected to close in the fourth quarter.
The cash considerations for these will total approximately $130 million, leaving roughly $370 million of cash.
These acquisitions will position the company for strong growth and are core to our strategies in both high margin software to enable the adoption of additive manufacturing as well as adoption of advanced 3D printing technologies in the field of regenerative medicine where we believe we will be a leader in the market.
As I conclude my remarks, I want to reflect on the past year.
I joined the company at the beginning of the third quarter of 2020.
At that time, the company was just beginning its transformation.
We had just announced results for the second quarter of 2020 that included negative operating cash flow of $21 million for the first half of that year, cash and cash equivalents on the balance sheet of only $64 million and $22 million of debt.
Now fast forward to this year and the transformation we've been through.
We have generated over $60 million of operating cash this year for the third quarter and ended the quarter with over $500 million of cash and cash equivalents with no debt.
We are 100% focused on additive manufacturing and growing strongly in our core markets.
We are able to make smart and strategic investments to support our core business and are rapidly advancing our key technologies into new segments such as regenerative medicine.
I continue to believe that we are uniquely positioned in our industry with a strong balance sheet growth, cash generation and a suite of technologies that continue to be in demand by our customers.
Finally, we wanted to provide an update at our Investor Day event.
You may recall that we had scheduled an event for September 9 in the Denver, Colorado area.
Out of the abundance of caution for the safety of our investors, analysts and employees, we postponed the planned Investor Day as COVID infection rates increased this past summer due to the Delta variant.
We are now seeing the hopeful signs of progress, with once again declining infection rate, rollout of booster shots and a newly announced pill that seems to offer promise of dramatically cutting the hospitalization rates from this infection.
As a result, we are in the early stages of planning an updated Investor Day with an aim for the first half of 2022.
We will provide an update as soon as possible and look forward to sharing our long-term growth strategy in more detail with the investment community.
Well, Jagtar and I have covered the remarkable progress that we've made over the last year.
We've created value for our investors, our customers and our employees by remaking the business.
Our growth and profitability distinguishes us in the industry and has made us a key partner for a growing number of organizations that are considering additive manufacturing.
At the same time, our transformation has also made us a more exceptional place to work to drive the future of additive manufacturing, and as a result, more talented individuals are becoming a part of the new 3D Systems each day.
However, as much as we've accomplished this last year, it's more about the future.
We will continue to be a valuable solutions partner with customers and deeply integrate with them as they adopt our solutions and technologies.
We will also invest in our business and drive our solutions capabilities in the five key areas I spoke about earlier.
I'm truly excited about the depth and breadth of technology we bring to our markets and application expertise.
| compname posts q3 earnings per share of $2.34.
q3 gaap earnings per share $2.34.
q3 revenue rose 14.6 percent to $156.1 million.
q3 non-gaap earnings per share $0.08.
on a non-gaap basis company expects 2021 gross profit margins to be between 41% and 43%.
|
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 provide the same details as they have historically, and as I have 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.
I was just checking to make sure I was on -- off mute for a change.
Let me start with a couple of words on COVID, even though I'm sure all of you, like I, are so sick of the topic and the issue.
For those of us in the U.S., I think we can sense at least the beginning of a change in mood.
At least for me, it's wonderful to see the rollout of vaccines, and no -- I don't know anybody who doesn't get incredibly excited when we see our friends or our family was getting vaccinated.
I think on the other hand, I think most of us know, the story is not as true every place around the world.
When I talk to colleagues on the continent of Europe, story feels somewhat aligned, but also somewhat different.
There's a lot of frustration about the slowness of the rollout of the vaccine, and it feels very different.
It felt very different last week when I talked with colleagues in Latin America and some colleagues in India.
If we look at the statistics, I think we see that global cases globally, total cases right now are actually at the highest levels we have ever seen -- the world has ever seen.
And of course, the rollout of the vaccine, though happening around the world, is happening at very different paces depending on where you sit.
So the good news, I think, is that we can all, at this point, see a light you can see that light at the end of the tunnel.
And I'm so excited for those of us for whom that light feels close.
I just want to also share -- say, mine and my colleagues, hearts and thoughts are also with all of those folks, within our firm and within yours for whom the light still feels further away.
Let me turn to a brighter subject, which is our quarter, our results.
It had some positive surprises in it and had some items that one can't count on recurring, which Ajay will talk about.
But even normalized for those, it was a terrific quarter.
I doubt very many people, 10 years ago or even a few years ago, would have thought that in a period where restructuring as an industry is down substantially, and our restructuring business is well off the peak that we saw last year that we would produce a halfway decent quarter but along a quarter like this.
But the quarter was spectacular.
Let me, however, say, something that we discussed many times, quarters are fickle.
Markets can fluctuate up and down.
Big jobs can come and go.
Cases can settle in continuously investments to drive future growth, although critical for the future can negatively impact quarters in the short term.
Quarters to me, as excited as you can be about a quarter are, in fact, never good measures of performance for this company, good quarter or bad quarters.
To me what is much more powerful than this quarter or any quarterly results is the strength of the longer-term trajectory that we have been on and that I believe we are on as well as the reasons for that grade trajectory.
Compared to 10 years ago -- forget the quarter.
Collectively, we have managed to build a business that is much more powerful, much more global, much more diverse than it ever has been.
And that's true for the company as a whole, but even within each segment.
Today, for example, our business, it's more powerful in restructuring than it ever has been, is also much broader, much more powerful, much breadth of experience and capabilities to serve our clients on a broader range of challenges and opportunities than ever.
Yes, it's powerful in restructuring but also in transactions, in the office of the CFO and so many other services, and you can say the same for all of our business segments.
The way we've gotten here is the basis for that, the terrific teams, reinvesting in our core, reinvesting behind our good businesses but also looking where our clients have needs and broadening our business, both our offerings and our geographical footprint.
Those actions and our collective commitment, the best behind great positions and great people, to me, have changed the fundamental trajectory and resilience for this company.
To me, we have shown over the past several years that if we do the right thing, if we do the right thing, if we commit to our -- position our business in a right way, if I support great people for long-term sustainable growth, though we can still have bad quarters, for any extended period of time, we control our destiny.
We control our destiny in a way that allows us to serve ever more our clients' most important needs across a wider range of circumstances, not just in things like restructuring but in antitrust, in major M&A and cybersecurity and SPACs and public affairs, in global cross-border investigations and it could go on.
And that to me, that growth and capabilities of our people, that ability to extend our firm to innovate is far more exciting and a much more durable basis for excitement and success than any, any given quarter's results.
So I'm not going to talk any more about the quarter, Ajay will.
It's been so frustrating to see that the light is there at the end of the tunnel, but see how slow it's been approaching in some places.
The emotional fortitude that our people have shown during this period that keep our company moving, to keep connected with each other, to remain supportive to each other, dedicated to our clients has been wonderful to see as the CEO but actually equally as much as just a human being.
I'm delighted to report year-over-year double-digit revenue growth this quarter.
On our last earnings call in February, we said that strong M&A activity would favorably impact our economic consulting, technology and strategic communications segments as well as our transactions business within our corporate finance and restructuring segment.
Conversely, we had also expected weakness in demand for our restructuring services.
Both trends occurred and were deeper than we anticipated.
And in Forensic and Litigation Consulting, or FLC, the segment which was most impacted by COVID-19 in 2020, we expected continued gradual improvement.
Instead in the quarter, results rebounded faster than we anticipated as we were able to resume work on many matters where trials were rescheduled or resumed, particularly in North America.
Obviously, we are very pleased with these results.
First quarter of 2021 revenues of $686.3 million were up $81.7 million or 13.5%.
GAAP earnings per share of $1.84, compared to $1.49 in the prior year quarter.
GAAP earnings per share included $2.3 million of noncash interest expense related to our convertible notes, which decreased earnings per share by $0.05.
Adjusted earnings per share of $1.89, which excludes the noncash interest expense, compared to $1.53 in the prior year quarter.
Net income of $64.5 million, compared to $56.7 million in the prior year quarter.
This increase was due to higher operating profits in our economic consulting, FLC, and technology segments, which was partially offset by lower operating profits in corporate finance and restructuring.
SG&A of $126.5 million was 18.4% of revenues and compares to SG&A of $127 million or 21% of revenues in the first quarter of 2020.
SG&A was flat year over year, primarily because lower travel and entertainment expenses offset higher costs related to the increase in nonbillable headcount.
Double-digit revenue growth and flat SG&A expenses more than offset higher billable headcount-related costs, resulting in first-quarter 2021 adjusted EBITDA of $99.5 million, an increase of 19.5%, compared to $83.2 million in the prior year quarter.
Our first-quarter 2021 effective tax rate of 23.9%, compared to our tax rate of 22.5% in the first quarter of 2020.
For the balance of 2021, we continue to expect our effective tax rate to be between 23% and 26%.
Weighted average shares outstanding or WASO for Q1 of 35.1 million shares declined 3.1 million shares, compared to 38.2 million shares in the first-quarter 2020.
For the quarter, our convertible notes had a potential dilutive impact on earnings per share of approximately 450,000 shares in WASO, as our share price on average of $118.44 this past quarter was above the $101.38 conversion threshold.
Billable headcount at the end of the quarter increased by 562 professionals or 12.3%.
This increase is largely due to 34.9% billable headcount growth in corporate finance and restructuring, which includes both organic hiring as well as the addition of 151 billable professionals from the acquisition of Delta Partners in the third quarter of 2020.
Sequentially, billable headcount increased by 75 professionals or 1.5%.
Now turning to our performance at the segment level.
In corporate finance and restructuring, revenues of $226.2 million increased $18.5 million or 8.9% compared to the prior year quarter.
Acquisition-related revenues contributed $16 million in the quarter.
Excluding acquisition related, revenues were essentially flat, primarily because an increase in transaction-related revenues globally was offset by lower demand for restructuring services, particularly in North America.
Adjusted segment EBITDA of $37.4 million or 16.6% of segment revenues, compared to $48.9 million or 23.6% of segment revenues in the prior year quarter.
The year-over-year decrease in adjusted segment EBITDA was due to flat revenues with a 34.9% increase in billable headcount and related compensation expenses and a 10 percentage point decline in utilization.
Turning to forensic and litigation consulting, revenues of $150.8 million increased 2.2% compared to the prior year quarter.
The increase in revenues was primarily due to higher demand for health solutions and investigation services, which was partially offset by a $4.1 million decline in pass-through revenues and lower realized pricing for our data and analytics services.
Adjusted segment EBITDA of $29.4 million or 19.5% of segment revenues, compared to $21.2 million or 14.4% of segment revenues in the prior year quarter.
The increase in adjusted segment EBITDA was primarily due to higher revenues with higher utilization, coupled with a decline in SG&A expenses and direct costs, primarily related to the lower pass-through revenues.
Sequentially, FLC revenues increased $23.6 million or 18.6%, and adjusted segment EBITDA improved $21.8 million, reflecting increased demand across all of our core offerings, including previously backlogged work and a 9 percentage point increase in utilization.
Our economic consulting segment reported record revenues.
Revenues of $169.3 million were up 28.1%, compared to the prior year quarter.
The increase in revenues was due to higher demand for our non-M&A-related antitrust and M&A-related antitrust services, as well as higher realized pricing and demand for our international arbitration services.
Adjusted segment EBITDA of $26.6 million or 15.7% of segment revenues, compared to $12.7 million or 9.6% of segment revenues in the prior year quarter.
The increase in adjusted segment EBITDA was due to higher revenues, which was partially offset by higher compensation related to an increase in variable compensation and a 9.9% increase in billable headcount.
In technology, we also had a record quarter.
Revenues increased 35.3% to $79.5 million compared to the prior year quarter.
The increase in revenues was due to a surge in demand for M&A-related second request services.
Adjusted segment EBITDA of $21.6 million or 27.2% of segment revenues, compared to $14.5 million or 24.7% of segment revenues in the prior year quarter.
The increase in adjusted segment EBITDA was due to higher revenues, which was partially offset by an increase in compensation.
Sequentially, Technology revenues increased $20.8 million or 35.5%, and adjusted segment EBITDA improved $11.4 million, primarily due to a large second request engagement.
Strategic communications revenues increased 3.7% to $60.5 million compared to the prior year quarter.
During the quarter, we experienced increased demand for our public affairs services, which was offset by a $2 million decline in pass-through revenues.
Adjusted segment EBITDA of $10.4 million or 17.2% of segment revenues, compared to $8.8 million or 15% of segment revenues in the prior year quarter.
Increase in adjusted segment EBITDA was primarily due to lower SG&A expenses.
Let me now discuss a few cash flow -- few key cash flow and balance sheet items.
As is typical, we pay the bulk of our bonuses in the first quarter.
Net cash used in operating activities of $166.6 million, compared to $123.6 million in the prior year quarter.
The year-over-year increase in net cash used in operating activities was largely due to an increase in salaries related to headcount growth and higher annual bonus payments, which was partially offset by an increase in cash collected.
During the quarter, we spent $46.1 million to repurchase 421,725 shares at an average price per share of $109.37.
As of the end of the quarter, approximately $167.1 million remained available for stock repurchases under our current stock repurchase authorization.
Total debt net of cash of $252.8 million at March 31, 2021, compared to $143.2 million at March 31, 2020, and $21.3 million at December 31, 2020.
The sequential increase was primarily due to $170 million of net borrowings under our bank revolving credit facility to fund cash used in operating activities primarily for annual bonus payments.
Turning to guidance, first, let me remind you of the guidance for 2021 we provided in February.
Revenues of between $2.575 billion and $2.7 billion.
EPS of between $5.60 and $6.30.
And adjusted earnings per share of between $5.80 and $6.50.
I believe, at this juncture, it is important that I shared with you why we believe the exceptional strength we have demonstrated in Q1 may not necessarily repeat in subsequent quarters this year.
First, we are, for the most part, a fixed-cost business.
As people and real estate represent some of our largest expenditures, these costs are not variable in the short term.
So small shifts in revenues have a much larger impact positively or negatively on EPS.
Second, we are at our core a large job firm.
And when matters end, they may not immediately be replaced.
This quarter, for example, our results were boosted by several exceptionally large engagements that were driven by record levels of M&A activity that may not be sustained through the year.
In technology, for example, we had one engagement, which concluded during the quarter.
That represented over 20% of of total quarterly segment revenues.
In economic consulting as well, we have several large engagements that are expected to conclude during the year.
Even our restructuring revenue this quarter was boosted by revenue from large matters that began last year and have either now ended or will likely end this year.
Meanwhile, credit markets remain in an accommodative mode.
And hence, the number of stressed and distressed issues remain low.
Moody's now expects the trailing 12-month Speculative Grade Global Default Rate to fall to 3.2% by the end of the year, down from 6.8% forecast they provided in December.
And Fitch, which measures defaults by dollar volume now expects a high-yield default rate for the U.S. of 2% by year end.
These forecasts point to lower demand for our restructuring services for at least the balance of this year.
Third, this quarter, we were delighted by results in FLC, our business most negatively impacted by COVID in 2020.
That being said, with the continued uncertainty of the pandemic and certain geographies experiencing third and fourth waves of infections, we remain cautious as we may be impacted in certain locations by COVID-19 related court closures and travel restrictions, which can impact our ability to serve our clients.
Fourth, our nonbillable travel and entertainment expenses are typically around 1.5% of revenue.
At the moment, this expense is largely nonexistent as travel and entertainment is severely curtailed in most geographies.
Lastly, our fourth quarter is typically our weakest quarter with the holiday season and compensation true-ups at the end of the year.
In 2020, our fourth quarter results were exceptional, in part, because of the implementation of a cross-border tax strategy.
The more rational expectation would be for a seasonally weaker Q4 as many of our practitioners take well-earned vacations.
Now with all those risks considered, clearly, the great performance in Q1 gives us a very good headstart for achieving our guidance.
Once we have another quarter under our belt, at the end of the second quarter, we will revisit guidance, as is typical, to see if any changes are warranted.
Before I close, I want to reiterate a few key themes that underscore the attractiveness of our business.
First, we have demonstrated that we have a tremendous collection of businesses that make us a very resilient company.
We are uniquely positioned to support our clients as they navigate their most complex business challenges regardless of business cycle.
Second, more than ever, I am convinced that the key to our success is the strength of our people and their relationships, both of which are exceptionally strong.
Third, our leadership team is focused on driving growth through strong staff utilization.
And finally, our balance sheet is enviable.
And we have demonstrated the ability to boost shareholder value through share buybacks, debt reduction, organic growth, and acquisitions.
| q1 adjusted earnings per share $1.89.
q1 earnings per share $1.84.
q1 revenue rose 13.5 percent to $686.3 million.
|
Let me start by highlighting some of our full-year financial accomplishments in 2021.
Our revenues of $20.4 billion, net income of $3 billion, adjusted EBITDA of $5.3 billion, and free cash flow of $2.1 billion were all-time annual records in our company's history.
The M&A consolidation that we executed in 2020 was a huge driver of the industry market conditions that led to the outstanding annual results that we achieved in 2021.
With this record annual profitability, we put the cash we generated to good use.
We reinvested in our business, acquired the leading prime scrap processor in North America, delevered our balance sheet, and reduced our diluted share count by 10% last year.
Just to give you an idea of how 2022 is going so far, on a year-over-year basis, we have already generated more adjusted EBITDA in January of 2022 alone than we did in the entire first quarter of 2021.
Now, focusing back on our Q4 2021 results.
Last quarter, we generated adjusted EBITDA of $1.5 billion on 3.4 million tons of steel shipments, the second-best quarterly performance in our company's history, only behind the previous quarter's $1.9 billion adjusted EBITDA on 4.2 million tons shipped.
The main driver of this quarter-over-quarter decline in EBITDA from Q3 to Q4 was this shipment reduction.
Additionally, service centers and distributors pulled even less tons than usual during this already typically weak period in late November and December.
Remaining steadfast in our disciplined supply strategy and based on this rebound we expected and are already seeing from our automotive clients this year, we elected to move up several operational maintenance outages originally planned for 2022 into the fourth quarter of 2021.
These actions reduced our sequential quarter-over-quarter steel production by 675,000 crude tons in Q4, ultimately also impacting our unit costs.
Partially offsetting the volume and cost impacts were higher selling prices in Q4, which rose by approximately $90 per ton from $1,334 to our highest level of the year of $1,423 per net ton.
This is also only an early indication of the success we have achieved in renewing our fixed price sales contracts as only a portion of our contract renewals were already in place during Q4 of 2021.
Remember, the majority of our renewals were not in place until January 1, 2022.
As this year progresses, the selling prices we report every quarter going forward will continue to demonstrate the successful renewal of these fixed-price contracts, and that will be even more evident if the index HRC price continues to drop.
For context, if we applied the contracts we have in place now in 2022 to the fourth quarter of 2021, holding all else constant, our Q4 2021 adjusted EBITDA would have been nearly $500 million higher.
This level of fixed contracts is the key differentiator in favor of Cleveland-Cliffs relative to all other steelmakers in the United States and gives us significant visibility into our cash flows for 2022.
Despite the lower shipments and additional inventory build, we generated $900 million of free cash flow in Q4 of 2021.
Of this $900 million, we used $761 million to acquire FPT and use the remaining $150 million or so to pay down debt.
So, in other words, with only one quarter's worth of free cash flow, we were able to pay for a meaningful acquisition and still had enough cash flow left over in the quarter to pay down some debt.
Now, speaking of our debt, we have already accomplished a lot more than we originally expected in terms of improving our leverage.
We keep a close eye on our overall debt levels on a dollar basis, but we also look at our overall leverage on a total debt-to-last 12 months adjusted EBITDA basis.
With total debt and LTM adjusted EBITDA at essentially the same level, at the end of 2021, we are at a total leverage of only one time.
By next quarter, our LTM-adjusted EBITDA will likely be even higher, which will continue to further reduce our overall leverage metrics.
As a reminder, our leverage was over four times in 2019, pre-COVID and before our transformation.
While overall leverage is in great shape, we will continue to simplify our capital structure by paying down debt, replacing existing bonds with cheaper ones, and extending debt maturities.
The significant free cash flow we anticipate in 2022 should allow us to pursue the dual goals of repurchasing shares and reducing debt.
We have already redeemed our convertible notes in 2022 and several other tranches of our bonds become callable this year at pre-negotiated prices, including the two tranches of secured notes we issued in 2020.
We fully intend to redeem or refinance these notes at some point in 2022.
As expected, last year, we built a substantial amount of working capital, which should be worked down throughout this year.
Given this increased collateral base, we were able to take advantage of these asset levels and upsized our ABL facility last quarter, increasing our available liquidity by $1 billion to our current level of $2.6 billion.
On another very important note on the balance sheet, our net pension and OPEB liabilities saw a $1 billion reduction during Q4, primarily due to actuarial gains and strong asset performance, leading to a $1.3 billion or nearly 30% net reduction during 2021.
Also importantly, in the rising rate environment that we are in today, we have meaningful potential for further pension and OPEB liability reductions.
Just for reference going forward, for every 50-basis-point increase in our discount rate, our expected liabilities would decline by about $500 million, all things equal.
Looking ahead, even under today's pessimistic HRC futures curve, we would expect higher overall average selling prices in 2022 than we saw in 2021 when HRC averaged $1,600 per ton.
On the cost side, we expect to see increases related to energy and materials, with the largest annual change in coal and coke.
Countering this, we have been offsetting our coke usage by increasing the usage of HBI in our blast furnaces and increasing the percentage of scrap in the charge of our BOFs.
Our capex budget for this year is $800 million to $900 million, an increase from the previous year, primarily due to an additional reliability and environmental projects, inflation and the reline of one of our Cleveland blast furnaces, which will be out for over 100 days during Q1 and Q2.
Full-year DD&A should be about $900 million.
Exclusive and one-time items, our 2022 SG&A expense should be around $520 million, which includes higher wages and also $40 million of FPT overhead.
Now that we have effectively exhausted our tax NOLs, our cash tax rate should be in the 15% to 20% range, with our book tax rate at 21%.
Our first full calendar year as the new Cleveland-Cliffs was an absolute success, and we could not have accomplished all the great results we were able to accomplish without the hard work and commitment of our 26,000 employees, approximately 20,000 represented by the USW, the UAW, the Machinists, and other unions.
We believe in manufacturing in the United States and in good-paying middle-class jobs.
We really appreciate the work of each one of our employees and the unions representing them.
We could not have done all that without you.
As great as 2021 was for Cleveland-Cliffs, we would have done even better if the automotive industry had resolved their supply chain problems.
The shortage of microchips cut their opportunity to build 18 million cars or more in 2021.
And the automotive sector ended the year with a much smaller 13 million units.
When we at Cleveland-Cliffs realized in the third quarter of 2021 that our automotive clients were still not performing up to the level that they were guiding us to build inventories for them, we then made the decision to move up to Q4 some important maintenance jobs originally scheduled for the first four months of 2022.
That decision, albeit correct, has clearly impacted our Q4 results.
Now with the first month of 2022 behind us, we are starting to see improved deliveries to our automotive clients.
While it is just a one-month data point, deliveries to automotive clients in January were stronger than each of the previous three months: October, November, and December.
And our adjusted EBITDA in January was a solid $588 million.
Furthermore, as the microchip shortage improves during 2022, the automotive companies will need a lot more steel this year than in 2021.
This steel comes primarily from Cleveland-Cliffs.
We are, by a huge margin, the largest supplier of steel to the automotive industry in the United States.
Let's make this abundantly clear to our investors.
There is no other steel company, integrated or mini mill, in the U.S. or more broadly in North America capable of supplying all the specs and all the tonnage we supply the American automotive industry.
Cleveland-Cliffs already has all the equipment and technological capabilities that other companies are only now spending several billions of dollars to try to replicate by building new melt shops and new galvanizing lines.
We typically sell 5 million tons of steel directly to automotive manufacturers and also sell another 2 million to 3 million tons through intermediaries.
Put another way, almost half of our steel sales ends up in automotive functions.
Another interesting fact, even though we have not deliberately tried to grow our automotive market share in 2021, we have actually increased our market share through tons resourced by our clients.
While the clients do not tell us why they are taking the order away from another steel company and reassigning this specific item to Cleveland-Cliffs, we can only assume that these other steel companies are not meeting the automotive industry's high standards.
That's probably why these competitors have to invest several billions of dollars to play catch-up.
Cleveland-Cliffs does not have to spend this type of money and will not.
With our capex needs in 2022 relatively low and strong confidence in our cash flows, we are very comfortable putting in place the $1 billion share buyback program just announced.
Another differentiating big feature of our way of doing business is the predictable pricing model that we have in place with automotive and tin plate and some select clients in other sectors as well.
This feature eliminates the worst cancer in our industry, which is self-inflicted volatility.
Going forward, we will work with more clients to move sales under this model.
Real clients don't need indexes.
They need reliable suppliers and fair prices.
We currently sell about 45% of our volumes under annual fixed-price contracts, by far, the highest in our industry and we want this number to continue to grow.
The harm caused by the volatility of steel pricing is most damaging for smaller service centers, who leave out of their inventory values.
Ironically, these same folks are the ones who create volatility in the first place, panic buying, double and triple ordering when supply is tight, and then halting purchases altogether when inventories are temporarily adequate, perpetuating a never-ending cyclicality.
We are convinced that it is in everyone's best interest to limit volatility in our industry.
And that's not only desirable but also feasible.
That's why we are moving away from sales to smaller players, further concentrating on the larger clients, which already make up the vast majority of our sales.
At this point, all important clients of Cleveland-Cliffs are being offered index-free deals to continue to do business with us.
Marrying stable costs with stable prices up and down the supply chain can create a much healthier business environment for steel in the United States.
Another ongoing important matter for the future of Cleveland-Cliffs is our commitment to ESG.
That was evident with our purchase of FPT, the national leader in prime scrap, which was completed in the fourth quarter.
The integration of FPT has gone remarkably well, and we are grateful for the buy-ins of the 600 employees of FPT, they are now employees of Cleveland-Cliffs.
Since closing the deal on November 18, we have made substantial moves securing a number of additional sources of prime scrap uptake.
Most notably, the largest automotive stamping plant in the country.
This particular stamping plant alone generates more than 150,000 tons of prime scrap per year.
Our agreement replaced an incumbent scrap company, who had been servicing this stamping plant for decades, even before this scrap company was acquired by a mini mill several years ago.
Our deal was made possible with a compelling proposition.
This automotive manufacturer buys the steel primarily from Cleveland-Cliffs, and now we can feed their scrap directly back to our steelmaking shops.
This is not just recycling steel, it's a real closed loop.
A closed-loop is a key piece of our automotive clients' environmental strategy, as well as a key piece of our own environmental strategy at Cleveland-Cliffs.
On the carbon emission side, we continue to lower our usage of coal and coke by increasing the utilization of HBI as a significant part of the burden in our blast furnaces.
While our flagship direct reduction plant in Toledo was originally built to supply third parties EAFs with HBI, this HBI is now being exclusively used in-house within Cleveland-Cliffs; the vast majority in our blast furnaces, playing a central role in lowering both our coke rate and our CO2 emissions.
Furthermore, we are currently working with Linde, our largest supplier of industrial gases, to implement the utilization of hydrogen in Toledo.
As you may know, our state-of-the-art direct reduction plant was originally designed and built with the possibility of using up to 70% of hydrogen in the mix as reductant gas.
We expect to report on the usage of hydrogen and the production of the first hydrogen-reduced HBI in steel in 2022.
The same goes for our iron ore pellets, another key competitive advantage we have and a driver of lower emissions relatively to foreign competition that uses primarily sinter feed ore in their blast furnaces.
Going forward, we will be limiting the tonnage of iron ore pellets we sell to third parties.
Iron ore is a finite resource and the time and cost it takes to get permits and extend life of mine is incredibly cumbersome.
In addition, iron ore pellets are Scope 1 emission for Cleveland-Cliffs, but they are Scope 3 emissions for the clients we sell them to.
Unfortunately, the Scope 3 emissions are not accounted for, not counted in anyone's reduction targets and surprisingly, at least for now, no one really seems to care about Scope 3 emissions, therefore, producing fewer tons of pellets automatically reduce our Scope 1 emissions.
And that's good enough for us, at least until Scope 3 becomes a topic of concern.
Also, with the use of additional scrap in our BOFs, our iron ore needs are not as high as before, and we no longer need to run our mines full out.
When determined where to adjust production, our first look is at our cost structure because we are now able to produce DR-grade pellets at Minorca and mainly due to the ridiculous royalty structure we have in place with the Mesabi Trust.
We will be idling all production at our Northshore mine, starting in the spring, carrying through at least to the fall period and maybe beyond.
At Northshore, no production, no shipments, no royal payments.
With more scrap in the BOFs, we need fewer tons of hot metal to produce the same tonnage of liquid steel.
As a consequence, the Northshore idle could go longer than currently planned.
As another consequence of our strategy of hot metal stretching, we have dramatically lowered our needs for coke and coal.
We already announced last quarter that we idled our coke battery at Middletown.
Now that our coke needs have been reduced even more, in the second quarter of 2022, we will also permanently close our Mountain State Carbon coke plant.
This action will not only further improve our carbon footprint but will also save us approximately $400 million in capex originally planned for this facility over the next few years.
Even though jobs are going to be eliminated at Mountain State Carbon, we have enough job openings at other nearby Cleveland-Cliffs facilities.
And we can ensure all good employees will have other employment opportunities within our company.
On that note, the last piece of our environmental strategy relates to how we operate our eight blast furnaces.
Our presence in highly specified automotive grade materials, particularly exposed parts, necessitates the use of blast furnaces.
EAFs continue to be unable to demonstrate that they can compete and produce the entire spectrum of specs demanded by the car manufacturers.
That's the main reason why all the major steel suppliers located in countries with a strong presence of automotive manufacturing like in Japan, in South Korea, in Europe, and here in the United States, are not mini-mills operating areas.
They are all integrated steel mills with blast furnaces and BOFs.
Cleveland-Cliffs is the one here in the United States.
And we do not use the sinter, we use only pellets and HBI in our blast furnaces, enabling us to establish the new world benchmark in low coke rates and low emissions.
This is particularly relevant when our automotive clients, with a worldwide presence, compare Cleveland-Cliffs against their other well-known automotive steel suppliers from countries like Japan, South Korea, Germany, Austria, Belgium, or France, among others.
Our full control over the entire supply chain from pellets to HBI to prime scrap creates a huge differentiation in favor of Cleveland-Cliffs, one that is impossible to replicate in Asia or in Europe.
That said, we also produce a lot of steel that goes to less quality intensive end users.
A blast furnace reline is a capex-heavy undertaking, albeit totally expected in our multiyear projections.
Under this evaluation process, we also take into consideration other upgrades to the upstream hot end, as well as the capital related to extending the life of mine of our iron ore mines.
With all that, in some cases, the capital requirements of a new EAF compared to the avoidance of reinvesting in a blast furnace reline and its associated supply chain could come out close to a wash, particularly because we at Cleveland-Cliffs already have the rolling and coating capabilities in place.
If and when that happens, the wash or better, we might consider an EAF as a replacement to a blast furnace reline in the future.
One final piece on the environmental to note.
Of all CO2 emissions generated in the United States, the emissions related to the production of steel represent just 1% of the total.
One more time, just 1%.
This number is 15% in China and 7% worldwide.
But here in the United States, it is just 1%.
The steel industry in the United States is the most environmentally friendly in the entire world.
Meanwhile, transportation, particularly affected by automotive tailpipe emissions, is responsible for 29%, while energy is responsible for another 25%.
This is where the importance of steel made in U.S.A. is most significant as our very small emissions footprint, again, just 1%.
We will play a critical role in improving the emissions of these two sectors, which, combined, are responsible for more than 50% of all CO2 emissions in the United States.
For one, Cleveland-Cliffs has been prepared for the transition from ICE to electric vehicles long before EV's rapid adoption.
And we have the right steels necessary to meet the automotive industry target of 50% EV adoption by 2030.
On the energy side, we need more renewables, like solar and wind, and both are steel-intensive.
Cliffs is the only producer in the United States of the electrical steels needed for the modernization of the electrical grid, which received $65 billion in funding under the recently passed infrastructure bill.
Our non-oriented electrical steels, we call it NOES, is used for motors in both hybrids and BEVs.
The infrastructure bill also includes another $7.5 billion earmarked for charging stations for electric vehicles.
Each charger uses approximately 50 pounds of GOES, grain-oriented electrical steel, and we are talking about half a million of charging stations, plus the equivalent amount of transformers to tie down these charging stations into the grid.
With all that and no other producer of GOES or NOES in North America other than Cleveland-Cliffs, in 2022, we have a more than full order book for electrical steels.
And that's just the beginning of the EV revolution, which will certainly progress between now and 2030.
With all we at Cleveland-Cliffs are doing related to carbon emissions, I can't believe so many companies are being given a free pass by the investment community, despite not doing much more than just saying they will be carbon-neutral by 2050.
What I have just laid out here are real, concrete, undeniable measures to reduce emissions, and we are implementing them all companywide at Cleveland-Cliffs.
We will continue to be able to track our progress in 2022, 2023, 2030, and beyond.
And we will watch how much others will actually do here in the United States and abroad.
The future, and specifically, 2022, is clearly bright for Cleveland-Cliffs.
Underlying demand remains strong, infrastructure-related spending has started, particularly regarding electrical steels.
And the chip shortage affecting the automotive has begun to ease, leading to meaningful pent-up demand for cars and trucks.
That should benefit Cleveland-Cliffs a lot more than any other steel company in the United States.
In the meantime, we will take full advantage of the market's lack of appreciation or lack of understanding of our business by buying back our stock, all to the benefit of our loyal shareholders.
| compname reports full-year and fourth-quarter 2021 results and announces $1 billion share repurchase program.
q4 revenue $5.3 billion versus $2.3 billion.
as of february 8, 2022, company had total liquidity of approximately $2.6 billion.
expect to see higher average selling prices for our steel in 2022 than in 2021.
|
Before we discuss our results, I encourage you to review the cautionary statement on Slides 2 and 3 for our customary disclosures.
Further information can be found in our regular SEC filings.
Bill and Pete will provide a Company update, as well as an overview of the Company's third quarter 2021 results.
During the Q&A, please limit yourself to one question plus one follow-up.
You may get back into the queue if you have additional questions.
Envestnet achieved strong adjusted revenue growth of 20% for the quarter and 18% year-to-date.
Our new guidance reflects an improved outlook for the full year 2021.
You'll hear more about our results from Pete following my opening comments.
Our commitment to our vision and strategy continues as we create the financial wellness ecosystem that enables the future of advice and makes possible an intelligent financial life.
There is excitement about what we're doing inside the Company, and in the marketplace.
We are driving innovation.
We are threading technology into everything we do.
We are using data to elevate incredible insights to our clients and our partners.
We are continuing to add to our industry-leading marketplace of solutions.
You see, Envestnet is differentiated from every other provider as a fully connected, open architecture, hyper-personalized partner that is paving the way for the future of our industry.
We are executing on our roadmap and it is absolutely resonating with our clients.
We previously shared our strategy with you and outlined the steps to accelerate growth by, first, capturing more of the addressable market.
We're already a market leader with $5.4 trillion in platform assets, but we can deliver consistently higher revenue growth by deepening our relationships, and offering new and better solutions to our over 108,000 financial advisors and our growing roster of more than 625 fintech firms.
Secondly, we are modernizing the digital engagement marketplace.
Envestnet continues to innovate and implement meaningful enhancements to our cloud-based API-driven platform.
This will improve user experience and create new opportunities for revenue growth.
And finally, establishing our open platform as the driver of the ecosystem.
There are more connections to more developers and more firms continue to expand and vitalize our environment.
Over the past quarter, we saw an increase in participants across both our data business and our wealth business.
Envestnet is also capitalizing on a number of compelling trends that accelerate our progress.
Let's start with demand for technology and automation that is absolutely increasing across the board, and this is all ages, all generations, from baby boomers to Gen Z. Another very important trend has to do with open banking.
Open banking leverages technology to deliver consumer permissioned, highly personalized services and solutions.
Every fintech and financial Institution will need open banking capabilities to compete in the future.
We believe that Yodlee powers the most advanced global functionality for open banking.
This is an accelerating advantage for our clients and their consumers.
We also continue to benefit from the growth of fee-based advice and the even faster growth of managed accounts.
We are outpacing the industry.
Over the last five years, Envestnet AUM/A organic growth rate has exceeded the managed account industry each and every year by approximately 500 basis points.
We're also seeing a meaningful growth of personalized services like direct indexing, like impact investing, and a heightened interest in tax services.
Loss trend, clearly data is incredibly valuable.
Envestnet has assembled a significant dataset.
We have also strategically built data solutions that bring insight and actionable intelligence, which is a unique and substantial advantage for our Company.
These trends create a remarkable opportunity for Envestnet, and we are well positioned to take advantage of them.
We now have $5.4 trillion in assets across 108,000 advisors, an increase of $240 billion in assets over the last quarter.
We continue to see assets moving from AUA to AUM.
We also continue to see new account opening accelerate.
We are now opening more than 20,000 new accounts every week.
We've also added several new large financial institutions over the quarter, which has helped us reach a total of 17.3 million accounts that we serve.
In addition, the average number of accounts per advisor on our platform grew 9% year-over-year.
Advisors are serving more and more of their clients using our technology and our solutions.
We're also leading in areas that are super-important and they're growth drivers for our clients today.
These are personalized services like direct index portfolios, like sustainable investing strategies, which have grown by 86% year-over-year showing the increasing focus on ESG and impact investing.
There is also tax management services.
And let me just spotlight our offering here.
We are using our rich internally generated data to identify advisors with accounts that would specifically benefit from our tax overlay offering.
19 new firms have enabled tax overlay to their advisors, and several hundred advisors used tax overlay for the first time since June 1.
This includes several new large enterprises using our tax services.
There are also emerging activities that are exciting like our embedded investing effort.
This opens up access to our capabilities for millions of millions of additional consumers.
These services are promising -- are making promising progress as we engage more deeply with our clients in a bevy of new prospects.
We are investing in our leading technology to connect the best of Envestnet, enabling advisors to serve the entirety of their clients' financial lives.
There are many exciting developments making their way to market.
In September, we piloted our next generation proposal tool with over 100 clients of ours.
The feedback has been overwhelmingly positive.
The result of taking a customer-focused approach and working with them to design an even better technology solution.
We continue to expand industry-leading set of solutions we provide powered by and integrated into our technology and data.
We recently announced a partnership with YieldX.
YieldX is a fintech that offers cutting-edge tools to advisors, helping them build more efficient fixed-income portfolios.
This partnership complements the capabilities of Envestnet's Insurance Exchange.
By combining YieldX and the Envestnet Insurance Exchange and other really important steps that we are taking, we are assembling the industry's leading marketplace of income and protection solutions.
We are creating the centralized source that enables advisors to offer the most comprehensive end-to-end solutions for income and protection, which is an essential need for retiring individuals.
There is real momentum in our efforts, as the Envestnet Insurance Exchange recently surpassed $1 billion in insurance assets served.
You may have noticed Envestnet in the media this past quarter.
We recently launched a new campaign aimed at our industry with the tag line fully vested.
The initial response has been significant with a tenfold increase in digital traffic, validating our alignment with our clients, and how they see the future of advice and how Envestnet is powering it.
We are growing awareness of the solutions we offer, creating familiarity with our brand and setting the stage for future offerings.
We have made progress on our strategic roadmap.
We are executing in all areas of our business, and we are delivering strong financial results.
Pete is going to provide more detail for you now.
Today, I'm going to review our third quarter results and then provide an update on our guidance for the fourth quarter and revised guidance for the full year.
Our third quarter results continue to demonstrate the strengths in our business model.
We expect the momentum from the first nine months of the year to carry through the fourth quarter.
Adjusted revenues for the third quarter grew 20% to $303 million, compared to the third quarter of last year.
Adjusted EBITDA was down 2% to $66 million, compared to the third quarter of 2020, outpacing our expectations for the quarter, and at the same time, reflecting the impact of our investment initiatives.
Adjusted earnings per share was $0.61.
Quickly on the balance sheet, we ended September with approximately $394 million in cash, and debt of $860 million.
Our net leverage ratio at the end of September was 1.7 times EBITDA.
Turning to our investment initiatives, I want to reiterate the expectations we've set forth earlier in the year.
We continue to expect the investments to account for roughly $30 million of operating expense this year.
We are making good progress on the hiring front, the impact of which is reflected in our third quarter results and our updated guidance.
We expect the impact of the investments to step up in the fourth quarter.
We continue to expect the accelerated investments to annualize to a run rate of approximately $45 million in 2022, at which point they should be completely in our expense base and grow at the same rate of our operating expenses thereafter.
Additionally, we continue to expect sustainable faster organic revenue growth over the longer term as we create a better more streamlined ecosystem, which elevates our value proposition to existing clients and expands our total addressable market.
But to summarize, for the fourth quarter, we expect adjusted revenues to be between $310 million and $312 million, up 17% to 18% compared to the fourth quarter of 2020.
Adjusted EBITDA to be between $54 million and $55 million as we further ramp up the investments, and earnings per share to be $0.49.
For the full year, we are again raising our outlook to reflect the strength of the first nine months of the year and improved outlook for the fourth quarter.
We expect adjusted revenues to be between $1,177 million and $1,179 million, up approximately 18% compared to 2020.
Adjusted EBITDA to be between $259.5 million to $260.5 million, representing growth of 7% for the full year, when the midpoint of our initial expectation for EBITDA was to be down around 5%.
EPS for the full year to be $2.41, which is $0.40 higher than the midpoint of our original guidance back in February.
Adding some detail about our revenue outlook to the fourth quarter of the year to highlight some of the drivers, first, our wealth business has performed well year-to-date.
Net flows into assets under management and administration, excluding conversions in the first three quarters of the year were the highest in our history, nearly double the flows from the first three quarters last year.
Further, our significant asset base benefited from favorable capital market valuations adding to our forecast of revenue growth.
Second, our data and analytics segment has grown subscription revenue around 4% in the first nine months of the year, compared to the same period last year.
We expect this business to see improving revenue growth in the fourth quarter.
As we continue to execute on our strategy in the coming years and benefit from the investments we're making now, we will capture more of the opportunities we've identified, positioning us to attain our longer-term targets of $2 billion of revenue, and adjusted EBITDA margin expanding into the 25% range by 2025.
Our year-to-date results are strong and we intend to close out the year capitalizing on this momentum by leveraging our scale, our technology, our market position, and another incredible asset that we have, Envestnet's people.
Envestnet has a team of dedicated individuals who deeply understand the needs of our industry and the needs of our clients.
This team is leaned into our mission and leaned into the work we are doing to establish Envestnet as the ecosystem that connects data, technology, and solutions to enable the intelligent financial life.
As the industry leader, we continue to innovate and drive the digital transformations that our clients want.
Our strategy remains clear.
We will capture more of the addressable market opportunity with our data and solutions.
We are modernizing the digital engagement marketplace, and we are opening up our platform to accelerate future growth.
I'm very pleased with the progress Envestnet is making.
Envestnet is differentiated from every other provider as a fully connected, open architecture, hyper-personalized partner that is paving the way for the future of our industry.
We will continue to execute, and we will create greater value for each and every one of our Company stakeholders.
| q3 revenue rose 20 percent to $303.1 million.
qtrly adjusted earnings per share $0.61.
sees adjusted net income per diluted share $0.49 for q4.
|
Today, I'm joined by Brian Tyler, our Chief Executive Officer; and Britt Vitalone, our Chief Financial Officer.
Brian will lead off, followed by Britt, and then we will move to a question-and-answer session.
We are happy to report another strong quarter for McKesson, driven by continued market improvements and underlying fundamentals of our businesses.
We achieved double-digit adjusted operating profit growth in all four segments based on a strong operating performance and alignment across the enterprise.
As a result of our second quarter performance our confidence in the second half of the fiscal year and McKesson's continue to role in the COVID-19 response efforts, we are raising our guidance range for fiscal 2022 adjusted earnings per diluted share from $19.80 to $20.40 to a new range of $21.95 to $22.55.
We continue to believe we will see a return to pre-COVID pharmaceutical prescription and patient engagement levels in the second half of our current fiscal year.
We're encouraged by the trends we continue to see across primary care, specialty, and oncology patient visits in addition to overall prescription volumes.
We are pleased to see our markets are recovering in line with our original expectations.
Our enterprisewide focus on our company priorities is driving operating performance and furthering the advancement of our long-term growth.
I'd like to take the time today to talk about each of our company's priorities.
First, we have a focus on our people and the culture, which is guided by our ICARE and ILEAD values.
These values include a commitment to both our local and global communities, our customers and the healthcare industry to innovate and deliver opportunities that make our customers more successful.
All for the better health of patients.
Along with these values, we're committed to fostering an inclusive workplace that celebrates our differences and respects the diverse world in which we live and work.
As an organization, we continue to be committed to diversity, equity and inclusion.
Through a more diverse and inclusive workplace we are a stronger, a more creative and a more productive team.
At McKesson our priority has been the health and safety of our employees and we're deeply committed to supporting our team members across the organization, which why I'm incredibly pleased to have announced McKesson's first ever day of wellness, which we call Your Day, Your Way.
This will take place this Friday, November 5th.
We understand that mental, physical and emotional well-being are at most importance to our team, so we made the decision to set aside a special day to help ensure our employees can rest, recharge and take time for themselves.
We're so grateful for all the contributions from the team over the last 19 months.
McKesson employees continue to be in the center of the fight against COVID-19 and we want to make sure everyone gets a chance to take a well-deserved break.
Our second priority is to strengthen our core pharmaceutical and medical supply chain businesses across North America, we have a best-in-class pharmaceutical supply chain.
As a reminder, in the US, we have a scaled distribution presence that delivers roughly one-third of prescription medicines each day.
Our operational excellence and our ability to leverage our scale with global suppliers is one of the many reasons why McKesson continues to be the partner of choice for hospitals, health systems and pharmacies of all size.
We strengthen our business when we strengthen our customers and partners.
This past quarter we held our Annual McKesson ideaShare educational event which brought together independent pharmacy operators to help them learn new skills, how to grow strategically and how to operate efficiently.
The virtual experience helped 2,000 independent pharmacies, prioritize education and networking, which we believe will shape the future of community, pharmacy and strengthen the independent business for the better.
In Canada, we've been the leader in healthcare-related logistics and distribution for 100-years and we support hospitals, community and retail pharmacies to ensure that medication is always available.
We're a leader in medical distribution to alternate site markets and our footprint in the US healthcare is underpinned by our strong sourcing and supply chain capabilities, we deliver medical and surgical supplies and services to over 250,000 customers.
Our pharmaceutical and medical distribution businesses continue to play an integral role in the pandemic response efforts, and our capabilities have been highlighted through our evolving partnership with US government's COVID-19 vaccine distribution, kitting and storage programs.
I'm glad to say that the Fundamentals in our core business remain solid and our execution has continued to improve as we accelerate our growth and work to deliver high quality resilient supply chains to our customers.
Our third company priority is to simplify and streamline the business.
We're prioritizing the areas where we have deep expertise and are central to our long-term growth strategies, largely within the North American market.
As a result we made the decision to fully exit McKesson's businesses in the European region.
In July, we announced that we have entered into an agreement to sell our European businesses in France, Italy, Ireland, Portugal, Belgium and Slovenia to the PHOENIX Group.
Today, we're announcing that McKesson has made the decision to sell our UK retail and distribution businesses as a whole.
The transaction is expected to close in Q4 of fiscal 2022 subject to customary closing conditions, including receipt of required regulatory approvals.
We believe this step toward a full exit of our European business is an important milestone in our strategy as a streamlined, efficient focused organization.
Building upon the foundation of a strong company culture and a stable business the last company priority encompasses our two strategic growth pillars.
We are investing to advance our oncology and biopharma services, which includes building integrated ecosystem that leverage our differentiated assets and capabilities and our strategic focus on these two pillars is important as both of these areas have good inherent growth opportunities.
McKesson's oncology ecosystem supports over 14,000 specialty physicians through distribution and GPO services, and we are the leading distributor in the community oncology space.
We have over 1,400 physicians in the US Oncology Network spread over approximately 600 sites of care in the US.
Within our oncology ecosystem Ontada generates insights at the intersection of technology and data and supports community providers with precise cancer care by improving patient outcomes and delivering evidence and insights to help accelerate life sciences research.
The ecosystem helps the clinicians to provide better care in an increasingly complicated oncology care landscape, by helping them grow their businesses, attract more patients and produce better health outcomes.
We can then leverage interconnected technology and real world insights to feed data back upstream to manufacturers, which can help them, think about identifying new products, innovations and new markets.
Within the biopharma ecosystem the Prescription Technology Solutions businesses leverage technology networks and access to provider workflows, to serve biopharma and life sciences partners and patients.
We have built this ecosystem over many years as it includes assets like RelayHealth Pharmacy, CoverMyMeds and RxCrossroads, it allows us to connect providers, payers and patients together to focus on access, adherence and affordability solutions.
Our two strategic pillars of oncology and biopharma services are not just businesses or products, but fundamentally a suite of solutions that solve long-standing problems in ways that bring more speed, impact and efficiency.
We will continue to invest and accelerate the execution against those strategies, which support a long-term growth for McKesson.
I'm confident in the progress against our company's priorities that they will enable the advancement of our growth.
Before I turn to our second quarter results just a brief update on our Board of Directors.
Dr. Carmona has a strong focus on improving public healthcare and extensive experience in clinical sciences, healthcare management and emergency preparedness, which led to his nomination and unanimous senate confirmation as the 17th Surgeon General of the United States from 2002 until 2006.
Currently, Dr. Carmona is Chief of Health Innovations at Canyon Ranch and a Professor of Public Health at the University of Arizona.
His hands on healthcare experience will be invaluable for McKesson's Board of Directors.
Now I want to turn to the business performance within the second quarter.
We are pleased with our strong second quarter performance and we remain encouraged by the underlying fundamentals in our business.
Let me start with US Pharmaceutical, while our solid results for the second quarter reflected continued improvement of prescription trends, which were in line with our expectations.
Within specialty oncology visits, we saw an exit rate of pre-COVID levels, which again was in line with our expectations.
The US Pharmaceutical segment saw a 12% adjusted operating profit growth, which was underpinned by the distribution of specialty products to providers and health systems and the contribution from our successful COVID-19 vaccine distribution operations.
We are in a strong position to continue to support the government and private enterprise in the future for distributing COVID and flu vaccines and our investments in the distribution business continue to be showcased through our successful vaccine response.
Through October 28th, our US Pharmaceutical business has successfully distributed over 311 million Moderna and Johnson & Johnson COVID-19 vaccines to administration sites across the United States and to support the US government's international donation mission.
In Prescription Technology Solutions, the business continued to perform well this quarter as our technology and service offerings have accelerated the support and growth of our biopharma customers, and we've been successful in adding new brands to our platforms.
The segment had excellent momentum and delivered a 38% increase to adjusted operating profit growth during the second quarter.
In addition to the operational strength, I'm proud to say that we are helping patients get access to the therapies through our market leading technology offerings in this patient care visits and we announced we are expanding our work with the US government through a new kitting and storage contract.
Our Medical-Surgical business remains well positioned to continue to support the government as needed.
The growth in our Medical-Surgical segment is reflective of strong topline performance and underlying business improvement.
As it relates to international, the segment had solid adjusted operating profit growth, benefiting from both local COVID programs and a new partnership with one of Canada's largest retailers.
Distribute and administer COVID-19 vaccines and through September, we've distributed over 58 million vaccines to administration sites in select markets across our international geographies.
As a reminder, excluding our planned divestitures in Europe, we have businesses in Norway, Austria, Denmark and Canada in our international segment.
For our remaining European businesses, we are exploring strategic alternatives as we align future investments to our growth strategies.
Before I close, I would like to update you on the status of the proposed opioid settlement.
Recently, we announced that enough states have agreed to settle to proceed to the next phase, which is the subdivision sign-on period.
During this phase, each participating state will offer its political subdivisions, including those that have not sued the opportunity to participate in the settlement for an additional 120-day period, which ends January 2nd, 2022.
We are pleased with this important step and we believe the settlement framework will allow us to focus our attention and resources on the safe and secure delivery of medications and therapies, while expediting the delivery of meaningful relief to the affected communities.
In closing, I am encouraged as we continue to make progress and accelerate growth as we advance our company priorities.
Our underlying distribution business have stable fundamentals, great teams and strong execution.
We are investing in what we believe are two good growth markets where we have differentiated capabilities and we look forward to sharing more of those successes and proof points with you at our upcoming Investor Day.
I'm pleased to be here today to discuss our fiscal second quarter results, which reflect strong performance and momentum across the business, driven by operational excellence and execution against our growth strategies.
This momentum could be seen in each of our segments.
Let me start with an update on Europe.
The ultimate proceeds from this transaction are subject to certain adjustments under the agreement.
Therefore, the proceeds may differ from the announced purchase price.
The customer will continue to operate these businesses and record revenue and income until the transaction is closed, which is expected to occur in our fourth quarter of fiscal 2022, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals.
The assets involved in this transaction contributed approximately $7.8 billion in revenue and $64 million in adjusted operating profit in fiscal 2021.
The net assets included in the transaction will be classified as held for sale, and held for sale accounting will be effective beginning with our fiscal 2022 third quarter.
We will remeasure the net assets to the lower of carrying amount or fair value, less cost to sell, and we estimate that this will result in a GAAP only charge of between $700 million to $900 million in our third quarter of fiscal 2022.
Due to held for sale accounting treatment, we will discontinue recording depreciation and amortization on the assets involved in the transaction.
This impact is not included in the fiscal 2022 outlook provided today.
This transaction provides us the focus to pursue the growth strategies of oncology and biopharma services in North America and as Brian mentioned, we remain committed to a full exit of our European businesses, which includes announced transactions to the Phoenix Group and Aurelius, as well as our remaining operations in Norway, Austria and Denmark.
Let me now turn to our second quarter results.
Before I provide more details on our second quarter adjusted results, I want to point out two additional items that impacted our GAAP only results in the quarter.
First, we recorded a GAAP only after tax charge of $472 million related to our agreement to sell certain European businesses to the Phoenix Group to account for the remeasurement of the net assets to lower of carrying amount or fair value, less cost to sell.
This transaction is expected to close within the next 12-months.
Also during the quarter we recorded an after-tax loss of $141 million on debt extinguishment related to the successful completion of a bond tender offer.
Moving now to our adjusted results for the second quarter, beginning with our consolidated results, which can be found on Slide seven.
Our second quarter results were highlighted by strong operating performance, which included record revenue and double-digit adjusted operating profit growth across all segments.
We are encouraged by the ongoing market improvement in both prescription volumes and patient visits, which we observed in our second quarter.
These improvements are supported by our strategic agenda setting us on a path of disciplined approach.
And our work to support US government's COVID-19 domestic and international vaccine and kitting efforts continues to contribute to growth in addition to the momentum we have built across the business.
Second quarter adjusted earnings per diluted share was $6.15, an increase of 28%, compared to the prior year.
This was -- this result was driven by the contribution from COVID-19 vaccine and kitting distribution and growth in the Medical-Surgical Solutions segment partially offset by a higher tax rate.
Second quarter adjusted earnings per diluted share, also includes net pre-tax gains of approximately $97 million or $0.46 per diluted share associated with McKesson Ventures equity investments, as compared to $49 million in the second quarter of fiscal 2021.
Consolidated revenues of $66.6 billion increased 9% above the prior year.
Principally driven by growth in US Pharmaceutical segment, largely due to increased pharmaceutical volumes, including growth in specialty products and our largest retail national account customers to partially offset by branded to generic conversions.
Adjusted gross profit was $3.3 billion for the quarter, up 12% compared to the prior year.
Comparable adjusted gross margins for the quarter was up 10 basis points versus the prior year.
Adjusted operating expenses in the quarter increased 4% year-over-year.
and adjusted operating profit of $1.3 billion for the quarter was an increase of 34%, compared to the prior year and reflected double-digit growth in each segment.
Interest expense was $45 million in the quarter, a decline of 10%, compared to the prior year driven by the net reduction of debt in the quarter.
Our adjusted tax rate was 18.8% for the quarter, which was in line with our expectations.
In wrapping up our consolidated results second quarter diluted weighted average shares were 155.8 million, a decrease of 5% year-over-year.
Moving now to our second quarter segment results, which can be found on Slides eight through 13, and I'll start with US Pharmaceutical.
Revenues were $53.4 billion, an increase of 11% year-over-year as increased pharmaceutical volumes, including growth in specialty products and our largest retail national account customers were partially offset by branded to generic conversions.
Adjusted operating profit increased 12% to $735 million, driven by growth in the distribution of specialty products to providers and health systems and the contribution from COVID-19 vaccine distribution.
The contribution from our contract with the US government-related to the distribution of COVID-19 provided a benefit of approximately $0.28 per share in the quarter, which is above our original expectations.
In the Prescription Technology Solutions segment revenues were $932 million, an increase of 40% driven by higher biopharma service offerings, including third-party logistics services and increased technology service revenue, partially resulting from the growth of prescription volumes.
Adjusted operating profit increased 38% to $144 million, driven by organic growth from access and adherence solutions.
Moving now to Medical-Surgical Solutions, revenues were $3.1 billion, an increase of 23%, driven by increased sales of COVID-19 tests and growth in the primary care business.
Adjusted operating profit increased 52% to $319 million, driven by growth in the primary care business, increased sales of COVID-19 tests, and the contribution from kitting, storage and distribution of ancillary supplies for the US governments COVID-19 vaccine program.
The contribution from our contract with US government-related to the kitting, distribution and storage of ancillary supplies for COVID-19 vaccines provided a benefit of approximately $0.14 per share in the quarter, which was above our original expectations.
Next, let me address our international results.
Revenues in the quarter were $9.1 billion, a decrease of 5%, primarily driven by the contribution of McKesson's German wholesale business to a joint venture with Walgreens Boots Alliance, partially offset by volume increases in the pharmaceutical distribution and retail businesses.
Excluding the impact from the contribution of our German wholesale business, which was completed in the third quarter of fiscal 2021.
Segment revenue increased 13% year-over-year and was up 9% on an FX adjusted basis.
Adjusted operating profit increased 41% year-over-year to $163 million.
On an FX adjusted basis adjusted operating profit increased 34% to $155 million, driven by the discontinuation of depreciation and amortization on certain European assets classified as held for sale beginning in the second quarter of fiscal 2022.
The held for sale accounting in our international business contributed $0.13 to adjusted earnings in our second quarter of fiscal 2022.
Moving on to Corporate.
Adjusted corporate expenses were $83 million, a decrease of 39% year-over-year, driven by gains of approximately $97 million or $0.46 from equity investments within our McKesson Ventures portfolio.
This quarter we had fair value adjustments related to multiple portfolio companies within McKesson Ventures, compared to fiscal 2021 gains from McKesson Ventures contributed $0.24 year-over-year.
As previously discussed it's difficult to predict when gains or losses on our Ventures portfolio companies may occur and therefore our practice has been, it will continue to be to not include Ventures portfolio impacts in our guidance.
We also reported opioid related litigation expenses of $36 million for the second quarter and anticipate that fiscal 2022 opioid-related litigation expenses will be approximately $155 million.
Consistent with the proposed settlement announced in July, we also made the first annual payment into escrow of approximately $354 million during the quarter.
Let me now turn to our cash position, which can be found on Slide 14.
We ended the quarter with a cash balance of $2.2 billion for the first six months of the fiscal year, we had negative free cash flow of $109 million.
In Q2, we completed several debt transactions.
In July, we redeemed EUR600 million denominated note prior to maturity.
In August, we completed a cash funded upsize tender offer, which resulted in the redemption of $922 million principal outstanding debt.
And finally, we completed a public offering of a note in the principal amount of $500 million at 1.3%.
These actions aligned with our previously stated intent to modestly delever and to further strengthen our balance sheet and financial position.
Year-to-date, we made $279 million of capital expenditures, which included investments to support our strategic pillars of oncology and biopharma services.
For the first six months of the fiscal year, we returned $1.4 billion in cash to our shareholders through $1.3 billion of share repurchases and the payment of $134 million in dividends.
We have $1.5 billion remaining on our share repurchase authorization and continue to expect diluted weighted average shares outstanding to range from 154 million to 156 million for fiscal 2022.
Let me transition now and speak to our outlook for the remainder of fiscal 2022.
As a result of our strong first half performance and our outlook for the remainder of the year, we are raising our previous adjusted earnings per share guidance range for fiscal 2022 to $21.95 to $22.55, which is up from our previous range of $19.80 to $20.40.
Our updated outlook for adjusted earnings per diluted share reflects 27.5% to 31% growth from the prior year.
And our guidance assumes growth across all of our segments.
Additionally, fiscal 2022 adjusted earnings per diluted share guidance includes $2.30 to $3.05 of impacts attributable to the following items: $0.50 to $0.70 related to the US governments COVID-19 vaccine distribution, which is an increase from the previous range of $0.45 to $0.55; $0.80 to $1.10 related to the kitting storage and distribution of ancillary supplies, an increase from the previous range of $0.50 to $0.70 as discussed at recent conference; $0.50 to $0.75 related to COVID-19 tests impairments for PPE related products; and approximately $0.49 from gains or losses associated with McKesson Ventures equity investments within our corporate segment year-to-date.
Excluding the impact of these items from both fiscal 2022 guidance and fiscal 2021 results this indicates 20% to 29% forecasted growth.
Let me provide a few additional assumptions related to our guidance.
We continue to expect prescription and patient engagement volumes will return to pre-COVID levels in the second half of our fiscal 2022, which is in line with our original guidance.
In US Pharmaceutical segment, we now expect revenue to increase 8% to 11% and adjusted operating profit to deliver 4.5% to 7.5% growth over the prior year.
We continue to see stable fundamentals.
Specifically, our outlook for branded pharmaceutical pricing remains consistent with our original guidance and the prior year of mid single-digit increases in fiscal 2022 and our views that the generics market remains competitive yet stable, as our volumes have continued to improve in the September quarter.
Our guidance includes contribution related to our role as a centralized distributor for the US governments COVID-19 vaccine distribution.
This includes we're preparing vaccines for international missions.
Our current outlook remains in mind to the volume distribution schedule provided by the CDC and the US government.
The current guidance excludes booster shots, due to the timing of the recent approvals, as well as vaccines for pediatrics, which have not been approved by the CDC.
We will continue to update you on the progress and contribution from this program.
When excluding COVID-19 vaccine distribution in the segment, we expect approximately 3% to 6% adjusted operating profit growth.
In addition, our investments in our leading and differentiated position in oncology will continue to represent an approximate $0.20 headwind in fiscal 2022.
In our Prescription Technology Solutions segment, we see revenue growth of 31% to 37%, and adjusted operating profit growth of 23% to 29%, this growth reflects the strong service and transaction momentum in the business.
Now transitioning to Medical-Surgical our revenue outlook assumes a 8% to 14% growth and adjusted operating profit to deliver 35% to 45% growth over the prior year.
As mentioned previously, our outlook includes $0.80 to $1.10 related to the contribution from the US government's distribution of ancillary supply kits and storage programs, and $0.50 to $0.75 related to COVID-19 tests and PPE impairments related products.
Excluding the impacts from these items from both fiscal 2022 guidance and fiscal 2021 results, this indicates 13% to 19% forecasted growth.
One additional note related to our US distribution businesses.
One of the pillars of our enterprise strategy is talent, the ability to attract and retain the best workforce in healthcare.
The labor market remains competitive and we have assumed a modest expense impact to ensure there is continued service continuity through the holiday season and the back half of our fiscal year.
Therefore, the guidance that we're providing today includes approximately $0.10 to $0.20 of adjusted operating expense impact for labor investments in our US distribution businesses in the second half of the year.
Finally in the international segment, our revenue guidance is 1% decline to 4% growth as compared to the prior year.
As a reminder, this reflects the impact of the contribution of our German wholesale business to a joint venture with Walgreens Boots Alliance.
For adjusted operating profit our guidance reflects growth in the segment of 39% to 43%, which includes approximately $0.38 of expected adjusted earnings accretion in fiscal 2022, as a result of the held for sale accounting related to our agreement to sell certain European assets to the Phoenix Group.
It also includes our strong performance in the second quarter and the contribution from COVID-19 vaccine distribution in the segment.
Turning now to the consolidated view.
Our increased guidance assumes a 8% to 11% revenue growth and 18% to 22% adjusted operating profit growth, compared to fiscal 2021.
Our full-year adjusted effective tax rate guidance of 18% to 19% remains unchanged.
And we anticipate corporate expenses in the range of $610 million, $660 million.
On our May 6th earnings call we outlined an initiative to rationalize office space in North America to increase efficiencies and to support employee flexibility.
We've made good progress against this initiative.
And based on this progress we now expect earlier benefits from these actions, resulting in the realization of annual operating expense savings of approximately $15 million to $25 million in the second half of fiscal 2022, with annual savings of $50 million to $70 million, when fully implemented.
These savings will be realized across all of our segments.
[Technical Issues] which is net of property acquisitions and capitalized software expenses.
As a reminder, historically we generate the majority of our cash flows in the fourth quarter of our fiscal year.
This strong cash flow generation provides the financial flexibility to execute a balanced capital allocation approach; investing in our strategies of oncology and biopharma services; positioning our business for long-term growth, while remaining committed to returning capital to shareholders through our dividend and share repurchases.
Our investment grade credit rating remains a priority and underpins our financial flexibility.
In closing, we are encouraged by our strong performance in the first half of our fiscal year.
The momentum across the business, including our partnership with the US government positions us to deliver the updated fiscal 2022 outlook provided here today.
Finally, we're looking forward to providing additional details on our strategies and the strength of our businesses at our upcoming Investor Day on December 8th.
| compname posts quarterly revenue of $66.6 billion.
qtrly adjusted earnings per diluted share of $6.15.
qtrly total revenues of $66.6 billion increased 9%.
increased fiscal 2022 adjusted earnings per diluted share guidance range to $21.95 to $22.55.
fiscal 2022 adjusted earnings per diluted share guidance includes approximately $2.30 to $3.05 of impacts.
|
Before we discuss our results, I encourage you to review the cautionary statement on slides 2 and 3 for our customary disclosures.
Further information can be found in our regular SEC filings.
Bill and Pete will provide a company update as well as an overview of the company's second quarter 2021 results.
Please limit yourself to one question plus one follow-up.
You may get back into the queue if you have additional questions.
It is good to speak with everyone today and I'm excited to report our second quarter results.
I will start by providing some highlights from the quarter.
Our strong performance is a reflection of our market leadership, where we serve more clients than ever before and those clients are engaging with us in more ways given the breadth and essential relevance of our offerings.
I will also review our strategy and progress toward creating the most impactful and comprehensive financial wellness, ecosystem of data, technology and solutions that powers our industry.
Envestnet achieved strong adjusted revenue growth of 23% in the quarter and 70% year-to-date.
Our new guidance reflects the stronger than expected first half of the year as well as an improved outlook for the second half of 2021.
This growth was enabled by our market leading position and the scale we have achieved and this is a market position we continue to expand.
I believe this is important to note our position and ability to create scale, creates unique leverage for Envestnet as we drive our strategic plan forward.
The number of advisors on the Envestnet platform is now almost 108,000 with 14 million accounts that make up $5.2 trillion in assets.
Our data aggregation business serves over 500 million aggregated accounts each day.
Our MoneyGuide financial planning business continues to be the market leader in the industry while Envestnet tamp services also stands atop the podium as the market leader.
We have the largest network of services, solutions and third-party providers and we continue to grow these options for our clients.
New accounts are being opened at a faster pace and we are averaging well more than 10,000 new accounts every week.
We added several new customers during the second quarter including notable firms such as security.
As we also continue to add services to the firms, we serve today.
Our exchanges are activating more and more advisors, financial planning continues to add exciting new features, we've rolled out to our existing clients and in our RIA business, we are seeing momentum adding manage accounts to a growing number of firms.
While our footprint continues to grow, total meaningful metrics such as asset per advisor, accounts per advisor and adjusted revenue per advisor.
We are operating at significant scale as well.
During the second quarter, we serviced almost 15 million trades and completed 1.8 million service requests.
We're also generating more than 8 million data driven recommendations a day for our clients to better connect and better serve all of their clients.
As we mentioned on Investor Day, we are on our way to 10 million recommendations a day by year-end and over a billion, a day by 2025.
These proof points are unique to Envestnet market position and enable us to advance our vision and pursue the growth strategy we have discussed on earlier calls.
I believe these are very clear leading indicators and as we continue to execute the future for Envestnet is brighter than it's ever been.
Over the past several months, we have laid out a straightforward and executable strategy and we are driving progress toward enabling ecosystem that powers our industry.
No one has the strength of platform user base and leadership position that we have and it is a significant differentiator position in Envestnet to continue its leading position and drive the company toward achieving our mission and our stated financial goals.
This scale combined with our cloud-based infrastructure and unparalleled data and solution set opens up the growing opportunity for us.
We are making important progress in bringing the pieces together in a frictionless, intelligent and connected ecosystem, so that the advisor and the consumer sees a much clearer and much more powerful view of their money in one place while at the same time, our customers have easier access to the entirety of our offerings to help them serve their clients more completely.
Our platform and ecosystem is the industry standard for how advisors engaged digitally with their clients today and it will be the standard for how they serve their clients into the future.
Digital transformation is the most powerful of several macro trends we benefit from and by capturing the lead here, we create a virtuous environment that opens, more and more opportunity for our company.
In addition to the digital transformation that is occurring, we continue to benefit from and also power several important industry trends.
These include the growth of fee-based advice even faster growth of managed accounts and the hyper growth of personalization services like direct indexing, tax overlay and impact investing.
As you overlay these trends across the current business that we serve today, which is $5.2 trillion in assets.
We believe we can increase our revenue by roughly 10 basis points on average on 10% to 15% of this asset base.
This creates a significant and growing revenue opportunity, which given our advanced market engagement strategy, we are increasingly identifying, engaging and executing all and our opportunity will continue to grow given these macro trends given our strong market position and given the significant capabilities that we have.
With that in mind, our leadership team has a laser sharp focus on three key drivers of revenue growth.
We will capture more of the existing addressable market by supercharging our platform to leverage our comprehensive data and solutions set.
This opportunity is large and it is sitting directly in front of us.
Next, we are leading and modernizing the digital engagement marketplace by extending our cloud-based migration, which allows us to connect the best of Envestnet for a truly seamless customer experience.
And lastly, we are opening the platform for expansion.
Our developer portal enables over 625, third party FinTechs to leverage APIs embedding our capabilities and data into their environments.
This usage has grown by 1700% since the beginning of January 2020.
At the same time, we are opening Envestnet's ecosystem for more third-party providers, all of which will drive users and engagement ultimately accelerating our revenue growth and our opportunity.
I want to double-click on capturing more of the existing addressable market and why we are very confident given the early progress that we're beginning to see.
You see, we have a differentiated engagement strategy, there is powered by the visibility and understanding we have given our data model.
This prioritize the use cases, the target large, identifiable, addressable pools of opportunity for Envestnet, which also deepen the relationships between advisors and their clients.
We have the broadest number of solutions available to our advisors.
Our data driven recommendations, drive increased adoption and increased adoption and increased solutions provide more data to improve the recommendations that we make.
We are accelerating growth utilizing the data in the ecosystem and removing friction from the tasks required for advisors to use and access our solutions.
And we are adding to our solutions during the second quarter, we introduced several new products that continue to build out our offering to the advisor and ultimately to the individual consumer.
We've been piloting the new client portal with several large customers and early feedback has been incredibly positive.
We also added services such as residential real estate with the credit exchange in our recently launched alternatives exchange, which we launched in July, a collaboration between investment UBS and I capital deliver a curated set of alternative investments in Envestnet clients via end-to-end digital platform.
2021 represents investment charting the course for advancing a tremendous opportunity for our industry to better serve its consumers.
We are a catalyst for this future and this is a moment for us to apply our efforts and taking advantage of the position that we have, and the strategy that we have created and the opportunity for sustained and accelerated growth.
Envestnet organization is locked in on executing on this.
Today, I'm going to review our second quarter results and then provide an update on our revised guidance for the first quarter and the full year.
Our second quarter results continue to demonstrate the strengths in our business model, positive dynamics from the first-half of the year we expect to carry into the third and fourth quarter, which are reflected in our updated full year outlook.
Adjusted revenues for the second quarter grew 23% to $289 million compared to the second quarter of last year, adjusted EBITDA grew 27% to $71 million compared to the second quarter of last year.
Adjusted earnings per share was $0.67.
Turning to the balance sheet; we ended June with approximately $370 million in cash and debt of $860 million.
The debt consists of our outstanding convertible notes maturing in 2023 and 2025.
Our $500 million revolving credit facility was undrawn as of June 30, making our net leverage ratio at the end of June 1.8 times EBITDA.
Turning to our investment initiatives; I want to reiterate our expectations.
We continue to expect the investments to account for roughly $30 million of operating expense during the year.
We are making good progress on the hiring front, the impact of which is reflected in our updated guidance.
We expect the investments to ramp up throughout 2021 with most of the impact in the second half of the year and annualizing to a run rate of approximately $40 to $45 million in 2022, growing at the same rate of operating expenses thereafter.
Additionally, we continue to expect to begin to generate faster revenue growth in 2022 as we create a better more streamlined ecosystem, which elevates our value proposition to existing clients and expands our total addressable market.
Adjusted EBITDA to be between $61 million and $63 million as we further ramp up the investments and earnings per share to be $0.58 per share.
For the full year, we are again raising our outlook to reflect the strength of the first half of the year.
For the full year, we expect adjusted revenues to be between $1.169 million and $1.174 million, up 17% to 17.5% compared to 2020.
Adjusted EBITDA to be between $253 and $257 million, representing growth of 4% to 6% for the full year, and earnings per share to be between $2.30 and $2.35, which is $0.31 higher than the original guidance we gave back in February.
Adding some detail about our revenue outlook for the second half of the year to highlight some of the drivers of our revenue growth trends.
First, our wealth business has performed increasingly well year-to-date.
During the second quarter, we completed the merger of two-like clients moving significant assets from an asset based relationship to a subscription-based pricing model.
While this doesn't hit the way, we have reported reclassifications in the past, it is an effect of reclassification.
If we adjusted for this, the second quarter was ahead of even the first quarter in terms of net new flows from existing business.
Further, our significant asset base benefited from favorable capital markets adding to our forecast of revenue growth.
Second, our data and analytics segment has grown subscription revenue around 4% in the first-half of the year compared to the first-half of last year.
We expect this business to see improving revenue growth in the second-half of the year.
As we continue to execute on our strategy in the coming years and begin to benefit from the investments were making now, we will capture more of the opportunity we've identified positioning us to attain our longer-term targets of mid-teens growth in revenue and adjusted EBITDA margin of 25% by 2025.
We are pleased with the progress we're making and are focused on the execution of our strategy.
The opportunity to be the leader of the ecosystem that powers the industry.
The ecosystem that connects data, technology and solutions to enable the intelligent financial life and is differentiated from every other provider as a fully connected, open architecture, hyper-personalized, wealth management platform.
As the industry leader, we will continue to enable the digital transformation that our clients need from us.
Our roadmap is very clear.
We are capturing more of the addressable market opportunity with our data in our solutions.
We are modernizing the digital engagement marketplace to reduce friction and land more clients and we're opening up our platform to accelerate growth.
We will continue to execute on that roadmap and it will continue to create greater value for each and every one of our stakeholders.
| qtrly adjusted earnings per share $0.67.
sees q3 adjusted net income per diluted share $0.58.
sees fy adjusted net income per diluted share to be $2.30 - $2.35.
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Total revenues for the first quarter of fiscal 2021 were $108.5 million compared to $109.4 million in the same quarter last year.
Net earnings for the quarter were $7.1 million or $0.65 per diluted share compared to net earnings of $8.3 million or $0.77 per diluted share in the prior year.
Net earnings for the quarter included an income tax benefit of approximately $1.7 million or $0.16 per diluted share related to the release of a valuation allowance in a foreign tax jurisdiction.
Irrigation segment revenues of $87.4 million for the first quarter increased $4.1 million or 5% compared to $83.3 million in the same quarter last year.
North American irrigation revenues were $52.8 million compared to $53.6 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 and this was partially offset by higher irrigation equipment unit volume.
In the international irrigation markets, revenues of $34.6 million increased $4.8 million or 16% compared to $29.7 million in the same quarter last year.
Increase resulted from higher unit sales volumes in several regions, which were partially offset by the unfavorable effects of differences in foreign currency translation rates compared to the prior year that totaled approximately $2.4 million.
Total irrigation segment operating income for the first quarter was $10.6 million, an increase of 9% compared to $9.8 million in the same quarter last year.
And operating margin improved to 12.2% of sales compared to 11.7% of sales in the prior year.
Improved [Phonetic] margins were supported by higher irrigation equipment sales volume.
However, this improvement was tempered somewhat by the impact of higher raw material costs and also from higher freight costs that resulted from reduced availability of commercial trucking resources.
Market prices for all types of steel products began to rise rapidly during the quarter with steel coil prices increasing over 70% from September to the end of December.
While we have implemented pricing actions to pass-through these cost increases, a large number of irrigation equipment orders were received prior to these actions taking effect.
We expect to see some margin headwinds in our second quarter as the backlog of orders received prior to the price increases are shipped.
Infrastructure segment revenues for the first quarter were $21.1 million compared to $26.1 million in the same quarter last year.
The decrease resulted primarily from a large Road Zipper System order delivered in the prior year that did not repeat and from lower road construction activity in the current year.
Infrastructure segment operating income for the first quarter was $4.3 million compared to $8.7 million in the same quarter last year.
Infrastructure operating margin for the quarter was 20.1% of sales compared to 33.5% of sales in the prior year.
This decrease is primarily due to lower revenue and higher margin product lines and was also impacted by an increase in raw material and other costs compared to the prior year.
Turning to balance sheet performance and liquidity.
During the quarter, we generated free cash flow of almost $10 million, representing 138% of net earnings.
Our total available liquidity at the end of the first quarter was $196.4 million with $146.4 million in cash and marketable securities and $50 million available under our revolving credit facility.
Our total debt was $115.9 million at the end of the first quarter, almost all of which matures in 2030.
Additionally, at the end of the quarter, we were well within the financial covenants of our borrowing facilities, including a funded debt to EBITDA leverage ratio of 1.5 compared to a covenant limit of 3.0.
| compname reports q1 earnings per share $0.65.
q1 earnings per share $0.65.
q1 revenue $108.5 million versus refinitiv ibes estimate of $113.1 million.
expect improved activity levels to continue in international irrigation markets.
seeing rapid and significant increases in steel and freight costs that will pressure margins in short term.
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Leading today's discussion will be Joe Saffire, Chief Executive Officer of Life Storage; and Andy Gregoire, Chief Financial Officer.
Our actual results may differ from those projected due to risks and uncertainties with the company's business.
Additional information regarding these factors can be found in the company's SEC filings.
I am very pleased to report another solid quarter and a great start to this year.
With record occupancy of 94% at quarter end, we have managed to grow occupancy by 460 basis points year-over-year, an incredible accomplishment, and I'm very proud of the entire Life Storage team.
With this level of occupancy, we have been aggressively pushing asking rates while also decreasing free rent, resulting in higher net effective rates, which were up roughly 20% for the quarter.
Further, we have been very active on the acquisition front, with 33 stores acquired or under contract since the beginning of the year.
These stores are a blend of lease-up and stabilized and as a group, will be immediately accretive and growing thereafter.
We also continue to see strong growth in our third-party platform with 18 new additions during the quarter and a very robust pipeline as more and more owners consider Life Storage as a leading candidate to manage their stores.
And we continue to see further traction in Warehouse Anywhere with a significant contract for our Enterprise product.
This product is unmatched in the self-storage industry, and we continue to drive more corporate business to our unique solution.
These enterprise customers would unlikely be using self-storage for their inventory needs, if it were not for Warehouse Anywhere brings to the table.
Our newer Lightspeed product also continues to expand with now three fully operational micro fulfillment centers and three more in the works to open over the coming months.
Revenue for this business will continue to grow as we add more and more clients to our last mile fulfillment solution.
This solution is also unmatched in the self-storage industry.
With all of this success and growth, we exceeded our expectations for the quarter, and as such, are increasing our guidance for the remainder of the year.
We are raising the midpoint of our estimated adjusted funds from operations per share by more than 3% to $4.37 this year, which would be 10.1% growth over 2020.
And with that, I will hand it over to Andy to provide further details on the quarter and revisions to our guidance.
Last night, we reported adjusted quarterly funds from operations of $1.08 per share for the first quarter, an increase of 16.1% year-over-year.
First quarter same-store revenue accelerated significantly again to 7.3% year-over-year, up 240 basis points from the 4.9% growth produced in the fourth quarter.
Revenue performance was driven by a 410 basis point increase in average quarterly occupancy.
That occupancy is augmented by positive rent roll up.
In the quarter, our move-ins were paying almost 6% more than our move-outs, which is a significant improvement from the rent roll down that we experienced in the same quarter last year.
Our move-ins have been paying more than our move-outs for six straight months, with March move-ins paying almost 8% more than move-outs.
Same-store operating expenses increased 4.7% year-over-year for the quarter.
The largest negative variance during the quarter occurred in repairs and maintenance, which increased primarily due to higher snow falling expense and miscellaneous repairs following record cold weather earlier this year.
Payroll and benefits, again, remained well controlled, up only 1.8% year-over-year, while advertising and Internet marketing costs were down 2.6%.
The net effect of the same-store revenue and expense performance was an increase in net operating income of 8.6% for the quarter.
Our balance sheet remains strong.
We supported our acquisition activity and liquidity position by issuing approximately $180 million of common stock via our ATM program in the first quarter.
Our net debt to recurring EBITDA ratio decreased to 5.5 times, and our debt service coverage increased to a healthy 4.9 times at March 31.
At quarter end, we have $457 million available on our line of credit, and we have no significant debt maturities until April of 2024 when $175 million becomes due.
Our average debt maturity is 6.7 years.
Regarding 2021 guidance, we've increased our same-store forecast, driven by higher expected revenues and unchanged expense expectations.
Specifically, we expect same-store revenue to grow between 5.5% and 6.5%.
Excluding property taxes, we continue to expect other expenses to increase between 2.25% and 3.25%, while property taxes are expected to increase 6.75% to 7.75%.
The cumulative effect of these assumptions should result in 6.5% to 7.5% growth in same-store NOI relative to our original guidance of between 3.75% and 4.75%.
We have also increased our anticipated acquisitions by $175 million to between $550 million and $600 million.
Based on these assumptions changes, we anticipate adjusted FFO per share for the 2021 year to be between $4.33 and $4.41.
| q1 adjusted ffo per share $1.08.
q1 ffo per share $1.08.
in quarter increased same store revenue by 7.3% and same store net operating income by 8.6%, year-over-year.
sees 2021 adjusted funds from operations per share $4.33 - $4.41.
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And then Rod Smith, our executive vice president, CFO, and treasurer, will discuss our Q3 2021 results and revised full year outlook.
Examples of these statements include our expectations regarding future growth, including our 2021 outlook, capital allocation, and future operating performance; our expectations regarding the impacts of COVID-19; and any other statements regarding matters that are not historical fact.
Consistent with our prior Q3 calls, my comments today will center on the key trends driving our business now and how we think the technological landscape will develop in the future.
I'll touch on how we are positioned to benefit as 5G deployments accelerate in cloud-native applications in the edge of all, particularly in the United States.
Additionally, I'll spend some time discussing our European markets, where we now have a scaled presence and are poised to create further value as technology evolves there, and then briefly cover what we are seeing in our earlier-stage international markets.
Finally, I'll outline some of the progress we've made in some of those same emerging markets and the platform expansion side, particularly with respect to our investments in sustainability and renewable energy as we continue to lead the industry into a greener future.
At a high level, much of my commentary today will sound familiar to those of you who have listened in on prior technology-focused calls, and we view that as a positive.
Technology is evolving and advancing right in line with our expectations.
In the long-term secular trends that have driven and continue to drive, our business remains strong.
There are also new developments in the marketplace around the overall digital ecosystem that we are excited about and our tenants continue to power ahead with their network augmentation and expansion activities.
Taken together, this is a backdrop that we expect will lead to sustained attractive growth for us over the long term.
Central to this belief is the view that our core global macro tower business will be the foundation of our success and the main driver of our cash flows for the foreseeable future, as macro towers should remain the most cost and technology efficient network deployment solution in most topographies worldwide.
Our conviction in this regard has only grown stronger over time supported by our customers' significant investments in new spectrum assets, record levels of wireless capex spending in markets like the United States, and numerous public statements by them indicating their intention to utilize macro sites to drive aggressive deployments of 5G and other wireless technologies globally.
We continue to view mid-band spectrum, which includes the recently auctioned C-band and the two and a half gig band currently being deployed in the U.S., as the workhorse of the true 5G experience, and we believe to be the fundamental enabler of the immersive next-generation 5G applications and use cases that are set to emerge as coverage improves and advanced devices penetrate the market.
Importantly, we continue to expect the propagation characteristics of the sub-6 gig frequencies, compared to traditionally deployed mobile spectrum to necessitate significant network densification over the long term supporting a multiyear period of strong growth on our tower sites.
today, generating record services revenues, driven by all of the major carriers as they accelerate the early stages of their respective 5G deployments.
Further, application volumes within our property business are strong, supported by expected wireless capex spend in the mid-$30 billion range this year.
Industry experts anticipate that these elevated levels of capital spending will be sustained for a number of years, driven by a mobile data usage growth CAGR of more than 25% over the next five years.
Amazingly, this follows a more than 25% CAGR for the last five years, and cumulative growth of approximately 7,500% over the last decade.
This compelling demand backdrop, coupled with the long-term noncancelable leases that comprise our more than $60 billion global contractual backlog, gives us confidence in our ability to drive organic tenant billings growth in the mid-single-digit range on average in the U.S. through 2027, and to drive higher growth rates abroad in that same period.
I'll touch on this further in a few minutes.
But as a quick reminder, these baseline growth expectations exclude any material contributions from our various platform expansion initiatives.
What they do include are expectations for an extended period of solid growth in our European markets, where we are seeing similar network growth trends to the United States with early stage 5G deployments set to accelerate in the coming years.
We expect that our newly scaled European presence will allow us to drive long-term value creation as the explosion of mobile data usage across the region continues and the need for communications infrastructure accelerates as a result.
Across Germany, Spain, and France, where 5G mobile subscriptions currently make up less than 5% of the total user base, we expect mobile data usage per smartphone to grow by more than 25% annually for the next five years, similar to the United States, and consequently expect capex spend across the three markets to exceed $11 billion annually over a similar time period.
And as happened in the United States, we are already seeing this acceleration in network investment translate into elevated activity.
In fact, in the third quarter, normalizing for the impacts of the Telxius deal co-location and amendment contributions to European organic tenant billings growth rose by around 200 basis points year over year.
Although we expect a significant portion of initial 5G investments to be focused in urban locations across our European footprint where roughly 80% of the population resides, we anticipate urban-oriented consumer demand to be complemented by an ongoing push from European regulators to deliver rural connectivity, which will represent another opportunity for us to drive colocation on our tower sites in those areas.
We believe our balance of rural and recently expanded urban assets positions us well to capture significant market share of upcoming 5G deployments over the next decade.
Finally, in our earlier stage markets across Latin America, Asia, and Africa, we continue to see solid demand for our critical infrastructure largely driven by deployments of legacy network technologies, particularly 4G.
Whether looking at Brazil, Mexico, India, or Nigeria, consumers are rapidly increasing their utilization of smartphones, thereby driving mobile data usage growth higher.
In many of these regions, existing network infrastructure is insufficient to support this deluge of usage as cell site performance is challenged with increased levels of network load.
In response to these trends, we are aggressively marketing our existing assets and continue to look for additional acquisition opportunities to bolster our footprint in these markets.
But at the same time, we have significantly ramped up our new build program given the tremendous need for entirely new infrastructure.
In fact, if you take the nearly 5,900 sites we built last year and add our expected 7,000 sites at the midpoint of our outlook to be constructed this year, it would represent almost as many sites as the previous five years combined.
And as we laid out a few quarters ago, we are targeting the construction of up to 40 to 50,000 new sites over the next five years.
With day one NOI yields on these builds continuing to average above 10%, we are excited about deploying significant capital to these initiatives going forward as we capitalize on the advancement of network technology across the emerging world while helping to connect billions of people.
In addition to the core secular growth trends driving our global tower business, we are seeing indications, particularly in more mature markets like the United States, of a broad evolution within the overall wireless ecosystem.
This evolution is closely intertwined with 5G and includes an increased prevalence of cloud-native network solutions, more emphasis on the various permutations of the network edge and an ever-increasing intersection of the wired and wireless portions of today's converged network architecture.
As networks virtualize, O-RAN or Open RAN, it's expected to become a more important option to improve their economics.
We are now starting to see this phenomenon with DISH in the United States, and in Germany, where one and one has spoken extensively about its intent to utilize this technology.
By utilizing O-RAN, carriers have the potential to optimize network design and drive cost efficiencies, freeing up incremental capital to invest in densification and other network enhancements that help drive growth in site deployments and colocations.
Importantly, the role of the tower in this evolving network design is as critical as ever.
While base station functionality will likely continue to evolve to be cloud native software agile, the radio equipment that is placed on the tower itself, which has always driven our revenue, will continue to reside on the tower.
Importantly, we believe we can leverage our extensive global distributed real estate portfolio to not only drive continued strong growth in our core tower business but also to take advantage of other emerging opportunities as networks virtualize.
This may include multi-access edge computing and potential other edge cloud permutations of neutral host infrastructure.
At the end of the day, modern software-driven networks are becoming smarter, faster, more capable, and more dynamic, and we are focused on ensuring that American Tower has a meaningful role to play in this context on the infrastructure and real estate side of the equation.
One of the areas we focused on is the development of the network edge or, more accurately, the development of multiple layers of the network edge.
With the need for lower latency expected to become more and more critical over time with applications like AR, VR, telemedicine, real-time analytics, autonomous driving, entertainment, streaming, you name it, and many others are beginning to emerge, we continue to believe that this could be a meaningful opportunity for American Tower.
As we've done more work on the evolution of the edge, the concept of multiple edge layers has come into better focus.
Today, for example, by far the most prevalent layer is the regional metro edge owned, for the most part, by the large data center companies where vast amounts of data processing is then centralized.
These locations provide access to cloud on-ramps and are absolutely critical within today's networks.
We expect this need to be the case for the foreseeable future.
In fact, as the volume of data carried across networks continues to explode, we anticipate the demand for these types of large-scale facilities will only grow.
The upside of these locations is their size and capacity.
The downside, to this point, hasn't been all that relevant, is the fairly significant network transit costs and latency built into reaching these central compute functions as the data often has to travel hundreds of miles to reach these destinations.
These transit costs and latency considerations, which we expect to become more important in the future, will necessitate more edge locations as uplink data increases from IoT use cases and demands for distributed computing advance.
The next layer beyond the metro edge, in our view, will be the aggregation edge.
Here, you're likely to post C-RAN hubs and future MEC applications as network virtualization advances, along with distributed data processing, AI inferencing, and other compute functions which will need reduced latency.
The major hyperscalers continue to evolve their edge cloud platforms so that they can extend computing capabilities deeper into the mobile access network at the aggregation edge.
The next layer beyond this, which we turn the access edge is where our existing tower sites are located today, offering an opportunity to meaningfully enhance the value of our legacy real estate.
We expect to eventually see vRAN and O-RAN network functions, AI inferencing, data caching, and a variety of other next-generation AR and VR cloud-native ultra-low-latency applications residing at these locations.
Finally, we've also identified the on-premise edge, which would lie beyond even our tower sites and could eventually help support private networks, smart factories, and a host of other applications located at the end-user site.
At the end of the day, our 20,000-foot view is that all of these edge elements will need to fit together to provide a cohesive framework for full-scale 5G across the network ecosystem.
The goal for us is to figure out what the optimal linkages between the layers look like, who are the key players will be and what elements of the edge we may want to own in order to further enhance the strong long-term growth we expect from our core existing business.
To date, as we seek to connect the dots, we've been active with a number of trial edge compute sites at the access edge while also operating our Colo ATL metro data center interconnection facility in Atlanta.
Through these investments, we have built relationships with key existing and potential future customers, have learned a tremendous amount about key demand trends and have had a front row seat for the beginning stages of the convergence of wireless and wireline networks that I alluded to earlier.
More recently, we acquired DataSite, a data center company, consisting of two multi-tenant data centers in the Atlanta area and in Orlando.
In addition to strengthening our existing position in Atlanta, the addition of a network dense carrier hotel facility in Orlando provides us with a strong Southeastern presence with the profile and characteristics that we believe will be critical in the early evolution of the metro edge as we evaluate its role in the mobile networks of the future.
We expect these facilities, which have 18 megawatts of combined power, an additional four and a half megawatts of expansion capacity, to effectively complement Colo ATL and enable us to enhance our ability to develop neutral-host, multi-operator, multi-cloud data centers to support the broader core to edge connectivity evolution in the United States.
We continue to believe that while a scaled application-driven edge-oriented business model is still likely several years away, it has the potential to be a sizable market opportunity with meaningful potential upside, not only in the United States, but also on a global basis.
Leading global MNOs are now positioning their networks with released 16 5G stand-alone core features to explore edge cloud opportunities.
And with our distributed macro side presence key markets around the world, we think we are well positioned to potentially be a provider of choice on the edge, particularly for large multinational MNOs and other categories of customers who may be looking for a multi-market solution.
Switching gears a bit.
While we believe edge compute will eventually also be relevant in emerging markets, it is unlikely to happen in the immediate future.
Consequently, we have focused our platform expansion efforts across our developing regions and other areas, most notably on increasing the sustainability and efficiency of power provisioning in our sites.
As we highlighted in our recently published 2020 corporate sustainability report, we've continued to make progress toward our goal of reducing diesel-related greenhouse gas emissions by 60% by 2027 from a 2017 baseline.
In 2020, we achieved an additional 8% reduction from 2019, reaching 53% of the 10-year goal.
We are continuing to make solid progress in 2021 with an expectation to spend an additional $80 million toward energy-efficient solutions, primarily in lithium ion and solar power across our Africa footprint, which will bring our cumulative spend to nearly $250 million.
And as we announced earlier this week, we are furthering our commitment to combat climate change by adopting science-based targets, which we expect to help inform our future investments in sustainability.
In addition to the positive environmental benefits from these investments, we are also delivering shareholder value through AFFO per share accretion.
Lithium ion batteries provide significant energy efficiency, density, and lifespan improvements over legacy solutions.
And while, to date, AFFO benefits to American Tower have largely come through fuel savings we anticipate over time that our yields on these investments will further expand as we are able to lengthen battery and generator replacement cycles.
Having already expanded our lithium ion-powered site count from 4,500 in 2019 to 6,700 in 2020, we are targeting another 8,000 sites by the end of 2022 and recently signed a multimillion dollar bulk battery purchase agreement in Africa in support of this goal.
Importantly, we believe that energy efficiency, the use of renewables, and sustainability in our broader sense can represent an important competitive advantage for us, not only from the flow-through to AFFO, but also the differentiation in service quality for our customers.
We continue to view sustainability as a critical component of our company culture, and we'll be highlighting our continued progress in future sustainability reports, which I encourage all of you to read by the way.
In closing, our excitement around 5G on a global basis continues to grow.
Consumers and enterprises are using more advanced devices for more things, resulting in consistent elevated growth in mobile data usage, which, in turn, strains existing wireless networks and necessitates incremental densification and network improvement.
Considerable new spectrum is being deployed.
New entrants in select markets are building greenfield networks, and our macro tower-oriented portfolio remains well positioned to capture a significant portion of wireless investment activity.
In addition, through our platform expansion strategy, we are focused on ensuring that the company benefits from the ongoing convergence of wireless and wireline and the associated expansion of virtualization in cloud-native applications throughout the network ecosystem.
Importantly, as we optimize our core business and look for ways to further enhance our growth path in the broader digital infrastructure world, we are as committed as ever to driving profitability, sustainability, and recurring growth.
We're energized by the future and are excited to be in a vibrant industry that is helping to connect the world.
I hope you and your families are well.
Q3 was another quarter of strong performance for us.
And as you heard from Tom, we are as encouraged as ever by the technological trends that underpin our long-term growth potential.
Before digging into the details of our results and raised outlook, I'd like to touch on a few highlights from the quarter.
First, we closed on our strategic partnership agreements with CDPQ and Allianz, through which they purchased an aggregate of 48% of our ATC Europe business for a total consideration of around EUR 2.6 billion.
In addition, we closed the remaining 4,000 Telxius communication sites in Germany back in August.
With the transaction now fully closed and funded, our teams are working to rapidly integrate the assets, and we are already seeing encouraging activity on the portfolio.
Second, we continued to strengthen our balance sheet, raising roughly $3 billion in senior unsecured notes, including our euro offering earlier this month.
Through our financing transactions, we have been able to maintain an attractive weighted average cost of debt while also continuing to extend our maturities.
As a result of this activity, along with the benefit from a nonrecurring advance payment received from a tenant during the quarter, we finished Q3 with net leverage of 4.9 times.
While we expect net leverage to increase back into the low 5 times range in the fourth quarter, we are right on track with our overall post-Telxius delevering path.
And lastly, we saw another quarter of record services activity in the U.S. as carriers accelerated 5G-related projects.
We view this as a leading indicator of strong levels of gross leasing in our property segment as we head into 2022 and beyond.
As you can see, our consolidated property revenue grew by over 19% year over year or over 18% on an FX-neutral basis to nearly $2.4 billion.
This included U.S. and Canada property revenue growth of around 10% and international property revenue growth of over 31% or 13% when excluding the impacts of the Telxius acquisition.
This strong performance is indicative of a continuation of the long-term secular trends driving demand for our infrastructure assets across the globe.
Moving to the right side of the slide, we also had a solid quarter of organic tenant billings growth throughout the business.
On a consolidated basis, organic tenant billings growth was nearly 5% for a second consecutive quarter.
and Canada segment of over 4%.
Contributions from colocation and amendments were more than 3%.
Escalators came in at 3.2%, and churn was just over 2%.
Moving to our international operations.
We drove organic tenant billings growth of nearly 6%, reflecting a sequential acceleration of around 60 basis points.
Africa was our fastest growing region in the quarter, posting organic tenant billings growth of well over 9% led by Nigeria, where we continue to see 4G investments driving both colocation activity and new site construction.
We also saw a consistent quarter in Latin America, where organic tenant billings growth was right around 7%, driven by solid new business and higher escalators primarily in Brazil.
Meanwhile, European organic tenant billings growth accelerated by around 100 basis points sequentially to nearly 5.5% as expected.
Excluding impacts from the Telxius acquisition, organic tenant billings growth in the region would have been over 4.5% in the quarter, more than 200 basis points higher than the year-ago period, driven primarily by new business contributions.
This positive trend reflects both ongoing 4G activity and early 5G investments leading to solid growth from both colocations and amendments.
Looking to Germany, in particular, we saw a more than 300-basis-point increase in colocation and amendment contributions in our legacy business, as compared to the prior year period, resulting in organic tenant billings growth of over 5.5%, up from 5.2% in the second quarter.
Finally, in Asia Pacific, we saw organic tenant billings growth of 0.7%, up roughly 200 basis points as compared to Q2.
This reflects a modest acceleration in gross new business activity, coupled with a more than 2% sequential decline in churn, which was in line with our expectations.
Turning to Slide 7.
Our third quarter adjusted EBITDA grew more than 19% or over 18% on an FX-neutral basis to nearly $1.6 billion.
Adjusted EBITDA margin was 63.2%, which was down compared to Q3 2020 as a result of adding new lower initial tenancy assets to our portfolio, which we believe will drive strong organic growth and, therefore, margin expansion in the future.
Cash SG&A as a percent of total property revenue was around 7.3%, a roughly 40-basis-point sequential improvement.
Moving to the right side of the slide, consolidated AFFO growth was over 13% with consolidated AFFO per share of $2.53, reflecting a per share growth of nearly 11%.
This was driven by strong performance in our core business, contributions from new assets and around $13 million in year-over-year FX favorability.
Our performance also reflected the benefits of our commitment to driving efficiency throughout our operations and minimizing financing costs despite growing the portfolio by nearly 38,000 sites over the last year.
And finally, AFFO per share attributable to AMT common stockholders was $2.49, reflecting a year-over-year growth rate of nearly 12%.
Let's now turn to our updated outlook for the full year.
I'll start by reviewing a few of the key updated assumptions.
First, our expectations for organic growth across the business are consistent with our prior outlook.
Carriers continue to deploy meaningful capital as they invest in network quality, and we are seeing numerous bands of spectrum being deployed for both 4G and 5G.
We are also slightly increasing our expectations for services revenue for the year to around $235 million as a result of an outsized third quarter, although this implies that services volumes will moderate somewhat in Q4.
Second, as a result of our focus on operational efficiency and cost controls, along with some onetime benefits, we expect to be able to take some costs out of the business as compared to our prior expectations.
Combined with the current services gross margin outperformance, this will drive our adjusted EBITDA margin expectations higher for the balance of the year.
Third, in India, we are encouraged by recent regulatory reforms, which we believe can provide some much-needed breathing room for capital-constrained carriers in the marketplace and improve the telecom environment overall.
While we believe this is a clear positive first step toward market recovery, we continue to expect flat 2021 organic tenant billings growth in the region as we further evaluate the long-term impacts of these developments on the sector.
Finally, incorporating the latest FX projections, our current outlook reflects negative FX impacts of $30 million for property revenue, $20 million for adjusted EBITDA, and $15 million for consolidated AFFO as compared to our prior expectations.
With that, let's move to the details of our revised full year outlook.
Looking at Slide 8, as expected, leasing trends remained strong across our global business, and as a result of an increase in pass-through together with some modest core property revenue outperformance, we are raising our property revenue outlook by $10 million.
This represents 14% year-over-year growth at the midpoint and includes $30 million in unfavorable translational FX impacts as compared to our prior outlook.
Moving to Slide 9.
You'll see that we are reiterating our organic tenant billings growth expectations of approximately 4% on a consolidated basis.
This includes roughly 3% growth in our U.S. and Canada segment where 5G deployments are driving solid activity levels as we exit the year.
As a reminder, we expect the first and largest tranche of contractual Sprint churn to hit our run rate in the fourth quarter of this year.
organic tenant billings growth rate of negative 1%, as we communicated previously.
On the international side, we continue to anticipate organic tenant billings growth in the range of 5 to 6% as carriers continue to focus their efforts on enhancing and densifying wireless networks in the face of ever-rising mobile data demand.
Moving to Slide 10.
We are raising our adjusted EBITDA outlook by approximately $50 million and now expect year-over-year growth of nearly 16%.
This increase reflects continued strength in our services segment, where we now expect to see roughly $145 million in services gross margin for the year, up from the 123 million implied in our prior guidance with year-over-year growth of more than 180%.
On the cost side of the equation, we continue to maintain cost discipline globally, helping to drive adjusted EBITDA margins up by around 40 basis points for the full year as compared to prior expectations.
Turning to Slide 11.
We are also raising our full year AFFO expectations and now expect year-over-year growth in consolidated AFFO of roughly 15% with an implied outlook midpoint of $9.64 per share.
The flow-through of incremental cash-adjusted EBITDA, coupled with the continued cash tax and net cash interest benefits as compared to the prior expectations are being partially offset by around $15 million in negative translational FX impacts.
On a per share basis, we now expect growth of approximately 14% for the year consistent with our long-term growth ambitions that we highlighted at the start of the year.
Finally, AFFO attributable to ATC common stockholders per share is expected to grow by nearly 12% versus 2020, incorporating the minority interest impacts of our strategic partnership with CDPQ and Allianz in Europe.
Moving on to Slide 12.
Let's review our capital deployment expectations for 2021.
As you can see, we remain focused on deploying capital toward assets that drive strong sustainable growth in AFFO per share coupled with a growing dividend, providing our investors with a compelling combination of growth plus yield.
Working our way through the specific categories, our first priority remains our dividend.
For the full year, we continue to expect to distribute $2.3 billion, subject to board approval, which implies a roughly 15% year-over-year per share growth rate.
As a reminder, our dividend growth will continue to be driven by underlying growth in our REIT taxable income, incorporating the impacts of M&A and other moving pieces in the business.
Consistent with our prior comments, we anticipate growing our dividend by at least 10% annually in the coming years.
Moving on to capex.
We reiterate our expectations of spending nearly $1.6 billion at the midpoint with nearly 90% being discretionary in nature.
Driving a good portion of this discretionary capex is our continued expectation to construct 7,000 sites at the midpoint this year with the vast majority in our international markets.
Including contributions from minority partners, we have deployed around $10 billion so far this year primarily for the Telxius transaction.
as well as for smaller transactions, including DataSite.
In total, of our nearly $14 billion in expected capital deployment for the year, we expect over 80% to be composed of discretionary growth capex and M&A.
Moving to the center of the slide.
You can see the composition of our $35 billion in cumulative capital deployments since the start of 2017, including our 2021 full year expectations.
We continue to augment our developed market presence, which we believe positions us optimally to drive value from accelerating 5G deployments and next-generation technology evolutions, as Tom laid out earlier.
We are also allocating capital toward higher growth earlier-stage markets that are typically at least five years behind the U.S. and Europe in their network deployments.
Taken together, we believe that our global footprint positions us to capture multiple waves of investments across the globe over a sustained period of time.
Finally, you can see that more than a quarter or around $9.5 billion of our deployed capital in the last five years has been distributed to shareholders in the form of dividends and share repurchases.
We continue to view these components as critical to total shareholder returns.
Moving to the right side of the chart.
Supporting this phase of significant investment and growth has been our investment-grade balance sheet.
We believe that our access to low-cost, diversified sources of financing has been a key differentiator and are proactively working to extend this critical competitive advantage into the future.
In fact, incorporating our latest financing efforts, we now have a weighted average cost of debt of around 2.4%, a weighted average tenor of debt of approximately seven years, and over 85% of our balance sheet locked into fixed rate instruments.
Finally, on Slide 13, and in summary, in Q3, we continue to capitalize on a strong global demand backdrop, delivering our highest quarter of consolidated AFFO per share on record.
This was driven by solid organic growth, record-setting services volumes, disciplined cost controls, strategic balance sheet management, and accretive portfolio expansion.
As we look ahead, we believe our existing global real estate portfolio is well positioned to drive long-term recurring growth as carriers augment and extend their networks.
And with the strength of our investment-grade balance sheet and diversified pool of funding sources, we expect to continue to deploy capital toward accretive investments that can enhance our growth path and enable us to create additional value.
Given our positioning at the intersection of real estate and technology in an ever more interconnected world, we are excited to continue to deliver connectivity to billions of people worldwide in a sustainable way while driving compelling total returns for our shareholders.
| as of oct 28, does not anticipate significant impacts to underlying operating results in 2021 as result of covid-19 pandemic.
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I am joined today by Kroger's chairman and chief executive officer, Rodney McMullen; and Chief Financial Officer Gary Millerchip.
A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.
[Operator instructions] I would also like to announce that we will be hosting a business update on March 4, 2022, in Florida with an opportunity to tour our recently opened Kroger delivery customer fulfillment center.
We hope that you are able to join us.
We often say the holidays are our time to shine.
And as we move through the holiday season, we feel great about our ability to deliver.
We are incredibly proud of our third quarter results and the underlying momentum in our business.
We returned to positive identical sales without fuel for the quarter.
We saw triple-digit digital sales growth on a two-year stack, and we've increased our full year 2021 guidance.
Our agility and the commitment from our amazing associates is allowing us to navigate current labor and supply chain conditions and provide the freshest food at affordable prices across our seamless ecosystem.
Customers are demonstrating more back-to-normal behaviors, and at the same time, are eating more food at home because it's more affordable, convenient, and healthier than other options, plus you can do it as a family.
Customers engaged in larger celebrations with friends and family compared to last year.
We also saw them continuing to cook at home, leading up to and during the holiday, and select more premium products to elevate the food experience.
These are all reasons why we believe the food at home change is structural and not temporary.
With most people consuming meals at home and grocery stores continuing to capture the majority share of stomach, it is more important than ever that we provide customers with flexibility on how they choose to shop with us.
We have the right seamless ecosystem in place to meet our customers' evolving needs.
At the same time, 84% of consumers said that they will continue to shop online the same amount or more in the future.
These seemingly contradictory behaviors are exactly what Kroger's seamless ecosystem was designed to accommodate.
We know that inflation is having an impact on customers as well.
82% of consumers polled across the country are feeling the impact of inflation, and one in four consumers are not confident in their finances right now.
We are leveraging our data and personalization to enable our customers to stretch their food dollars.
We deliver value when customers need it the most with personalized promotions, big packs, and dynamic holiday offerings.
And while price continues to be top of mind, customers continue to desire the freshest food options, and we're there for them, leading with fresh.
We grew sales in Natural & Organics as customers continue to gravitate toward better-for-you options.
Our fresh departments outpaced total company identical sales without fuel during the quarter as well.
We had a record quarter in our alternative farming offerings, which includes new approaches to growing produce, including vertical and indoor farm operations.
These offerings expand customers' access to produce picked at the peak of freshness.
We are very proud to share that Home Chef became a $1 billion brand on an annualized basis in the third quarter as mealtime shortcuts and solutions, as well as new product innovations, have clearly resonated with our customers.
Kroger is focused on delivering a customer-centric, seamless experience that requires 0 compromise no matter how customers choose to engage with us.
We launched three new offerings during the quarter that support the plan to double digital sales and digital profitability by 2023.
First, Boost by Kroger builds on our industry-leading loyalty program to deliver additional savings and personalized offers to our members.
We are encouraged by the initial engagement in the program which is ahead of internal expectations.
Second, we launched Kroger Delivery Now in partnership with Instacart.
This unique convenience and immediacy offering positions us to win more trips with current customers and to bring new customers to the Kroger ecosystem by offering the largest selection of quality fresh products at affordable prices in 30 minutes.
Here's what's so special about this offering.
It was profitable on day one, contributing to our goal to double digital profitability by 2023 that was announced during our 2021 investor day.
And third, we announced a strategic collaboration with Bed Bath & Beyond and buybuy Baby that will expand our current marketplace offering and provide Kroger shoppers easy access to essential home and baby products.
This exclusive offering will be available through both Kroger.com and on a small-scale physical store pilot at select stores beginning in 2022.
We continue to be pleased with the rollout of our customer fulfillment centers in Groveland, Florida; and Monroe, Ohio, which are exceeding internal expectations, and we are especially proud of our Net Promoter Scores, driven by our teams, delivering a world-class experience for our customers, and we're really looking forward to hosting you in Groveland early next year.
Turning now to our supply chain.
We feel great about our ability to serve customer needs through the holidays and beyond.
This is because our teams have done such a good job, planning well ahead to maintain a full, fresh, and friendly customer experience.
In fact, our customers took action to prepare for today's supply chain constraints back in the spring.
And a great example of leveraging learnings from operating during the pandemic, we kept the additional warehouses originally brought on to support business through COVID to ensure we were able to provide for customers throughout the holiday season as well.
We chose to incur significant costs in our supply chain during 2021, which has allowed us to provide our customers today and into 2022.
We continue to deploy a wide array of tools, including our owned and operated fleet, and we're working closely with suppliers to mitigate pain points for the customer.
Our hybrid hiring event last month contributed to the hiring of over 64,000 new associates during the quarter.
We continue to invest in our associates by expanding our industry-leading benefits, including continuing education and tuition reimbursement, training and development, health and wellness, and continued investments in associate wages.
As we reflect on the one-year anniversary of our Framework for Action in response to racial injustice across the country and in the communities we serve, we are pleased to share our progress with you.
Over 405,000 associates have completed diversity and inclusion training.
We've increased our strategic hiring partnerships with Historically Black Colleges & Universities and Hispanic-serving institutions from six to 17.
Foundation has awarded more than $3 million in grants to support innovative organizations focused on building more equitable and inclusive communities, and we increased Kroger's diverse supplier spend by 21% to $4.1 billion last year alone and remain on track toward our long-term goal to spend $10 billion annually with diverse suppliers by 2030.
While we know that there is more work to be done, we are energized and look forward to keeping our stakeholders updated on our progress.
One of Kroger's greatest strengths is our ability to manage our business successfully in every operating environment.
We remain customer-obsessed and focused on operational excellence to deliver for our customers, associates, communities and shareholders.
Our focus on execution, combined with our disciplined approach to balancing investments in our associates and customers with strong cost management and growth in our alternative profit business, is positioning us well for the future.
Over time, our model has proven to be resilient during different economic scenarios, and this was true again during the third quarter as we grew the top and bottom lines while navigating higher product cost inflation, a tight labor market, and supply chain constraints.
Our identical sales without fuel in the quarter returned to positive, growing 3.1% as we delivered for our customers across our seamless ecosystem, and customers, again, signaled higher food-at-home consumption is here to stay.
Adjusted FIFO operating profit and adjusted earnings per share both increased year over year and grew by compounded annual growth rates of 22% and 29%, respectively, versus 2019.
Third quarter earnings per share was impacted by two unusual items that were excluded from our adjusted earnings per share result.
First, we engaged in an annuity buyout and lump-sum distribution transaction related to the company's consolidated retirement benefit plan which will reduce future administrative costs.
This triggered a write-off of deferred losses and a nonrecurring noncash charge of $87 million on a pre-tax basis.
This company pension plan is currently 100% funded as a result of previous action taken to freeze the plan and protect benefits for our associates.
This transaction was fully funded by assets in the plan.
The second unusual item was Kroger recording a nonrecurring benefit of $47 million or $0.07 per diluted share, primarily due to the favorable outcome of income tax audit examinations, covering multiple years.
This amount is also excluded from the company's adjusted net earnings per diluted share result for the third quarter.
I'll now provide more detail on our operating results in the quarter.
On a two-year stack basis, our identical sales without fuel increased 14%.
We also saw digital sales increased 103% on a two-year stack.
As we have previously shared, we do not expect digital growth to be linear, especially as we cycle last year's sales spike and customers become more comfortable shopping in store again.
The launch of several new digital offerings, which Rodney outlined earlier, in addition to the rollout of new customer fulfillment centers, gives us confidence in our ability to deliver against our growth targets for digital sales and profitability.
We look forward to sharing more detail on our digital road map at the business update in March that Rob noted earlier on the call.
With regard to digital profitability, we continue to make progress during the quarter and achieved our best cost to serve on record for pickup orders.
Gross margin was 21.66% of sales for the third quarter.
The FIFO gross margin rate, excluding fuel, decreased 41 basis points compared to the same period last year.
This decrease primarily related to higher supply chain costs and continued price investments, partially offset by sourcing benefits.
Our investment was in line with expectations and fully funded by cost savings and OG&A improvement.
Recognizing recent inflation trends and our outlook for the rest of the year, we recorded a higher LIFO charge for the quarter of $93 million, compared to $23 million in the prior year.
This increase represents a $0.07 headwind to earnings per share in the quarter versus 2020.
The operating, general and administrative rates decreased 49 basis points, excluding fuel and adjustment items.
This improvement was achieved even with continued investments in our associates and growth in our average hourly rate and reflects the outstanding work our associates are doing to execute cost-saving initiatives in a very dynamic environment.
We remain on track to deliver $1 billion of cost savings during 2021.
Our alternative profit business had a record third quarter and remains on track to deliver the high end of our expected range of $100 million to $150 million of incremental operating profit in 2021.
We saw increased strength in Kroger Personal Finance results during the quarter, and Kroger Precision Marketing introduced a new programmatic advertising marketplace to unleash first-party targeting and measurement capabilities, further highlighting our ability to differentiate in the advertising space.
Fuel is also an important part of our overall value proposition and a key offering to help customers stretch their dollars, especially in times when fuel prices are high.
During the quarter, we saw a significant increase in the number of customers actively engaging in our fuel program.
Gallons grew in the third quarter by 5%, outpacing market growth.
The average retail price of fuel was $3.24 this quarter versus $2.15 in the same quarter last year.
Our cents per gallon fuel margin was $0.42, compared to $0.37 in the same quarter in 2020.
I'd now like to spend a couple of minutes providing some additional perspective on how we are proactively managing inflation.
We are currently operating in a more volatile inflationary environment.
And during the third quarter, Kroger saw higher product cost inflation in most categories.
We are being disciplined in managing these increases.
Our teams are doing an excellent job, working to minimize the effect on our customers and our financial model by using our data and working closely with our suppliers.
We are passing along higher cost to the customer where it makes sense to do so.
In some key areas, we are choosing not to pass through cost increases and continuing to invest in value for the customer.
We are investing where it matters most, using our proprietary data to be strategic in our pricing and personalization with the objective of winning long-term customer loyalty.
We also believe our brands is an -- is an even more important differentiator for Kroger in an inflationary environment, offering customers an unmatched combination of great value and great quality.
Turning now to our financial strategy.
Kroger is operating from a position of strength and continues to generate strong free cash flow as evidenced by our net debt-to-EBITDA ratio hitting an all-time low of 1.68 in the third quarter.
While we continue to see attractive opportunities to invest in the business, to widen our competitive moat, and drive sustainable revenue and earnings growth, our capital expenditures in 2021 are now expected to be below our original guidance range of $3.4 billion to $3.6 billion.
This is because of delays in project implementations, primarily due to COVID-19-related supply challenges.
Kroger continues to return cash to shareholders.
During the quarter, we repurchased $297 million of shares, and year to date, have repurchased $1 billion of shares.
Since 2000, we have now returned more than $20 billion to shareholders via share repurchases at an average price of $16.45 per share.
As of the end of the third quarter, $511 million remains outstanding under the current Board authorization announced on June 17, 2021.
We look forward to sharing more about our plans for future deployment of excess cash to drive sustainable growth and create value for our shareholders at our business update in March.
As Rodney mentioned, we continue to invest meaningfully in our associates.
In addition to the $350 million of hourly rate investment already planned this year, we have committed to further investments in the fourth quarter, which equates to an incremental $100 million on an annualized basis.
During the third quarter, we ratified new labor agreements with the UFCW for associates in our Columbus and Mid-Atlantic divisions, covering over 4,500 associates.
We continue to negotiate contracts with the UFCW for store associates in Houston, Lake Charles, Freeport, Dallas meat, Little Rock, Memphis, Portland, and Denver.
Our financial results are pressured by inefficiencies in healthcare and pension costs, which most of our competitors do not face.
We continue to communicate with our local and international unions, which represent many of our associates about the importance of growing our business in a profitable way, which will help us create more jobs and career opportunities and enhance job security for our associates.
I'll now turn to our expectations for the remainder of 2021.
Driven by the momentum in our third quarter results and sustained trends in food at home, we are raising our full year guidance.
We now expect identical sales without fuel for the full year to be between negative 0.4% and negative 0.2% and a two-year identical sales stack of between 13.7% to 13.9%.
There remain some uncertainties as we look ahead, and our guidance of positive ID sales excluding fuel of between 1.5% to 2.5% in the fourth quarter reflects this.
We expect adjusted net earnings per diluted share to be in the range of $3.40 to $3.50.
We expect our adjusted FIFO operating profit to be in the range of $4.1 billion to $4.2 billion, reflecting a two-year compounded annual growth rate of between 17% and 18.4%.
The midpoint of our adjusted earnings per share range for 2021 now equates to full year results, approximately in line with our 2020 results, despite cycling the unique COVID-19-related demand spike last year.
Our guidance fully reflects the investments in our customers and associates I shared earlier, plus increased marketing to support the exciting new digital initiatives we launched in the third quarter.
It also reflects the latest projection for LIFO.
And because we recorded a LIFO credit in the fourth quarter last year, LIFO is now expected to be a $0.13 headwind to earnings per share in the fourth quarter.
Overall, we are very proud of our results, which are projected to be significantly ahead of where we originally guided for the year.
In conclusion, Kroger is executing against its key financial and operational initiatives and continues to invest in strategic priorities that will deliver attractive and sustainable total shareholder return of 8% to 11% over time.
We believe our business is emerging stronger through the pandemic and through the investments we are making is well-positioned to grow beyond 2021.
Kroger's strong year-to-date results are the outcome of our customer obsession, our incredible associates who bring our vision and values to life, and our commitment to bringing fresh, affordable food to everyone.
The strength of our teams have never been more apparent.
With every new challenge, they raised to the occasion, whether by implementing solutions to minimize supply chain disruptions, delivering the freshest produce to our customers, or using our data to offer personalized promotions that surprise and delight.
Our team is bringing our competitive moats to life.
| qtrly identical sales without fuel increased 3.1%.
qtrly digital sales two-year stack grew 103%.
expect 2021 adjusted net earnings per diluted share to be in range of $3.40 to $3.50.
now expect our two-year identical sales stack to be in range of 13.7% to 13.9% for 2021.
expect our adjusted net earnings per diluted share to be in range of $3.40 to $3.50 for 2021.
sees 2021 adjusted capex $3.1 billion - $3.3 billion.
|
These statements are subject to certain risks and uncertainties, a description of which can be found in our SEC filings.
Actual results may differ materially from what may be discussed today.
We will also discuss certain non-GAAP financial measures such as AFFO and FFO.
We have a lot to talk about.
Third quarter was filled with unusual challenges and a great many successes.
Here are three headlines.
Aimco operations does well in difficult times.
Aimco reduces leverage by a $1 billion.
And Aimco unlocked shareholder value, reducing risk, leverage, and costs by separating into two entities.
Here's the rest of the story.
The challenges were the continued effects of the pandemic.
Following the second quarter collapse of the economy, third quarter GDP rebound strong but uneven.
Many sectors remain at historic lows.
For example, many universities are now virtual and many office buildings stand empty as workers now work from home.
For apartments, we are now subject to unprecedented government regulation of rent setting and rent collections.
In many of our markets, we've experienced rioting, violence in camps for the homeless, targeting of police, and a general challenge to public order.
And the public health outlook continues uncertain with COVID-19 cases spiking across the country, including several of the markets in which we operate.
Through it all, Keith and his team worked hard and successfully to provide homes for the individuals and families who live in Aimco apartment homes.
They provide safety and refuge from the virus, good neighbors, respectful treatment for all and a helping hand to those in need.
As Keith and Paul will discuss later in detail, the economy took its toll.
As in previous recessions, some residents could no longer afford their rent.
With their departures, occupancy dropped and bad debt increased.
In other instances, and this is unprecedented, local ordinances gave residents the option to live rent free.
Two-thirds of Aimco bad debt in the third quarter is owed by residents who've lived rent free for the past six months.
While cautious about a second spike in the pandemic, it seems that the worst is behind for Aimco.
For example, lease space is up and available to let is dramatically down.
The rate of new delinquencies has been steadily declining.
Some important properties in urban settings remain impacted but the largest portion of our portfolio is returning to its normal performance and steady improvement.
As we move forward, we'll benefit from Keith's disciplined adherence to providing world-class customer service as graded by our customers and maintaining this customary high standards for selecting customers who will be good neighbors and stay longer.
Notwithstanding the turbulence, Wes and his team advanced our long cycle redevelopments and found a few new opportunities for future growth including acquisition of a bayfront community in Miami and formation of an interesting venture with IQHQ, a dynamic life science campus developer.
Patti Fielding sold a minority joint venture stake at a portfolio of 12 California properties to a passive institutional investor.
The $2.4 billion joint venture was priced in September at 4.2% cap rate equal to 97% of Aimco's pre-COVID estimated value, validating Aimco's published net asset value and taking an important step to rebalance the Aimco portfolio.
The same JV was also the source of funds to reduce leverage by a $1 billion, significantly improving Aimco's strong and flexible balance sheet.
With personal and family concerns from the pandemic in school closings and with the business challenge of difficult markets and changing regulations, the Aimco team maintained their focus and did excellent work.
I'm proud of their successes and grateful for the chance to work together.
The Aimco board of directors was, as always, highly engaged.
While total shareholder returns for past one, three and five years have been competitive with coastal peers, the board would like them to be better and seized the share price discount to net asset value is offering the opportunity for outperformance.
The board goal is to create a simple, transparent and low-cost public vehicle to invest in stabilized multifamily properties.
The board plan is to simplify the business and reduce execution risk, allocate to a second entity roughly 10% of total capital for development, redevelopment and nontraditional assets, and hold 90% of Aimco capital in the high-quality diversified portfolio of stabilized apartment communities, to reduce financial risk, by lowering leverage by $2 billion sourced from the joint venture and from the separation, to increase FFO and dividends per share by substantial reductions in vacancy loss and G&A costs related to redevelopment, and to replenish the tax bases to reduce the need for future stock dividends and enhance our flexibility in capital allocation.
After the separation, shareholders were on the same asset before and after.
But shareholders will then have the ability to make individual allocations to the entity owning only stabilized apartment communities to be known as AIR and to the entity with more complicated longer cycle development and redevelopment and nontraditional assets to be known as Aimco or New Aimco.
Full SEC descriptions of these plans are expected in Form 10 filings expected to be published in the next few days.
Until then, I'll not be able to add much on this subject beyond what I've already said.
The third quarter brought in mix of challenge, uncertainty and promise.
Encouraging signs make us highly optimistic about recovery and the long-term outlook for our business.
New leasing pace rebounded and was up 20% year-over-year.
As a result, lease percentage, our best forward indicator of occupancy increased by more 6% from July 1 to today.
And our units to lease have been cut in half.
Our high standards for resident selections are paying dividends, as collections have been consistently high since April.
Our customer service remains world-class with residents giving its 4.3 stars on 19,000 service.
And at the same time, we achieved 2.6% rate growth on renewals, this all despite an environment with constant changes in employment, schools, courts, and regulations.
One measure of the health of our core businesses is residential net rental income.
Simply put, this is our occupancy in average rate of apartment homes, which was down 2.5% in the third quarter.
Average daily occupancy was 93.9%, down 280 basis points from last year, blended lease rates were down 3% with new lease rates down 7.6% and renewals up 2.6%.
Bad debt expense was 190 basis points, including 130 basis points attributable to court closures in recent Los Angeles regulations.
Same-store revenues declined 4.9% in the third quarter, while expenses were down 1.3% due to increased efficiencies from our team and lower net utility costs as our energy initiatives drive value.
As a result, same-store third quarter net operating income decreased 6.3% year-over-year.
With that said, results in the quarter depended on geography.
In our stable suburban markets, operations were largely business as usual.
These communities distributed across the country totaled 19,100 units.
Our occupancy was 95.7%.
Blended rates were nearly flat.
And residential net rental income was up 60 basis points.
In our 8,500 units located in urban areas, demand was down and lease rates were more frequent, leading to turnover of 47%.
Occupancy of 89.5% and blended lease rates were negative 6.7% and residential net rental income was down 7.1%.
In each urban neighborhood, cumulative local conditions led to this performance and the reversal of those conditions will fuel growth next year.
In Philadelphia, University City felt the impact when new UPENN and Drexel announced the fall semester was virtual.
In Center City, many offices were empty including both Comcast Towers.
We expect Philadelphia to turn around shortly when students return to class and employees return to their office.
In Mid-Wilshire in West Los Angeles, the interruptions to the entertainment industry and shutdown of the city nearly eliminated demand in the spring.
While rate remains pressured and losses were compounded by local laws allowing residents to live rent free, we see blue skies coming with leasing up 44% year-over-year in the third quarter and up 150% in October.
Occupancy is anticipated to fully recover by year-end.
On the Peninsula in Northern California, work-from-home policies of tech companies changed the demand for apartments.
The Pacific neighborhood weakened and has since stabilized while San Mateo and Redwood City continue to face challenges with demand and rate and will likely remain tough in 2021.
Our exposure to these submarkets is limited and our diversified portfolio in Northern California includes solid performances in San Jose, Marin and East Bay.
In October, business continues to improve, leasing pace is still running ahead of last year, average daily occupancy for the month is 94.2% and we expect further increases through the end of the year and into 2021.
Pricing remains challenged with new lease rates down 10%, renewals up 1.4% and blended lease rates down 6.7%.
For some context on new lease rates, we've signed 95% of our leases for the year and in our suburban market rates are healthier and improving.
In our urban markets, rates have been tough but we've also seen them stabilize.
And with our suburban markets full, urban leasing has made up an increasing share of the transaction dollars each month since July.
We anticipate that these three trends will hold through the winter months as we believe we've reached the bottom.
Lastly, October collections were consistent with recent months.
New delinquencies are slowing with more of our accounts receivable growth coming from residents who have been delinquent since the beginning of the pandemic.
We anticipate an improvement in bad debt once local emergency ordinances and closures unwind sometime next year.
In a moment Paul will provide more details on our collections and bad debt.
We continue to focus on the long game, keeping a steady hand on the wheel and building sustainable revenue growth for the coming year.
We have a strong operational architecture in place today with smart home technology in every unit.
Artificial intelligence is delivering productivity and improved results, a centralized team driving consistent execution, relentless innovation enabling us to hold our expenses flat, in-depth analytics guiding our decision-making, and most importantly our field team members that consistently deliver exceptional service and outstanding results.
Amid this year's challenges, the Aimco team has sourced new investment opportunities, advanced construction on our major projects, and worked hard to fill newly delivered apartment homes with high-quality residents.
First, I'll touch on new investments made during the quarter and we'll then turn to our redevelopment and development activities.
In August, Aimco acquired Hamilton on the Bay located in Miami's Edgewater neighborhood for a price of $90 million.
The acquisition included a waterfront apartment building containing 271 units averaging over 1,400 square feet plus an adjacent development site.
Combining the parcels will allow for more than 380 additional residential units under the current zoning.
We are planning to invest as much as $50 million and a substantial redevelopment of the existing building and the second phase focused on unlocking the value of the available development rights is being explored.
Also during the quarter, Aimco made a $50 million commitment to invest in IQHQ, a premier life sciences real estate development company.
In addition to our investment in the company, Aimco secured the right to collaborate on the multifamily portions of future IQHQ development sites.
Post-separation, we expect these new investments will be strong contributors to the growth of Aimco's development business, and we are actively pursuing additional opportunities with plans to further grow our pipeline.
Now, turning to our ongoing redevelopment and development projects; here are some highlights as of the end of October.
At Parc Mosaic in Boulder, Colorado, where construction was completed earlier in the year, Keith and his team have leased 97% of the apartment homes.
Our townhouse project in Elmhurst, Illinois is now substantially complete, with all 58 homes delivered and 57 of those being leased.
At 707 Leahy in Redwood City, we've delivered 60 homes, over 80% of them leased, and the remaining 50 are scheduled to complete before year-end.
At The Fremont on the Anschutz Medical Campus, just over 100 homes have been delivered, here too, 80% have been leased and the remainder will be completed in the coming months.
Our final two long cycle projects, Prism in Cambridge, and the North Tower at Flamingo in Miami Beach, remain on track for initial delivery in early and mid-2021 respectively.
Initial rental rate performance on those projects currently in lease-up has averaged 98% of our original expectations.
However, we believe that NOI yields will meet or exceed our underwriting as the impacts of continuing onsite construction and strained local market conditions lift.
Today, I will discuss Aimco's balance sheet, third quarter financial results, rent collections and bad debt, and then wrap up with a brief discussion of Aimco's previously announced special dividend.
As Terry mentioned, in 2020, we expect to reduce leverage by $2 billion, $1 billion from the September closing of the California joint venture and a $1 billion from the separation transaction.
The $1 billion leverage reduction reduced third quarter leverage-to-EBITDA on a trailing 12-month basis to 7.0 times.
Now, on the Aimco financial results; third quarter pro forma FFO of $0.61 per share was down $0.03 or 5% year-over-year.
We estimate lower occupancy and other COVID-related impacts reduced third quarter FFO by $0.09 year-over-year.
Offsetting the COVID-related impacts was $0.04 of increased interest income associated with the Parkmerced mezzanine loan and $0.03 of lower offsite costs.
The remaining $0.01 decline is attributable to the net impact of property sales and lower interest expense.
Next, I'd like to spend a minute discussing Aimco rent collections and bad debt.
Residential revenue includes apartment rents and also such items as storage rents, parking rents and related fees owed by residents.
In the third quarter, Aimco recognized 98.1% of all residential revenue.
Of the 98.1%, 96.7% was paid in cash, 30 basis points better than the second quarter's collection percentage as of the same date.
60 basis points is subject to recovery by offset against security deposits and $1.6 million or 80 basis points is considered collectible based on Aimco review of individual customers' credit.
Aimco does not expect to collect, and therefore did not recognize revenue on 190 basis points of third quarter billings.
These amounts are reflected as bad debt in our quarterly financial statements.
The majority of this amount, approximately 130 basis points, is attributed to residents who have not paid April and subsequent rents.
Prior to the enactment of restrictive city ordinances and closed courthouses, these residents would have been evicted in ordinary course, and therefore the bad debt would not have continued for the past six months.
The remaining amount, approximately 60 basis points, reflects residents, whose initial delinquency occurred during the third quarter.
This is elevated reflecting stress in the economy, but the rate of initial delinquencies has been steadily declining since July.
We expect the decline to continue until reaching a more normal 30 basis points in 2021.
As we look forward, we also expect the emergency ordinances that allow residents to live rent-free to unwind, providing us with the opportunity to rerent these apartments to rent-paying residents.
Lastly, as previously announced, the Aimco board of directors declared a special dividend on October 21 to distribute the taxable gains resulting from the partial sale of assets in the California joint venture and other 2020 dispositions.
$8.20 per share dividend consists of 10% cash or $0.82 per share, which covers Aimco's regular scheduled quarterly dividend and the acceleration of the next dividend typically paid in February.
The remaining 90% will be paid in common stock.
Shareholders of record on November 4 allowed the option to elect to receive either cash or shares of common stock.
If either option is oversubscribed, the shareholder will receive a prorated amount of cash and common stock.
Special dividend will be payable on November 30, concurrent with the reverse stock split effectively neutralizing the per share impact of the additional common shares issued in the dividend.
Post-separation, it is expected that the need for special dividends to distribute taxable gain on sale at AIR will be reduced or eliminated due to the refreshed tax basis.
Rocco, I'll turn over to you for the first question.
| aim q3 pro forma ffo per share $0.61.
q3 pro forma ffo per share $0.61.
|
Gary Norcross, our Chairman and CEO, will discuss our performance and review our strategy to continue accelerating revenue growth and maximizing shareholder value.
Woody Woodall, our Chief Financial Officer will then review our strong financial results and provide updated forward guidance.
Bruce Lowthers, President of FIS, will also be joining the call for the Q&A portion.
Turning to Slide 3.
Also throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, adjusted net earnings per share and free cash flow.
These are important financial performance measures for the company, but are not financial measures as defined by GAAP.
Our second quarter results exceeded expectations across the board and demonstrates the continued success of our pivot to growth strategy that we laid out before the pandemic.
Revenue of $3.5 billion was the highest quarterly revenue in our company's history.
Revenue increased more than $500 million or 17% year-over-year, and adjusted earnings per share grew 40%.
Sales results, which were the strongest in our company's history, are being driven because our solutions remain in high demand, enabling businesses of all sizes to advance the way the world pays banks and invest.
This demand, combined with our organizational focus on delivering broader value to our clients, was also reflected in a very strong cross-sales, driving our largest revenue synergy quarter-to-date, increasing our run rate by 50% or $150 million sequentially to $450 million.
This sales execution in turn drove a $1.5 billion increase to our backlog, which is now greater than $22 billion.
Our strong execution is driving us to raise both our 2021 guidance and increase our year-end revenue synergy target to $700 million.
In addition, as we consider client demand across our portfolio of solutions, we are extending our mid-term outlook of 7% to 9% revenue growth through 2024.
They are our most important asset and play a vital role in advancing the commerce and financial technology that keeps thousands of clients up and running in the economy moving every day.
Turning to Slide 6.
I'd like to highlight a few recent wins that demonstrate FIS' differentiation.
Clients are increasingly demanding access to new capabilities that are outside of their traditional solution, so they can innovate in new and interesting ways.
We have the unique ability to serve our clients horizontally across a breadth of financial technology with integrated cloud native platforms.
Further, our open APIs are resilient and easy to use as clients expand their relationships with FIS.
Our sales success with the Modern Banking platform demonstrates this client demand as they look to differentiate with cloud native capabilities.
This quarter, we delivered the largest release since the start of MBP, including expansion of commercial deposit functionality as well as new enhancements to our lending module.
As we have previously discussed, one of the exciting opportunities with the current MBP clients is an ongoing ability to cross-sell additional functionality modules.
This quarter, we had our first cross-sell to American Express, who added a new checking account feature to their deployment.
This is a great example of our ability to land large complex clients and the value of our modern platform.
As we continue to add functionality, clients continue adopting these new capabilities to grow their businesses, which drives additional revenue for FIS and expand these important relationships.
Fifth Third Bank provides a second key example of the ways we grow our strategic relationships.
Fifth Third is a longtime client, who is on a journey to reengineer its technical infrastructure with a focus on resiliency and scale.
This quarter, they expanded their relationship with us to replace their legacy in-house core with the Modern Banking platform and their legacy wealth management system with FIS Unity.
Unity is our leading-edge global wealth management system and will provide rich data and insights for Fifth Third's customers throughout their wealth journey.
It incorporates automated cash management, multicurrency and other advanced wealth management functionality and flexible design that is fully integrated with FIS Trust accounting.
T. Rowe Price provides yet another example of an industry leader looking to FIS to help them modernize their 401(k) retirement offering with advanced technology.
This landmark win will lay the foundation for other large asset managers to utilize FIS as they look to leverage our scale and expertise in the retirement space.
In addition, PayPal and Chevron both expanded their relationships with us to begin utilizing our cloud-enabled payment switching capabilities.
And finally, WesBanco joined our merchant referral network in order to upgrade to our leading acquiring technology.
As we continue to innovate, our integrated cloud native ecosystem creates a powerful network effect that empowers our clients to transform and grow.
On Slide 7, I want to highlight another important win.
I'm pleased to announce that Walmart will begin utilizing our innovative loyalty network, Premium Payback, for both in-store and e-commerce transactions.
The value proposition for this solution is exceptional, driving positive outcomes for our merchants, issuers and the end consumer.
In other retail locations where we have rolled out the solution, we are seeing consumers accept premium paybacks offered to pay with points approximately 50% of the time when they are prompted.
Both our merchant and our issuer clients are increasingly eager to participate, and we expect adoption to continue to ramp as we implement the solution with all the innovative clients shown on the slide as well as more in the future.
Premium Payback is a clear example of the network effect that we've created by integrating, issuing and acquiring.
Turning to Slide 8.
We invest heavily in new solutions and capabilities with the belief that the market is changing and how it consumes technology and looking for cloud-native architectures.
The revenue contribution from solutions developed over the past three years continues to grow as a percent of our total revenue mix, up from less than 1% in 2019 to over 4% in 2021.
This rapid growth is driven by our ability to cross-sell new solutions into our existing client base as well as adjacent verticals, which increases our total addressable market.
New solutions also contribute meaningfully to our total revenue growth, with contribution increasing from less than 1% in 2019 to more than 2% in total revenue growth in 2021.
Looking forward, we expect new solutions to drive up to 3 points of incremental growth each year, supporting our outlook for 7% to 9% revenue growth through the midterm.
At this point, a strong commitment to innovation is embedded in our culture and will continue to drive growth for years to come.
We are at the forefront of the industry with the broadest collection of cloud-native solutions available.
We remain uniquely positioned to serve domestic and multinational merchants who are looking for a single trusted provider for all of their acquiring needs.
We solve our clients' most complex problems, ranging from global acquiring for their e-commerce business to treasury and cash management with our innovative Quantum software.
Further, on the right side of the page, we show our unique bundle of cloud native solutions for financial institutions that demonstrate our ability to innovate at scale.
Lastly, we highlight a few examples of innovative solutions that create compelling value propositions for both merchant and FIS clients in the center of the page.
Clearly, the investments we've made during the pandemic and driving differentiated outcomes for our clients and for us, and we continue to make these investments today in order to power future growth.
It's why we are confident in our forward momentum to drive strong 7% to 9% revenue growth through 2024.
Starting on Slide 11, I will begin with our second quarter results, which exceeded our expectations.
On a consolidated basis, revenue increased 17% to $3.5 billion, driven by outperformance in each of our operating segments.
Organic revenue growth was 16%.
We haven't had any material M&A activity over the past year.
So the difference between reported and organic revenue growth this quarter is primarily due to the impact of foreign exchange rate.
Adjusted EBITDA margins expanded 460 basis points to 44%, reflecting strong operating leverage and synergy contribution.
As a result, adjusted earnings per share increased 40% year-over-year to $1.61 per share.
As Gary mentioned, we had exceptional cross-selling quarter, driven primarily by Premium Payback, issuer processing, merchant referral and data analytics win.
Given our progress and strength of our pipeline, we are increasing our revenue synergy target for 2021 by $100 million to exit the year at $700 million on an annualized run rate basis.
Our achievement of cost synergies also continues to be successful, running further ahead of schedule than we anticipated when we announced the deal.
We have more than doubled our initial cost synergy target of $400 million and are on-track to exit the year with approximately $900 million in total annualized savings, including approximately $500 million in operating expense synergies.
Turning to balance sheet and cash flow.
We repurchased 2.7 million shares worth approximately $400 million during the quarter, bringing share repurchase to a total of $800 million year-to-date at an average price of $145 a share.
Our leverage ratio declined to 3.3 times, keeping us on-track to end the year below 3 times leverage.
Lastly, we generated free cash flow in excess of $1 billion this quarter, which is the most in our company's history and reflects the highly cash generative nature of our business.
Turning to Slide 12 to review our segments.
Banking revenue growth accelerated to 8% due in part to strong issuer processing growth of 17% and a 30% increase in Modern Banking platform revenue.
As Gary noted, we had another 2 MBP wins this quarter as well as an add-on sale and MBP revenue will continue to accelerate as more clients go live.
We currently expect MBP revenue growth of nearly 50% for the full year 2021 and for this to further accelerate into 2022.
The Banking segment's adjusted EBITDA margin expanded 410 basis points to 46%.
These strong results were driven primarily by ramping revenues from our recent large bank wins as well as continued recurring revenue growth.
Capital markets revenue growth also accelerated to 6% this quarter, reflecting strong recurring revenue growth and sales execution.
Capital Markets adjusted EBITDA margin expanded 100 basis points to 46%.
Lastly, for Merchant, revenue growth rebounded sharply to 45% in the second quarter, which includes 10 points of yield benefit and the segment generated its largest new sales quarter in the history of the business.
Merchants' revenue acceleration included 31% revenue growth in e-commerce.
Our eComm revenue growth is particularly impressive in light of in-store reopening as lockdown orders eased and cross-border travel remains affected, making it an avenue for significant future growth.
Growth was also broad-based, expanding both domestic and international and discretionary verticals like restaurant are accelerating sharply.
Merchants adjusted EBITDA margin expanded 910 basis points to 50%, primarily reflecting its high contribution margin and synergy benefits.
As we begin to lap the pandemic with growth spanning online and in-store, SMB and enterprise across North America and International, our results clearly demonstrate the strength of our competitive position.
In addition, growth includes both rebounding volume and yields, as we expected.
Relative to 2019, we've seen no increase in attrition, and we'll continue to grow our client count.
We have not taken our foot off the gas, investing through the pandemic, completing NAP, ramping Access Worldpay, expanding our sales force, entering new countries and adding multiple strategic ISV and bank partners, including expanding integrated payments to Europe.
The business clearly has strong underlying momentum.
We expect to further drive acceleration relative to 2019 in the second half of the year.
Turning to guidance on Slide 13.
Based on our strong results and favorable outlook, I'm pleased to raise full year guidance.
We now anticipate revenue of $13.9 billion to $14 billion for the full year 2021, which represents an increase of $250 million over our prior guidance.
This guidance assumes full year revenue growth for Banking in the upper single digits and Capital Markets in the mid-single digits.
We now expect Merchant growth to approach 20% this year, ahead of our initial expectations.
Relative to 2019, Merchant revenue growth accelerated 9% in the second quarter or 12% in the U.S.
We expect Merchant revenue growth to continue to accelerate into the mid- to high teens in the second half of the year as international revenue and discretionary verticals like travel and airlines continue to rebound versus 2019.
We're also raising our full year 2021 adjusted EBITDA guidance to $6.125 billion to $6.2 billion and increasing our adjusted earnings per share guidance to $6.45 to $6.60 per share.
For the third quarter, we expect 9% to 10% revenue growth and to generate revenue of $3.49 billion to $3.52 billion.
As a result of the high contribution margins in our business, we expect adjusted EBITDA margin to expand more than 50 basis points sequentially or about 200 basis points year-over-year to approximately 44% for the third quarter.
This will result in adjusted earnings per share of $1.66 to $1.69 in the first year.
I'm excited about our results and raised guidance.
Beyond our guidance for the year, we expect to generate 7% to 9% revenue growth in the midterm through 2024, as Gary discussed.
I have comments on this outlook for a number of reasons.
First, our sharp second revenue growth acceleration and our ability to significantly increase revenue guidance, show strong execution and the underlying strength in the business.
Second, strong new sales and cross-selling activity drove our backlog above $22 billion and increased our revenue synergy attainment by 50% in just one quarter, which will continue to drive future growth into 2022 and beyond.
And finally, the investments we've made and continue to make are driving strength across our segments and accelerating our revenue growth profile.
Our cloud native ecosystem of solutions is highly differentiated, helping us to grow in new and emerging verticals.
| sees q3 adjusted earnings per share $1.66 - $1.69; sees fy 2021 adjusted earnings per share $6.45 - $6.60.
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Dan will begin our call with a review of our financial results for the third quarter of 2021.
I will then provide more comments on the results.
The key takeaways from our third quarter 2021 results are: total company net sales of $338 million were up 16%.
Industrial Division net sales of $219 million, were up 12%, Agricultural Division net sales of $119 million, were up 25%.
Operating income of $30 million was down 3%, net income of $17.5 million or $1.49 per diluted share was down 13%, adjusted net income of $18.9 million or $1.59 per diluted share was down 8%.
Adjusted EBITDA was flat to the prior year third quarter and remained up 7% from full year 2020.
Total debt outstanding was reduced by $20.7 million during the third quarter and was down 21% from the prior year third quarter.
Our -- and our backlog increased to $645 million, which is up 154% over the prior year third quarter.
Third quarter 2021 net sales of $338 million, was 16% higher than the prior year third quarter.
We continued to benefit from strong order rates and recent pricing actions, but supply chain constraints and labor capacity issues are still limiting our ability to ship finished product.
Industrial Division third quarter 2021 net sales of $219 million, represented 12% increase from the prior year third quarter.
Despite stronger customer demand, this division's top line result was particularly hit hard by truck chassis availability as well as other supply chain disruptions.
Agricultural Division third quarter 2021 sales were $119 million, up 25% from the prior year third quarter.
During the quarter, favorable agricultural market conditions, low dealer inventories and pricing actions continued to drive organic sales growth in this division which was also affected by port delays and other supply chain constraints.
Gross margin for the third quarter of 2021 was $86.3 million or 25.5% of net sales compared to $78.6 million or 27% of net sales in the prior year third quarter.
The favorable gross margin impact we would normally expect from higher volume and aggressive pricing actions was more than offset by continued material inflation, production inefficiencies resulting from supply chain and labor capacity constraints and a less favorable mix of service part sales.
Operating income for the third quarter of 2021 was $30 million or 8.9% of net sales, which was down 3% from the prior year quarter.
The gross margin effects already mentioned were offset by a more normal level of operating expenses compared to the reduced spending levels of the pandemic affected prior-year period.
As mentioned last quarter, while our recent pricing actions have been aggressive, the effective impact of these actions continued to lag rising cost.
On a positive note, September was the first month and over a year that we didn't see a rise in published mill pricing -- mill prices for hot-rolled steel.
Net income for the third quarter 2021 of $17.5 million or $1.40 per diluted share was down 13% from the prior year third quarter.
If we exclude from the current year quarter, $1.4 million of after-tax charges stemming from accelerated stock award vesting related to the retirement of our former CEO as well as Morbark inventory step-up expense from the prior year quarter, third quarter adjusted net income of $18.9 million, was down 8% from the prior year result, while income before taxes was up $0.3 million over the prior year third quarter, mainly due to lower interest expense.
Net income was lower due to an income tax provision for stock-based compensation in anticipation of a 28% full year effective income tax rate as well as the non-deductibility of compensation expenses related to the retirement of our former CEO.
Third quarter 2021 adjusted EBITDA was flat to the prior year third quarter adjusted result as trailing 12 month adjusted EBITDA of $155.3 million remained flat to the trailing 12-month results that we reported at the end of the second quarter 2021.
This remains 7% above the adjusted 2020 EBITDA.
During the third quarter of 2021, we continued to delever the balance sheet by further reducing debt $20.7 million on the flat adjusted EBITDA performance.
We ended the third quarter of 2021 with a record high order backlog of $645 million which was an increase of 154% over the prior year third quarter.
We continued to see strong customer order rates and no significant order cancellations, despite supply chain induced shipping delays.
To recap our third quarter 2021 results.
Total company net sales of $338 million were up 16%, Industrial Division net sales of $219 million were up 12%, Agricultural Division net sales of $119 million were up 25%, operating income of $30 million was down 3%, net income of $17.5 million or $1.49 per diluted share was down 13%, adjusted net income of $18.9 million or $1.59 per diluted share was down 8%, adjusted EBITDA was flat to the prior year third quarter, but remained up 7% from full year 2020, total outstanding debt was reduced by $20.7 million and was down 21% from the prior year third quarter and our backlog increased to $645 million, up 154% over the prior year third quarter.
Before discussing our results for the quarter, I'd like to offer a brief update regarding COVID-19.
I'm pleased to report that during the third quarter, we experienced very few cases of COVID-19 among our employee population.
While the direct impact of COVID was far or less this quarter than what we've experienced during the last several quarters, the lingering indirect effects of the pandemic significantly impacted our operations during the third quarter.
Our markets remained strong during the quarter duely across the board and our order bookings for the quarter increased sequentially again as they've done every quarter of this year.
In the agricultural market, prices for corn, soybeans and livestock while off from their previous peaks remained at historically attractive levels.
Tractor sales were also modestly higher than they were a year ago, although recent demand growth has been skewed to the larger tractors that are somewhat less meaningful to Alamo Group's sales of attachments.
Activity in our governmental markets also remains strong.
State, county and municipal governments continue to invest in equipment to update their right of way maintenance fleets.
In addition, demand for our industrial products from industries such as steel, cement and mining also continued to rebound.
Finally, demand for our forestry and tree care products has been very strong as we anticipated when we acquired the Morbark, Rayco and Denis Cimaf brands late in 2019.
The increased pace of order bookings brought our backlog to a new all-time record of $645 million by the end of the quarter.
To-date we have not observed any signs that the momentum of our markets will change in the near term nor have we experienced any meaningful order cancellations due to the extended lead times we are currently experiencing.
So long as dealer inventories remain at the current low levels, we expect demand for our Agricultural Division's products will remain strong with minimal risk that orders will be canceled or postponed.
Governmental agencies by their nature don't purchase equipment on speculation or warrant [Phonetic] advance of known fleet renewal requirements, so we don't foresee significant risk of order cancellations from these customers.
Non-governmental buyers of our industrial products including operators of our forestry and tree care equipment, place orders to meet expanding demand for their own products and also in anticipation of their current equipment reaching the end of their expected lifecycle.
While there is some risk that these customers could cancel orders in the event of a recession, we do not anticipate this recurring in the near term -- this occurring in the near term.
Turning now to Alamo Group's operations in the third quarter.
We experienced significant disruption in our normal manufacturing process flows during the third quarter as a result of instability in the supply chain.
We experienced extended delivery times for a wide variety of components we required to manufacture our products, including shortages and delivery delays of truck chassis, industrial engines, gearboxes, cutting blades, hydraulic components and even such relatively mundane items as wiring harnesses and specialty assembly hardware.
Our operations depend on reliable and timely supplies of these kinds of components to operate efficiently.
When the supply chain is significantly disrupted as we experienced broadly in the third quarter, our workforce is less productive as they have to shift production priorities frequently based on what products can be completed with the materials on hand.
When a component needed to assemble -- needed for the assembly of our products is delayed, our work in process inventory also increases beyond what is normally expected as orders increase.
Input cost inflation was also a significant issue during the third quarter.
While our teams have been closely monitoring supplier cost changes and adjusting our prices regularly, there is a lag effect until these pricing actions materialize in our margins.
Our Agricultural Division has had success renegotiating pricing for orders and backlog.
However, it's not really possible for our Industrial Division to renegotiate prices for orders and backlog from governmental customers.
Shortages of skilled labor were also more impactful during the third quarter than we had experienced earlier in the year.
While we've been able to partly address the shortage of welders by increasing the pace of our deployment of robots, skilled assembly technicians with experience in electronics, hydraulics and pneumatics remain difficult to recruit, although this was certainly less impactful to our results in supply chain bottlenecks, it also has contributed to restraining sales growth in some of our operations.
Transportation costs were another headwind we encountered during the third quarter, particularly costs associated with inbound shipments.
While transportation costs were higher across the board, we also incurred additional costs to expedite inbound shipments of components to complete production in order to achieve the earliest possible deliver dates to our customers.
As a result of the cost pressures I've described, our margins in the third quarter were lower than they were in the third quarter of 2020.
However, our margins were actually slightly higher in the third quarter than they were in the second quarter of this year and I think this indicates that better pricing in the backlog is beginning to flow through.
Finally, sales, general and administrative costs were higher in the third quarter.
As expected, selling costs increased as COVID related travel restrictions eased and our sales teams were able to travel more regularly to serve our customers in-person and to attend trade shows, many of which were suspended last year.
With our higher sales in the quarter, commission expenses also increased.
The increase in administrative expense, primarily involved non-recurring costs related to the retirement of our previous CEO.
Our effective tax rate in the third quarter was 37% compared to 27% in the third quarter of 2020.
The higher tax rate was primarily the result of a provision for stock-based compensation and an anticipation of a full year 2021 tax rate of 28%.
So as you can see, there was a lot going on during the third quarter, and this is reflected in our results.
At the moment there is no clear evidence that the external business climate will be meaningfully different or better during the fourth quarter.
One positive note is that we've recently seen steel prices begin to stabilize, albeit at higher levels than we would like.
Otherwise inflation generally seems to be gradually gaining momentum at least in the United States.
In spite of this, I remain optimistic about the future prospects for our company.
Our strong record high backlog gives us confidence and good visibility to allow us to make appropriate investment plans concerning the development of our people, our products and our facilities.
I was also very pleased to announce the acquisition of Timberwolf Limited last week.
Although this is a small company, they are a UK market leader with a very nice range of brush and limb chippers.
They have a comprehensive dealer network spanning the UK, Europe and other areas that will provide important access points into these markets for our full range of forestry, tree care and recycling products.
At the same time, Timberwolf Chipper products fill an important product offering gap in Morbark's range that will complete and strengthen our tree care offering in North America.
Finally, I want to take this opportunity to remind the investor community that commencing in the fourth quarter, we will report our business through two new segments, namely Vegetation Management and Industrial Equipment.
All of Alamo's products that cut or process organic material will be organized under Vegetation Management.
This division combines all of the brands of our former Agricultural Division with the governmental mowing, forestry and tree care operations that had previously been part of our former Industrial Division.
More specifically, this means that our Alamo Industrial Tiger Mowers, Morbark, Rayco and Denis Cimaf brands will be reported as part of Vegetation Management going forward.
Our Industrial Equipment division includes our excavator, vacuum trucks, street sweeper, leaf removal and snow removal brands.
I believe this structure brings improved strategic clarity and more closely balances the size and scope of our two operating divisions.
| q3 adjusted earnings per share $1.59.
q3 sales rose 16 percent to $338.3 million.
qtrly backlog of $645.1 million, up 154% compared to prior year q3.
alamo group - expect to continue to experience headwinds associated with cost inflation, supply chain disruptions and skilled labor shortages in q4.
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With us on the call today are Mike Long, Chairman, President and Chief Executive Officer; Sean Kerins, Chief Operating Officer; and Chris Stansbury, Senior Vice President and Chief Financial Officer.
Our actual results could differ materially due to a number of risks and uncertainties, including the Risk Factors in our most recent 10-K and 10-Q filings with the SEC.
These non-GAAP measures are not intended to be a substitute for our GAAP results.
I will now hand the call to our Chairman, President and CEO, Mike Long.
When I spoke to you in late April of 2020, right after our first quarter, there was much we didn't know about how the coming months would unfold, which is why it's incredible to be here today talking about record quarterly sales and earnings in the fourth quarter of the year.
Not to mention, in 2020, we generated record operating cash flow, reduced debt by a record amount, and returned a record cash to the shareholders for the year, it's a true testament of our strength.
But not only did we do that, but in a very short period of time, we had almost 15,000 people that had to go from office work to work from home, and this is a true testament of the hard work and the dedication of our team.
Every day our customers have a choice, we're proud they continue to choose Arrow.
Customers place their trust in Arrow's engineering, design and supply chain services.
They rely on us to ensure their products are designed to be efficiently manufactured and well-received in the marketplace.
Our suppliers are critical to our success.
They continue to choose Arrow to sell, market and design their components into some of the most innovative and important products coming to market.
While our reputation speaks for itself, our consistency comes from putting our people first.
While some of these -- While some of the same obstacles we've had in the past, we've seen major devices upgrades and major upgrade cycles, followed by strong sales.
The foundation of our business has never been stronger, while business conditions in our industry are dynamic, we're cautiously optimistic that the demand environment for Americas and Europe can return to growth.
Customers are ramping up prior production levels across many industries, and the inventory correction that occurred prior to the pandemic means that some components are in short supply.
Orders and backlog are up in all regions.
In line with this, our Americas customer sentiment survey showed an increase in the percentage of customers that have an inventory shortage and a decrease in customers with an excess of inventory.
Turning to our enterprise computing solutions business, we are pleased to deliver operating income growth on a year-over-year basis.
Operating income growth continues to be the truest measurement of performance for this business, and in addition, operating margin reached its highest level since the fourth quarter of 2017.
While we were pleased with our enterprise computing solutions results, we see strong potential for further improvements in 2021.
First, the markets we serve remain challenged by lockdowns and continued restrictions to related on-site work.
In the meantime, widespread work from home policies continue to drive security and cloud solutions.
In the past, we've seen major upgrades, followed by strong infrastructure spending to support them.
We see further benefits to enterprise computing from a recovery by special VARs and MSP customers, who serve some of the industries that have both -- mostly been impacted by the pandemic.
Our customers see service, the hospitality, retail, restaurant and even the medical industries have been hampered by an inability to work on-site at their end customers.
We derive value from complexity, so helping these customers design and self-secure multi-site hybrid cloud data solutions should benefit our volumes and profits compared to our business in 2021 [Phonetic].
Before closing, I thought I'd share a few words of our Company's long-standing commitment to developing business leaders and proactive succession planning.
We recently announced the appointment of Sean Kerins as Arrow's new Chief Operating Officer.
Sean has been a valued member of our team since 2007.
His leadership and proven track record at Arrow make him the ideal executive to now lead both businesses in advance, innovation across our global sales, marketing and operations.
We're confident in his ability to help Arrow capture value and growth from the increasing convergence of semiconductor, electronic component industries with the information and operational technology industries.
With that, I'll now hand the call over to Chris to provide more details on our fourth quarter results and our expectations for the first quarter.
Fourth quarter sales were $8.45 billion.
Sales increased 13% year-over-year on a non-GAAP basis.
The average euro-dollar exchange rate for the quarter was $1.19 to EUR1 compared to the rate of a $1.16 we've used for forecasting.
Strengthening of the euro relative to the dollar boosted sales by approximately $50 million compared to what we had anticipated in our prior guidance.
Global component sales were $5.92 billion.
Sales were above the high-end of our prior guidance and we saw improving demand across regions in most industries.
Global component's non-GAAP operating margin was 4%, up 40 basis points year-over-year.
This improvement was mainly due to greater operating expense efficiency in all regions as we leveraged higher sales volumes.
We continue to see substantial opportunity for further operating income leverage as all regions can capture an improving mix of higher value component sales, and as the Americas and Europe regions continue to recover.
Enterprise computing solutions sales of $2.53 billion were above the midpoint of our prior expected range.
Fourth quarter billings increased year-over-year adjusted for changes in foreign currencies and we experienced growth in infrastructure software across the portfolio, security, storage and industry standard servers.
Global enterprise computing solutions non-GAAP operating income margin increased by 30 basis points year-over-year to 6.3%, the highest level since 2017.
Returning to consolidated results for the quarter, the effective tax rate was below our expectations due to timing of certain discrete items.
For the full-year 2020, our effective tax rate was near the low-end of our long-term range of 23% to 25%.
We continue to see 23% to 25% as our appropriate target range going forward.
Non-GAAP diluted earnings per share were $3.17, it's $0.44 [Phonetic] above the high-end of our prior expectation, approximately $0.04 of the upside to prior guidance was attributable to more favorable exchange rates.
Turning to the balance sheet and cash flow, operating cash flow was $200 million, despite substantially stronger demand than we anticipated.
Our cash cycle improved by two days compared to the third quarter and 11 days compared to last year.
This improvement significantly aided cash flow generation in the face of working capital demand.
Inventory days were the lowest level since the fourth quarter of 2015.
Ending 2020, debt decreased by $715 million compared to 2019.
Leverage, as measured by debt-to-EBITDA, was at the lowest level in over five years.
We returned approximately $100 million to shareholders during the fourth quarter through our share repurchase plan.
The remaining authorization under our existing plan is approximately $463 million.
Now, turning to guidance.
Midpoint sales and earnings per share guidance would be all-time first quarter records.
The diversity of the products we sell and the customers and industries we serve helped provide stability for our business as a whole.
Our guidance reflects continued improvement in both global components and global enterprise computing solutions operating margins on a year-over-year basis.
Finally, as we discussed last quarter, please note that CFO commentary includes information on our fiscal calendar closing dates for 2021.
In 2021, the first, second and third quarters close on April 3, July 3 and October 2, respectively.
Unlike in 2020, where they closed on March 28, June 27 and September 26.
These closing dates have a much greater impact on enterprise computing solutions and on global components and full-year comparisons are not affected as fiscal 2021 ends on December 31, as always.
| q4 non-gaap earnings per share $3.17.
q4 sales $8.45 billion versus refinitiv ibes estimate of $7.8 billion.
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As we have done on our past calls, we'll be taking questions at end of Craig's comments.
There are also outlined in our related 8-K filings.
We will start on Page 3, with recent highlights from the second quarter and as you can imagine, I'm extraordinarily pleased with the way our teams have executed in the midst of this pandemic in the economic downturn.
We've done a good job of keeping our employees safe, have delivered for our customers and certainly generated exceptional cash flow, all while flexing our costs at record rates.
Our results, while also of last year, certainly, in absolute terms, were better than expectations and we continue to make an important investments for the future.
Q2 earnings on a per share basis were $0.13 on a GAAP basis and $0.70 on adjusted basis, which excludes $0.20 of charges related to acquisitions and divestitures and $0.37 related to the multi-year restructuring program that we just announced.
Our Q2 revenues were $3.9 billion, down 22% organically.
As we noted on our Q1 earnings call, April was down approximately 30%, this was followed by slightly better volumes in May and then relatively strong finish in June, which was down, let's call it low double-digits.
And in fact, I mean, this has a point of maybe amplification, our Electrical business in the Americas, in Europe and Asia, all posted low-single digit organic growth in revenue in the month of June.
And so once again, our Electrical businesses are remaining very resilient in the face of this pandemic an economic downturn.
Segment margins were 14.7%, down 110 basis points from Q1 and our detrimental margins were at 25%, 5 points better than our guidance of 30%.
Once again a good indication of how well our teams have done in controlling the elements that are really within our control.
However, recognizing that some of our businesses could be looking at a slow and certainly what you could call it, prolong recovery, we announced a multi-year restructuring program of $280 million, including $187 million charge in Q2.
These actions will reduce structural cost for sure and are targeted in those end markets, including commercial aerospace, oil and gas, NAFTA Class 8 truck and North America and European light vehicle markets, where these markets have been certainly highly impacted.
The other clear highlight for the quarter was our operating cash flow, which was $757 million and free cash flow of $667 million.
Both very strong results and which gives us the ability to really reaffirm our free cash flow guidance of $2.3 billion to $2.7 billion and a midpoint of $2.5 billion.
So teams continue to do great in converting on cash as well.
Finally, as most of you know, we made an important announcement during the quarter regarding sustainability and our commitment to 2030 sustainability goals.
I thought it'd be helpful just to put this announcement in the context in order to show you how it fits within the broader strategic framework of the company, which we do on Page 4.
I think, simply stated at Eaton, sustainability really is at the core of our mission.
We talk about our mission being to improve the quality of life in the environment.
And certainly, that means, sustainability.
In fact, if you think about all of our value propositions with customers, they're built around creating safe, reliable and efficient solutions, let's call them sustainable solutions and so as we oftentimes say, what's good for the environment is good for Eaton.
We believe that meaningful efforts to support the environment are fundamental to how we create value for customers and it certainly plays where we think Eaton should play a leadership role.
Sustainability, as we think about it, really presents growth opportunities to help our customers solve their business goals and to this extent and have been so subjective, we've laid out 10-year plans that include investing $3 billion in R&D to create sustainable products over this period of time.
This will also include reducing our emissions from our installed base of products and upstream sources by some 15%.
Just to maybe give you an example of where we think this really fits with our overall strategy, sustainability really is about capitalizing for Eaton on secular growth trends, around electrification for sure, across all of our businesses and also in energy transition.
Sustainability, I'd tell you is also an important part of how we run the company on a day-to-day basis.
Since 2015, we reduced our absolute greenhouse gas emissions by some 16% and we're certainly on track to deliver our 2025 targets.
By 2030, we now have committed to achieve science-based targets of 50% reduction of greenhouse gas emissions from 2018 levels.
And finally, to achieve these goals, we obviously have to continue to work on building a workforce that's engaged and passionate about making a difference.
So this will continue to be a large project for the company overall.
So hopefully, that's provided just a little context in terms of why we think sustainability is such an important initiative for Eaton and how we're going to convert on that and turn it into accelerated growth for the company.
Now turning to Page 5, we summarize our Q2 financial results and I noticed a couple of things on this page.
First, acquisitions increased sales by 2%, this was more than offset by the 8% impact from divestitures and also we had negative currency impact of negative 2%.
I'd also remind you that we now recognize all charges related to acquisitions, divestitures and restructuring at corporate rather than at the segment level.
And we did it because we would hope would make it easier for you to do your forecast by quarter, by segment without the volatility that comes with these types of one-time charges.
Next on Page 6, we show our results for Electrical Americas.
Revenues down 29%, 9% decline organic revenue,19% impact from M&A and this was primarily the divestiture of the Lighting business and a small impact from negative currency as well of 1%.
Operating margins increased 130 basis points to 20.7% and these margins were certainly favorably impacted by the divestiture of Lighting, but also our teams did a great job of controlling costs to really counter the impact of the economic impact of COVID-19.
This combination resulted in a very strong decremental margin performance, up 16%.
So this segment continues to prove to be highly resilient when you look at margins, but also when you look at orders and backlog.
Orders increased 2.1% on a rolling 12-month basis with strength in residential and utility in data centers.
And of note here, our data center orders actually were up some 7% on a rolling 12-month basis.
And lastly, our bookings remain strong.
They were up 11% versus last year.
Turning to Page 7, we have our results for the Electrical Global segment.
Revenues were down 16% with 14% decline in organic revenues and 2% headwind from currency.
Operating margins here declined some 160 basis points, but to a very respectable 16% and decremental margins here were also very well managed, coming in at 26%.
Orders declined 4.6% on a rolling 12-month basis, but with most of the significant declines coming, as you would expect in global oil and gas markets and in industrial markets.
So, not an unexpected result with respect to where we saw strength and weakness.
And lastly, our backlog for Electrical Global increased 2% on a year-over-year basis.
On Page 8, we summarized our Hydraulics segment.
For Q2, revenues were down 32%, with a 30% decline organically and a 2% currency impact.
Operating margins were 9% and orders for the quarter were down 33.7% year-over-year and this was driven really by weakness in both OEMs and the distributor channel both.
We continue to work closely with Danfoss in completing the customary closing conditions and regulatory approvals and I would tell you that Danfoss organization remains excited about owning the business.
We do however now expect the transaction to close at the end of Q1 next year.
The delay as you can imagine, due to the COVID-19 impact, which has impacted the pace of some of the regulatory approvals that we expect.
On Page 9, we summarize results for the Aerospace segment.
Revenues declined 27% with a negative 35% in organic growth offset by 8% increase from the acquisition of Souriau.
Operating margins declined to 14.8% and really this is due to lower sales, but also the acquisition of Souriau also had a dilutive impact on margins.
Orders declined 12.8% on a rolling 12-month basis with particular weakness in the quarter, as you would expect in commercial OEM and aftermarket, it is worth noting, I would tell you though that orders for the military aftermarket were up 13% on a rolling 12-month basis.
Backlog was down 5% year-over-year overall.
Certainly, as everyone here understands the commercial aerospace markets are grappling with significant declines in passenger demand and this is impacting our business and certainly impacting both the OEM and the aftermarket.
Next on Page 10, we summarize the results for the Vehicle segment.
Revenues declined 59%, 52% of which was organic in addition to the divestiture of the Automotive Fluid Conveyance business which impacted revenues by 4%, we had 3% negative impact of currency.
The decrease in organic sales was really driven by I'd say, widespread customer plant shutdowns due to COVID-19, which really resulted in lower Class 8 OEM production as well as continued weakness in light vehicle production.
Just once again, it's a little bit more color on this one, during Q2, most of light and commercial OEMs had shutdowns at range between six and eight weeks.
These shut downs, which really began, let's say in late March, occurred throughout the month of April and extended into mid-May and so many of our customers were shut down for almost half the second quarter.
But production is now certainly beginning to come back online.
Global light vehicle market production was down 55% in Q2 and Class 8 OEM build was down from 70% in Q2.
We now project NAFTA Class 8 production to be 175,000 units for the year, which is down slightly from our prior forecast 189,000 units.
But still down some 49% from 2019.
This steep reduction and certainly -- this sudden reduction in OEM production led to operating margins of a negative 6.4%, but I would add, this business has once again done a great job managing decrementals and despite this tremendous reduction in revenue delivered a respectable decremental margin of 33%.
Not surprisingly, and much needed, we do expect better market conditions in the second half and our business will be well positioned to participate in this recovery.
Moving to Page 11, we have our eMobility segment.
Revenues were down 33%, all of which was organic.
Organic margins of negative 3.6% -- excuse me, operating margins of negative 3.6% primarily due to lower volumes and a particular weakness in the legacy internal combustion engine platforms.
And once again, the ongoing increase in R&D expenditure.
We continue to be enthused by the way, about the long-term potential of the business and and quite frankly, have seen nothing but upward revisions in the expectation for the penetration of electric vehicles.
And so a market that we still think will be very attractive long-term.
We're very well positioned once again with the common technology platforms that we're creating, leveraging the strength in our core Electrical business.
A good example of this idea of everything becoming more Electric is one of the recent wins that we've had with the truck OEM, a $21 million program for export power inverter where major commercial truck customer and so, in almost every aspect of our business there is more electrical content and we're well positioned once again through this particular segment to participate in that growth.
Overall, we've won programs with a value of approximately $500 million of mature-year revenue.
On Page 12, we show the details of our plans to accelerate and I'd say, expand our restructuring actions.
And I say accelerate because for the most part, we're pulling forward a number of the restructuring ideas that we would have done anyway.
Given the economic implications of the pandemic, we naturally have a greater sense of urgency and also more capacity to take on these projects.
We announced the $280 million multi-year restructuring program, as I noted, designed to eliminate structural costs and we've taken charges of $187 million in Q2 and then we expect to see additional cost of $93 million realized through 2022.
Just to characterize those additional dollars, we'd expect to deliver over the next three years some $33 million of charges in the second half of this year, $55 million in 2021 and $5 million in 2022.
We would expect to realize $200 million of mature-year benefits from these actions once they are fully implemented and we think full year implementation is 2023.
Approximately two-thirds of these costs are in our Industrial businesses, principally, Vehicle and Aerospace and the remaining one-third is with our Electrical sector, particularly with an emphasis on our oil and gas business that will report through our Electrical Global segment.
Naturally, we're focused on those businesses serving in the end markets that are more severely impacted by the pandemic.
And then, turning to Page 13, we do our best to provide Q3 outlook on revenues versus last year and while you can imagine that all these markets will be stronger than what we realized in Q2, this is really a year-over-year growth for Q3 versus last year.
For Electrical Americas, we expect organic revenues to be between down 2% and up 2%, so essentially flat.
With strength in residential, utility, data centers offsetting weakness in industrial markets.
For Electrical Global, our current view is organic revenues will decline between 10% and 14% with strength in Asia-Pacific.
And data center markets offset by declines in Europe and once again, in the oil and gas market.
For Aerospace, we expect organic revenues will be down between 28% and 32% with continued strength in Military offset by really significant declines in all of the commercial markets.
And Vehicle, we project revenues will decline between 30% and 34%.
Some markets are still very weak in absolute terms, but these markets will be up significantly from Q2.
And for eMobility, we expect declines of between 13% and 17%, once again pressured from legacy internal combustion engine platforms.
And lastly, for Hydraulics, we think market will be down between 23% and 27%.
Freight in overall, we're estimating Q3 revenues to be down between 13% and 17%, and so an improvement versus Q2, which was down some 20%, but still on absolute terms, where markets are still in decline.
Moving to Page 14, here we provide our best look at guidance for Q3 and some commentary on the full year, but for Q3, we expect organic revenues to decline between 13% and 17% and this really does include what we know about July, where we saw low double-digit declines.
We've elected not to provide full year revenue guidance given the kind of the ongoing uncertainty around the pandemic and its impact on markets in Q4.
As many of you aware, we are still dealing with the pandemic in various regions, the U.S. and around the world, we're still seeing a growth in the number of cases and so we're still living in this period of uncertainty.
We do think Q2 will be the trough for organic revenue declines and barring second wave of the pandemic, Q4 should be better than Q3.
For Q3 and full year, we expect decremental margins of between 25% and 30% and for Q3, we expect our tax rate on adjusted earnings to be between 15% and 16%.
We're maintaining our free -- 2020 free cash flow guidance, the range of $2.3 billion to $2.7 billion and I would note that this range does in fact, include now the impact related to the multi-year restructuring program that we announced, and that was not in our prior guidance.
As a point of reference, in the first half, just to give you some comfort around our ability to deliver this number, we generated some 35% of our $2.5 billion midpoint, that's in our free cash flow guidance and this number is very consistent with our performance over the last five years.
And so we do tend to be a bit back half loaded.
We're providing new guidance for share buybacks and we're seeing between $1.7 billion and $1.9 billion for the year.
And recall that we repurchase $3 billion of shares in Q1 with the proceeds in the lighting sales.
We continued to deliver free strong -- strong free cash flow and we now plan to buyback between $400 million and $600 million of our share is half of the year.
Number one, ensuring that we continue to move the company in the direction of becoming what we see as an intelligent power management company, that takes advantage of important secular growth trends and we talked about them being electrification, energy transition, LTE connectivity and blended power.
So these trends are continuing and despite whatever temporary hiccups we're experiencing, we think long-term it's the right place to be.
By doing so, we're working on creating a company that's going to deliver better secular growth and better growth through various cycles, higher margins and with much better earnings consistency.
Our long-term goals have not changed, it include 2% to 3% organic growth, 20% segment margins, 8% to 9% earnings per share growth and $3 billion a year of free cash flow, and with our strong cash flow we'll continue to be focused and disciplined in how we deploy it.
By investing in organic growth as a top priority, delivering top quartile dividends and ongoing program of share buyback and then actively managing our portfolio, while being a disciplined acquirer.
So we continue to remain excited by the Eaton's story, I hope you are as well.
Before we start our Q&A of our call today, I do see that we have a number of individuals in the queue with questions, so I appreciate if you can limit your opportunity just to one question and a follow-up.
| compname says q2 sales fell 30%.
q2 sales fell 30 percent to 3.9 billion usd.
q2 earnings per share 0.13 usd.
qtrly organic sales were down 22 percent.
expect restructuring program to deliver mature year benefits of $200 million when fully implemented in 2023.
2020 full year free cash flow guidance reaffirmed at $2.3 billion to $2.7 billion.
adjusted earnings per share of $0.70 for q2 excluding charges.
|
It's been six months since the pandemic was officially declared and I think the world is at the beginning of an Ironman Triathlon.
It's not just a marathon but a triathlon of endurance, agility, change.
In fact, I think over the next two years, we're going to see more change than we've seen in the past 10.
Change will circle humanity.
And in business, different work will need to get done and work will need to get done differently.
Almost every company on the planet is going to have to reimagine their business, whether that's rethinking their organizational atmosphere, their structure, roles, responsibilities, how they compensate, how they engage, how they develop their workforce.
There is -- change is going to be all around us.
They're going to need to hire learning, agile, diverse talent, and do so in a more inclusive ethos and in an increasingly digital world and that's the essence of Korn Ferry's business, to enable people and organizations to exceed their potential, to be more of them.
In early March, we were announcing the best results in our history.
Record fee revenue and the continued transformation from a monoline firm to an organizational consultancy.
And then the world temporarily paused.
Certainly that pause temporarily impacted our business.
During the first quarter of our fiscal year, we generated about $344 million in fee revenue, which was down about 28% in constant currency.
But I think the key word is temporary.
As we alluded on our last call, we're continuing to see green shoots, with July new business better than June, June better than May, and May better than April.
Trailing new business for the three months ended August was down about 13% year-over-year combined, which is obviously more positive than we saw in our first quarter in what we saw when the world stopped in April.
In fact, August new business was only down about 6% year-over-year.
So really good news.
July new business was up 34% over June.
So again, green shoots that we're seeing.
And I think I'm -- more than anything I'm proud, proud of our organization and motivated by how we've positioned ourselves for the opportunity ahead, and we face this crisis from a position of strength, not only when you consider the breadth and depth of our solutions, but when you consider our balance sheet.
And the foundation of the firm has been to ground it in [Phonetic] IT [Phonetic] and data.
And that continues to be the backbone of Korn Ferry.
We've got rewards data on over 20 million people, 25,000 companies, we've done almost 70 million assessments, we have thousands of organizational benchmark data, we've got thousands of success profiles, every year we train and develop 1 million professionals a year, and certainly last but not least is we place a candidate at each business hour, every three minutes.
And so we're using this time of change not only to have an impact with our clients, but also to reimagine our own business.
And that includes moving from analog to digital including in our assessment and learning business, which today it's almost 25% of the company and we're certainly shifting that business.
We've done more virtual sessions in the last couple of months than we've done in the last many, many months.
The pipeline is good.
We pivoted very quickly.
I can't be prouder of our team.
And when you look at the uptick here month over month in both our Consulting and Digital new business, you can see that something is working.
And on the recruiting side, that's another place where we are reimagining that business as well through AI technology and a lot of the platform that we use in RPO.
We've taken this IP.
We've taken it out to the marketplace.
I'm very proud in terms of the stance we have taken.
I think our biggest opportunity as a company is to recast the Korn Ferry brand.
We recently launched Leadership U, a curriculum that helps leaders taking on today's challenges.
And more importantly, amid all the calls for change, we're amplifying our voice, not only on diversity, but also in equity and inclusion, both within Korn Ferry and among our clients.
And we know from our research that diversity is a fact, engagement is an emotion, but inclusion is a behavior.
And so, our focus on D&I, it's about -- actually it's about eight years ago almost -- actually it was two days ago eight-year anniversary of us making an investment in a company at that time was called Global Novations.
We've turned that into what I consider to believe the absolute best D&I consulting business in the world.
And as I mentioned, our July Consulting new business was the fourth highest month in our history.
And I think that was driven in part by the strong voice we've taken not only around the pandemic, but also around D&I.
And I'm also proud and pleased to say that we're launching Leadership U for Humanity and that's a non-profit venture of the Korn Ferry charitable foundation, focused on developing the total mosaic inside communities and within corporations.
One of our partners will be the Executive Leadership Council, an absolute preeminent organization.
Their mission is to develop/increase the number of successful Black executives around the goals -- around the globe.
And our goal is to develop 1 million new leaders from diverse backgrounds using our Korn Ferry Advance and Leadership U platforms.
And so not only I think we demonstrated that we say what we mean, but we're not just talking about it, we're being about it and providing a systemic solution to a systemic issue.
And so out of tomorrow's change, a new order is emerging, and Korn Ferry is going to help drive that change, helping people and organizations be more of them.
With that, I am joined here by Bob Rozek and Gregg Kvochak.
Before I jump into the first quarter results, I want to just elaborate on a couple of points that Gary talked about.
I think he's absolutely right, concerning the amount of change that will take place in the next two, even three or four years.
We're already seeing it in our clients.
I truly believe that Korn Ferry is uniquely positioned to lead companies through this change.
The data, IP and know-how that Gary talked about, really sits at the center of our organization and permeates all of our solutions.
And that provides a common harmonized language for talent that's really core to our One Korn Ferry integrated approach to helping clients solve their thorniest business issues through the most valuable asset, which obviously is the people.
Again, I believe we're uniquely positioned because we're the only firm that has the end-to-end data, IP and know-how to address every aspect of an employee's engagement with his or her employer.
Not only do we have first-mover advantage, but in my opinion, our position and our collection of assets is virtually impossible to replicate.
So as I sit here today in the midst of this wave of change with the collection of assets and solutions we've assembled, my optimism for Korn Ferry's future growth prospects have never been higher.
Now let me turn my attention to the first quarter.
I'll start with a few highlights before turning it over to Gregg, and then I'll come back on and address recent business trends.
For the first quarter of fiscal year '21, our fee revenue was $344 million, down about 28% in constant currency.
More importantly, our monthly fee revenue trends within the quarter showed signs of stabilization.
Consolidated fee revenue in May was down about 34% year-over-year, while June and July were down 27% and 26%, respectively.
For each of our service offerings, we saw fee revenue slowing at different rates, which really was in line with our expectation and reflects the diversification and mix shifts that we've been communicating.
Specifically, fee revenue in the first quarter, measured at constant currency, was down 37% for Executive Search, 35% for Professional Search, our Consulting was down 26%, RPO was down 22%, and Digital was down 2%.
Driven by the revenue contraction, our consolidated adjusted EBITDA for the first quarter was $10.6 million with an adjusted EBITDA margin of 3.1%, and our adjusted fully diluted loss per share was $0.19.
Our balance sheet and liquidity remained strong.
At the end of the first quarter, cash and marketable securities totaled $733 million.
Excluding amounts reserved for deferred comp and for accrued bonuses and actually net of the funds used to rightsize the firms, our investable cash balance at the end of the first quarter was about $511 million, and that's up about $150 million year-over-year.
We continue to have undrawn capacity of $645 million on our revolver.
So altogether, we have close to $1.2 billion in liquidity to manage our way through the COVID-19 crisis and to invest back into the business through the recovery.
Last, we had about $400 million in outstanding debt at the end of the quarter.
Finally, during the quarter, we completed our restructuring actions to size the firm for the anticipated current levels of revenue.
As you will recall, in April, just before the end of our fiscal fourth quarter of FY '20, we announced a number of cost actions targeted at both compensation expense, which included layoffs, furloughs and across the board salary cuts, as well as other actions focused on the reduction of G&A.
Combined with the actions completed in the first quarter, we have initially reduced our cost base by about $321 million annually.
Starting with our Digital segment.
Global fee revenue for KF Digital was $56 million in the first quarter and down approximately $2 million or 2% year-over-year measured at constant currency.
The subscription and licensing component of KF Digital fee revenue in the first quarter was approximately $21 million, which was up $6 million year-over-year and flat sequentially.
New business in the first quarter for the Digital segment was down approximately 3% globally year-over-year at constant currency with the subscription and licensing component up approximately 40%.
Adjusted EBITDA in the first quarter for KF Digital was $7.9 million with a 14.2% adjusted EBITDA margin.
Now turning to Consulting.
In the first quarter, Consulting generated $99 million of fee revenue, which was down approximately 26% year-over-year at constant currency.
As clients have settled into their new work from home protocols and have become more familiar with our virtual delivery capabilities, new business for our Consulting services has begun to improve.
Measured year-over-year at constant currency, new business in the first quarter for our Consulting segment was down approximately 4%, led by North America, where new business was up 11% year-over-year.
Adjusted EBITDA for Consulting in the first quarter was $6.6 million with an adjusted EBITDA margin of 6.6%.
RPO and Professional Search generated global fee revenue of $68 million in the first quarter, which was down 27% year-over-year at constant currency.
RPO fee revenue was down approximately 22%, and Professional Search fee revenue was down approximately 35% year-over-year measured at constant currency.
Adjusted EBITDA for RPO and Professional Search in the first quarter was $6 million with an adjusted EBITDA margin of 8.8%.
Finally, for the Executive Search, global fee revenue in the first quarter of fiscal '21 was approximately $120 million, which compared year-over-year and measured at constant currency was down approximately 37%.
At constant currency, North America was down 38%, while both EMEA and APAC were down 35%.
The total number of dedicated Executive Search consultants worldwide at the end of the first quarter was 510, down 59 year-over-year and down 46 sequentially.
Annualized fee revenue production per consultant in the first quarter was $900,000 and the number of new assignments opened worldwide in the first quarter was 1,115, which was down approximately 34% year-over-year, but up 9% sequentially.
Adjusted EBITDA for Executive Search in the first quarter was approximately $8.1 million with an adjusted EBITDA margin of 6.7%.
Globally, year-over-year declines in monthly new business exiting fiscal year '21 Q1 and entering the second quarter continued to stabilize.
Excluding new business awards for RPO, global new business measured year-over-year was down approximately 31% in May, down 25% in June, rebounding to down 5% in July.
Measured sequentially, June new business was up 17% over May and July new business was up 34% compared to June.
With summer vacations, August is a seasonally slow month and normally is lower relative to July.
Measured year-over-year, August new business was stable and down about 6%, which is in line with what we saw in July.
Monthly new business trends have varied by segment and have, in some cases, been choppy month-to-month.
Digital new business was up 3% year-over-year in June, down 5% year-over-year in July and up 10% in August.
Likewise, Consulting new business was down 28% year-over-year in June, rebounding to up 34% in July and up 10% in August.
For Executive Search, new business was down 34% year-over-year in June, improving to down 27% in July and was down 19% in August.
And finally, Professional Search new business was down 15% year-over-year, falling to down 23% in July and August.
With regards to RPO, a strong quarter of new business with $56 million of global awards and that was comprised of $32 million of new clients and $24 million of renewals and extensions.
And we continue to have a strong pipeline of new business in the RPO world [Phonetic].
Approximately two months have passed since our last earnings call, yet there remains significant uncertainty about the ultimate impact of COVID-19 on society and global economies.
Currently, governments are struggling to balance reopening and reengaging in an effective way against the maintenance of an environment that fosters the health and safety of everyone.
There really is no playbook.
This effort takes on many forms, and there's not a clear path to success.
Further, it's unclear whether certain governmental a programs that were put in place to provide financial assistance to impact the businesses and individuals, whether they will remain in place or for how long.
The unprecedented nature of the current environment, combined with many unanswered questions and rapidly changing data points, like the recent acceleration of corporate layoffs and the potential outcome of the US presidential election, that really continues to cloud the near-term predictability of our business.
And consistent with our approach in the last two earnings calls, we will not issue any specific revenue or earnings guidance for the second quarter of fiscal year '21.
We're glad to take any questions you may have.
| q1 adjusted loss per share $0.19.
will not issue any specific revenue or earnings guidance for q2 of fy'21.
|
With me on the call today are Seamus Grady, chief executive officer; TS Ng, chief financial officer; and Csaba Sverha, vice president of operations, finance, and CFO designate.
We had a very strong second quarter, with financial results that exceeded all of our guidance metrics, including record quarterly revenue.
This performance was driven by sequential growth in nearly all areas of our business.
With end market demand stabilizing, we expect to see continued year-over-year growth in the third quarter.
Revenue in the second quarter was 426 million, up 7% from the first quarter and 6% from a year ago.
Revenue upside largely fell to the bottom line with non-GAAP net income of $1 per share, which was also above the top end of our guidance range.
Gross margin was 11.9%, and we continue to anticipate non-GAAP gross margins to be within our target range of 12 to 12 and a half percent for the full year.
Looking at our business by end markets.
Optical communications revenue was 322 million, up 6% from the first quarter.
This represented 76% of total revenue, consistent with the first quarter.
Within optical communications, telecom revenue was 248 million, up 8% from the first quarter and 20% from a year ago, and represented 77% of optical revenue.
Our Berlin transfer program with Infinera, again, contributed to our telecom growth, and the program was fully ramped at the end of the quarter as anticipated.
Datacom revenue in the second quarter was 74 million, a slight increase from Q1, which was better than we had anticipated as demand trends for these products continue to stabilize.
Datacom represented 23% of optical communications revenue.
By technology, silicon photonics-based optical communications revenue increased by 7% from the first quarter to 82 million, and represented 26% of optical communications revenue.
Revenue from QSFP28 and QSFP56 transceivers was 48 million, up 3 million from the first quarter.
By data rate, 100-gig programs represented 49% of optical communications revenue at 159 million, and products rated at speeds of 400 gig and above continued to see rapid growth, up 31% from the first quarter to 49 million.
Looking at our non-optical communications business, revenue of 104 million was up from 97 million in the first quarter, which was also better than expected.
We were pleased to see the demand for industrial lasers improve, and as a result, revenue for these products was also better than expected at 46 million, compared to 41 million in the first quarter.
We remain optimistic that over the longer-term, industrial laser manufacturers will increasingly leverage outsourcing to remain globally competitive.
And we believe we are uniquely positioned to be a leader in serving this market as the opportunity evolves.
Automotive revenue moderated to 21 million, reflecting normal quarter-to-quarter variability from next generation automotive programs and which we expect to return to growth in the third quarter.
Sensor revenue increased slightly to 3.9 million from 3.5 million.
Finally, revenue generated from other non-optical applications grew 20% sequentially to 33 million, mainly from Fabrinet West.
During the quarter, we saw additional programs that had ramped production at Fabrinet West transferred to Bangkok where we anticipate their volumes will continue to grow.
This is another illustration of the success of our new product introduction model which we will continue to leverage in Santa Clara and we are gearing up to extend to Israel in the coming months.
At the same time, the success of our program with Infinera demonstrates our ability to build complete network systems, while offering economic advantages to our customers.
We believe there could be additional opportunities for us to vertically integrate from the component level, up to the system level, that can provide additional business to Fabrinet, while simplifying the supply chain for our customers, and we have been actively pursuing these opportunities.
And today, I am pleased to announce that after the close of the second quarter, we were awarded a significant new project by Cisco which will further build on our successful partnership.
While it is still early days, we believe that if this program ramps as anticipated, that Cisco could represent 10% of revenue or more for Fabrinet in fiscal 2021.
We look forward to sharing more on this program as it progresses.
We're extremely grateful to TS for his contributions over the years to Fabrinet, and for his commitment to ensuring a smooth transition.
TS will be reporting to me as EVP special projects during this transition period.
His dedication and positive attitude are a model for us all, and we wish him the best in his well-deserved retirement.
Csaba has been vice president of operations finance at Fabrinet for almost two years now, and I have had the pleasure of working directly with Csaba in the past.
He displays all the characteristics that have had a meaningful hand in Fabrinet's past success, including integrity, collaboration, and commitment to success.
I am confident that Csaba will play a leading role in helping Fabrinet get to our next level of performance.
While our third-quarter results often reflect a small seasonal down-take, guidance that we are providing for the third quarter also includes the anticipated impact from extended shutdowns in China due to the coronavirus outbreak.
Specifically, the Lunar New Year week-long shutdown at our Casix facility in Fuzhou, China, which manufactures custom optics components, has been extended from one week to two weeks ending February 10th.
In addition, some of our third-party suppliers in China are also impacted by shutdowns.
This has a direct impact on our top and bottom-line expectations, and is considered in the guidance we are providing for the third quarter.
News related to the coronavirus is rapidly evolving, and our top priority is to keep our employees safe, and will continue to monitor the situation.
In summary, we are pleased with our stronger than expected performance in the second quarter, and we're excited about our new business activity.
While we anticipate that coronavirus outbreak will result in a larger than normal sequential revenue decline in the third quarter, I believe we remain well positioned to extend our business success and market leadership as we look ahead.
I would like to congratulate Csaba on his appointment, and I am committed to making sure his transition to the CFO position is smooth.
Now turning to our results.
I will provide you in more details on our financial results for the second quarter, and then we'll introduce Csaba to provide our guidance for the third quarter of fiscal year 2020.
Total revenue in the second quarter of fiscal year 2020 was 426.2 million, above the upper end of our guidance range, and a quarterly record.
Non-GAAP net income was $1 per share, and was also above our guidance range, even after a foreign exchange headwind of 1 million, or approximately $0.03 per share.
Non-GAAP gross margin in the second quarter was 11.9%.
We continue to expect gross margin to be within our target range for the year.
Non-GAAP operating expense was 12.3 million in the second quarter.
As a result, non-GAAP operating income was 38.5 million, and non-GAAP operating margin was 9%.
Taxes in the quarter was 2 million, and our normalized effective tax rate was less than 5%.
We continue to expect our effective tax rate to be 5 to 6% for the full year.
Non-GAAP net income was above our guidance range at 37.7 million in the second quarter or $1 per diluted share, as I indicated earlier, on a GAAP basis, which includes share base compensation expenses and amortizations of debt issuing costs, net income for the second quarter was 31.2 million or $0.83 per diluted share, also above the high-end of our guidance.
Turning to the balance sheet and cash flow statement.
At the end of second quarter, cash, restricted cash, and investments was 450.5 million compared to 436.4 million at the end of the first quarter.
Operating cash flow in the quarter was 50 million, and with capex of 9.1 million, free cash flow was 40.9 million in the second quarter.
During the quarter, our working capital returned to neutral level as we began consuming the transfer inventory and collecting receivables.
We did not repurchase any shares during the quarter.
62.2 million remain in our share repurchase program.
We will continue to evaluate market conditions to opportunistically purchase shares when possible.
I appreciate your professionalism, and have enjoyed working with all of you.
I wish you all nothing but the best.
I will now invite Csaba to give our FQ3 guidance.
I'm looking forward to stepping up as the next CFO at Fabrinet.
TS has been a great mentor, and my aim is to maintain the transparent and open level of dialogue with investors that TS has had.
I'm looking forward to a smooth transition, including getting to know those of you attending OFC in March, or other investor events in the coming months.
I would now like to turn to our guidance for the third quarter of fiscal year 2020.
After the record quarterly revenue performance in Q2, we expect to maintain our year-over-year growth in the third quarter.
We anticipate that the third-quarter revenue will moderate more than the usual seasonal impact as a result of the coronavirus outbreak in China.
For the third quarter, we anticipate revenue to be between 410 and 418 million.
From an earnings per share perspective, we anticipate non-GAAP net income per share in the third quarter to be in the range of $0.92 to $0.95, and GAAP net income per share of $0.75 to $0.78, based on approximately 37.9 million fully diluted shares outstanding.
In conclusion, we are pleased with our strong performance in the quarter.
We are excited about our business momentum, and despite a small near-term impact of coronavirus outbreak, we remain optimistic that we can continue to build shareholder value over the longer-term.
| compname posts q2 earnings per share of $0.83.
q2 gaap earnings per share $0.83.
sees q3 revenue $410 million to $418 million.
q2 revenue $426.2 million versus refinitiv ibes estimate of $413.2 million.
sees q3 2020 non-gaap earnings per share $0.92 to $0.95.
sees q3 2020 gaap earnings per share $0.75 to $0.78.
csaba sverha to succeed ts ng as chief financial officer.
|
With me on the call today are Seamus Grady, chief executive officer, and Csaba Sverha, chief financial officer.
Before I discuss the details of our results, I would like to tell you about how we are handling COVID-19.
We are very fortunate that COVID-19 has not impacted our ability to keep our factories running globally.
Needless to say, we greatly appreciate the extraordinary efforts of our employees and their families, our suppliers, and of course, our customers for their continued dedication and hard work during this challenging time.
We've taken great measures to ensure the safety of our employees and their families, and we are pleased to report that we are operating at 100% capacity and that our employees are well.
Extreme flexibility, decisive response to the crisis, excellent leadership and teamwork, together with excellent partnerships with our customers and suppliers, helped us make immediate changes to our build schedules and operating protocols to meet the volatile demand resulting from the crisis.
We came to know about the COVID-19 issues from Casix, our factory in China, in late January.
The information received from our staff during the Chinese New Year was very disconcerting as the virus was reported to be similar to the SARS virus of 2003.
We immediately implemented all of the measures taken in our China factory across all of our factories, starting the first week of February.
We continued to enhance the measures as recommended by the CDC, the World Health Organization, local and federal governments of the regions where we operate as well as based on our own research on the subject.
The measures include monitoring body temperatures of all people entering the factories, cutting down on visitors, banning visitors from regions heavily hit by the virus, mandatory social distancing, frequent washing of hands, wearing face masks, stopping large group meetings, providing disinfectant in all areas of the factories and special training of staff on the symptoms and precautions to be taken in the factory and at home.
We encouraged staff to work from home where possible and mandated that all vulnerable staff work from home.
By mid-February, we started disinfecting all material coming in to ensure it was virus free before it was issued to the manufacturing lines.
Despite the challenges we faced, we demonstrated the flexibility inherent in our business model to produce financial results that were within our guidance range in our fiscal third quarter, with revenue of $411 million and non-GAAP net income of $0.92 per share.
This nimbleness also enabled us to generate significant free cash flow.
Looking at some of the details of the quarter.
Our high-level business mix was relatively consistent with our recent history, with 75% of revenue from optical communications and 25% from non-optical communications.
Optical communications revenue of 309 million was down 4% from the second quarter but up 3.5% from a year ago.
Within optical communications, telecom revenue was 224 million, down 10% from the second quarter but up 3% from a year ago, reflecting some inventory adjustments associated with certain next-generation programs.
Datacom revenue of 85 million rebounded nicely and was up 14% from the second quarter and up 5% from a year ago.
By technology, silicon photonics-based optical communications revenue increased 5%, both from the second quarter and from a year ago, to 86 million and represented 21% of total revenue.
Revenue from QSFP28 and QSFP56 transceivers also continued to grow and was up 7% from the second quarter and 17% from a year ago at 51 million or 12% of total revenue.
By data rate, 100-gig programs grew 1% from the second quarter and 10% from a year ago to 161 million.
Products rated at speeds of 400-gig and above declined 41% from the second quarter but grew 25% from a year ago to 29 million.
Looking at our non-optical communications business.
Revenue of 103 million was essentially flat from the second quarter and up 2% from a year ago.
Demand for industrial lasers was also flat sequentially with revenue of 46 million.
During the third quarter, we reclassified certain revenue from other non-optical revenue to automotive to better represent the end market being served.
As such, automotive revenue was 31 million and other revenue was 22 million.
Excluding the impact of this reclassification, revenue from automotive and other non-optical revenue would have been consistent with the second quarter.
Sensor revenue was 3 million.
As we look to and beyond the fourth quarter, it's clear that there is extraordinary uncertainty ahead.
In light of this, I wanted to share some thoughts on how the COVID-19 crisis could impact our business going forward.
On the one hand, with work-from-home protocols in place around the world, demand for Internet bandwidth has grown substantially.
Clearly, the next-generation telecom and datacom products we manufacture for our customers, which make up about three-quarters of our revenue, are critical to expanding network capacity.
This will continue to be a positive driver for Fabrinet.
On the other hand, we could continue to see regional downward demand adjustments if outbreaks return.
In addition, markets for other products we manufacture such as industrial lasers and automotive are likely to see reduced demand in a prolonged economic downturn.
Our approach toward managing shifting customer demand remains unchanged.
Our employee wellbeing remains our top priority, and that means we will continue to follow intense safety protocols at all of our facilities.
At the same time, the availability of parts and materials we need to manufacture are likely to face variability.
And we will continue to work closely with our customers and suppliers to identify solutions to satisfy our customers' demand.
These supply chain constraints are the primary factor that has pressured our gross margin in the third quarter and will likely continue to do so in the foreseeable future until the COVID-19 impact settles down.
Because of this, we now expect our gross margin to be in the range of 11.5 to 12% or slightly below our target range of 12 to 12.5% for the full year.
And we could see this pressure continue into early fiscal 2021.
Fortunately, our business model remains extremely resilient and agile.
More than 90% of our costs are variable, with components and materials making up the greatest portion of our costs.
Because of this, we are able to quickly adjust manufacturing costs to manage changing demand dynamics.
As such, we believe we can maintain industry-leading gross margin levels despite the demand churn and material availability challenges.
From an operating expense perspective, we continue to be a very lean organization and do not foresee meaningful expansion of operating expenses in the near future.
From a balance sheet perspective, we remain very well capitalized with over $465 million in cash and investments and total debt of approximately $55 million.
In addition, we continue to generate significant cash flow and anticipate maintaining that position in the upcoming quarters.
In summary, we're in a very dynamic business environment and our within guidance performance in the third quarter is a strong reflection of our resiliency and agility.
This ability to quickly respond to shifting markets has been a part of Fabrinet's core strategy since our inception, and its value becomes most apparent when the environment gets challenging.
As such, we believe we are uniquely positioned to continue to thrive during and post the COVID-19 crisis.
I will provide you with more details on our financial results for the third quarter and our guidance for the fourth quarter of fiscal year 2020.
Total revenue in the third quarter of fiscal year 2020 was 411.2 million, within our guidance range and slightly below our record second-quarter performance as anticipated.
Recall that in our last call, our revenue guidance incorporated an 8 million to $10 million impact from COVID-19.
During the quarter, we have demonstrated our extreme flexibility to produce financial results that were within our guidance changes even though the actual impact on revenue from the pandemic was 12 to $15 million or 4 to $5 million more than we originally anticipated.
Non-GAAP net income was $0.92 per share, which was at the lower end of our guidance range, even after the greater-than-expected effects on both revenue and expenses that Seamus discussed.
Now, turning to the details of our P&L.
Seamus described a number of extraordinary efforts we are going through during COVID-19 to remain operational while also keeping our employees safe.
Combined with the revenue impact, gross margin was below our target range at 11.2% in the third quarter.
Non-GAAP operating expense was $12.2 million in the third quarter, flat with Q2.
As a result, non-GAAP operating income was 33.7 million, and non-GAAP operating margin was 8.2%.
Taxes in the third quarter were 1 million and our normalized effective tax rate was 2.4%.
With revenue streams coming from more advantageous tax jurisdiction, we now expect our effective tax rate to be below 5% for the full year.
Non-GAAP net income was 34.8 million in the third quarter or $0.92 per diluted share, as I indicated earlier.
On a GAAP basis, which includes share-based compensation expenses and amortization of debt issuance costs, net income for the third quarter was 28.3 million or $0.75 per diluted share, also within our guidance range.
Turning to the balance sheet and cash flow statement.
At the end of the third quarter, cash, restricted cash and investments were 465.2 million, up from 450.5 million at the end of the second quarter.
Operating cash flow in the quarter was 51.8 million.
And with capex of $12.1 million, free cash flow was $29.8 million in the third quarter.
On a year-to-date basis, operating cash flow was 104.4 million and free cash flow was 77 million.
From a capital allocation perspective, we remain committed to returning value to shareholders and have been focused on opportunistically repurchasing share in the open market as permitted.
During the quarter, we repurchased 355,000 shares at an average price of $58.27 for a total cash outlay of 20.7 million.
At the end of the quarter, we have 41.5 million remaining in our share repurchase program.
We will continue to evaluate market conditions to opportunistically repurchase additional shares when possible.
I would now like to turn to our guidance for the fourth quarter of fiscal year 2020.
We believe that long-term growth trends are intact for the markets we serve and that the current environment in many respect highlight the importance of products we manufacture.
That said, we are not immune from the broader factors that are impacting some of our customers, and this is reflected in our revenue guidance, which calls for a sequential decline of 6% at the midpoint.
At the same time, the market uncertainty is greater than we have seen in some time.
As such, we are expanding our guidance ranges to reflect this.
For the fourth quarter, we anticipate revenue to be in the range of 370 to 400 million, including a 25 to 35 million impact from COVID-19-related uncertainties.
We are also reflecting in our guidance an approximately 15 million impact as a result of an inventory correction from one of our customers.
As you'd anticipate from the factors that impacted our gross margin in the third quarter, many of which will extend into upcoming quarters, we expect gross margin to be in the range of 11.5 to 12%, slightly below our target range of 12 to 12.5% for the full year of fiscal 2020.
From an earnings perspective, we anticipate non-GAAP net income per share in the fourth quarter to be in the range of $0.80 to $0.92 and GAAP net income per share of $0.64 to $0.76, based on approximately 27.6 million of fully diluted shares outstanding.
In conclusion, we are pleased to see our resilient business model work successfully at a volatile time.
While we see the potential for even greater uncertainty ahead, our flexibility and agility leaves us well positioned to protect our business during this pandemic.
We believe we can exit the crisis in an even stronger position and continue to be optimistic about our prospects to deliver shareholder value over the longer term.
| compname posts q3 non-gaap earnings per share of $0.92.
q3 non-gaap earnings per share $0.92.
q3 gaap earnings per share $0.75.
sees q4 revenue $370 million to $400 million.
q3 revenue $411.2 million versus refinitiv ibes estimate of $414.1 million.
sees q4 2020 non-gaap earnings per share $0.80 to $0.92.
sees q4 2020 gaap earnings per share $0.64 to $0.76.
|
Today, you will hear from our president and chief executive officer, Tom McInerney, followed by Dan Sheehan, our chief financial officer and chief investment officer.
Our actual results may differ materially from such statements.
Also, references to statutory results are estimates due to the timing of the filing of the statutory statements.
Sarah has been with Genworth for 10 years and she held several leadership roles in Genworth's finance organization.
She knows Genworth and our two businesses very well.
We refreshed Genworth's board of directors over the last two years with the addition of four new directors who received strong support at Genworth's May 2021 annual shareholders' meeting.
As more fully described in our proxy statement issued last April, our new directors bring excellent credentials to the board, and they've already stepped up to challenge management and guide the company forward.
Melissa was appointed executive vice president and chief human resources officer.
She's a strong advocate for our people and understands the vital role they play in delivering current results and implementing our vision for the future.
She has played a leading role on Genworth's HR team, including working with Genworth's various businesses and functional units.
She will focus on our post-COVID strategy, our return-to-work arrangements, talent management and talent development of Genworth's key leaders and managers.
Greg was named executive vice president and general counsel.
Greg hails from Brooklyn and has a strong litigation background.
He led Genworth's litigation function for many years.
He was also instrumental in the resolution of the AXA litigation with Genworth and as Genworth's Chief Liaison with AXA in their ongoing legal dispute with Banco Santander.
life division for many years.
Let me now turn to Genworth's outstanding performance for the full year 2021.
Genworth's U.S. GAAP net income for the full year was $904 million.
Adjusted operating income for 2021 was $765 million.
Adjusted operating income was $1.48 per share, which is well above analysts' expectations and our own internal projections.
These outstanding results were led by a record year for NAT and adjusted operating income available to Genworth shareholders in 2021 was $520 million.
life and runoff achieved excellent financial results during 2021.
Full year adjusted operating income for U.S. life and runoff combined was $321 million, led by strong LTC adjusted operating income of $445 million for the year.
GAAP accounting regime based on new long-duration targeted improvement or LDTI rules, Genworth will also be highlighting U.S. life's statutory results.
statutory results when assessing the financial condition and performance of life insurers.
Therefore, because of the importance that insurance regulators put on statutory accounting and the fact that future statutory results will be based on a consistent methodology, we think that highlighting these results going forward will provide important additional information for shareholders and investment analysts.
We have included our statutory information through September 2021 on pages 15 and 16 of the investor deck.
life statutory after-tax net income for the full year to be approximately $660 million.
The strong net income result was driven by outstanding results for LTC, with pre-tax statutory income of approximately $910 million in 2021.
The GLIC consolidated statutory balance sheet was significantly strengthened this year.
We expect GLIC's capital and surplus to increase from $2.1 billion at the end of 2020 to approximately $2.9 billion at year-end 2021.
Similarly, GLIC's negative unassigned surplus is expected to improve from negative $1.8 billion to approximately negative $1.0 billion at year-end.
GLIC's RBC ratio at year-end 2021 is projected to be approximately 290, an increase of approximately 61 points from 229 at the end of 2020.
The significant improvements in the GLIC RBC ratio and statutory balance sheet were driven by excellent statutory net income in 2021, primarily from the strong LTC results.
The year-end statutory results in RBC calculations are preliminary as they are still under review and they will be filed with our year-end statutory filings.
I'm very pleased with our strong statutory results for the year.
Moving on from our strong 2021 financial results.
I want to provide an update on the five strategic priorities we announced last year.
The first strategic priority is to maximize the value of our equity position in Enact to benefit Genworth's shareholders.
Genworth's board considered several different options for Enact in 2021, including selling 100% of Enact, maintaining 100% ownership before deciding ultimately to move forward with a partial IPO.
Our objective has always been to protect and ultimately unlock Enact's value, enabling us to maximize value for Genworth shareholders over the longer term.
The various third-party sale transactions we considered were either not supported by regulators or involves significant regulatory risks, which we would potentially delay the timing of returning cash proceeds to Genworth shareholders.
Genworth therefore decided to proceed with a partial IPO and sold approximately 18.4% of Enact shares, which we believe was the best viable option for shareholders.
Genworth's 81.6% retained interest will allow us to receive significant future cash flows from Enact to enable delevering at Genworth and return of capital to Genworth shareholders.
But at the same time, we retain future optionality with our holdings in Enact, including a tax-free spinoff to Genworth's shareholders, as well as other options.
Genworth has decided that retaining our current holdings in Enact for the foreseeable future is the best option.
As we achieve our debt target and return capital to Genworth shareholders, we will continue to be open to other options in the future.
In the interim, we believe Enact has various levers to create near and long-term value, and Genworth will continue to advance initiatives that support Enact's value as the majority owner like debt reduction and other levers to further improve our holding company ratings, which we'll discuss later.
I'm extremely proud of the significant progress achieved in 2021 on our second strategic priority, which is to reduce Genworth's holding company debt to approximately $1 billion.
This has been a long-term objective for the company because this amount of debt is much more appropriate given Genworth's annual operating cash flows to the parent holding company.
We reduced our outstanding debt by approximately $2.1 billion last year, including paying off the AXA promissory note and redeeming the $400 million of parent holding company debt due in 2023.
We now have approximately $1.2 billion of parent holding company debt outstanding.
However, because Genworth ended the fourth quarter with cash of $356 million, our net debt position is already below $1 billion.
We will look to continue to reduce our debt to meet our target in the near term.
Looking at other key indicators of balance sheet strength.
Our U.S. GAAP debt to capital ratio at the end of the year was 13%, one of the lowest among life insurers that report this metric.
Looking ahead, we expect Genworth's interest coverage ratio to improve significantly.
After we retire the remaining of Genworth's $280 million of debt due in 2024, our pro forma cash flow coverage will be approximately five times based on a conservative view of projected future cash flows.
We are hopeful that with a substantial reduction in outstanding parent holding company debt in 2021, our improved cash interest coverage ratio, significant excess cash available to repurchase our outstanding 2024 debt, the long duration of the remaining 2034 and 2066 debt and the expectation of continued strong U.S. statutory net income that the rating agents will continue to upgrade the parent debt ratings over time.
The third strategic priority is perhaps the most important priority for the next several years.
Since the end of 2012, Genworth has made outstanding progress on moving the legacy LTC portfolio closer to breakeven.
We continue to define our multiyear LTC rate action plan, or MYRAP.
During 2021, Genworth delivered a new record for approved LTC rate increases of $403 million from 45 states on 173 separate rate filings.
The net present value of the 2021 LTC rate increases was approximately $2.3 billion.
During the fourth quarter annual LTC assumption review, we made long-term assumption changes mainly to our benefit utilization trend assumptions based on cost of care growth.
2021 margins reflect the updated unfavorable benefit utilization trend assumptions fully offset by higher model future in-force rate actions.
Our 2021 LTC margins remain positive, in the $0.5 million to 1 -- $0.5 billion to $1 billion range, and the assumption update did not cause a financial statement impact in the quarter.
Dan will review the assumption changes in more detail during his remarks.
We have the strongest and most experienced LTC premium increase team in the industry, led by Jamala Arland.
Jamala Arland and her team are continuously improving the LTC projection models to capture more accurate data and determine the level of actuarial active premium increases to request.
Regulators have a high regard of Genworth's LTC projection models, which have made the premium approval process more efficient.
These models have also helped us update the level of net present value, or NPV, from prior approved premium increases and benefit reductions given our new cost of care assumptions.
In addition to the approximately $2.3 billion NPV benefit from the $403 million of approved increases in 2021, the models project based on the latest assumption changes that the NPV achieved since 2012 has improved by an additional $2.8 billion compared to our earlier projections.
As of the end of 2021, Genworth now projects that the LTC premium increases and benefit reductions achieved since 2012 have improved the legacy LTC portfolio by $19.6 billion on a net present value basis.
This is a $5.1 billion increase from the $14.5 billion that reported at the end of 2020.
I am incredibly proud of the progress we've made toward stabilizing the legacy LTC book through our holistic approach, and I look forward to sharing further updates in the future.
The four strategic priority is advancing Genworth's LTC growth initiatives.
This is an important long-term priority because we believe that Genworth can only stand on its own without ongoing support from Enact dividends if we bring the legacy LTC portfolio closer to breakeven and develop a viable growth strategy that Genworth investors believe is sustainable.
If we can achieve both objectives, it would facilitate the future spinoff of Genworth's 81.6% of Enact because the remaining Genworth business would be viable as a stand-alone public company.
To support our growth strategy, we are in the process of standing up a new business line, Global Care Solutions.
And we have hired Joost Heideman as CEO to lead Genworth's LTC growth initiatives that will be developed within the new business line.
Joost has approximately 30 years of experience in the insurance industry.
He has worked for both large global insurers and for venture capital has focused on new health insurance models in emerging markets.
Joost worked with me at ING Group for over a decade, including stints helping me oversee ING's worldwide insurance and investment management businesses in over 40 countries and restructuring ING's very large side agency distribution channels in the emerging markets in Asia, Latin America and Eastern Europe.
After leaving ING in 2014, Jos was chairman and CEO of Unive, a mutual life and health insurer in the Netherlands.
He was working with Dutch venture capitalist to develop a new digital health insurance venture in East Africa in 2020 until the COVID-19 pandemic halted that venture.
I'm very pleased we were able to recruit Joost in 2020 as an outside consultant to help us develop our LTC growth strategies and that he will now be overseeing the implementation of those strategies as the CEO of global care solutions.
Because of the geopolitical challenges between China and the U.S., we have reduced our focus on China opportunities until those issues become more transparent.
LTC businesses as part of our new global care solutions.
The first business will offer fee-based advice consulting and services in the aged care space.
We see meaningful opportunities to provide advice, consulting and services to address the needs of elderly Americans, their caregivers and their families.
Genworth's CareScout subsidiary, led by Ed Motherway, currently provides some of these services.
Acquired by Genworth in 2008, CareScout is a market leader in providing LTC care assessments and care support through our network of 35,000 clinicians nationwide.
Joost and Ed will work together to further develop the long-term opportunities for CareScout.
Genworth has not funded CareScout over the last five years as our focus had been directed toward seeking premium increases on our legacy LTC portfolio.
We see tremendous potential in the business as part of our LTC growth strategy, so we are making an investment of approximately $8 million in CareScout in the first quarter to expand its clinical assessment capabilities in care support solutions.
This investment will allow CareScout to extend their assessment services to help support the many healthcare organizations that are experiencing a high volume of patients, ongoing assessment staffing shortages and numerous work for disruptions due to the COVID-19 pandemic.
We expect this investment to triple the annual assessment revenues in the next few years to approximately $30 million.
Longer term, CareScout and its future service affiliates are expected to provide a diversified source of capital-light fee-based revenues as we deploy new capabilities and solutions to meet the needs of a growing marketplace.
Our CareScout and other service strategies are based on converting these considerable capabilities into a viable and scalable advice, consulting and service businesses for the elderly and their families.
The second LTC growth business strategy is based on transforming the existing LTC insurance market.
The new Genworth LTC products to be sold in the market will be designed to solve the myriad of issues that have plagued the legacy LTC insurance business.
The most important change is to transform the LT insurance market is to implement an annual rerating model.
Genworth believes the primary problems with all insurers' legacy LTC insurance products were caused by the level premium regulatory model.
Legacy LTC products were sold pursuant to a regulatory regime designed to make premium adjustments difficult to obtain even though it is impossible to price products with assumptions that will hold, and of course, they did not hold for 30 to 40 years.
We are in the process of finalizing Genworth's first new LTC individual insurance product.
The new product is priced for a mid-teen return using pricing assumptions that we believe are conservative.
The product has a maximum lifetime benefit of $250,000, and the pricing assumptions for the key LTC risk were interest rates, lapses, morbidity and mortality are based on Genworth's current experience and projections for these factors.
However, because we understand that these pricing assumptions may not hold over the next 30 to 40 years, we will only write new business in states that will allow annual rerating to change premiums if pricing assumptions and market reality differ over time.
We have had extensive discussions with regulators, and we believe enough regulators support the concept of annual rerating to move forward with the product.
However, because of regulatory issues with the need for large premium increases on Genworth's legacy books and the need for many states to change to their current rate stabilization rules, some of which require legislative action, we do not expect to be able to launch the new LTC product in most states right away.
We may, however, decide to accelerate the launch with a handful of states who seem enthusiastic about bringing a new innovative LTC product into their state's insurance market.
I believe that these innovative forward-thinking states can help rebuild a robust long-term care insurance market that contributes to solving the massive long-term care funding crisis based in the country and that is at the core of Genworth's multifaceted growth initiatives.
Genworth's current financial strength and ratings are also an issue for the viability of the new LTC product.
We have a new Genworth insurance company, which will only write new business and will not have any legacy LTC business.
We expect that 75% of the risk with a new LTC product will be reinsured with the A+ rated reinsurer, though the level of reinsurance that we expect to be reduced to 50% over time.
Preliminary discussions with AM Best have provided a good understanding of their methodology around investment-grade ratings.
Genworth expects to offer several additional new and innovative LTC products, including hybrid products and a nonguaranteed LTC benefit product in the future.
Genworth's fifth strategic priority is returning capital to our shareholders.
Given that our net debt position is now below $1 billion, and we expect Enact to share their dividend policy later this year, we plan to consider initiating a capital management program later in 2022.
We'll have an update on Genworth's capital management plans on the next earnings call.
In closing, I'm very pleased with the strong operating performance and the progress on our strategic priorities achieved in 2021.
We have made outstanding progress on Genworth's turnaround, and I remain confident in our plans to drive shareholder value.
The fourth quarter was another excellent quarter for Genworth, with net income of $163 million and adjusted operating income of $164 million or $0.32 per share.
In the fourth quarter, we also continued to make significant progress on our debt management strategy.
In this quarter alone, we fully retired $400 million of debt due in August 2023 and reduced our February 2024 debt maturity by $118 million for a total of $518 million.
Even with this debt management activity, we ended the quarter with a solid holding company cash and liquidity position of $356 million.
Turning to the operating companies.
For the fourth quarter, Enact reported adjusted operating income of $125 million to Genworth and a strong loss ratio of 3%, driven in part by a $32 million pre-tax reserve release on pre-COVID delinquencies.
I'll note that Genworth's fourth quarter adjusted operating income excludes 18.4% of minority interest, which accounted for $29 million of adjusted operating income.
Last quarter, minority interest accounted for only $4 million of adjusted operating income due to the timing of the initial public offering in September.
Absent minority interest, Enact's adjusted operating income increased, largely driven by the favorable reserve development in the quarter.
Enact saw a 9% year-over-year increase in insurance in-force growth, driven in part by $21 billion of new insurance written in the quarter.
In addition, Enact finished the quarter with an estimated PMIER sufficiency ratio of 165% or approximately $2 billion of published requirements.
The decline in the PMIER sufficiency versus the prior quarter was largely driven by the dividend they paid in the quarter.
Subsequent to the quarter, in January, Enact executed an excess of loss reinsurance transaction, which will cover the 2022 production and is expected to provide approximately $300 million in PMIERs credit.
Reinsurance transactions are a key part of their credit risk transfer program that is designed to provide cost-effective capital relief and reduce loss volatility.
We're very pleased with Enact's performance for the full year and the fourth quarter, which included the payment of its first dividend as a public company.
The $1.23 per share dividend generated $163 million for Genworth.
With respect to our expectations for future dividends from Enact, Enact is evaluating its dividend policy and expects to initiate a regular common dividend around mid-2022.
We reported $41 million of adjusted operating income in the quarter, driven by the continued strength of LTC earnings from the multiyear rate action plan and variable investment income.
Mortality continued to be elevated in the quarter, in part from COVID-19, which benefited LTC earnings but negatively impacted our life insurance results.
Results in the quarter also included charges in our term universal life and universal life insurance products of $102 million related to assumption updates and DAC recoverability testing.
In our long-term care insurance business, we reported strong results with fourth quarter adjusted operating income of $119 million compared to $133 million reported in the prior quarter and $129 million in the prior year.
As we discussed last quarter, while our overall GAAP margins are positive, we've established a GAAP-only profits followed by losses reserve, which covers projected losses in the future.
This reserve reduced LTC earnings by $121 million after tax during the quarter.
As of year-end, the pre-tax balance of the profits followed by losses reserve was $1.3 billion, up from $625 million at year-end 2020.
Our fourth quarter adjusted operating earnings from in-force rate actions were $296 million after tax and before applying profits followed by losses, which increased from $225 million in the fourth quarter of 2020.
The legal settlement on our LTC choice one policy forms continued to favorably impact our results by $57 million or $14 million after profits followed by losses this quarter.
The choice one legal settlement applies to approximately 20% of our LTC policyholders.
As of quarter end, approximately 65% of the settlement class had reached the end of this election period.
We currently expect the remaining class members to make their elections over the course of this year.
There are two other similar legal settlements pending.
The one for our PCS 1 and PCS 2 policy forms comprises approximately 15% of our LTC policyholders and is subject to final court approval.
Should the settlement be approved in the near term, we expect claimants to start making their elections in mid to late 2022.
Additionally, we've reached an agreement in principle for a settlement on our choice two policy forms, which covers approximately 35% of our LTC policyholders or as many policies as the two other settlements combined.
The choice two settlement is still subject to the execution of a formal agreement in the court schedule and ultimate approval.
Subject to these events, we anticipate that we'll begin implementing an approved settlement by early 2023.
While our financial results in 2021 have been favorably impacted by the choice one legal settlement and the other two settlements are expected to positively impact future financial results, it's difficult to quantify their overall impact on our financials as full implementation will take several years that is subject to specific policyholder elections.
In terms of LTC invoice rate action approvals, it was a record year for Genworth due in part to regulators' recognition of the importance of actuarially justified rate increases for Genworth and the industry.
During the quarter, we received approvals impacting approximately $223 million of premiums with a weighted average approval rate of 36%.
On a year-to-date basis, we received approvals impacting nearly $1.1 billion in premiums with a weighted average approval rate of 37%.
This is favorable compared to the prior year when we received approvals impacting $1 billion in premiums with a weighted average approval rate of 34%.
We experienced favorable variable investment income at LTC again this quarter, reflecting higher limited partnership income, gains on treasury inflation-protected securities, bond calls and mortgage prepayments.
While we saw a very strong variable net investment income in 2021, which is not subject to reductions from profits followed by losses, we do expect this investment performance to moderate over time.
Claim terminations in the fourth quarter were higher versus the prior quarter and lower versus the prior year, as noted on page eight.
We made a minimal adjustment to our previously established COVID-19 mortality reserve for the quarter, decreasing the cumulative balance to $134 million.
As the pandemic continues, mortality experience may fluctuate, and the COVID-19 mortality adjustment would be reduced if mortality experience becomes unfavorable.
New active claims are higher than the prior year, but new claims incidence experience remains lower than pre-pandemic levels and continues to drive favorable incurred but not reported, or IBNR, claim reserve development.
In the fourth quarter, given the gradual increase in incidents, we reduced our COVID-19 IBNR claim reserve by $34 million, resulting in a cumulative balance of $75 million.
We completed our annual review of key actuarial assumptions in each of our product lines during the fourth quarter.
Our assumptions for LTC claim reserves or disabled life reserves held up in the aggregate and the margin for policies not yet on claim included in our active life reserves remains positive.
Therefore, we did not increase our reserves and there was no P&L impact from these updates.
Please note that the COVID-19 pandemic impact to the businesses were not considered when reviewing our long-term assumptions as they are not currently expected to be indicative of future trends or loss performance.
As part of the LTC active life margin testing process, we reviewed our long-term assumptions relative to experience.
During this year's assessment, we updated several assumptions with respect to lapses, mortality, expenses, interest rates, and most significantly, benefit utilization trends.
Margin testing results for the LTC block are shown on page nine.
These results remain positive in both the historical and acquired blocks.
The combined margin was approximately $500 million to $1 billion, which is consistent with the prior year's range.
As Tom outlined, given the expected future increase in the cost of care, we expect our long-term benefit utilization to trend higher than previously assumed.
This is one of our key long-term assumptions that impacts trends modeled over a 60-year period.
Prior to this update, we had assumed that the long-term benefit utilization would improve over time.
Based on our experience, it has not improved as much as we predicted, largely due to the cost of care growth driven both by broad-based inflation and minimum wage increases in some large states, among other factors.
Therefore, we've increased the outlook for our future benefit utilization trend.
Since margin testing remained positive, we're not required to increase our LTC active life reserves for policies not yet on claim as the model benefit from adjustments to our multiyear rate action plan offsets the approximately $4 billion impact from the assumption updates.
I'm pleased that our progress on the multiyear rate action plan and other risk mitigation actions, combined with future actions, have allowed us to absorb these assumption updates without incurring any charges in our financial results.
A multiyear rate action plan is essential to our strategy of proactively managing and mitigating adverse emerging experience.
And with this updated trend assumption, it further emphasizes the ongoing need for rate actions.
The success of the multiyear rate action plan has strengthened our ability to pay claims in two ways.
First, there is the increased premium revenue.
Second, in connection with approved rate actions and the legal settlements, we've managed our long-term exposure to generous product features, like lifetime benefits and compound inflation riders, as policyholders have elected benefit reductions to mitigate rate increases.
As evidenced on page 13, 44% of policyholders have selected reduced benefit or non-forfeiture options, which reduces our long-term risk.
Our peak claim mirrors are over a decade away, and as always, we'll continue to monitor emerging experience to help evaluate the need for future changes.
We now project the need in aggregate for approximately $28.7 billion in LTC premium increases and benefit reductions on a net present value basis, which is important in our progress toward achieving economic breakeven on our legacy LTC block.
While this amount has increased as a result of the assumption update, we are over two-thirds of the way there, having achieved $19.6 billion in rate actions since 2012.
The $19.6 billion we've achieved has grown significantly since last year, in part because of the value of our 2021 rate action approvals of $2.3 billion.
Additionally, the benefit utilization trend assumption update for higher cost of care growth increased the value of our previously achieved rate actions by $2.8 billion.
The remaining amount we have left to achieve is $9 billion, which has grown from last year, largely to offset the unfavorable impact from the assumption updates.
Based on our proven track record and the strength of the multiyear rate action team and their process, our ability to close the remaining amount is achievable.
As I've shared before, we're managing the U.S. life insurance companies on a stand-alone basis.
Through capital and surplus, rate increases and reduced benefit options, we're working to ensure our ability to pay LTC benefits over the long term.
Turning to our life insurance products.
We reported a fourth quarter adjusted operating loss of $98 million compared to operating losses of $68 million in the prior quarter and $20 million in the prior year.
Overall mortality for the fourth quarter continued to be elevated versus expectations, though improved versus the prior quarter and prior year.
The fourth quarter included approximately $27 million after tax and COVID-19 claims based upon death certificates received to date.
As part of our annual assumption review, we made assumption updates on the term universal and universal life products as well for both mortality and interest rates, which resulted in a combined unfavorable impact of $70 million in the fourth quarter.
In our universal life products, we recorded a $32 million after-tax charge for DAC coverability testing compared to $30 million in the prior quarter and $50 million in the prior year.
These charges continue to reflect unfavorable mortality experience and block runoff.
In fixed annuities, adjusted operating earnings of $20 million for the quarter included the benefit from favorable mortality in the single premium immediate annuity products.
In the runoff segment, our adjusted operating income was $16 million for the fourth quarter compared to $11 million in the prior quarter and $13 million in the prior year.
Variable annuity performance was driven by equity market performance, which was favorable versus the prior quarter though less favorable than the prior year.
life insurance company, statutory financials and cash flow testing results remain in process and will be made available with our year-end statutory filings.
We expect consolidated capital in Genworth Life Insurance Company, or GLIC, as a percentage of RBC to be approximately 290% at December 31, in line with the 291% at September 30.
This is due in part to the expected negative impacts of the life assumption updates and cash flow testing offset by the $170 million statutory capital benefit from the life block reinsurance transaction completed in the quarter.
RBC is significantly higher than the 229% at December 31, 2020, due primarily to the favorable LTC statutory earnings in the year.
This increase was driven by the benefit from in-force rate actions, including the impacts from the choice one legal settlement, favorable investment performance and favorable terminations.
We expect GLIC consolidated year-end capital in surplus to be close to $3 billion as we've seen a strong trend throughout the year.
Pages 15 and 16 highlight recent trends in statutory performance for LTC and GLIC consolidated on a quarter-lag basis due to the timing of when statutory results are finalized.
Statutory earnings for LTC are generally higher than GAAP earnings as the concept of profits followed by losses that I discussed earlier does not exist under statutory accounting.
Statutory earnings are also aligned to taxable earnings, which have resulted in strong cash tax payments to the parent holding company throughout 2021.
Rounding out our results, we reported an adjusted operating loss in the corporate and other segment of $18 million, which was an improvement of $31 million from the prior year, reflecting lower interest expense given the reduction of holding company debt, as well as lower corporate expenses.
Turning to the holding company.
We ended the quarter with $356 million of cash and liquid assets.
Page 17 provides a detailed cash activity for the quarter.
Key items in the quarter included the debt reduction of $518 million of principal, the dividend from Enact of $163 million, and $75 million in the intercompany cash tax payments, reflecting strong underlying taxable income from Enact and the U.S. life insurance business.
The holding company received $370 million in cash taxes in 2021.
We will continue to utilize holding company tax assets in 2022 and anticipate that the holding company will receive approximately $200 million in cash taxes in 2022, subject to ultimate taxable income generated.
Given our current tax position, we do not anticipate paying federal taxes in the near term.
In closing, when I think about where we started 2021, I'm incredibly proud of our financial results and the progress we've made against our strategic priorities.
For the full year 2021, net income was very strong at $904 million versus $178 million in 2020, and adjusted operating income was $765 million versus $310 million in 2020.
Enact contributed $520 million in adjusted operating earnings to Genworth in 2021, and we're very pleased with LTC's $445 million in adjusted operating earnings.
While statutory results are still in progress, we estimate full year after-tax statutory net income for the U.S. life insurance business of $660 million, driven by LTC's estimated $910 million of pre-tax statutory income.
Throughout 2021, we improved our financial strength and flexibility each quarter, putting up strong operating results, driving efficiencies to reduce our annual run rate expenses by approximately $75 million, maximizing the value of our assets and reducing our debt and overall cost of capital.
With the completion of the Enact IPO, we achieved rating upgrades from Moody's and S&P at the parent holding company in recognition of the improved credit risk profile and increased financial flexibility.
Enact was also upgraded by Moody's, S&P and Fitch, which has enabled it to expand its customer base and be more competitive against peers.
In 2021, we took a proactive approach to managing our holding company debt, which has strengthened our balance sheet as we head into 2022.
We retired over $2 billion in debt, including the AXA promissory note and of approximately $1.2 billion of parent holding company debt remaining as of year-end.
We plan to retire the remaining 2024 debt of $282 million ahead of its maturity date.
After we retire the 2024 debt, our next debt maturity will be more than a decade away in 2034, and we would expect cash interest coverage to be approximately five times based on a conservative view of projected cash flows, which will be great progress.
While it has been over 13 years since Genworth returned capital to shareholders, we plan on announcing more specific capital management plans later this year given the tremendous improvement in our financial condition achieved in 2021.
The timing is dependent on redeeming the remaining $282 million of debt due in 2024 and Enact's announcement of its future dividend policy.
The bottom line is that we've had a terrific year and are entering 2022 with a strong foundation and a clear path for the future.
We look forward to sharing more with you soon.
| compname reports q4 adjusted operating earnings per share $0.32.
q4 adjusted operating earnings per share $0.32.
q4 earnings per share $0.32.
|
Earlier today, we reported record levels of sales and earnings in our second quarter.
We continue to see a good recovery from the pandemic-related disruption last year, with strong double-digit growth in each of our retail, wholesale and International segments.
Profitability is meaningfully higher than last year and significantly better than our pre-pandemic performance.
Earnings in the second quarter were up over 70% compared to our second quarter 2019 earnings.
Over the past year, we made structural changes in our business to help us weather the pandemic and emerge stronger from it.
We focused our product offerings on fewer and better choices.
We dropped low-margin styles and reduced product choices by over 20%.
We then increased the mix of higher margin, longer life cycle product choices, including our new sustainable Little Planet brand and Bold Basics product offering.
We ran leaner on inventories and reduced low-margin clearance and off-price sales.
With a better mix of inventory, our marketing focused more on brand building and less on promotions.
We strengthened our e-commerce capabilities during the pandemic last year to improve the experience for our high-margin online customers, including curbside pickup, same-day pickup and ship-from-store capabilities.
We launched a new mobile app and invested in RFID capabilities that we believe will improve inventory accuracy, sell-throughs and margins.
And we doubled our store closure plan to edit out lower-margin stores that have a low penetration of omni-channel sales.
The collective benefit of fewer better product choices, fewer better higher-margin stores, a better mix of high-margin e-commerce customers, leaner inventories and fewer and better promotions drove a meaningful improvement in price realization and profitability in the second quarter and first half this year.
Given our strong first half performance and expected continued benefit of structural changes to our business, we have raised our sales and earnings forecast for 2021.
In the second half, we expect sales and gross profit will be higher than previously planned.
Given the positive trends in our business, we're planning higher levels of spending in the second half to expedite deliveries from Asia, to support higher demand for our brands and to overcome pandemic-related delays in production.
We're also increasing our investments in eCommerce capabilities, brand marketing and employee compensation, which was curtailed during -- last year during the height of the pandemic.
These investments are expected to enable a strong finish to this year, and more importantly, get us off to a good start in 2022.
If we're successful with our balance of year plan, we will achieve a record level of profitability this year and build a stronger foundation to grow on in the years ahead.
In terms of sales trends, the second quarter got off to a good start as warmer weather arrived in more parts of the country, and consumers began to update their children's spring and summer outfits.
We saw better-than-expected demand in each month of the quarter.
The third quarter has also gotten off to a good start.
Our Retail segment was the largest contributor to our second quarter sales and earnings.
The collective benefit of a stronger product offering, higher margin e-commerce sales and fewer low-margin stores enabled us to achieve the highest second quarter retail operating margin in over 10 years.
eCommerce continued to be our highest margin business in the quarter with penetration growing to 38% of our retail sales, up from 27% prior to the pandemic.
Our store sales and earnings meaningfully outperformed our expectations in the quarter driven by higher units and better price realization.
Comparisons to our 2020 results are less meaningful given the COVID-related store closures last year.
Compared to the second quarter of 2019, retail sales were higher despite nearly 60 fewer stores.
We're on track to close over 100 low margin stores this year.
We estimate that the store closures will reduce our retail sales by nearly $90 million this year compared to 2019 but will improve profitability by over $5 million.
We continue to see a meaningful lift in the profitability of our stores located in markets adjacent to the stores that we closed.
Those transferred sales flow through a very high margin given the fixed cost structure of our store model.
We paused our store opening plan during the pandemic and are only opening one store this year.
Our real estate team is evaluating new store opportunities in the top 20 U.S. markets.
We expect to resume opening stores beginning next year.
We'll share those plans with you after they're firmed up later this year.
We continue to see more customers taking advantage of our omni-channel capabilities.
90% of our stores are located in outdoor shopping centers, which makes it more convenient for consumers to shop online and pick up their purchases at our stores.
Over 30% of our online orders in the quarter were supported by our stores compared to less than 12% last year.
We're focused on providing a higher service level to our omni-channel customers because they are our highest value customers.
They shop more frequently and spend nearly three times more than our single-channel customers.
Our retail and marketing teams are focused on the upcoming back-to-school shopping season.
We recently launched a highly creative OshKosh brand campaign focused on back-to-school outfitting.
We expect to see a very good recovery in our back-to-school sales this year.
We saw good growth in our wholesale segment in the second quarter driven by our flagship Carter's brand.
Collectively, our exclusive brands had good growth on top of the surge in demand last year during COVID-related store closures.
Our exclusive brands contributed nearly 50% of our second quarter wholesale sales.
We also saw good growth with our OshKosh and Skip Hop brands.
Many of our wholesale customers are also seeing the benefits that we are seeing by running leaner on inventory commitments, driving higher sell-throughs with less end-of-season clearance sales and better margins.
For the year, we're expecting good double-digit growth in wholesale sales and earnings, and growth with nine of our top 10 customers.
Together with our wholesale customers, our global eCommerce sales grew to over $0.5 billion in the first half this year, up over 60% compared to 2019.
No other company in children's apparel has the breadth and depth of eCommerce distribution that Carter's has, working with the largest online retailers in the United States.
We were recently honored by Target as their vendor of the year, recognizing Carter's for its performance during the pandemic.
We launched our exclusive brand with Target 20 years ago.
It has been a significant source of growth for us.
It provided a good model to launch our exclusive brands for Walmart and Amazon and enabled us to extend the reach of our brands to three of the most successful retailers in the world.
Together with our wholesale customers, we saw growth in each of our age segments from a newborn to a 10-year-old child.
A high percentage of our sales through our wholesale customers are Baby apparel.
Our Carter's brand is a traffic driver for the national retailers.
It's the brand consumers expect to see when shopping for their new baby.
Carter's is the best-selling brand in children's apparel.
It's the most recommended brand by moms for moms and has the highest level of social media engagement in kids apparel.
The latest U.S. market data suggests Carter's was the fastest-growing brand in young children's apparel in the second quarter.
Our sales growth in the second quarter was driven by Baby apparel with sales up over 30%.
Earlier estimates had suggested 300,000 to 500,000 fewer children would be born this year in the United States due to the pandemic.
First, we're estimated to decrease as much as 8% to 14% versus 2020.
The latest data from the CDC reflects first this year are down only 5%.
With the continued benefit of government stimulus, including the enhanced child tax credit, we may see a moderation in the decline in birth that would be good for our country and our company.
We also saw good growth in our toddler and kid size apparel.
The early read on back-to-school products like graphic tees, denim, uniforms is good.
Casual and comfortable styling continues to outperform special occasional fitting.
That said, with more people traveling, even the fancier outfits are picking up as parents are reconnecting with family and friends.
Our International segment was also a good contributor to our growth in the quarter.
International sales nearly doubled, recovering nicely from the pandemic-related disruption last year.
Our operations in Canada and Mexico had good growth despite COVID-related store closures.
More than half of our stores in Canada were closed for most of the second quarter due to government mandates.
We also saw good growth with our international wholesale partners, including Amazon.
eCommerce sales through our international segment grew by nearly 70% in the first half of this year driven by Canada and Amazon.
The drivers of our growth in international markets include new omni-channel capabilities launched in Canada earlier this year.
Consumers in Canada are responding very positively to the convenience of shopping online and picking up their purchases in our stores.
We are the largest specialty retailer of children's apparel in Canada with more than three times the share of our nearest competitor.
In Mexico, we plan to replicate the success we've achieved through our co-branded store model in the United States and Canada.
Over the next five years, we plan to convert all of our stores in Mexico to the co-branded model.
Mexico also launched eCommerce capabilities last year, and it's off to a good start, better than we had planned.
Our Simple Joys brand sold internationally through Amazon, is expected to be a meaningful source of growth for us in the years ahead.
Our wholesale relationships with retailers in Brazil and the Middle East are also expected to be good contributors to our growth.
With respect to our supply chain, we continue to be challenged by two to three week delays in the receipt of product from Asia.
This is a macro challenge affecting many retailers.
Transportation-related delays have improved relative to the first quarter, but COVID-related factory delays have continued to impact deliveries as infections from the virus appear to be outpacing access to vaccines in Asia.
We expect late deliveries will continue in the balance of the year, and we've reflected that risk in our forecasts.
To mitigate that exposure, we are expediting deliveries at a higher cost.
To the extent possible, we are also moving production schedules up to mitigate pandemic-related delays in Asia and the West Coast ports.
To date, we have not seen any meaningful order cancellations due to late deliveries to higher risk than usual.
Our freight costs will be higher this year, but they are being offset by better sell-throughs of our product offerings, fewer promotions, better price realization and higher margins.
We've had the benefit of lower product costs this year, but our suppliers are seeing inflation in cotton and polyester prices, which will impact our product costs beginning with our spring 2022 product offerings.
We have raised our prices for spring 2022 to maintain product margins next year.
Those price increases have been agreed to by our wholesale customers given the macro environment.
It is our intention to continue improving margins through SKU productivity, marketing effectiveness, store rationalization and better price realization.
In summary, we've had a good first half, and we are now projecting a much stronger-than-expected recovery from the pandemic.
Carter's continues to lead the market because of the strength of our brands, unparalleled market distribution and over 19,000 store locations and nearly 20,000 employees worldwide working to provide the very best value and experience in young children's apparel.
I'll begin on page two with our GAAP income statement for the second quarter.
Net sales were $746 million, up 45% from last year.
Reported operating income was $108 million compared to $21 million last year, and reported earnings per share was $1.62 compared to $0.19 a year ago.
Last year's second quarter results were heavily affected in the early days of the pandemic by store closures, which began in mid-March and continued through the balance of the second quarter, and the suspension of shipments to many of our wholesale customers.
Our second quarter results for 2021 and 2020 included unusual items, which are summarized on page three.
We've treated these items as non-GAAP adjustments to our reported results to enable greater comparability and provide insight into the underlying performance of the business.
My remarks today will speak to our results on an adjusted basis, which excludes these unusual items.
On page four, we summarize some highlights of our second quarter performance over the past three years.
Given the significant disruption to our business and the broader marketplace in last year's second quarter, we expected to post good growth over 2020, which we delivered.
As the chart indicates, we also delivered growth over our 2019 performance, especially in profitability.
Certainly, the recovery from the pandemic has been a significant contributor to our performance, but we've also made some fundamental improvements to our business, many of which Mike just enumerated.
We believe these factors will continue to drive our business going forward.
Moving to page five and our adjusted P&L for the second quarter.
Building on the 45% increase in net sales, gross profit grew at an even greater rate 57%, to $369 million.
Gross margin improved 370 basis points to 49.4%, a fifth consecutive quarterly record for us.
For reference, this year's second quarter gross margin was 540 basis points over what we achieved in 2019.
The expansion in our gross margin over last year was driven by strong product performance and strong wholesale customer and retail consumer demand.
We were less promotional in our U.S. retail business.
And saw a good recovery in demand for our core Carter's brand in the wholesale channel.
Product margins in the quarter were also helped by lower product costs.
These benefits were offset somewhat by higher transportation costs incurred in response to the supply chain disruptions that many companies are experiencing currently.
Royalty income nearly doubled to $7 million, driven by recovery in demand across our domestic and international licensees.
Adjusted SG&A increased 34% to $265 million, reflecting higher store payroll expenses given store closures a year ago, the restoration of compensation provisions, which were curtailed a year ago, and higher marketing spend.
Spending was lighter than we had planned, some portion of which was due to timing and will shift into the second half of the year.
Given the strong growth in net sales, SG&A leveraged 300 basis points to 35.5% of sales.
Adjusted operating income nearly tripled from $41 million to $110 million, and adjusted operating margin improved 680 basis points to 14.8%, reflecting our gross margin expansion and expense leverage.
On the bottom line, adjusted earnings per share was $1.67, up meaningfully from $0.54 in last year's second quarter.
Moving to page six.
Our balance sheet continues to be in great shape.
Our liquidity remains strong.
We ended the quarter with over $1 billion in cash on hand, and our total liquidity was nearly $2 billion when considering the availability under our credit facility.
Accounts receivable were fairly consistent year-over-year.
As expected, we saw a significant growth in wholesale sales.
Most of our customers have returned to their pre-pandemic terms.
And we've had good payment trends.
Quarter-end net inventories declined 8% to $620 million.
The quality of our inventory is very good, given strong demand and meaningfully lower excess inventory versus this time last year.
We're projecting that inventory will grow year-over-year through the balance of the year, in part because of how constrained second half inventory was a year ago.
And also, we're trying to bring in inventory earlier where we can, given the disruptions we've experienced in the supply chain.
We're expecting year-end net inventory to be up in the high single digits over the end of last year due to our efforts to accelerate product receipts and to support good planned demand in the first part of next year.
Our long-term debt is down over $240 million versus last year when we were partially drawn on our revolver.
Those borrowings were repaid in the second half of last year.
Given our strong first half performance, cash flow from operations was $50 million.
This was down from last year when our working capital initiatives in response to the pandemic yielded unusually strong cash flow, particularly for the first part of the year.
As we announced on our last call, our Board of Directors approved the resumption of our quarterly dividend, which was paid at $0.40 per share in the second quarter.
Given our strong liquidity and our improving outlook for the business, we continue to evaluate additional opportunities to return capital, including share repurchases over time.
Turning to page eight with a summary of our business segment performance in the second quarter.
Each of our segments grew net sales and profit dollars, and we saw substantial operating margin expansion in both the U.S. Retail and International segments.
In U.S. Wholesale, we saw improved profitability in several aspects of the business, including improved product margins and favorable mix with strong sales of the Carter's brand.
These gains were offset by higher transportation costs to expedite delayed product from Asia.
Corporate expenses as a percentage of net sales increased slightly to 3.8%, reflecting higher compensation provisions and consulting fees in support of our productivity initiatives.
Overall, our consolidated adjusted operating margin expanded to 14.8%.
Now for some additional information on each of our segment's performance in the second quarter, beginning with U.S. Retail on page nine.
We posted strong sales in our Retail segment above our expectations.
Our outperformance was driven by our stores and improved price realization.
As expected, eCommerce sales were down versus last year, given the surge in online consumer demand, especially in the early part of the pandemic.
As Mike noted, we have continued to make progress in improving the quality of our store portfolio and have closed nearly 90 stores year-to-date.
Profitability in the Retail segment improved substantially.
Gross margin and operating margin expanded due to the improvements in how we've been managing the business, including improved inventory management and lower promotional activity.
Now turning to page 10.
An important event in the quarter was the refresh of our core Baby assortment.
Previously, these products had carried the Little Baby Basics names.
This year, we've rebranded these offerings as My First Love in order to better capture the joy and emotion, which accompany the arrival of a new child.
These products are made with 100% Oeko-Tex certified cotton, which certifies that the manufacturing processes for our products eliminate exposure to potentially harmful chemicals.
We launched the My First love collection in June with a first of its kind live digital shopping event on carters.com, featuring styles curated by Bachelor Alum and Mom, Jade Roper Tolbert.
We're seeing strong consumer response to this year's launch in all of our channels.
Turning to page 11.
One of the most significant contributors to retail growth over the past several years has been our Age Up strategy.
The extension of our age and size ranges under the Carter's brand has been very well received by consumers and has allowed us to extend the length of our customer relationships and increase their lifetime value to us.
As shown on the slide, our Age Up product offering is comprised of differentiated and complementary assortments, including Carter's and OshKosh branded product.
Turning to page 12.
In addition to Carter's, the other great children's apparel brand in our portfolio is OshKosh B'gosh.
We acquired OshKosh in 2005 as a strategic and complementary brand, given its focus on playwear with its sweet spot in the toddler age range.
Since then, we have integrated the brand in all of our channels, stores, online and wholesale in the U.S., Canada and Mexico.
This iconic brand has over 125 years of rich history with a well-deserved reputation for quality and value.
We have photos in our archives of John F. Kennedy and Ronald Dragon visiting OshKosh facilities.
This is a brand whose history is intertwined with that of our country.
Over the past few years, we've made some significant changes to OshKosh, improving the focus and productivity of its assortments and updating the aesthetic to be even more unique and differentiated in the market.
We're currently on track to achieve the best year yet in OshKosh profitability.
Today, consumers rank OshKosh as one of the most recommended and durable children's wear brands, and one which they are proud to give as a gift.
Turning to page 13.
Building on this iconic heritage, our marketing team has developed a very creative new brand campaign for OshKosh.
The Today is someday campaign, Spotlights notable Trailblazers as children.
In the first series of ads, young versions of Mariah Carey, Mohammad Ali and Outcast all share messages of confidence and determination and encouraging the next generation to dream boldly about who they will become someday, all while wearing their OshKosh outfits.
The campaign is off to a strong start, generating outstanding impressions and consumer touch points since its launch.
Moving to page 14.
As we told you on our last call, we recently launched Little Planet by Carter's.
This brand has an overall emphasis on organic materials and sustainability, both of which are increasingly important to today's consumers.
Little Planet is also available in over 400 target stores nationwide, and we're planning to launch the brand on Amazon in spring 2022.
Our data suggests that Little Planet is attracting a largely new customer to Carter's.
And in the second half, we've allocated additional marketing spend to support Little Planet's continued growth and introduction to new customers.
page 15 highlights another important investment that we're making in our retail business.
We're currently implementing an RFID technology solution in our U.S. stores.
This technology is intended to improve our in-store inventory accuracy and support our growing omni-channel demand by making a broader range of in-store inventory available to consumers shopping online and opting for in-store pickup.
Additionally, it's expected to increase efficiency across numerous tasks in the store, better leveraging store labor and freeing up our associates to spend more time interacting with customers.
Ultimately, we believe RFID will be an important tool in our objective to run a higher-margin retail business through better inventory management.
We expect to complete the RFID rollout this fall, realizing some benefits beginning in the fourth quarter and more meaningful contributions in 2022 and beyond.
Moving to page 16, and our U.S. Wholesale business.
As expected, we posted strong sales growth in this part of our business in the second quarter.
A year ago, many of our wholesale customers canceled or deferred their orders as their stores closed in response to the pandemic.
While sales were strong across wholesale, the largest contributor to growth was increased demand for our core margin-rich Carter's brand.
Our My First Love assortment launched at wholesale in June, and we're seeing good performance and strong replenishment demand in this channel.
Overall segment profit increased to $41 million in the quarter, albeit at a lower margin rate as transportation costs were elevated and given favorable changes in inventory reserves, which occurred in last year's second quarter.
On page 17, our Simple Joys brand sold on Amazon continues to be an important presence for Carter's online.
Amazon shifted its meaningful Prime Day event back into the summer months this year, Simple Joys was featured prominently on the Amazon Prime Day banner page, along with other leading brands such as Keurig and Levi's.
Over the two day June prime event, sales of Simple Joys increased 70% over last year.
Page 18 features some of our recent marketing efforts with Kohl's, one of our most significant customers of the core Carter's brand in the wholesale channel.
This year, our marketing focused on launching the My First Love collection as part of Kohl's Baby sale in June.
Turning to page 19, and second quarter results for our International segment.
We saw strong growth in our International business in the second quarter, where sales nearly doubled to $91 million.
Canada was the largest contributor to our growth as sales in this market increased 75% over last year.
A good portion of our store base in Canada was closed for much of the second quarter due to the reimposition of government safety mandates.
Despite this, our stores outperformed our expectations, driven by strong consumer demand and improved price realization.
eCommerce was also strong in Canada with strong demand while the stores were closed as well as increasing utilization of the new omni-channel capabilities now in place in this market.
Business in Mexico and with our international partners also performed well in the second quarter.
Profitability in the International segment increased significantly over the loss posted last year driven by strong sales growth, improved product margin and expense leverage.
On page 20, our partnership with Riachuelo in Brazil continues to expand.
This new store recently opened in Rio de Janeiro.
Riachuelo currently distributes the Carter's brand in 260 of its own department stores and has opened seven stand-alone Carter's stores in Brazil.
Riachuelo is planning on having approximately 25 Carter's stores in Brazil by the end of 2021.
Riachuelo is also planning to develop the eCommerce channel later this year.
Despite the significant cover disruptions in Brazil, demand for the Carter's brand in this important market has been very strong.
On page 21, one of our most important international markets is the Middle East.
This region has been particularly hard hit in the past couple of years with lower oil prices and also by the impact of COVID.
But now with the price of oil having increased and the world beginning to open up, the outlook in this part of the world is improving.
Our partner recently opened this beautiful new Carter's store in the United Arab Emirates.
Our partner has nearly 40 stores in the Middle East, and the UAE is home to the largest freestanding Carter's store outside of North America.
Many stores in this market are some of the most productive Carter's stores in the world.
As we've mentioned on past calls, we've stepped up our focus on all things ESG.
And in this inaugural report, we provide a good overview of our commitments across a number of areas, including our sourcing activities, stewardship of the environment and workforce diversity.
On page s 23 and 24, we summarized our adjusted results for the first half of the year.
It's been a great start to 2021 with sales in the first six months, up 31% and significant gross margin expansion and SG&A leverage.
Our first half adjusted operating margin was 15.6% compared to low single-digits last year.
I'll note that our first half 2021 sales and earnings performance exceeded what we achieved prior to the pandemic in 2019.
It's also worth noting the strong improvement in our adjusted EBITDA in the first half of the year.
This performance obviously reflects the broader recovery in the marketplace after the historic disruptions of a year ago, but also the fundamental changes and improvements to how we run the business as we've been sharing with you.
Now turning to our outlook for the balance of the year, beginning on page 26.
On balance, we're optimistic about our prospects for the second half of the year.
We've raised our forecast for second half demand, even though there remains a good deal of uncertainty and risk in the marketplace.
We believe a number of factors will drive our second half, and we've summarized some of them on this slide.
As we've been discussing, we believe we've made some fundamental changes to how we run the business, and we intend to continue these disciplines going forward in areas such as assortment and SKU productivity, marketing efficiency and inventory management.
These changes have enabled the very strong gross margin performance we have posted the last number of quarters.
There are a number of issues, though, many outside of our control that we continue to monitor closely.
In recent days and weeks, the Delta COVID variant has emerged as a significant threat to the ongoing recovery of the country and world from the pandemic.
Infections and hospitalizations have been rising.
The impact on key aspects of our business is unknown, such as kids returning to school, which we expect will contribute to a very good back-to-school -- to very good back-to-school apparel sales.
We've mentioned factory and transportation delays, and we expect these issues may persist through the second half.
We've already incurred significant and unusual expense to expedite delivery of our product to the United States.
As we've demonstrated over the last 18 months or so, we intend to continue to actively manage through whatever the situation turns out to be, and we're well positioned to do so.
Turning to page 27.
We're fortunate, given our very strong first half performance, to be able to continue to invest in the business, especially when our senses, many others are retrenching.
While our demand forecast for the second half has increased, we will have higher spending relative to our previous expectations.
Some of the spending represents investments for the long term, including on technologies such as continuing to enhance our eCommerce and digital capabilities, upgrading our point-of-sale system in stores and adding new capabilities around pricing, data and analytics and RFID.
We will also spend more on marketing in the second half, some spend related to the OshKosh brand campaign, and higher spend on digital marketing, which has proven very effective for us.
We're also increasing our provisions for performance and other compensation for our employees, which were curtailed a year ago in response to the pandemic.
It's a competitive market out there, and this is one element of retaining and motivating our outstanding team.
Other spending is related to business continuity.
We will spend much more than typical on transportation costs.
Market rates have increased substantially through COVID, and we're spending extraordinary amounts on expediting delayed product.
This additional spending and some differences in the timing of revenue will affect the comparability of this year's second half to 2020.
It's important to look at the year in total, given these comparability issues, and we expect 2021 will turn out to represent extraordinary performance for Carter's.
Moving to page 28, and our specific thoughts on the outlook for the third quarter and full year.
For the third quarter, we're expecting net sales of approximately $960 million, adjusted operating income of approximately $110 million and adjusted earnings per share of approximately $1.60.
Today, we're raising our sales and earnings outlook for the full year.
We're now projecting net sales growth of approximately 15%, up from our previous view of 10%.
We've meaningfully increased our expectation for earnings growth.
Adjusted operating income is now expected to be approximately $475 million, up from our previous view of about $400 million.
If we achieve our forecast, this would represent record operating income and a very strong operating margin of about 13.5%.
Adjusted earnings per share is expected to grow approximately 75%, up from our prior view of plus 40%.
So finally, on page 29, here's a graphical depiction of our expected performance, dropping in our guidance for full year 2021.
We're not forecasting that we will get fully back to 2019's level of net sales, and that's all right with us.
With our focus on profitability, we're not repeating low margin sales from last year through the off-price channel or from low-margin stores, which are being closed.
Achievement of this forecast would represent a terrific year for us, and we're focused on executing a very strong second half of the year.
| carter's q2 earnings per share $1.62.
q2 earnings per share $1.62.
q2 sales $746 million versus refinitiv ibes estimate of $715.5 million.
q2 adjusted non-gaap earnings per share $1.67.
sees q3 sales about $960 million.
company raises full year fiscal 2021 outlook.
quarterly dividend resumed in q2 at $0.40 per share.
sees q3 adjusted earnings per share about $1.60.
for fiscal 2021, projects net sales will increase approximately 15%, adjusted operating income will be approximately $475 million.
sees 2021 adjusted diluted earnings per share to increase approximately 75%.
|
We're in the final weeks of a much stronger year and recovery than we had forecasted earlier this year.
Our fourth quarter is off to a good start.
Weather is turning cooler, Christmas shopping is underway, and we're seeing strong demand for our brands across all channels of distribution.
For the past 20 months, we've worked our way through, hopefully, once-in-a-lifetime global pandemic.
We were faced with store closures and school closures, travel restrictions and lockdowns, high unemployment and shipping delays.
So like other challenges in years past, the financial crisis back in 2008, the Great Recession that followed, and the cotton crisis in 2011.
Carter's employees use these periods of disruption to strengthen our company and emerge stronger from them.
We're forecasting sales this year at about 98% of the pre-pandemic level in 2019.
Over the past two years, we've intentionally edited out lower margin sales.
We focused our product offerings on fewer, better and higher margin choices, and reduced SKUs by about 20%.
We then increased the mix of higher-margin, longer life cycle products, including our new organic brand, Little Planet, and our Bold Basics product offering.
We ran leaner on inventories and reduced low-margin clearance and off-price sales.
Relative to 2019, our sales forecast this year reflects the closure of over 100 low-margin retail stores, a $50 million reduction in clearance sales, a nearly 50% reduction in low-margin off-price sales and lower demand from international guests, who historically were drawn to our low-margin clearance sales.
By focusing on higher-margin products, closing low-margin stores, running leaner on inventories, and focusing our marketing investments on brand building versus promotions.
We significantly improved price realization and margins this year.
We believe the fundamental changes made to our business are producing earnings and margins, which are sustainable.
Earlier this year, we shared our longer-term growth objectives with you.
Those projections are now being revised based on the progress we've made this year.
We'll firm up our revised growth objectives in the balance of the year, and share them with you early next year.
Those projections will reflect the benefits from improvements in our business and emerging macro factors that may be helpful to us.
There are multiple signs of a robust recovery in the post-pandemic period.
Americans at all income levels have more savings than the pre-pandemic period.
Wages are rising, not from government mandates but through supply and demand.
There are more job openings today than people seeking jobs, and Carter's is seeing a favorable trend in job applications.
The latest CDC data reflects an increase in births in the second quarter.
Birth trends are far better than projected this year.
And weddings, many postponed during the pandemic, are projected to increase to a near 40-year high next year.
It is expected that some portion of the spending plan proposed by Congress will be approved.
A meaningful portion of that proposed legislation is focused on helping lower and middle-income families, including enhanced child tax credits, child care and Universal pre-k for three- and four-year-old children.
This proposed legislation is focused on reversing a 13-year decline in U.S. birth, which would be good for our country and our company.
An improvement in birth trends could be a catalyst for Carter's.
Like every year, there are challenges, we will continue to work our way through.
We expect to be challenged by the lingering effects of the pandemic in the months ahead, including supply chain disruption and inflation.
Production and transportation delays have increased since we updated you in July.
In recent years, we reduced our exposure to China due to tariffs and other rising costs.
We shifted production to Cambodia and Vietnam, given their higher capacity for growth and lower costs.
Cambodia and Vietnam now produce over 50% of our unit volume.
By comparison, we source less than 10% of our products from China.
We believe that this shift in production will serve us well in the years ahead.
That said, Cambodia and Vietnam have lagged China in terms of vaccination rates and on-time production.
With broader access to vaccines in the months ahead, we expect on-time performance to improve next year.
Transportation delays have weighed on the growth that was otherwise possible this year.
Bottlenecks in the U.S. ports affected our third quarter sales, and have increased the risk of wholesale order cancellations in the balance of this year.
We've reflected that risk in our fourth quarter forecast.
To put the current challenge in perspective, we've seen up to 20-day delays getting our products through the West Coast ports.
There's been a 30% increase in shipping container volume this year.
By comparison, trucking capacity is up only 8%.
In recent months, we've invested an unprecedented level of air freight to expedite the receipt of essential core products to serve the needs of families with young children.
We focus that effort on product offerings for our largest wholesale customers who supported our brands during the most challenging periods of the pandemic.
With only eight weeks to go before Christmas, the selling windows are shortening.
We are proactively engaging our wholesale customers and together deciding what products to ship in the balance of the year, which product should be packed and held over to next year, and what orders should be canceled.
Transportation delays may moderate in the months ahead.
Historically, the peak shipping volume is from July to October.
The post-holiday shipping period may give the dock workers and truck drivers time to catch up as we head into the spring season next year.
Transportation rates will be higher heading into 2022.
We have negotiated and locked in higher, but very favorable freight rates with our suppliers and have largely avoided the abnormally high spot market rates for ocean containers.
Inflation will impact our product costs next year.
Our suppliers are raising their prices to help offset higher cotton and polyester prices.
We're planning a mid-single-digit percentage cost increase for our spring and summer product offerings.
We've raised our prices by a similar percentage, and our wholesale customers have agreed to those increases.
To put it in perspective, a mid-single-digit wholesale price increase is about $0.30 per unit.
Based on our market analysis, we believe we will be competitive on pricing next year, and we'll continue to offer a compelling value to families with young children.
For the year, we expect our retail business will drive nearly half the growth in our total sales.
Our stores are expected to be the highest contributor to our annual revenue this year with store sales projected to exceed $1.1 billion.
We saw a very strong recovery in back-to-school sales, and good demand for our older age segment product offerings.
The profitability of our stores is forecasted to grow by over 30% relative to 2019 on nearly $150 million less revenue driven by our reduction in SKUs and closure of low-margin stores, leaner inventories, fewer clearance sales and improved price realization.
Carter's has the largest eCommerce platform focused exclusively on young children's apparel.
Our U.S. eCommerce penetration is forecasted to be nearly 40% this year, up from less than 32% in 2019.
Relative to 2019, our eCommerce business has been our fastest-growing and highest-margin business.
We've invested significantly in technology in recent years that has provided consumers with the convenience of shopping online the ease of same-day pickup of those orders in our stores and access to the full scope of our product offerings with easy online shopping in our stores.
With our investment in RFID capabilities, we're expecting higher productivity of inventory and faster shipping by leveraging over 70% of our stores to fulfill online orders.
Increasingly, our stores are providing a higher service level to our margin-rich online customers.
Year-to-date, nearly 30% of our online orders were fulfilled by our stores.
Consumers who shop both online with us and in our stores are our highest value customers.
They spend nearly 3 times more a year than our single-channel customers.
Carter's is a traffic driver for shopping centers.
Given the consumer staple nature of our business, with children rapidly outgrowing their outfits in the early years of life, our brands drive frequent visits by families with young children.
We've seen the benefit of a more favorable rental market in our lease negotiations this past year.
Our average remaining lease term is less than 2.5 years, which gives us the flexibility to negotiate better rates or exit the site.
We renegotiated over 25% of our leases this year, and over 70% of those renewals were at a lower cost.
Given the more favorable rental market, our real estate team is pursuing opportunities to open more stores than previously planned.
Our focus will continue to be exiting low-margin stores upon lease expiration and opening higher-margin stores in centers located in densely populated areas with good co-tenancy, a high return on investment and the flexibility to exit if our investment objectives are not met.
We'll firm up our store opening plan in the balance of this year and share the revised growth plan with you in February.
Our Wholesale business is forecasted to be the second largest contributor to the sales -- to our sales this year.
The largest component of our wholesale sales and earnings growth is expected from our flagship Carter's brand, which was affected by store closures last year.
Demand from our wholesale customers this year exceeded our ability to support that demand because of supply chain delays.
That said, we believe we'll have the inventory needed to support our growth objectives this year.
Our total wholesale sales this year are not expected to be back to the 2019 level.
Some of our wholesale customers were more conservative with inventory commitments due to pandemic-related uncertainties.
That said, with leaner inventories, these retailers are experiencing higher sell-throughs and margins this year.
Relative to 2020, we're forecasting higher wholesale margins and nearly 20% earnings growth for our Wholesale segment this year.
Our wholesale margins will be affected by higher air freight costs in the second half.
Going forward, our annual freight costs are expected to be a fraction of the nearly $40 million investment we're planning this year.
We are the largest supplier to the largest and most successful retailers in North America.
No other company in children's apparel has the scope of distribution we've built over the past 20 years with our brands sold in over 19,000 store locations, and on the largest, most successful online platforms.
Together with our wholesale customers, the online sales of our brands this year have exceeded $1 billion, up over 50% compared to 2019.
We're also seeing a strong recovery in our international sales and profitability.
International sales are projected to exceed 13% of our annual sales this year, which would be a record level of sales and profitability.
Our operations in Canada are expected to contribute the largest component of our international sales and earnings.
We have the largest share of the children's apparel market in Canada, more than twice the share of our nearest competitor.
Despite extensive COVID-related store closures in the first half, our sales in Canada are projected up 16% this year, including over 10% growth in store sales and nearly 30% growth in e-commerce sales.
In Mexico, we are executing the same strategy that served us well in Canada and the United States.
We are converting all of our stores in Mexico to the more productive and more profitable co-branded model with the very best of our Carter's, OshKosh and Skip Hop brands.
Like Canada, we built a multichannel model in Mexico with eCommerce and wholesale distribution capabilities.
Wholesale distribution is an important component of our international growth strategy.
Our brands are sold in over 90 countries through wholesale relationships, including Amazon, Walmart and Costco.
We expect our international eCommerce sales to exceed $100 million this year, more than double the pre-pandemic period.
In summary, we're emerging from the pandemic, a stronger and more profitable company.
We've made substantive and sustainable structural changes to our business, which we believe will enable us to build off a higher level of profitability in the years ahead.
Carter's is the best-in-class in young children's apparel.
Our brands have withstood the test of time in many market disruptions over the past 100 years.
We've served the needs of multiple generations of families with young children and believe we're well positioned to benefit from the post-pandemic market recovery.
I'll begin on Page two with our GAAP income statement for the third quarter.
Net sales were $891 million, up 3% from last year.
Reported operating income was $124 million, up 9%, and reported earnings per share was $1.93, up 4% compared to $1.85 a year ago.
Our third quarter results for 2021 and 2020 included unusual items, which we summarized on Page three.
We've treated these items as non-GAAP adjustments to our reported results to enable greater comparability and insight into the underlying performance of the business.
The adjustments were not meaningful in this year's third quarter.
Last year's adjustments totaled $6 million in pre-tax expenses.
As I speak to our results on an adjusted basis today, these unusual items are excluded.
Page four summarizes our third quarter performance over the past three years.
As Mike noted, while we saw strong demand for our brands in the third quarter, top line sales performance was constrained by delays across the global supply chain.
These delays had particular impact on our U.S. wholesale business where we've estimated we achieved about $70 million less in sales than we had planned.
Despite this challenge, better-than-planned gross margin and expense management enabled us to exceed our earnings objectives.
For the third quarter, we posted record gross margin rate and gross profit dollars.
Our adjusted operating margin was also strong at nearly 14%.
As shown in the chart, despite lower revenue, we exceeded our 2019 pre-pandemic profit performance in 2021.
Given our strong liquidity and improved profitability, we resumed share repurchases in the third quarter.
When including dividends paid, our cumulative return of capital to shareholders through the third quarter was $145 million.
Moving to Page five, and our adjusted P&L for the third quarter.
Building on the 3% growth in net sales, gross profit grew 7% to $409 million, and gross margin improved 150 basis points to 45.9%, both records, as I've mentioned, our gross margin expansion was driven by strong consumer demand and less promotional activity, which resulted in improved price realization.
These benefits were partly offset by higher freight charges, particularly air freight, and the unfavorable comparison to last year's third quarter release of inventory reserves.
Royalty income was down about $1 million.
Last year's third quarter was particularly strong as shipments of licensed products surged as stores reopened.
On a year-to-date basis, royalty income has grown by 13%.
Adjusted SG&A increased 7% to $293 million, compensation provisions, which were significantly curtailed a year ago in response to the pandemic, were higher as was spending on brand marketing and technology initiatives.
Spending was lower than we had planned, and was well controlled.
The organization did a good job cutting back and deferring spending where possible, especially if the outlook for delays and the receipt of inventory became more pronounced.
Adjusted operating income was $124 million, up 4% compared to last year, and adjusted operating margin improved 10 basis points to 13.9%.
Below the line, there were a couple of factors which reduced the flow-through of year-over-year growth in operating income.
First, we had a modest FX-related loss in the quarter compared to an FX gain a year ago.
Second, our effective tax rate was higher than last year, 21.6% compared to 19% in last year's third quarter.
This increase reflects a greater mix of U.S.-based income and higher nondeductible compensation expense relative to last year.
For the full year, we're forecasting an effective tax rate of approximately 23% versus around 19% last year.
Our average share count was consistent year-over-year, while we executed meaningful share repurchases in the quarter.
It takes some time for that benefit to be reflected in the average share count used in calculating EPS.
So on the bottom line, adjusted earnings per share were $1.93 compared to $1.96 in last year's third quarter.
Moving to Page six with a recap of our balance sheet and cash flow.
Our balance sheet and liquidity remained very strong.
We ended the quarter with nearly $950 million in cash, and total liquidity of $1.7 billion when including available borrowing capacity under our credit facility.
Quarter end net inventories were 12% higher than last year.
At quarter end, we had $272 million of in-transit inventory, an increase of over 100% versus a year ago.
As we've said, production and transportation delays in the supply chain have been extensive in our business as they have been for many others as well.
We believe our inventory quality is very good, and we're well reserved for known issues.
We're projecting that year-end inventories will also be up low double digits, reflecting plans to bring in product earlier to offset potential transportation delays, and given good demand planned in the first half of next year.
Year-to-date cash flow from operations was $7 million compared to $319 million last year.
Last year was a very unusual year given the significant extension of vendor payment terms and rent deferrals.
This year's cash flow is benefiting from our growth in earnings, but the changes in working capital, including higher inventory, are working against us.
As the business continues to recover from the pandemic, we expect to return closer to our historical profile of generating significant operating and free cash flow.
As a reminder, our operating cash flow in 2019 was nearly $400 million.
We resumed share repurchases in Q3, buying back $110 million of our stock.
Share repurchases under our current trading plan have continued in the fourth quarter, bringing cumulative repurchases in 2021 to just over $190 million.
This brings our cumulative return of capital year-to-date, including dividends, to over $200 million.
Turning to Page eight with a summary of our business segment performance in the third quarter.
Our U.S. Retail and International segments delivered top line growth and good margin expansion, particularly our U.S. retail business.
Our U.S. wholesale business was disproportionately affected by the late receipt of product and higher freight costs, both of which weighed on sales, and a specialty segment operating income.
The increase in corporate expenses is largely attributable to higher compensation expense given our strong performance this year and the comparison to last year when many aspects of compensation had been curtailed.
All in, our consolidated adjusted operating margin improved to 13.9%.
Our year-to-date performance is summarized on Page nine.
We've had very strong growth in both sales and earnings in 2021 as the business has rebounded.
Year-to-date sales were up 19%, and our profitability is up significantly with adjusted operating income growth of 171%, and our adjusted operating margin expanding to 15%.
Year-to-date profitability in all of our business segments is up meaningfully.
Now moving to some individual business segment highlights for the quarter, beginning in U.S. retail on Page 10.
Our retail team did a great job managing through the quarter, delivering sales growth and even more significant profit improvement.
Delays in inventory receipts also affected our retail business.
Net sales in our U.S. retail segment grew 4%, with comparable sales growing nearly 6%.
The schools resuming in-class instruction this year, we saw a nice recovery in back-to-school demand.
We achieved a double-digit comp over the Labor Day selling period, with strong growth in our big kid sizes and playwear product categories.
U.S. retail profitability improved meaningfully in the third quarter.
Our retail team continued to make good progress in expanding gross margin through more effective pricing, promotion and inventory management.
Additionally, the strong retail comp sales performance in the quarter allowed us to leverage the fixed cost of the business.
Regarding fixed costs, our store optimization program has allowed us to eliminate about $30 million of annual costs related to low-margin stores, which we've now closed.
On Page 11, we have several significant technology initiatives underway in retail currently, two of which we've summarized here.
First, we're in the process of replacing our point-of-sale system in the stores.
This initiative includes both new software and the replacement of legacy hardware in the stores.
This new POS is expected to drive a number of benefits, including a significant reduction in checkout times.
Our initial experience has indicated it is as much as 50% faster.
The new POS will also better integrate the store and eCommerce experiences for consumers, and ultimately enable some of the innovative initiatives we're planning in marketing, including personalization.
These marketing personalization capabilities are intended to drive stronger, more enduring and more profitable relationships with our customers.
On our last call, we told you about our RFID initiative.
We've completed the initial deployment of RFID-tagged inventory to our stores, and have conducted extensive training with our retail team.
It will take into next year for all of our store inventory to be tagged, but we will start to realize some of the benefits of this technology right away, including improved visibility to store-level inventory, which will enable greater store fulfillment of online orders.
Our retail field team is very excited about this new technology, and what it will mean in terms of better serving customers in addition to the numerous operational and profitability benefits, we believe it will drive over time.
Now turning to Page 12, and some of our Carter's marketing in the third quarter.
One of our core strategies is to win in Baby.
Baby is the core of the Carter's brand, and we enjoy significant credibility with consumers, having served generations of families with young children, especially those with new babies.
We understand the challenges which come with welcoming a new baby.
Our research has told us that most new parents are looking for reassurance that they're on the right track.
Our marketing team recently created the "Made for This" Carter's brand campaign.
This highly emotional spot features a mother, now a grandmother, speaking to her daughter who has just had her first child.
We've received great feedback and engagement from consumers so far.
We've included the link to the video and encourage you to watch it.
Our marketing team recommends that you have some tissues nearby when you do.
Our Carter's marketing also increasingly speaks to consumers shopping for older children.
Our objective with Age up is to meet the needs of parents shopping for up to about a 10-year-old child and to increase the lifetime connection and value of our customer relationships.
Sales of these older age range products have driven meaningful sales growth in our retail business in recent quarters, and were our fastest-growing product segments in the third quarter.
Turning to Page 13, and the OshKosh brand.
Back-to-school is a key selling period for OshKosh.
As expected, with the return of in-person learning in most of the country, we had planned for a good back-to-school season, and that's what we delivered, especially with OshKosh.
As we told you on our last call, we kicked off back-to-school with a new OshKosh brand campaign, Someday is Today, featuring icons Mariah Carey, Muhammad Ali and Outkast.
This campaign resulted in $2.5 billion earned media impressions and a strong lift across all key brand metrics.
As a fast follow-up to the campaign, we partnered with leading fashion house Kith to present its first-ever kids brand collaboration.
Capsule Collection paired Oshkosh's iconic heritage and timelessness with kid's modern aesthetic and edge and pop culture to reintroduce the brand to parents in a whole new life.
Turning to Page 14.
Holiday selling is underway, and we're pleased with early demand so far.
Given the challenges of last year, including the COVID surge late in the year, which kept many families apart for the holidays, we think consumers are in a celebratory mode this year, and our holiday messaging this year will emphasize families celebrating together.
In the spirit on Page 15, in addition to beautiful holiday products, we're continuing to develop new and innovative ways to drive consumers to our stores and to our award-winning website throughout the holiday season with exclusive giveaways and child and parent-focused experiences.
First up is one of its kind collaboration with Vistaprint, where customers can order their annual holiday cards with a backdrop showcasing Carter's signature PJ prints.
Family dressing, especially in Carter's iconic Christmas Pajamas, has been a very strong trend in our business for the last several years, and this Vistaprint collaboration is a new way to extend and enhance this touch point with consumers.
On Page 16, we're continuing to leverage social media as a key way to connect with parents.
We've recently expanded into new social channels such as TikTok, and we've increased our video content as we continue to increase our relevance to in connection with today's parents, especially those from Gen Z. This strategy continues to pay dividends as we captured over 70% of kids apparel social engagement on Instagram in Q3, and continue to grow our community of parents.
Moving to Page 17, and our U.S. wholesale business.
Wholesale segment sales were $294 million compared to $302 million in last year's third quarter, a decline of 3%.
We've talked a lot about late inventory receipts, and wholesale was our most affected business in this regard.
The Baby category is heavily penetrated in our wholesale business, and much of this product is manufactured in Cambodia and Vietnam.
Two countries heavily affected by COVID.
As such, inventory availability was particularly acute in this part of our business.
Because of these inventory issues, we realized about $70 million less in wholesale sales in the third quarter than we had planned, with these orders rolling from Q3 into the fourth quarter.
Fortunately, the majority of this $70 million has now shipped.
Our customers remain hungry for inventory.
And to date, we've not seen any meaningful customer order cancellations.
The risk of order cancellations remains elevated though, particularly if delays of fall, winter and holiday product persist or worsen as we move deeper into the fourth quarter.
Relative to our previous forecast, we have increased our estimate of shipments previously planned to occur in the fourth quarter, which will be affected by late arriving product.
We're expecting fourth quarter wholesale sales will be up mid- to high single digits over last year.
Our supply chain and wholesale teams have worked around the clock for many months now under very adverse circumstances in order to serve our customers in the most complete and efficient manner possible.
Bright spots in the third quarter included good overall sales growth with our exclusive brands, and strong replenishment demand for our core My First Love Baby products under the Carter's brand and the replenishment components of the exclusive brands businesses.
Adjusted segment income was $40 million compared to $67 million in last year's quarter.
Segment margin was 13.7%, down from 22.3% last year.
This lower profitability is due to a number of factors as summarized on this page.
One very notable driver has been the very significant expenditures for air freight in the wholesale segment, which were about $15 million in the third quarter.
As Mike mentioned, this is a significant multiple of what we've spend in any given year.
As I mentioned, year-to-date performance of all of our business segments, including wholesale, has been strong.
Year-to-date wholesale margins are up 360 basis points over last year.
And for the full year, we're forecasting higher earnings and margin expansion in the U.S. Wholesale segment.
Moving to Pages 18 and 19.
Our strong wholesale business is a unique strength of Carter's business model.
Our wholesale partners provide 19,000 points of distribution across North America.
Throughout the pandemic, we've leaned into marketing support for our wholesale customers, especially Kohl's, Macy's, Target, Walmart and Amazon, which have been such important destinations for consumers seeking our brands during the pandemic.
Our wholesale customers recognize the importance to consumers of having Carter's and OshKosh as the market-leading brands on their sales floors and websites.
This marketing highlights our Fall and Holiday product and utilizes our iconic photography and branding, which consumers have come to know so well.
As the world continues to recover from the pandemic, many of our wholesale customers have strengthened their market positions with consumers and as such, remain very important destinations for our products.
On Page 19, we show some of the rich holiday marketing planned by Kohl's and Macy's, which will prominently feature the Carter's brand.
Turning to Page 20, and International segment results.
Reported segment sales grew 15% in the third quarter.
On a constant currency basis, segment sales grew 10%.
International wholesale in Canada drove the strong growth.
Sales in Canada grew 5%, reflecting growth in both eCommerce and stores since launching omni-channel capabilities.
Earlier this year, Canada's omni-channel demand has ramped nicely, with stores supporting over 25% of online orders.
Sales to international wholesale customers grew 70% over last year, principally driven by demand from our partner in Brazil and Amazon outside the United States.
Profitability in the International segment increased meaningfully over last year, with adjusted operating margin increasing 17.4%.
This performance reflects strong sales growth and improved gross margin.
On Page 21, we continue to make good progress holding our business in Mexico despite significant COVID-related disruption in this market over the past 20 months.
We've opened three new co-branded stores in Mexico this year, including this one in Monterrey, which has quickly jumped to be one of our highest performing locations.
Turning to an update on our supply chain on Page 23.
As we've been discussing, there are a number of supply chain related challenges we're managing through right now.
These issues are not unique to Carter's.
Fortunately, we've taken strong steps to address these issues.
First, as it relates to delayed product, we've managed the situation over the past number of months in close collaboration with our wholesale customers and our suppliers.
Where necessary, we canceled production in order to avoid order cancellation, and the creation of excess inventory and related liabilities.
Our mindset has been to maximize the return on investment on our inventory rather than default to heavy clearance activity or overreliance on the off-price channel.
We've developed new strategies to pack-and-hold inventory for future seasons and to make greater use of our own retail channel to sell through excess inventory.
In certain cases, we've spent to expedite product from Asia to the United States.
While we certainly don't relish spending so much on air freight.
We're fortunate to have the financial strength to be able to do so.
Many other companies do not have this same ability.
Second, transportation delays and higher transportation costs have been well documented issues in the marketplace.
Our teams have responded well by reducing our reliance on the heavily congested West Coast ports.
And we've renegotiated our ocean freight agreements in order to improve speed and service, and lock in rates below where spot market prices have trended.
Third, cotton and oil costs are up.
These higher input costs will affect our 2022 product costs.
Fortunately, our global sourcing teams have locked in product costs for the first half of next year, which are only up modestly and within our ability to cover with higher pricing.
As a point of reference, we've estimated that raw cotton represents about 16% of the cost of a finished good.
So movements in that particular input are usually very manageable.
We've always considered our supply chain capabilities to be a competitive and strategic asset for Carter's.
This perspective has been validated over the last year as our teams have responded so admirably to the various challenges that the pandemic has presented.
Now for our outlook for the balance of the year, beginning on Page 25.
For the fourth quarter, our outlook for sales in total has improved relative to our previous forecast.
This is driven in part by the movement into Q4 of wholesale shipments previously planned to occur in the third quarter, and higher forecasted international demand.
As we indicated on our last call, there are several factors affecting comparability to last year's fourth quarter, and these factors are listed here.
We're expecting to post sales of over $1 billion in the fourth quarter with adjusted operating income of $127 million and adjusted earnings per share of approximately $2 per share.
For the full year then, on Page 26, we were encouraged by our profit performance in Q3, a combination of improved gross margin despite incurring extraordinary transportation costs and overall effective management of other spending across the business.
Our updated forecast essentially flows through the profit upside realized in the third quarter to the full year.
So on somewhat lower full year projected net sales, we've increased our profitability forecast.
If we're successful in achieving our forecast, 2021 would represent record profitability for the business, and grow far greater than we thought possible this year.
The charts on Page 26, show our performance for 2019 and 2020, in addition to our current outlook for 2021's full year results.
We're now targeting full year net sales of approximately $3.450 billion.
Adjusted operating income of $490 million, up from our previous forecast of $475 million, and adjusted earnings per share of $7.57, up from our previous guidance of $7.28.
We're focused on delivering a very strong fourth quarter to conclude what's been a very good year for Carter's.
| compname reports q3 earnings per share of $1.93.
q3 earnings per share $1.93 .
q3 adjusted non-gaap earnings per share $1.93.
sees fy adjusted earnings per share about $7.57.
compname reports q3 adjusted non-gaap earnings per share of $1.93.
|
With me on the call is our Chief Executive Officer, Brian Deck; and our Chief Financial Officer, Matt Meister.
JBT's periodic SEC filings also contain information regarding risk factors that may have an impact on our results.
These documents are available in the Investor Relations section of our website.
Also, our discussion today includes references to certain non-GAAP measures.
A reconciliation of these measures to the most comparable GAAP measure can be found in the Investor Relations section of our website.
Finally, I encourage you to review the second quarter slide deck, which is also posted in the Investor Relations section of the JBT website.
In it, we show historical trends, our key performance metrics and business opportunities and speak to our growth strategy.
It's great to be here to talk about JBT's strong financial performance and the strategic progress we made in the second quarter.
As we highlighted last quarter, JBT continues to enjoy robust demand at FoodTech and encouraging signs of recovery at AeroTech.
At the same time, we continue to face a challenging macro environment driving increase in cost of doing the business including material cost inflation, supply chain constraints and tight logistics.
Those pressures have intensified and now also include rising labor costs and labor shortages.
Notwithstanding this challenging backdrop, we outperformed expectations on the top and bottom lines in the second quarter.
I'd like to express my appreciation to everyone at JBT who did an excellent job of getting orders out the door to satisfy customer needs in this tough operating environment.
In the second quarter, we also booked record orders and generated excellent cash flow.
Moreover, we advanced our growth strategy with the exciting acquisition of Prevenio which expands our recurring revenue stream and further strengthens JBT's wall in food safety.
I'll hand it over to Matt who will provide a more detailed analysis of the second quarter results, speak to the benefits of the convertible note offering we completed in the quarter and walk you through our updated guidance.
JBT's second quarter performance continued to demonstrate our ability to deliver on growth in a challenging operating environment.
FoodTech revenue was $361 million, an increase of 19% year-over-year and 16% sequentially.
As Brian mentioned, we outperformed in the quarter driven primarily by better than expected shipments as our businesses executed well despite the challenges they faced.
The impact of foreign exchange translation was also a positive factor in the quarter, accounting for approximately 5 percentage points of the year-over-year growth which was 3 percentage points higher than expected.
Adjusted EBITDA margin for the quarter was 19%, operating margins of 14.3% at the low end of our guidance range and negatively impacted by the cost pressures we experienced with the supply chain and labor market.
AeroTech revenue of $115 million which was ahead 6% year-over-year and 8% sequentially was at the high end of our expectations.
Adjusted EBITDA margins of 11.1% and operating margins of 10.5% exceeded guidance due to a favorable mix of higher recurring revenue.
Interest expense came in nearly $1 million less than forecast due to better than expected cash flow.
As a result, JBT reported diluted earnings per share from continuing operations of $0.95 in the second quarter.
Adjusted earnings per share of $1.19 includes an adjustment for a $4.4 million or $0.14 per share non-cash deferred tax remeasurement associated with the tax law change in the UK.
Adjusted EBITDA for the second quarter was $70.1 million up 2.58% year-over-year and 20% sequentially.
Operating profit of $47.3 million declined 1% year-over-year and higher M&A costs also had [Phonetic] 25% sequentially.
Free cash flow for the quarter remained strong at $35 million, representing a conversion rate of 115% with continued goods collections and accounts receivable, customer deposits and a slower than expected investment in inventory due to supply chain constraints.
Going forward, we need to invest in inventory levels to support the increased backlog.
And therefore, with higher forecasted revenue, we anticipate that the balance sheet will expand in the second half of the year.
Additionally, we are increasing our capital expenditure forecast for the year by approximately $5 million from our previous guidance to support further strategic investment in our digital capabilities.
Altogether, we expect free cash flow conversion for the year to remain north of 100%.
As we look ahead to the full year of 2021, we have refined our guidance based on first half results and order trends.
We have again raised top line guidance for FoodTech, forecasting a year-over-year gain of 10% to 12% organically with another 2% increase related to FX translation, that compares with our previous guidance of 9% to 11%.
With the inclusion of Prevenio acquisition, our all-in top line guidance for FoodTech is 14% to 16% growth in the full year.
Considering the continuing supply chain and operational cost pressures, we have updated the margin guidance range for FoodTech with projected operating margins of 14% to 14.75% and adjusted EBITDA margin of 19% to 19.75%.
At AeroTech, we have narrowed our revenue guidance range to 1% to 4% from the previously communicated range of 0% to 5%.
We are holding margin guidance with projected operating margins of 10.75% to 11.25% and adjusted EBITDA margins of 12% to 12.5%.
Additionally, we are adjusting our forecast for corporate costs as a percent of sales down slightly to 2.7% and lowering interest expense guidance to $9 million to $10 million.
Altogether, we have raised our adjusted earnings per share guidance to $4.60 to $4.80 which excludes M&A and restructuring costs of $12 million to $14 million and the previously mentioned UK tax remeasurement in the second quarter.
Our GAAP earnings per share guidance of $4.15 to $4.35 is $0.05 below our previous guidance and primarily due to higher M&A related costs.
We've also raised our full year adjusted EBITDA guidance to $280 million to $290 million up from the previous guidance of $270 million to $285 million.
Now focusing on the third quarter, we expect revenue growth for JBT of 18% to 19%.
This consists of year-over-year growth of 19% to 20% at FoodTech, which includes 3% to 4% from acquisitions.
For the AeroTech business, we are projecting growth of 15% to 16% for the quarter.
At FoodTech, we are projecting third quarter operating margin of 14% to 14.5% with adjusted EBITDA margins of 19% to 19.5%.
For AeroTech, operating margins are forecasted in 11.25% to 11.75% with adjusted EBITDA margin of 12.25% to 12.75%.
Corporate costs for the quarter are expected to be $13 million to $14 million, excluding approximately $4 million in M&A and restructuring costs.
Interest expense should be $2.5 million to $3 million.
That brings third quarter 2021 earnings per share guidance to $1 to $1.10 on a GAAP basis and $1.10 to $1.20 as adjusted.
Finally, I would like to briefly touch on the convertible note offering that we completed in the second quarter.
With net proceeds of more than $350 million, we have locked in a portion of JBT's capital at a historically low fixed interest rate with favorable conversion terms that limit shareholder dilution until the stock exceeds the synthetic strike price of $240 per share.
The notes also afford JBT's additional flexibility in our capital structure to support our organic investments and acquisition strategy.
As I mentioned at the top of the call, JBT generated record orders in the second quarter.
FoodTech orders expanded 3% sequentially from the first quarter's record level.
We continue to enjoy robust demand from customers serving the retail market with improvements on the foodservice side with particular strength in poultry, plant-based foods, pet foods, fresh produce and packaged ready meals.
In addition, our automated guided vehicle business outperformed in the second quarter with several large food customer orders, a reflection of the growing demand for back-end automation among our customer base.
FoodTech's robust order trends are also a direct reflection of the continued investment we've made in product innovation.
JBT's recent product launches featuring advances of hygiene, capacity and automation have gained nice acceptance in the marketplace.
Furthermore, new features that reduce food waste and promote more efficient use of water and energy enabled JBT to help our customers on their sustainability journey.
Geographically, FoodTech commercial activity in North America remained robust.
Europe was essentially flat versus a volatile first quarter, but with progress on vaccine penetration and governmental economic support, its outlook seems to be more promising albeit subject to uncertainty surrounding COVID.
As it relates to Asia and South America, we are experiencing some fresh pandemic-related delays in customer investment decision making.
AeroTech also enjoyed record orders in the second quarter.
This primarily reflected some major orders on the infrastructure side of the business, which will mostly ship in 2022.
AeroTech's second quarter orders also reflected typical seasonal strength including demand for cargo loaders and deicers.
Given the lumpiness of orders, we expect AeroTech order activity in the second half of the year to be normal -- to be more normalized relative to the outstanding second quarter.
At the same time, we are encouraged by the pickup in US passenger traffic and have a few -- have secured a few additional orders from commercial airlines.
However, as we've said, we expect full recovery to take another two years to play out and we're cautiously watching the developments surrounding the Delta variant, which also could impact the pace of recovery in air travel.
Nonetheless, we feel we are clearly beyond the bottom of the investment cycle.
Now to the acquisition of Prevenio which closed in early July.
Prevenio further strengthens JBT's role in food safety, which is a critical and growing concern for our food processing customers.
They offer a unique delivery system for consumption-driven anti-microbial solutions which provide optimal food safety performance on our customers' operations, a safer environment for their employees as well as enhances food integrity.
Financially, Prevenio has demonstrated an impressive growth record with EBITDA margins in the mid-20s.
Moreover, the revenue model is predominantly consumable and contractual adding to the strength of our recurring revenue profile.
And as part of JBT, we foresee significant opportunities to expand Prevenio's applications beyond its core poultry market and its other proteins and fresh food and vegetables where JBT has a strong presence.
Furthermore, over time, we see opportunities to extend its geographic reach.
Switching gears toward internal investments, JBT plans to accelerate investment in our digital strategy in iOPS platform that builds intelligence in our products and services.
Through a focus on digitally enabled customer-centric solutions, we believe we can further entrench JBT as a holistic uptime solutions provider with our customers.
Additionally, I want to speak to the rebranding of what was previously our liquid food business within the FoodTech segment.
Its new name Diversified Food & Health reflects a business that has expanded far beyond its historical focus on juice and canned goods as a result of continued investment, both organically and through acquisition.
Diversified Food & Health now provides a wide portfolio of solutions for customers across the FoodTech segment including processing, preservation and packaging solutions to serve end markets for fresh cut and processed foods and vegetables, convenience foods, prepared and ready to eat meals, pet foods, protein and plant-based beverages, dairy, pharmaceuticals and nutraceuticals.
Together with our protein business, FoodTech has an enviable diverse offering for our food and beverage customers.
Overall, we are very pleased with the robust commercial activity at FoodTech, which has enjoyed broad-based strength on the retail side growing demand for automation solutions and a pickup in the hard hit foodservice side.
At AeroTech, continued strength on the infrastructure side has been accompanied by initial improvement in our business with commercial airlines.
However, we remain concerned by the recent resurgence in COVID and the potential impact of macroeconomic conditions.
We are otherwise mindful of the high cost environment under which we are working.
Lastly, as part of JBT's core values, we continue to prioritize a diverse and inclusive work culture that promotes continued education, enhance development opportunities, mutual respect and teamwork.
| compname reports q2 adjusted earnings per share $1.19.
q2 adjusted earnings per share $1.19.
sees q3 adjusted earnings per share $1.10 to $1.20.
sees fy adjusted earnings per share $4.60 to $4.80.
sees fy gaap earnings per share $4.15 to $4.35.
q2 earnings per share $0.95 from continuing operations.
qtrly orders increased 68 percent year over year and 19 percent sequentially with an expanding backlog.
expects total revenue expansion of 10 to 13 percent for full year.
|
The year is off to a good start.
In the first quarter, we generated earnings of $2.43 per share, a 59% increase over the fourth quarter, primarily driven by strong credit quality.
Our ROE grew to over 18% and our ROA was 1.68%.
I am pleased to report that we are hearing more optimism among our customers and colleagues across our markets.
Stimulus payments to individuals and enhanced unemployment benefits, along with PPP loans to small- and medium-sized businesses have provided much needed relief to those that are struggling.
Also, the Infrastructure Bill that is being considered is expected to spread spending over many years.
This fiscal stimulus and the ramp up in the vaccine distribution, in combination with ample liquidity and low borrowing costs, has the potential to spur substantial activity.
The economic metrics are improving quickly and the outlook for the back half of the year is for strong economic growth.
As the economy continues to reopen and pre-pandemic conditions return, many businesses are beginning to experience accelerating activity.
I remain very proud of the unwavering commitment of our team to serve our customers, communities and each other.
We've again stepped up our efforts to support those affected by the pandemic.
Last month, Comerica and the Comerica Charitable Foundation pledged approximately $16 million to support small businesses and communities impacted by COVID.
This support is in addition to the $11 million committed in 2020.
As you know, last year, we funded $3.9 billion in the first round of PPP loans.
Also, so far this year, through the hard work of colleagues across the Bank, we further assisted businesses by funding close to $1 billion in the second round of PPP.
In addition, in the first quarter, we processed over $600 million in PPP loan repayments, mainly through forgiveness.
Turning to our first quarter financial performance on Slide 4.
Compared to the fourth quarter, average loans decreased with seasonally lower home purchase volumes impacting our Mortgage Banker business.
Also, total line utilization across nearly all businesses have remained low.
However, our loan pipeline has continued to grow.
Average deposits increased over $1 billion to another all-time high as customers received additional stimulus payments.
Net interest income was impacted by $17 million in lease residual adjustments in an expiring legacy portfolio.
Excluding this impact, pre-tax pre-provision net revenue increased 5% despite the shorter quarter and the decline in loan volume.
This increase in PPNR was due to continued robust fee generating activity in our expense discipline.
As far as credit, our conservative culture, diverse portfolio, as well as deep expertise has served us well.
Strong credit performance and an improvement in our economic forecast resulted in a negative provision of $182 million.
The credit reserve remains healthy at 1.59%.
Net charge-offs were only 3 basis points.
Through the cycles, our net charge-offs have typically been at or below our peer group average, including during the past year as we navigated the pandemic.
With more confidence in the economic recovery and an estimated CET1 ratio of 11.09%, we plan to restart share repurchases.
In the second quarter, we expect to make significant strides toward our 10% target, giving careful consideration to earnings generation, as well as capital needs to fund future loan growth.
Our ongoing goal is to provide an attractive return to our shareholders, which includes a dividend that currently has a yield of about 4%.
Turning to Slide 5, average loans decreased approximately $800 million.
As Curt mentioned, the biggest driver was Mortgage Banker, which declined from its record high in the fourth quarter due to lower purchase volumes.
Energy decreased as higher oil prices are resulting in improved cash flow and capital markets activity.
We had expected National Dealer loans would begin to rebound in the first quarter.
However, supply chain issues, most notably with computer chips have STIMI [Phonetic] production.
In addition, March auto sales were the second highest of all-time for that month, further depleting inventory.
Dealer loans were $1.5 billion below the first quarter of 2020.
We remain confident in the floor plan balances will eventually rebuild to historical levels.
Equity Fund Services was a bright spot, increasing over $200 million with strong fund formation.
Total period end loans reflected decreases of $900 million in Dealer and $700 million in Mortgage Banker.
Line utilization for the total portfolio declined to 47%.
We feel good about the pipeline, which now sits above pre-pandemic levels.
It increased to nearly every business line and loans in the last stage of the pipeline nearly doubled over the fourth quarter.
Ultimately, we would expect this to translate into loan growth.
As far as loan yields, there were $17 million in lease residual value adjustments, mostly on aircraft and an expiring legacy portfolio.
We have not done business in this segment for many years and no further adjustments are expected.
Excluding the 14 basis point impact from the residual adjustment, loan yields increased 3 basis points with the benefit of accelerated fees from PPP forgiveness.
Continued pricing actions, particularly adding rate floors when possible as loans renew, offset the decline in LIBOR.
Average deposits increased 2% or $1.1 billion to a new record as shown on Slide 6.
Consumer deposits increased nearly $1 billion, primarily due to seasonality and the additional stimulus received in January.
Customers continue to conserve and maintain excess cash balances.
With strong deposit growth, our loan-to-deposit ratio decreased to 69%.
The average cost of interest-bearing deposits reached an all-time low of 8 basis points, a decrease of 3 basis points from the fourth quarter and our total funding cost fell to only 9 basis points.
Slide 7 provides details on our securities portfolio.
Period end balances are up modestly as we recently began to gradually deploy some of our excess liquidity by opportunistically increasing the size of the portfolio.
Lower rates on the replacement of about $1 billion in payments received during the quarter resulted in the yield on the portfolio declining to 1.89%.
Yields on repayments averaged approximately 235 basis points, while recent reinvestments have been in the low-180s.
We expect to mostly offset the yield pressure on MBS in the near term with a modestly larger portfolio.
However, maturing treasuries will likely be a slight headwind in the back half of the year, depending on the mix of MBS and treasuries we would likely replace them with, as well as market conditions.
Turning to Slide 8, excluding the impact of the lease residual adjustment and two fewer days in the quarter, net interest income was roughly stable and the net interest margin would have increased 2 basis points.
As far as the details, interest income on loans decreased $28 million and reduced the net interest margin by 8 basis points.
This was primarily due to the $17 million of lease residual adjustments, which had a 9 basis point impact on the margin, as well as two fewer days in the quarter, which had a $7 million impact.
Lower loan balances had a $5 million impact and were partially offset by a $3 million increase in fees related to PPP loans.
Other portfolio dynamics had a $2 million unfavorable impact and included lower LIBOR, partially offset by pricing actions.
Lower securities yields, as I outlined in the previous slide, had a $2 million or 1 basis point negative impact.
Continued prudent management of deposit pricing added $3 million and 1 basis point to the margin and a reduction in wholesale funding added $1 million and 1 basis point.
Average balances of the Fed were relatively steady and remain extraordinarily high at $12.5 billion.
This continues to weigh heavily on the margin with the gross impact of approximately 41 basis points.
Credit quality was strong and metrics are moving in the right direction as shown on Slide 9.
Net charge-offs were only $3 million or 3 basis points.
Non-performing assets decreased $34 million and at 64 basis points of total loans, they are about only half of our 20-year average.
Inflows to non-accrual were also very low.
Criticized loans declined $366 million and comprised 5% of the total portfolio.
Positive migration in the portfolio, combined with growing confidence and improving economic forecast, resulted in a decrease in our allowance for credit losses.
Of note, both the social distancing-related segments, as well as the Energy portfolio have performed better-than-expected.
However, we continue to apply a more severe economic forecast to these areas.
Our total reserve ratio is very healthy at 1.59% or 1.72% excluding PPP loans and remains well above pre-pandemic levels.
Non-interest income increased $5 million as outlined in Slide 10, sustaining the positive trend we've seen for the past year.
Derivative income increased $11 million as volumes remain robust, particularly for energy hedges, combined with a $10 million benefit from a change in the credit valuation adjustment.
Note that we have made a change in reporting, we have combined foreign exchange and customer derivative income, which was previously included in other non-interest income into a combined derivative income line item.
Prior periods have been adjusted to reflect this change.
Warrants and investment banking fees moved higher and we had smaller increases in fiduciary and deposit service charges.
Partly offsetting this, commercial lending fees decreased $6 million with the seasonal decline in syndication activity.
Deferred comp asset returns were $3 million, a $6 million decrease from the fourth quarter and are offset in non-interest expenses.
Note, card fees remained elevated.
They were over 20% higher than a year ago due to government card and merchant activity spurred by the economic stimulus and changes in customer behavior related to the COVID environment.
All in all, another strong quarter for fee income.
Turning to expenses on Slide 11, which decreased $18 million or 4%.
Starting with salaries and benefits, which were up $11 million due to seasonal factors.
This increase was driven by annual stock compensation and payroll taxes resetting.
Providing a partial offset was a decrease in deferred comp, as well as a reduction due to two fewer days in the quarter and seasonally lower staff insurance costs.
All other expenses decreased $29 million.
As discussed last quarter, strong investment performance in 2020 has resulted in an $8 million reduction in pension costs, which is included in other non-interest expense.
In addition, effective January 1, we adopted a change in the accounting method for our pension plan.
Previous quarters have been adjusted, specifically fourth quarter pension expense was reduced by $8 million.
This change also decreased AOCI and increased retained earnings at year-end by $104 million, which resulted in a 16 basis point increase to our CET1 ratio.
Finally, we realized seasonal decreases in advertising and occupancy, lower operating losses and FDIC expense, as well as smaller decreases in other categories.
Our strong expense discipline is assisting us in navigating this low rate environment as we invest for the future.
Our CET1 ratio increased to an estimated 11.09% as shown on Slide 12.
As always, our priority is to use our capital to support our customers and drive growth while providing an attractive return to our shareholders.
In this regard, we have maintained a very competitive dividend yield.
As far as share repurchases, we have a long track record of actively managing our capital and returning excess capital to shareholders.
With more confidence in the path of the economic recovery, we plan to resume share repurchases in the second quarter.
We expect to make significant strides toward our CET1 target of 10%.
Slide 13 provides our outlook for the second quarter relative to the first quarter.
In addition, we have provided expected trends for the second half of the year relative to the second quarter outlook.
In the second quarter, excluding PPP loans, we expect loan volume to be stable.
We expect growth in several lines of business led by middle market as a result of increasing M&A, as well as working capital and capex needs.
However, this will be offset by continuing headwinds in Mortgage Banker, National Dealer and Energy.
In line with the MBA forecast, Mortgage Banker is expected to decline as refi volumes begin to cool with higher rates.
We expect National Dealer to continue to decrease as auto inventory levels are challenged by strong demand combined with supply issues.
Also, Energy loans are expected to remain on the current declining trend as higher oil prices are driving improved cash flow and capital markets activity.
As far as PPP loans, it is difficult to predict.
However, we believe loan forgiveness will pick up toward the end of the second quarter and the bulk should be repaid by year-end.
Excluding PPP loan activity, we believe loans should grow across nearly all business lines in the second half of the year.
This is based on our robust pipeline and expectations that the economy will continue to strengthen.
We expect average deposits to remain strong with the second quarter benefiting from the latest federal stimulus.
These record levels are expected to wane in the back half of the year as customers start to put cash to work.
As far as net interest income, the $17 million lease residual adjustment we took in the first quarter will not recur.
That aside, all other factors, including PPP are expected to offset each other in the second quarter.
For example, headwinds from lower reinvestment yields on securities should be offset by a modestly larger portfolio.
As we move into the second half of the year, we expect pressure on securities yields and swap maturities to be roughly offset by non-PPP loan growth.
In addition, lower PPP loan volume and accelerated fees are expected to be a headwind.
Of course, PPP activity is difficult to predict and may result in variability.
Credit quality is expected to remain strong.
Assuming the economy remains in the current path, we expect our allowance should move toward pre-pandemic levels.
We expect non-interest income in the second quarter to benefit from higher card fees driven by recent stimulus payments, as well as increased syndication fees following lower seasonal activity in the first quarter.
Also, we expect growth in fiduciary income reflecting annual tax-related activity and new business generation.
This growth is expected to be more than offset by a decline in derivatives and warrants income from elevated levels, as well as deferred comp, which is not assumed to repeat.
As we progress through the year, we believe customer-driven fee categories in general should grow with improving economic conditions.
However, card fees are expected to be a headwind as the benefit from growing merchant and corporate volumes could be more than offset by lower government card activity due to the absence of further individual stimulus payments.
We expect expenses to be stable in the second quarter.
Salary and benefit expenses are expected to decrease in the second quarter with lower stock comp, as well as lower payroll taxes, partly offset by annual merit and one additional day.
Offsetting this decrease, we expect a rise in outside processing tied to growth in card fees, as well as seasonally higher marketing and occupancy expenses.
As far as the second half of the year, by maintaining our focus on expenses, we expect to offset higher tech spend.
In addition, we expect increases in certain line items due to seasonality and revenue growth.
Finally, as I indicated on the previous slide, we plan to restart share repurchases in the second quarter.
As I mentioned at the beginning of the call, we are off to a good start and we expect the economy will continue to improve throughout this year.
We believe firming manufacturing conditions, increasing business and consumer confidence, as well as pent-up demand will support strong economic growth.
It is hard to believe that just over a year ago we drastically changed the ways in which we work and live.
We have demonstrated the resilience of our business model as we embraced our core values and rose to the occasion to support our customers, communities and each other.
Our success is anchored by our ability to provide our expertise and experience to build and solidify deep, enduring relationships, particularly during challenging times.
I'm extremely proud of the work our team has done to ensure we continue to deliver the same high-level of service.
We are focused on delivering a more diversified and balanced revenue base with an emphasis on fee generation, and our progress is demonstrated in our results as non-interest income has increased in each of the past four quarters.
Our robust card platform is a great example has helped position us for the recent and likely ongoing changes in customer behavior.
Also, our fiduciary business is growing with strong collaboration between Wealth Management, Commercial and Retail Bank divisions.
In February, we increased the breadth and scale of our Trust Alliance business through the acquisition of a small group with expertise in this area.
In addition, we are committed to maintaining our strong expense discipline.
Our technology investments are enhancing the customer and colleague experience, helping to attract and retain customers and improving colleague efficiency.
Finally, our disciplined credit culture and strong capital base continue to serve us well.
These key strengths provide the foundation to continue to deliver long-term shareholder value.
| compname reports q1 earnings per common share of $2.43.
qtrly earnings per common share $2.43.
qtrly provision for credit losses decreased $165 million to a benefit of $182 million versus q4 .
|
And as a result of this performance and an improved outlook for the rest of the year, we have once again raised our guidance.
The 2021 guidance that we provided you last quarter was already within reach of our original pre-COVID plans for 2021.
Our revised guidance today significantly exceeds those original plans.
In many ways 2020 was a reset year for our company and also for the industry.
We've been saying for a long time that the traditional timelines for the development of new drugs are too long.
The speed at which COVID vaccines were developed in 2020 has obviously raised the bar in terms of what expectation should be.
The crisis accelerated the adoption of new technologies and we believe it will force a lasting change in how innovative medicines are developed and commercialized.
All of these has made IQVIA even more relevant to our clients and has highlighted the power of our differentiated offerings.
The deep client engagements that we had during the pandemic demonstrated how uniquely positioned we are to bring new insights and expertise that can improve drug development and commercial timelines.
What is also becoming clear is that there is a lot of pent-up demand due to one, the many trials that were slowed down or temporarily pushed to the right.
And two the trials that did not get started as they were crowded out by the COVID resolution efforts on which everyone was focused.
This pent-up demand across therapy areas combined with record levels of biotech funding provide a very strong backdrop for our industry.
As a result of these favorable conditions we started the process of revisiting our vision 2022 goals.
We plan to update you later this year on our vision '22 progress and lay the groundwork for the next phase of our journey.
We may do this at an investor conference later this year, especially if we are able to hold one in person, so stay tuned for more information.
So now, let's review the quarter.
Revenue for the first quarter grew 24% on a reported basis and 21% at constant currency was $209 million above the high end of our guidance range, but about half of this beat came from strong operational performance and half was from higher pass-throughs.
First quarter adjusted EBITDA grew 32%, reflecting our revenue growth and productivity measures.
The $69 million beat above the high end of our guidance range was entirely due to the stronger organic revenue performance.
First quarter adjusted diluted earnings per share of $2.18 grew 45%.
The beat here entirely reflect the adjusted EBITDA drop-through.
A little bit more color on the business.
Our commercial technology presence continues to grow as we launch new offerings in the market.
During the quarter, a top 10 pharma client deployed our next best action solution in 14 countries.
This tool is a SaaS-based technology platform that optimizes our client's sales force effectiveness.
It increases the success of their marketing activities by providing automated sales call recommendations to the field based on advanced artificial intelligence and machine learning algorithms.
Our base OCM -- CRM win rates remain strong.
We added another 10 new clients this quarter and now have 150 clients deploying about 70,000 users.
Our eCOA technology platform or Electronic Clinical Outcomes Assessment tool, which is used by our real world as well as R&DS team is also experiencing strong demand.
This cloud-based platform utilizes a user-friendly interface to collect clinical data directly from patients.
We launched this solution during 2019 and the team is seeing strong user acceptance.
To-date, we've been awarded over 125 studies with over 300,000 patients enrolled and over 4 million surveys completed.
Moving now to R&DS.
We continue to build on our strong bookings momentum in our R&DS business.
In the first quarter, we achieved a contracted net book-to-bill ratio of 1.41, including pass-throughs and 1.41 excluding pass-throughs.
At March 31st, our LTM contracted book-to-bill ratio was 1.52 including pass-throughs and 1.45 excluding pass-throughs.
These numbers are although more impressive, obviously, given our strong revenue growth.
Our contracted backlog in R&DS including pass-throughs grew 18.3% year-over-year to $23.2 billion at March 31, 2021.
As a result, our next 12 months revenue from backlog increased by over $600 million sequentially to $6.5 billion, that's up 31.1% year-over-year.
The R&D team is building on the success we experienced in 2020 with our hybrid virtual trial offering or the term what is now decentralized trials.
In the first quarter we won decentralized trials in new therapeutic areas, including cardiovascular and metabolic disorders.
We are working with 5 of the top 10 pharma client and to-date we've recruited almost 170,000 patients using our advanced decentralized trial solutions.
Finally, you saw that on April 1, we completed the acquisition of the remaining interest in Q Squared Solutions from Quest Diagnostics.
As you know Q Squared is an industry-leading laboratory service provider for clinical trials with global capabilities across safety, bioanalytical, vaccine, genomics, and bioanalytical testing along with best-in-class technology in bio specimen and consent lifecycle management.
This transaction streamline strategic decision making for us and gives us the flexibility to build out greater bioanalytical, genomic and biomarker capability, as we see increased attractive growth opportunities in this expanding market.
As already mentioned, this was a very strong quarter.
We'd start first by giving you some more detail on revenue.
First quarter revenue of $3,409 million grew 23.8% on a reported basis.
Analytics Solutions revenue for the first quarter was $1,348 million, which was up 20.7% reported and 17.1% at constant currency.
R&D Solutions first quarter revenue of $1,868 million improved 29.6% at actual FX rates, and 28.1% at constant currency.
Pass-through revenues were a tailwind of 770 basis points to the R&DS revenue growth rate in the quarter.
CSMS revenue of $193 million was down 1.5% reported and 4.1% on a constant currency basis.
Moving down to P&L, adjusted EBITDA was $744 million for the quarter.
Margins expanded 140 basis points despite significant headwinds from higher pass-through revenue and lower margin COVID work.
GAAP net income was $212 million and GAAP diluted earnings per share were $1.09.
Adjusted net income was $425 million for the first quarter and adjusted diluted earnings per share grew 45.3% between [Technical Issues] $2.18.
R&D Solutions delivered another exceptional quarter of net new business.
Backlog was up 18.3% year-over-year to $23.2 billion at March 31.
Next 12 months revenue as Ari mentioned from backlog grew significantly and currently stands at $6.5 billion, up 31.1% year-over-year.
And of course this metric now includes the first quarter of 2022, which is a further indication that we see the momentum of the business continuing beyond this year.
Now let's review the balance sheet.
At March 31, cash and cash equivalents totaled $2.3 billion and debt was $12.2 billion, resulting in net debt of $9.9 billion.
Our net leverage ratio at March 31 improved to 3.9 times trailing 12 month adjusted EBITDA, marking the first time since just following the merger that this ratio was below 4 times.
And this is particularly noteworthy, you may recall that in 2019, when we gave you our three year guidance, we committed to delever to 4 turns or below exiting 2022.
We're pleased to have achieved this target entering 2021.
First quarter cash flow, free cash flow in particular was very strong.
Cash flow from operations was $867 million, capex was $149 million, resulting in free cash flow of $718 million.
We repurchased $50 million of our shares in the quarter, which leaves us with $867 million of share repurchase authorization remaining under the program.
Now let's turn to guidance.
You'll recall that back on April 1, when we announced the acquisition of Quest 40% interest in our Q Squared joint venture, we raised our 2021 earnings per share guidance by $0.12 to reflect the elimination of Quest minority interest in the joint venture's earnings.
We wrapped revenue and adjusted EBITDA guidance unchanged, of course because we already consolidated the -- or consolidated the financial of the joint venture prior to the transaction.
Well, today we're revising our guidance upward again as follows.
We're raising our full-year 2021 revenue guidance, both at the low and high end of that range, resulting in an increase of $625 million at the midpoint of the range.
The new revenue guidance is $13,200 million to $13,500 million, which represents year-over-year growth of 16.2% to 18.8%.
This increased guidance range reflects the first quarter strength and the continued operational momentum that we see in the business.
And also absorbed an FX headwind versus our previous guidance.
Now compared to the prior year, FX is expected to be a tailwind of about 150 basis point to full-year revenue growth.
From segment perspective, we now expect full year Technology & Analytics Solutions revenue to grow at a low to mid-teens percentage rate and R&D Solutions to grow in the low to mid-20s.
Our previous expectation that revenue in the CSMS business would be slightly down, remains unchanged.
We're also raising our full-year profit guidance as a result of stronger revenue outlook, we've increased it, increased adjusted EBITDA guidance at both the low and high end of the range, resulting in an increase of $133 million at the midpoint.
Our new full-year guidance is $2,900 million to $2,965 million, which represents year-over-year growth at 21.6% to 24.4%.
Moving to EPS, I mentioned Q Squared transaction on April 1, as a result of that, we raised our adjusted diluted earnings per share guidance by $0.12 to a new range of $7.89 to $8.20.
We're now raising both the low and the high end of that guidance range, resulting in a new adjusted diluted earnings per share guidance of $8.50 to $8.75 or year-over-year growth of 32.4% to 36.3%.
Moving to detail on P&L, interest expense is expected to be approximately $400 million for the year, operational depreciation and amortization is still expected to be somewhat over $400 million and we're continuing to assume an effective tax rate of approximately 20% for the full year.
This guidance assumes that current foreign currency exchange rates remain in effect for the rest of the year.
Now let's turn to the second quarter guidance, assuming FX rates remain constant through the end of the quarter, second quarter revenue is expected to be between $3,225 million and $3,300 million, which represents reported growth of 27.9% to 30.9%.
Adjusted EBITDA is expected to be between $690 million and $715 million, which represents reported growth of 42.9% to 48%.
And finally, adjusted diluted earnings per share is expected to be between $2 and $2.10, up 69.5% to 78%.
So to summarize, we delivered very strong first quarter results, once again reporting double-digit growth in all key financial metrics.
This included revenue growth of over 20% in both our TAS and R&DS segment.
R&DS backlog improved to $23.2 billion, up 18% year-over-year.
Next 12 months revenue from that backlog increased to $6.5 billion, up 31% year-over-year.
Free cash flow was strong again this quarter.
Net leverage improved to 3.9 times trailing 12 month adjusted EBITDA.
And finally, given the strong momentum we see in the business, we are once again raising our full year guidance for revenue, adjusted EBITDA and adjusted diluted EPS.
Before we open up the call up for Q&A, I'd like to make you aware of a couple of leadership changes within IQVIA finance organization.
Andrew Markwick, who has led Investor Relations function for the past four years very capably, I think you'll agree, is moving on to become, CFO of the R&DS unit.
Nick Childs, who currently runs our Corporate FP&A function will take-over as SVP of Investor Relations and Corporate Communications.
Nick has been in his role for over three years and has a very deep knowledge of the company and our financials.
He will be succeeded by Mike Fedock who has served as CFO of the R&DS unit for the past few years.
Finally those of you on the fixed income side know that Andrew who has also served as our Treasurer for the past couple of years and Manny Korakis who is our Corporate Controller will also assume leadership of the Treasury function going forward.
And with that, let me hand it back over to Casey, who will open the call for Q&A.
| q1 adjusted earnings per share $2.18.
q1 gaap earnings per share $1.09.
q1 revenue rose 23.8 percent to $3.409 billion.
sees 2021 revenue $13,200 million - $13,500 million.
sees 2021 adjusted diluted earnings per share $8.50 - $8.75.
sees q2 revenue $3,225 million - $3,300 million.
sees q2 adjusted diluted earnings per share $2.00 - $2.10.
|
We felt the short-term impacts of omicron in January, particularly in the U.S., causing our Q3 revenue to fall short of our expectations.
The COVID resurgence affected not only procedure volumes but also created acute periods of worker absenteeism with our customers, suppliers, and in our own operations and field teams.
Now that said, COVID infections in the U.S. are declining.
Available hospital ICU capacity is increasing and procedure volumes are picking up.
While some of the impacts from the pandemic, like inflation, supply chain issues, and healthcare worker shortages will linger, we do expect that our markets, our customers, and our industry are on the path to recovery.
Over the last 18 months, we've made significant changes to our operating model, moving to 20 focused operating units as well as making major enhancements to our culture and incentives.
These changes have improved our pace of innovation and our competitiveness, as evidenced by recent product filings and approvals that came faster than expected.
And we're not finished driving change.
We're accelerating improvements to our global supply chain and operations, leveraging our scale to further improve quality, increase product availability, and reduce costs.
In addition, we've enhanced our portfolio management and capital allocation processes.
Our new operating model is giving us line of sight into what is required to compete and win over the long term in each of our businesses.
As a result, we're looking at our portfolio with a more critical eye, with a focus on growth, and creating shareholder value.
I'd be surprised if there weren't changes over the coming fiscal year, but I don't know yet if they will be smaller or more significant.
Now let's look at our third quarter results, starting with our market share performance.
Now market share is an important metric and a reflection of the culture and incentive changes that we're making in the company.
About 60% of our businesses held or won share in the last calendar quarter.
While that's down slightly from last quarter due to some supply constraints and where certain businesses are in their product cycles, it is a significant improvement from where Medtronic was just 18 months ago.
So starting with our cardiovascular portfolio.
In cardiac rhythm management, one of our largest businesses, we continue to build on our category leadership, adding over 1.5 points of share.
We're winning share in both high and low power devices.
And we recently launched our Micra AV leadless pacemaker in Japan and Micra VR in China, resulting in international Micra growth of over 50% in Q3.
In Peripheral Vascular Health, we won about a point of share with strong growth in our Abre deep venous stents and venous seal closure system.
And in Cardiac Surgery, we gained over a point of share on the strength of our extracorporeal life support products.
In our medical surgical portfolio, we estimate we gained share in GI, driven by momentum from the recently launched Emprint HP Generator and our Beacon endoscopic ultrasound franchise.
In Respiratory Interventions, despite the year-over-year headwind as ventilator sales continue to return to pre-pandemic levels, we estimate we gained about 400 basis points of share.
We won share in premium ventilation with our Puritan Bennett 980, in video laryngoscopes with our McGRATH MAC, and in core airways with our Taperguard endotracheal tubes.
In our neuroscience portfolio, we increased our market share in Cranial, Spinal technologies.
We're launching new spine implants that enhance the overall value of our ecosystem of preoperative planning software, imaging, navigation, and robotic systems as well as powered surgical instruments, all of which are transforming care in spine surgery.
In Neuromodulation, we have great momentum from new products in both Pain Stim and Brain Modulation.
In Pain Stim, despite the headwinds from omicron, we estimate we gained over a point of share, driven by both our Intellis with DTM technology and Vanta recharge-free systems.
And in Brain Modulation, while we continue to face headwinds from replacement devices, our business grew 15% on strong adoption of our Percept Neurostimulator with BrainSense technology, paired with our SenSight directional lead.
Medtronic is the only company with sensing capabilities on our deep brain stimulators, which drove about 10 points of new implant share and over a point of overall DBS share in Q3, and we expect this momentum to continue.
Another business with momentum is our Neurovascular business, where we are back to winning share, picking up about two points this quarter.
We're seeing strength from our pipeline family of flow diverters for treating intracranial aneurysms.
Our flow diversion launches in Japan, CE Mark countries, and the United States, coupled with broader portfolio growth in China, propelled neurovascular to 12% growth this quarter.
Now while the majority of our businesses are winning share, we have some businesses that lost share in Q3 where we are focused on improving our performance.
In cardiac diagnostics, despite year-over-year share loss, we gained share sequentially for the first time in many quarters.
We've made good progress increasing our manufacturing capacity for our LINQ II insertable cardiac monitor, and we began our rollout of our Accurythm artificial intelligence algorithms, which were just enabled for all LINQ II patients in the U.S.
We expect ongoing supply improvement and additional AI detection algorithms along with new indications to expand the market and drive growth.
In our structural heart and aortic business, we lost share in Aortic due to supply constraints and continued pressure from our Valiant Navion recall and competitive launches.
At the same time, though, we maintained our TAVR share in Q3, growing in the mid-teens.
In our surgical innovations business, we lost a little over 0.5 points of share overall due to acute resin shortage that impacted our flagship LigaSure vessel sealing portfolio.
This was partially offset by increased share in advanced stapling given strong market adoption of our Tri-Staple reinforced reloads as well as share gains in hernia and sutures.
The good news here is that our teams have improved our resin supply, and we expect to be able to meet demand in Q4.
Inpatient monitoring, we estimate we lost a few points of share due to a difficult comparison from the strength we had last year in pulse oximetry and capnography monitor sales.
However, our share has been relatively consistent for the past four quarters.
In pelvic health, procedures slowed this past quarter and we lost some share.
We expect this market to recover, and we are well-positioned to compete.
In ENT, we lost share for the first time in a long time, given some temporary supply chain disruptions that we expect to have resolved going forward.
And in diabetes, we continue to lose share, predominantly in the U.S. Look, we're extremely focused on resolving our warning letter and bringing new products to the U.S. market although timing is difficult to predict.
In December, CMS expanded coverage for our CGM sensors, including those integrated with our insulin pumps, and we're pleased that this will take effect for Medicare patients at the end of this month.
In the international markets, we launched the 770G in Japan last month, making it the first hybrid closed loop system available in that country.
And in Europe, we continue to see success and strong adoption of our 780G with the Guardian 4 sensor.
Next, let's turn to our product pipeline.
We've launched over 200 products in the U.S., Western Europe, Japan, and China in the last 12 months, and these are having an impact across our businesses.
At the same time, we continue to advance new technologies that are in development with increased investments in R&D.
We're expecting these investments to create new markets, disrupt existing ones, and accelerate the growth profile of Medtronic.
Now starting with our cardiovascular portfolio.
We continue to make progress in cardiac rhythm Management on disrupting the ICD market with our Aurora extravascular ICD.
Our U.S. pivotal study is fully enrolled.
We continue to expect CE Mark approval later this calendar year and U.S. approval next calendar year.
Our EV ICD can both pace and shock without any leads inside the heart and veins.
And it does this in a single device that is the same size as a traditional ICD.
We believe Aurora will accelerate adoption of EV ICDs and make this a $1 billion market by 2030.
In cardiac ablation solutions, we're advancing a number of technologies to become a leader in the $8 billion EP ablation market.
We're rolling out our DiamondTempt RF ablation system as well as our exclusive first-line paroxysmal AF treatment indication using our cryoablation system.
We also continue to make progress with our Anatomical PulseSelect PFA system, which has breakthrough device designation from the FDA.
Our global pivotal trial completed enrollment back in November, and we're very excited about how our PFA system could disrupt the EP ablation market.
Last month, we announced our intent to acquire Affera.
Affera has several development programs underway, including a differentiated mapping and navigation system that closes a competitive gap in our product portfolio and a focal PFA system that is a separate and complementary platform to our anatomical PFA system.
We're looking forward to welcoming the Affera team into Medtronic.
Moving to our Symplicity renal denervation procedure for hypertension.
We continue to enroll our ON MED study and expect to complete the six-month follow-up in the second half of this calendar year.
We'll then submit the data to the FDA as ON MED is the final piece of our submission to seek approval for Symplicity.
Adding to our body of evidence, three-year data from our ON MED pilot study will be presented at the ACC scientific sessions in April.
In structural heart, we now expect to begin the limited U.S. market release of our Evolut FX valve in Q1, followed by a full market release later in fiscal '23.
Evolut FX enhances ease-of-use improvements in deliverability, implant visibility, and deployment stability.
In China, we expect to launch our Evolut PRO valve this quarter, our first entry into this large and underpenetrated TAVR market.
We also continue to advance our transcatheter mitral and tricuspid development programs.
In our APOLLO pivotal trial for TMVR, we just had the first implant using our transfemoral delivery system, and we expect this new system to meaningfully accelerate patient enrollment.
Moving to our medical surgical portfolio and our surgical robotics program, we've made progress improving our supply chain and manufacturing and remain focused on scaling production.
At the same time, we continue to add regulatory approvals and expand our limited market release, most recently in Canada, Australia, and Israel.
And we intend to start our U.S. urology clinical trial soon.
In addition to uro and GYN cases, surgeons in Panama, Chile, and India are now performing general surgery procedures with Hugo, including advanced cases like colorectal and lower anterior resection surgeries.
And we announced earlier this month the first Hugo procedures in Europe.
In diabetes, our MiniMed 780G insulin pump, combined with our Guardian 4 sensor, continue to be under active review with the FDA, with approval subject to our warning letter.
When approved and launched in the U.S., we expect this system to be highly differentiated and accelerate growth in our diabetes business.
We continue to expect submission of our next-generation sensor Simplera to the FDA this quarter.
Simplera is fully disposable, easy to apply and half the size of Guardian 4.
Finally, we're making progress on multiple next-gen sensor and pump programs, including patch pumps, although we haven't disclosed details for competitive reasons.
While it will take time, we expect the technology pipeline investments we're making will result in our diabetes business being accretive to total company growth and eventually grow with this important market.
Now turning to our neuroscience portfolio.
We were pleased to receive FDA approval for our diabetic peripheral neuropathy indication for our Intellis and Vanta spinal cord stimulators last month.
This came following the FDA's rigorous review of our clinical submission and years earlier than we had previously communicated.
The approval represents the beginning of a multiyear market development process which we are uniquely suited to execute given our presence in both the pain stim and the diabetes markets.
We believe that DPN market opportunity will reach $300 million by FY '26, and with an annual TAM of up to $1.8 billion, making DPN for SCS one of the biggest market opportunities in med tech.
In addition to DPN, we also continue to make progress on expanding indications for SCS and to nonsurgical refractory back pain and upper limb and neck chronic pain.
If that was not enough for Pain Stim, we're also excited about our inceptive ECAPs closed-loop spinal cord stimulator which we submitted to the FDA late last year.
We expect inceptives closed-loop therapy that optimizes pain relief for patients to revolutionize the SCS market.
Finally, in pelvic health, we're expecting FDA approval for our next-gen InterStim recharge-free device in the first half of this calendar year.
With its designed best-in-class battery, constant current, and full-body MRI compatibility at both 1.5 and 3 Tesla, we expect this device will extend our category leadership in sacral neuromodulation.
Our third quarter organic revenue increased 2%.
While we were tracking to our quarterly guidance in early January, the impacts from this latest wave of COVID affected our revenue in the last month of the quarter.
Despite the challenging revenue, we controlled expenses and delivered adjusted earnings per share in line with our guidance and $0.01 ahead of consensus.
From a geographic perspective, our U.S. revenue was flat, and non-U.S. developed markets grew 1%, given the impacts of omicron.
Our emerging markets were relatively stronger, growing 7%, with strength in South Asia, Latin America and the Middle East, and Africa.
Converting our earnings into strong free cash flow is a priority.
Our year-to-date free cash flow was $4.3 billion, up 23% from last year, and we continue to target a full year conversion of 80% or greater.
And we remain focused on allocating our capital to generate strong future growth and shareholder returns.
We are increasing our organic R&D investments broadly across the company to fuel the pipeline that Geoff walked through earlier, and we are supplementing this with attractive tuck-in acquisitions.
Since the beginning of last fiscal year, we've announced eight acquisitions totaling over $3.2 billion in total consideration, including last month's acquisition of Affera in our cardiac ablation business.
At the same time, we're increasing our minority investments in companies that could become future acquisitions, as was the case with Affera.
We have a commitment to return more than 50% of our free cash flow to our shareholders, primarily through our attractive and growing dividend.
We are an S&P dividend aristocrat.
And fiscal year to date, we paid over $2.5 billion in dividends to our shareholders.
And finally, particularly in periods where we see share price dislocation, we look to execute opportunistic share repurchases, as was the case this quarter.
Fiscal year to date, we've repurchased over $1.1 billion of our stock.
While procedure volumes are still impacted from omicron in the first few weeks of February, we are beginning to see improvement.
Our outlook assumes continued procedure volume recovery through March and April.
And we expect to be back to pre-COVID levels in most of our markets before the end of the fourth quarter.
Assuming that holds, for the fourth quarter, we're comfortable with current Street consensus for our organic revenue growth of approximately 5.5%.
At recent foreign exchange rates, currency would be a headwind on fourth quarter revenue of approximately $185 million.
By segment, we would model cardiovascular at 7% to 8% growth, neuroscience at 2.5% to 3.5% growth, medical surgical at 7.5% to 8.5% growth, and diabetes down 6% to 7%, all on an organic basis.
On the bottom line, we expect fourth quarter non-GAAP diluted earnings per share in the range of $1.56 to $1.58, in line with current consensus.
And at recent rates, we expect currency to have a flat to slightly positive impact on the bottom line.
I am truly grateful for the perseverance that both healthcare workers and our employees have demonstrated to ensure patients receive our life-changing therapies around the world.
Back to you, Geoff.
For the last few quarters, I've been closing by commenting on the progress the company is making in various areas of ESG, or environmental, social, and governance impacts.
Today, I want to highlight that we recently released our global inclusion, diversity, and equity 2021 annual report entitled Zero Barriers.
The report shares how we are accelerating our efforts to remove barriers to opportunities by creating an inclusive work environment, doubling down or removing bias, and amplifying our impact in our local communities.
Our commitments to ID&E and the UN sustainable development goals compel us to solve health and equities faster.
Systemic socioeconomic, racial, geographic, and even generational factors all contribute to a person's ability or inability to achieve good health and reach their full potential as a contributing member of society.
We're committed to urgently addressing barriers to education, diagnosis, and treatment, as the global crisis of health and equity can be solved by accelerating access to healthcare technologies.
One such inequity is mortality from colorectal cancer.
While colorectal is one of the most preventable cancers, low screening rates make it one of the deadliest, with mortality rates 40% higher for the black population in the United States.
In addition, Hispanic and Latino adults are more likely to be diagnosed in later stages of the disease when it's more difficult to treat.
Today, I'm pleased to announce that Medtronic is collaborating with Amazon Web Services and the American Society for Gastrointestinal Endoscopy to place GI Genius modules at facilities that support low-income and underserved populations across the United States.
Our GI Genius system improves the quality of colonoscopies using AI to assist physicians in detecting both precancerous and cancerous growth.
Increasing access to technology that can improve clinical outcomes through earlier and more accurate detection can provide a significant positive impact for communities most vulnerable to colorectal cancer.
We continue to look for creative solutions like this one to address health inequities.
Now let me close on this note.
While the pandemic and its associated impacts have affected our revenue in the past couple of quarters more than we expected, we haven't lost sight of the big picture.
We've made significant changes in the company, and we're strengthening our operations, supply chain, and global quality systems.
We're also laser-focused on capital deployment and portfolio management processes, with a deep commitment to creating shareholder value.
And we have several exciting growth catalysts in our pipeline.
We expect to benefit as market procedures reaccelerate post omicron and as we lead in high-growth MedTech markets.
While it's been a bumpier ride than I would have liked and we still have challenges to work through.
I'm confident in our organization's ability to accelerate and sustain our growth profile over the long term to grow at or above our markets and, as we do so, create value for our stakeholders.
As a result of your efforts, we can fulfill the Medtronic mission: alleviating pain, restoring health, and extending life for millions of people around the world.
Now let's move to Q&A.
[Operator instructions] With that, Win, can you please give the instructions for asking a question.
| sees q4 non-gaap earnings per share $1.56 to $1.58.
issues q4 revenue and earnings per share guidance.
qtrly revenue of $7.8 billion was flat year-over-year as reported and grew 2% organic.
qtrly cardiovascular revenue of $2.745 billion increased 1% as reported and 3% organic.
qtrly cranial & spinal technologies revenue of $1.102 billion increased 2% as reported and 3% organic.
expects q4 organic revenue growth of approximately 5.5%.
qtrly neuroscience revenue of $2.144 billion increased 1% as reported and 2% organic.
q3 revenue results reflect unfavorable market impact of covid-19 and health system labor shortages on medical device procedure volumes.
qtrly medical surgical revenue of $2.290 billion decreased 1% as reported and increased 1% organic.
impact of covid-19 resurgence on healthcare procedure volumes, particularly in u.s., peaked in final weeks of our quarter in january.
expect healthcare procedures to reaccelerate post-omicron.
|
With me on the call today are Seamus Grady, Chief Executive Officer; and Csaba Sverha, Chief Financial Officer.
We had a very strong quarter, representing our third quarter in a row of record revenue and earnings per share, both of which also exceeded our guidance.
With sequential growth in all of the end markets that we track, total revenue was $479.3 million.
Non-GAAP operating margins of 9.5% were at the highest level in two years and helped produce record non-GAAP earnings of $1.21 per share.
We generated these results while positioning ourselves for continued growth, and we are optimistic that we can deliver another record quarter in Q4.
Looking at some of the highlights of the quarter.
Optical communications revenue reached a new record, driven primarily by record telecom revenue.
Our Cisco optical transport system transfer program, which we have been discussing on recent calls, contributed to this strong performance.
This program transfer was completed in the third quarter, reaching its full run rate about one quarter earlier than originally anticipated.
Based on the success of this transfer, we believe that our unique value proposition in manufacturing complete network systems puts us in a strong position to win additional new business from our existing customers, as well as other systems manufacturers who are looking to leverage their supply chain by outsourcing more efficiently.
Notably, these newer systems programs are having a positive impact on operating margins as we were able to generate this revenue with close to zero incremental operating expenses.
We also achieved record non-optical communications revenue in Q3.
Revenue grew sequentially from all non-optical markets, with automotive reaching a new record revenue level and representing the largest non-optical category for the third quarter in a row.
Newer automotive technologies were the biggest factors driving our strong automotive growth in the quarter.
In summary, we are pleased to have delivered record third quarter results that exceeded our guidance.
We are optimistic about all the end markets that we serve and believe that with continued efficient execution, we'll be able to deliver an even stronger fourth quarter, resulting in our best year ever.
We are excited about our performance in the third quarter, which produced record revenue and non-GAAP earnings.
Revenue of $479.3 million was above our guidance range, and non-GAAP earnings of $1.21 also exceeded our guidance.
Looking at revenue in more detail.
Optical communications was $361.7 million or 75% of total revenue, up 4% from Q2.
Non-optical communications revenue was $117.6 million or 25% of total revenue and increased 11% from Q2.
Within optical communications, telecom revenue was $283.5 million, up 4% from last quarter.
Datacom revenue was $78.3 million, up 5% sequentially.
Silicon photonics remains an important revenue driver at 22% of total revenue or $105.4 million, up 4% from Q2.
Revenue from 100G products increased 8% sequentially to $138.6 million but remains below peak levels as growth from faster data rate products continues to accelerate.
Revenue from 400G and faster was $105.1 million, up 1% from last quarter and more than tripled from a year ago.
In Q4, we expect optical communications growth trend to continue.
Looking at our non-optical communications business.
Automotive has grown to become the largest category for the third quarter in a row with record revenue of $52.5 million in the third quarter, up 12% sequentially, driven primarily by growth from new automotive programs.
We remain optimistic about these new automotive programs as we look ahead.
Industrial laser revenue was $36.1 million, up 7% from Q2.
Sensor revenue was $4.1 million and other non-optical communications revenue was up 10% to $24.8 million.
We believe the combination of laser and automotive strength will generate sequential growth for non-optical communications again in the fourth quarter.
Now turning to the details of our P&L.
Gross margin was 12.2%, up from 12.1% in Q2 and in line with our target range of 12% to 12.5%.
Operating expenses in the quarter were $12.7 million or 2.6% of revenue, reflecting our ability to grow revenue without meaningful increases in operating expenses.
This produced record operating income of $45.6 million or 9.5% of revenue, the highest level in two years.
Taxes in the third quarter were $1.6 million and our normalized effective tax rate was 4%.
We continue to anticipate an effective tax rate of about 4% for the year.
Non-GAAP net income was a record at $45.4 million or $1.21 per diluted share.
On a GAAP basis, net income was also a record at $27.5 million or $1 per diluted share.
Turning to the balance sheet and cash flow statement.
At the end of the third quarter, cash, restricted cash and investments were $508.9 million.
Operating cash flow was a strong $23.8 million.
With capex of $6.4 million, free cash flow was $27.5 million in the third quarter.
During the quarter, we repurchased approximately 15,000 shares at an average price of $80.64 for a total cash outlay of $1.2 million.
I would now like to turn to our guidance for the fourth quarter of fiscal year 2021.
We continue to be very optimistic about our business and anticipate another record quarter for revenue and profitability in Q4.
We expect total revenue in the fourth quarter to be between $475 million and $495 million and earnings per share to be in the range of $1.18 to $1.25 per diluted share.
In summary, we had our best performance ever in Q3 and are well positioned to continue our track record of success as we look ahead.
| sees q4 revenue $475 million to $495 million.
sees q4 non-gaap earnings per share $1.18 to $1.25.
q3 non-gaap earnings per share $1.21.
q3 revenue $479.3 million.
|
Joining the call today are Tom Ferguson, Chief Executive Officer; Philip Schlom, Chief Financial Officer; and David Nark, Senior Vice President, Marketing Communications and IR.
Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets and the metal coatings markets; prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management and employees to implement the Company's growth strategies.
In addition, AZZ's customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic.
First, I need to express my great appreciation for the way our AZZ employees, their families and our partner stepped up during the COVID pandemic and also during the winter storm that impacted a significant portion of our production just two weeks before the end of our fiscal year.
Due to the concerted and in some cases extraordinary efforts of our employees, we were able to quickly respond and finish out a profitable fourth quarter.
Overall annual sales declined 21% versus the prior-year record, reaching $839 million, with Metal Coatings down 8% to $458 million and Infrastructure Solutions declining by 32% to $381 million.
The lower volumes were driven primarily by the impact on our customers caused by the COVID pandemic as well as the divestitures we made during the year.
I will get into the details of this as we go along.
We're pleased to have completed our 34th consecutive year of profitability and while COVID negatively impacted our results, we were able to take several actions to better position AZZ for the future.
We continue to generate strong cash flow during the year with $92 million of net cash provided by operating activities.
We generated adjusted net income of $55 million and adjusted earnings per share of $2.11 per diluted share.
We were successful in completing the divestiture of our SMS and GalvaBar Businesses during the year.
We closed a couple of galvanizing plants due to both local market conditions and the proximity of our other plants that could efficiently absorb the majority of their business.
We also closed the Surface Technology plant in [indecipherable] and coating lines, two of which were recently brought back online.
In line with our strategic commitment to value creation, we repurchased over 1.2 million shares for $48.3 million and distributed $7.6 million in dividends.
In Metal Coatings, we posted sales of $458 million while achieving operating margins of 23.3% on an adjusted basis, up nicely from the previous year.
The margin improvement was primarily due to driving operating efficiencies and productivity in the face of rising labor and energy costs.
The team completed the acquisition of Acme Galvanizing in Milwaukee near the end of the fiscal year.
We remain committed to delivering on the investments made in our Surface Technology business, but it is important to note that customers for this business were more severely impacted by COVID than on the galvanizing sites.
Our Infrastructure Solutions segment was severely impacted by the COVID pandemic, particularly in the early part of the year.
Sales declined over 32% to $381 million, with adjusted operating income down 52% generating adjusted margins of 4.1%.
We divested the SMS business since it was deemed to be non-core to our long-term strategy.
Restructuring and impairment charges for Infrastructure Solutions totaled $9.2 million for the year.
For fiscal 2022, COVID continues to generate some uncertainty, but our folks are managing disruptions well and keeping our employees safe.
So we are reaffirming our previously issued guidance.
We anticipate sales to be in the range of $835 million to $935 million and earnings per share of $2.45 to $2.95.
Metal Coatings is continuing to focus on sales growth, including leveraging our spin galvanizing operations at several sites.
They are also focused on operational execution and customer service, as labor and operating expenses due to material cost inflation are increasing.
Our Infrastructure Solutions segment has seen a gradual return to more normalized business activity and entered Q1 with some momentum.
Our Industrial business is seeing good results from our expanded Poland facility, although globally the business continues to experience some intermittent project delays due to COVID outbreaks at certain customer sites.
The electrical platform is focused on operational execution and growing it's e-House and switchgear businesses.
For fiscal year 2022, AZZ will continue to execute on strategic growth objectives that drive shareholder value.
At our core, we are a metal coatings company and a manufacturer of products and provider of services that are critical to sustaining infrastructure.
Our commitment to superior customer service is unwavering.
Our ability to generate strong cash flow is based on initiatives to drive operational excellence, manage costs, ensure pricing discipline and emphasis on receivables collection within our operating platforms.
We are confident that our businesses remain vital to improving and sustaining infrastructure, so we are actively working to position our core businesses to provide sustainable profitability long into the future.
For the fourth quarter of fiscal year 2021, we reported sales of $195.6 million, $49.7 million or 20.3% lower than the fourth quarter of fiscal year 2020.
Gross margin of $45.8 million for the quarter was $5.3 million or 10.4% below prior year.
However, gross margins rose to 23.4% of sales compared to 20.8% in the prior year fourth quarter, a 260 basis point improvement year-over-year.
Net income for the quarter was $16.2 million compared to a loss of $10.6 million in the comparable prior year fourth quarter, where the company had recorded a loss on sale of our Nuclear Logistics business and recorded charges related to the impairment of assets within the Infrastructure Solutions segment.
Reported diluted earnings per share for the quarter was $0.63 per share.
As Tom had earlier indicated, full year fiscal 2021 sales of $838.9 million were down 21% compared to the prior-year sales of $1.06 billion, largely as a result of the impact to the business from the pandemic, divestitures and lower revenues in China as we continue to execute on our existing China backlog.
Gross margins as reported improved to 22.5% from 22.3% on a year-over-year basis on stronger Metal Coatings performance, partially offset by the impacts of the pandemic within our Industrial and Electrical platforms, which are part of our Infrastructure Solutions segment.
Reported operating profit for the year of $61.6 million was $17.7 million or 22.3% lower than the prior year.
Operating profit in the current year was reduced $20 million as a result of our second quarter restructuring and impairment charges as well as losses recorded on the divestitures of Metal Coatings GalvaBar business and Infrastructure Solutions SMS business during the year.
Reported operating margins of 7.3% were down 20 basis points from the prior year.
Full-year operating profit as adjusted was $81.6 million, $25.5 million or 23.8% lower than the prior year's adjusted operating profit of $107 million, mostly as a result of the impact on the Infrastructure Solutions business, where they were impacted more strongly by the Energy market downturn in the pandemic.
EBITDA for fiscal year '21 was $105.2 million compared with $128.5 million in the prior year due to the lower current year earnings, partially offset by a reduction in tax expense in the current year as compared to the prior year.
Full year EBITDA as adjusted for impairment and restructuring charges was $125.2 million or 19.9% decrease from prior year's adjusted EBITDA of $156.3 million.
Cash flows from operations in the current year of $92 million were $50 million -- $50.3 million or 35.3% lower compared to the prior year, on lower net income, higher non-cash charges in the prior year and fluctuations in working capital during the year.
During the year, we continued to invest in the business.
In regards to capital allocation, we were successfully able to navigate tougher market conditions and accomplished the following.
We repurchased $48.3 million in outstanding shares.
We refinanced our $125 million 5.42% senior notes with an upsize offering of $150 million over 7-year and 12-year periods bearing interest under 3%, resulting in $2.5 million of lower annual interest expense.
Even with the pandemic, we were able to reduce debt $24 million, ending our fiscal year with $170 million -- $179 million of borrowings, compared to $203 million in borrowings at the end of last year.
We continue to support growth initiative by internally investing $37.1 million in capital projects during the year.
We completed our Houston spin plant as well as the expansion and modernization of our Poland manufacturing and operations facility.
We acquired one galvanizing and plating operation in January 2021.
We divested as had Tom noted and closed underperforming operations during the year and we continue to pay quarterly dividends.
We maintain a strong balance sheet with plenty of liquidity and continue to evaluate capital allocation strategies as we progress further on our strategic alternatives.
Lastly, we improved our internal controls over financial reporting and successfully remediated our previously reported material weakness related to our tax accounting.
Here are some key indicators that we are paying particular attention to.
For the Metal Coatings segment's galvanizing business, we are carefully tracking fabrication and construction activity, material and labor cost inflation and progress of infrastructure legislation.
For Surface Technologies, we are primarily focused on expanding our customer base and some of our customers may take considerable time in getting back to normal production.
For Infrastructure Solutions, we are off to a decent start with turnaround and outage activity having returned to a normal level and the fall season is currently looking to be quite good.
The Electrical platform is benefiting from transmission, distribution and utility spending and increasing data center and battery energy storage activity.
Finally for Corporate, we are focused on completing the strategic review of Infrastructure Solutions and replacing our credit facility.
We remain committed to our growth strategy around Metal Coatings and achieving 21% operating margins with galvanizing performance being quite steady as we continue to improve Surface Technologies.
We will remain acquisitive, particularly in galvanizing.
For Infrastructure Solutions, we will continue to focus on profitable growth in our core businesses.
Our Infrastructure Solutions business unit should benefit from more normal turnaround and outage seasons and a solid market for T&D, utility and data center, e-houses and switchgear.
| azz inc reaffirms fiscal year 2022 guidance.
azz inc - reaffirms fiscal year 2022 guidance.
azz inc - sales for the fourth quarter of fiscal year 2021 were $195.6 million, compared to $245.4 million for the prior year.
azz inc - net income for the quarter was $16.2 million, or $0.63 per share on a diluted basis.
|
I'm Yan Jin, Eaton's Senior Vice President of Investor Relations.
As we have done on our past calls, we'll be taking questions at the end of the Craig's comments.
We'll start on page three with highlights for the quarter and by noting that our team delivered record results in Q3 despite kind of the well-publicized supply chain challenges in this environment.
We had strong execution across all of our businesses and as we focused on controlling what we could control.
And as you can see, we posted an all-time record for adjusted earnings per share of $1.75.
Supply chain constraints did have an impact on our revenue, but we still posted 8% growth in the quarter.
And for the third quarter in a row, we delivered record segment margins at 19.9% in Q3.
It was an all-time record and an increase of 230 basis points over prior year.
On top of record margins, we're also pleased with our incremental margins, which were 46% in the quarter, due to actions that we took to mitigate inflationary costs, the portfolio changes that we have undertaken, and savings from restructuring programs.
We did have a bit of help from favorable mix as well in the quarter.
And while revenues were lighter than expected in our Electrical Americas segment, we're very pleased to see the strength in orders and the growing backlog.
Overall demand remains very strong.
For the Electrical businesses overall, orders were up 17% on a rolling 12-month basis, and our backlog was up more than 50%, another all-time record.
Next, on page four, we summarize our Q3 results, and I'll notice a few points here.
First, on 9% revenue growth, we increased our operating profit by 23%, which reflects strong operating leverage and benefits from our portfolio actions.
Second, our acquisitions increased revenues by 7%, which was fully offset by the sale of Hydraulics.
We're naturally pleased to have replaced the Hydraulics revenue with a collection of businesses that are, I'd say, higher growth, higher margin, and have more earnings consistency.
And last, our margins of 19.9% were well above our guidance range of 19% to 19.4% as our team did an outstanding job of executing despite the lower-than-expected revenues.
Moving to page five, we have the results of our Electrical Americas segment.
Revenues were up 9%, including 1% organic and 8% from the acquisition of Tripp Lite.
Organic sales growth was driven by strength in data centers and residential markets, partially offset by weakness in large industrial projects and sales to utilities.
As I mentioned earlier, revenues were impacted by supply chain constraints.
Our Electrical Americas segment suffered from the general supply chain constraints that we're all feeling, but was actually disproportionately impacted by a few unique suppliers who are especially impactful to this business.
We're naturally addressing these and other supply challenges and expect to do better in Q4.
Operating margins continue to be strong at 21.7% and were up 40 basis points from Q2.
This is consistent with our expectations, and we're doing a good job of getting price to offset inflation.
I'd say the biggest highlight in this segment is the continued growth in orders and in backlog.
On a rolling 12-month basis, orders were up 17% organically, and this was an acceleration from up 13% in Q2.
The strongest segments were utility and residential markets and the backlog is up more than 50% from last year and up 9% from Q2.
Both, I'd say, are encouraging signs and support our expectations that the missed shipments will simply be pushed into future quarters.
Turning to page six.
We summarize our Electrical Global segment results, which I'd say were just strong across the board.
Organic growth was 18% with broad strength in really all end markets and currency added 1%.
We also posted all-time record operating margins of 20.1% and had very strong incremental margins of nearly 40%.
The margin performance was driven by volume leverage, strong cost control, and savings once again from restructuring actions.
Orders were very strong, up 17% organically on a rolling 12-month basis, with particular strength in the quarter in industrial, commercial and institutional markets.
Like our Americas segment, the backlog is up more than 50% and at record levels.
Before we move to the industrial businesses, here's the way I'd summarize the performance of our electrical businesses.
When you add the two together, they delivered solid organic growth of 8%, built a sizable backlog, which strengthens our outlook for future quarters and they improved margins by 110 basis points.
So on balance, I'd say, a very strong set of quarterly results for our Electrical businesses.
Moving to page seven.
We have the financial results of our Aerospace segment.
Revenues were up 38%; 4% organic and 33% from the acquisition of Cobham Mission Systems and 1% from currency.
Organic growth was primarily due to higher sales in commercial markets partially offset by weakness in military markets.
Operating margins were 22%, up 350 basis points from last year and 100 basis points sequentially.
This strong performance gives us confidence that as aerospace markets continue to recover, we'll meet or exceed the 24% margin targets that have been set for this segment.
In the quarter, we also had strong organic incremental margins, which were driven by favorable mix, primarily from the growth of commercial aftermarket business and as a result, once again from savings from the restructuring actions that we've taken.
And by the way, Q3 was the first full quarter where Cobham Mission Systems were part of the company, and we're very pleased with the financial performance of the business and the integration process is going very smoothly.
As we look to the future, we're seeing encouraging signs of recovery in this segment with both orders and backlog now trending positively.
On a rolling 12-month basis, orders were up 4%, primarily with strength in the business segment and our backlog has increased by 5%.
Next on page eight, we have the results of our Vehicle segment.
Organic revenues increased 11% with solid growth in North America Class A truck business and strength in South America that more than offset the weakness in North America light vehicle markets.
And as you're all well aware, light vehicle production has been severely impacted by supply chain constraints.
Operating margins were 18% and we generated very strong incremental margins of more than 50%.
In addition to strong execution, we also had some favorable mix in the quarter.
Specifically of note, North America, the truck business benefited from strong aftermarket, where sales were up some 40% and attractive aftermarket margins.
And our North America light vehicle motor business also benefited from favorable mix as customers prioritize programs with more of our content, more full-sized pickups and SUVs and fewer small cars.
So good mix, good volume growth and savings from the multiyear restructuring program all contributed to very strong quarterly operating results here.
Turning to page nine.
You'll see the financial results of our eMobility segment, where revenues increased 6% organically.
Light vehicle business, customer production levels were reduced by supply chain constraints here as well.
And given the nature of the products that we sell in this segment, they were more significantly impacted by the semiconductor shortages that we've all read about.
As a result, our backlog is up significantly here.
Operating margins were a negative 9.5%, once again due to heavy R&D investments and start-up costs associated with new programs.
We continue to be pleased with the progress in this business, which is one program is worth nearly $600 million of mature year revenue.
And we expect to see a significant ramp up in revenues in 2023, which positions us well to achieve our long-term revenue target of $2 billion to $4 billion by 2030.
On page 10, we provide an update at our organic growth and operating margins for the year.
With supply chain constraints in Q3 continuing into Q4, we now expect overall organic revenue growth of 9% to 11% for 2021.
For Electrical Americas, we expect 5% to 7% growth.
And you'll note the implied guidance for Q4 is actually 7% to 9%, which is a solid step-up from the 1% in Q3.
Organic revenues in Aerospace are expected to be roughly flat with strength in commercial markets being offset by weakness in military markets.
And the other segments had some minor reductions in revenue as well, but just minor.
Despite slightly lower organic revenue growth outlook, we're increasing our operating margin guidance by 20 basis points from 18.6% to 19%.
And I'd note that with this guidance, we're on track to generate strong incremental margins of approximately 40% for 2021, which we see naturally is outstanding performance given the current inflationary environment.
Moving to page 11.
We have the remaining items of our guidance for the year.
We expect full year adjusted earnings per share between $6.59 to $6.69.
At the midpoint, this represents 35% growth over 2020.
We're also delivering significant margin improvement, up 240 basis points from last year at the midpoint of our increased margin guidance.
So I'm pleased that we have strong operating performance in the face of what we call store supply chain challenges and the businesses are doing well.
Next, given more active M&A activities, we now expect share repurchase to be between $375 million and $425 million.
And lastly, our Q4 guidance includes earnings between $1.68 and $1.78, organic revenue growth between 7% and 9%, and segment margins between 18.8% and 19.2%, an increase of 160 basis points at the midpoint versus prior year.
So overall, once again, a strong 2021 with solid revenue growth, strong orders and good execution, allowing us to deliver record margins.
Next, on page 12, we did want to provide some preliminary assumptions for our end markets for 2022.
And as you can see, we're expecting attractive growth in nearly all of our markets with very good growth in data centers and industrial facilities in our Electrical business and our Commercial Aerospace business, and certainly, in all Vehicle markets.
We'll provide more detailed color on organic revenue growth assumptions when we provide our 2022 guidance in February, but we did want to share some of our preliminary thinking here.
We would also expect to see carryover benefits from pricing actions taken, which should also help our year-over-year growth next year.
And lastly, on page 13, we provide just some summary thoughts here.
And I'd say, first, I'm proud of the record quarter results and particularly our strong margin performance.
Our team has demonstrated that we can manage through a challenging operating environment, supply chain constraints, inflationary pressures, and still improve margins and EPS.
And the long-term secular growth trends of electrification, energy transition and digitalization are playing out just as we expected or maybe even better.
We also see 2021 as a transformative year for Eaton in terms of portfolio management.
We're a higher-growth, higher-margin and less cyclical company today.
And with strong year-to-date performance, we're well on our track to deliver a very strong 2021 with double-digit organic revenue growth and 35% adjusted earnings per share growth.
And I'd also add, we have great momentum going into the Q4 and into next year.
We have strong order growth.
We have a full backlog, and many of our end markets are poised for recovery.
And you'll recall that at the beginning of the year, we set medium-term targets of 4% to 6% organic revenue growth annually, 400 to 500 basis points improvement in margins and 11% to 13% annual growth in adjusted EPS.
And so evaluating our progress about one year in, I'd say that we're running ahead of expectations.
| quarterly operating profit rose 7 percent to 402 million usd.
qtrly sales increase consisted of 8% growth in organic sales.
for full year 2021, company now expects organic growth of 9-11%, compared to a previous estimate of 11-13%.
sees q4 2021 adjusted earnings per share to be between $1.68 and $1.78.
sales in q3 of 2021 were $4.9 billion, up 9% from q3 of 2020.
|
I'm Jeff Kotkin, Eversource Energy's Vice President for Investor Relations.
These factors are set forth in the news release issued yesterday.
Additionally, our explanation of how and why we use certain non-GAAP measures and how those measures reconciled to GAAP results is contained within our news release and the slides we posted last night and in our most recent 10-K and 10-Q.
Speaking today will be Joe Nolan, our President and Chief Executive Officer; and Phil Lembo, our Executive Vice President and Chief Financial Officer.
Also joining us today are John Moreira, our Treasurer and Senior Vice President for Finance and Regulatory; and Jay Buth, our Vice President and Controller.
We hope that all on the phone are safe and well, and we look forward to seeing many of you in person next week at the EEI conference.
First, I want to discuss last week's Northeast, which impacted approximately 525,000 customers across our service territory.
Our Eastern Massachusetts customers sustained the greatest damage with more than 450,000 customers impacted.
That's over 35% of Eversource's customers in Eastern Massachusetts.
This storm was far less damaging in Connecticut, Western Massachusetts and New Hampshire.
So as we wrapped up the restoration in those areas, we were able to quickly redeploy resources to the Southeastern Massachusetts, Cape Cod in Martha's Vineyard, areas that took the brunt of the storm.
Our internal resources were supplemented by hundreds of crews from outside the region, and we were able to essentially complete the work over this past weekend.
This experience underscores the benefits of a large T&D organization, one where resources can be shifted based on the greatest need.
Last year, it was Connecticut.
Last week, it was Massachusetts.
Next time it might be in New Hampshire.
We have 9,300 dedicated employees, all focused on providing the best possible experience for our customers.
Lessons we learned last year in Connecticut, particularly regarding communication with municipalities have been vigorously applied this year.
Our customers and community leaders have certainly noticed our enhancements, and we have received many positive comments on our storm response.
When storms have threatened us and recall that we have had glancing blows from three tropical storms this summer in last week's events that I described at the beginning of my comments, I have been at the center of the action from before the storm hits into the lost of our customers has power restored.
I believe that's critical for us to be out front, visible, transparent and collaborative during these major events, something that has been difficult to do as we all work in a remote pandemic restricted environment for the last 18 months.
Next, I want to discuss our Connecticut rate settlement.
In News reports, Governor Lamont, Attorney General William Tong and state leaders were quoted as saying that the settlement provides customers with some well-deserved relief in the short term, greater local control and oversight and an improved customer experience.
Phil will discuss settlement specifics in a moment, but we are very grateful to PURA for the opportunity to move forward on a positive note.
Settling critical regulatory and legal disputes was a necessity to reset our relationship with key Connecticut stakeholders.
We all want the state to move ahead on addressing critical energy and climate issues.
And the outstanding disputes have the potential to delay some of this important work.
Since becoming CEO this past spring, my top priority has been to strengthen our relationship Ins' Connecticut.
I've met regularly with key state policymakers as well as business leaders and customers, underscoring our commitment to the state with the largest number of Eversource employees live and work.
This will continue to be a strong focus for me going forward.
Eversource is fully committed to providing each and every one of our 4.3 million electric, natural gas and water customers across New England with exceptional service.
With Connecticut temporary rate docket now behind us, we can move on to other important topics, where progress has been hindered by the drain in time and resources devoted to strong ESA ES and the interim rate reduction, supporting the build-out of electric vehicle infrastructure, incenting the construction of customer-owned energy storage, installing AMI.
That is the clean energy future, and we will work together with our customers in policymakers to get there.
I'm going to cover some very positive developments in recent months concerning our offshore wind partnership with Orsted.
You can see the status of our current projects on slide three.
Each has advanced since our last earnings call.
To start, our smaller projects, South Fork, has received its final environmental impact statement, and we expect a record of decision to be posted later this month.
BOEM's project website anticipates a decision on South Fork's construction and operating permit or COP in January of 2022, and we anticipate construction beginning early next year.
We continue to expect commercial operation of the 12 turbines, 130-megawatt project by the end of 2023.
In August, we announced that Kiewit will commence construction of the project substation this month in Texas, and that we expect it to be installed in the summer of 2023.
Moving to the 704-megawatt Revolution Wind project that will deliver clean power to Connecticut and Rhode Island.
BOEM continues to anticipate a COP decision in July of 2023, which would support a 2025 in-service date.
State siting hearings have commenced.
Finally, our largest project, Sunrise Wind, which will supply 924 megawatts to New York.
We are looking for federal agencies to complete their final reviews in late 2023, a schedule that would support a late 2025 in-service date.
Last week, we announced that Sunrise will be the first offshore wind project in the United States that will utilize high-voltage direct current technology.
HVDC offers advantages over AC technology when used over long distances.
In Sunrise, we'll have an approximately 100-mile submarine transmission cable from offshore energy production area to the grid connection in Brookhaven, Long island, New York.
We continue to project mid-teens equity returns for these three projects.
The Biden administration continues to show significant support for offshore wind in both words and actions, targeting 30,000 megawatts of offshore turbines by 2030.
We view our partnerships to ocean tracks off of Massachusetts as the best offshore wind sites on the Atlantic seaboard.
Our leases are in close proximity to both the New England and New York markets.
They enjoy strong offshore winds, particularly in the winter, and they have modest ocean depths.
They can hold at least 4,000 megawatts of offshore wind turbines, far more than the approximately 760 megawatts we currently have under contract.
We continue to exercise strong fiscal discipline in using the remaining offshore acreage that we have leased from the federal government.
We did not bid into Massachusetts September RFP for up to 1,600 megawatts of offshore wind.
Current Massachusetts bidding rules discourage imaginative bid packages, Governor Baker and some Massachusetts policymakers are now recognizing that Massachusetts is not benefiting from the same level of economic development as states that place greater emphasis on infrastructure and supply chain development.
As such, the governor recently filed legislation that would eliminate the state's current price cap.
In Rhode Island, we are constructing a service vessel in the state.
In Connecticut, we are partnering with the state on more than $200 million upgrade of the New London State Pier.
The Pier will become the premier site in the entire Northeast for staging offshore wind development.
Onshore construction is underway, which you can see from either I-95 or Amtrak's nearby Boston to New York line.
In New York, I joined members of the Governor Hochul's administration last month and announcing the largest single offshore wind supply chain contract award in New York to support the Sunrise project.
The local company, Riggs Distler, will construct advanced foundation components at the port on the Hudson near Albany.
It is just the latest commitment we have made to New York, which also includes basing an offshore wind maintenance hub in Port Jefferson.
We have an excellent relationship with New York policymakers, and that is where most of our currently contracted offshore wind capacity is headed.
We look forward to bidding into future RFPs, with our strong mix of sites, skill sets, discipline bidding strategies and offsets vast offshore wind experience will make us a formidable contender in any competition that takes a broad look at the benefits of shore winds.
I'll start with our results for the quarter slide four.
Our GAAP earnings were $0.82 per share for the quarter, including the $0.19 charge associated with the Connecticut electric rate settlement and the $0.01 charge relating to our integration of Eversource gas of Massachusetts.
Overall, we experienced improved operating results at the electric transmission and distribution segments and lower results at the natural gas and water segments as well as the parents and other.
Our electric transmission business earned $0.40 per share in the third quarter of 2021 compared with earnings of $0.36 in the third quarter of last year, reflecting a higher level of necessary investment in our transmission facilities.
Our electric distribution business, excluding charges related to the Connecticut rate settlement, earned $0.62 per share in the third quarter of 2021 compared with earnings of $0.60 in the third quarter of 2020.
Higher distribution revenues were partially offset by higher O&M, depreciation, interest and property taxes.
Storm-related expenses remain a headwind for us, costing us $0.01 a share in the third quarter of 2021 compared to the same period in 2020 and a total of $0.05 a share more in 2021 than last year on a year-to-date basis.
Our natural gas distribution business lost $0.06 per share in the third quarter of 2021 compared with a loss of $0.04 in the third quarter of 2020.
Given the seasonal nature of customer usage, natural gas utilities tend to record losses over the summer months, our natural gas segment now -- our natural gas segment loss is now about 50% larger as a result of the acquisition of Columbia Gas of Massachusetts assets back in last October.
And as you recall, we now refer to that franchises as Eversource Gas of Massachusetts.
So Eversource Gas of Massachusetts lost about $0.03 per share in the quarter.
It had no comparable amount in the third quarter of 2020.
I think it's important to point out here that given this is the first full year for our Eversource Gas of Massachusetts or EGMA franchise, modeling its quarterly earnings contribution has varied widely across street estimates, at least the ones that I've seen.
Just to some investors underestimated the $0.14 per share positive contribution from EGMA in the first quarter.
I believe there may have been some underestimate of EGMA losses in the third quarter.
As I said, EGMA lost $0.03 in the quarter, and it was not part of the Eversource family in the third quarter of 2020.
I'd say going forward with a year's track record behind us, I'm sure that the estimates will better reflect the earnings pattern we have for that franchise going forward.
Our water distribution business, Aquarion, earned $0.05 per share in the third quarter of 2021 compared with earnings of $0.07 in the third quarter of 2020.
The lower results were due primarily to the absence of the Hingham, Massachusetts water system that we sold at the end of July of 2020.
The $17.5 million that we earned at our water segment in the third quarter of 2021 is more on -- a more normalized level for that segment.
Our parent and other earned $0.01 per share in the third quarter of 2021 compared with earnings of $0.03 in the third quarter of 2020.
Lower earnings were primarily due to a higher effective tax rate.
Our consolidated rate was 24.8% in the third quarter of 2021 compared with 23.7% in the third quarter of 2020.
Turning to slide five.
You can see that we have reiterated the $3.81 to $3.93 earnings per share guidance that we issued in February.
That range excludes the $0.25 per share of charges related to our Connecticut settlement and storm-related bill credits that we recognized in the first quarter of this year as well as the transition costs related to the integration of the former Columbia Gas of Massachusetts assets into the Eversource system.
Also, we project long-term earnings per share growth in the upper half of the range of 5% to 7% through 2025.
Excluding the impact of the positive impact that we expect from our offshore wind projects.
That growth is largely driven by our $17 billion five-year capital program and continued strong operational effectiveness throughout the business.
For reference, our five-year capital forecast is shown in the appendix.
And through September 30, our capital expenditures totaled $2.3 billion.
From the financial results, I'll turn to our recently approved Connecticut settlement on slide number six.
Earlier, Joe provided you with an overview.
I'll just add a few additional details.
The settlement calls for $65 million in rate credits to CL&P customers over the course of December of 2021 in January of 2022.
And that's about -- in total, $35 per customer over the two months for the typical residential customer.
It provides another $10 million of shareholder pay benefits to customers who are most in need of help with their energy bills.
Further, as part of the settlement, we will withdraw our superior court appeal of the $28.4 million total storm-related credits that customers first saw in their bills in September of 2021.
So these customers will continue.
They'll continue to flow back to customers through August of next year.
As prior of the settlement, the 90 basis point indefinite reduction of CL&P's distribution ROE will not be implemented.
Additionally, the current 9.25% ROE and capital structure will remain in effect.
This will avoid an appeal of the interim rate reduction and will withdraw the pending appeal of the 90 basis point reduction.
CL&P cannot implement new base distribution rates before January one, 2024.
Priorities to the settlement agreed that this review satisfies the statutory requirement in Connecticut that all-electric and natural gas distribution company rates be reviewed once every four years.
That's to determine whether they're just unreasonable.
So as a result, the next statutory mandated review would be in late 2025.
Since CL&P's last distribution rate case was effective in May of 2018, the actual -- the company's actual ROEs have generally ranged between 8.6% and 9%, with the latest reported quarter at 8.6%.
There are some tracking mechanisms that will allow us to recover costs associated with certain new investments over the coming years, such as those to improve reliability or implement grid modernization initiatives, but we will not be able to obtain any additional revenues to offset higher wages, employee benefits costs, property taxes and other inflationary items.
We'll continue to provide superior service to our nearly 1.3 million CL&P customers will also be effectively managing our operations.
It will certainly be a challenge, but one, I know that our entire CL&P and Eversource team is up to meeting.
From the Connecticut settlement, I'll turn to our various grid mod, AMI, electric vehicle initiatives in Connecticut and Massachusetts.
On October 15, CL&P filed a final electric vehicle program designed documents for PURA review and approval, including a proposed budget and program implementation plan for residential managed charging.
PURA will conduct a review process with a final decision targeted for December the eight.
The program is planned to launch January one of 2022, and will support the state's target of having at least 125,000 electric vehicles on the road by the end of 2025.
In terms of AMI, in Connecticut, CL&P is preparing to file an updated proposal based on a straw proposal from Pier to have all our customers on AMI by the end of 2025.
To date, we'll need to replace more than 800,000 meters over the next -- to do that, we'll have to replace over 800,000 meters over the next several years.
Altogether, moving CL&P fully to AMI would involve a capital investment of nearly $500 million we estimate in meters and communication related technologies.
In Massachusetts on slide eight, as we mentioned on our July earnings call.
We've submitted nearly $200 million grid modernization plan to regulators for the 2022 through 2025 period.
The vast majority of that investment would be capital.
We expect a ruling on the entire program by the second quarter of 2022.
Our Massachusetts AMI program is now being evaluated by the Massachusetts Department of Public Utilities, with a decision expected in 2022.
It would involve about $575 million of capital investments over multi-years from 2022 through 2027.
And like Connecticut, would provide significant customer service, reliability, energy efficiency, grid modernization and demand management improvements.
Also in Massachusetts, the DPU is evaluating an extension of our electric vehicle program.
The extension would provide investments of nearly $200 million over the next four years, with about $68 million being capital investments.
We currently expect a decision on this by mid-2022.
Turning to slide nine.
We've been receiving regular questions over the past couple of months about the impact of higher natural gas prices on this winter's electric and natural gas supplies and prices.
So I'll first start with supplies.
First, what do we have to supply?
Our three natural gas distribution companies are required to have access to enough natural gas to be able to serve our firm customers on the coldest day in the last 30-year period.
So we accomplished that through a combination of firm capacity contracts across multiple interstate pipeline systems and through storage, both inside and outside of our service territory.
Our regulators in Connecticut and Massachusetts have had the foresight to allow us to maintain significant in region LNG storage in Waterbury, Connecticut.
And Hopkinton and Acushnet, Massachusetts as well as various facilities that we purchased as part of the Columbia gas of Massachusetts transaction.
Although, these facilities provide us with -- altogether, these facilities provide us with storage connected to our distribution system of nearly 6.5 billion cubic feet.
Our regulators have also permitted us to acquire additional firm delivery capacity that was added to the Algonquin system in recent years through the AIM and Atlantic Bridge expansion projects.
We've also acquired additional firm capacity on the Tennessee and Portland pipelines.
So from a reliability standpoint and supplies, we consider ourselves very well prepared for the winter.
In terms of price, our natural gas sources include a combination of stored gas, where the price has been fixed and pipeline gas from Marcellus Shale basin that is price based on NYMEX related indices.
Because our firm pipeline capacity, we are able to purchase at the Marcellus related price, not at the New England Citygate price.
You can see on the slide that we have in our deck, that there's significant difference in pricing between the two.
Nonetheless, even the Marcellus price is higher this year.
And as of now, we expect the commodity portion of natural gas bills to be approximately 20% higher than last winter's extremely low levels due to COVID, prices were pretty low last year and well below levels we experienced a decade ago after Hurricane Katrina struck the Gulf of Mexico and Louisiana.
Overall, including the distribution charge, we expect natural gas heating bills will be up about 15% on average.
That's about $30 a month to the average for a typical heating customer compared to last winter.
And that's an average across our three natural gas distribution companies.
While a 15% increase is significant it is far less than the -- more than 30% increase that propane heating customers are facing and really a 60% increase that's out there for home heating oil as the alternatives for customers.
Of course, a primary determinant of the total bill is usage, right?
The autumn has been quite mild here in New England, thus far, and natural gas usage has been particularly low.
Nonetheless, a bitly cold month of December or January could cause natural gas cost to increase.
Recognizing the stress that this situation could place on customers.
We've suggested to our regulators that we spread out the recovery of certain charges in our distribution portion of our bill to moderate the potential bill impacts where possible.
We're also taking additional proactive steps and working closely with regulators so that customers understand the current price environment and take actions to address it.
We're intensifying our communications to be sure customers understand the bigger picture macro factors affecting natural gas bills.
And we are urging customers to take advantage of our nationally recognized energy efficiency programs and leverage payment options that we have available.
So on the electric side, it's a bit different.
Natural gas power plants are on the margin in New England year-round, really, except for the coldest days of the year.
So rising natural gas prices are significantly affecting power prices.
Between 60% and 65% of our electric load is bought by customers directly from third-party suppliers.
For the 35% to 40% of our load that continues to buy through our franchises, Connecticut Light & Power, NSTAR Electric and Public Service in New Hampshire, this is mostly residential load and customers will see higher prices, but they are partially protected by the fact that we contract for power in multiple tranches throughout the year.
So lower cost tranches from our purchases earlier in 2022 will offset some of the higher priced tranches that we purchased more recently.
Due to wintertime natural gas constraints in New England, our customers normally see $0.015 to $0.02 per kilowatt hour increase in their retail electric prices in January, an increase that usually reverses as we move into the summer.
This January customers in Massachusetts and Connecticut elected to experience an additional $0.02 to $0.03 increase due to higher gas prices driving power production.
This would be an additional $20, $25 per month for a typical residential customer compared with last winter.
Our New Hampshire customers, the rates remain in effect until February, so there's really no impact at this stage for our New Hampshire customers.
While the vast majority of our residential customers do not use electricity for space heating, we recognize that any increase in energy bills add stress to the household budget.
And we've redoubled our efforts again to urge customers to take advantage of the more than $500 million that we have available on energy efficiency initiatives that we provide customers throughout our states each year.
I should note that similar to natural gas prices, wholesale electric prices were extremely low in 2020.
In fact, they were at a 10-year low.
So the percentage increase is -- that we're reporting here comes off some very low base numbers from last year.
As a reminder, increases and/or decreases in the energy component of our electric bills, our pass-throughs dollar-for-dollar pass-throughs, we earn nothing on providing the procurement service for customers.
| compname reports q3 earnings per share $0.82.
q3 earnings per share $0.82.
today reaffirmed its previously disclosed 2021 earnings per share (eps) projection of $3.81 to $3.93 per share.
|
Factors that could cause the actual results to differ materially are discussed in detail in our most recent filings with the SEC.
An audio replay will be made available on our website shortly after today's call.
It is now my pleasure to introduce Anant Bhalla.
We enter 2021 focused on being vigilant about realization of shareholder value.
2021 will be a transition year from the AEL 1.0 strategy to the AEL 2.0 business model.
It will be the execution year as we make demonstrable progress with closing of already announced reinsurance transaction plan under our capital structure pillar and start our migration to alpha active with investment management partnerships under our investment management pillar.
I'll share more on these partnerships in a few minutes.
First, the Virtuous Flywheel builds on an industry-leading at-scale annuity funding origination platform.
Second, adding in differentiated investment management capabilities and expertise in aligning the annuity liability funding with cross-sector asset allocation now gives us a competitive advantage over traditional asset managers as we leverage expertise for both sides of our balance sheet.
And third, demonstrable success overtime on these first two using our own capital will attract third-party capital to our business and grow fee revenues for AEL.
These fee revenues will be generated by growing third-party assets under management in our investment management partnerships and from creation of additional side-cars reinsurance vehicles with new equity investors like the two we've announced to date with Brookfield and Varde-Agam.
These fees will diversify our earning streams.
Fourth, leveraging third-party capital will transform AEL into a more capital-light business.
The combination of differentiated investment strategies and increased capital efficiency improves annuity product competitiveness, thereby enhancing new business growth potential and further strengthening the operating platform.
We believe that in the foreseeable market environment, it is imperative for most asset-intensive insurers, including American Equity, to switch the source of earnings generation from traditional core fixed income investing to a blend of core fixed income and an alpha-generating private credit and real or physical assets, and over the next few years, migrate to a combination of spread and capital-light fee-based businesses.
Regarding American Equity-specific execution.
The fourth quarter was the start of the turnaround of the go-to-market pillar, our strategy to enhance our ability to raise long-term client assets through annuity product sales.
We and our distribution partners consider American Equity's marketing capabilities and franchise to be core competitive strengths.
The liabilities we originate result in stable, long-term attractive funding, which is invested to earn a spread and return on the prudent level of risk capital.
In the fourth quarter, we reintroduced ourselves to our markets.
We used the fourth quarter to tell distribution that we are back and in a big way.
Driven by the introduction of competitive three and five-year single-premium, deferred-annuity products at both American Equity and Eagle Life, we saw a substantial increase in sales, with total deposits of $1.8 billion, doubling from the prior year quarter and up 221% from the third quarter of 2020.
Fixed-rate annuities was a major driver of fourth quarter sales increase, while fixed-indexed annuities also increased, up 23% sequentially.
Total sales at Eagle Life were up over six fold on a sequential basis, and for the first time in its history, Eagle Life surpassed American Equity Life in total sales.
The competitive positioning we took in the fixed-rate annuity market benefited both the fixed-indexed annuity sales and recruiting of new producers.
Our FIA sales in the bank and broker-dealer channel increased 76% sequentially.
New representatives appointed with Eagle Life during the quarter increased by nearly 1,200 to over 9,300 at year-end.
While not as dramatic, we saw growth in sales at American Equity Life as well.
Total sales increased 103% from the third quarter, while fixed-indexed annuity sales climbed 16%.
The momentum that began in the fourth quarter has continued into the new year.
Pending applications when we reported third quarter results stood at 1,625.
For fixed-indexed annuities, we will shortly launch a revamped AssetShield product chassis to appeal to a broader market adding two new proprietary indices, the Credit Suisse Tech Edge Index and the Societe Generale Sentiment Index, in addition to the existing Bank of America Destinations Index, all of which we expect to illustrate extremely well with participation rates that cost well within our pricing budgets to meet our target pricing IRRs.
With the introduction of these multi-asset indices, we will offer clients a compelling single-accumulation annuity product that covers traditional equity indices as well as multi-asset custom indices focused on U.S. risk parity, global risk control asset allocation, and sector-specific allocations.
Following last year's refresh of IncomeShield, we are very well situated for income.
The level of income offered to retail clients dominates the market in almost all the important combinations of age and deferral periods, and where we don't, we are top three, which is key to getting distribution partners' attention.
I want to highlight management changes we've made at Eagle Life to accomplish our goals.
In September, we announced the hiring of Graham Day as President of Eagle Life.
Graham has added quickly to his team from other leading annuity manufacturers, including Greg Alberti as Head of National Accounts and Bryan Albert as Head of Sales.
Eagle Life is a key piece of our expansion into being a scale player in a new channel of distribution.
Pending applications when we reported third quarter results were at 975.
Moving onto the investment management pillar.
In 2021, we intend to focus on ramping up our allocation to alpha assets.
Our first foray in this area includes our partnership with Pretium, announced in the fourth quarter, including an equity investment in the general partner.
With Pretium, we expect to expand our focus as both a lender and a landlord in the residential market.
In each new alpha asset subsector that we enter, we expect to partner with a proven industry manager with aligned economic incentives and risk management culture.
This allows AEL to have an open architecture asset allocation approach versus other insurers that may have a more closed architecture approach to asset allocation.
Our focus expansion sectors include middle market credit, real estate, infrastructure debt, and agricultural loans.
Yesterday, we announced plans to enter the middle market credit space with Adams Street Partners.
American Equity and Adams Street will form a management company joint venture for co-developing insurer capital efficient assets with secured first-lien middle market credit.
Our company will initially commit up to $2 billion of invested assets to build the joint venture, and we expect to bring this capital-efficient asset product to other insurers as well.
As this venture and other similar ventures in the future garner third-party assets, American Equity's mix of fee revenues will grow supporting the migration to a more sustainable higher-return business profile.
The capital structure pillar is focused on greater use of reinsurance structuring to both optimize asset allocation for American Equity's balance sheet and to enable American Equity to free up capital and become a capital-light company overtime.
We are working diligently to complete in 2021 the announced reinsurance partnerships with Varde Partners and Agam Capital Management as well as Brookfield Asset Management and the formation of our own offshore reinsurance platform.
These transactions will enable American Equity to generate deployable capital in order to pivot toward a greater free cash flow generative and a capital-light or ROA, return on assets, business model.
Turning to financial results for the fourth quarter and full year.
For the fourth quarter of 2020, we reported non- GAAP operating income of $72 million, or $0.77 per diluted common share.
Financial results were significantly affected by excess cash in the portfolio as we repositioned our investment portfolio by derisking out of almost $2 billion of structured securities and $2.4 billion of corporates in the fourth quarter and build cash we expect to redeploy by transferring to Varde-Agam and Brookfield reinsurance transactions.
Overall, 2021 is a transition year for repositioning a significant portion of our balance sheet and hence a reset year for American Equity.
Over this year, we will explain any transaction execution driven short-term or one-time notable impacts on financial results.
For full year 2020, we reported non-GAAP operating income of $69.1 million or $0.75 per share.
Excluding notable items, specifically the one-time effect of annual actuarial review in the third quarter, a tax benefit from the enactment of CARES Act, and loss on extinguishment of debt, 2020 non-GAAP operating income was $381.4 million or $4.13 per share.
As part of our AEL 2.0 strategy work, we executed a series of trades designed to raise liquidity to fund the Varde-Agam and Brookfield block reinsurance transactions and derisk the investment portfolio.
As part of this derisking, we sold nearly $2 billion of structured securities and an additional $2.4 billion of corporates where we generally focused on securities that we believed were at risk of future downgrades.
The sales occurred before the recent ramp up in interest rates, so our timing was fortuitous.
As of the fourth quarter, the fixed maturity securities portfolio had an average rating of A minus with almost 97% rated NAIC 1 or 2.
In addition, almost 80% of our commercial mortgage loan portfolio was rated CM1 at year-end, with 99.7% rated either CM1 or CM2.
All commercial mortgage loans in the portfolio were paid current as of year-end, and in the fourth quarter of 2020, there were no additional forbearances granted.
Back on our first quarter 2020 call, we laid out an estimate of our capital sensitivity to a 12-to-18-month adverse recessionary scenario modeled on the Fed's CCAR stress test.
Through year-end, the portfolio performed better than expectations.
The impact to ratings migrations totaled 23 RBC points compared to the projection of 50 RBC points in that 12-to-18-month economic stress scenario.
The impact of credit losses and impairments was 10 points, which compared to a projection of 25 RBC points in the stress scenario.
Following derisking activities of the fourth quarter, we would expect our capital sensitivity in an adverse economic environment to be truncated relative to our March 2020 estimates.
Looking forward, we expect to reposition the portfolio starting this year.
With the completion of the reinsurance transactions with Varde-Agam and Brookfield, AEL will free up capital and then redeploy part of that capital to support a move into alpha-generating assets.
Going forward, we expect to operate at lower invested asset leverage than in the past.
Fourth quarter 2019 results included a $2 million, or $0.02 per share, loss from the write-off of unamortized debt issue cost for subordinated debentures that were redeemed during the period.
Average yield on invested assets was 3.88% in the fourth quarter of 2020 compared to 4.10% in the third quarter of this year.
The decrease was attributable to a 22 basis point reduction from interest foregone due to an increase in the amount of cash held in the quarter.
Cash and short-term investments in the investment portfolio averaged $4.4 billion over the fourth quarter, up from $1.7 billion in the third quarter.
At year-end, we held $7.3 billion in cash and short-term investments in the life insurance company portfolios yielding roughly 7 basis points.
The current point-in-time yield on the portfolio, including excess cash, is approximately 3.4%.
So the pressure on investment spread will continue in the first quarter.
Excluding excess cash and invested assets to be transferred as part of the reinsurance transactions, we estimate the current point-in-time yield on the investment portfolio to be roughly 4%.
As we expect to close the reinsurance transactions in or after the second quarter, starting in March, we may partially pre-invest the assets for the reinsurance transactions, thereby offsetting some cash drag.
We do not expect significant benefit in the first quarter from such pre-investing.
On our future quarterly earnings calls, we will call out the effect of excess cash, if any, related to the reinsurance transactions.
The aggregate cost of money for annuity liabilities was 163 basis points, down three basis points from the third quarter of 2020.
The cost of money in the fourth quarter benefited from one basis point of hedging gain compared to a three basis point gain in the third quarter.
Excluding hedging gains, the decline in the adjusted cost of money reflects a year-over-year decrease in option cost due to past renewal rate actions.
Reflecting the decline in the portfolio yield, investment spread fell to 225 basis points from 244 basis points in the third quarter.
Excluding non-trendable items, adjusted spread in the fourth quarter was 213 basis points compared to 231 basis points in the third quarter of 2020.
The average yield on long-term investments acquired in the quarter was 4.46%, gross of fees, compared to 3.59% gross of fees in the third quarter of the year.
We purchased $152 million of fixed income securities at a rate of 3.32%, originated $142 million of commercial mortgage loans at a rate of 3.67%, and purchased $224 million of residential mortgage loans at 5.63% gross of fees.
The cost of options declined slightly to 139 basis points from 142 basis points in the third quarter.
All else equal, we would expect to continue to see the cost of money continue to decline throughout most of 2021, reflecting lower volatility and the actions taken in June of last year to reduce participation rates on $4.3 billion of policyholder funds and S&P annual point-to-point and monthly average strategies.
The cost of options for the hedge week ended February 9th was 143 basis points.
Should the yields available to us decrease or the cost of money rise, we continue to have flexibility to reduce our rates if necessary and could decrease our cost of money by roughly 62 basis points if we reduce current rates to guaranteed minimums.
This is down slightly from the 63 basis points we cited on our third quarter call.
The liability for lifetime income benefit riders increased $79 million this quarter, which included negative experience of $16 million relative to our modeled expectations.
Coming out of the third quarter actuarial assumption review, we said we had expected for that quarter a $63 million increase in the GAAP LIBOR reserve based on our actuarial models, while actuarial and policyholder experience true-ups had added an additional $5 million of reserve increase.
We said that we thought expected plus or minus $10 million would seem reasonable.
So the fourth quarter of 2020 was a little bit above that range.
There were pluses and minuses in the fourth quarter, with the biggest differences due to a $6 million increase from lower-than-expected decrements on policies with lifetime income benefit riders and a $10 million increase as a result of lower caps and par rates due to renewal rate changes and policies having anniversary dates during the quarter.
We will continue to experience the impacts from the renewal rate changes made in the second quarter of 2020 and the first and second quarters of this year.
Deferred acquisition cost and deferred sales inducement amortization totaled $113 million, $16 million less than modeled expectations.
The biggest items driving the positive experience were lower-than-modeled interest and surrender margins, lower-than-expected utilization of lifetime income benefit riders, and the second quarter of 2020 renewal rate changes I spoke about previously.
The benefit on the combined deferred acquisition costs and deferred sales inducement amortization from the second quarter 2020 renewal rate changes was $10 million, effectively offsetting the negative effect on the lifetime income benefit rider reserve.
Other operating costs and expenses increased to $55 million from $43 million in the third quarter.
Notable items not likely to reoccur in the first quarter of 2021, primarily advisory fees related to the unsolicited offer for the company in September totaled, approximately, $3 million with much of the remaining increase associated with the implementation of AEL 2.0.
Post-closing of the announced reinsurance transactions with Varde-Agam and Brookfield and the creation of the affiliated reinsurance platform, we would expect the level of other operating costs and expenses to fall in the mid-to-high $40 million range.
We expect to complete the execution of the already announced accelerated share repurchase program in the first quarter.
Based on current estimates, we expect an additional 520,000 shares to be delivered to us in addition to the initial 3.5 million shares delivered at the initiation.
Combined with the 1.9 million shares we repurchased in the open market prior to the initiation of the ASR program, we will have effectively reduced the share dilution resulting from the November 30th initial equity investment of 9.1 million shares from Brookfield Asset Management by, approximately, two-thirds.
The risk-based capital ratio for American Equity Life was 372%, flat with year-end 2019.
Total debt to total capitalization, excluding accumulated other comprehensive income, was 12.2% compared to 17.7% at year-end 2019.
At year-end, cash and short-term investments at the holding company totaled $484 million.
We expect to have over $300 million of cash at the holding company even after buying back additional shares after completion of the existing ASR to fully offset Brookfield issuance related dilution.
We are strongly capitalized as we look to execute AEL 2.0 with ample liquidity at the holding company, low leverage ratio relative to our industry peers, and robust capitalization at the life company.
| q4 non-gaap operating earnings per share $0.77.
|
Please ensure that your [Technical Issue] Leading our call today will be Mike Jackson, our Chief Executive Officer; and Joe Lower, our Chief Financial Officer.
I will be available by phone following the call to address any additional questions that you may have.
Today, we reported all-time record quarterly results with earnings per share of $5.12, an increase of 115% compared to adjusted earnings per share of $2.38 last year.
This marks AutoNation's sixth consecutive all-time record quarter, driven by strong performance across both variable and fixed operations.
Our third quarter same-store revenue of $6.4 billion was up 18% compared to the prior year as well as the third quarter of 2019.
Consumer demand continues to outpace supply, driven by consumer desire for personal transportation and ongoing manufacturer supply chain disruption.
We expect this to continue well into 2022.
New vehicle sales are currently constrained by reduced production volume, low inventory levels leading to even more pent-up demand and should support sales for the foreseeable future.
In our used vehicle business, our strong self-sourcing capability, digital tools and customer-focused sales processes are competitive advantage that has allowed us to outperform our peers and the broader used vehicle market.
In the third quarter, we self-sourced 90% of our pre-owned vehicle retail sales and our same-store used vehicle revenue increased 63% year-over-year.
We see additional opportunity to capture used vehicle market share to our AutoNation USA expansion.
This week, we opened our eighth AutoNation USA store and our second store in the Denver market and we expect to open two additional stores in Phoenix and Charlotte before year end.
Our rollout schedule remains on track with 12 additional stores planned for 2022 and over 130 stores by the end of 2026.
Today, we announced that we signed an agreement to acquire Priority 1 Automotive Group, adding $420 million in annual revenue.
Together with our previously announced acquisition from Peacock Automotive Group, AutoNation has announced $800 million in annual revenue from acquisitions this year.
We also continue to buy back our shares during the third quarter.
Over the last 12 months, through the end of the third quarter, we repurchased 27% of our shares outstanding from September 30 last year.
Our strong execution and cash flows have positioned us well to continue our disciplined, opportunistic capital allocation strategy.
I'm going to start the same place as Mike opened.
Today, we reported net income of $362 million or $5.12 per share versus adjusted net income of $212 million or $2.38 per share during the third quarter of 2020.
This represents our sixth consecutive all-time high quarterly earnings per share and 115% increase year-over-year.
As Mike mentioned, consumer demand for personal transportation remained strong, while new vehicle inventory is at historically low levels.
In this environment, we continue to focus on optimizing new vehicle margins and procuring used vehicle inventory to support sales.
We expect these trends with demand exceeding supply to continue well into 2022.
For the quarter, same-store variable gross profit increased 42% year-over-year, driven by an increase in total combined units of 4% and an increase in total variable PVR of $1,709 or 39%.
A decline in new units of 11% was more than offset by growth in used units of 20%.
Our customer care business has recovered with same-store customer care gross profit increasing 8% on a year-over-year basis and 6% compared to the third quarter of 2019.
Taken together, our same-store total gross profit increased 29% compared to the prior year and 45% compared to the third quarter of 2019.
We also continued to deliver significant SG&A leverage due to strong cost discipline and robust vehicle margins.
Third quarter SG&A as a percentage of gross profit was 56.9%, a 750 basis point improvement compared to the year ago period on an adjusted basis.
As measured against gross profit on an adjusted basis, our metrics improved across all key categories, with overhead decreasing 390 basis points, compensation decreasing 290 basis points and advertising decreasing 70 basis points.
We expect SG&A as a percentage of gross profit to remain below 60% for the fourth quarter and the full year 2021.
Floorplan interest expense decreased to $5 million in the third quarter of 2021, due primarily to lower average floorplan balances.
This, combined with a lower effective tax rate and fewer shares outstanding generated a record EPS.
Turning to the balance sheet and liquidity.
Our cash balance at quarter end was $72 million, which combined with our additional borrowing capacity resulted in total liquidity of approximately $1.8 billion.
We continue to leverage our strong balance sheet and robust cash flows to invest in our business.
As Mike mentioned, this week we opened our eighth AutoNation USA store in Denver, Colorado.
We remain on track to open two additional stores in the fourth quarter and 12 more in 2022.
Again, as Mike mentioned, longer term we continue to target over 130 stores by the end of 2026.
In addition to organic growth initiatives, today we announced the acquisition of Priority 1 Automotive Group.
We will continue to look for additional acquisitions that complement our portfolio and meet our return thresholds.
We have also continue to repurchase our own shares.
During the third quarter, we purchased 7.9 million shares for an aggregate purchase price of $879 million.
This represents an 11% reduction in shares outstanding for the fourth quarter alone.
Today, we announced that our board has authorized an additional $1 million for share repurchase.
With this increased authorization, the company has approximately $1.3 billion available for additional share repurchase.
As of October 19, there were approximately 66 million shares outstanding.
Despite our significant capital deployment, we maintained ample capacity on our balance sheet.
At the end of the third quarter, our covenant leverage ratio of debt to EBITDA was 1.4 times, up slightly from 1.2 at the end of the second quarter, but still well below our historical range of 2.0 to 3.0 debt to EBITDA.
We continue to demonstrate strong operational execution and disciplined capital allocation.
Going forward, we will remain focused on leveraging our balance sheet and strong cash flows to drive long-term shareholder value.
It's been my honor to serve in a leadership position of AutoNation for the past 22 years.
We've built an exceptional brand.
We are America's most admired and respected automotive retailer.
We provide a peerless customer experience from coast to coast.
And we have made a difference in people's lives with DRIVE PINK and our efforts to beat cancer.
He is one of the world's most respected, admired automotive executives, and we are thrilled to have him as our new CEO.
And AutoNation has an even brighter future.
| compname reports qtrly gaap earnings per share from continuing operations of $5.12.
qtrly gaap earnings per share from continuing operations $5.12.
qtrly same store revenue $6.4 billion, up 18%.
compname announces agreement to buy priority 1 automotive group, representing about $420 million in annual revenue.
authorized repurchase of up to additional $1 billion of common stock.
|
Gary Norcross, our Chairman, President and CEO, will discuss our quarterly operating performance and share our strategy for continued accelerating revenue growth.
Woody Woodall, our Chief Financial Officer, will then review our financial results, including our balance sheet, cash flow and segment-level trends.
Turning to Slide 3.
Also, throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings and adjusted net earnings per share.
These are very important financial performance measures for the company but are not financial measures as defined by GAAP.
I'm extremely proud of our third quarter results, which returned to positive organic growth for the quarter, an impressive results for our team, given the backdrop of a global pandemic.
We continue to sell new business, grow the top line, expand margins and generate exceptional free cash flow.
Our strong performance demonstrates the durability of our unique business model and underscores our commitment to lifting our clients and communities.
While others have been forced to retrench and preserve capital, we continue to invest for growth, bringing new solutions and services to our clients now.
This quarter alone, we launched several new solutions, including Access Worldpay, which is now the world's most advanced payments gateway; ClearEdge, a new subscription-based offering that enables community banks to run a highly efficient, modern bank while also benefiting from simplified pricing and contracting; Ethos is our innovative, new data ecosystem that provides clients with a unified view across our enterprise, powering data-driven insights and automating reporting.
In addition, we partnered with The Clearing House to launch our new real-time payments managed service, which provides a complete turnkey service for financial institutions to quickly and cost-effectively connect to the United States' real-time payments network.
Even with all these new solutions, we continue to look beyond our own current capabilities to see what's next on the horizon for our clients.
I'm pleased to announce that we recently completed our fifth annual Fintech Accelerator program, which was just named Best Fintech Accelerator by Finovate, and we launched our new FIS Impact Labs, both of which are focused on accelerating transformative innovation into the market.
Now more than ever, our clients are embracing innovative technologies like these and our scalable end-to-end solutions are increasingly in demand.
We saw evidence of this demand from our recent InFocus client event, which was heavily attended and expanded its reach virtually this year to nearly 40 countries and which drove a 25%-plus increase in demand for FIS solutions.
Our strong new sales performance has increased our backlog by 6% organically during the third quarter.
And our pipeline is exceptionally strong, up more than 30% year-over-year as we continue to grow and win new business.
We are also adding our new sales opportunities for revenue synergies.
As of the end of the third quarter, we are generating $150 million in annual run rate revenue synergies and we have $60 million more currently being implemented with our clients.
This puts us in great shape to exceed our $200 million revenue synergy target before the end of the year.
We clearly have the momentum to continue accelerating revenue growth through 2021 and to sustain high single-digit top line growth into the future.
Our ability to leverage our world-class scale is driving ongoing margin expansion.
Adjusted EBITDA margins expanded 340 basis points sequentially and 30 basis points year-over-year during the third quarter as we continue to harness the operating leverage inherent in our business.
We remain focused on further enhancing our superior cost structure by driving automation, streamlining our organizational structure and generating expense synergies through our proven integration capabilities.
Our unique combination of durable revenue growth and persistent operating leverage enables us to generate exceptionally high levels of free cash flow.
We will use our free cash flow to invest back into our business, both organically to delivering innovative solutions like the ones that I mentioned a few moments ago, as well as inorganically to expand into new high-growth segments of the market.
This, in turn, will reinforce the momentum that we're building to drive continued growth acceleration.
Turning to Slide 6.
People often ask me what's next for FIS and how their investments allow us to compete with disruptors.
In order to answer that question, it's important to understand not only where we've been, but where we are going, what's new and what's next for FIS and most importantly, for our clients.
It begins with the pathway to transformation that we started five years ago.
We consolidated data centers and moved solutions to the cloud.
We rearchitected our application stack to be modular and componentized while upgrading and integrating our enterprise tool sets.
And we launched a dramatically more client-friendly approach to delivery and service.
Now we are leveraging our technology and expertise to leapfrog over inflexible point solutions using cloud-native open architecture to deliver digital omni-channel solutions that are simple to integrate and easy to navigate.
In this way, we are helping our clients to quickly adapt to rapidly changing consumer expectations with innovative solutions that are fast, flexible and frictionless.
What you can expect to see next from our centers around our unique ability to tailor end-to-end experiences by connecting the global financial ecosystem in ways that only FIS can do.
We serve each of our clients as a trusted partner by building new and unique capabilities to better solve their challenges.
We then scale these new capabilities across our cloud-based environment for the benefit of all of our clients in a highly efficient and cost-effective manner.
This is the advantage of our unique business model.
And we're just getting started.
By investing approximately $1 billion annually in new product development and R&D, we are bringing tomorrow's innovation forward now.
And by using our one-to-many model, we can continue to grow faster than the market, support our clients' needs and sustain their technology leadership.
I'll give you a few examples of how we are bringing together capabilities from across the business to create new and exciting growth opportunities on Slide 7.
Case New Holland is a global leader in agriculture and industrial equipment.
They have been a valued client with our capital markets business for the past three years, leveraging our auto and equipment finance solutions to deliver a robust and automated digital experience for its customers.
They recently asked us to help them to drive data and insights as well as improved acceptance across their network of more than 900 dealerships.
Now we're bringing capital markets together with merchant by partnering to drive frictionless payments.
Another great example is our Premium Payback solution, which enables consumers to pay for purchases with reward points.
Demand is very strong from both our banking and merchant clients as there is a compelling value proposition for each of them as well as for the consumer.
Thousands of financial institutions, representing more than 7,000 card loyalty programs, are enrolled in the FIS Premium Payback ecosystem.
In this quarter, we added one of the largest issuers in the world to our points bank, further driving adoption.
In addition, we announced this quarter that Walgreens is now one of the growing number of merchants to offer its customers our Premium Payback service, joining companies like PayPal, Shell and BP.
The ability to use loyalty points is becoming an increasingly important factor in consumer decisions on where to shop.
Highlighting the type of next-generation value that we are offering to our clients now.
Another area where we are driving phenomenal value is with our merchant bank referral network.
When we signed the Worldpay deal, we thought that we would be able to sign three to four new bank referral agreements per year.
As it turns out, we have signed more than 15 significant new bank relationships, adding well over 1,000 branches to our partner distribution network in the first year.
Lastly, it's gratifying to see one of the key benefits of the deal come to fruition as we expand our global reach.
We're leveraging our combined scale to enable our merchant business to enter new countries and markets.
Our e-com business remains a global leader and continues to be a partner of choice for multinational companies and leading global brands.
We're expanding into six new countries this year, including Argentina, which we announced most recently.
With our new domestic acquiring licenses, Worldpay from FIS can deliver advanced payment technology to both merchants and global companies operating in these countries around the world.
I'm also happy to announce that we have successfully expanded our integrated payments business into Europe.
We signed more than 30 partners there already and are finalizing agreements with several more.
Winning these new partners gives us access to distribution that will drive accelerated growth through 2021 and beyond.
With recent investments in the U.S. as well, new wins are up significantly within our integrated payments despite the pandemic.
In banking, we added another top 30 financial services firm to our growing roster of large client wins.
They will use our Modern Banking Platform to power their online bank and chose FIS because of our cutting-edge technology and omni-channel capabilities.
We are also seeing strong success with our digital and mobile banking solutions.
This quarter, we signed an agreement with a top 50 bank, who chose us because our Digital One and mobile banking solutions will enable them to rapidly innovate, further differentiate their consumer user experience and increase their speed to market for new products.
In merchant, we signed a top 100 luxury retailer, who chose to partner with us because of our end-to-end capabilities, including our debit routing, e-commerce and differentiated omni-channel technology.
Sticking with the omni-channel theme for a moment, I'm very pleased to announce that Walmart, the world's largest retailer, recently began processing e-commerce transactions with us, further expanding our existing relationship.
It's a testament to our superior client value proposition and omni-channel capabilities that we continue to win share of wallet with our largest global clients.
In integrated payments, we signed two of the world's leading dealer management system software providers, one in the U.S. and one in the U.K. Between the 2, it will provide us with distribution to thousands of dealerships through these leading ISVs.
Turning to capital markets.
Demand for our end-to-end, SaaS-based solution remains robust.
I'm excited to announce that we signed a deal with a leading global technology company to power their complex multinational treasury function as well as to modernize their B2B payment operations.
The company selected FIS because of our cloud-based technology, flexible deployment and simple integration.
We also signed a significant new deal with a large Japanese bank to provide a middle- and back-office post-trade derivative clearing solutions.
The bank chose us in order to leverage our new API-driven technology stack to drive efficiencies and reduce operational risk.
We clearly have the momentum to continue accelerating revenue growth through 2021 and to sustain high single-digit top line growth into the future based on our new solutions, our unique ability to combine our knowledge and expertise from across our business and new ways to solve our clients' challenges and due to our continued sales success with marquee clients.
As Gary highlighted, we're excited about the momentum that we are building in the business.
Our pipelines are full with more than 30% in banking and capital markets and remain the largest that I've ever seen.
Our cloud-based end-to-end solutions are clearly resonating in the market right now.
Transaction and volume growth continue to improve in our merchant segment.
And we are seeing positive trends in our revenue yields as well.
And with our backlog consistently growing in the mid- to upper single digits for multiple quarters in a row, I feel really good about our ability to accelerate revenue growth next year, consistent with the 7% to 9% range we have been messaging.
But let's start with our third quarter results beginning on Slide 10.
We delivered a strong set of financial results with significantly improving trends.
On a consolidated basis, revenue increased 13% to $3.2 billion, up 1% organically, which represents a marked improvement from the 7% decline that we experienced last quarter.
Improving revenue growth was primarily driven by two things: stronger recurring revenue in both banking and capital markets as well as improving trends throughout the quarter within our merchant business.
Adjusted EBITDA increased to $1.4 billion with margins expanding 340 basis points sequentially and 30 basis points year-over-year to 42%.
We continue to expect margins to expand sequentially again in the fourth quarter as consumer spending trends continue to improve, driving margin expansion for the full year as compared to 2019.
As a result of our improving revenue growth and profitability, we achieved adjusted earnings per share of $1.42 for the third quarter.
Touching on our Worldpay integration.
We are more than two years ahead of schedule.
We have achieved $150 million in revenue synergies as we continue to see really strong traction with our Premium Payback solution.
And we are significantly outperforming our initial expectations for merchant bank referrals.
We have also achieved cost synergies of over $700 million, including $385 million in operating expense savings, contributing to our adjusted EBITDA margin expansion.
I'll expand more around our segments with Slide 11.
Banking Solutions revenue increased 3% organically to $1.5 billion.
This includes a three percentage point headwind related to COVID as well as an exceptionally large license comparison in the prior year period.
Excluding these, organic revenue growth was closer to 6% for banking, which is more consistent with our strong growth in recurring revenue.
Adjusted EBITDA was $653 million for banking, representing 220 basis points of sequential margin expansion to 43%.
This is a very good result as the team drove effective cost management to overcome the large margin headwind associated with last year's license comparison.
Our merchant segment also saw a significant rebound in the quarter.
Revenue was flat on an organic basis at $1 billion.
This represents 14 points of improvement over 2Q when normalizing for the U.S. tax deadline shift as we continue to win market share, particularly in our e-commerce, integrated payments and merchant bank referral channels.
Adjusted EBITDA in the segment was $487 million, representing over 700 basis points of sequential margin improvement as we saw a material rebound in our higher-margin transaction processing revenue.
Capital markets revenue has increased 3% year-to-date on an organic basis, demonstrating more than one point of acceleration compared to the prior year period.
We continue to see good progress in transitioning this business to a SaaS-based recurring revenue model and away from license sales.
Capital markets declined 1% in organic revenue growth for the third quarter and was primarily due to quarterly differences in the timing of license renewals.
And we expect quarterly variability of this segment to continue to improve as we complete the transition to SaaS.
Recurring revenue continues to grow strongly and new sales for our SaaS-based recurring revenue solutions increased by nearly 50% during the third quarter, reinforcing our confidence for continued acceleration in revenue growth during 2021 and beyond.
Adjusted EBITDA was $286 million, representing a consistent 46% margin with last quarter, as capital markets teams continue to manage cost and execute at a very high level.
Turning to Slide 12 for an overview of our recent merchant volume and transaction trends.
We continue to see improvement throughout the third quarter with volume and transaction growth exiting the quarter at 6% and 3%, respectively.
Trends have consistently improved since April.
And this is especially notable for our revenue yields.
Historically, merchant revenue growth has been highly correlated with transaction and volumes.
But the severe impact of the COVID pandemic on cross-border and SMB caused revenue growth to fall by more than volume growth last quarter.
This quarter, as expected, we saw that spread narrowing as yields continued to improve, primarily with improving SMB trends.
E-commerce transactions increased 30% in the quarter, excluding travel and airlines.
While the global pandemic continues to affect us all, we believe this is a critical time to continue to invest in our solution suite to empower our merchants into an accelerating digital economy.
As Gary mentioned, we have rolled out significant enhancements within our merchant segment, all of which continue to position FIS as the premier provider of global e-commerce and integrated payments.
Turning to Slide 13.
I wanted to provide some color on the strength of our balance sheet, cash flows and liquidity position.
We ended the quarter with a total debt balance of about $20 billion and a weighted average interest rate of 1.6%.
Our debt balance is up slightly quarter-over-quarter, primarily due to FX translation, as we carry significant euro- and pound-denominated balances.
We continue to generate high levels of free cash flow.
This quarter, we generated $866 million, representing a 27% conversion of revenue.
Capital expenditures were $263 million or 8% of revenue.
As a result, liquidity increased again to $4.2 billion, up by more than $700 million quarter-over-quarter.
Our business model remains durable and our strategy is clearly working to help us win market share.
| compname reports q3 adj earnings per share of $1.42.
q3 adjusted earnings per share $1.42.
|
These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon them.
We refer you to B&G Foods most recent annual report on Form 10-K and subsequent SEC filings for a more detailed discussion of the risks that could impact our Company's future operating results and financial condition.
Bruce will then discuss our financial results for the first quarter as well as expectations for 2021.
Assessing our results for the quarter my overall comment is that the quarter played out much as we expected.
In total, we achieved record first quarter net sales of $505.1 million, a 12.4% increase from Q1 2020.
Net sales in our base business, which excludes the Crisco acquisition completed in December, were approximately $447 million, virtually flat versus first quarter 2020 at a modest 0.6% decline.
Within that number, US base business net sales were up 2.1% while international base business net sales were down 31.8%.
Virtually all of that Green Giant sales in Canada due to severe allocation of the brands there.
Compared to fiscal 2019 our base business net sales, which for purposes of the two-year comparison also exclude Clabber Girl and Farmwise net sales increased $16.6 million or 4% for the quarter.
Our $447 million of base business net sales were supplemented by the $58 million of Crisco net sales, bringing our total net sales up to the $505 million figure.
Adjusted EBITDA for the quarter also set a first quarter record at $92.9 million a 15.2% increase, a result of solid base business volume and earnings and a fulsome Crisco benefit in our first few months of ownership.
Those are the highlights.
As Dave just discussed, we had very strong financial performance during our first quarter, delivering Company record first quarter net sales and adjusted EBITDA.
We reported net sales of $505.1 million in the first quarter, an increase of $55.7 million or 12.4% compared to the prior year first quarter and an increase of nearly $95 million or 22.4% compared to the first quarter of 2019.
As you know, the Crisco acquisition closed on December 1, 2020 providing us with a full quarter of net sales in the first quarter.
Crisco generated approximately $58.1 million in net sales for the quarter, which is slightly ahead of our internal model.
Base business net sales, which excludes the benefit of Crisco, were essentially flat to last year's first quarter, were down 0.6%.
Excluding the benefit of Crisco, net sales were up approximately $34.4 million or 8.3% from Q1 2019, approximately $17.7 million of which was due to the May 2019 acquisition of Clabber Girl and the February 2020 Farmwise acquisition and approximately $16.7 million of which was due to base business net sales growth.
We generated adjusted EBITDA before COVID-19 expenses of $95.8 million in the first quarter of 2021, an increase of $15 million or 18.5%.
During the first quarter of 2021, we incurred approximately $2.9 million in incremental COVID-19 costs at our manufacturing facilities, which primarily included temporary enhanced competition for our manufacturing employees, compensation we continue to pay the manufacturing employees while in quarantine, and expenses related to the precautionary health and safety measures.
As discussed in our fourth quarter and full year 2020 call, we expect to see a continued reduction in these costs, which averaged $1.5 million per month during the height of the pandemic.
Inclusive of these costs, we reported adjusted EBITDA of $92.9 million which is an increase of $12.2 million or 15.2% compared to last year's first quarter.
Adjusted EBITDA before COVID-19 expenses as a percentage of net sales was 19% in the first quarter of 2021.
Adjusted EBITDA as a percentage of net sales was 18.4%.
Adjusted EBITDA before COVID-19 expenses as a percentage of net sales and adjusted EBITDA as a percentage of net sales were 18% in the first quarter of 2020 as COVID-19 expenses did not fully kick in until the second quarter of 2020.
We reported $0.52 in adjusted diluted earnings per share in the first quarter of 2021 an increase of $0.06 per share or 13% compared to the prior year first quarter.
Leading our brand performance were Spices & Seasonings.
Net sales of our spices and seasonings including our legacy brand such as Ac'cent and Dash and the brands we acquired in 2016 such as Tone's and Weber were up by $30 million or 41.2% for the quarter.
Net sales of spices and seasonings were up by $17.1 or 20% compared to the first quarter of 2019.
Net sales of spices and seasonings reached $397.7 million for the 12 months ended March 2021.
The retail side of this business continues to show a momentum that began last summer as more and more Americans began to fully embrace cooking and seasoning their meals at home, a trend which continues in 2021.
The foodservice side of this business has also begun to show some momentum with a budding recovery in the away from home channel as many Americans have begun to emerge from a year or more of lockdowns and shelter at home safety precautions.
Despite the recovery, foodservice net sales of spices and seasonings remain below pre-pandemic levels for the quarter, but did have an increase for the month of March.
Other major brands contributing to the net sales growth include Maple Grove Farms, Las Palmas and Ortega.
Maple Grove Farms generated approximately $20.7 million in net sales during the first quarter of 2021 an increase of $2.3 million or 12.1% compared to Q1 2020, and an increase of $2.8 million or 15.5% compared to Q1 2019.
Las Palmas generated $10.7 million in net sales during the first quarter of 2021, an increase of $0.2 million or 1.8% compared to Q1 2020 and an increase of $1.3 million or 14.4% compared to Q1 2019.
Ortega generated $39 million in net sales during the first quarter of 2021, an increase of $0.2 million or 0.4% compared to Q1 2020 and an increase of $1.7 million or 4.6% compared to Q1 2019.
Green Giant, which was one of the largest beneficiaries of COVID-19 pandemic buying of the past year in our portfolio had approximately $639 million in net sales during fiscal 2020, an increase of $112.2 million or 21.3% compared to the prior year.
As we discussed during our last earnings call, Green Giant, as well its competitor brands will have supply constraints until we reach the new pack season later this year.
As a result, we were forced to make tough decisions and place the brand on allocation with our customers, which will limit sales of Green Giant products until this year's third quarter, so that we don't sell out before the pack season.
Primarily as a result of those decisions, Green Giant net sales were just $132.5 million in the quarter, a decrease of $25.9 million or 16.4% compared to the prior year quarter.
However demand for Green Giant remained strong and we expect a strong second half of the year and we expect full year net sales of Green Giant products to exceed the brand's fiscal 2019 net sales of approximately $525 million.
While demand has remained strong, and that sales have generally remained elevated when compared to fiscal 2019, many of our other brands were unable to surpass Q1 2020 net sales.
Cream of Wheat for example generated $18.2 million in net sales during the first quarter of 2021, a decrease of $0.7 million or 4% compared to Q1 2020, but an increase of $0.8 million or 4.3% compared to Q1 2019.
Clabber Girl generated $17.4 million in net sales during the first quarter of 2021 a decrease of $1.3 million or 6.8% compared to Q1 2020, but significantly greater than the estimated $15 million or so of net sales generated during the Q1 2019 period under prior ownership.
Our gross profit was $117.8 million for the first quarter of 2021 or 23.3% of net sales.
Excluding the negative impact of approximately $5.5 million of acquisition divestiture related expenses, the amortization of acquisition related inventory, fair value step up, and non-recurring expenses included in the cost of goods sold, our gross profit would have been $123.3 million or 24.4% of net sales.
Gross profit was $104.9 million for the first quarter of 2020 or 23.3% of net sales.
Excluding the negative impact of approximately $2.3 million of acquisition divestiture related expenses and non-recurring expenses included in cost of goods sold, our gross profit would have been $107.2 million or 23.9% of sales.
As discussed on our fourth quarter and full year call, we are certainly seeing inflationary pressures in 2021.
So far this year, the first quarter has largely played out as expected with low to mid single-digit inflation on a blended basis across our basket of goods with significant increases in agricultural products and commodity relate input costs, as well as corrugated steel and aluminum.
We are also seeing meaningful increases in freight costs and COVID-19 related customer fines.
Our procurement policy has led us to be somewhat aggressive when covering costs in a rising environment and we have locked in costs for many of our inputs through the first three quarters of the year.
We have also continued to be aggressive with our cost-cutting initiatives and we are taking revenue enhancing actions across many of the brands that have been impacted by cost inflation when appropriate in attempt to maintain margins.
Selling, general and administrative expenses for the year were $50.4 million or 10% of net sales.
This compares to $40 million or 8.9% for the prior year.
The dollar increase in SG&A is primarily composed of an incremental $4 million investment in consumer marketing, $1.9 million in incremental acquisition related costs, and non-recurring expense, which primarily relate to the acquisition and integration of the Crisco brand and $4.1 million in increased warehousing costs.
The increase in warehousing costs was primarily driven by the Crisco acquisition and COVID-19 related customer funds.
General and administrative expenses increased by $1.3 million.
These costs were partially offset by decreased selling expenses of $0.9 million.
As I mentioned earlier, we generated $95.8 million dollars in adjusted EBITDA before COVID-19 expenses and after the inclusion of $2.9 million of COVID-19 expenses adjusted EBITDA of $92.9 million.
This compares to adjusted EBITDA before COVID-19 expenses of $80.8 million in Q1 2020 and $75.8 million in Q1 2019.
We generated $0.52 in adjusted diluted earnings per share in the first quarter of 2021 compared to $0.46 per share in Q1 2020 and $0.44 per share in Q1 2019.
We remain very encouraged by these trends.
We had another strong quarter of cash from operations, although it was impacted by the timing of one of our semiannual interest payments and the payout of increased incentive compensation related to the Company's 2020 performance.
Net cash provided by operating activities was $26 million during the first quarter of 2021 compared to $57.6 million during Q1 2020.
The majority of the decrease was driven by the timing of an approximately $24 million interest payment for 2025 notes on April 1, which happened to fall into our first quarter for this year and our second quarter last year.
The remainder of the decrease was driven by a $12.6 million increase in incentive compensation paid in cash as a result of the Company's very strong performance in fiscal 2020 relative to the prior year.
Our consolidated leverage ratio, as defined by our credit agreement, and which is calculated on a pro forma and net debt basis, was 5.23 times and remains within our long-term leverage target of 4.5 to 5.5 times and well below our credit agreement covenant threshold of 7 times.
We are reaffirming our 2021 sales guidance that we provided in March as we continue to expect Company record net sales of $2.05 billion and $2.1 billion in fiscal 2021 inclusive of the benefit of a full year of the Crisco acquisition.
From a pacing perspective, we knew that we had a head start in the first quarter of this year with exceptional performance in the months of January and February that would be coupled with a final month of March that would come in well short of last year when we were at the beginning of the COVID-19 shutdown and related pantry loading.
And that is exactly how the quarter played out.
Crisco is purely incremental for us at this stage and is performing in line with our expectations.
For the second quarter we expect something similar with our base business net sales to trend much closer to our 2019 net sales than our 2020 net sales, may be low to mid single-digit percentage points higher than what we experienced in 2019.
Crisco will again be purely incremental for us in the second quarter.
Historically, Crisco generated about 20% of its full year net sales in the April to June period.
And as we discussed earlier, we expect 2021% to present us with a different set of challenges and opportunities than we had last year.
Demand for our products remain elevated, but not quite as high as during the pandemic.
With the exception of Green Giant and certain of our other brands, we are also in a much better position from a supply standpoint across most of our portfolio than we were late last year, which should enable us to meet much of this demand.
We highlighted our concerns about inflation during our last earnings call and these concerns are certainly proving out as we are seeing inflation across a number of key input costs, including certain agricultural products, other commodity products such as oils as well as packaging and freight.
As in prior years, our experience and expectation is that we will manage these costs through a combination of revenue enhancing initiatives including pricing and trade spend optimization where appropriate, as well as certain cost saving activities to preserve our margin profile and our cash flows.
As a result, we expect to generate adjusted EBITDA as a percentage of net sales of approximately 18% to 18.5%, which is generally consistent with our performance in the recent fiscal years.
As I said at the beginning of the call, the quarter played out much as we expected with substantial sales gains in the first 10 weeks and then tough comparisons in the last few.
The last two weeks of Q1 2020 essentially saw four weeks of normal sales volume compressed into two as COVID-19 driven panic buying commenced.
Nearly all of our brands benefited from this phenomenon as consumers loaded their pantries with anything and everything and our case especially canned goods and frozen vegetables.
So it is no surprise that the most challenging comparison we have for the quarter is in the canned goods brands.
As Bruce described, the largest dollar decline we saw in quarter-to-quarter sales was in Green Giant, down 16.4%.
Virtually all of that happened in the final two weeks of the quarter, making total brand sales for the full quarter similar to the first quarter of 2019.
An additional handicap is that we have supply constraints on the canned side of the Green Giant brand due to unprecedented demand late last year, but even with those constraints we expect brand sales to continue to track to 2019 levels until the new crop arrives.
Excluding the Green Giant brand and the remarkable swing in that brand, net sales for the remainder of our base business increased by 8.1% over first quarter 2020.
Sales remained broadly strong, especially in areas such as baking and spicing and seasonings.
Foodservice sales strengthened as well helping the overall performance.
First quarter was our first full quarter of ownership of the Crisco brand and we were very pleased with its performance.
At $58.1 million in net sales it is tracking to our expectations and margins were accretive to our overall results.
We do face temporary cost challenges with the brands as the cost of oils used in the products has more than doubled since this time last year.
But we view these very high levels as an anomaly that the market will work through over time.
Meanwhile we own what we see as an iconic brand that fits well with our portfolio of products related to baking at home and revitalize consumer behavior.
With the addition of Crisco, we estimate that our baking at home brands will be approximately 20% of our net sales.
While much of our businesses started shifting back to more normal performance, one area where we see continuation of new consumer behavior is in e-commerce.
While there are no complete or precise measures of net sales through this means, we are able to estimate that retail sales of our brands these various e-commerce venues grew by over 60% to $50 million in the first quarter.
At this point we estimate that e-commerce retail sales for the full year will continue to grow at that rate and reach $275 million this year.
I should emphasize that this is not necessarily growth in our factory sales, but instead a noteworthy shift in how consumers are buying our products.
We are investing significantly in this area to ensure that we are well represented in the phenomenon which shows no signs of leveling off in the near future.
If anything, retailers are upping the ante with one recent article citing plans for two-hour delivery of orders to consumer's homes.
Our household penetration has grown substantially in the past year and is up almost 10 percentage points versus 12 months ago.
At the same time, consumer purchase frequency and size has also grown.
Our job is to retain these new and revitalized consumers as the pandemic eases.
We believe the potential to do that exists, primarily because work from home is here to stay in one form or another.
Our own experience as we return to normalcy is that employees want flexibility in their schedules and work days.
Given that, we are orienting our marketing to reinforcing behavior adopted during the pandemic.
An example is, the new website integrated for our baking demands, bakingathome.com where consumers can find a wealth of recipes and baking tips, many of course featuring B&G Foods brands.
Similar efforts will be taking place across the business as we use the efficiency and cost effectiveness of social media to reach consumers.
Although encouraging as first quarter results are, there are certainly risks and unknowns to deal with for the remainder of 2021.
Rising costs are a significant issue and one that will not be resolved anytime soon.
As Bruce noted, freight costs have increased steadily.
Capacity issues in the trucking industry in both labor and equipment will continue for the foreseeable future.
Packaging and raw materials have seen widespread cost increases as well.
We have insulated ourselves in many cases with forward buying positions, but even with these in place, we have also had to announce pricing and manage our trade spending to compensate for these cost pressures.
Some of these increases are already in effect and others will take effect of shortly.
On the positive side, we are seeing reduced expenses related to COVID-19 as vaccination of our workforce expands.
While this was a $2.9 million negative in the first quarter, we should save much of the $13.3 million we spent on COVID-19 related measures in the last three quarters of 2020.
As we continue to grow larger, we are investing more resources toward meeting our responsibilities as a corporate citizen.
The Corporate Social Responsibility Committee of the Board of Directors is charged with the overall direction of these efforts and has initiated a broad array of efforts in diversity, equity, and inclusion, as well as environmental and sustainability.
During the first quarter we worked with the Culinary Institute of America to establish a scholarship program for diverse students.
The program will fully support tuition for five students as they pursue careers in the food industry.
This effort joins the extensive work B&G Foods is already doing with St. Jude Children's Research Hospital.
We are also developing further programs around environmental and sustainability goals at our manufacturing facilities and distribution centers and are working toward increasing our public disclosures regarding our environmental and sustainability programs and goals.
With the pandemic easing, we are working hard to return to the B&G Foods of old, a company that delivered steady reliable results on a regular basis with exceptional margins and strong free cash flow.
That is the model that has served our shareholders well over the years and delivered superior returns.
I stated started my remarks by stating that the first quarter played out much as we expected and that's very encouraging, but we do expect second quarter to be the most challenging quarter of the year and the largest unknown.
Our net sales increased by 38% in the second quarter of 2020 over 2019, reflecting the height of the pandemic pantry loading.
We obviously won't match that increase, but we believe that our business will perform favorably versus fiscal 2019 and continue to produce solid results.
We are all looking forward to welcoming Casey here and I hope to return over a company that is raring to go when he arrives.
With that, we will conclude our remarks and we would like to begin the Q&A portion of the call.
| compname reports q1 adjusted earnings per share $0.52.
q1 adjusted earnings per share $0.52.
q1 sales $505.1 million versus refinitiv ibes estimate of $526.4 million.
net sales guidance reaffirmed at a range of $2.05 billion to $2.10 billion.
expect our base business net sales for q2 to trend much closer to our 2019 net sales than our 2020 net sales.
|
In this year's first quarter, we achieved consolidated earnings of $0.52 per share versus $0.38 per share during the first quarter of 2020.
That's a 37% increase or a 21% increase on an adjusted basis.
You can see from this slide that each of our three operating segments contributed to the year-over-year earnings-per-share growth.
The results of our regulated utilities were driven by CPUC-approved rate increases, while our contracted services segment performed a higher level of construction work during the quarter compared to last year.
Steve will discuss this slide in more detail.
We continue to execute on our business strategies in the quarter, provide high-quality water, wastewater and electric services to over 1 million people and make timely investment in our systems, all while keeping our unwavering commitment to reliability and safety.
Our capital investments allow us to replace and upgrade critical infrastructure as well as ensure we can meet our customers' needs for generations to come.
We also remain committed to conservation, environmental stewardship, employee safety and well-being, diversity and inclusion and sound governance practices.
While these issues have always been at the core of our company, we created an environmental, social responsibility and governance section, also known as ESG, on our website, to more clearly make our disclosures available in these areas.
The website includes our corporate social responsibility report, TCFD and SASB disclosures and other relevant documents.
We will continue to focus on our ESG commitments, which benefit our customers, suppliers, employees, broader communities and ultimately, our shareholders.
In addition to producing strong first quarter results in all of our business segments, we filed the cost of capital application for the Water segment yesterday and saw new water and electric rates go into effect starting in January, which generate additional gross margin.
And on a longer-term scale, we continue to invest in infrastructure at our regulated utilities and contracted services business to provide quality services to our customers, perform more work on the military bases we serve, compete for new military based contracts and deliver consistent dividend growth to our shareholders.
I'll touch on these in greater detail later on in the call.
Let me start with our first quarter financial results on Slide 8.
I'm pleased to report that the company had a great quarter with consolidated earnings of $0.52 per share as compared to $0.38 per share last year.
Excluding the $0.05 per share loss on an investment item from the first quarter of last year, earnings for the first quarter of 2021 increased by $0.09 per share or 20.9% as compared to last year.
For our water utility subsidiaries, Golden State Water Company, earnings were $0.33 per share as compared to $0.29 per share, as adjusted to exclude the $0.05 per share loss on investments incurred in the first quarter of last year.
The increase in earnings were due to a higher water gross margin generated from new rates authorized by the California Public Utilities Commission, partially offset by an increase in depreciation expense and property taxes.
Our Electric segment's earnings for the first quarter of 2021 were $0.07 per share as compared to $0.06 per share for the first quarter of 2020 due to an increase in electric rate and a decrease in interest expense.
Earnings from our Contracted Services segment increased $0.04 per share for the quarter.
This was due largely to an increase in construction activity as a result of timing differences of when work was performed as compared to the first quarter of last year, as well as lower expenses for legal and other outside services.
The timing differences were expected to reverse over the remainder of 2021.
We still expect the Contracted Services segment to contribute $0.45 to $0.49 per share for this year.
Our consolidated revenues for the first quarter increased by $8 million as compared to the same period in 2020.
Water revenues increased $3.6 million during the quarter, due to third year step increases for 2021 as a result of passing earnings tax.
The increase in Electric revenues was largely due to CPUC-approved rate increases effective January 1 this year, as well as an increase in usage as compared to the first quarter of 2020.
Contracted Services revenues for the quarter increased $3.8 million, largely due to an increase in construction activity, resulting from timing differences of when construction activity was performed as compared to the first quarter of last year.
In addition, there were increases in management fees due to the successful resolution of various economic price adjustments.
Turning to Slide 10.
Our water and electric supply costs were $22.6 million for the quarter, an increase of $1.3 million from the same period last year.
Any changes in supply costs for both the Water and Electric segments as compared to the adopted supply costs are tracked in balanced income.
Looking at total operating expenses other than supply costs.
Consolidated expenses increased $1.7 million as compared to the first quarter of 2020.
This was primarily due to an increase in construction costs at ASUS resulting from increased construction activity, partially offset by lower unplanned maintenance costs and the Water segment and an increasing administrative and general expense because of lower legal outside service costs.
Interest expense, net of interest income and other decreased by $2.5 million due primarily to gains on investments held for retirement benefit plan compared to losses incurred during the first quarter of last year as previously discussed.
Slide 11 shows the earnings per share bridge comparing the first quarter of 2021 with last year's first quarter.
Turning to liquidity on Slide 12.
Net cash provided by operating activity was $24.7 million as compared to $15.7 million in 2020.
This was largely due to recent improvement in cash flow from accounts receivable from utility customers, which were negatively impacted by the COVID-19 pandemic throughout 2020.
The timing of cash receipts and disbursements related to other working capital items also affected the change in net cash provided by operating activities.
Our regulated utility invested $35.8 million in company-funded capital projects during the quarter, and we estimate our full year 2021 company-funded capital expenditures to be $120 million to $135 million.
In addition, we intended to prepay the entire $28 million of Golden State Water's 9.56% notes issued in 1991 and due in 2021 later this month.
The early redemption will include a premium of 3% of par value or $840,000 if redeemed before May 15, 2022.
Golden State Water recovery redemption premiums in its embedded cost of capital was filed in the cost of capital proceedings, where the cost savings from redeeming high interest rate debt are passed down to customers.
At this time, we do not expect American States Water to issue additional equity.
I'd like to provide an update on our recent regulatory activity.
As you may know, the Water segment has an earnings test that must meet before implementing the second and third year step increases in the three-year rate cycle.
As we reported in our last call, we have timely invested in our capital projects and achieved capital spending consistent with the amount authorized by the CPUC.
As a result, rate increases are expected to generate an additional $11.1 million in the adopted water gross margin for 2021 as compared to the adopted water gross margin for 2020.
We continue to make prudent and timely capital investments.
Golden State Water filed its cost of capital application yesterday.
We requested a capital structure of 57% equity and 43% debt, which is our currently adopted capital structure, a return on equity of 10.5% and a return on rate base of 8.18%.
A final decision on this proceeding is scheduled for the fourth quarter of 2021 with an effective date of January 1, 2022.
As we discussed in our prior calls, Golden State Water filed a general rate case application for all its water regions and the general office last July.
This general rate case will determine new water rates for the years 2022 through 2024.
Among other things, Golden State Water requested capital budgets of approximately $450.6 million for the three-year rate cycle and another $11.4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed.
We are pleased that the administrative law judge assigned to this rate case has clarified that Golden State Water can continue using the water revenue adjustment mechanism or WRAM, and the modified cost balancing account, also known as the MCBA, until our next general rate case application covering the years 2025 through 2027.
In February 2021, the CPUC adopted a resolution that extended the existing emergency customer protections previously established by the CPUC through June 30, 2021, including the suspension of service disconnections for nonpayment of electric utility customers in response to the ongoing COVID-19 pandemic.
For water utilities, the moratorium on service disconnections was implemented in response to an order by the Governor of California, which we believe would require another action by the governor to cease the moratorium on service disconnections for our water customers.
It is expected that the CPUC will work with the governor's office to coordinate the lifting of the moratorium for water utility customers, consistent with the electric customers.
The CPUC's February resolution did extend the COVID-19-related memorandum accounts established by Golden State Water and by Bear Valley Electric Service to track incremental costs associated with complying with the resolution.
In addition, the resolution required utilities in California to file transition plans to address the eventual discontinuance of the emergency customer protections.
Golden State Water's memorandum account is being addressed in its pending water general rate case while Bear Valley Electric Service intends to include the memorandum account in its next general rate case application expected to be filed in 2022.
Golden State Water and Bear Valley Electric filed their transition plans with the PUC on April 1 this year.
Turning our attention to Slide 16.
This slide presents the growth in Golden State Water's rate base as authorized by the CPUC for 2018 through 2021.
The weighted average water rate base has grown from $752.2 million in 2018 to $980.4 million in 2021, compound annual growth rate of 9.2%.
The rate base amounts for 2021 do not include any rate recovery for advice letter projects.
Let's move on to ASUS on Slide 17.
ASUS' earnings contribution increased by $0.04 per share versus last year's first quarter to $0.12 per share, due to an overall increase in construction activity resulting from timing differences of when work was performed as compared to the first quarter of last year and lower legal fees and outside services expenses.
We reaffirm our projection that ASUS will contribute $0.45 to $0.49 per share for 2021.
Thus far, the COVID-19 pandemic has not had a material impact on ASUS' operations.
We continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work for improvement of the water and wastewater infrastructure at the military bases we serve.
In addition, completion of filings for economic price adjustments, requests for equitable adjustment, asset transfers, and contract modifications awarded for new projects provide ASUS with additional revenues and dollar margin.
The U.S. government is expected to release additional bases for bidding over the next several years.
We're actively involved in various stages of the proposal process at a number of bases currently considering privatization.
We continue to have a good relationship with the U.S. government as well as a strong history and experience in managing water and wastewater systems at bases, and believe we're well positioned to compete for these new contracts.
I'd like to turn our attention to dividends.
Each quarter, I'd like to remind everyone of our long and consistent history of dividend payments, dating back to 1931, in addition to our unbroken 66 year history of annual dividend increases, which places us in an exclusive group of companies on the New York Stock Exchange.
In the past decade, our Board of Directors has raised the dividend at a compound annual growth rate of 9.4%, in line with our dividend policy, providing a compound annual growth rate of more than 7% over the long term.
| compname reports q1 earnings per share $0.52.
q1 earnings per share $0.52.
|
Joining me on the call today to go through the materials are Andy Inglis, chairman and CEO; and Neal Shah, CFO.
These documents are available on our website.
I'll then talk about the operational momentum we saw in 2021 before handing over to Neil, who will walk you through our financials.
I'll then outline our plans for 2022 and the key investments we're making to deliver significant shareholder value in the next 12 to 24 months.
We'll then open the call up for Q&A.
Starting on Slide 2.
Looking back, 2020 was a year of survival for the sector, in which Kosmos took the opportunity to high-grade its investment options to create a stronger company for the future.
2021 was a year of resuming operational delivery and strengthening the balance sheet, both of which were significantly enhanced by the Oxy Ghana and Tortue FPSO transactions.
2022 is the year in which Kosmos can really start to thrive.
We have the right portfolio for the future, and the boxes on the left of the slide highlights the key characteristics that define our portfolio.
First, we have low-cost, high-quality assets.
The company is underpinned by world-class fields that have a longevity to deliver sustainable, high-margin cash flow.
That gives us the ability to invest in our existing assets to materially grow production and free cash flow while simultaneously reducing debt.
The right-hand chart shows the company's production is forecast to grow by around 50% between 2022 and 2024 as we bring our planned developments on stream.
Second, as the chart also shows, we are increasing our exposure to gas and LNG.
The Tortue phase one comes online in the second half of next year.
We also have a deep hopper of world-class gas opportunities in Mauritania and Senegal that we expect will provide further growth well into the future.
Third, we have a robust balance sheet, which we expect to strengthen further in 2022 with a year-end leverage target of around one and a half times at current prices.
Fourth is planned capex and free cash flow grows, there is potential for meaningful shareholder returns once leveraged for sustainably below our target.
And finally, we have strong ESG credentials, driven by a portfolio shift toward lower carbon natural gas and a commitment to our host countries in Africa to support a just energy transition.
Kosmos has emerged from the last two years with a strong team, excited about the future and hungry to deliver the significant value we see in the portfolio for our investors.
Turning to Slide 3.
One of the key areas of differentiation for Kosmos is a long reserve life of our portfolio, which underpins the growth we are planning.
At year-end 2021, Kosmos 1P and 2P reserves were both at record levels.
The top chart on the slide shows the oil gas split of our 1P and 2P reserves.
On a 1P basis, oil makes up around 60% of our reserve base, whereas on a 2P basis, gas is over 55% of the portfolio, reflecting the longer-term direction of the company, a bias for oil in the near term and gas longer term.
The bottom chart shows the diversification of the portfolio on a 2P basis.
Ghana, Mauritania, and Senegal each make up around 40% of the portfolio with Equatorial Guinea in the Gulf of Mexico, making up about 20% between them.
This diversification is important as it means we're not dependent on a single field or a single geography to deliver our future plans.
In 2021, our 1P reserves more than doubled to approximately 300 million barrels of oil equivalent with the booking of Tortue phase one and the Oxy Ghana acquisition.
Our 2P reserves are approximately 580 million barrels of oil equivalent, which gives us a 2P reserve to production ratio of over 20 years.
Even excluding the Oxy Ghana acquisition, our reserves replacement ratio was strong with 114% of the total of our 2P reserves demonstrate the underlying quality of our asset base.
Turning now to Slide 4.
As you're well aware, for the last 18 months, we've been focused on deleveraging and have made good progress.
With a portfolio of highly cash-generative assets, we expect leverage to continue to fall sharply this year.
As guided, we ended 2021 at around two and a half times, a significant year-on-year reduction.
We remain on track to end this year below pre-COVID levels.
Our year-end target for 2022 is around one and a half times at strip pricing.
We expect to achieve this deleveraging through a combination of rising EBITDAX and absolute debt reduction.
EBITDAX is expected to increase materially year on year through several drivers including higher production and stronger oil prices, which we've been able to hedge in much higher levels than 2021.
In addition, with greater production from Jubilee, we expect our unit cost to decrease as well.
We also plan to reduce absolute debt by up to $500 million this year, which will further drive the leverage multiple lower.
This absolute debt reduction is driven by the free cash flow we generate, but could be enhanced with the potential for contingent payments from Shell, the Oxy Ghana pre-emption proceeds and the NOC loan refinancing.
I'll provide an update on the pre-emption process shortly.
On the NOC loan, we had initially aimed done by year-end 2021 and received several term sheets for the transaction.
We continue to progress those discussions.
However, we want to ensure any deal done is in Kosmos' best long-term interest and are taking the time to get it right.
Our liquidity position is strong and could get stronger with potential proceeds from Ghana pre-emption and the shale exploration bonus.
Therefore, we continue to pursue the NOC loan refinancing, the timing is less pressing.
Turning to Slide 5.
I talked about the embedded growth we expect to see over the next two years which is driven by Tortue phase one, Jubilee Southeast, and Winterfell, delivering an expected production increase of around 50%.
As these developments start up, our capital commitments are expected to fall by more than 30%.
With production up and capex down, we expect free cash flow to more than triple from the levels we expect in 2022 at $75 Brent.
This cash generation is sustainable and underpinned by our 20-year 2P reserve life putting us in a position to deliver material shareholder returns.
Turning to Slide 6 and our commitment to sustainability.
As I've noted on the previous slides, we have a long-dated portfolio of high-quality assets.
Our goal is to help our host nations develop their hydrocarbons in a responsible way and expand access to affordable, reliable energy.
Through creating economic benefits, we help to drive sustainable developments in our host countries.
On environment, two years ago, Kosmos set out a policy to achieve carbon neutrality for our scope one and two operated emissions by 2030, and we're working to accelerate that time line.
We'll give further updates in this year's sustainability report, which we'll publish in the first half of this year to give investors access to 2021 data sooner.
We also plan to provide additional disclosure on our equity emissions.
On social performance, we care deeply about the people who work for Kosmos and those who work with Kosmos.
offices in Dallas and Houston are consistently named in the top places to work.
In our host countries, we aim to be a trusted partner and good corporate citizen.
We work with a range of stakeholders and our communities to facilitate sustainable development.
We worked in this manner for nearly 20 years going back to when the company was founded.
Each year, we find important social investment programs in Ghana, Equatorial Guinea, Senegal, and Mauritania, that are aimed at creating economic opportunity, advancing social progress, and improving standard living.
The success of the Kosmos Innovation Center is a prime example.
This initiative in Ghana, Mauritania, and Senegal invest in young entrepreneurs and small businesses outside the oil and gas industry.
We train and empower young people to turn their ideas into viable businesses.
And we work alongside promising start-ups to help them scale and reach their full potential.
Governance has always been a key pillar of our business and cascades now from our experience and diverse Board of Directors through the executive leadership team to our employees.
We have always taken an industry-leading position on transparency, publishing all of our material petroleum contracts online.
In summary, our consistent commitment to sustainability is a core value and supports our ability to deliver long-term value to our shareholders and stakeholders.
Turning to Slide 8, looking back at 2021, a year that saw an acceleration of our strategic progress with operational momentum across all areas of the portfolio.
On production, we hit our year-end production target of 75,000 barrels of oil equivalent per day, boosting fourth-quarter cash flow and reducing leverage at year end to approximately two and a half times.
Our LNG development made significant progress during the year with Tortue phase one around 70% complete at year end.
We enhanced our reserve base and now have a 2P reserve life of over 20 years with a growing gas weighting.
We executed a highly accretive transaction in Ghana, acquiring a stake in the Jubilee and TEN fields from Oxy, which has helped to transform the balance sheet and increase free cash flow generation.
And finally, we continue to advance our ESG agenda, supporting a just energy transition in Africa.
On the following slides, we'll briefly look at the progress we've made in each of our core geographies.
Turning to Slide 9 and starting Ghana.
2021 was a pivotal year for Kosmos in Ghana, where we got back to drilling after a pause in 2020.
Kosmos had net production of around 39,000 barrels of oil per day across Jubilee and TEN in the fourth quarter.
The increased drilling activity in 2021 was promising, particularly at Jubilee, where the partnership drilled three wells and Kosmos has a much greater interest.
The challenge shows Jubilee production for midyear where new wells started to come online.
And you can see production rising from around 70,000 barrels of oil per day in July to over 90,000 barrels a day by year end, which is where the field is producing today.
On TEN, the partnership drilled one gas injector, which is helping to support existing producers.
However, this has not been enough to fully stem production decline.
Turning to Slide 10.
In October, we announced and completed the acquisition of additional interest in Jubilee and TEN from Oxy for a total cash consideration of around $460 million.
At the time, we talked about the attractive economics of the deal in a $65 world, which is highly accretive on all metrics and an expected payback of around three years.
With the ongoing strong operational performance of the assets and the recent strength in oil prices, we believe payback will be reduced under two years with significant future upside as we continue the infill program.
I'm pleased to see the benefit of this transaction delivering so quickly.
On pre-emption, both partners exercise their pre-emption rights in November.
The impact of pre-emption on Kosmos is a small reduction in our Jubilee state from around 42% to around 38%.
In TEN, the reduction is more meaningful with our stake reducing from around 28% to around 20%.
Assuming pre-emption is completed, we would expect to receive a bit more than $100 million of closing which we used to pay down debt.
The impact on Kosmos production will be about 5,000 barrels of oil per day.
We are working with the partners on the transaction and the pre-emption remains subject to the approval by the Government of Ghana.
Turning to Slide 11.
In Equatorial Guinea, 4Q gross production was in line with the full year at around 30,000 barrels of oil per day.
Similar to Ghana, we saw increased activity in 2021 with the first wells drilled on the assets since 2015.
The partnership drilled two jack-up wells, both of which came online in the fourth quarter.
We've been pleased with initial performance and the combined impact on gross production can be seen on the chart with Ceiba and Okume collectively producing at levels not seen for over 18 months.
In the Gulf of Mexico, turning to Slide 12, 4Q production was 21,000 barrels of oil equivalent per day, slightly above full-year production of 20,000 barrels of oil equivalent per day.
On drilling the successful Tornado dump flood boosted output in the second half of the year as the chart shows.
The highlight in the Gulf of Mexico last year was the Winterfell discovery and the successful appraisal well.
With around 100 million barrels of gross resource potential in the Central Winterfell area and proximity to several nearby host platforms with OH, we're excited about the future potential of this asset.
Turning to Slide 13.
The Tortue project saw a ramp-up in activity in 2021 with all key work streams making significant progress.
At year end, phase one of the project was around 70% complete.
Looking at each of the work streams.
On the FPSO, the final four process modules were lifted onto the deck in December.
Mechanical completion of the process subsystems is now underway.
In images of the FPSO on the slide show the high level of completion.
On the hub terminal, we completed construction of the 21st and final caisson and the piling installation for the jetty has commenced ahead of the hub terminal facilities delivery.
But the subsea activity is ramping up.
The pipeline has recently completed its nautical trials in North Sea and should be ready for the offshore installation campaign in the second quarter.
And on the floating LNG vessel, the four mixed refrigerant compressors have been lifted on board and the pipe rack installation operations have commenced.
So 2021 was a busy year for us, and with the operational momentum we have built, we are well placed to take delivery this year.
With that, I'll hand over to Neal to take you through the financials.
I'd like to start on Slide 14 by talking about the financial delivery we saw in 2021.
We accomplished a lot to have positioned the company well to prosper over the coming years.
First, we successfully refinanced the reserve-based lending facility, which now has a total facility size of $1.25 billion, with $1 billion drawn at year end.
In August, we announced the completion of the Tortue FPSO sale and leaseback transaction, which funds around $375 million of our capex on the project and with key parts of the financing path we laid out in November 2020.
Our producing assets generated strong free cash flow of around $175 million during the year, excluding working capital, in line with our guidance.
The combination of these, along with the bond transactions we executed have deferred all of our near-term debt maturities and helped increase our liquidity to over $750 million available at year end.
Through strong operational performance in the Oxy Ghana transaction, we materially reduced leverage during the year, ending at around two and a half times as planned.
And finally, we have taken advantage of higher commodity prices to put in hedges at significantly higher floors and ceilings than we had in 2021.
Around 55% of our production is hedged with an average ceiling of around $80 per barrel with the rest exposed to current prices.
All in all, it was a good year for Kosmos.
While there's still more work to do in 2022, we start the year in a strong position.
Turning to Slide 15, Kosmos delivered a record quarter in 4Q with our highest ever sales volumes and EBITDAX.
Net production of approximately 70,000 barrels of oil equivalent in the quarter was in line with our expectations.
Sales volumes of 82,000 barrels of oil equivalent were higher than guidance as a result of an additional Jubilee cargo in Ghana, loading in late December.
The realized price of around $65 per barrel, which includes the impact of hedging, was materially higher than the previous quarter, a trend we expect to continue in 2022.
In the first quarter of this year, we anticipate a realized price net of hedging of over $80 per barrel.
Costs were all in line or slightly below previous guidance, which helped to drive today's positive 4Q results.
Turning to Slide 16.
And the chart on the left of this slide shows that liquidity remains at a healthy level.
This quarter, we expect to complete the refinancing of the RCF pushing that maturity to late 2024.
The chart on the right shows that we expect to have no material debt maturities until late 2024 at the latest, although we do plan to utilize our flexibility to prepay some of our existing debt well before that.
With that, I'll hand back to Andy to take you through the year ahead.
Across our business, this is an important year for the company.
We're investing in our key assets to drive the increase in production and cash flow that we discussed earlier.
Turning to Slide 18.
In Ghana, we have a world-class field in Jubilee that has the potential to produce at elevated levels for the next several years as we deliver on our plans.
In 2022, we're investing capital in three infill wells, one producer, and two injectors that support the base production.
With these new wells, combined with the benefits of the wells we drilled last year, we expect to deliver year-on-year growth at Jubilee of around 10%, which includes the impact of the two-week shutdown planned for the second quarter.
Around the end of the year, the partnership plans to start drilling the first Jubilee South East wells.
Jubilee Southeast is an untapped area of the reservoir, where we will be drilling lower GOR wells.
Once online, in mid-2023, these wells should post gross production in Jubilee to around 100,000 barrels of oil per day.
On TEN, as the operator guided previously, production is expected to trend lower until we see the benefits of the wells that are being drilled later this year.
The partnership plans to invest in two infill wells this year, one producer and one injector, which should help stem decline in 2022.
We're also drilling two riser-based wells, which are targeting an undeveloped extension of the NTM reservoir closer to the FPSO, allowing us to take advantage of existing infrastructure.
These riser-based wells are expected online in 2023 and should help to increase production.
As the operator recently communicated, the longer-term plan with TEN is to double current production levels by increasing the activity at TEN with a second rig in Ghana.
And finally, we're aligned with the operator and the Government of Ghana to eliminate routine flaring by 2025.
As a first step, we plan to modify the gas handling system on the Jubilee FPSO during the shutdown in the second quarter of this year, which is expected to allow us to inject and export more gas volumes.
Turning to Slide 19.
In Equatorial Guinea, production year to date has continued to be strong as a result of the wells drilled late last year.
In 2022, investment will be focused on facility maintenance, well work, and a second ESP program with the aim of keeping production around these levels through the year.
There's a lot of untapped upside at Equatorial Guinea and we have several high-grade ILX opportunities, particularly in the untested deep Albian.
In the Gulf of Mexico, we're planning to sidetrack the Kodiak well in the first half of the year, funded by insurance proceeds with the well expected to contribute in the second half.
That, in addition to some production optimization projects, should support existing production levels.
On Winterfell, we're working with partners on a low-cost, lower carbon development, targeting sanction for the initial two-well development scheme in mid-2022.
First oil is expected around 18 months from sanction.
In addition, we continue to mature multiple prospects for future ILX drilling in 2023 and beyond.
Turning to Slide 20.
As I said, last year, we continue to make strong progress on Tortue phase one, with all the major work streams advanced as evidenced by the images on the slide.
In 2022, we expect to hit several important milestones, ahead of first gas planned for the third quarter of next year.
We plan to begin drilling the initial four wells next quarter with offshore installation of the subsea infrastructure expected to commence in the second quarter as well.
On the hub terminal, we expect to commence facilities hookup in the third quarter this year.
On the FPSO, sail-away from the yard in China is due late in the third quarter with the vessel expected to arrive on site around the end of the year.
And on the floating LNG vessel, GOLAR will be testing the steam turbines later in the year and they've been commissioning of the vessel power management system with sale-away anticipated early in 2023.
Turning to Slide 21.
Beyond phase one of Tortue, we also have a significant amount of low-cost gas across our assets in Mauritania and Senegal that we are working to commercialize.
Given the ever tightening supply demand backdrop of global LNG, we believe our discovered resource has significant value upside to Kosmos.
For the second phase of Tortue, we're working with BP in the NOCs to optimize the upstream facilities to deliver another 2.5 million tonnes of capacity at an upstream cost less than $1 billion of gross capex we have previously communicated.
We expect to make a development decision related to the projects around the middle of this year.
This would kick off the FID work to fully support the detailed contracting costing required for formal FID.
At BirAllah, we expect to complete the seismic reprocessing and reservoir modeling which should allow development concept to be selected.
And in Yakaar-Teranga, the partnership plans to advance pre-FEED studies and the met-ocean and geophysical surveys while also progressing domestic gas sales discussions.
Turning to Slide 22, which looks at our high-level guidance and capital plan for 2022.
There is a more detailed guidance slide included in the appendix.
We expect company production for the year to be in the range of 67,000 to 71,000 barrels of oil equivalent per day, which is at the midpoint, would be a year-on-year increase of over 20%.
capex of around $700 million is broken out in the chart on the bottom right.
We plan to spend between $250 million to $300 million of maintenance capex on the producing assets which is development drilling and integrity spend in Ghana, Equatorial Guinea and the Gulf of Mexico.
We also plan to spend between $100 million to $150 million of growth capex on the base business for production growth in 2023 and beyond.
This includes Jubilee Southeast, the TEN riser-based wells, Winterfell as well as long lead items ahead of our 2023 drilling program in Equatorial Guinea.
On Tortue phase one, we expect to spend around $250 million during the year, which reflects the timing of accrued capex based on the approved budget from the operator.
We also expect to spend a further $50 million in Mauritania and Senegal on Tortue phase two and increase the activity on BirAllah, Yakaar-Teranga support progress on those developments.
At $75 Brent, we would expect to generate around $200 million of free cash flow, which we plan to use to reduce debt.
Kosmos has a differentiated portfolio and exciting outlook.
We have low-cost, high-quality assets with significant embedded growth.
We are investing in world-class gas projects that will help facilitate the energy transition to provide the company with long-term sustainable cash flow.
We have a robust balance sheet that continues to get stronger as we delever this year and beyond.
As our leverage improves, we anticipate our efforts will generate significant amount of cash flow which will enable meaningful shareholder returns, especially at current commodity prices.
And finally, we have strong ESG credentials that give us a license to operate in our host countries and a portfolio that is fit for the future.
| total net production in q4 of 2021 averaged approximately 70,000 boepd.
kosmos expects to spend approximately $700 million in capital expenditures in 2022.
|
We'll begin today with a brief strategic overview from Randy, Mike will review the title business, Chris will review F&G, and Tony will finish with a review of the financial highlights.
There is a significant uncertainty about the duration and extent of the impact of this pandemic.
Such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected.
It will also be available through phone replay beginning at 3:00 p.m. Eastern Time today until March 4.
Our primary focus has been and continues to be the health and well-being of our employees while maintaining our business continuity and ensuring the needs of our customers are consistently met.
For the fourth quarter, we generated record adjusted pre-tax title earnings of $624 million compared with $355 million in the year ago quarter and a record 22.7% adjusted pre-tax title margin compared with 16.3% in the fourth quarter of 2019.
While we are very pleased with our strong financial results, we also made significant headway on our technology investments in our title business, having recently announced both the inHere platform and subsequently Close inHere.
Mike will go into more detail on this, but as we continue to drive the innovation of the title industry, we believe our significant national footprint will prove to be a real plus as further adoption of our client-facing and title automation technology expands our competitive advantage.
Turning to our acquisition of FGL Holdings.
F&G continues to execute on its growth strategy, generating retail sales growth of over 40% in the fourth quarter.
The credit rating upgrade that F&G has enjoyed as a result of the acquisition by FNF has opened additional large market opportunities.
F&G is gaining momentum in the newly entered bank and broker-dealer channel, generating $500 million of channel sales since our launch on July 1.
Additional distribution channels, including institutional products, will continue to be a strategic area of focus for F&G in 2021, including the pension risk transfer marketing.
Chris will go into more detail on F&G's fourth quarter results shortly.
Looking forward, our priority continues to be focused on long-term value creation for our shareholders through our diligent capital allocation program, while also remaining focused on investing in our business to sustain growth.
Last week, we announced a quarterly cash dividend of $0.36 per share, reflecting the fourth quarter dividend increase of 9%.
Additionally, in October, we announced a 12-month $500 million share repurchase target.
And since that announcement, we have repurchased 3.8 million shares for approximately $140 million.
And for 2020 in total, we repurchased 7.5 million shares for approximately $244 million.
As Randy mentioned, the fourth quarter was a record for adjusted pre-tax title earnings and adjusted pre-tax title margin, as we continue to benefit from low interest rates driving sustained momentum in refinance volumes, strong purchase demand and the continued rebound in commercial real estate activity.
For the fourth quarter, we generated adjusted pre-tax title earnings of $624 million, a 76% increase over the fourth quarter of 2019.
Our adjusted pre-tax title margin was 22.7%, a 640 basis point increase over the prior year quarter.
We had a 40% increase in direct orders closed -- 48% increase in direct orders closed, driven by an 86% increase in daily refinance orders closed, an 18% increase in daily purchase orders closed and a 1% increase in total commercial orders closed.
Total commercial revenue was $322 million compared with the year ago quarter of $321 million due to the 1% increase in closed orders.
Total commercial fee per file was flat compared to the year ago quarter.
For the fourth quarter, total orders opened averaged 11,600 per day, with October at 11,800 and November at 11,900 in December at 11,000.
For January, total orders opened were over 13,400 per day and through the first three weeks of February were over 13,500 per day as we continue to see strong demand and purchase activity and continued strength in the refinance market.
Daily purchase orders opened were up 14% in the quarter versus the prior year.
For January, daily purchase orders opened were up 15% and versus the prior year.
And through the first three weeks of February were up 4% versus the prior year.
Refinance orders opened increased by 90% on a daily basis versus the fourth quarter of 2019.
For January, daily refinance orders opened were up 96% versus the prior year and, through the first three weeks of February, were up 40% versus the prior year.
Lastly, total commercial orders opened increased by 3% over the fourth quarter of 2019.
Commercial opened orders per day remained strong, with the fourth quarter flat sequentially from the third quarter.
For January, total commercial orders opened per day were up 5% over January 2020 and were up 2% through the first three weeks of February versus the prior year.
We remain encouraged by the order volumes we have seen in the last two quarters as open orders have rebounded across multiple geographies to the levels we saw before the outbreak of the pandemic.
As Randy briefly touched on, we made significant progress on our technology investments.
We have a long history of investing in and developing technology from title automation to data collection and order processing.
Our inHere Platform is focused on transforming the real estate transaction experience by improving the safety and simplicity needed to start and track the progress of a real estate transaction as well as notarizing and signing the necessary documents.
inHere works with our network of local trusted escrow and settlement professionals nationwide, leveraging the industry's largest footprint and the latest cloud-based technology.
In January, we launched Close inHere, our guided digital closing experience for consumers finalizing their real estate transactions.
For many, the closing of the transaction is the most overwhelming part of the process of buying or refinancing a home.
Close inHere based upon digital tools instead of the traditional paper allows our staff of closing professionals to deliver a truly digital intelligent and interactive guided approach to closing.
Today, the entire suite of inHere solutions are currently undergoing deployment throughout FNS family of companies, and this will continue throughout 2021.
To conclude, we are committed to driving innovation in the title industry and to investing in technology for the benefit of all of our customers, employees and shareholders.
The fourth quarter capped off another record year of growth at F&G.
Building on the momentum we saw in the third quarter, we achieved record sales of fixed indexed annuities, or FIAs in the fourth quarter, while maintaining our pricing discipline.
Total retail annuity sales of $1.3 billion in the fourth quarter were up 42% from the prior year, and core FIA sales were $947 million, up 19% from the prior year.
We continue to see significant growth ahead of us as we take further market share in our primary independent agent channel and gain traction in new channels.
As we previously shared, post the FNF acquisition, we successfully launched into the financial institutions channel in July.
Since then, we've generated over $500 million in new annuity sales in the channel to date, including $322 million in the fourth quarter alone.
These phenomenal sales results have surpassed our original expectations, and we continue to get very positive feedback from our new partners on our quality of service as well.
With these solid sales results, we grew average assets under management, or AAUM, to $28 billion, driven by approximately $900 million of net new business flows in the fourth quarter.
Now despite the decline in interest rates this year, our spread results have remained in line with historical trends, demonstrating our continued pricing discipline and active in-force management.
Total product net investment spread was 255 basis points in the fourth quarter, and FIA net investment spread was 302 basis points.
Adjusted net earnings for the fourth quarter were $128 million.
Strong earnings were driven by steady spread results and a favorable tax benefit recognized following the FNF acquisition.
Net favorable items in the period were $68 million, primarily as a result of this tax benefit.
Adjusted net earnings, excluding notable items, were $60 million, down from $64 million in the third quarter due to $4 million of higher strategic spend due to our faster-than-expected launch into new channels.
Next, I want to quickly touch on the topic of mortality, which many in the life and annuity industry are monitoring in the current pandemic.
In contrast to many of our peers, F&G has minimal exposure to traditional life products at only 6% of GAAP reserves after reinsurance.
In addition, mortality in our in-force life block has been within our pricing expectations despite the pandemic environment.
Most importantly, our investment portfolio continues to perform well, and credit impairments for the year were less than our product pricing assumptions.
In addition, as of year-end, the portfolio's net unrealized gain position grew to $2 billion, a sharp reversal from the net unrealized loss position experienced early in 2020 due to the pandemic.
Moreover, we came into 2020 with a strong balance sheet, which allowed us to effectively weather the volatility and economic impacts of the pandemic, while still growing the business.
As expected, we ended the year with an estimated RBC ratio of over 400% for our primary insurance operating subsidiary.
We also completed the sale of our offshore third-party reinsurance business, F&G Re, to Aspida Holdings in December.
Proceeds from the sale will be used to fund future growth opportunities for F&G.
And we also entered into a mutually beneficial flow reinsurance agreement with Aspida on our MYGA products beginning in the first quarter of 2021.
So in summary, our sales are growing nicely as we diversify into multiple channels following the FNF acquisition.
We continue to consistently generate stable net investment spread and earnings, and we remain confident in our investment portfolio.
We generated approximately $3.8 billion in total revenue in the fourth quarter, with the title segment producing approximately $3 billion, F&G producing $667 million and the corporate segment generating $60 million.
Fourth quarter net earnings were $801 million, which includes net recognized gains of $573 million versus net recognized gains of $131 million in the fourth quarter of 2019.
The net recognized gains in each period are primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether the securities were disposed of in the quarter or continued to be held in our investment portfolio.
Excluding net recognized gains, our total revenue was $3.2 billion as compared with $2.2 billion in the fourth quarter of 2019.
Adjusted net earnings from continuing operations were $588 million or $2.01 per diluted share.
The title segment contributed $498 million.
F&G contributed $128 million, and the corporate and other segment had an adjusted net loss of $38 million.
Excluding net recognized gains of $290 million, our title segment generated $2.8 billion in total revenue for the fourth quarter compared with $2.2 billion in the fourth quarter of 2019.
Direct premiums increased by 29% versus the fourth quarter of 2019.
Agency revenue grew by 33%, and escrow title-related and other fees increased by 21% versus the prior year.
Personnel costs increased by 15%, and other operating expenses decreased by 7%.
All in, the title business generated a 22.7% adjusted pre-tax title margin, representing a 640 basis point increase versus the fourth quarter of 2019.
Interest income in the title and corporate segments of $32 million declined $23 million as compared with the prior year quarter due to the reduction of short-term interest rates on our corporate cash balances and our 1031 exchange business.
FNF debt outstanding was $2.7 billion on December 31 for a debt-to-total capital ratio of 24.2%.
Our title claims paid of $54 million were $33 million lower than our provision rate of $87 million for the fourth quarter.
The carried title reserve for claim losses is currently $62 million or 4.1% above the actuary central estimate.
We continued to provide for title claims at 4.5% of total title premiums.
Finally, our title and corporate investment portfolio totaled $5.7 billion at December 31.
Included in the $5.7 billion are fixed maturity and preferred securities of $2.5 billion with an average duration of three years and an average rating of A2, equity securities of $900 million, short-term and other investments of $500 million and cash of $1.8 billion.
We ended the quarter with just under $1 billion in cash and short-term liquid investments at the holding company level.
| compname reports q4 revenue $3.8 bln.
compname reports fourth quarter 2020 diluted earnings per share from continuing operations of $2.74 and adjusted diluted earnings per share from continuing operations of $2.01.
compname reports fourth quarter 2020 pre-tax title margin of 29.4% and adjusted pre-tax title margin of 22.7%.
q4 adjusted earnings per share $2.01 from continuing operations.
q4 revenue $3.8 billion versus $2.4 billion.
|
Following our remarks, we will open the call for analyst questions.
Please limit yourself to one question with one follow-up.
We describe these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics.
I'm proud of the way our team continues to execute in these dynamic times.
In the third quarter, sales increased to 11%, our fifth consecutive quarter of double-digit top line growth.
This was against a strong 16% comp from last year.
This growth came as we continue to face significant supply chain challenges.
Certain raw materials were hard to come by, such as resins, microchips and even pallets.
Freight congestion in ports and lack of trucking capacity contributed to increased delays in shipping and receiving goods and labor shortages, continue to be a challenge.
They have kept our plants running, and our customers supplied, resulting an outstanding top line performance.
Operating margin for the quarter was 17.5% as we executed our planned transition to a more normalized level of SG&A expense to support our brands, innovation and new products.
Moving to our segment performance, beginning with Plumbing.
Sales increased 15% excluding currency, led by exceptional growth in North America and international faucets and showers and our spa business.
These results highlight the strength of our plumbing platform diversity across geographies and channels.
To support our continued international growth, Hansgrohe recently announced plans to invest in a new manufacturing facility in Serbia.
This additional capacity will enable further growth and further strengthen Hansgrohe's capabilities to serve its customers.
We plan to invest approximately $100 million in this project over the next three years.
And our Decorative Architectural segment sales grew 4% against a robust 19% comp from the third quarter of 2020.
Propane had an exceptional growth of over 45% in the quarter, helping to offset moderating demand in DIY paint.
DIY paint declined mid single-digits against a tremendous comp of over 25% in the third quarter of 2020.
We continue to see indications of DIY paint demand stabilization as demand was fairly consistent throughout the quarter.
When compared to our third quarter 2019 sales, our DIY paint sales were up over 20%, a clear indication of a reengaged homeowner and strong home improvement fundamentals.
Lastly, Behr Paint was recently recognized as the Home Depot Partner of the Year in the paint department.
This recognition was a result of successfully keeping the Home Depot on stock during the DIY surge last year.
Our continued investment in our joint effort to grow the PRO paint category, and our commitment to bringing new and innovative products such as our recently launched Behr Dynasty to The Home Depot, each of these has contributed to tremendous growth for both Behr Paint and the Home Depot.
And this recognition is a testament to the strength of our partnership.
Moving on to capital allocation.
We continued our share buyback activity during the quarter by repurchasing 2.2 million shares for $128 million.
In addition, we anticipate deploying approximately $150 million in the fourth quarter, bringing our total share repurchases to over $1 billion for the year.
Now let me give you an update on what we are experiencing with inflation.
The second half of 2021 is largely unfolding as anticipated.
We experienced low double-digit inflation in the third quarter and we expect mid teens inflation in the fourth quarter.
We have taken pricing actions across both segments, and expect to achieve price cost neutrality by year-end.
It has been an extremely dynamic year and our supply chain and commercial teams have done an exceptional job managing through the many challenges.
Because of this outstanding execution and continued strong demand for our products, we are maintaining the midpoint of our previous guide and expect to achieve earnings -- full-year earnings per share in the range of $3.67 to $3.73.
This report demonstrates our commitment to environmental, social and governance responsibility.
During a year of unparalleled change, our team members remained committed to maintaining our strong reputation for ethical business practices, reducing our environmental impact and enhancing our DE&I efforts.
I'm proud of the hard work we are doing every day to ensure that our employees feel a sense of inclusion, belonging and support.
Our progress in ESG is a priority for our Board and our executive leadership team.
I hope you will take the time to read more about how our long-term sustainability influences the way we run our business, operate our facilities and contribute to the community.
As Dave mentioned, my comments today will focus on adjusted performance excluding the impact of rationalization and other one-time items.
Turning to slide seven.
Demand for our industry-leading brands remains strong and our teams executed exceptionally well in a dynamic environment.
This resulted in another strong quarter of double-digit top line growth.
Sales increased to 11% against an impressive 16% comp in the third quarter of last year.
Net acquisitions contributed 2% growth and currency had a minimal impact.
In local currency, North American sales increased 9% or 6% excluding acquisitions.
The strong performance was driven by outstanding execution to achieve volume growth in propane, faucets, showers and spas, and by increased selling prices.
In local currency, international sales increased a robust 15% or 18% excluding acquisitions and divestitures against the healthy 9% comp.
Gross margin of 34.2% is impacted by higher commodity and logistics cost in the quarter.
We expect this inflation will have peak impact on our P&L in the fourth quarter.
We will offset these costs with additional pricing actions and productivity initiatives.
We expect the exit this year price cost neutral.
SG&A as a percentage of sales was 16.7%.
As planned during the quarter, we increased certain expenses such as headcount, advertising and marketing to a more normalized level to support our brands.
We expect this increase to continue into the fourth quarter and these costs continue to normalize.
Operating profit in the third quarter was $385 million, with an operating margin of 17.5%, our earnings per share was $0.99.
Turning to slide eight.
Plumbing growth continued to be strong with sales up 16% against the 13% comp in the third quarter of last year.
Net acquisitions contributed 2% to its growth and currency contributed another 1%.
North American sales increased 16% or 10%, excluding acquisitions.
Delta led this outstanding performance, delivering another quarter of robust double-digit growth driven by strength in e-commerce and trade channels.
With strong brand recognition and channel relationships, Delta continues to drive consumer demand for its products.
Watkins Wellness also contributed to growth in the quarter with both demand and our backlog remained strong.
International plumbing sales increased 15% in local currency or 18%, excluding net acquisitions.
Hansgrohe delivered strong growth and demand continue to improve across Europe and numerous other countries.
Hansgrohe's key markets of Germany, China and the UK, all grew double-digits in the quarter.
Segment operating profit in the third quarter was $248 million and operating margin was 18.7%.
Operating profit was impacted by the planned increases in SG&A that I mentioned earlier, as well as an unfavorable price/cost relationship.
This was partially offset by strong incremental volume.
We anticipate additional SG&A increases in commodity inflation will most significantly impact this segment's operating margins in the fourth quarter.
We will mitigate the commodity inflation with additional pricing and productivity actions, we expect to be price cost neutral as we enter 2022.
For full-year 2021, we continue to expect Plumbing segment sales growth to be in 22% to 24% and operating margins of approximately 18.5%.
Turning to slide nine.
Decorative Architectural sales increased 4% for the third quarter and 3% excluding acquisitions.
Our DIY paint business declined mid single-digits in the quarter against more than 25% comp in the third quarter of last year.
Despite this decline, DIY paint demand appears to be stabilizing, as we have seen relatively consistent demand since July.
When comparing to Q3 2019, our third quarter DIY sales are up over 20%.
Our propane business delivered exceptional growth of more than 45% in the quarter, as paint contractors are applying top rated Behr paint to more commercial and residential projects.
We expect demand in this channel to remain strong as propane contractors report growing demand for their services.
When comparing to Q3 2019, our third quarter PRO sales are up over 35%.
Segment operating margin in the third quarter was 19% and operating profit was $166 million.
Operating profit was impacted by lower volume, with increased commodity costs and higher marketing expense to support the new Behr Dynasty product launch, partially offset by higher net selling prices.
For full-year 2021, we continue to expect Decorative Architectural sales growth will be in the range of 2% to 5%, and operating margin to be approximately 19%.
Turning to slide 10.
Our balance sheet is strong with net debt-to-EBITDA at 1.3 times.
We ended the quarter with approximately $1.9 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver.
Working capital as a percent of sales, including our recent acquisitions, was 17%.
Finally, we repurchased more than 15.2 million shares in 2021 for $878 [Phonetic] million.
This is approximately 6% of our outstanding share count at the beginning of the year.
We expect to deploy approximately $150 million for share repurchases or acquisitions in the fourth quarter as we continue to aggressively return capital to shareholders.
And turning to our full year guidance, we have summarized our expectations for 2021 on slide 11.
We continue to anticipate overall sales growth of 14% to $16, and operating margin of approximately 17.5%.
Lastly, we are maintaining our 2021 earnings per share estimate midpoint, but narrowing the range to $3.67 to $3.73 growth at the midpoint of the range.
This assumes the 252 million average diluted share count for the year.
Additional modeling assumptions for 2021 can be found on slide 14 of our earnings deck.
Demand for our products and home renovation remained strong at at a much higher levels than experienced in 2019.
When you compare our third quarter performance to Q3 2019, revenue is 28% higher, operating profit is 29% higher, operating margin is 10 basis points higher and adjusted earnings per share is an outstanding 62% higher.
With our demonstrated supply chain excellence and our ability to offset inflation with price, we believe we are well positioned to carry this momentum into 2022 and deliver margin expansion and double-digit growth consistent with our long-term outlook.
We look forward to sharing our details for 2022 outlook on our fourth quarter call in February.
I'll now open the call up to questions.
| q3 adjusted earnings per share $0.99 from continuing operations.
q3 sales rose 11 percent to $2.204 billion.
sees fy adjusted earnings per share $3.67 to $3.73.
q3 adjusted earnings per share $3.67.2021 expected earnings per share to be in range of $1.67 - $1.73.
|
I'm Patrick Burke, the company's head of investor relations.
It's great to be with you today to discuss what we believe were excellent Q1 results as well as to provide some color on the outlook for the business going forward.
Our Q1 results exceeded our revenue and profitability expectations in all three of our principal business segments.
Our golf equipment segment continued to experience unprecedented demand, which combined with a strong performance by our supply chain team, delivered 29% revenue growth versus 2020, and 16% growth versus 2019.
Our apparel and soft goods segment also overperformed our expectations, driven by positive brand momentum in both TravisMathew and Jack Wolfskin.
The fact that this segment delivered positive segment profitability was, in my opinion, an exceptional performance given the headwinds faced by COVID restrictions and shutdowns in the European markets.
I believe these trends bode very well for the long-term outlook of this segment.
Lastly, Topgolf outperformed expectations based on a faster-than-anticipated recovery in demand as well as strong operating efficiencies.
We believe it would be hard to find three better-positioned business segments both for the current environment and our expectations going forward.
Like me, I'm sure our team remains highly motivated to capitalize on the strong list of opportunities in front of us.
Let's now turn to Page 6 and jump into our Q1 results by segment.
Our golf equipment segment continues to benefit from record demand levels.
retail sales of golf equipment hard goods were up 49% compared to Q1 2019 and 72% compared to 2020, thus setting another record for Q1 just as the last two quarters delivered records for their respective time periods.
Our supply chain team did a great job in Q1 chasing demand and exceeding our expectations on supply.
Even with this great work, field inventory levels remain extremely low and we expect them to remain so at least through midyear, perhaps even longer.
Fortunately, we also believe our supply chain is and will continue to deliver us a competitive advantage through the balance of the year, especially in custom fitting, where demand is also surging right now.
Although we fully expect the current unprecedented demand to moderate at some point, we have yet to see a slowdown, and we continue to see particular strength in product aimed at women's, juniors and new entrants to the game.
We are now quite confident that 2021 will be a very strong year and we also believe there will be a long-term benefit to the golf industry as we expect it will leave the pandemic period with a significantly larger total addressable market and strong momentum.
Our Q1 market share was a little weaker than desired during the quarter as four major golf equipment brands launched metal wood product this year, while Q1 2020 only had two of the four launch.
We never like to cede share, but at this point, we are not overly concerned.
As our most recent share trends are improving, we expect this improvement to continue through Q2, and we are performing relatively stronger in key accounts that are not reporting to Datatech as well as a strategically important green grass channel.
Furthermore, we've been receiving excellent feedback on the performance of our products, especially the Epic MAX Woods, the Apex Ford tires, the two-bolt tin putter as well as our entire ball lineup.
We also remain comfortable with our brand strength and position.
In the U.S., third-party research from Datatech showed our brand to be the No.
1 club brand in overall brand rating as well as the leader in innovation and technology.
Over the last several years, we have shown resilience with these important brand positions.
Turning to our soft goods and apparel segment.
Given the headwinds faced by COVID restrictions and lockdowns in the European markets, the results delivered in this segment were both better than our expectations, and in my opinion, an exceptional performance.
Looking at the larger individual businesses in this segment, starting with TravisMathew, we had high expectations for growth, and still, the business exceeded these expectations.
Driving this performance, e-com was up 145% year over year in Q1, and company-owned stores comped up nearly 10% despite some code restrictions early in the quarter.
Sell-through at wholesale was also very strong.
Ryan Ellison and his team at TravisMathew are to be commended as momentum for this business is at an all-time high.
Turning to Jack Wolfskin.
This is the business that probably most overperformed expectations in Q1.
As you probably recall, this business has started to deliver some nice year-over-year growth at the end of last year and was starting to look like we had turned the corner on brand momentum.
Though the COVID resurgence and resulting third-wave shutdowns in Europe, we were naturally concerned.
Although these circumstances have significantly impacted our business, how could they not?
And they will continue to do so through at least Q2.
Our brand momentum in our European e-com channel and key digital partners has really moderated that negative impact.
Combine this with both nice growth in China and strong financial discipline, what could have been a significant drag on our business has become manageable.
On top of this, the improving brand momentum should set us up for a strong second half, assuming, of course, the European markets open up as expected by then.
Our sell-through momentum in this business is good, and prebooks for the full winter line have been quite strong.
As a reminder, Richard Collier joined the brand in December as CEO.
Richard joined us from Helly Hansen, where he held the title of global product officer and served in that capacity as well as de facto COO.
We are really pleased with the leadership team we now have in place, and I'm increasingly confident in the future of this brand.
Last but not least, a few comments on the Callaway branded softwood business.
As mentioned last quarter, in Korea, we plan to take back the Callaway Golf apparel brand that's been licensed to a third party for several years and launched our own apparel business during the second half of this year.
We remain on track for this and are investing in staffing and IT systems accordingly.
The team there is energized by this opportunity as this is something, we have been considering for several years now.
Taking a step back in looking at the big picture.
For the last year, the hero of the soft goods and apparel segment is certainly e-com.
This is a channel that was significantly strengthened by investments we made prior to the pandemic as well as those continuing to this day.
These investments enable our apparel business e-com to deliver 96% year-over-year growth in Q1.
E-com is now a significant portion of the channel mix of this segment, and we are confident our expanded capabilities and strength here will bolster this business' growth prospects and profitability going forward.
Post-COVID, we continue to expect our apparel and soft goods segment to grow faster than our golf equipment business, and with that growth, deliver operating leverage and enhanced profitability.
And although the pandemic delayed our efforts, we still believe we'll be able to deliver $15 million of synergies in this segment over the coming years.
Like our company overall, this segment, with its concentration in golf and outdoor, appears to be well positioned for both the months and years ahead both during the pandemic and after.
Now turning to Top Golf.
This exciting new segment also outperformed expectations based on a faster-than-anticipated recovery in demand as well as strong operating efficiencies.
We were pleased to close the transaction in early March, and equally pleased to onboard Artie Starrs as the new CEO in early April.
Artie brings a wealth of valuable experience and talent to an already strong management team and an exciting business.
Needless to say, I'm thrilled by this combination.
On the venue side, all venues are now open globally.
After a challenging start to the year, COVID restrictions are continuing to ease.
COVID impacted, so these include the impact of venues shut or restricted during COVID during the period.
Same venue sales versus 2019 was in the low 80s for the quarter, which was above our expectations and showed improving trends through the quarter.
We now believe we will be either at the high end or modestly above our previous full year same venue sales expectations, which was 80 to 85%.
Walk-in traffic remains stronger than events still, and both are trending well.
Our financial results benefited from the same venue sales fee as well as the operating efficiencies that are higher than both historical levels and our plan.
Some of this is due to the fact that in the current environment, like so many other service businesses, it's hard to keep the venues fully staffed.
Fortunately, we're working through this well, and so far, it has neither meaningfully constrained us, nor has it had a negative impact on guest satisfaction measures.
We see it as the manageable challenges of now.
Also, with these results, we're increasingly confident that previously communicated venue economics will be achievable long term.
We successfully opened five new venues so far this year, two in Q1 and three, so far, in Q2.
Globally, we have 66 company-owned venues in operation.
For the full year, we are on track to open at least three more venues, for a total of at least eight venues this year.
We also remain confident in our pipeline for future venues.
We successfully installed 1,533 bays in Q1, a new record despite the COVID challenges globally.
We now have just over 10,000 bays globally, which is significantly more than our largest competitor.
Demand remains strong for the product, and we are finding strong synergies between the Callaway sales team and the Toptracer team.
We remain on track for 8,000 bays this year.
At the end of this week, we'll be launching the next global Toptracer tournament, the 9-Shot Challenge.
This time, presented by the PGA America and the PGA Championship.
This is an excellent example of how we can leverage our global scale and build a digital community.
Looking forward, given the unsettled market conditions globally, we're still not providing specific revenue and earnings guidance.
However, we now have enough new information and visibility to provide the following color: As discussed on our previous calls, we continue to have headwinds in our supply chain, logistics and labor.
As far as I'm aware, most companies do at this point.
Our cost estimates for these headwinds have increased since we last spoke.
However, our supply chain and HR teams are proving up to these challenges.
I believe we may even have a competitive advantage here.
Also, at present, the demand is high enough that positive volume variances are expected to overshadow the majority of this year's cost impacts from these challenges.
We also continue to make select reinvestments back into our business.
For the balance of the year, these will be marginally more than what we discussed during our last call.
These include incremental new store openings at TravisMathew, investments in demand creation and digital resources for all brands, as well as the apparel business.
We have a track record for making these kind of internal investments and are confident these will deliver higher returns for shareholders.
Although we continue to fight COVID impacts globally,and business conditions remain unsettled, the strong demand equation and the momentum of our brands is such that it's clearly going to be a strong financial year; significantly stronger than previously thought.
We now expect that revenue and adjusted EBITDA for the full 12 months of 2021 will meet or beat 2019 results.
More specifically, We are now expecting our legacy business to exceed its 2019 results and the Topgolf business to meet or exceed its 2019 full-year results, as measured over the full 12-month period.
It is worth noting that a couple of quarters ago, I said I thought this was not in reach.
I'm happy to have to correct that previous statement.
Lastly, we are increasingly confident in the future potential of this unique and powerful business.
Brian, over to you.
We are very pleased with our first-quarter results, with consolidated revenue increasing 47% and adjusted EBITDA increasing 113% compared to the same period in 2020.
Our consolidated revenue and adjusted EBITDA for the first quarter of 2021 increased by 26% and 38%, respectively compared to the first quarter of 2019.
Each of our three operating segments performed ahead of plan during the first quarter of 2021.
In addition to this better-than-expected operating performance, our liquidity has also improved substantially compared to a year ago.
As of March 31, 2021, our available liquidity, which is comprised of cash on-hand and availability under our credit facilities, was $713 million compared to $260 million at March 31, 2020.
All in all, we are pleased with the current state of our business and are optimistic for the balance of the year.
In evaluating our results for the first quarter, you should keep in mind some specific factors that affect year-over-year comparisons.
First, as a result of the OGIO, TravisMathew and Jack Wolfskin acquisition, we incurred non-cash amortization expense of intangible assets in the first quarter of 2021 and 2020.
The first quarter of 2021 also includes non-cash amortization of intangible assets related to the Topgolf merger as well as depreciation expense from the fair value step-up of Topgolf property, plant and equipment and expense related to the fair value adjustments to Topgolf's leases and debt.
Second, we also incurred other acquisition and non-recurring charges in the first quarter of 2021, including Topgolf merger transaction and transition expenses and implementation costs related to the new Jack Wolfskin IT system.
In 2020, the company incurred non-recurring integration costs related to the Jack Wolfskin acquisition and costs related to the transition to our new North American distribution center in Texas.
Third, we recognized in the first quarter of 2021 a $253 million non-cash gain related to the write-off of our premerger Topgolf investment.
Fourth, we incurred in the first quarter of 2021 and will continue to incur noncash amortization of the debt discount on the notes issued during the second quarter of 2020.
Fifth, we recorded in the first quarter of 2021, a non-cash valuation allowance related to certain of our deferred tax assets as a result of the merger.
Lastly, the Topgolf merger was completed on March 8, 2021.
Topgolf generally operates in a 13-week quarter.
As a result, our first-quarter 2021 financial statements include Topgolf results for our four-week period, commencing March 8, 2021 and ending April 4.
This can become confusing, and we would do our best to call out when we are discussing Topgolf results for the full quarter versus the four-week stub period.
But you should do care when preparing your models to ensure you are using the correct one.
We have provided in the tables to this release a schedule detailing the impact of these items on first-quarter results, and these items are excluded from our non-GAAP results.
With those factors in mind, I will now provide some specific financial results for the first quarter of 2021 compared to the first quarter of 2020.
Turning now to Slide 11.
Today, we are reporting record consolidated first-quarter 2021 net revenues of $652 million, compared to $442 million for the same period in 2020, an increase of 210 million or 47%.
This increase was led by a 26% increase in the legacy Callaway business, as well as an incremental $93 million from the four weeks of the Topgolf business.
Changes in foreign currency rates had a $17 million favorable impact on first-quarter 2021 net sales.
We are also reporting for the first quarter of 2021 operating income of $76 million, an increase of $35 million or 85%, compared to $41 million for the same period in 2020.
On a non-GAAP basis, operating income for the first quarter of 2021 was $97 million, a 54 million or 126% increase compared to 43 million for the same period in 2020.
The increase in non-GAAP operating income was led by a $50 million increase in segment operating income from the legacy Callaway business as well as an incremental $4 million from the four weeks of the Topgolf business.
Other income was $244 million in the first quarter of 2021 compared to other expense of $3 million in the same period of the prior year.
This includes the $253 million non-cash gain related to the Topgolf merger.
On a non-GAAP basis, which includes Topgolf gain, other expense was $5 million in the first quarter of 2021 compared to other expense of $3 million for the comparable period in 2020.
The $2 million increase in other expense was primarily related to higher interest expense related to incremental interest from the convertible bonds issued in May 2020, plus four weeks of Topgolf interest, partially offset by a decrease in foreign currency-related losses.
Pretax income was $320 million in the first quarter of 2021 compared to $38 million for the same period in 2020.
Non-GAAP pre-tax income was $91 million in the first quarter of 2021 compared to non-GAAP pre-tax income of $41 million in the same period of 2020.
Earnings per share was $2.19 or approximately 125 million shares in the first quarter of 2021 compared to earnings of $0.30 or approximately 96 million shares in the first quarter of 2020.
Non-GAAP earnings per share was $0.62 in the first quarter of 2021 compared to earnings per share of $0.32 for the first quarter of 2020.
Fully diluted shares were 125 million in the first quarter of 2021 compared to 96 million shares for the same period in 2020.
The net 29 million share increase is primarily related to the issuance of additional shares in connection with the Topgolf merger.
Full year estimated diluted shares is approximately 176 million shares, which represents the weighted average shares issued in connection with the merger over approximately a 10-month period.
As of March 31, 2021, we had approximately 185 million shares that were issued and outstanding.
Adjusted EBITDA was $128 million in the first quarter of 2021 compared to $60 million in the first quarter of 2020 and $93 million in the first quarter of 2019.
Topgolf contributed adjusted EBITDA of $15 million for the four-week period.
To provide some additional perspective, The Topgolf first quarter 2021 EBITDA, the full three months was $17 million.
The golf equipment segment's net revenue increased $85 million or 29% to, $377 million in the first quarter of 2021, compared to $292 million in the first quarter of 2020.
This increase was driven by the continued surge in golf demand and participation, our supply chain team's ability to secure a greater-than-expected supply of golf equipment components during the first quarter as well as the COVID-19 shutdowns across portions of our business in the first quarter of 2020.
Both golf club and golf ball sales increased by 26% and 50%, respectively.
The golf equipment segment operating income was $85 million or 22.5% of net revenues in the first quarter of 2021 compared to $59 million or 20.2% of net revenues in the first quarter of 2020, an increase of $26 million or 230 basis points.
The increase was driven by the increased revenue, operating expense leverage and favorable foreign currency exchange rates, partially offset by increased freight and product mix, including lower margins on our higher technology golf club product offerings and package sets.
The apparel, gear and other segment's net revenue increased $31 million or 21% to $182 million in the first quarter of 2021 compared to $151 million in the first quarter of 2020.
The increase was driven by a 23% increase in apparel sales as well as an 18% increase in gear and accessories and other.
Both the TravisMathew and Jack Wolfskin business had a recovery from a pandemic faster than expected, despite continued retail restrictions and other effects from COVID-19, particularly in Europe.
The apparel, gear and other segment's operating income increased $24 million to $20 million compared to a loss of $4 million for the same period in the prior year.
In 2021, this equated to 11% of segment revenue, a 1,360-basis-point improvement over the first quarter of 2020.
The increase was driven by the increased sales, operating expense and cost of revenue leverage, favorable foreign exchange rates and increased commerce revenue, partially offset by the lower retail revenue in Jack Wolfskin due to further government-mandated retail shutdowns during the first quarter in Central Europe.
The Topgolf segment net revenue was $93 million in the first quarter of 2021, which includes four weeks of the Topgolf business.
The Topgolf segment's operating income was $4 million for the four-week stub period.
To provide investors additional perspective, Topgolf's full first quarter net revenues were $236 million and full first quarter GAAP operating loss was $30 million and on a non-GAAP basis, Topgolf's operating loss was 15 million.
Turning now to Slide 13.
I will now cover certain key balance sheet and other items.
As of March 31, 2021, available liquidity was $713 million compared to $260 million at the end of the first quarter.
This additional liquidity reflects higher revenues in the legacy Callaway business, improved liquidity from working capital management, and proceeds from the convertible notes we issued during the second quarter.
At March 31, 2020, we had total net debt of $1,160 million, including 640 million of Topgolf related net debt.
The Topgolf debt includes landlord financing of $222 million related to financing the venues business.
Our consolidated net accounts receivable was $329 million, an increase of 27% compared to $260 million at the end of the first quarter of 2020.
Days sales outstanding decreased slightly to 61 days on March 31, 2021, compared to 62 days as of March 31, 2020.
The increase in net accounts receivable primarily is attributable to the increase in first quarter revenue, but also includes an incremental $9 million of accounts receivable.
We continue to remain very comfortable with the overall quality of our accounts receivable at this time.
Also, this on Slide 13, our inventory balance decreased by 19% to $336 million at the end of the first quarter of 2021 compared to 413 million at the end of the first quarter of the prior year.
The $77 million decrease was due to the high demand we are experiencing in the golf equipment business, recovery of our soft goods businesses, as well as inventory reduction efforts in the soft goods business.
Capital expenditures for the first quarter of 2021 were $29 million.
This includes $16 million related to Topgolf.
From a full-year 2021 forecast perspective, the legacy Callaway forecast is increasing to approximately $65 million versus the previous forecast of 50 million due to capacity investments in our plants and warehouses, as well as increasing the number of play in TravisMathew retail stores.
The full year and 12-month forecast for Callaway and Topgolf is approximately $265 million, driven primarily by the new venue openings.
If you include Topgolf for only 10 months, that would be approximately $235 million.
Depreciation and amortization expense was $20 million in the first quarter of 2021.
Non-GAAP depreciation and amortization expense was $17 million in the first quarter of 2021 compared to $8 million in 2020.
This includes $9 million of non-GAAP depreciation and amortization related to Topgolf.
To help give investors additional perspective, the Topgolf full Q1 non-GAAP depreciation and amortization was $27 million.
For the full year of 2021, we expect non-GAAP depreciation and amortization expense to be approximately $155 million, which includes 115 million for the Topgolf business.
I'm now on Slide 14.
We are not providing specific revenue and earnings guidance ranges for 2021 at this time due to the continued uncertainty surrounding the duration and impact of COVID-19.
However, we would like to provide some guidance comments we previously made.
First, last quarter, we provided some guidance on full year consolidated gross margins and operating expenses.
Due to the merger with Topgolf, that guidance is no longer applicable.
We are no longer providing specific guidance for consolidated gross margins and operating expenses, given the disparate treatment of those items from the legacy Callaway business and the Topgolf business.
With that said, I would like to call out a few factors that have changed since our call in February.
First, we have changed our accounting for golf advertising and our golf equipment business.
For 2021, it is treated as a discount to sales as opposed to an operating expense in 2020 and 2019.
This negatively impacted gross margins for the golf equipment business in the first quarter of 2021 by approximately 85 basis points and will continue to affect comparisons with prior periods for the balance of the year as prior periods were not changed.
There is no change to operating income.
This is only a shift between gross margin and operating expenses.
We previously estimated that the freight container shortage was expected to have a negative impact of $13 million on freight costs in 2021, with a substantial majority affecting the first half.
At this point, the impact of COVID-19 in our overall freight cost is expected to be greater than the 13 million, with more costs hitting the balance of the year than originally expected.
We also previously estimated that operating expenses for the legacy Callaway business would be approximately $78 million higher than in 2019 due to the negative impact of foreign currency inflationary pressures and continued investment in the company's business, which included investment needed to assume the apparel business, investment in the other soft goods businesses and investment in Pro Tour.
We now expect these factors along with both deferred spending from the first quarter and increased variable costs associated with the increased revenue and higher stock price will have an overall greater impact than we originally anticipated for the balance of the year.
In addition, we plan to invest a little more back into our business than originally planned.
These incremental investments include additional TravisMathew stores given that brand's momentum and the availability of favorable lease terms in the current environment, and incremental investments in demand creation and digital resources for all brands as well as the Korea apparel business.
Lastly, we, along with most other companies are experiencing increased wage pressure due to a tight labor market, increased freight costs as I mentioned earlier, and increased commodity prices.
These are impacting all aspects of our business.
We're seeing increased freight costs in terms of increased container prices, but also increased air freight expense as well.
We're also seeing an increase in commodity prices from steel to titanium, from rubber urethane to textiles and from cheese to chicken wings.
As Chip mentioned, at present, demand is high enough the positive volume variances are expected to overshadow the majority of these increased costs.
But these increased costs in the aggregate will still have some impact on balance of the year operating margins.
In 2022, we will have to explore price increases if those higher costs continue.
We have previously guided that due to the impact of COVID-19, the company's revenue and adjusted EBITDA would not return to 2019 levels until 2022 for either legacy Callaway business or the Topgolf business.
Given the faster-than-expected recovery of both businesses, and with all three of our operating segments performing above plan in the first quarter, we now project that revenue and adjusted EBITDA from our legacy businesses will exceed 2019 levels, and then our Topgolf business for the full 12 months of 2021 will meet or exceed 2019 levels, which is a year faster than expected.
As a reminder, in 2019, the Calllaway legacy business reported revenue of $1.7 billion and adjusted EBITDA of $211 million.
For full year 2019, that's 12 months.
The Topgolf business reported revenue of $1.06 billion and adjusted EBITDA of $59 million in 2019.
Please note that Callaway's actual reported full year financial results will only include 10 months of Topgolf results in 2021, and therefore, will not include January and February results which were in the aggregate, $143 million in revenue and $2.3 million in adjusted EBITDA.
Operator, over to you.
| callaway golf q1 non-gaap earnings per share $0.62.
q1 non-gaap earnings per share $0.62.
q1 earnings per share $2.19.
not providing specific net revenue and earnings guidance ranges for 2021 at this time.
expects that revenue and adjusted ebitda for full year 2021 for legacy callaway business will exceed 2019 levels.
|
Today, Greenbrier announced that effective March 1, our founder, Bill Furman will transition to the role of Executive Chairman and the appointment of Lorie Tekorius as Greenbrier's next CEO and President.
In addition to Bill and Lorie, Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer; and Adrian Downes, Senior Vice President and CFO are participating in today's call.
As Justin indicated earlier today, we announced our Board of Directors has elected Lorie Tekorius, Greenbrier's current President and Chief Operating Officer to be the Company's next Chief Executive Officer, a position she will assume on March 1, 2022.
Lorie and I along with the Board have been working toward this goal for several years.
Together, we've built a very strong talent bench.
I'm very pleased with the teams we have in place for the future, and I'm also pleased with the strategy that Lorie has evolved which I think will take the Company to higher peaks.
I want to take this opportunity to congratulate Lorie.
Lorie, I know you will do an outstanding job as Greenbrier's next CEO and I look forward to working with you through the transition.
I'm very proud of you.
Everyone joining us today should understand our joint commitment to ensure the smoothest possible transition.
When Lorie become CEO, I will concurrently assume the newly created role of Executive Chair until September 2022, when I will retire from an executive position.
In this role, my focus is on continuing to work with our Board of Directors as well as support Lorie in her transition to CEO.
I will manage as Board member until 2024.
This transaction -- transition is coming at an important and exciting time for the Company.
As we've discussed over the past several quarters, the recovery in our end markets is gaining momentum.
Our fiscal fourth quarter was Greenbrier's strongest quarter of the year.
Greenbrier's fiscal fourth quarter was in fact our fifth quarter in a row with increased new railcar order activity.
It was also Greenbrier's third consecutive quarter with a book-to-bill ratio over 1 leading to a book-to-bill of 1.33 for fiscal 2021.
The spread of the Delta variant has created challenges worldwide for business and society, and it has made the pace of the recovery partly unpredictable.
It continues to impact Greenbrier on a personal level.
Both vaccinated and un-vaccinated individuals across our workforce have experienced isolated COVID-19 infections during the fourth quarter.
I was one of them along with my wife, Jane, despite being both double vaccinated.
Fortunately, our symptoms were mild and we have fully recovered.
Sadly, however, we recently lost another colleague, Pedro Gonzalez [Phonetic].
Pedro was an 18-year veteran of the GRS Kansas City wheel shop.
He was the 10th member of the Greenbrier family we have lost due to COVID-19.
We are supporting his family during this difficult time.
We are urging people to get vaccinated and to keep social distancing.
The health and safety of our employees is paramount.
We continue to maintain a vigilant posture, particularly as we integrate new manufacturing employees in response to expanding production capacity.
Of course, the virus is not the only issue to be faced.
Global markets have been impacted by labor shortages, supply chain disruptions, volatile commodity markets and other disruptive headwinds.
These factors persist into Greenbrier's fiscal 2022, and this is all in addition to what I would term the regular challenges for a manufacturing, maintenance and leasing business as we transition from low production after a rapid downturn and then a rapid spike-up and employment rates to higher employment and greater levels of production activity.
So, this is an environment that demands a disciplined strategy we've adhered to since the outset of the pandemic.
It also demands our best efforts.
Specifically, our strategy has been to first maintain a strong liquidity base and balance sheet, next, to survive the COVID-19 and economic crisis by safely operating our factories while generating cash flow.
Everyone knows that in an upturn, cash is required to replenish working capital and for growth.
And finally, we needed to prepare for and manage well during the economic recovery and the forward momentum in our markets which is now well underway.
Our actions have been purposeful and successful and the result of a strong team effort, a flexible approach and scalable manufacturing capacity or both central to Greenbrier's response to an improving market outlook.
The demand outlook is strong.
It is strong in all of our markets globally, notwithstanding the impact of elevated steel and other input prices to our customers' decision-making processes.
I'm proud of how seamlessly our teams are ramping up to '22 production lines by the end of November from just nine lines of operation at lower rates of production, only nine years ago -- nine months ago, sorry.
This phase of our strategy has presented novel challenges and operational risks as we add a large number of new production lines, many involving product changeovers and adding new people.
Safety, availability of labor and supply chain constraints are key priorities for Greenbrier to manage as production increases.
Importantly, our liquidity position remains strong, maintaining it remains a top priority.
We're balancing efficient management of working capital with protecting our supply chain and ensuring production continuity.
Before I conclude today and hand the call over to Lorie, I would like to remind our listeners that we do not expect to the market recovery to follow a smooth straight line.
Our industry is still recovering from the shock caused by the pandemic.
Uncertainties and obstacles do remain.
It is clear, however, that our strategy has produced and is producing results, and I believe, we are well on the other side of where we have been.
We are also pleased to recently increased the scale of our leasing fleet through our GBX Leasing joint venture.
Our lease investment provides Greenbrier tax advantaged cash flows.
It reduces and in the future will continue to reduce exposure to the inherent cyclicality of freight transportation, equipment manufacturing and other sources.
At GBX Leasing, we are building a long-term annuity stream with solid credits, longer and balanced maturity ladders and product diversity.
While doing so, we are foregoing some immediate revenue recognition in the short term to build for the future.
All factors considered, Greenbrier is extremely well positioned to navigate the months ahead and deliver further value to our shareholders.
Before electing Lorie as CEO, we thought it is important that she sketch out her strategy for the future.
She spent four to five months in thoughtfully putting together that strategy.
In the future, we'll be happy to share the changes that this will bring, but as a headline we look to technology, diversification and services and other ways to take the cycle out of the inherent manufacturing business cycle and growth of the future.
I want to express my appreciation to Bill and the Greenbrier Board for appointing me Greenbrier's next CEO.
I'm honored and humbled to follow Bill as only the second CEO in Greenbrier's history.
Bill and I have worked together toward this goal for some time and I feel well prepared.
I look forward to continuing to work with Bill on this transition and to build on the strong established foundation he created with our senior management team.
Today, we're reporting results from operation that continue the momentum from Q3.
Volatility seems to be the new norm and Greenbrier's employees rose to the challenge.
The resiliency, flexibility and focus allowed Greenbrier to produce great results in addition to providing excellent levels of service and the production of quality railcars.
Supply chain and labor force shortages in the United States were two of the most notable and unfortunately common challenges we're managing today.
In the quarter, Greenbrier delivered 4500 railcars, including 400 units in Brazil.
Q4 deliveries increased 36% from Q3, reflecting manufacturing successful ramping of production over the last six months.
This is our highest level of production and deliveries since fiscal 2020 and we're pleased to see another quarter of double-digit growth.
Our global purchasing group continues to do an outstanding job, even as disruptions spread from basic raw materials and components to resins, paint and industrial gases.
Our global sourcing team has rapidly responded to changing supply dynamics and continues to take measures to ensure we avoid significant production delays or line introduction.
And while hiring is currently challenging in the US, we're fortunate to have a strong and talented labor pool in Mexico, allowing us to add over 500 employees during the quarter and over the last nine months, we've added nearly 2000 employees in our manufacturing business.
Safety continues to be a priority as we bring back our workforce in a measured manner.
In our North American network of maintenance and parts operations or Greenbrier Rail Services, we continue to make improvements in how we manage our operations and interface with our customers, including license [Phonetic].
The continued focus on safety resulted in a record setting Q4 and full year safety performance.
These positive strides were somewhat offset by labor shortages impacting operating efficiencies and an obsolete inventory adjustment in Q4.
Excluding the inventory adjustment, gross margins would have been similar to Q3.
I'm confident we'll be able to leverage the improvements made in GRS for 2022 and beyond.
Our leasing and services group which include our GBX Leasing operations had another busy quarter.
Nearly 70 million of railcars were contributed into GBX Leasing in Q4, bringing the total market value of assets in fiscal 2021 to almost $200 million.
Subsequent to year end, we acquired a portfolio of 3600 railcars, a portion of which will also be held in GBX Leasing.
This purchase provides commodity, age and credit diversity.
Our GBX Leasing fleet is valued at $350 million at the end of September and continues to gain momentum.
As a reminder, GBX Leasing is currently utilizing a non-recourse warehouse credit facility, a portion of which we expect to term out in the next few quarters with more traditional long term railcar financing.
Our enhanced leasing strategy will provide revenue and tax-advantaged cash flow offsetting the cyclicality of railcar production.
Our capital markets team syndicated 1000 units in the quarter and continues to generate liquidity and profitability.
In fiscal 2022, we expect syndication activity to increase meaningfully as overall demand and production levels rise.
And in the next few weeks, Greenbrier will be publishing its Third Annual ESG Report.
I'm excited about the progress shown in the report on a variety of areas and congratulate our internal ESG team for providing a valuable summary of how Greenbrier is serving its stakeholders.
Looking ahead, we continue to see positive momentum in fiscal 2022.
Emerging from an economic recession and cyclical trough can be challenging in the best of times, but with the ongoing impact of the pandemic, labor shortages and supply chain disruptions, this year is going to be a completely different type of challenge.
I'm pleased that we have talented employees and a strong management team with significant industry experience to guide Greenbrier through the next few quarters.
I remain excited about the long-term opportunities for Greenbrier and proud to be leading into the next part of our journey as a company.
And now, Brian Comstock will provide commentary on the railcar demand environment.
While it feels like much has occurred over the last three months, overall, the economy continues to be trending in a positive direction and economic indicators point to a sustained recovery in rail.
While this recovery seems to be more unpredictable, we continue to think about it as a sharper V-shape recovery with a sustainable crust.
Now, instead of discussing industry statistics, I'm going to focus on a few important things from 2021 and how we are approaching 2022.
In Greenbrier's fourth quarter, we had a book-to-bill of 1.5, reflecting deliveries of 4500 units and orders of 6700 units.
This is the third consecutive quarter of growth in our book-to-bill ratio.
For fiscal '21, Greenbrier generated orders of 17,200 units and deliveries of 13,000 units, which equates to a book-to-bill of 1.3.
International order activity accounted for approximately 30% of this new railcar order activity.
New railcar backlog grew by 2000 units or nearly $400 million of value to 26,600 units with an estimated market value of $2.8 billion.
Operations in each continent we operate in are carrying backlog that supports production well into fiscal 2022.
Notably, we ended the fiscal year with a record backlog for Europe, where we have many production lines booked into fiscal 2023.
Greenbrier's lease fleet utilization ended on August 21 at roughly 94% and has grown to over 96% year to date.
Additionally, we are seeing improved lease pricing and term on all new lease originations and lease renewals.
We have seen recovery in all of our markets.
We have also seen significant increases in raw materials, components and shortages of basic supplies.
We are seeing traffic congestion throughout the network, especially at the ports where a record setting number of ships are waiting to be offloaded underlining the fact that when you shut down large portions of the global economy, turning it back on is not as easy as just flipping a switch.
There will be disruptions and unintended consequences.
However, we continue to see growth opportunities in our global markets.
Europe is beginning to see the benefits of a broad scale economic reforms to address climate change.
We are in the early days of a model shift to freight from polluting and congested road travel to efficient higher speed rail service.
We believe this model shift will drive significant growth in railcar demand in the years to come.
This growth is in addition to replacement demand as fleets in EU countries are ageing with many cars already well past the time for replacement.
Equally as exciting is the future of the North American market.
Right now, we are seeing a return to replacement demand levels, but imagine what will happen when the United States follows a similar path as Europe.
Freight rail is one of the more sustainable solutions because of its environmental friendliness.
Similar to Europe, we see an extended period of substantially higher demand except it involves one of the largest freight rail fleets and systems in the world.
With all that being said, Greenbrier's global commercial team is focused on not only the basic blocking and tackling of new railcar orders, leasing and service solutions, but also in continuing to develop a more comprehensive and integrated approach for our customers globally.
Now over to Adrian for more about our Q4 and full financial performance.
Greenbrier's Q4 performance represents the strongest quarter of our fiscal 2021 year as a result of the continuing momentum we've been seeing in our end markets.
I will speak to a few highlights from the quarter and provide a general overview of fiscal 2022 guidance.
Highlights for the fourth quarter include revenue of $599.2 million, an increase of over 33% from Q3.
Aggregate gross margins of 16.4%, driven by stronger operating performance as a result of increased production rates, syndication activity and lease modification fees.
Selling and administrative expense of $55.4 million increased sequentially as a result of higher employee-related costs.
Adjusted net earnings attributable to Greenbrier of $32.9 million or $0.98 per share excludes $1.2 million or $0.03 per share of debt extinguishment losses.
EBITDA of $70.4 million or 11.8% of revenue.
The effective tax rate in the quarter was a benefit of 14.5%.
This reflects the tax benefits from accelerated depreciation associated with capital investments into our lease fleet.
These deductions will be carried back to earlier high-tax years under the CARES Act, resulting in a tax benefit in the quarter and cash tax refunds to be received in fiscal 2022.
I'm very proud of the close collaboration between our leasing and tax teams that maximized this benefit to Greenbrier over the course of fiscal 2021.
In the quarter, we recognized $1.6 million of gross costs specifically related to COVID-19 employee and facility safety.
In 2021, we spent nearly $10 million, ensuring our employees and facilities could operate safely.
The quarter also included an unfavorable adjustment for labor and materials in our lease business as well as unfavorable excess and obsolete inventory adjustments of fields repair and parts.
Adjusted net earnings for the year attributable to Greenbrier was $37.2 million or $1.10 per share on revenue of $1.7 billion and excludes $4.7 million net of tax or $0.14 per share of debt extinguishment loses.
EBITDA for the year was $145.2 million or 8.3% of revenue.
Greenbrier has a strong balance sheet and with liquidity of $835 million comprising cash of $647 million and available borrowings of $188 million, we are well positioned to navigate the market disruptions that we expect to persist into calendar 2022.
You may have noticed the tax receivable has grown to a $112 million as of August 31.
We expect to receive most of these refunds in the second quarter of fiscal 2022.
This is an addition to Greenbrier's available cash and borrowing capacity that I just mentioned.
In the fourth quarter, Greenbrier completed almost $1.1 billion of debt refinancing, extending the maturities of our domestic revolving facility and two term loans into 2026 and 2027.
In addition to the GBX Leasing, railcar and warehouse credit facility, Greenbrier's Legacy lease fleet is partially levered with a $200 million six year term loan while the remaining fleet assets serve as collateral in Greenbrier's $600 million US revolving facility.
Also in the quarter, we repurchased an additional $20 million of senior convertible notes due in 2024 and maybe from time to time retire additional outstanding 2024 notes in privately negotiated transactions within the limitations of applicable securities regulations.
Overall in fiscal 2021, Greenbrier completed $1.8 billion of financing activity including $1.5 billion of debt refinancing and the creation of the $300 million GBX Leasing warehouse credit facilities.
We have effectively doubled the maturity profile of our existing cash at favorable interest rates and removed the 2023 refinancing risks.
Greenbrier's Board of Directors remains committed to a balanced deployment of capital designed to protect the business and simultaneously create long-term shareholder value.
Our Board believes that our dividend program enhances shareholder value and attracts investors.
Today, we announced a dividend of $0.27 per share, which is our 30th consecutive dividend.
Based on current business trends and production schedules, we expect Greenbrier's fiscal 2022 to reflect deliveries of 16,000 to 18,000 units, which include approximately 1,500 units from Greenbrier Maxion in Brazil.
Selling and administrative expenses are expected to be approximately $200 million to $210 million.
Capital expenditures of approximately $275 million in leasing and services, $55 million in manufacturing and $10 million in wheels repair and parts.
Gross margins to be lower in the first half of the year, reflecting a few primary factors.
Production reflects more competitive pricing taken during the pandemic 9 to 12 months ago.
Early in the year, we will have some operating inefficiencies due to product line changeovers and continued production ramping.
As production rates stabilize, operating efficiencies will increase benefiting margins.
More production is scheduled for syndication or leasing fleet activity and will be on the balance sheet until final disposition is decided.
We expect margins to improve over the course of the year as we work through less profitable mix, achieve production efficiencies and other factors.
We expect deliveries to be back half weighted with a 40% front half, 60% back half left [Phonetic].
As Bill mentioned earlier on the call, the introduction of GBX Leasing and our shift and leasing strategy has an impact on our production and delivery activity.
Historically, we would build a railcar with a lease and syndicate it a few quarters later.
Now, in addition to direct sales and syndication activity, a portion of production will be capitalized into our lease fleet.
While this activity reduces revenue and margin in the near term, it creates a long term stable platform of repeating cash flows and income and is part of our strategic shift to smooth the impact of the new railcar demand cycles on our results.
In fiscal 2022, approximately 1400 units are expected to be built and capitalized into our lease fleet.
These units are not reflected in the delivery guidance provided.
We consider a railcar delivered when it leaves Greenbrier's balance sheets and is owned by an external third-party.
We have an experienced management team that has a track record of success in identifying and taking advantage of opportunities as well as managing through the challenges and factors we described earlier.
As a result, we are optimistic that our operating momentum will continue into fiscal 2022, albeit in a non-linear fashion.
| compname reports q4 adjusted earnings per share $0.98.
q4 adjusted earnings per share $0.98.
q4 revenue $600 million.
appointment of lorie tekorius as company's next ceo and president, effective march 1, 2022.
greenbrier companies - well-positioned to navigate challenges of increasing production rates safely, while ensuring labor and supply chain continuity.
|
Our consolidated earnings for the first quarter of 2021 were $0.98 per diluted share compared to $0.72 for the first quarter of 2020.
Now, I'll turn the discussion over to Dennis.
Yet we know it could still be a while before we're able to return to the offices or settle into any type of new normal.
In the meantime, we'll continue to provide care and compassion for those who are struggling to make ends meet through energy assistance programs, through payment arrangements, and even COVID-19 debt relief grants.
I am extremely proud of our employees, despite these unique times, they have adapted easily and continue to move our business forward on all fronts.
The quarterly results, we are sharing with you today demonstrate their drive and determination to get the job done.
Recently, we've taken steps to move us toward a clean energy future.
A few weeks ago, we announced our aspirational goal to reduce our carbon emissions for natural gas by setting new natural gas goal of being carbon-neutral by 2045, with a near-term goal of reducing greenhouse gas emissions by 30% by 2030.
Our strategy to achieve lower emissions includes investing in new technologies like renewable gas, RNG, which is RNG hydrogen or other renewable biofuels.
We're evaluating how to best integrate RNG into our gas supply portfolio and researching hydrogen as another renewable fuel.
We will also focus on reducing consumption through conservation and energy efficiency and improving our infrastructure.
We realize this is a heavy lift.
There are several critical pieces that will need to fall into place in the coming years.
Technology costs must come down, new innovations need to occur, and regulatory support will be necessary for us to achieve these goals.
As we identify our strategies keeping costs affordable will be a priority.
We're committed to executing on this goal in ways that support affordability and reliability for our customers.
Our natural gas goal demonstrates that our vision of a clean energy future income consists both electric and natural gas resources.
And then we are dedicated to reducing greenhouse gases from the energy we deliver to our customers.
We're also moving the dial toward achieving our clean electricity goal of providing customers with carbon-neutral electricity by the end of 2027, and carbon-free electricity by 2045.
Last month, we entered into a contract with the Chelan County Public Utility District that will add more renewable hydropower to our electric generation portfolio.
The contract delivers on the strategies included in the 2021 Electric Integrated Resource Plan that we filed recently and also supports the goals of Washington State's Clean Energy Transformation Act or CETA.
In regards to our quarterly results, we're off to a good start in 2021, and we are on track to meet our earnings targets for the full year.
Avista Utilities' earnings were better than expected while AEL&P's earnings met expectations for the first quarter, and our other businesses exceeded our expectations.
That new law will help transform the regulation of electric and natural gas companies toward multi-year rate plans and take the first steps toward performance-based rate-making.
The benefits we see with the passage of this important legislation is a requirement to file multi-year rate plans from two to four years in length with the foundation of the rate plan being set using methodologies the commission may use to minimize regulatory lag.
Ultimately, it will require current and future commissioners to implement the change, but we feel this is an important first step toward progressing the regulatory model in the State of Washington.
Meanwhile, here's an update on our regulatory filings in January.
As you know, we filed two-year general rate cases in Idaho, one for electric, one for gas.
And in 2020, we filed general rate cases in Washington again, one for electric and gas.
We continue to work through the regulatory process in these jurisdictions.
In Oregon, we expect to file a rate case in the second half of 2021.
We reached a significant milestone in our focus on electric transportation when the Washington Utilities and Transportation Commission approved three tariffs that allow us to proceed with several programs outlined in our transportation-electrification plan.
Among other things, the UTC's approval allows us to establish both an optional general service and large commercial electric vehicle rates which will help us enable and accelerate fleet electrification for commercial customers such as the Spokane Transit Authority.
Our transportation, electrification plan and newly approved tariffs will serve as a valuable model for others.
And it's a great example of our industries' role in electric transportation and our clean energy future.
Once again, Avista is leading the way.
Looking ahead, we remain focused on running the great utility and continue to invest prudent capital to maintain and update our infrastructure and provide reliable energy service to our customers.
We are confirming our 2021 through 2023 earnings guidance.
So last night, my Blackhawks were eliminated from the playoffs.
So we have five more games left, but we have no chance for postseason play this year.
So that's a sad day for me.
But on the happy note, we had a great first quarter, the Avista Utilities contributed $0.92 per diluted share compared to $0.68 last year.
And compared to the prior year, our earnings benefited from higher utility margin.
And we had general rate increases and customer growth.
The first quarter also included an accrual -- the first quarter of the prior year had some negative accruals in it related to the Washington remand case, a 2015 case, and disallowances around Colstrip in an accrual for the Colstrip community fund.
That all happened in 2020 that were drags on 2020 earnings.
The ERM in Washington with a pre-tax benefit of $4.3 million in the first quarter compared to $5.2 million in the first quarter of 2020.
We continue to be committed to investing the necessary capital in our utility infrastructure, and we expect Avista Utilities' capital expenditures to total about $415 million in 2021.
With respect to liquidity on April 5 of 2021, we repaid the outstanding balance of our one-year credit agreement that we entered into in April of 2020, and that was to remind you to make sure we had sufficient liquidity at the start of the pandemic.
On April 30, we had $182 million of available liquidity under our $400 million line of credit, and we expect to extend that line of credit into a multi-year deal in the second quarter.
We expect to issue approximately $120 million of long-term debt in 2021, and $75 million of equity.
As Dennis mentioned earlier, we are confirming our 2021, 2022, and 2023 earnings guidance with consolidated ranges of $1.96 to $2.16 per diluted share in '21, $2.18 to $2.38 in 2022, and $2.42 to $2.62 in 2023.
And this puts us on track to earning our allowed return by 2023.
Our guidance does assume timely and appropriate rate relief in all of our jurisdictions.
Our '21 earnings guidance reflects again unrecovered structural cost estimated to reduce our return on equity by approximately 70 basis points.
And in addition, our '21 guidance reflects a regulatory timing lag estimated to reduce our equity return by approximately 100 basis points.
This results in a return on equity for Avista Utilities of approximately 7.7% in 2021.
We are currently forecasting customer growth of about 1% annually for Avista Utilities.
For 2021, Avista Utilities is expected to contribute in the range of $1.93 to $2.07 per diluted share with the midpoint of our guidance range, not including any expense or benefit under the Energy Recovery Mechanism.
Our current expectation is to be in the 75% customer, 25% Company sharing band, which is expected to add approximately $0.06 per diluted share.
For 2021, we expect AEL&P to contribute in the range of $0.08 to $0.11 per diluted share, and our outlook for both Avista Utilities and AEL&P assumes among other variables normal precipitation and slightly below normal about 92% for Avista Utilities hydroelectric generation for the year.
For 2021, we expect our other businesses to be between a loss of $0.05 to $0.02 per diluted share.
Our guidance generally includes only normal operating conditions and does not include any unusual or non-recurring items until the effects of such items are known and measurable.
| compname reports q1 earnings per share $0.98.
q1 earnings per share $0.98.
confirming 2021, 2022, and 2023 earnings guidance.
|
Following our remarks, we will open the call for analyst questions.
Please limit yourself to one question with one follow up.
We describe these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission.
Our statements will also include non-GAAP financial metrics.
I hope everyone is staying safe and healthy.
We performed exceptionally well in the second quarter, and demand for our products was strong.
This resulted in our fourth consecutive quarter of double digit sales growth and sixth consecutive quarter of both margin expansion and double digit earnings-per-share growth.
I'm extremely proud of our entire team as we successfully navigated numerous supply chain challenges to enable this growth.
For the quarter, sales increased 24%.
Excluding acquisitions, divestitures and currency, sales increased 18%.
Operating profit increased 27% and margins expanded 60 basis points to 20.1%, principally due to strong volume leverage.
Earnings per share increased an outstanding 34%.
Our overall performance demonstrates the strength of our portfolio of lower ticket, repair and remodel products that are diversified across geographies and channels, serving both the consumer and the professional.
Turning to our plumbing segment, sales increased 48%, excluding currency, led by exceptional growth from our North American and international faucet and shower businesses and our spa business.
International plumbing grew 50% in the quarter, excluding currency, as Hansgrohe sales rebounded sharply in nearly all of its markets.
Strong operational execution and new products such as Hansgrohe's Rainfinity shower systems led to share gains in many of these markets.
New product introductions will continue as we launched the award-winning AXOR One collection in the second half of the year.
This collection was designed by Barber Osgerby, an award-winning internationally acclaimed London-based industrial design studio.
This continues Hansgrohe's legacy of combining leading contemporary design with innovative functionality.
North American plumbing posted strong growth of 47%, excluding currency, in the second quarter, led by approximately 75% growth at Watkins Wellness and robust double digit growth at Delta.
Delta faucet delivered another record quarter with growth across all channels, and particularly strength in the professionally oriented trade channel.
We continue to invest in new products in North American plumbing as well.
And two days ago, we introduced a Frank Lloyd Wright collection by Brizo that furthers the brand's commitment to distinctive design and innovative products.
Lastly, in plumbing, at the beginning of July, we acquired Steamist, another bolt-on acquisition for Delta.
Steamist is a leading manufacturer of residential steam bath products that will complement our strong trade and e-commerce product offering and is consistent with our bolt-on acquisition strategy.
In our decorative architectural segment, sales declined 5% against the healthy 8% comp for the second quarter of 2020.
While bath and cabinet hardware, lighting and propane grew in the quarter, demand moderated for DIY paint.
Material availability and other supply chain issues also impacted our overall coatings business, as nearly all of our resin suppliers were operating under a force majeure declaration during the second quarter.
Because of these issues, sell-through on our coatings products was better than sell-in and inventories in the channel were reduced during the quarter.
Due to lower than expected second quarter sales and our expectation that material availability issues will persist but slowly improve, we are lowering our DIY sales expectation from flat to down low-single digits for the full year.
However, with the acceleration we saw in our propane business in the quarter, we are incrementally more optimistic and are raising our expectations to low-double digit growth from high-single digit for the full year for our propane business.
For the decorative segment overall, we now expect growth to be in the range of 2% to 5% for the full year.
With respect to innovation in the decorative segment, we continue to invest in new products and are excited to launch a new high end line of paint in the third quarter at the Home Depot called Behr Dynasty for both DIY and pro painters.
Dynasty is our most durable, stain-resistant, scuff resistant, one-coat hide paint ever.
It's low VOC, Greenguard and LEED certified, fast drying and has an anti-microbial mildew-resistant paint finish.
This is yet another example of how our innovation teams continue to focus on the voice of the customer to deliver leading innovation and value for both the consumer and the professional.
Moving on to capital allocation.
We continued our aggressive share buyback during the quarter by repurchasing 6.6 million shares for $447 million.
As part of the accelerated share repurchase agreement that we executed during the quarter, we will additionally receive approximately 900,000 shares in July to complete that agreement, bringing our total shares repurchased year-to-date to 13.1 million shares for $750 million.
This is approximately 5% of our outstanding share account at the beginning of the year.
Underscoring our strong financial position and confidence in the future, we now anticipate deploying another $250 million in the second half of the year for share repurchases and acquisitions for a full year total of approximately $1 billion.
Finally, like I did last quarter, let me give you an update on what we are experiencing with inflation and supply chain tightness.
We continue to see escalating inflation across most of our cost basket, including freight, resins, TiO2 and packaging.
Inbound freight container costs nearly tripled during the quarter.
We now expect our all-in cost inflation to be in the high-single digit range for the full year for both our plumbing and decorative segments, with low-double digit inflation in the second half of the year.
Inflation in coatings will likely be in the mid-teens later in the fourth quarter.
To mitigate this inflation, we have secured price increases across both segments, and are taking further pricing action across our business to address these continued cost escalations.
We're also working with our suppliers, customers and internal teams to implement further productivity measures to help offset these costs.
Despite the increased inflation, we still expect to achieve price/cost neutrality by year-end.
While cost inflation has clearly been an issue, material availability has also impacted our business.
Our teams have done a tremendous job of qualifying new suppliers, developing material substitutions, and shifting production to adapt to this dynamic environment and to serve our customers.
However, these raw material constraints have limited our ability to build inventory of many of our products and the channels that we serve.
We anticipate material availability to slowly improve in the second half of the year, and we expect to replenish inventory to the appropriate levels over time.
The demand for our products remains strong.
And with an improved outlook for plumbing based on the continued strength of both our North American and international operations, we are increasing our full year expectations of earnings per share to be in the range of $3.65 to $3.75 per share, up from our previous expectations of $3.50 to $3.70.
As Dave mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization and other one-time items.
Turning to Slide 7.
We delivered another exceptional quarter as we capitalized on strong consumer demand, resulting in continued growth and increased backlogs.
As a result, sales increased 24% with currency and net acquisitions, each contributing 3% to growth.
In local currency, North American sales increased 15% or 12%, excluding acquisitions.
Strong volume growth in North American faucets, showers and spas led this outstanding performance.
In local currency, international sales increased a robust 50% or 49%, excluding acquisitions and divestitures.
Gross margin was 36.3% in the quarter, up 50 basis points as we leverage the strong volume growth.
Our SG&A as a percentage of sales improved 10 basis points to 16.2% due to our operating leverage.
During the quarter, certain expenses such as headcount, marketing, and travel and entertainment increased as planned.
We expect SG&A as a percent of sales to increase in the third and fourth quarters, as these costs normalize.
We delivered strong second quarter operating profit of $438 million, up $94 million or 27% from last year, with operating margins expanding 60 basis points to 20.1%.
Our earnings per share was $1.14 in the quarter, a 34% increase compared to the second quarter of 2020, due to volume leverage, lower interest expense and lower share count.
Turning to Slide 8.
Plumbing growth accelerated in the quarter with sales up 53%.
Currency contributed 5% to this growth and acquisitions, net of divestitures, contributed another 4%.
North American sales increased 47% in local currency or 41%, excluding acquisitions.
Delta led this outstanding performance, delivering another quarter of robust double digit growth.
With a strong brand recognition and market leadership, Delta continues to drive strong consumer demand across all its product categories and channels.
Watkins Wellness also significantly contributed to growth in the quarter with both demand and our backlog remained strong.
International plumbing sales increased 50% in local currency or 49%, excluding acquisitions and divestitures.
Hansgrohe delivered robust growth as demand continues to improve across Europe and numerous other countries.
Hansgrohe's key markets of Germany, China, UK and France, all grew strong double digits in the quarter.
Segment operating margins expanded 230 basis points to 20.6% in the quarter, with operating profit of $274 million, up $115 million or 72%.
The strong performance was driven by incremental volume, favorable mix and cost productivity initiatives, partially offset by an unfavorable price/cost relationship and higher spend on items such as travel and entertainment, marketing and growth initiatives.
During the quarter, we also completed the divestiture of HUPPE, a small shower enclosure business based in Germany.
HUPPE sales were approximately EUR70 million in 2020.
This transaction closed on May 31, and net proceeds were not material.
Given our second quarter results and current demand trends, we now expect plumbing segment's sales growth for 2021 to be in the 22% to 24% range, up from our previous guidance of 15% to 18%.
Finally, due to our improved sales outlook, we are increasing our full year margin expectations to approximately 18.5%, up from our previous guide of approximately 18%.
Turning to Slide 9.
Decorative architectural declined 5% for the second quarter and was 6%, excluding the benefit from acquisitions.
DIY paint business declined double digits in the quarter against the healthy high-teens comp due to moderating demand and raw material supply tightness as resin plants affected by storms in the Texas Gulf Coast region in the first quarter continued to face production challenges.
We expect these raw material headwinds to persist in the third quarter and now anticipate our DIY paint business to be down low-single digits for the full year.
To help mitigate these challenges, we are working with our existing suppliers and qualifying new sources for materials to meet the demand of our customers which remains strong.
Our PRO paint business delivered strong double digits growth in the quarter, as consumers are increasingly willing to allow professional paint contractors in their homes.
We expect demand in this channel to remain strong and now anticipate low-double digit growth for the PRO paint business for the full year, up from our previous expectation of high-single digits as PRO paint contractors' order books continue to grow.
Our builders' hardware and lighting businesses each delivered growth in the quarter, as they continue to capitalize on increased consumer demand.
Segment operating margins were 22.1% and operating profit in the quarter was $188 million due to lower volume, partially offset by cost productivity initiatives.
For full year 2021, we now expect decorative architectural segment's sales growth will be in the range of 2% to 5%, down from 4% to 9% due to lower than expected second quarter sales and persistent raw material constraints.
We continue to expect segment operating margins of approximately 19% as productivity initiatives in pricing help offset higher input costs.
Turning to Side 10.
Our balance sheet is strong with net debt to EBITDA at 1.3x.
We ended the quarter with approximately $1.8 billion of balance sheet liquidity, which includes full availability of our $1 billion revolver.
Working capital as a percent of sales, including our recent acquisitions, was 16.9%, an improvement of 120 basis points over prior year.
As we discussed last quarter, we terminated and annuitized our U.S. qualified defined benefit plans in the second quarter and had an approximate $100 million final cash contribution to the plans to complete this activity.
This removes approximately $140 million of pension liabilities from our balance sheet, and it will benefit our free cash flow by approximately $50 million through reduced cash contributions, starting in 2022.
Also, we received approximately $166 million from the redemption of our preferred stock related to the recent sale of our former cabinet business.
Finally, as Keith mentioned earlier, as of today, we repurchased 13.1 million shares in 2021 for $750 million.
We expect to deploy an additional $250 million for share repurchases or acquisitions for the remainder of this year.
Collectively, these actions demonstrate our confidence in our business and our commitment and ability to further strengthen our balance sheet, while aggressively returning capital to our shareholders.
Turning to our full year guidance, we have summarized our updated expectations for 2021 on Slide 11.
Based on our second quarter performance and continued robust demand, we now anticipate overall sales growth of 14% to 16%, up from 10% to 14% with operating margins of approximately 17.5%, up from 17%.
Lastly, as Keith mentioned earlier, our updated 2021 earnings per share estimate range of $3.65 to $3.75 represents 19% earnings per share growth at the midpoint of the range.
This assumes the 252 million average diluted share count for the full year.
Additional modeling assumptions for 2021 can be found on Slide 14 in earnings deck.
We had an outstanding second quarter driven by our strong brands, our innovation pipelines and most of all, our people, as demonstrated by outstanding execution by our supply chain teams.
Our strong performance demonstrates the strength of Masco's balanced and diversified business.
Masco is a broad portfolio of lower ticket, repair and remodel-oriented home improvement products.
Our products are broadly distributed across geographies and channels for both consumers and professionals.
Additionally, our markets remain strong, and we expect home remodeling expenditures to drive growth in 2022.
The fundamentals of our repair and remodel business are strong, with year-over-year home price appreciation of over 15% in May and existing home sales up over 23%.
Both metrics have a strong correlation with our sales on a lag basis.
And the consumer is strong, with nearly $2 trillion in savings and an increased desire to invest in their homes.
Lastly, we continue to invest in our business and are well positioned for long-term growth.
We are bringing new, innovative products to market, fueling our growth and expanding our leading market share.
And with our leading margins and strong free cash flow, we will continue to deploy capital to reinvesting in our business, acquiring complementary bolt-on companies and returning cash to shareholders in the form of dividends and share repurchases all to drive long-term shareholder value.
With that, I'll now open up the call to questions.
| compname says q2 adjusted earnings per share $1.14 from continuing operations.
q2 adjusted earnings per share $1.14 from continuing operations.
anticipate 2021 adjusted earnings per share to be in the range of $3.65 to $3.75 per share, increased from our previous expectation of $3.50 to $3.70/share.
qtrly sales increased 24 percent to $2,179 million.
|
Today, we will discuss the financial performance of KAR Global for the quarter ended December 31st 2020.
Let me also mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures.
Today, I plan to cover three topics, I want to review 2020, provide you with an update on the integration of TradeRev and BacklotCars and review our guidance for 2021.
Let me start with acknowledging the challenges that we faced in the most unusual year.
Obviously, COVID-19 impacted all businesses in 2020, including KAR.
We remain committed to providing the safest possible working environment for our employees and our customers.
With the challenges COVID-19 created in our workforce, we also saw challenges that directly impacted our marketplaces for wholesale used cars.
We continue to operate our auctions on our digital platforms, Simulcast, Simulcast+, OPENLANE, TradeRev and DealerBlock, but demand was very low in April as uncertainty was prevalent throughout the automotive ecosystem.
We continue to offer vehicles only through our digital marketplaces from mid-March through the remainder of 2020.
A key challenge that we faced in the second quarter was the need to accelerate the development of our digital marketplaces.
This increased level of online bidding began literally over a two-week period and our technology teams had to make sure our systems were always available and there were no service disruptions caused by the increased use of our networks.
I'm extremely proud of the collective effort of all KAR employees to make this happen.
In the past, many investors have asked me what keeps me awake at night, and technology and digital disruption have always been at the top of the list.
Well, while the challenges of 2020 took technology and digital disruption to a new level, we responded quickly, and today we have the best collection of digital assets in the entire industry.
We were able to accelerate the transition of our legacy physical auction business to a digital operating model in the matter of weeks instead of the three years to five years that we anticipated at the beginning of 2020.
Another challenge that we faced in 2020 was handling our workforce.
In late March, we closed all of our auctions and sent our employees home with pay to evaluate the impact of COVID-19 was having on the safety of our employees and our customers.
We furloughed 11,000 of our 15,000 employees globally.
In April, our weekly revenue had fallen to as low as 10% of the prior year revenue, the low point for KAR Global performance.
By May, we began to see some recovery in demand.
Our supply at the time was strong as inventory had been building up at our sites.
It became obvious that our business process had changed and many of these changes were going to be permanent.
We leaned heavily into technology for our auctions and supporting our back-office functions.
Changes in the business operations and especially, all of our support functions led us to permanently eliminate 5,000 positions, reducing our annual payroll costs by over $150 million.
By fall, we had our headcount and cost structure aligned with the business and our digital auction process.
We saw the impact of the permanent changes in our cost structure in our third quarter results and expect this to contribute to an improved financial performance going forward.
And then we saw a resurgence of COVID-19 with the impacts that went beyond what we had experienced in the spring.
We saw the supply of used vehicles tighten and our inventory levels continue to decline as retail demand remains strong, resulting in strong conversion rates and high wholesale prices.
Lower transaction volumes led to reduce performance in the fourth quarter despite all the reductions that we'd made to our cost structure.
In any organization, people are the most valuable asset.
In this environment, the strain and the uncertainty, our people are feeling is the most challenging aspect of running the business today, and it looks like it will be a while longer before we see relief from the strain of COVID-19.
Now, let me share some of our accomplishments in 2020.
First, we have successfully migrated all of our auction platforms to digital marketplaces.
This has been a strategic direction for KAR for over two years, and we were able to accelerate the pace of change during 2020.
We are committed to operating a digital marketplace business supported by services and logistics capabilities that make the wholesale process easy and efficient.
Our collection of digital assets that we have strategically focused on building and acquiring over the last five years put us in the unique position to move forward with a digital business model.
It is true that many of our competitors are running cars through the lane despite the increased COVID numbers over the past several months.
But we have not returned to the old way of doing business and don't believe there is any evidence that running cars across the block improves the financial outcomes for our customers.
We are committed to providing our auction services digitally going forward.
In 2020, we introduced Simulcast+ to the marketplace.
Simulcast+ is a fully automated auction that can easily sell cars from multiple locations using technology instead of people to manage and run the auction event.
Simulcast+ has proven to expand the geography represented by buyers and this improves liquidity for the sellers.
We are also not tied to a sale day event when using Simulcast+.
We can operate Simulcast+ any day of the week from one or multiple locations.
These can be ADESA or customer locations.
And the Simulcast+ platform gives us additional digital capabilities that allow our sellers to manage the auction event in real time without leaving their office.
We have provided a number of demos to investors this year.
And if you have seen one of those virtual tours, you saw that we have a significant amount of information available to both buyers and sellers that lead to strong pricing and conversion on the Simulcast+ platforms.
We see a number of benefits for both buyers and sellers.
We've seen increased liquidity.
We're able to reach a greater number of buyers that are interested in the car being offered.
We've seen lower costs to execute the transactions for all involved, and it is easier to integrate data and analytics in the process, excuse me, that is available to all parties.
Better information leads to better price attainment on the vehicle and realistic expectations by the sellers as to what is the current value of the vehicle.
Another success in 2020 was the improved growth and profitability for our TradeRev platform.
Our combination of dealer consignment sales teams of ADESA and TradeRev has been a success.
We reduced the use of incentives and focused on service levels.
We simplified our auction process in order to provide a better experience for our customers.
We generated positive earnings for several months in 2020 and have proven this business model can be profitable growth going forward.
And we acquired BacklotCars in order to accelerate our growth in the dealer-to-dealer segment in the U.S. market.
And finally, let me talk about the permanent reductions in our cost structure.
First, the changes we made in moving to a digital business model allowed us to make permanent reductions in our labor costs, both direct labor and SG&A.
Our SG&A was down year-over-year in Q4 by $25 million.
This decrease was achieved despite adding $5 million of SG&A in the fourth quarter related to BacklotCars.
Even though our costs, we're able to -- even though we were able to reduce our costs, our fourth quarter performance fell below our expectations as we saw the supply of wholesale vehicles decline throughout the entire industry.
Our volumes in Q4 reflect the slowing of the economy in response to the increased COVID cases.
I do not believe the lower volumes reflect the seasonal impacts or the permanent disruption of our marketplaces.
I believe the factors that negatively impacted our supply in Q4 are transitory.
Now, let me give you a real-time update on TradeRev and BacklotCars.
First, we are migrating all U.S. dealer-to-dealer transactions that previously took place on TradeRev to the BacklotCars platform.
We ran a pilot migration in three U.S. markets in January to refine our migration playbook.
We were pleased with the results of the migration and the acceptance of BacklotCars platform by our TradeRev customers in these markets.
Beginning February 1st, we initiated the migration of all U.S. TradeRev customers to the BacklotCars platform.
We expect the migration activities to be completed in March.
By moving our U.S. customers from the TradeRev application to the BacklotCars, we will be moving from a timed auction format to a 24/7 bid-ask marketplace.
Our analysis of the performance on the two platforms supported this move.
We believe running a single dealer-to-dealer digital marketplace will maximize liquidity.
Utilizing the inspection process developed by BacklotCars should lower our inspection cost per vehicle and provide greater consistency in the inspection reports for cars sold on BacklotCars platform.
And most important, we believe the price realization on the BacklotCars platform in the U.S. outperforms the competition in the U.S. market.
The early results on the migration activities has been very positive.
Initially, there was a small reduction in volumes as former TradeRev customers began using BacklotCars platform.
The learning curve for our customers seems to be about five days to seven days and in the second week, we began seeing our combined volumes increase in the markets that we are in the first wave of migrations.
We believe the BacklotCars is the fastest growing dealer-to-dealer platform in the U.S. market.
Our goal is simple.
We want BacklotCars to be the number one digital dealer-to-dealer marketplace in the U.S. Just to be clear, we will continue to operate TradeRev in Canada.
To sum it all up, after 90 days of owning BacklotCars, we are pleased with the performance and the fit with KAR.
We have focused -- we have a focused and energetic team leading our efforts to be the leader in the digital dealer-to-dealer transactions in the U.S.
Our customers have been receptive to change in the early days of integration activities and bringing the strength of the KAR organization to the outstanding team at BacklotCars is a winning combination that should accelerate the already fantastic pace of growth in the digital dealer-to-dealer space.
The last agenda on my -- the last item on my agenda and an important topic for today is an update on our outlook for 2021.
We are reinstating annual guidance for 2021.
While we continue to be in the middle of the COVID crisis in all of our markets, we believe we are better positioned to analyze the impacts on our business and assess the likely outcomes on various scenarios.
We are not providing a range, but we are providing the minimum level of performance we expect this year.
We still have significant uncertainty around the economy, employment, levels of new car production, the timing of repossession activities and many other factors that are still a ways from returning to normal.
Obviously, our guidance indicates we expect to continue to be below pre-COVID level of transactions and this is representative of our industry outlook.
I would like to provide some insight without specific numbers into how we see 2021 coming together.
First, we expect lower supply of wholesale used vehicles to persist through the first half of the year.
As a result, our outlook for the first and second quarter is conservative.
We do not believe the second half of 2021 will improve upon the first half of 2021 and the second half of 2020.
We have seen good progress in providing vaccinations in the first months of 2021 and expect continued progress on this front in all of the geographic markets we serve.
We also see stimulus in the U.S., Canada, and European -- and Europe as a positive for our customers in the used car retail market if passed by legislators.
We also believe that our financial performance may exceed 2019 levels before we achieve 2019 volume levels given the improvements that we have made in our cost structure.
Let me speak to the parts of the market that we believe will drive a return to normal.
First, our digital dealer-to-dealer platforms, BacklotCars in the U.S. and TradeRev in Canada are expected to grow substantially over 2020 levels.
We expect to continue -- to continue gaining market share in this channel throughout the year.
We are committed to expanding the use of Simulcast+ in 2021.
We are targeting an increased number of events using this technology platform.
There is tremendous value to using the Simulcast+ platform for multi-location sales events, targeted marketing for similar vehicles that allow us to create events that have high buyer interest and expand the geographic reach of the typical physical auction.
And our growth internationally, especially at ADESA Europe, formerly, CarsOnTheWeb is very strong and we expect this to continue throughout all of 2021.
We have not given a range of guidance, it is difficult to set an upper end of the range with the uncertainty on when operations will return to normal levels.
We still have more questions and answers on what our markets will look like, especially in the first half of the year.
But we have had -- have an opportunity to outperform above the adjusted EBITDA and operating adjusted net income per share provided in our guidance once volumes start improving.
As a team, we will focus on controlling our costs, increasing our market share, we expect our market share to be driven primarily by digital dealer-to-dealer platforms, BacklotCars and TradeRev, and we will be disciplined around capital deployment.
We think our balance sheet, excuse me, is an asset in the current economic environment.
And as we look to deploy capital, we expect uses of capital to have a strong connection to our strategic priorities around the digital transformation of the wholesale used car industry.
We are a digital marketplace business that utilizes data and analytics and value-added services through a network of locations throughout North America.
We are leading the digital transformation of our industry.
We have reduced our cost structure permanently and we expect increased profitability going forward.
We have combined two leading digital dealer-to-dealer wholesale auction platforms and have the goal of being the leading provider in this segment of the market in the United States and Canada.
And finally, we believe our balance sheet is well positioned to support the growth of our business.
We will deploy capital going forward on the initiatives that support our strategy.
And before I get into my remarks, I'd like to correct the statement Jim made during the call.
He said that we do not believe the second half of 2021 will improve upon the first half, he misspoke, it is, we do believe the second half of 2021 will improve upon the first half of 2021 and the second half of 2020.
So now I'll get into my remarks.
Let me start with an overview of our financial performance in 2020.
To say the least, it was a challenging year and our results quarter-to-quarter were like riding a roller coaster.
We experienced both ups and downs in performance this year.
In review, we started the first quarter strong and performed very well until the middle of March.
Uncertainties created by COVID-19 caused us to shut down our operations for the last two weeks of March.
We lost approximately $35 million in those two weeks as revenue was minimal and all employees were paid for two weeks despite all locations being closed.
We lost money in the month of April.
We had negative adjusted EBITDA of approximately $25 million for the month.
We then saw a relatively fast rebound during May as weekly volumes rebounded to over 90% of the prior year, followed by June, where volumes and our financial performance exceeded the prior year.
Volumes and financial performance remained strong in July, as we saw strong used car demand, low new car inventories, used car values were increasing and we were selling inventory that had been on our properties through the pandemic.
While volume started to decline in August, we finished the third quarter with volumes over 90% of 2019 levels for the quarter and adjusted EBITDA that was 8% above 2019 levels.
We had gross profit of over 50% of net revenue and adjusted EBITDA margin that was 23.5% of total revenue.
We feel this performance demonstrates the performance characteristics of our business model going forward when volumes are at or near 2019 levels.
Unfortunately, the fourth quarter saw volumes dropped to 75% of the prior year, excluding acquisitions.
And our financial performance deteriorated due to the low revenue levels.
Gross profit declined to 40% -- 46% of net revenue.
Even though we have improved our cost structure and reduced direct labor, there is a fixed component to our direct cost and the volume levels experienced in the fourth quarter did not generate sufficient revenue to maintain our gross margins.
In terms of SG&A, we're able to control cost and hold the SG&A below the prior year by $25 million.
This was accomplished despite recording approximately $16 million in incentive pay in the fourth quarter compared to $7 million in the prior year.
This increase in incentive pay reflects the proposal by management to adjust the threshold for payment to 50% from approximately 95% of target for 2020.
We felt the sacrifices and contributions of our employees should be recognized with the opportunity for a performance-based incentive payout.
The threshold set at the beginning of the year did not reflect the challenges we faced in 2020.
The Compensation Committee of the Board of Directors approved the adjustments of threshold.
The total payout for employees with annual incentive programs was approximately 70% of target for the year.
We also recorded an adjustment to contingent purchase price related to the acquisitions of CarsOnTheWeb and Dent-ology, that was a net increase in expense of $4.7 million.
This represents an increase in the expected contingent purchase consideration for CarsOnTheWeb as performance has exceeded the expectations set at the time of the transaction, offset by a reduction in contingent purchase consideration related to Dent-ology, where payments are expected to be less than estimated at the time of the acquisition.
Our effective tax rates for the fourth quarter and full-year were unusual in 2020.
The contingent purchase consideration and the write-off of goodwill totaling $25.5 million for our U.K. operations that we recorded earlier in the year are not tax deductible and increased our effective tax rate.
As we look forward, we expect our effective tax rate to be approximately 30%, unless, the U.S. federal income tax rate is increased from current levels.
I know the big question in everyone's mind is what does KAR's performance look like post-pandemic?
We believe our performance in June and through the third quarter gave us insight on what we can do going forward.
We believe when volumes get back to 90% or more of 2019 levels, our business can generate gross profit of approximately 50% of net revenue with adjusted EBITDA margins in the mid 20% range.
Our focus on operating a digital marketplace business and maintaining processes that leverage technology for a more efficient cost structure will allow us to perform at this level.
Now we need the markets to get back to what we would call normal, so we can prove to you the changes we have made will generate these results.
We are providing auction fees, service revenue, purchased vehicle revenue and finance-related revenue.
This will give a clear picture of the major components of revenue in our businesses.
In terms of key metrics provided in MD&A, we're now disclosing volumes for on-premise and off-premise vehicles sold.
We are reporting auction fee per vehicle sold as a key performance metric.
We will no longer be utilizing physical revenue per vehicle sold as a key metric.
While the number is easy to calculate, a significant portion of services revenue is generated from off-premise activity and not related to the on-premise vehicles sold.
We are also computing the gross profit dollars per vehicle sold and including that in MD&A.
This is a key indicator of performance and trends in this metric will be important going forward as volumes increase.
This metric will capture both the impact of auction revenue and services revenue on our performance.
We have also simplified our segment reporting to be consistent with the simplification of the KAR businesses post spin of Insurance Auto Auctions.
All holding company costs are reflected in the ADESA business segment other than costs specifically related to AFC.
This simplified segment reporting better reflects the KAR organization structure and how the businesses are being managed.
We want to maintain a cost structure that reflects the revenue and performance of the business.
Aligning our costs directly with the reportable segments simplifies our reporting and matches the cost structure of KAR with the revenue produced by our businesses.
Let me close with some comments on guidance.
However, one item that creates confusion is the computation of weighted average diluted shares.
Generally Accepted Accounting Principles require us to compute per share numbers using either the two-class method or the if-converted method when determining the impact of the Series A convertible preferred stock.
For clarity, we use both calculations and for GAAP, are required to use the number that produces the lower earnings per share.
For GAAP purposes, we reduced net income by the preferred dividend and exclude the preferred shares from the calculation of fully diluted shares outstanding when we used the two-class method.
In computing operated adjusted net income per share, we are utilizing the if-converted method.
In this method, we do not adjust for the preferred dividend, but do include the conversion of the preferred shares into common shares in the calculation.
To the extent, preferred dividends are paid in kind, we include the accrued dividends in the conversion calculation.
In summary, the only difference between the two weighted average diluted shares numbers is the conversion of the convertible preferred stock to common shares using the conversion price of $17.75 per share.
We did buy back $10.2 million of common stock in the fourth quarter at an average price of $17.50 per share.
We acquired the shares in the open market within the parameters we established during our open window during the quarter.
One last item that I will provide in the call, because it will be included in the 10-K that will be filed later today or tomorrow, is our expectation for capital expenditures for 2021.
We expect capital expenditures to be approximately $125 million, an increase from actual capital expenditures of $101 million in 2020.
The increase in capital expenditures expected in 2021 reflects continued investment in technology to support our strategy around digital transformation, as well as a return to normal capital spending to support our physical locations.
Our 2020 capital expenditures were reduced from our expected levels for 2020 to conserve capital as our business was adversely impacted by the pandemic.
| kar auction services - for 2021, co expects net income from continuing operations of at least $90 million and adjusted ebitda of at least $475 million.
|
I'm joined today by our CEO, Bill Crager; and CFO, Pete D'Arrigo.
Such comments are not guarantees of future performance, and therefore, you should not put undue reliance on them.
We also will be discussing certain non-GAAP information.
I know these continue to be challenging days with uncertainty all around us regarding our economy, our society, so many families concerned about the health of their loved ones and millions of families worried about their financial well-being.
At Envestnet, we have been incredibly busy as our clients have depended on us more than ever to help them navigate this period of time.
Somehow, after months of working in a new way, it feels like business as usual despite these very unusual circumstances, we've been able to deliver and adapt to the demands of this extraordinary time on behalf of our clients.
We've also been able and been successful in securing new and expanded relationships, delivering solid financial performance and executing on our strategic roadmap.
I'm incredibly proud of our team for their amazing resilience and commitment to our long-term vision.
Envestnet vision is clear: to be the leading provider of financial wellness solutions and services in North America.
Given the accelerated reliance on cloud-based solutions such as what we offer and the number of firms, advisors, partners and consumers that interact with our network today, the stage is set for where we have been headed.
A new standard for personal financial advice is emerging, and we are driving it.
Through our data initiative and platform modernization efforts, we are working to create a fully configurable platform that works effectively both in an end-to-end ecosystem and in smaller app sized pieces.
By leveraging Envestnet's digital environment, deploying what we do will become increasingly friction-free and enable our clients to deliver essential advice in ways that they've traditionally engaged their clients and importantly, also an evolving digital model that meets the expanding expectations of consumers.
And with the use of APIs, we can take advantage of emerging distribution opportunities through which they can deploy our digital solutions.
Demand for these solutions is accelerating.
What we are doing here is important.
It will recreate how the infrastructure for financial wellness will be delivered in the future.
The addressable market opportunity we see ahead of us is substantial, and we are investing to capitalize on it.
We will build, partner and when it makes sense to, we will acquire as we integrate the best capabilities that enable our customers' success.
Our second quarter financial results exceeded our expectations, and our outlook for the remainder of the year has improved.
Pete will provide all the details on that in a little bit.
But first, let me provide some examples of the progress we're making across our business as we execute against our roadmap.
In our wealth solutions business, we continue to demonstrate the many levers we have for growth.
With our land and expand strategy that has worked for the better part of 15 years, our focus has mainly been on the first part of that, adding advisors and accounts to the platform in ways they want to be served by us by investment.
We've been very successful in doing that.
Today, we have more than 103,000 financial use advisors using the Envestnet wealth technology.
Those advisors oversee more than 12 million accounts with $3.8 trillion assets supported by our platform.
But we're beginning to see how our expanded integrated solutions and services create more value for our existing relationships.
Ultimately, data-driven digital engagement is the foundation of everything we do and everything we provide to our clients.
Data informs the financial plan.
A recommendation engine prescribes tangible next steps an advisor and their clients can take.
These steps are all integrated with a variety of financial wellness solutions.
This includes investments, insurance credit and other elements, which advisors and clients can act on immediately, all in one-scale and tested platform.
Highlighting the value of advice is even more important in this virtual world.
Our next to actions, data insights, elevate the advisor's value proposition by handing the advisor's relevant points of contact with their clients.
This is how we expand the value we provide to our clients and deliver on our financial wellness vision.
Our MoneyGuide financial planning business is an excellent example of how this is working.
Financial planning is the cornerstone for financial wellness.
MoneyGuide, which we acquired just last year, had its best quarter in its history.
Revenue and profitability are at its highest levels yet.
We continue to innovate, making financial planning more accessible and easier to leverage for millions of consumers through the tens of thousands of advisors that are using our planning software each and every day.
We now have over 200 integrations, and we continue to see success in renewing, expanding and cross-selling existing enterprise relationships, while we're also establishing new ones.
Recently, a client of ours, Citizens Bank, signed an additional schedule for unlimited retirement block use for approximately 4,000 personal bankers and on their public website for consumers to access directly.
This is an example of how we are deploying these upsized planning components.
We're also seeing a large uptick in the number of RIAs leveraging MoneyGuide solutions.
Sales to independent advisors, those who are not associated with a large broker-dealer or enterprise, were up 23% in the second quarter over last year.
We're implementing our app size MyBlocks to integrate tightly into our solutions.
This changes the ballgame from the app to answers, to the ability to click and execute, these easy deploy blocks illustrate the powerful, disruptive advancement that integration drives for us.
Related to this is how we are paving the way to unlock additional opportunities within our installed base.
Both our insurance and credit exchanges continue to add product providers, shelf space at Envestnet clients and access to thousands of advisors.
Both are integrated within the Envestnet platform and volume is beginning to ramp-up.
In June, we officially launched the Advisor Services Exchange, which enables critical services, including access to capital to RIAs, which is incredibly timely given the backdrop of this current environment.
Another area where data and technology has differentiated us is how we are growing high-value fiduciary solutions that are increasingly being adopted by our clients.
A few data points to highlight.
The number of advisors who are using our tax and impact overlay solutions grew 16% since just this past December, and overlay accounts grew 19%.
And our impact portfolios are also growing as investors seek to align their social and moral priorities with their investments.
Advisers using these solutions are up 12% and impact portfolio accounts are up 18% since the end of just last year.
Quantitative portfolios, our first direct indexing solution, also experienced higher usage, with 23% more advisors using these solutions in 33% more accounts also since the end of 2019.
We're also making progress selling managed account solutions to our Tamarac installed base of RIAs.
Several large firms, including a top 20 RIA, according to Barron's, are transitioning a meaningful amount of their managed account assets to our platform as they seek an operationally efficient way to migrate to model-traded UMAs.
In our Envestnet Yodlee business, revenue also outperformed in the second quarter.
This period of time highlights why Yodlee is the industry-leading provider of high-quality, secure data aggregation and analytics solutions.
While COVID has been disruptive for many industries, financial institutions, specifically retail banks and wealth management firms, are increasingly embracing digital solutions, which their depositors and investors are accessing more frequently check in on their financial information.
We're also seeing an acceleration of data access agreements being executed between banks and our Yodlee business.
To date, we've secured open banking agreements with half of the top 10 U.S. banks.
We're actively engaged with 25 banks at the moment and expect to have 10 more agreements executed by the end of the year.
Over the past year, we've also significantly enhanced our aggregation platform, modernizing our core architecture so that FinTech developers could easily utilize our comprehensive yet streamlined API platform.
So far this year, Envestnet | Yodlee has more than doubled the FinTech signings compared to last year as some customers have moved from incumbent aggregators.
The momentum here is definitely encouraging.
As we have updated in prior quarters, our investment manager analytics offering continues to face challenges in the market due to the proliferation of alternative data sources and resulting pricing pressure for new and renewal business.
But we're bullish on the value embedded within consumer spending trends that can be gleaned from the data coming into our aggregation platform.
Just this week, we launched something called Insights Solutions.
This is a hyper-personalization capability for financial institutions.
Through APIs, the new solution enables financial service providers to provide experiences that engage customers proactively across their financial wellness and financial planning channels.
They also empower firms to unlock the value of data to support more informed decision-making, accurate customer segmentation and actionable guidance that they're providing to their clients.
Additionally, this quarter, the Federal Reserve Bank of Chicago is now a customer of Envestnet | Yodlee.
They'll be leveraging our spending insights, along with data from other providers to inform their economic research and policymaking.
Last quarter, I shared our thoughts on the future, key themes that are driving the industry as we get through this COVID period.
The perspective guides us as we think about Envestnet's role in shaping the future and supporting our clients.
A few weeks ago, we launched the advisor's playbook for leading clients forward, a guide in supporting website covering these key themes.
We also launched our virtual Advisor Summit in place of our in-person annual client conference.
Through both of these, thousands of advisors and home office participants engage with us in our content, and we've had great feedback.
The feedback has been tremendous, setting our industry thought leadership and how valuable it is, particularly during these times.
These are excellent resources to understand how we're helping lead the industry forward.
Uncertainty presents the opportunity for innovation.
And today, there is a future that is emerging.
Envestnet is helping our clients and millions of households navigate the current environment as they seek answers to these critical emotional questions that they're asking.
Like, what should I do?
And will my family be OK?
A role on answering these questions is to enable a new advice model for the industry that embraces the future, and we are well on our way.
Everything we do is driven by our technology and data capabilities.
They are the conduit to every service and every solution that we offer, our opportunity to expand relationships with our current customers, our installed base, if you will, has never been greater.
We believe that opportunity will grow as we firmly establish this ecosystem for financial wellness.
Today, I'm going to review the second quarter and update our outlook for the rest of the year.
Our second quarter results were quite strong, meaningfully exceeding our expectations.
Adjusted revenue for the quarter was $235 million, well above the guidance we provided.
Asset-based revenue was better despite the impact of the market sell-off in March.
Favorability was primarily driven by product mix, including the increased use of our overlay and direct indexing solutions that Bill mentioned earlier.
We also saw modest favorability in subscription and professional services revenue across our business, again, relative to our expectations.
Cost of revenue was modestly above our guidance, driven by the outperformance in asset-based revenue.
However, most of the revenue favorability flowed through to adjusted net revenue as our overlay and direct indexing solutions, there are no direct cost of revenue.
Our operating expenses overall were in line with expectations, which had assumed lower levels of activity such as reduced near-term hiring and travel expenses, as examples.
As a result, our adjusted EBITDA of $55.8 million was up 29% compared to last year.
This translated to similarly strong performance and adjusted earnings per share of $0.59, 28% above last year.
So what does this mean for margins and our longer-term outlook?
The current environment has created larger swings in our asset-based revenue than normal due to the sizable market fluctuations in the first half of the year.
The effect of the market, while negative a quarter ago, was meaningfully positive during the second quarter, leading to an increased outlook for asset-based revenue in the back half of the year compared to our expectations set out in our last earnings call.
However, the market at June 30 was still not back to beginning of the year levels, and our AUMA was down around $22 billion from the beginning of the year.
Specifically, second quarter market action was a positive $60 billion in AUMA, offsetting a good portion of the negative $82 billion in the first quarter.
Today's guidance assumes a market-neutral outlook based on market levels as of June 30.
Additionally, with stay-at-home orders and travel restrictions in place in all states where we have offices and with all of our employees working remotely and not traveling, our operating expenses have been lower.
We've assumed that pandemic-related circumstances will continue to impact our expenses in the near term, particularly in the third quarter.
We're assuming a modest increase in business activity as we head into the fourth quarter.
However, we recognize that normal will mean something new in the future.
With these assumptions, we would see a sequential increase in some operating expenses between the third and fourth quarter.
And our guidance reflects these increases, and this assumption is the primary reason behind the relatively flat adjusted EBITDA implicit between the third and fourth quarter in today's updated guidance.
At some point in the future, business activity will start to pick up, and our expenses will return to some higher level, likely between where they are now and where they were pre-COVID.
We are already considering how our business should be organized and how we will manage expenses in the future.
Our goal is to further align the organization with our strategy, and we are taking short-term action while evaluating the longer-term organizational framework.
For example, in the second quarter, we closed nine smaller offices across the U.S. with all of those employees permanently working remotely, and we are assessing our optimal geographic footprint for the long term.
Having seen the effectiveness of remote working for certain groups, we are exploring how to operate more in a hub-like fashion.
Over the next several years, we still expect to drive our adjusted EBITDA margin into the mid- or upper 20s, but in the current environment, the path to that will have some variability quarter-to-quarter.
For the full year 2020, we are raising our top and bottom line expectations.
This is driven primarily by the favorable market action during the second quarter, and this quarter's outperformance relative to our guidance.
We now expect adjusted revenue for the year to be between $977 million and $980 million, up 7% to 8% year-over-year.
Adjusted EBITDA to be between $221 million and $223 million, up 14% to 15% year-over-year.
And adjusted earnings per share to be between $2.28 and $2.31.
Turning to the balance sheet.
We ended June with $92 million in cash and debt of $620 million.
Our net leverage ratio at the end of June was 2.3 times EBITDA, down from 2.6 at the end of March.
With $225 million available on our revolver and positive cash flow generation, we are comfortable that we have the liquidity and flexibility as we balance managing the business in the current environment with continuing to invest in growth opportunities, both organically and through strategic activities.
And at this point, I will Bill for his closing remarks.
Recently, I've been thinking a lot about progress.
Last week, we celebrated the 10-year anniversary of our IPO.
During the 10 years after our founding extraordinary people, many who still work in Envestnet today, transformed an idea into a business, into a company that ultimately was traded on the New York Stock Exchange.
That's an incredible journey.
We accomplished a lot in our first 10 years.
But after we rang the bell, we did not stop.
We had more to do.
During these past 10 years, we've experienced tremendous growth, both organically and through acquisition as we established investment as an industry leader.
Last week, as we reached that milestone, Jud Bergman was very much on my mind.
He is every day, but especially last week.
There's a great picture of him, Pete and myself as the first trade cross the wire.
We traded up one step.
And as you can tell by the photograph we've included in the material, it was a big one.
I'm grateful for each step that we have the opportunity to take together.
We covered amazing ground.
But there's so much more for us to do, and that brings us to today.
I mentioned earlier that despite these extraordinary and disruptive days, there is a future that is emerging.
We are driving hard to push this future.
As we outlined in our viewpoint for the industry, data and technology, the idea that all advisors need to become digital is essential and the comprehensive integrated advice that households will receive in the future will come from the experts, and that's the network of financial advisors and firms that we're incredibly fortunate to work with.
But they will be more and more supported by technology that helps them provide insights that powers and engages consumers as they achieve their financial goals.
This is where we live.
We are on our way to establishing the ecosystem that can make financial wellness a reality for everyone.
A cloud-based model where advisors and their clients can tackle the financial questions that are big and small, make the decision and execute it in the platform.
We're fulfilling a vision that positively impacts millions and millions of families.
We have work to do, but I am incredibly excited about what these next 10 years will bring for us.
| q2 adjusted earnings per share $0.59.
sees q3 adjusted net income per diluted share $0.59.
sees fy 2020 adjusted net income per diluted share $2.28 - $2.31.
|
Before we delve into the details of the last quarter, I'd like to spend a few minutes on some of the trends we saw last year and what we're seeing looking into 2021 and 2022.
While we're still working through an ongoing health crisis and ensuing economic headwinds, there is clearly light at the end of the tunnel.
Looking at our collection rate in the fourth quarter, our leasing activity, our discussions with our retailers, it's comforting to see both stability with respect to current operations and then, more importantly, very encouraging green shoots in terms of new leasing activity, in terms of existing retailer performance and our collections as John will discuss.
Collections throughout our portfolio have stabilized to above 90%.
Initially, this was driven by the more essential and suburban components of our portfolio, but more recently, the street retail component has begun to restabilize as well.
And while the range of potential outcomes remains very wide, and I suspect focus on monthly collections will continue for another few quarters.
There are a few worthwhile trends that are beginning to emerge.
One of the more notable trends we saw in the fourth quarter and accelerating to date is that tenants are looking past the pandemic and positioning themselves for the reopening of the economy in the second half of the year.
Retailers are showing up, and most recently, not just in the suburban portion of our portfolio, but also in the street and urban components.
In terms of our current leasing pipeline, which we mentioned on the last call as being approximately $6 million and now it has grown to over $8 million.
And this number is relevant because this pipeline already represents a rebound of about half of the 10% short-term hit to our NOI that we estimated as a result of COVID.
This pipeline has rebuilt faster than we had initially expected and has continued to improve over the past month.
To date, we have executed $3 million of leases in this pipeline, we are at lease for another $3 million and then the balance is at the letter of intent stage.
Leasing activity in our pipeline is now weighted fairly proportionate to our portfolio weighting, meaning that while initially the activity was weighted to our suburban and necessity portion of our portfolio, looking forward in our pipeline, our deal flow is now rebalancing, and about 70% is in street and urban.
Now, given that the street portion of our portfolio represents about 40% of our core portfolio and is a key area of differentiation for us, I think it's worth spending a few minutes on the encouraging rebound we're seeing there.
After a very scary and quiet couple of quarters, retailers are actively touring and going to lease in these markets.
The early movers we saw for the street component, they were in the half of our street portfolio located in the less dense markets that were generally quicker to reopen for business.
For example, in Greenwich and Westport, Connecticut, in the last few weeks, we have finalized leases in both of those markets.
Rents there are approaching pre-COVID levels.
But even more encouraging in terms of street retail trends is the recent activity in the more dense gateway markets.
We are finalizing several leases in Manhattan including in Soho, several leases in Chicago including in the Gold Coast.
And here, we're seeing a variety of retailers stepping up in these markets from luxury leaders to up and coming digitally native brands, all preparing for a post COVID economy and using these stores to further differentiate themselves in an omnichannel world as these retailers focus on the shifting channel of distribution.
Our retailers are looking past the harsh short term realities that we're facing this winter, as well as the oversimplified longer term narrative around retail real estate.
And based on the number of retailers touring, and many of them signing leases, our retailers are making it clearer every day that the key markets in our portfolio will remain long term must have locations.
Now starting rents compared to pre-COVID rates are going to vary space by space and street by street and they are certainly well off of their 2017 peaks.
But we have built our portfolio to avoid some of these peaks and valleys.
And these leasings -- leases will be compelling especially if the long-term rents are consistent with our pre-COVID goals and so far, they are.
And our retailers are telling us that the ratio of rents to their anticipated sales performance looks compelling from their perspective, which is also essential for this recovery.
It's still early, but if these trends hold, the street portion of our portfolio will be a key driver of our longer-term growth metrics.
We recognize that the significant portion of our portfolio both urban and suburban that is weighted with necessity and value-based tenants like Target and TJ Maxx.
That provided us a very important ballast to weather a truly 100 year storm.
But it is becoming clearer that the longer-term growth will come from our mission critical locations for a few reasons.
First of all, our releasing potential here is of uniquely high quality locations and we were -- are working off of decades low occupancy level.
Second, the contractual rental growth rate in our street portfolio is a 100 basis points to 200 basis points higher than in the other components of our portfolio.
And finally, from an AFFO perspective, since the cost of retenanting in these higher rent markets is substantially less as a percentage of rent, the net effective rent growth will be stronger than in the lower rent portions of our portfolio.
Now this is not ignoring some of the longer-term trends that are playing out in our industry, the accelerated move to digital commerce, the reality that the U.S. is over retailed in general, and that some formats are facing functional obsolescence.
Nor does ignoring a workforce that's pondering where they might live, how they might work.
These are real challenges.
Challenges that our industry is being forced to adapt to on an accelerated basis.
But notwithstanding these challenges, we are seeing signs of recovery and our portfolio is well positioned for that.
And some of this rebound in hindsight, will look obvious.
For example, it's important to keep in mind that the consumer in general and especially that segment of the consumer that is shopping at the stores in our portfolio, that consumer is climbing out of this recession in a much different spot than prior recessions.
Now for that significant portion of the population that could not shift to remote work, that is living paycheck to paycheck or worse, the impact of this crisis is heart-wrenching.
But for that portion of the economy that has been able to shift to remote work, that has seen their house values and their stock portfolios rise, for those consumers, their savings rate and disposable income is much stronger than when they were climbing out of the global financial crisis.
But to date, spending by this segment has been down as the short-term trend has been on necessities, on essentials, on pajamas, almost irrespective of the financial condition of that specific consumer.
Not because of fear or belt tightening by the affluent as much as just the realities of the lockdown.
And as we move past this lockdown, our retailers are expecting shifts in consumer spending as well.
And our retailers are seeing not just short term pent-up demand, but longer-term trends and are planning accordingly.
From a capital market's perspective, both the debt markets and the equity markets are slowly beginning to rebuild albeit selectively.
The retail real estate industry is still working through the drama around the collection crisis of last spring.
And while that is abating, the aftershocks are still with us in many of the traditional and found metrics that our industry has historically used to evaluate location quality have paused.
Last spring, for instance, property level collection rates trumped credit quality, and credit quality trumped location quality.
Now during the darkest days of the crisis, this might have made sense.
But longer term, location quality tends to win out.
And while this trend is beginning to resolve, it's going to take time.
Additionally, many institutional investors are overweight retail due to their mall holdings, and even investors who are not overweight retail are looking for clarity.
Clarity, as to what the cost to restabilize assets will be, clarity as to when and what level will rents and tenant performance stabilize.
And then finally, what will the longer-term growth rates look like?
Now, I get that providing this clarity sounds like a tall order; it always does at this point in the cycle.
And then the rebound happens usually, faster than most of us predict.
In terms of our investment activity with our stock at a discount to NAV, and our cost of capital being elevated, we don't anticipate acquisitions in our core in the short term.
In fact, we'll be opportunistically monetizing assets as we recently did with a freestanding Home Depot in New Jersey, where the net lease retail market is still robust and properties are trading at peak pricing.
But we are hopeful that as significant buying opportunities arise, we'll be in a position to capitalize on them.
Given that retail is in such disfavor and many folks who previously dabbled in it are gone, there will be less competition.
And our expertise will be in demand and it will be of value.
And while we wait for the public markets to rebalance, fortunately, as Amy will discuss, we have our discretionary fund, where we still have plenty of dry powder and deal flow is finally picking up after a quiet year.
So to conclude, we are pleased to see tenants stepping up.
And while it's hard to predict when the capital markets will also respond and kind, when they do, a portfolio like ours dominated by unique must have locations with stability and then strong prospects for growth, we'll once again become compelling.
And management teams like ours, with access to multiple types of capital and a proven track record of deploying it, we'll be well positioned to execute on the opportunities in front of us.
I know that it felt like at times that the earth stopped spinning around its axis.
I assure you, it didn't.
And your efforts and your commitment not only helped us get through this treacherous period and survive, but helped us plant the seeds going forward for our ability to thrive as well.
I will start off by providing an update on our cash collections, along with our fourth quarter results, followed by a discussion of our 2021 guidance and then closing with our balance sheet.
Now starting with collections.
In hindsight, the initial and immediate impact of the pandemic was staggering, with our April 2020 results barely achieving a 50% collection rate.
But over the course of the year, we quickly saw improvement, not only with the collections at current rent, but also in past due amounts.
In fact, as we look back over the course of the pandemic, we actually ended up collecting over 86% of our billings during the three quarters in 2020 and over 90% when we looked at the third and fourth quarter alone.
And as that we outlined in our release, we are now consistently collecting in excess of 90% of our rents.
And as we experienced throughout the pandemic, our collection percentages remain consistent throughout our street, urban and suburban locations, given the relatively comparable credit that exists across our portfolio.
As I discussed last quarter, our balance sheet continues to reflect our collection efforts.
Not only did we see our net tenant receivables decline from the prior quarter, in fact they're actually even lower than they were as compared to the fourth quarter 2019.
In terms of tenant deferral agreements, we have approximately $3 million on our books at December 31st, and as our approach was to largely focus our deferral efforts on credit tenants, we remain on track for full repayment in 2021.
Moving on to quarterly earnings.
Our FFO as adjusted for special items was $0.24 a share for the fourth quarter.
We anticipate that our quarterly FFO prior to any transactional items should remain around the current level for the next few quarters, give or take a few pennies in other direction as we navigate through the pandemic.
As we highlighted in our release, we have provided our 2021 guidance with a range of $0.98 to $1.14 of FFO before special Items.
Now, we continue to expect ongoing variable in our results for at least the first half of 2021.
We've not attempted to predict the impact of this within our guidance, but as we've done throughout the pandemic, we will continue to point out any significant items in our quarterly results and will update our expectations accordingly.
Additionally, although we didn't include any specific NOI assumptions, I want to provide a bit more color as to how we're thinking about it.
Consistent with what we experienced the past couple of quarters, we expect that our quarterly pro rata core and fund NOI should trend in the low to mid $30 million range for at least the first half of 2021.
And this is based on our assumption of maintaining a 90% collection rate along with no meaningful tenant expirations or no leases coming online.
In terms of overall occupancy, as we've said in the past given the wide range of rents that exist within our portfolio, the percentage change in and of itself is generally not particularly well correlated to the NOI impact.
Our expectation is that our physical occupancy percentage drops a bit further in Q1 and Q2 primarily to natural lease expirations within our suburban portfolio, before it begins climbing in the second half of the year.
It's worth highlighting that our current spread between physical and leased occupancy is in excess of 1% and given the velocity as to which our leasing team is building the pipeline and executing leases, we anticipate this spread, particularly in our street and urban locations to continue to expand throughout the year.
Now, as we move into the latter half of 2021, we anticipate that our quarterly NOI run rate will increase by approximately $1 million to $3 million.
And this is coming from a combination of reduced credit losses along with the additional NOI from the leasing efforts beginning to come online.
Now in terms of rent commencement on those new leases.
Of the $8 million pipeline that Ken mentioned, approximately 40% of this involves -- or $3 million involves executed leases, and we expect about $800,000 of that will show up in the second half of 2021 and the remaining portion coming online at various points throughout 2022.
And as I will touch on shortly, we are becoming cautiously optimistic that this will be the start of what we believe is a meaningful, multi-year NOI growth trajectory.
In terms of other assumptions within our fund and transactional side of our business, I want to point out a few things.
Consistent with our past practice, we will continue to exclude any changes in value from our unsold Albertsons shares.
Rather, we will only include the realized gains if the shares are sold.
And as I mentioned on prior calls, we expect that the remaining Albertsons shares should be sold over the course of the next 18 months to 24 months.
As a reminder, we own on a pro rata basis, approximately 1 million shares, which are subject to certain lockup arrangements.
And based upon the current share price, this equates to approximately $16 million of gains as the shares are sold.
Additionally, we have guided toward $2 million to $5 million of a temporary reduction in fund fees.
This is primarily a result of the pandemic-driven timing delays and our acquisition and leasing activities, and we anticipate these fee should revert back to more normalized levels in 2022.
I also want to point out and Amy will discuss further, we have approximately 40% remaining in Fund V to deploy.
And if we invest that consistent with the Fund V returns to date, this provides us with an additional $0.05 to $0.06 of incremental FFO on an annual basis.
Now in terms of the multi-year core NOI growth trajectory.
Not only does our base case model have us returning to pre-COVID levels by late 2022, early 2023, we are also starting to see the building blocks forming to grow above and beyond that, and we are becoming increasingly optimistic that this shows up within the next few years.
The key drivers of that return to pre-COVID, core NOI and the ongoing growth beyond that are expected to come from two primary sources.
First, a reduction in credit losses.
And we estimate that should result in roughly $7 million of annual NOI.
We continue to estimate that about half of our non-paying tenants get to the other side of the pandemic and revert back to contractual rents.
In terms of timing, as I mentioned in my guidance, we expect to see some improvement beginning in the second half of 2021 with stabilization at some point in '22.
Secondly, lease up and more specifically, lease up in our street and urban portfolio.
Our overall core occupancy is at a decade low occupancy of 90% with the street and urban portion at 87% in some of our best locations available.
In terms of timing of lease-up, as Ken mentioned, our team has made strong progress in this past several months with building out an $8 million pipeline, the majority of which is coming from street and urban locations.
So we certainly have a lot of hard work in front of us.
We are encouraged at the leasing activity we have seen and continue to see and the opportunities it presents for meaningful and profitable multi-year NOI growth.
Now moving onto the balance sheet.
I want to highlight just a few items along with an update on our dividend.
We continue to maintain ample liquidity between our cash on hand and available liquidity under our various facilities with no material near-term core capital needs.
And at a 90% cash collection rate, coupled with a breakeven below 50%, we are continuing to retain cash flow.
In terms of the dividend, as we highlighted in our release, we expect to initially reinstate our dividend at $0.15 a share.
Our initial payout was conservatively determined based upon what we currently expect will be the minimum payout required to maintain recompliance.
And at this level, we should be able to generate meaningful amounts of liquidity and to set ourselves up for strong dividend growth over the next several years, as we execute on the lease-up opportunities within our portfolio.
In summary, while we are still in the midst of the pandemic, we are starting to see the green shoots.
And while our earnings will continue to feel the impacts of the pandemic for the next couple of quarters, we are starting 2021 with increased optimism and a positive outlook as we look forward.
While I usually discuss all our funds on these calls, today, I will focus my remarks primarily on Fund V which is our current fund vehicle for new investments.
When we launched this fund in 2016, we were already facing disruption in the retailing industry and knew we were late cycle.
In response, we chose to focus this fund on selectively acquiring out of favor suburban shopping centers where most of our return comes from existing cash flow.
Our thesis was, buy it in 8% cap rate, leverage at two-thirds, in our case at a sub 4% interest rate and then clip a mid-teens coupon.
We did not anticipate any material growth in NOI, nor was it required to make an attractive return at an 8% going in yield.
This thesis proved to be prudent.
While the events of the past year were certainly unexpected, consistent with our original expectations for our Fund V portfolio, the properties have largely been performing consistent with plan.
For example, last year at the property level, we achieved roughly a 14% leveraged yield on invested equity including deferred rents.
Looking ahead, we expect 2021 and 2022 to achieve similar mid teens returns reflecting continued growth in NOI, but also continued investment of equity as we complete various leasing activities.
Second, collections have rebounded since April and May and are now roughly at or above the 90% level.
Third, our team has built a strong leasing pipeline which has enabled us to maintain our NOI.
Post COVID outbreak, our Fund V leasing pipeline has 32 leases, aggregating annual base rent or ABR of $5.1 million of which 20 leases and approximately $2.6 million of ABR have already been executed.
These metrics provide further evidence of our acquisition selectivity and our overall careful approach to capital allocation.
I'd also like to share a couple of examples at the property level.
First, since recapturing a 95,000 square foot Kmart at Frederick County Square in Maryland, last February, we have successfully pre-leased 83% of that box to Lidl, Ollie's Bargain Outlet and Harbor Freight Tools together with our partners at DLC management.
We are also negotiating a lease to the remaining 17,000 square feet.
The blended rents for the four new leases is more than five times Kmart's rent.
Next, consistent with our core portfolio, we monetized two parcels at Family Center at Riverdale in Utah.
The parcels located at the back of the shopping center generated $10 million of gross sale proceeds.
Given the strength of the net lease market, we were able to achieve roughly a 200 basis point spread between the allocated cap rate in our underwriting and our actual exit cap rates.
This translates into about $2.5 million to $3 million of profit on these two sales alone.
Looking ahead to new transactional activity, we have approximately $200 million of discretionary equity available to invest, which gives us approximately $600 million of buying power on a leveraged basis.
We are still seeing opportunities consistent with Fund V's existing high yield strategy and hope to close several more of these types of deals this year.
The good news is, we're seeing an increasing appetite among our vendors to finance these types of properties.
On the other end of the risk spectrum, we are also focused on the acquisition of more deep distressed and opportunistic investments ranging from buying distressed debt to restructurings to heavier lifting, value add projects, all areas where we have successfully invested in the past.
These opportunities have been for a variety of reasons slower to emerge, but they are clearly coming.
Most importantly, we will make sure that we are being rewarded appropriately for the risks we're taking.
Given the success of Fund V and the long-standing support of our investors, we remain confident that we will have the time we need to put the balance of the fund to work.
At the same time, we continue to proactively mine our existing fund portfolio for disposition opportunities, be they smaller transactions, less reliant on debt or large levels of debt or traditional shopping centers with a larger share of essential retailers.
Finally, on the debt front, during and subsequent to quarter end, we successfully extended approximately $150 million of loans across our fund's platform at a weighted average duration of 17 months.
In conclusion, our fund platform remains well positioned with a successful capital allocation strategy and ample dry powder to continue to execute on it.
| q4 ffo per share $0.24 excluding items.
|
I'm joined today by our CEO, Bill Crager; and CFO, Pete D'Arrigo.
Such comments are not guarantees of future performance, and therefore, you should not put undue reliance on them.
We also will be discussing certain non-GAAP information.
I hope that you and your families have remained safe and healthy during these last months.
And also that maybe you had the chance to catch up on your sleep after that sleepless selection night earlier this week.
In such a dramatic and disruptive time period, it is noble to begin with the progress we're making.
Such mission is to make Financial Wellness a reality for everyone.
That is our purpose.
We have a clear strategy to achieve that mission which we've spoken about in prior calls.
Here, we bring together our data solutions with our market-leading technology and network to the broadest set of solutions available.
In doing so, we are creating the ecosystem that connects all the capabilities and components of Financial Wellness that buys value for our customers.
And our customers well, they are financial services firms and the advisors who work for them.
They're also FinTech companies.
And there are also new opportunities in new markets where they're embedding financial services into offerings, all of which makes us accessible to tens of millions of consumers.
Envestnet is uniquely positioned to achieve the mission And we have spent these extraordinary months executing on our strategy and our progress has been meaningful.
The business continues to perform very well in the current environment, with our third quarter financial results exceeding our expectations.
As we head toward the end of the year, I'm incredibly pleased with the progress we are making.
We focused -- we've invested in key parts of our business and we are attacking areas of opportunity.
Envestnet has the scale, the footprint, the capabilities in the organization to continue to drive the future of financial advice.
We are the market leader.
We are winning share, and we also are expanding the solutions that we offer to the marketplace.
Today, our Wealth Solutions business supports $4.1 trillion in assets, in nearly 13 million investor accounts.
And our data and analytics infrastructure is unmatched with more than 17,000 data sources, 450 million linked consumer accounts and more than 33 million users in the most recent quarter.
Our Planning and Wealth platform is used by more financial advisors in the United States than any other provider.
In fact, 17 of the 20 largest banks in the U.S. work with Envestnet.
47 of the 50 largest wealth management and brokerage firms work with us.
3,000 RIA firms, including many of the nation's largest and more than 500 FinTech companies rely on investment to help them meet the growing demand and expectations from their customers.
Whether you are in Rhode Island and you're accessing us, you're on your phone with your bank's offering of our MyBlocks that's integrated with our Yodlee data to help manage your credit card, your credit card debt or you're sitting with your advisor in Arizona to plan your estate in the transition of generational wealth, Envestnet's offerings are reaching further touching more users and creating more deeply integrated financial experiences.
What's emerging is a powerful network effect.
When we are powering it, we're generating it.
As manufacturers put more products on our shelves or services, they become more valuable.
And they can address more customer needs.
This attracts more sellers to the ecosystem.
And more sellers drive more users connected to more consumers.
More consumers means more financially well people who seek more services and products to meet their needs into the future.
Our focus has been on execution and executing on behalf of our customers.
are identifying what drives our customers' success and then making it easy for them to deploy our offerings, on providing the most modern and integratable platform, on prioritizing investing in the most critical success stories for our customers and organizing our talent and resources to the right metrics as we drive value through this ecosystem.
We have aligned our investments during this year to help us meet our clients' needs and the opportunities that they see, things like modernization of the platform and our move to the cloud.
Our value-add fiduciary solutions are exchanges enhancing user experiences and building consumer-facing technologies and engaging the marketplace with a much more cohesive go-to-market organization.
The opportunity for us to invest is greater now than perhaps it ever has been before.
We see areas where we have the ability to lean in and drive long-term value, and we will continue to invest in these areas.
Why is it greater now?
Because we are seeing how the marketplace and our clients are responding to these integrated offerings how they're using data to power and differentiate our solutions to drive long-term value.
It is long-term value for them, our clients, for their customers, but is also long-term value for investment.
We are seeing meaningful progress in advisors adopting our higher-value fiduciary solutions.
On last quarter's earnings call, we highlighted success with our tax and impact overlay solutions, our impact in ESG investment portfolios in our direct indexing products.
Advisers continue adopting these solutions in the third quarter.
We continue to see accelerated use of our overlay solutions and a 35% year-to-date increase in use of our direct index portfolios.
The growth and adoption of these solutions is impressive, highlighting the contribution to our consistent revenue outperformance that we've experienced this year.
We are exploring how we can move deeply integrate these solutions into a seamless execution environment in making these solutions available to a broader base of investors.
In our data and analytics business, the work we've done to modernize our developer portal, to drive growth in the FinTech channel continues to bear fruit.
Year-to-date, we've seen more than a tripling in the number of FinTech deals.
Our paid user count has increased 28% versus last year, driven by new logos and user growth in both our financial institutions and our FinTech channels.
And we continue to strengthen our relationship with leading financial institutions by signing additional data sharing agreements.
And while it does not translate to meaningful revenue growth next year, it does position us to lead industry's open finance movement and represent broader distribution opportunities for our Financial Wellness solutions.
We are developing and deploying new solutions for our installed base of customers.
An important example of new solutions is our exchange offering, something I've talked about on past calls.
I'm going to spend a minute here to explain to you kind of how the insurance exchange works and why it's so important.
We started the insurance exchange with a team of industry experts, folks who sense the scope of opportunity inside our ecosystem and utilize their expertise to leverage and accelerate disruptive advisor-focused technology.
We enrolled manufacturers in the vision and they invested time and money to help identify the marketplace needs and accelerate our go-to-market implementation.
Today, 10 insurance carriers among the the largest providers representing more than half of the variable annuity market in the U.S., while they're participating in the exchange.
We are now creating shelf space for the offering by contracting with broker-dealers, contracting with RIAs to provide their advisors with access.
And we're engaging with those advisors and training those advisors on the capabilities and the processes, and advisors now are starting to utilize these very powerful tools.
That usage begets production.
That production drives engagement from the carriers and also from our clients and ultimately drives revenue for investment.
From here, we have a base, we have a foundation.
From here, what comes is additional insurance products that can be sold and managed through the very same types, with the same firms, the same advisors into the same consumers who have a additional need.
D.A. Davidson will be leveraging Envestnet's insurance exchange to the fullest extent.
They will be converting their entire annuity business to the platform, and they will be processing all of their fee-based and commission-based annuities via the Envestnet Insurance Exchange.
And we expanded our relationship with Dynasty Financial Partners last quarter as the firm recently made the investment credit exchange available to their partner firms, allowing them to have broad access to prequalified lending solutions.
These are just two examples of notable wins in our effort to drive meaningful long-term results from our exchange solutions with more to come in insurance, in credit, in advisor services and other exchanges that we have planned for the future.
We have spent most of the year -- much of the year, aligning the organization to drive our strategy forward.
Functions are now organized across all business lines to facilitate internal and external communication and to bring to bear the full capabilities of our company.
Over the years, we've developed and acquired the leading expertise in our industry.
As we brought Envestnet's talent together, we've continued this culture of innovation.
We are complementing the incredible talent inside the organization with valuable perspective and experienced leadership to further scale our business and help us achieve our mission.
Recently, we have named new senior leaders into the company and these include Dana Daria as our Co-Chief Investment Officer.
Dana joins us from Symmetry Partners.
Donna Peoples is our Chief Relationship Officer; Donna was most recently the Chief Client Officer at FIS and previously served as Chief Customer Officer for AIG.
She also has experience at an emerging conversational AI company named Type stream.
Bob Copela has been named as our new Chief Technology Officer.
He began on Monday.
And he joins us from Cision, a software-enabled as a service provider who served as their Chief Information Officer.
He also held technology leadership roles at Bloomberg, Thomson Financial and McGraw Hill.
Dana, Donna and Bob are great additions to the Envestnet team, and I'm very much looking forward to the progress they will help us make.
Envestnet people have always engaged the big challenges to create significant opportunity.
Starting a business during a recession with a card table and dial-up modem, building a technology platform that supports one out of every three financial advisors in the United States, building a network of data connectivity that powers individual's understanding of their money, scaling and infrastructure to support extreme market volatility in trading volumes during the pandemic while working remotely.
I'm confident as we navigate the uncertainty caused by this pandemic, we will continue to engage the challenges, and we will continue to create significant opportunity.
We are making the investments to ensure we use our market position to continue to press the opportunities that we see.
We're enhancing existing capabilities.
We're integrating new solutions We're driving further adoption of our ecosystem, and we're supporting and growing our customers as they power Financial Wellness to millions and millions of consumers.
Today, I'm going to review our results for the third quarter, update our outlook for the fourth quarter and provide context for our thinking about 2021.
Consistent with what we've been experiencing since the pandemic began in March, our third quarter results were quite strong, meaningfully exceeding expectations.
Adjusted revenue for the quarter was $253 million, well above the guidance we provided as we saw outperformance in asset-based and subscription-based revenue as well as professional services.
Asset-based revenue benefited from favorable net flows, continued adoption of higher-value fiduciary solutions like our tax and impact overlay and direct indexing solutions as well as a favorable market on accounts that bill monthly and on the average daily balance during the quarter.
Subscription-based revenue performed well, driven by higher usage in the Data and Analytics segment with our financial institution and FinTech customers.
Operating expenses overall came in around $5 million lower than our expectations for the quarter.
While we had already assumed lower operating expenses due to COVID-related restrictions on things like travel, we saw even more favorability than anticipated in the quarter as we saw lower-than-projected expenses associated with slower hiring, medical, marketing and travel.
As a result, our adjusted EBITDA of $67.6 million was up 24% compared to last year.
This translated to similarly strong performance in adjusted earnings per share of $0.72, 20% above last year.
We are raising our fourth quarter revenue outlook from our prior expectations as we expect our asset-based revenue to benefit from stronger-than-expected net flows and a favorable market in the third quarter, both of which contributed to higher billable values at September 30.
We also expect our adjusted EBITDA and earnings per share to improve in the fourth quarter relative to our August guidance, despite a meaningful sequential increase in operating expenses compared to the third quarter.
As a result of our outperformance in the third quarter and this improved outlook for the fourth quarter, we are raising our top and bottom line guidance for the full year of 2020.
We now expect adjusted revenue for the year to be between approximately $991 million and $993 million, up 9% year-over-year.
Adjusted EBITDA to be between $238 million and $239 million, up 23% to 24%, and we are raising adjusted earnings per share to be between $2.51 and $2.53.
To add some context to the full year, our EBITDA, EBITDA margin and earnings per share this year are meaningfully higher than we expected at the beginning of the year, with revenue growth expected at 9% and EBITDA growth expected at 23% to 24%.
That level of margin expansion is beyond expectations.
Expense management and pandemic-related circumstances have lowered expenses significantly and unsustainably for the long-term.
This expense favorability gives us an opportunity to assess many elements of our business, like our office footprint, given our successful work-from-home transition and the need for travel at the levels we did in 2019 and before, allocating some of that spending into the product, technology, engineering and organizational initiatives Bill mentioned.
We are looking at how we better drive our strategy to position us for long-term value creation.
Over the next several years, we target returning to double-digit growth in revenue while driving our adjusted EBITDA margin into the mid- to upper 20s.
In any given year, we may make more or less progress toward those targets.
Next year is a prime example of the variability we may experience from period to period.
While we are not yet providing specific guidance for 2021, we expect that adjusted revenue will grow in the mid- to high single digits, embedded in that expectation is high single-digit growth in wealth revenue and low to mid-single-digit growth in the Data and Analytics segment.
As our expenses return to a more normal level over the course of 2021 and as we continue to invest in our long-term growth, its likely operating expenses will grow at a faster rate than revenue next year.
However, when combining the performance we expect in 2020 with an early look at 2021, the average growth rate in adjusted EBITDA exceeds our revenue growth rate over that 2-year period from 2019, on track with our long-term margin targets.
Turning to the balance sheet.
We ended September with $363 million in cash and debt of $863 million, including the convertible notes we issued in August.
Our net leverage ratio at the end of September was 2.1 times EBITDA, down from the 2.3 times at the end of June.
And the proceeds from our recent convertible note issuance enabled us to pay off the amount that was outstanding on our revolver.
So now the revolver is entirely undrawn.
With $500 million available on the revolver, meaningful cash on the balance sheet and positive cash flow generation, we are comfortable that we have the liquidity and flexibility as we balance managing the business in the current environment with continuing to invest in growth opportunities, both organically and through strategic activities.
The future of consumer financial services is an integrated experience that connects the person's daily financial lives to their long-term financial goals.
People will access financial information and make decisions in new ways.
Yes, absolutely more digital engagement.
That's for sure, but also relying more and more on accessible expert advice to guide them.
We are seeing this play out during this COVID disrupted period of time.
Envestnet is best positioned, and we are investing in capabilities and talent to make sure we take advantage of this opportunity.
We have work to do, but the progress we are making is meaningful.
We're on our way to establishing the ecosystem that can make Financial Wellness, a reality for everyone.
And this is a cloud-based model where advisors and their clients can access capabilities to tackle the financial questions, both big and small, make a decision and then seamlessly execute on it.
We are very encouraged by our progress, and we are very excited about what we see ahead of us.
| q3 adjusted earnings per share $0.72.
sees fy adjusted earnings per share $2.51-$2.53.
|
Such statements are based on current information and management's expectations as of this date, and are not guarantees of future performance.
As such, our actual outcomes and results could differ materially.
You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings.
We will also be making certain references to non-GAAP financial measures, such as segment operating income and operating statistics.
Reflecting on where we were at this point last year, I'm encouraged by the recovery we are currently experiencing as well as how the company has navigated through a multitude of challenges in 2020.
Last year, I said that two factors were crucial for us for continued success going forward.
First, maintaining our financial strength and second, maintaining a long-term focus for future opportunities.
I'm happy to report that the company continues to execute in both areas.
Today's mid-$60 oil price is robust compared to what we experienced over the past year.
But going forward, we anticipate a degree of permanence in the change of historic industry behaviors and norms.
Energy markets are coming back into balance, global oil demand is reviving and oil inventories are falling back to their 5-year average.
The energy industry's capital discipline, which actually began prior to the global pandemic, also remains resolute.
While this last point is uncomfortably limiting for the industry's near-term growth horizon, this is something we believe is imperative.
Focused disciplined spending that generates returns under a variety of commodity price scenarios is what the industry needs to attract and retain investors.
Back to the long-term focus and what we believe the future holds for H&P.
A natural step in capital discipline is driving the most value per capital dollar spent, not just in a 1-year budget cycle, but over the life of an investment.
This corresponds to where we believe H&P as the leading drilling solutions provider contributes the most value to our customers and is the driver behind the development of our digital technology solutions, and our new commercial models that are structured around achieving value-added outcomes.
Aligned with our strategic objectives, H&P will continue to concentrate on delivering value to the customer by leveraging software, data and FlexRig technology.
Our digitally enabled drilling operations provide automation solutions that deliver both efficiency gains and wellbore quality.
Not only do our customers experience near-term financial benefits like lower well costs and the reduction of certain downhole risks, but also improvements in areas that were historically beyond our ability to influence, but have significant economic implications over the long-term life of the well.
An important ingredient to a successful technology strategy is the integration of new commercial models, which incorporate performance metrics and eventually, wellbore quality metrics.
One example is having a tortuosity index and tying them together with financial remuneration.
New commercial models are designed to generate win-win outcomes.
The customer has a well with improved economics, and H&P is compensated for helping to create a portion of that value.
Currently, approximately 30% and of our active U.S. fleet is under some type of performance contract.
Contrasting the successful adoption of these new commercial models compared to a year ago, where we only had about 10% of our fleet on performance contracts.
Our digital technology is providing H&P and our customers another differentiating capability in delivering the best outcomes.
Let me give you a few examples.
H&P's automation technology deployed on our FlexRig is providing smoother wellbores and reduced tortuosity, which helps extend downhole tool life, deliver smoother casing runs, increase reliability and reduced well durations.
In addition, a less tortuous wellbore also saves the customer time and money during the completion phase of the well by lowering downtime events, reducing overall completion time and creating more certainty for the life of the well.
We are automating directional drilling with our AutoSlide solution, and this is driving repeatability and consistency in drilling the curve.
This enables landing the curve earlier in the zone, resulting in an additional frac stage and improved returns for the customer.
Well cost consistency achieved through automation is providing more certainty and confidence to key stakeholders, affording a clear vision and more confidence in future expansion.
I do believe that FlexRig solutions are unique in the industry and contributing to the demand for H&P as our current rig count in the U.S. is at 118 rigs, up 25% since the end of fiscal Q1.
In addition, we have approximately 35% of the public company E&P market share and about 14% of the private E&P market share.
Both are leading metrics in the U.S. We're making good progress in deploying digital technology solutions and introducing new commercial models to the industry.
All of that said, we also realize there's still a lot of work ahead.
As the demand for FlexRig solutions has increased, we find ourselves at a point where rig reactivations are becoming an increasing financial burden.
We believe the market is fast approaching an inflection point where this financial burden will have to be carried by our customers as well, either through lump sum payments or pricing over the life of the contract.
We estimate that industrywide, there are only a handful of idle super-spec rigs that have been active during the past nine to 12 months, particularly as longer idled rigs are put back to work, higher reactivation costs will play a larger role in contract economics going forward.
We already see a shortage of ready-to-work super-spec rigs in the market.
So there's momentum emerging in the near-term to improve FlexRig solutions' pricing and contract economics during the rest of 2021.
If commodity prices remain strong, many believe E&P budgets will likely respond positively in 2022, and that will increase the demand for incremental super-spec rigs.
Those incremental rigs will be those that have not worked in well over a year, and it will be costly to bring those rigs back into service.
Again, contract pricing and economics must be supportive of that investment.
I will not soon forget last summer's reorganization effort where we downsized corporate G&A and operational overhead in response to the pandemic.
Mark will give a more complete description of how these efforts are expanding this year.
But I wanted to underscore that our industry is structurally smaller today.
And the prospects of that trend reversing, seem very slim, especially near term.
We must respond to the changing priorities, but it doesn't mean there are no longer opportunities for H&P to innovate, to grow and to thrive in this evolving environment.
Oil and gas is still critical to the global economy, and it will remain so for many years to come.
Growing internationally is another strategic priority for H&P.
While international markets are lagging behind the U.S. recovery, we are participating in several bid opportunities in South America, the Middle East and elsewhere.
We are encouraged that several of these opportunities are unconventional resource-type plays, and we have industry-leading technology and expertise.
The process of obtaining international work has its set of challenges, and we are shifting our strategy to drive success.
We are committed to growing that part of our business and given our significant U.S. super-spec capacity, leading-edge technology offerings and financial ability, we are well positioned for many of these opportunities.
H&P has long been committed to operating in a safe and environmentally responsible manner, and we continue to invest in advancing cleaner and more efficient energy through new technologies that minimize the environmental impact of our drilling operations.
We are pleased with our ongoing partnerships with our customers to reduce GHG emissions.
Our operational and technological experience, combined with our rig design, help our customers minimize operational costs and risks and reduce the environmental impacts associated with producing oil and gas.
We are also investing in power management systems and alternative power sources.
The company recently launched our new website, and it's designed to provide greater insight into our solutions capabilities and outcomes-based results and other important disclosures.
We've included new disclosures around our CO2 emissions including rig and vehicle emission improvements we've realized over the past three years.
In the coming months, we plan to publish our HSE sustainability metrics, and other information as we continue to improve our ESG disclosures and culminating with publishing our sustainability report in 2021.
As we commented on our last call, we entered 2021 optimistically and so far, so good.
One of H&P's strengths is its ability to adapt to changing and often volatile market conditions.
Our people, our rig assets and digital technology and our financial position are the drivers behind why H&P is considered a market leader and partner of choice within the energy industry.
The industry will continue to face challenges, but I'm confident that H&P and our people are up to the task and will be successful.
Today, I will review our fiscal second quarter 2021 operating results, provide guidance for the third quarter, update remaining full fiscal year 2021 guidance as appropriate and comment on our financial position.
Let me start with highlights for the recently completed second quarter ended March 31, 2021.
The company generated quarterly revenues of $296 million versus $246 million in the previous quarter.
The quarterly increase in revenue was due to a higher rig count activity in North America Solutions as expected.
Total direct operating costs incurred were $231 million for the second quarter versus $200 million for the previous quarter.
The sequential increase is again attributable to the aforementioned additional rig count in the North America Solutions segment.
General and administrative expenses totaled $39 million for the second quarter, consistent with our expectations and with the previous quarter.
Towards the end of the second quarter, we continued our focus on operating super-spec rigs and phasing out the less capable portions of our fleet.
As a result, we developed and began executing a plan to sell 68 domestic non super-spec rigs, all within our North America Solutions segment, the majority of which were previously written down and decommissioned and/or used as capital-spared donors.
We expect most of these rigs to be sold for scrap value.
These assets were written down to their net realizable value of $13.1 million and were reclassified as held for sale on our balance sheet.
As a result, we recognized a noncash impairment charge of $54.3 million.
Additionally, during the second quarter, we downsized and moved our Houston FlexRig assembly facility as part of our ongoing cost management efforts.
In conjunction with this initiative, we incurred a loss on sale of assets of $18.5 million, primarily due to closing on the sale of scrap inventory and obsolete capital spares for an aggregate loss of $23 million.
This loss was offset by approximately $4.5 million in aggregate gains on asset sales, primarily related to customer reimbursement for the replacement value of drill pipe damaged or lost in drilling operations.
Our Q2 effective income tax rate was approximately 23%, which is within our previously guided range.
To summarize this quarter's results, H&P incurred a loss of $1.13 per diluted share versus a loss of $0.66 in the previous quarter.
Absent these select items, adjusted diluted loss per share was $0.60 in the second quarter versus an adjusted $0.82 loss during the first fiscal quarter.
Capital expenditures for the second quarter of fiscal 21 were $17 million below our previous implied guidance as the timing for that spending has shifted to the third and fourth quarters.
H&P generated approximately $78 million in operating cash flow during the second quarter of fiscal 21.
Turning to our three segments, beginning with the North America Solutions segment.
We have averaged 105 contracted rigs during the second quarter, up from an average of 81 rigs in fiscal Q1.
We exited the second fiscal quarter with 109 contracted rigs, which is at the high end of our guidance range as demand for rigs continue to expand from the low reached back in August of 2020.
Revenues were sequentially higher by $48 million due to the activity increase.
North America Solutions operating expenses increased $29 million sequentially in the second quarter, primarily due to the addition of 15 rigs.
We ended up reactivating 21 rigs during the quarter due to churn across basin geographies where some releases offset the total number of reactivations.
Most of the rigs released during the quarter have returned to work or are expected to return during the third fiscal quarter.
This resulted in onetime reactivation expenses of approximately $9.7 million in fiscal Q2, including a portion of expenses for the April incremental fleet additions.
Looking ahead to the third quarter of fiscal 21 for North America Solutions.
As I mentioned earlier, we exited Q2 at the high end of our expected range.
The activity level has continued to grow at a strong pace since March 31 but we expect that growth to be more moderate for the remainder of the quarter.
As of today's call, with the nine additions I discussed, we have 118 rigs contracted and turning to the right.
We expect to end the third fiscal quarter of 2021 with between 120 and 125 contracted rigs.
As of March 31, about 30% of our active rigs were working under some form of a performance contract.
As John mentioned, these new commercial solutions contracts reward H&P with incremental margin for delivering better and more consistent outcomes for the customer.
In the North America Solutions segment, we expect gross margins to range between $65 million to $75 million with no early termination revenue expected.
We will have quite a few rigs rolling off term contracts during the third quarter, with many front loaded in Q3.
We expect many of the operator programs from these rollovers to continue.
However, the rigs will reprice in conjunction with the term expirations.
As we continue to add rigs, one-time reactivation expenses continue to pressure margins, as I mentioned a moment ago, with regards to Q2.
We expect those expenses to be approximately $6 million in the third quarter.
As John mentioned, there is a strong correlation between the length of time a rig has been idle and the cost required to reactivate.
Historical experience indicates the rig stacked for nine months or longer will incur costs in excess of $400,000 to reactivate, and that figure rises as more time passes.
Keep in mind that most of our rigs were stacked back in April of 2020, some 12 months ago.
Reactivation costs are mostly incurred in the quarter of start up, so the absence of such cost of future quarters is margin accretive.
Our current revenue backlog from our North American Solutions fleet is roughly $370 million for rigs under term contract.
But importantly, this figure does not include additional margin that H&P can earn if performance contract targets are achieved.
Regarding our International Solutions segment.
International Solutions business activity averaged approximately four active rigs quarter-on-quarter, but we did add a fifth rig in Argentina midway through the second fiscal quarter.
Margin contribution was above expectations for the quarter, primarily due to the incremental rig commencing work in Argentina, coupled with revenue reimbursements for upgrades performed on a rig.
As we look toward the third quarter of fiscal 21 for International, our activity in Bahrain is holding steady with the three rigs working, and we have two rigs under contract in Argentina.
Also, we still have a pending rig deployment in Colombia that continues to be delayed as our customer waits unrequired regulatory approvals to begin work.
In the third quarter, we expect to have a loss of between $1 million to $3 million, apart from any foreign exchange impacts.
Turning to our Offshore Gulf of Mexico segment.
We continue to have four of our seven offshore platform rigs contracted, and we have management contracts on three customer-owned rigs, one of which is on active rate.
Offshore generated a gross margin of $6 million during the quarter, which was at the lower end of our estimates due to some unexpected downtime on one rig.
As we look toward the third quarter of fiscal 21 for Offshore segment, we expect that Offshore will generate between $6 million and $9 million of operating gross margin.
Now let me turn to the third fiscal quarter and update full fiscal year 2021 guidance as appropriate.
Capital expenditures for full fiscal 2021 year are still expected to range between $85 million to $105 million with the remaining spend distributed evenly over the last two fiscal quarters.
Our expectations for general and administrative expenses for the full fiscal year 21 have not changed and remain approximately $160 million.
We also remain comfortable with the 19% to 24% range for our estimated annual effective tax rate and do not anticipate incurring any significant cash tax in FY 21.
The difference in effective rate versus statutory rate is related to permanent book to tax differences as well as state and foreign income taxes.
Now looking at our financial position.
We had cash and short-term investments of approximately $562 million in March 31, 2021, versus $524 million at December 31, 2020.
Including our revolving credit facility availability, our liquidity was approximately $1.3 billion.
In mid-April, lenders with $680 million of commitments under our $750 million in revolving credit facility, or RCF, extended the maturity of the RCF from November of 2024 to November 2025.
No other terms of the RCF were amended in conjunction with this extension.
The remaining $70 million of commitments under the 2018 credit facility will continue to expire in November of 2024.
Our debt-to-capital at quarter end was about 14%, and our net cash position exceeds our outstanding bond.
H&P's debt metrics continue to be best-in-class measurement among our peer group that allows us to keep our focus on maximizing our long-term position.
As a reminder, we have no debt maturing until 2025, and our credit rating remains investment grade.
Now a couple of notes on working capital.
As discussed in our February earnings call, we received a $32 million tax refund, plus $3 million of interest in January.
Still included in our accounts receivable is approximately $19 million related to further tax refunds that we expect to collect in the coming quarters.
The preponderance of our trade AR continues to be less than 60 days outstanding from billing date and increased a modest $8 million sequentially.
Our inventory balance has declined for the third consecutive quarter even as our active rig count climbed.
We continue to focus our efforts on reducing out-of-pocket expenditures.
Given our current outlook for activity, we expect our cash balances at fiscal year-end to be relatively unchanged from March 31.
On one hand, rising activity drives our run rate cash generation higher, while on the other hand, in the short term, some of that higher cash generation potential was masked by reactivation expenses and working capital investments required to enable that higher activity.
We believe at these higher activity levels, our point forward quarterly operating earnings will fund our maintenance capital expenditures, debt service costs and dividends.
As John mentioned, cost control remains a high priority.
Since we last spoke on the February earnings call, we have further advanced this initiative as we seek to adjust our cost structure to what we expect to be a smaller industry scale.
This effort is one of our current strategic objectives, and we have several work streams being carried out in parallel.
One such work stream was the reduction in size and relocation of our Houston FlexRig assembly facility, which lowers go forward overhead while simultaneously increasing capabilities at that facility.
As these work streams progress, we will update you on the expected magnitude and timing of these various cost savings opportunities.
That concludes our prepared comments for the second quarter.
| compname reports q2 loss per share of $1.13.
q2 loss per share $1.13.
|
Life at Cleveland-Cliffs has been intense, and we have a number of developments to discuss today.
We completed the acquisition of ArcelorMittal USA on December 9, 2020.
And a couple of weeks earlier, we completed the construction and begun operating our direct reduction plant in Toledo, Ohio.
We have also, one more time, with our financial expertise to good use and took advantage of opportunities presented by the capital markets to improve our balance sheet.
And last but not least, we have recently announced our public commitment to aggressively reduce our greenhouse gas emissions 25% by 2030.
I will begin with the most transformational theme, the acquisition of ArcelorMittal USA including the totality of INtech and INCoats, which ArcelorMittal previously shared ownership with Nippon Steel.
The very first point I would like to make is the most important part of the acquisition, and that is the people that are now working for Cleveland-Cliffs.
I could not be more pleased with the buy-in we have received from the workforce previously working for ArcelorMittal.
Not just from the leadership team, but also from the employees at the shop floor.
If there is a single reason why we are doing so well as we integrate the new assets to our existing footprint, that is the buy-in from these new Cleveland-Cliffs employees.
That came also with the normal support and help coming from the employees that were it does before, included the ones that joining Cliffs from AK Steel.
It is fair to say that the entire workforce and that includes our union partners, all recognize that Cleveland-Cliffs' unique business model is now the envy of the steel industry, and they seem to be proud of that.
We have proof ideas without strategy are nothing.
And strategy without execution is irrelevant.
But one can only execute if the people involved believe and buy in.
Our great workforce, integrated and unified under a common strategy and disciplined execution, is the reason why we have been so successful.
Our competitive advantage is also predicated on a few things.
We operate the entire production flow from the extraction of iron ore out of the ground all the way to manufacturing of complex auto parts and components.
Said another way, Cleveland-Cliffs has reinvented the meaning of the word integrated, as in integrated steel mill.
The word now includes mines, pellet plants, direct reduction, blast furnaces, DOFs DAFs, ALDs, hot strip mills, plate mill, cold rolling mills, electrolytic thinning lines hot-dip galvanizing lines, electro galvanizing lines, cold and hot stamping, precision welding, laser manufacturing, and complex tooling.
All these resources give Cleveland-Cliffs full control on costs and quality, and results includes having a tangible competitive advantage over our competitors.
Also, as we process in our downstream facilities is still produced by other companies, we have a window into what others are actually capable or not capable to do in automotive.
Such insights was a determinant factor in guiding our decision to acquire AM USA.
The assets we acquired from AM USA are complementary to the ones we already had from AK Steel, and that will save us from spending a significant amount in capex to make the AK Steel assets able to produce certain grades that we can produce in Indiana Harbor or Cleveland works.
For the ones I would like to talk about who is gaining market share from him in the steel business, let me remind you one thing.
One year ago, Cleveland-Cliffs was producing fairly zero tons of steel.
And we are now, one year later, the largest flat-rolled steel company in North America.
That is a pretty sizable gain in market share, I believe.
Even more importantly, in comparing what we have at Cleveland-Cliffs with what we see from others, we feel extremely comfortable that our leadership position in automotive is very solid.
The acquisition of AM USA elevated our participation in automotive to five million tons per year.
On top of that, we also supply 1.5 million tons of automotive-grade blast to ArcelorMittal Nippon Steel in Calvert, Alabama.
Even with increasing tons from 3 million to 5 million, we actually reduced our percentage of participation in the auto sector from 70% as AK Steel stand-alone to 40% as the combined Cleveland-Cliffs, allowing us to benefit faster from higher market prices for steel.
We also supply 100% of our iron ore needs in-house, and that is extremely important.
The steelmaking assets we acquired both from AM USA and from AK might have been historically at a competitive disadvantage on that regard, due to having to purchase pellets from us.
But now, the advantage is kept all within Cleveland-Cliffs.
Another point to consider.
Differently from the scrap-based nonunion shops, we do not pay our employees based on tons produced.
Unlike these other steel producers, our business model does not prioritize the production of tons.
And we are not in the pursuit of capacity utilization either.
We prioritize value over volume.
We prioritize delivering on time, and we accommodate the demands of our clients, particularly automotive clients.
We, in 2021, are applying to the newly acquired assets the same methodology we applied to AK Steel in 2020.
And that will bring the new assets to the same high level of delivery performance we have established at AK Steel since we implemented our way of doing business last year.
Our clients know that and appreciate the changes and improvements we have been implementing.
Our asset optimization process is off to a great start as well.
We have already started moving slabs and coils between the former AK former AM facilities to reduce logistics costs and to improve our customers' delivery requirements.
This material movement continues to be optimized and we should increase over time.
With that and several other initiatives, we are well on the way to reach our synergy target of $150 million by the end of this year.
Next, on to our Toledo plant.
We are delighted to have completed construction of the most modern direct reduction plant in the world and to begin production of HBI late last year.
Those who have been following us are well aware of the value proposition this product brings to both Cleveland-Cliffs and to the entire industry.
Our natural gas-based HBI is not only a cost-competitive premium alternative to imported [Inaudible] and scrap but will also reduce Scope two greenhouse gas emissions in our industry as a whole.
Additionally, once hydrogen becomes commercially available, our plant is already capable of using up to 30% of hydrogen as a partial replacement for natural gas with no equipment modification needs, and up to 70% with minor modifications, which would even further reduce emissions from the baseline.
We are progressing through our planned ramp-up period, steering through a cold winter and making the appropriate adjustments to bring the plant up to its full production level by the second quarter.
We are currently making HBI exclusively for our own internal use, and we will start to ship product to third-party customers later in March.
The timing of the start-up of HBI plant is extraordinarily positive for us with the obvious scarcity of domestic prime scrap in the marketplace.
This scarcity of scrap should only grow as new EAFs start up in the United States, and we will have more bias for the same scrap.
Good for our HBI and good for Cleveland-Cliffs.
We are also benefiting from a favorable steel price environment.
This is particularly true since we acquired AM USA.
This latter acquisition has given us more exposure to spot HRC prices.
Then when we only owned AK Steel, with a case outsized percentage of fixed price automotive contract sales in the product mix.
With our very relevant position as a player in the newly consolidated U.S. domestic market, we are taking a disciplined approach to supply.
We will continue to manage our customer needs and will not restart capacity on a whim just to add tonnage to the spot market.
That would not be good for anyone, including Cliffs' business and our workforce.
As I said, we don't pay our people based on tons produced with the practice that has impacted this industry.
We let our order book guide our production levels.
Right now, the order book is in a good place, particularly for consumer goods, as well as from stainless steel clients and service centers in general.
Demand from automotive remains strong, and auto OEMs continue to struggle to keep up with resilient consumer demand.
So far, we have seen only minor short-term demand impact from a widely publicized cheap shortage, all of which, as we have been told by our automotive clients, will be made up for during the year.
In the meantime, we have been selling more steel to select service centers and manufacturing clients outside the automotive sector, enhancing our presence with these clients.
This is actually a very positive demand development for these select clients.
Because they are increasing their business with Cleveland-Cliffs, a company that is very accustomed with producing high-quality steel and delivering on time, and also very good for us because we are accelerating the benefit from higher steel market prices ahead of annual contract renewals with automotive clients.
The value over volume philosophy also guides our near-term production decisions.
As has been publicized, we will be taking our Middletown facility down for a 45-day maintenance outage to do some work inside the blast furnace, but not a full reliance.
In order to continue to meet our strong customer demand, we have restarted the smaller Cleveland No.
6 blast furnace to make up for the lost Middletown production.
Once Middletown comes back, we will have another maintenance outage at Indiana Harbor No.
We currently have 10 blast furnace in our portfolio and are keeping between six and eight points in simultaneous operations.
At any given time, we will probably have some maintenance to perform.
We will manage all of these assets appropriately, without having any shortfalls with our customers, while also not what in the market with steel.
Value over volume is a simple philosophy that we will carry on into the future, and it is why you are not going to hear me talk about capacity utilization or even market share, except in automotive, but just because our leadership position on this one segment is still up.
Only as most liked of the recent steel price run-up positively impacted our fourth-quarter adjusted EBITDA performance of $286 million.
Due to how contract prices work and usually applies lagging mechanisms and the fact that we only controlled the AM USA assets for the last 23 days toward the end of the year, our steel profitability in the fourth quarter of 2020 has not benefited or improved from these strong prices just yet.
As a result, our EBITDA performance will dramatically improve in the first quarter of 2020.
In addition, we can confidently say that the second quarter will look even better than the first quarter, this very good first quarter that we are in now, as rising prices become further reflected, HBI shipments pick up pace and external pellet sales pickup with the reopening of the Great Lakes.
This current steel pricing environment has also highlighted the competitive advantages that our unique business model.
As we all know, EAF uses scrap as their primary feedstock.
The price for a ton of busheling scrap in the Midwest has almost doubled from where it was a little over a year ago.
Meanwhile, the cost of our primary iron feedstock, iron ore pellets we produce ourselves out of our own mine, is basically the same as it has been for the past five years.
Because of this, Cliffs has actually been your proverbial low-cost producer.
To make it clear, this is not even a tie I care to have because there is so much more to making steel than a low production cost.
You cannot reach safety first if you are obsessed with tons per employee.
You can't invest capital to protect the environment if you are governed by your production cost number.
And you will not pay your workforce well if cash cost is your main metric.
This is actually a capital-intensive industry, and we must work to generate return on invested capital and not for bragging rights based on a questionable and not always true low-cost position.
Hopefully, this current environment is a lesson on the blank statements made comparing cost positions, and we can put that subject to rest for good.
As I said, we don't believe this current scrap dynamic will be short lived.
China has publicly stated their target of doubling EAF capacity from 100 million metric tons to 200 million metric tons over the next five years.
The increase alone is bigger than the size of our entire domestic steel industry and will require a lot of scrap.
By 2025, China will be producing two and a half to three times more steel via the EAF route than the United States.
However, to move from where they are today to the level that they plan to be, China does not have the infrastructure in place to collect and deliver all that scrap, and the void will be filled by imported scrap into China.
That will come in large part from the United States, which has, by far, the largest and most mature scrap infrastructure in the world.
This is something we at Cleveland-Cliffs predicted several years ago and one of the reasons why we built our direct reduction plant.
With the already very large existing EAF capacity in the United States, the new EAF furnaces being built by the domestic mills here in the U.S., and the massive new EAF capacity coming online in China, all fighting for the same amount of scrap available.
We at Cleveland-Cliffs feel very comfortable with the powerful company we have built and with our self-sufficient [Inaudilble] business model.
The capital structure, underlying this best-in-class business model, was improved once again two weeks ago.
As you may recall, last April, at the beginning of the pandemic, when the automotive industry was out of operations, we issued a tranche of high-component secured bonds as insurance capital.
Now that business conditions have normalized, we sought to reduce the outstanding amount of these secured notes as much as possible.
And the only method to achieve that was by using the 35% equity cost provision from the indenture of the notice.
The sole focus of issuing the small number of 20 million shares was to use this claw-back provision and retire the maximum amount possible of these high-coupon notes without paying a make-whole panel.
This coincided with a block sale of about half of ArcelorMittal's CLF common shares that they received as part of the payment we made to them when we acquired AM USA.
These secondary shares were already outstanding and had no impact on share count.
We also successfully placed $1 billion of unsecured notes, the lowest coupons we have ever achieved as a high-yield issuer, respectively, 4.625% and 4.875% for eight- and 10-year issue.
These outstanding coupons and the same-day deal price execution, after spending just a few hours in the market, are a clear and unequivocal demonstration of the leveraged finance market support to our business model, strategy, and execution.
And at the end of the day, with this capital markets activity, we replaced secured debt with unsecured debt, lowered interest expense, cleared our maturity runway entirely all the way to 2025, and further improved our liquidity by using a portion for ABL repayment.
Finally, in January, we publicly announced our commitment to reduce greenhouse gas emissions by 25% by the year 2030, covering both the Scope one and Scope two emissions.
While we have transformed as a business, we will continue to operate Cleveland-Cliffs on the same environmentally responsible manner we have always done.
Climate change is one of the most important issues impacting our industry and our plants.
Our commitment includes using more natural gas to reduce our iron ore as we do in our direct reduction plant producing HBI, implementing clean energy and carbon capture technologies, and becoming more transparent on disclosing our products.
Before I get into the specific results that were foreshadowed with our pre-announcement a month ago, I will first discuss our new business segmentation.
You saw in today's release that we are now split into four segments, but the bulk of the operational and commercial activity will take place in our steelmaking segment.
The foundation for this is driven by how the management team views our business.
The strategic rationale behind our two major acquisitions was to form one large and competitive, fully integrated steel company, which is exactly what this segment represents.
This segment captures effectively all of the production activity that begins at our mine sites, including our pellet plants and other raw materials operations, and ends with our steel and finishing plants.
Products sold for this segment include slabs, hot rolled, cold rolled, coated, galvanized, stainless, electrical, tinplate, plates, rail, forgings, pellets, and HBI.
Our downstream units will remain as separate segments due to the different commercial nature of these businesses, though they remain an important piece of our integrated entity.
Because of this reporting change, we will not have any significant, noticeable intersegment eliminations going forward, other than the small impact from the finished steel sold to our downstream segments resulting in a much smoother and cleaner model.
As for our results, our fourth-quarter adjusted EBITDA of 286 million represented 127% increase over last quarter and 158% increase over last year's fourth quarter.
The sequential increase was driven by the following: increased steel shipments, higher prices, better costs due to increased production volumes, and reduced idle costs, the stub period contribution from the AM USA assets, and increased third-party pellet prices.
In the steelmaking segment, of our 1.9 million net tons of shipments, we shipped 1.25 million net tons from the AK side and picked up the remaining 600,000 from our 23 days of ownership of AM USA.
We expect to more than double this amount in the first quarter with total shipments of approximately 4 million net tons.
You will notice our average net selling price declined in the fourth quarter compared with the prior quarter, which was purely related to mix.
The AM USA assets we acquired do not sell stainless or electrical steels, which carry a much higher average selling price, bringing the overall average down.
Our shipments during the quarter were 44% coated, 22% hot rolled, 18% cold rolled, and 16% other steel, which includes stainless, electrical, slabs, plate, and rail.
Third-party pellet sales during the fourth quarter were about 2.0 million long tons which consists of approximately 1.6 million long tons sold to AM USA prior to the acquisition date.
Going forward, our external pellet sales volume should be 3 million to 4 million long tons per year, with the remainder of our output being used internally by our blast furnaces and direct reduction facility.
Our steel supply contracts are roughly 45% annual fixed price with resets throughout the year, and 55% HRC index-linked.
That latter piece further breaks down to about 40% on pricing lag, split between monthly and quarterly, with the remaining 15% on a spot basis that currently have lead times up to three months for hot-rolled and four months for cold-rolled, and coated products.
As Lourenco noted, given this structure and the short stub period for the new AM USA acquisition, the recent run-up in steel prices should accelerate in our results in the first quarter and continue its advancement into the second quarter.
When we completed the AM USA acquisition, we upsized our ABL facility from 2 billion to 3.5 billion, which is currently more than fully supported by our inventory and receivable balances.
This has provided us with a sizable liquidity balance of 2.6 billion as of this week, of which approximately 850 million is earmarked for bond redemptions set to take place in March related to the capital markets transactions we completed earlier in February.
Most of the other significant changes to our balance sheet, like PP&E and goodwill, are attributable to standard acquisition accounting.
As for cash flow, our fourth quarter was impacted primarily by changes in working capital, most notably receivables and inventory.
Because of the factoring arrangement AM USA had in place prior to the acquisition that was terminated at closing, we began rebuilding the receivable balance in December, which was factored into our valuation for the acquisition.
We will continue to build working capital in the first quarter, after which it will then normalize and become a source of cash for the remainder of the year.
Our fourth-quarter capital expenditures of 147 million took into account spending for the AM USA assets during the last 23 days of the year and included $61 million related to the Toledo plant, where we have about 60 million in run-out spend going into 2021.
This is included in our 600 million to 650 million capital budget for 2021, which includes about 500 million in sustaining capex, as well as other small projects such as the new precision partners plant in Tennessee, walking beam furnaces at Burns Harbor, and the Powerhouse at Cleveland Works.
In closing, with the completion of our two transformative acquisitions and the recent capital structure activity we completed two weeks ago, the company is on solid financial ground with no cash taxes to pay and manageable capex, interest, post-employment obligations, we are primed to generate significant free cash throughout 2021.
We will use this excess free cash flow to continue to reduce our debt balance, and we will have ample opportunity to do so in the current market environment.
What a year 2020 was, and what a phenomenal company we have formed during 2020.
Rather than panic during the most challenging days of the pandemic, we went on the offensive and took advantage of the amazing opportunities out there to improve not only ourselves but also to change for good the steel business environment in the United States.
As the new Biden administration starts to work toward infrastructure, manufacturing, environmental responsibility, and good pay middle-class union jobs, we believe we have just built the perfect company to thrive in these challenging times that we are in.
We are ready to make our market on the industry with our 25,000 employees all rowing in the same direction, and we can't wait to show you what we can accomplish.
| cleveland-cliffs - with contribution of steel sales from cleveland-cliffs steel llc for full quarter, expect q1 steel product shipments of about 4 million net tons.
full-year 2021 capital expenditures are expected to stay in range of $600 million to $650 million.
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A copy of the release can be found on our IR website at ir.
These statements are based on how we see things today and contain elements of uncertainty.
A reconciliation of these non-GAAP financial measures to their respective GAAP measures is available on our website.
With me on the call today is our Chairman and CEO, Andreas Fibig, and our Executive Vice President and CFO, Rustom Jilla.
We will begin by sharing a detailed look into our fourth quarter and the full year 2020 results, and then Rustom and I will highlight the go-forward outlook and opportunity for the new IFF.
I'm really excited and proud to say that as of February 1, we have officially completed our merger with DuPont N&B.
Our teams have hit the ground running establishing our new company as an innovation leader in the global value chain for consumer goods and commercial products.
With the close of the N&B transaction, we also unveiled a new brand identity and purpose intended to unify our organization and best position our divisions for success.
As a purpose-driven enterprise, we share a mission to build from strength and transform our industry.
We are now squarely focused on execution, building on recent performance to leverage the exciting capabilities and broader customer base of our new company.
I'm confident that the direction that we are moving and the opportunity ahead of us will lead to accelerated growth and improve profitability as we generate strong value creation and total shareholder return.
Beginning with Slide 6, I would like to recap what was truly a remarkable 2020.
Amid an unprecedented pandemic that challenged our global organization, we delivered solid financial results while embarking on a transformational journey to create a new industry leader together with DuPont N&B.
I'm pleased to report that we completed 2020 with positive momentum on a comparable basis, and we have seen this trend continue in January 2021 as a combined company.
In 2020, our portfolio remained resilient to an evolving and incredible challenging global environment due to the ongoing COVID-19 pandemic.
IFF generated USD5.1 billion in sales for the full year 2020, about a 1% increase on a currency-neutral basis from last year when excluding the 53rd week of 2019.
This sales growth was primarily driven by strong performance in our Scent division, which we believe is even better positioned to capture further market share in 2021.
We achieved an adjusted operating margin, excluding amortization, of 18.1%, driven by our synergy efforts with Frutarom and pursuing additional productivity initiatives across the business.
As we reflect on the integration of Frutarom, we are pleased with what we have achieved as it relates to cost synergies from procurement, manufacturing and administrative expenses.
Acknowledging the revenue challenges at Frutarom over the past two years, we have restructured the business and, going forward, it will be an integral part of our larger new segment, including Taste, Food and Beverage segments now we have the combined combination with N&B.
We really emphasized free cash flow management throughout the year.
This led to meaningful increases year-over-year as we continued to focus on managing our balance sheet through the pandemic.
We finished the year with an adjusted earnings per share, excluding amortization, of $5.70.
With the completion of our combination with DuPont N&B, we have also achieved the important milestone of completing the integration planning phase related to the merger.
We are now focused on execution going forward as we are committed to realizing the meaningful synergies presented by the transaction.
For capital synergy opportunity, we are encouraging collaboration across divisions and closely aligning with the markets and regions we serve to showcase the full breadth of IFF's new portfolio.
I will provide further details regarding our integration initiatives a bit later.
On Slide 7, let's take a second look at the sales dynamic that we have seen across the business.
Reflecting on 2020, we were off to a very strong start, growing 6% in Q1 2020, until the pandemic had a profound impact on society and, ultimately, our business.
Given the disruption of the year, we want to offer a bit more perspective on the trends we have seen within our business as we cover from the peak of the regulatory restrictions of the pandemic in the second quarter of 2020.
Our growth rates continued to improve in the fourth quarter, up 2% excluding the 53rd week, versus the 1% year-on-year growth seen in the third quarter.
A large part of this improvement came from Fine Fragrance, which returned to growth in the fourth quarter.
As we have noted before, roughly 15% of our business was negatively impacted by COVID-19 and decreased by 16% in 2020, excluding the impact of the 53rd week.
The vast majority of our portfolio, which includes food, beverage, hygiene and disinfection type products, is defensive in nature or benefited from the pandemic.
This was roughly 85% of our pre-pandemic sales and these grew approximately 4% for the full year, excluding the impact of the 53rd week.
Our performance was strong with multinational customers, especially those who benefited from the pandemic.
However, our exposure to local and regional players adversely impacted sales.
I think it's important to remember that while these smaller and regional customers were disproportionately impacted by COVID-19, they have historically been an important source of growth across our industry and we expect them to be important contributors in our recovery.
On the whole, we are proud of the results achieved and resilience of our business in 2020.
Some of our end markets have seen prolonged and significant negative impact that led to inevitable headwinds for certain segments.
However, when you look at the whole of our portfolio, we see strong results with meaningful momentum that affirm our central role in the consumer product good value chain.
That gives me great confidence as we begin to execute as a new IFF with the N&B business in 2021.
As we begin 2021, I'm very pleased to say we, on a combined company basis, had a strong performance in January, with approximately 3% currency-neutral growth against a strong year-ago comparison.
Scent trends continued to be very strong, Taste improved and N&B continued to be pressured by COVID.
It is good to see that the business has had steady improvement since the pandemic lows.
I would now like to pass the call over to Rustom, who will provide a more detailed review of our financial performance in the fourth quarter.
I will cover the P&L high points on this slide and get into additional detail as we go through the following several slides.
In the fourth quarter, IFF generated $1.3 billion in sales, down 2% year-over-year on a currency-neutral basis.
When excluding the roughly $50 million impact of 2019's 53rd week, our comparable currency-neutral growth was plus 2%, and as I'll explain on the next slide, up approximately 4%, counting foreign exchange-related price changes as our peers in many CPGs disclosed.
While Taste performed at levels similar to Q3 2020, we did see a significant acceleration in Scent.
In the fourth quarter, our adjusted operating profit, excluding amortization, decreased by 10% on a currency-neutral basis, or by 9% including a one percentage point benefit of FX, with solid operating performance -- operational performance offset by a challenging year-ago comparable and COVID costs.
We delivered adjusted earnings per share, excluding amortization, of $1.32, mostly as a result of lower operating profit in the quarter.
This was down 11% on a currency-neutral basis, or 10% including the one percentage point benefit of FX.
It was good to finally see foreign currency having a positive impact on sales, operating profit and earnings per share in the quarter.
Now moving to Slide 9.
I would like to focus on the emerging markets and currency impacts on our results, both in the fourth quarter and the full year, to provide better clarity regarding our currency-neutral sales growth.
For the fourth quarter and for the full year, the impact of FX-related pricing was approximately two percentage points.
To be clear, if we simply looked at our revenue in the current period by local currency and applied the average FX rates from the prior period to the current period, our currency-neutral growth of 2% in the fourth quarter would have been up approximately 4%, and our full year currency-neutral growth of 1% would go to approximately 3%, all excluding the impact of the 53rd week.
At the segment level, Scent would have grown 10% in Q4 2020 and 7% in the full financial year, while Taste would have been up 1% in both Q4 and the full year 2020.
Again, all excluding the impact of the 53rd week.
Responding to feedback from our investors and after further review of what our competitors and other CPG companies are doing, starting in Q1 2021, we will align our reporting with our peers' methodology.
For 2021, our plan is to provide this on a consolidated basis and divisional level.
And before our next earnings call, we'll provide a historical restatement of growth by division for 2020.
Moving now to Slide 10.
Let me break down the key factors impacting our Q4 profitability.
I do want to go into more detail on this as the overall results hide some meaningful operational improvements that support our optimism and momentum heading into 2021.
A close look at our operating profit bridge shows that we were able to drive operational improvements, about 8%, largely attained through Frutarom synergy realization, productivity initiatives and reformulation activities, mostly in Scent; higher volumes ex the 53rd week and disciplined cost management.
As expected and communicated earlier this year, there was a negative impact from our annual incentive compensation, or our AIP program reset, which was a direct result of weak Q4 2019 results.
Further negative offsets came from a challenging year-to-year comparable, which included the 53rd week and the Brazilian indirect tax RSA benefit that both occurred in 2019, and in 2020, incremental COVID-19 costs, which we expect will only reduce in the second half of 2021.
Unfortunately, these combined items represent an 18 percentage point year-over-year headwind and were the primary driver of our 10% currency-neutral decline in operating profit.
Now on Slide 11, I'd like to discuss our Scent division results in more detail.
Another strong overall performance from Scent.
Sales totaling $504 million were up 3%, or 7% when excluding the 53rd week comparison.
We've continued to see strong growth from our Consumer Fragrance business with a high single digit increase, driven by strong performances in our Home Care and Personal Wash categories.
Also, the new color is, where we recently gained access in Consumer Fragrance, core to our 2021 strategy, grew more than 60% in the fourth quarter and represented more than 1/3 of our Consumer Fragrance growth.
I'm also happy to share that we returned to growth in our Fine Fragrance business with a mid-single-digit increase as a result of several new wins in North America and Europe.
While this was a nice development in Q4 2020, we're cautious and are not extrapolating the trend for the first quarter of 2021.
In Fragrance Ingredients, we experienced a high single-digit growth, driven by double-digit growth in Cosmetic Actives.
So overall, the Scent division achieved a 15.9% profit margin on the $504 million of sales in the quarter.
Our recent performance across the Scent portfolio is encouraging and will remain a core piece of our growth story moving forward, bolstered over time by expanded sales opportunities from working together with N&B.
The team has done a tremendous job delivering market-leading growth, adjusted for the reporting differences over the past three years, while improving Scent's margin profile.
Turning now to Slide 12.
I'd like to highlight the fourth quarter performance of our Taste division.
Our Taste division, with the exception of our Food Services business, has remained resilient throughout the pandemic.
Taste sales totaling $766 million declined 5%, or 1% when excluding the 53rd week comparison.
Food Service was down roughly 17% on a similar basis.
The Taste division achieved approximately 11.8% profit margin, with $90 million in segment profit.
These numbers also include approximately $42 million in amortization of intangible assets.
If you exclude that amortization, our Q4 margin would be 17.2%.
Frutarom continued to be pressured in the quarter, declining mid-single digits on a currency-neutral basis as COVID-19 has disproportionately impacted Food Service and the end market performance of local and regional customers, both of which represent a large portion of Frutarom's annual sales.
Looking at our performance by region.
Our North American business remains particularly strong, outperforming other markets with mid- single-digit growth.
We have experienced challenges -- experienced challenges in our Flavors segment in Latin America and Greater Asia due to the ongoing pandemic, while our EAME performance was challenged by weakness in Savory Solutions, specifically driven by the Food Services market.
So returning to profitable growth in our Taste division will remain a top priority in 2021.
And we fully expect to deliver improved results and enhanced profitability as we emerge from the pandemic.
Now turning to Slide 13.
I'd like to spend some time on our cash flow.
IFF has always been a strong generator of cash, but given our 2020 starting leverage and the fact that N&B was coming along in early 2021 bringing additional debt, it was even more critical that we focus our people on the importance of cash generation across the company.
So capex and working capital targets were both included in our annual incentives, we launched specific initiatives and we tracked progress throughout the year.
As you will see, operating cash flow for the full year was up from $699 million in 2019 to $714 million this year, an increase of 2%.
Net income was lower as a function of operating profit but also higher year-over-year transaction and integration-related costs.
However, this headwind was more than offset by lower incentive compensation payments in 2020 as a result of our 2019 performance as well as by the timing of payments on some integration-related costs.
Core working capital was a modest use of cash, driven primarily by timing related to accounts receivable, where Q4 2019 was favorably impacted by the 53rd week.
Collections in that extra week ending in January helped 2019's cash flow, and this was always going to be very hard to fully offset this Q4.
Overall, we're satisfied with the 2020 trajectory of our 5-quarter average cash conversion cycle, which improved six days year-over-year.
And this was despite holding additional inventory to avoid any customer disruption due to COVID-19-related supply chain issues.
We also reduced our capex to 3.8% of sales versus 4.6% of sales in the prior year period as we prioritized spending more than ever to manage and preserve cash through the pandemic.
And travel and on-site work restrictions also helped lower 2020 capex.
All this led to a significant 13% increase in free cash flow compared to 2020's $522 million.
And we will be equally focused in 2021 in cash generation and on reducing our overall level of net debt.
Moving to Slide 14.
I would like to address the key assumptions behind our full year 2021 expectations.
While we were certainly encouraged by our business trends in the fourth quarter and in January 2021, we expect COVID-19 to have a similar impact in 2021's first half, as we've seen in 2022's second half.
While we expect improvements in Fine Fragrance, Food Services and our biorefinery business on a full year basis, 2021 sales will likely remain below our 2019 levels.
Assumed in our full year guidance is a euro to U.S. dollar exchange rate of $1.18, which represents approximately 25% of our combined sales.
We expect approximately $50 million of merger-related cost synergies with DuPont N&B, mostly back-end loaded this year, with $45 million coming from cost synergies and an additional $5 million from the EBITDA contribution of revenue synergies.
Now we also provided some additional inputs that should help you model the business moving into 2021.
We expect total annual depreciation and amortization to be $1.165 billion, which includes amortization of approximately $715 million.
Annual interest expense is expected to be around $315 million.
For our annual effective tax rate, we are still working through the details, given that we just completed the acquisition on February 1.
While we do have an estimate, it's still being validated by the team, so my preference is to complete additional work before we communicate.
Lastly, we expect diluted shares outstanding for the pro forma company, for earnings per share calculation purposes, to be approximately 255 million shares, and that's including the approximately 141 million shares from the transaction.
For Q1 2021, please do remember that it's two months of actuals for N&B and three months for IFF when modeling.
And also, please note that we'll continue to dig into these numbers post close, but we did want to share our thinking at this point in time.
So we will update you accordingly should anything change.
Now turning to Slide 15.
I'd like to detail our pro forma full year 2021 financial guidance.
In line with the projections included in our December 22 S-4 filing, plus the synergy realization plan communicated January 11, we expect to generate approximately $11.5 billion in sales at an approximately 23.2% adjusted EBITDA margin.
Please note that this is a 12-month combined company pro forma estimate and includes approximately $507 million of N&B sales that occurred in January 2021.
These metrics reflect our confidence in the combined company's ability to generate strong results in the complex global market as several of our businesses are expected to see improvement throughout the year.
On a pro forma basis, sales are expected to grow nearly 4% and EBITDA margin to expand by approximately 100 basis points.
We should note that we are moving toward reporting and guiding on an adjusted EBITDA basis as part of our broader effort for easier comparability with our peers, which includes our reported sales growth as well.
We are redoubling our efforts to be more transparent and investor-focused as a combined company, and we think EBITDA is a key contributor to that in our sector.
With an even stronger portfolio and enhanced capabilities, the new IFF is starting the year with a strong financial foundation from which to deliver strong results.
Our 2021 guidance reflects the strength of our enhanced platform, our expectation that the impact of the pandemic will have meaningfully subsided in the second half and our rigorous focus on execution.
As such, we expect to deliver 2021 results that are meaningfully better than 2020's.
I'd also like to comment on some of the underlying dynamics that we expect will continue into the first quarter of 2021.
As we face a strong first quarter comparison from both IFF at 6% and N&B at 3%, we will also continue -- we also continue to manage through pandemic-related headwinds.
While the majority of our portfolio delivers essential products and solutions, we expect that Food Service, biorefinery and microbial sales will continue to remain under pressure in the near term or until we lap the COVID-related challenges.
We are closely monitoring trend improvements in our Fine Fragrances business and are cautious not to extrapolate our Q4 -- our Q4 trends in the first quarter as we believe some of the performance was due to a strong holiday period.
Building on what Andreas said earlier, I'm pleased to say that we had solid pro forma results in January, with approximately 3% currency-neutral growth on our new disclosure basis.
In January 2021, N&B finished with approximately $507 million in sales.
Given that N&B became part of IFF's business just -- of IFF just eight business days ago, we are not providing quarterly guidance.
Just one reminder for anyone extrapolating out our January results for the quarter.
While this has no impact on our full year expected sales, please remember that we moved away from our previous 4, 4, five reporting cycle to calendar month reporting from January.
So in Q1 2021, we will have two less working days for legacy IFF.
Therefore, perhaps a better metric for tracking progress is average daily sales.
While we do not know where the pandemic will take us, we're happy with our start to 2021.
We will continue to thoughtfully manage resources, operating expenses and capital to ensure that our business is well positioned to deliver in an uncertain market.
We also want to note that since we closed the deal on February 1, we have been working on getting the investment community pro forma segmentation for our combined company.
Now moving to Slide 16, and before passing it back to Andreas, let me end by summarizing our go-forward reporting and disclosure updates, all aimed at being more investor-friendly and more comparable to our peers.
Starting in Q1 2021, we will align our currency-neutral sales reporting to the more common methodology.
We will calculate currency-neutral sales growth by taking our revenue in the current period in local currency and applying average FX rates for the prior period to the current period.
We've shifted from our previous financial reporting calendar of 4, 4, five weeks to the more commonly used calendar month end to eliminate comparable issues related to the 53rd week.
We're also moving toward reporting and guiding on an adjusted EBITDA basis for easier comparability with our peers.
This includes both at the consolidated level as well at the segment level.
And we will be eliminating our corporate expense line in our segment profit table by allocating corporate expenses accordingly to each division.
Turning to Slide 17.
Let's focus on 2021 and the new IFF with the N&B business.
Our teams executed well on the tremendous integration planning for the transformational combination despite working remotely due to COVID-19.
This integration planning effort, more than one year long, has provided an opportunity to create the right team and operating model needed to secure our global leadership position.
It has been driven by the lessons we have learned in past integrations across both organizations, rounding our plans and practical experience that will enable near-term execution.
We set out an aggressive time line in 2019 to close and complete integration planning in 2020.
The global pandemic only challenged us even further.
But I'm very pleased to say that our teams worked extraordinarily well together to complete every aspect of our integration planning.
I'm confident that the new IFF is ideally positioned to succeed.
With this planning complete, we can entirely focus on execution, delivering our commitments and realizing significant revenue cost synergies, resulting in significant value creation for shareholders for the years to come.
Let's move to Slide 18 and take a second and we focus on the value proposition of the new IFF.
Our new company is poised to realize significant value for all of our stakeholders.
And these two highly complementary companies form a true innovation partner for all customers.
The new IFF will be a force in shaping the future of our industry.
Our R&D investment will be 1.5 times greater than our nearest peer.
We will have #1 or #2 positions in core categories in nutrition, cultures, enzymes, probiotics, soy proteins, flavors and fragrances.
This is coupled with the broadest and most diverse customer base in our industry, more than 45,000 in total, and about 48% of our annual sales from small medium and private label customers.
We are well positioned to drive profitable growth for our shareholders.
This allows us to enhance the value we can deliver to our customers in a very powerful way.
We can deliver value to customers in every interaction, from leading product offerings to significant benefits of speed to market and supply chain simplification as we deliver market-leading integrated solutions.
I think it is important to remember that while the N&B transaction is a culminating and transformational move, it is completely consistent how we have been evolving the portfolio over the past five years.
Our strategy focused on positioning the company for where the industry is going, not where it has been.
That has required more naturals, more regional supply chains, reaching smaller customers and increasing technology and science-led innovation.
Actions like Frutarom, Lucas Meyer, Ottens Flavors and others were important foundational steps as we executed the strategy.
As we look ahead, we are pleased we have the most complete portfolio in the business.
While our portfolio may change around the edges, it is complete and gives us the right base to grow and the right assets to drive the financial results you see from our long-term targets.
Put simply, the new IFF will be the strongest partner to customers worldwide to corporate essential solutions for on-trend innovation.
Now to Slide 19.
I would like to emphasize the long-term value creation potential we have seen for IFF.
Our new company has substantial synergy opportunities that will drive growth and expand margins.
Through our integration planning, we confirmed the run rate revenue synergy expectation at approximately USD400 million by 2024, with a contribution of at least USD145 million of EBITDA by that time.
In addition, we expect to achieve meaningful cost savings, including a run rate cost synergy expectation of USD300 million by the end of 2023.
We expect that execution on our plan will unlock about $50 million in EBITDA contribution in 2021.
I think it's important to say that any combination is not just about synergies, but also to strong and leading-based businesses.
Our leaders across legacy IFF and legacy N&B businesses are committed to running every part of this business, both base business and combined, to yield superior results.
This requires a mindset of continuous improvement and operational excellence that we are embracing across the organization.
It is critical to underscore that we have a comprehensive structure in place to track more progress against the identified objectives.
At the center of our discussion will be synergy realization, where we will track diligently, including the onetime costs in both expense and capital.
Our hope is to highlight, on a continuous basis, all value creation levers to provide you with a critical how component of our value creation story.
And in the end, while we are focused on synergy realization, success will not be defined just as that.
It will be the cumulative results where synergies are additive to base business performance for a stronger total P&L.
On Slide 20, I want to highlight the actions that we are immediately taking to begin execution.
One of the most questions we get from investors is, not what will you deliver, but instead, how will you actually do it?
As you can imagine, synergy capture is all about the how.
And we -- and as we mentioned on January 11th, there are 85 separate initiatives behind the $300 million cost savings that are in our plan on the cost side and another several initiatives on the revenue side.
We try to give you a flavor for the type of actions that are part of these initiatives.
In terms of revenue synergies, we have engaged with our top global and regional customers to introduce joint portfolio and capabilities, accelerate co-development partnership with global customers, activate cross-divisional innovation and collaboration in R&D and launch combined commercial excellence and integrated solution teams.
At a high level, I would characterize the cost actions as follow.
First, where there's duplication, we eliminate the duplication.
You can imagine across two global companies, there's a lot of duplication in back-office and admin functions.
Second, we look to align our cost structure with best-in-class peers where it is comparable.
We have undertaken benchmarking across functions like G&A, which gives us a tangible target for improvement.
No two organizations are identical.
So we use this as a goal rather than a prescription.
Third, where there is efficiency, we spread the benefits of dollar spend across a larger base.
Let me give you an example.
Both organizations invest in R&D.
We can now leverage across double the categories and customers.
This powerful -- and this is powerful and shows you the benefit of global scale for supporting cutting-edge science investments.
Fourth, I will point out the power of centralized services.
We have empowered regional business leaders who drive their P&LS, but they have access to the best-in-class global-shared service centers in areas like HR, finance and procurement where there's a tangible benefit to scale and combine resources.
And finally, we have set all of our incentive compensation metrics to reflect and align with our base business and integration objectives.
I really hope this gives you some flavor for the how.
We now know the targets we want to deliver and we have told you our long-term goals.
So over the coming quarters, focus will be very much on these actions.
The new IFF is set to deliver a best-in-class financial profile and maximize value for our shareholders.
This slide summarizes our long-term outlook, which we introduced to investors at the beginning of this year.
From a revenue perspective, we expect currency-neutral organic sales growth of approximately 4% to 5% over the next few years, led by our unrivaled product and solutions portfolio, which is set to benefit from our industry-leading R&D programs.
We also expect to see meaningful operating margin improvements for IFF, including an estimated adjusted EBITDA margin of approximately 26% in 2023, up around 400 basis points from our 2020 pro forma.
The new IFF will continue to generate strong free cash flows, and we expect a significant increase to approximately $2 billion in 2023.
As we pursue further growth toward capital management and delevering, we remain -- we will remain at core priority.
We are targeting almost 3 times net debt-to-EBITDA ratio, 24 to 36 months post close and reaffirm our commitment to maintaining our investment-grade rating.
Finishing on Slide 22.
Across the world, our teams have worked tirelessly throughout a difficult year to ensure IFF continued to serve our customers and deliver strong business results.
Our full year financial results showcase the strength of our portfolio and, most importantly, our people.
Through this challenging environment, we made tremendous progress on our transformational journey.
The formation of the new IFF, together with N&B, has made us an even stronger company, better positioned to deliver value for our stakeholders.
With the pre-integration process completed, it's now time to execute.
We have the team and structures in place to ensure that our newly combined company will meet our financial and operating goals in order to shape the future of our industry and improve our world.
While global volatility is expected to persist, our foundational commitment to our people, customers, communities and planet will remain unchanged as we look to strengthen and redefine our role as the industry-leading ingredients and solutions partner.
I'm really thrilled for IFF's exciting new chapter, and hope that you will join us on our pursuit to revolutionize the industry and deliver for our customers, teams and shareholders.
So before opening to questions, please note that our plan for Q&A today is to focus on our results and outlook and not to address questions about market rumors.
| sees 2021 pro-forma (giving effect to n&b transaction) sales to be approximately $11.5 billion.
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A copy of which is available on our website at www.
During the call, we will discuss certain non-GAAP financial measures such as total segment operating income, adjusted EBITDA, total adjusted segment EBITDA, adjusted earnings per diluted share, adjusted net income, adjusted EBITDA margin and free cash flow.
To ensure disclosures are consistent, these slides 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.
Mollie, can you hear me?
Let me say I hope everything is well with each of you and that you and your families are healthy and safe.
Obviously, we all know this is an incredibly difficult time for many of us individually, the economy and in fact, for the world as a whole.
And it's an emotional time for many people too.
Unfortunately, this sort of call is not the sort of back and forth conversation that allows me to check in with each of you personally, but let me just say again, I do hope everything is well with each of you and the people you care deeply about.
In a minute, Ajay will share you the specifics of our first quarter.
Let me, if I may, upfront, make three points that I think might be of interest to you.
The first one is to let you know that I believe our team globally is doing a fabulous job, not a perfect job because in this environment, nobody does a perfect job, but a fabulous job of juggling, of adjusting, of modifying in ways so that we can weather this storm and help our clients weather this storm.
The second that I'd like to emphasize that there are both puts and takes with respect to the impact of COVID on different parts of our business.
There are some places where clients have desperate, urgent needs for immediate help from us, the same time there are places that have been negatively affected of slowdown and probably will be slow for a while.
The third point, I believe, is the most important which is that even though there will be puts and takes, none of the puts or takes, in my view, takes away from the underlying strength of this firm, the terrific long-term trajectory we've been on, an incredible trajectory, I believe, over any extended period of time we can stay on.
So let me take those three points in turn.
In terms of the first point, our key -- I'm sure, many of you have had to and are working through a whole line of issues during this period.
95% of our people around the world right now are working from home.
In some places around the world, people were working from offices, then the offices close, then they work from home, then they went back to the offices and now they're back working from home.
For the people working from home, like I'm sure for many of you, it's a challenge.
We have to try to collaborate with clients, with each other, and our teams, to drive critical work product, sometimes with tight deadlines with a level and duration of separation that probably none of us have ever had to face before.
And in many places, people are doing that while juggling kids, who are home from school or taking care of sick relatives that live with them or nearby.
And of course, everyone is dealing with stress and worries, worries about themselves, their families, their loved ones.
I want to communicate that in the face of all that challenge and disruption, I believe our people are doing a fabulous job of supporting our clients, supporting each other, and keeping our business moving ahead.
I can't give multi examples, but a few.
On one assignment, our real estate group worked 23 consecutive days to meet an aggressive deadline to help key players in a mortgage REIT industry avoid liquidation.
In Tech, our teams over the last few weeks worked in many cases around the clock with clients to find a way to do secure review of legal documents not in review centers but in home.
Our teams have implemented new processes for digital forensics to collect and analyze data remotely versus having to go into a company, for example, to crack hard drives and other devices.
And many in our firm have figured out ways to collaborate across FTI as well as with external parties like law firms to do podcast, webinars and other thought leadership to engage our clients on the wide array of challenges now and the future that are being created by COVID-19.
In many places, our people have accelerated training, whether it's educating our teams or clients on new legislation like CARES or cross-training to equip folks with the capacity to support areas in which demand is surging.
And then finally, like many of you, we've had people -- I'll just say incredibly creative, way more fun than I am but -- and it's just, it's a delight to see internal connection activities, maintaining morale, promoting the spirit and level of collaboration necessary to succeed.
Lots of people leaning in.
And that's resulting in us maintaining effectiveness and connection during this trying period.
I hope that gives you a sense, at least, of what our teams are doing to keep this company vibrant, to make us most effective in helping clients.
Though in many cases have deep needs right now, whether their storm, while also making sure we're engaged with clients who don't currently have work that are going to have needs down the road and position ourselves to best meet those needs.
But the result of those activities, I believe, our company is weathering this storm about as well as anybody possibly can.
Having said that, second point I want to underscore is that not all of our parts -- not all parts of our firm are currently firing on all cylinders.
Now some are, some parts of our business, for example, are advising clients who are facing near-term financial crises or liquidity issues or reputational issues.
Around that sort of work, there's an enormous sense of urgency as you might expect.
And that is creating the need, in some cases, for our people to work incredibly long hours to deliver for our clients.
And we are getting called on for substantial amount of important work like that.
On the other hand, one only has to talk to a few law firms to know that there has been recently a significant slowdown on a fair amount of litigation, for our professionals are experts to testify in court and provide courtroom graphics.
The fact that the courts are closed in many jurisdictions and litigation is being postponed is a very real effect.
And it's not just litigation that's being affected by COVID right now.
All of our businesses, Corp Fin, FLC, Econ, Tech, Strat Coms have service offerings that are focused on supporting major transactions with M&A activity plummeting this quarter and continued economic and political uncertainty out there, those parts of our business have been affected and will likely be affected for some time.
So though we have businesses that are incredibly busy, we clearly have seen negative effects of COVID-19 as well.
We saw some significant slowdown since some of our businesses tied to litigation and transactions toward the end of the first quarter.
Not so much throughout the quarter, but toward the end.
And we expect those slowdowns to extend into the second quarter at least, and maybe, maybe beyond.
I do want to stress what I believe is the key point however and maybe the most important point which is even if we have slowdown in parts of our business, it does not make those parts of our businesses bad businesses or unattractive when one thinks about any medium-term time frame.
And just to make an -- to give an example.
I think it's the strongest international arbitration practice in the world.
That business has had a very slow first quarter which is reflected in some of the economic results which Ajay will talk about, and we're expecting quite a slow quarter in the second quarter as well.
That pause in activity doesn't mean that the need for international arbitration services is going away more permanently, nor does it mean that the leading positions that we have around the globe where the caliber of our people has changed because of COVID-19.
Our people didn't get stupid overnight.
It just means we are currently having weaker results than we would normally expect from that business, and they, for a while.
And the same is true for a number of our other litigation and transaction-oriented businesses.
Important, longer term, we do not expect litigation or M&A or capital markets activity to be permanently depressed.
Our experience with respect to litigation, in fact, is to the contrary which is that this sort of crises, ultimately triggers a huge amount of incremental litigation.
So though we expect some of these businesses to be affected, impacted in the near term, we have no less confidence in the strength of our positions in those businesses or the ultimate demand for our services in the medium and long term.
That leads me to the third point, the final point which is that though there are puts and takes, I do not believe that this pandemic takes away, in any way, from the underlying strength of this firm, the power of the trajectory that we have been on and our ability to stay on that trajectory over any medium or long term.
As we talked about a lot on these calls and elsewhere, one never can build a great professional services firm by focusing on quarters anyway.
In fact, an individual quarter results is often not a good indication of the long-term trajectory the company is on.
A great professional services firm is created by having teams of great people who develop and deliver on key propositions, on topics of critical importance to clients.
None of that's created over a quarter nor does it get lost over a quarter.
We have been, over the last several years, building those capabilities in good quarters and bad quarters, and it is that focus that has allowed the last five years of this company's history to be by far the best years, five years ever.
Whether this year we had great quarters or not great quarters, we will continue to build this enterprise.
We will not sacrifice building this business in any way just to make individual quarters look better.
In fact, as we have in the past, if great talent becomes available, this year, even in businesses that happen to be slow in that quarter, and we believe it will help us build the business for future, we will take advantage of that -- those opportunities, the potential disruptions in talent market even if it further dampens a potentially slow quarter.
The reason we do this, we intend to do this, it's not only because it's the right way to build a great professional services firm for our people and to create value for shareholders over any extended period of time, it's also because we can.
This company has never been as strong as we are today in terms of our client relationships, the breadth of our offerings, the capabilities of our people, the relevance of our brand, the companies that are challenged or in terms of financial strength and balance sheet.
So yes, we may, this year, have some puts and takes.
I do want to underscore the depth of my belief in the power of this company, the terrific job our people have been doing and are doing and the confidence that leaves me with about our ability not only to weather the storm, but diverge from COVID-19 on at least as good a trajectory as we entered this period.
With that, let me turn this over to Ajay to give you more details on the quarter.
As part of the guidance discussion, I will share our current expectations on how the global COVID-19 pandemic may impact our business.
So beginning with the first-quarter results.
Revenues of $604.6 million were up $53.3 million or 9.7% compared to revenues of $551.3 million in the prior-year quarter.
Worth noting, while revenues in EMEA and North America increased 22.8% and 8.1% respectively in the quarter, revenues in Asia Pacific which represented 6.6% of our overall revenues in 2019, declined 14.8%.
The decline in Asia Pacific was primarily due to COVID-19 related disruptions and associated restrictions which resulted in delayed or postponed client engagements.
GAAP earnings per share was $1.49 compared to $1.64 in the prior-year quarter.
GAAP earnings per share included $2.2 million of noncash interest expense related to our convertible notes which decreased earnings per share by $0.04.
First-quarter adjusted earnings per share of $1.53 which excludes the noncash interest expense, compared to $1.63 in the prior-year quarter.
Our convertible notes had a potential dilutive impact on earnings per share of approximately 433,000 shares and weighted average shares outstanding for the quarter.
As our share price on average of $117.71 this past quarter was above $101.38 conversion threshold.
Worth noting, the trigger for conversion of our convertible notes prior to maturity was not met during the quarter.
Net income of $56.7 million compared to $62.6 million in the prior-year quarter.
The year-over-year decrease in net income was primarily because the 9.7% growth in revenues did not adequately offset increased compensation expense related to the 18 and a half percent increase in head count, higher variable compensation and an increase in SG&A expenses.
SG&A of $127 million was 21% of revenues.
This compares to SG&A of $113.2 million or 20.5% of revenues in the first quarter of 2019.
An increase SG&A year over year was primarily related to nonbillable headcount growth, with salary and benefits increases as well as higher real estate and IT expenses.
First quarter of 2020 adjusted EBITDA of $83.2 million compared to $96.1 million in the prior-year quarter.
Our adjusted EBITDA margin of 13.8% compared to 17.4% in the first quarter of 2019.
Our first-quarter 2020 effective tax rate of 22 and a half percent compared to 24.1% in the first quarter of 2019.
expenses and a favorable adjustment to the valuation allowance on certain deferred tax assets.
For the balance of 2020, we now expect our effective tax rate to range between 25% and 27%.
Worth noting, Q1 of 2020 GAAP and adjusted earnings per share were positively impacted by FX remeasurement gains primarily due to the strengthening of the U.S. dollar and the euro in the quarter as compared to the British pound.
This benefited our first quarter of 2020 adjusted earnings per share by $0.07.
Billable headcount at the end of the quarter increased by 716 professionals or 18 and a half percent compared to the prior-year quarter.
The increase is due to growth across all business segments.
Sequentially, billable headcount increased by 156 professionals or 3.5% again with every business segment growing.
Now, I will share some insights at the segment level.
In Corporate Finance & Restructuring, revenues increased 29.1% to $207.7 million compared to the prior-year quarter.
The increase in revenues was due to higher demand for restructuring services in North America and EMEA which included revenue contributions from our August 2019 acquisition in Germany and increased demand for our business transformation and transaction services in North America.
From an industry perspective, during the quarter, we experienced particularly strong demand in the TMT and energy verticals.
Adjusted segment EBITDA of 48.9% or 23.6% of segment revenues compared to $37.4 million or 23.2% of segment revenues in the prior-year quarter.
Sequentially, revenues increased 14.7% driven by higher demand for both our business transformation and transactions and restructuring services in North America and EMEA.
Turning to forensic and litigation consulting.
Revenues increased 6.2% to $147.6 million compared to the prior-year quarter.
The increase in revenues was driven by higher demand for our data and analytics services as well as increased demand for our disputes and construction solution services in EMEA and North America.
Adjusted segment EBITDA of $21.2 million or 14.4% of segment revenues compared to $31.8 million or 22.9% of segment revenues in the prior-year quarter.
Sequentially, revenues decreased 1.8% primarily due to engagements being delayed by both court closures and travel restrictions resulting from the COVID-19 outbreak, particularly in Asia.
Our economic consulting segment reported revenues of $132.1 million which declined 7.1% compared to the prior-year quarter.
The decrease in revenues was largely due to the lower demand for financial economics and non M&A-related antitrust services as well as lower realized rates for international arbitration services which was partially offset by a higher demand for M&A-related antitrust services.
Adjusted segment EBITDA of $12.7 million or 9.6% of segment revenues compared to $24 million or 16.9% of segment revenues in the prior-year quarter.
Sequentially, revenues decreased 13.7% primarily driven by lower demand and realization for our international arbitration services due to arbitration hearings being postponed in light of the COVID-19 pandemic and lower demand for our financial economic services driven by large engagements that were rolling off.
In technology, revenues increased 14.4% and to $58.7 million compared to the prior quarter.
The increase in revenues was primarily due to higher demand for M&A-related and global cross-border investigation services.
Adjusted segment EBITDA of $14.5 million or 24.7% of segment revenues compared to $12.7 million or 24.8% of segment revenues in the prior-year quarter.
Sequentially, revenues increased 14%.
The increase in revenues was driven by higher demand for M&A-related and litigation services in EMEA and North America.
Strategic communications revenues increased 1.2% to $58.4 million compared to the prior-year quarter.
The increase in revenues was due to higher demand for public affairs services.
Adjusted segment EBITDA of $8.8 million or 15% of segment revenues compared to $11.5 million or 20% of segment revenues in the prior-year quarter.
Sequentially, revenues decreased 12% primarily due to a $4.4 million decline in pass-through revenues and lower project-based revenues in EMEA and Asia.
Let me now discuss a few cash flow -- a few key cash flow and balance sheet items.
As is typical, we pay the bulk of our bonuses in the first quarter.
So net cash used in operating activities of $123.6 million this quarter compared to $102.1 million used in operating activities in the prior-year quarter.
The year-over-year increase in use of cash was primarily due to higher annual bonus payments reflecting our record 2019 financial performance and higher salaries related to the increase in headcount which was partially offset by an increase in cash collected resulting from higher revenues.
During the quarter, we spent approximately $50.3 million to repurchase 450,198 shares of our common stock at an average price of $111.73 per share.
As of the end of the quarter, approximately $116 million remained available for stock repurchases under our $500 million stock repurchase authorization.
Total debt, net of cash, of $143.2 million at March 31, 2020, compared to $137 million at March 31, 2019, and a negative $53.1 million at December 31, 2019.
The sequential increase in total debt net of cash was primarily due to cash used in operating activities resulting from bonus payments as well as an increase in share repurchases.
I am sure you are all more interested in what impact the global pandemic may have on our ensuing quarters and result in guidance for 2020 than in our Q1 results.
The pandemic is certainly affecting our business segments, though in different ways.
For our restructuring practice and to a lesser degree, currently, for crisis-driven disputes and communication services, it is resulting in a significant tailwind.
For other parts of our business, there is at least a deferral of work, if not, a reduction in demand.
It is uncertain how long we will have to proceed with shelter-in-place and similar orders and how deep the impact will be on the overall business environment.
We have ran several scenarios shaped by our current expectations.
I will now take you through these expectations.
We expect M&A transactions to be deferred and possibly canceled and litigation to be postponed or possibly settled, causing revenues from some of our service offerings in our FLC, economic consulting and technology segments to decrease in the near term.
As Steve mentioned, our practitioners are doing a remarkable job serving our clients from home offices.
However, certain essential aspects of what we do are difficult to do from home which may impact revenue adversely.
Some examples of the delays or pauses that we are experiencing include: in-court expert witness testimony has been delayed due to court closures in many countries; monitorships in certain jurisdictions, where our teams must be physically on-site to perform their analyses, are unable to continue; and there are moratoriums on certain regulatory or other proceedings, such as a 6-month moratorium in certain insolvent trading rules for directors in Australia which means that many companies that would otherwise have filed for insolvency have stayed in business.
We also expect travel restrictions to hinder in-person business development.
Conversely, also worth noting, that business travel all but stopped.
There is an associated drop in billable and nonbillable travel and entertainment expenditures.
Resulting from these expectations, our outlook in Q2, and perhaps even into Q3, is that the increased demand for our restructuring services may not adequately offset the negative impact on several of our other businesses.
Our second quarter earnings per share could be well below the level we reported in Q1.
Though we are currently expecting some weakness in the second quarter, we are not currently expecting that weakness to persist for the entire year for four reasons.
First, the wave of distress and ensuing default continues to grow and will likely continue even beyond the time frame when work that has been paused or deferred resumes.
Already, we are seeing increased demand for our restructuring services in several verticals including retail, energy, mortgage REITs, healthcare, airlines, gymnasiums, restaurants, entertainment and entertainment revenues which may further accelerate.
Second, our restructuring practice is also able to draw on resources from other areas within our Corporate Finance segment and possibly, to a lesser extent, from other segments to service these engagements.
Third, though courts may not get fully back to normal, we are anticipating that the current constraints and travel restrictions will not persist at this level.
And fourth, our expertise is needed as distressed transactions, crisis communications, litigation-related to material adverse effect clauses, disputes related to business interruption and investigations arising from improprieties in the face of this pandemic grow.
After running several scenarios based on the above expectations, while there is an increased range of uncertainty and outcomes, for the full-year 2020, we do not see a basis for changing our guidance range at this time.
We will evaluate our guidance again after the second quarter when we will have better information regarding how adversely our business as a whole may be impacted and how much of such decline is offset by the increased demand for restructuring and other services.
Before I close, I want to reiterate a few key themes that underscore the strength and potential of our business.
We have significantly diversified our offerings over the last several years with investments in areas such as non M&A-related antitrust, international arbitration, business transformation, cybersecurity and public affairs.
While some of these adjacencies may be depressed in the short term, we believe that these areas will come out strong as we emerge on the other side of this pandemic.
Our balance sheet strength gives us the flexibility to allocate capital and create shareholder value in numerous ways, particularly, we are able to attract and retain the world's leading experts in their respective fields.
At our core, we help our clients especially in times of dislocation as they navigate their most complex business challenges.
As Steve mentioned, this pandemic will undoubtedly result in a new genre of disputes, investigations and conflicts that our experts are well-positioned to assist with and support.
Lastly, we have a world renowned restructuring practice.
And now, even more than in the recent past, our restructuring services are in great demand.
| q1 earnings per share $1.49.
q1 revenue $604.6 million versus refinitiv ibes estimate of $603.3 million.
q1 adjusted earnings per share $1.53 excluding items.
toward end of quarter, we began to see effects of covid-19 materialize.
|
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Despite the ongoing pandemic and most of our team working from home, Hilltop had an unbelievable quarter, with record breaking mortgage earnings that more than offset a sizable and judicious reserve build at the Bank.
Before getting into the results of the quarter, I would like to start on Slide 3, and provide an update on our response to the COVID-19 pandemic.
From an operation standpoint, we are very fortunate to have realized Hilltop over the past three years by building a robust holding company and integrating the functional departments of our operating companies.
This is enabled us to ensure business continuity while prioritizing the health and safety of our employees.
We continue to operate with the majority of our employees working remotely, so that essential staff can work safely from our offices.
We are tracking all COVID-19 cases to ensure the quarantine of affected employees and to ensure impacted offices are cleaned so that they can get back open as soon as possible.
We are also providing frequent and open communication so that everyone adheres to safety protocols and feel connected.
While we did see an increase in employee cases this past quarter, the overall number remains low and has not had a material impact on our businesses.
Since the start of the pandemic, we have been in constant contact with our clients to continue to serve their needs, and in particular provide relief and support where required.
By partnering with our borrowers that had been impacted by COVID-19, the Bank has provided deferrals on $1 billion of loans of which $619 million were principal only and $349 million for principal and interest for the more severely impacted borrowers.
As the initial 90-day deferrals are starting to come due, the Bank has already received requests for approximately $120 million of second-round modification.
We will be reviewing each of these requests on a case-by-case basis to ensure they are need-based and assess their viability.
Certain industries including hotel and restaurants, have been more severely impacted.
So we anticipate a large portion of those credits will be requesting second deferral.
As well, the Bank booked over 2,800 PPP loans totaling $672 million.
This was a huge effort by our bankers, who were able to help many customers in need.
As the pandemic persists, we will continue to provide personal banking assistance including the waving of fees, increased daily spending limit and the suspension of residential foreclosure activity.
Moving to Slide 4.
For the second quarter of 2020, Hilltop reported net income of $128.5 million or $1.42 per diluted share resulting in a 3.3% return on average assets and a 23% return on average equity.
Net income from continuing operations was $97.7 million.
As noted at the bottom of the page, the results for National Lloyds this period and the gain on its sale are included in discontinued operations.
This quarter illustrates the strength of our businesses and the importance of diversification.
With the mortgage and broker-dealer businesses both delivering strong growth from fee income that alleviated the impact of the provision at the Bank.
Favorable market conditions aided our results, but I'm most proud of our team for working closely together and executing on the opportunities that arose.
On June 30, the National Lloyds sales to Align Financial closed for total cash proceeds of $154 million, resulting in a net gain on sale of $32 million, which was non-taxable.
This was a great outcome for both parties.
Hilltop also had an important strategic accomplishment in the quarter.
With the successful issuance of $200 million of subordinated debt, which further bolsters our liquidity and capital to persevere the current recession and to enhance our position to take advantage of future opportunities.
As for managing risk.
Net charge-offs for the period were $16.4 million, which included $12.5 million that was the oil and gas credit that was reserved for in Q1 2020.
The allowance for credit losses increased by $49.6 million this quarter as Hilltop built its loan reserve to reflect the deteriorated economic outlook from Q1 2020.
We also continue to enhance our liquidity position and ended the period with $6.6 billion of cash, security and secured borrowing capacity.
Moving to Slide 5.
PlainsCapital Bank recorded a pre-tax loss of $17.5 million largely due to our sizable CECL provision of $66 million that was partially offset by stable net interest income and lower operating expenses.
The Bank's pre-provision net revenue increased 5% from the second quarter 2019.
Notably, Jerry and the Bank team did a great job growing PPNR while working tirelessly to process PPP loan and borrower deferral request.
PrimeLending had an outstanding quarter and generated pre-tax income of $138 million, an increase of $116.5 million from Q2 2019.
That was driven by a 54% increase in origination volume and a 35 basis point increase in gain on sale margins.
Steve Thompson and the entire PrimeLending team worked over time to process the overwhelming volumes and they took advantage of the industry's oversupply by raising prices and retaining servicing.
HilltopSecurities, increased pre-tax by $6 million to $28 million, driven by profitable growth in the fixed income services and structured finance businesses.
Brad Winges and the HilltopSecurities team are well under way in raising the caliber and profile of the firm to become the preeminent municipal focused investment bank.
Additionally, they completed the major system conversion for HilltopSecurities in the quarter.
Moving to Slide 6.
Hilltop has a synergistic and durable business model, that is something we have been building toward -- throughout the life of our company.
Through acquisitions, we initially integrated our company for capital and funding purposes.
Over the past three years, we have largely implemented our platform for growth and efficiency initiatives by integrating the shared services departments and executing on efficiency projects to build a scalable platform.
And now with the sale of National Lloyds we have solidified our business model, which is a franchise anchored by PlainsCapital Bank and augmented with powerful fee income businesses in PrimeLending and HilltopSecurities.
We have made significant investments in talented professionals and system, and believe we are in a solid position to grow these core businesses.
I'll start on Page 7.
As Jeremy discussed, for the second quarter of 2020, Hilltop reported consolidated net income attributable to common stockholders of $128.5 million, equating to $1.42 per diluted share.
Income from continuing operations attributable to common stockholders equated to $97.7 million or $1.08 per diluted share.
Hilltop's continuing operations generated $202 million of pre-provision net revenue or PPNR during the second quarter, which brings the first half of 2020 total PPNR to $302 million.
PPNR increased by $125 million or 162% versus the prior year period.
Growth versus the prior-year period was driven by diversified revenue streams and led by strong mortgage originations.
During the second quarter revenue related to purchase accounting was $3.3 million and expenses were $1.3 million resulting in a net purchase accounting pre-tax impact of $1.9 million for the quarter.
In the current period, the purchase accounting expenses largely represent amortization of deposit and other intangible assets related to prior acquisitions.
We expect that revenue from purchased loan accretion will continue to decline as the purchase loan portfolio continues to run off.
Further, we expect the revenue from purchased loan accretion will average between $3 million and $5 million per quarter for the remainder of 2020.
Given the significant growth in earnings, coupled with the successful sale of National Lloyds, and the subordinated debt raise completed during the second quarter Hilltop's capital position has been significantly strengthened as we both address the ongoing impacts of the pandemic and position the company to take advantage of opportunities that may be presented over time.
Hilltop's period end Common Equity Tier 1 ratio equated to 18.46% and the Tier 1 leverage ratio equated to 12.6%.
I'm moving to Page 8.
Net interest income from continuing operations for the second quarter equated to $104.6 million and declined by $2.7 million versus the second quarter of 2019.
The decline in net interest income was driven by lower purchase loan accretion of $3.2 million offset by interest income from higher loan held for sale and loans held for investment during the quarter.
During Q2, Hilltop's consolidated average earning assets increased by $1.9 billion as the business experienced significant inflows of customer deposits across all product types.
Deposit growth coupled with planned actions including Hilltop's $200 million subdebt raise, an increase in acquired brokered deposits of approximately $550 million and proceeds from the sale of National Lloyds all contributed to the increase in the ending period balance of cash on deposit at the Federal Reserve which grew by approximately $1.2 billion versus the prior quarter.
In addition, the Bank generated PPP loans of $672 million, net of approximately $21 million of deferred fees which will be recognized over the life of loans.
Lastly, the mortgage warehouse lending business generated growth of approximately $120 million versus the prior quarter, as mortgage volumes surged in the second quarter.
The second quarter Hilltop consolidated net interest margin equated to 280 basis points and declined by 61 basis points versus the prior quarter.
This decline was driven by the aforementioned growth in average earning assets, the build in liquidity as well as lower yields on loans, securities and deposits.
We expect that NIM will continue to be pressured in the third quarter, after which we expect that we will begin to see a modest rebound during the fourth quarter and into the first quarter of 2021.
A significant driver of the improvement will be our efforts to reduce our cash and liquidity position over the second half of the year to between $5 billion and $6 billion.
We continue to monitor the capital markets, Hilltop's mortgage volumes and overall market functions related to liquidity and we will continue to balance our excess liquidity against the risk over time.
Turning to Page 9.
The table on the bottom right of Page 9 highlights the liquidity that we maintain at the bank as of June 30.
The Bank ended the period with over $6.6 billion of liquidity, including both cash, securities and secured borrowing sources.
Further, at period end, the parent maintained $388 million of cash, which equates to approximately 4 times annual expenses, dividends and debt service.
Moving to Page 10.
Noninterest income for the second quarter equated to $468 million.
During the period mortgage applications and locks were very robust as PrimeLending locked approximately $7.4 billion in new mortgages.
This is a record rate lock quarter for the business and reflected the impact of lower rates and better-than-expected demand for purchase mortgages across our markets.
The combination of strong lock-in origination volume and improving gain on sale spreads resulted in mortgage production and fee income increasing by $176 million versus the prior year period.
During the second quarter, gain on sale margins in our mortgage business did expand by 43 basis points versus the first quarter of 2020.
We expect the gain on sale margins will move higher during the third quarter to between 430 and 450 basis points.
Further, we expect that spreads will remain elevated versus historical levels, but begin to moderate during the fourth quarter of 2020.
During the second quarter, the securities business continued to show solid progress as fixed income capital markets delivered revenue growth of approximately $12 million and structured finance saw market conditions improve and revenue increased by $6.5 million versus the prior year.
At the period end, the mark on the structured finance loan pipeline stood at $15 million.
It remains important to note, that results from our fixed income and structured finance businesses can be volatile as market rates, spreads and volumes can change significantly from period to period.
Turning to Page 11.
Noninterest expenses increased from the same period in the prior year by $66 million to $370 million.
The growth in expenses versus the prior year were driven by the increase in variable compensation of approximately $56 million at both PrimeLending and HilltopSecurities.
This increase in variable compensation was directly linked to strong fee revenue growth in the quarter compared to the prior year period.
Non-variable personnel expenses rose versus the prior year by $8 million driven by increases in over time hour at work, notably in our mortgage operations as well as deferred compensation and project labor spend in the period.
Over the last nine quarters, we continue to make progress in aligning our businesses to the current market conditions and driving efficiencies across the franchise.
Through these efforts, headcount, professional service costs and marketing and development expenses continued to trend lower as we make progress against our efficiency and objectives.
During the second quarter, Hilltop incurred $3.5 million in costs on $5.6 million of spend related to our ongoing core system improvement.
During the second quarter, we continued to make progress and are moving into the final stages of implementation of our three core system installations.
The new core loan system has been installed throughout the mortgage business.
The securities team completed the Phase 1 implementation of the new operating platform HilltopSecurities.
And we have now begun the final deployment of the new general ledger and ERP system across Hilltop.
We expect that all of these implementations will deliver significant value to our franchise and position Hilltop for profitable growth in the future.
I'm turning to Page 12.
Total average held for investment loans grew by 9% versus the second quarter of 2019.
Growth versus the same period in the prior year was driven by $672 million of net PPP loan originations, coupled with growth in our mortgage warehouse lending business, which experienced growth of approximately $219 million versus the prior year period.
Other business loans declined versus the first quarter of 2020, as customer demand has remained soft.
Loan yields have declined over the prior four quarters and continue to decline in the second quarter.
Lower market rates, including the prime rate and LIBOR rates coupled with lower purchase loan accretion has contributed to the yield decline.
We do expect that loan yields will continue to be pressured in the coming quarters as market rates remain low and we've added $672 million in PPP loans that yield 100 basis points.
Lastly, our loan pipeline remains stable, but many clients are delaying pricing and funding on new loan commitments until they have greater clarity on the economic impact of the pandemic.
Moving to Page 13.
During the second quarter, Hilltop continued the process of building excess liquidity to prepare for the potential disruptions that may be caused by the pandemic and support outsized mortgage origination activity.
Second quarter average total deposits were approximately $11.2 billion and have increased by $2.2 billion or 25% versus the first quarter of 2020.
During the quarter, the bank swept back to the securities business approximately $200 million in deposit as the securities business can achieve a better return of those funds then the bank can earn on excess cash.
Excluding the growth from PPP deposits, the subdebt raise and the proceeds from the National Lloyds, customer deposits have continued to grow as customers retain cash until clarity emerges related to the economic activity.
As shown in the graph, the bank has been able to deliver growth in noninterest bearing deposits, which increased by approximately $600 million or 21% versus the first quarter of 2020 on an ending balance basis.
Turning to Page 14.
During this quarter, net charge-offs equated to $16.4 million or 92 basis points of total bank held for investment loans on an annualized basis.
Charge-offs during the quarter largely represent the final disposition of a single energy credit and the writedown of the assets related to real estate properties that were all reserved for during the first quarter.
While non-performing assets improved as is a percentage of criticized loans in the second quarter, it is important to note that the Bank approved $968 million in COVID-19-related loan modifications during the second quarter, and these deferrals are not reflected in the graph on this page.
Further, in the graph on the bottom right, Hilltop allowance for credit losses, the Bank's loans held for investment increased to 2.1% during the quarter.
As it relates to the allowance to credit loss to bank loans ratio, if we exclude PPP balances and our collateral maintenance loans, which we believe will have little loss content over time because of the collateral coverage of the loan types which include broker dealer margin and correspondent loans and mortgage warehouse lending loans, the coverage ratio at the end of the period equates to 2.6%.
I'm turning to Page 15.
During the second quarter, the macroeconomic outlook deteriorated materially from the outlook that we leveraged to evaluate allowance for credit losses during the first quarter.
We have presented a few key metrics for comparison in the table at the bottom of this page.
The outlook we use as our base case for CECL modeling as of June 30, reflects that GDP will fall significantly in Q2 with a material rebound during the third quarter of 2020 and then a slower, but steady improvement through the end of 2021.
Further, our base case assumes US unemployment remains elevated between 8% and 10% through at least Q4 2021.
The impact of these economic changes yielded a net allowance build of $60 million in the quarter, including the economic impacts, charge-off, and specific reserves, the allowance for credit losses increased by approximately $50 million in the second quarter.
In addition to the changes in economic factors, we incorporated model overlays to reflect ongoing reopening efforts, the potential impacts to the most at-risk portions of the portfolio included -- including the COVID-19 loan modification portfolio as well as the impact of government stimulus.
As it relates to future period, it remains very difficult to assess how the economy will react as the pandemic continues over the coming quarters.
However, assuming the economic performance generally aligns with our current base case outlook, the primary factors affecting allowance will be credit portfolio migrations and new loan originations over time.
As we've noted in the past, we do expect that allowance for credit losses could be volatile in the future, given the potential for significant shifts in the economic outlook from one reporting period to another.
Turning to Page 16.
We are updating our views of the COVID-19 impacted portfolio to represent those customer loans that requested and received a payment deferral during the period versus the broader portfolio views that we've discussed during the first quarter.
We believe that this group of loans represents the highest risk portfolio related to COVID-19 and that the relationship management credit teams are managing these relationships to monitor performance as these clients progress through these very challenging times.
As previously mentioned, the Bank approved deferrals for $968 million of loan portfolio representing approximately 13.5% of the total loan portfolio, excluding PPP loans.
Importantly, $619 million were principal only deferrals and $349 million were principal and interest deferrals.
In the table, we provided detail on how the $968 million stratified across industry segments and also the amount of allowance for credit loss in dollars and percent terms prior to these loans as of June 30.
Notably, the ACL loan coverage on this portfolio is 7.1% as of period end.
As of July 24, we have received requests for follow-on deferrals related to $122 million of loans and we'll be evaluating those requests during the third quarter.
Of the follow-on request, 56% are restaurant and bars and 36% are hotels.
We do expect that many of our hotel clients will request additional deferrals as those businesses continue to show significant stress.
As well as the case in the first round of deferrals, our top priority is protecting the principle of the bank, while working to aid our clients in progressing through these unprecedented times.
Any follow-on deferrals will be need-based and our target will be to extend for an additional 90-day period.
Moving to Page 17.
During the second quarter, the energy portfolio declined by $42 million.
The decline was driven by customer pay downs and the final resolution in charge-off of large energy credit we referenced during Q1 of 2020.
In total, the energy portfolio represents $104 million of outstanding balances and $59 million of unfunded commitments for a total exposure of $163 million.
As of June 30, our allowance for credit losses on the energy portfolio equates to $9 million or 8.7% of the outstanding balance.
Turning to Page 18.
During the second quarter of 2020, PlainsCapital Bank incurred a pre-tax loss of $17.5 million, driven by a $66 million provision expense, as previously reviewed.
The quarter's results reflect stable net and noninterest income and ongoing improvement in our operating expenses.
The efficiency ratio during the quarter equated to 54% and reflects the ongoing efforts to reduce deposit costs, lower operating costs and drive prudent revenue growth over time.
During the first quarter, and in response to the pandemic and the unknown economic impacts, we suspended the retention of single-family mortgages by the Bank.
As we move forward and assuming markets continue to function in an orderly fashion and consumer credit remains stable, we expect to begin retaining PrimeLending originating mortgages during the second-half of 2020.
Turning to Page 19.
PrimeLending generated a pre-tax profit of $138 million during the second quarter of 2020, driven by strong origination volumes that increased from the prior year by $2.1 billion or 54%.
As noted earlier, gain on sale margins expanded during the second quarter versus the prior year, as market volumes and pricing actions provided for higher spreads.
During the period, refinanced activity represented 47% of total origination.
Further, we expect that during the third quarter, the portion of originations that are refinanced transactions, will remain elevated from our historical level.
During the second quarter, Hilltop retained approximately 89% of the mortgage servicing rights related to loans sold during the period.
Beginning in March and carrying into the second quarter, the market for servicing deteriorated substantially as concerns regarding funding, servicer advances as well as margin requirements escalated as the pandemic accelerated.
Given Hilltop's strong liquidity and capital position, we were able to retain the mortgage servicing rights and the asset is now approximately $82 million.
We do expect that we will continue retaining a significant portion of the servicing rights for loans sold over the coming quarters and the asset could grow to between $150 million and $175 million by year end.
The results of our mortgage business during the quarter were very solid, and we're pleased with how our mortgage origination team is executed under some very challenging circumstances during the second quarter.
Turning to Page 20.
HilltopSecurities delivered a pre-tax profit of $28 million in the second quarter of 2020.
In the quarter, fixed income services generated solid revenue growth as their traders were able to happily negotiate challenging conditions, both in terms of pricing and liquidity.
The performance of the team demonstrates the progress we have and continue to make in this business.
We made substantial investments in the team and our broad set of capabilities, and those investments are returning dividends in 2020.
The structured finance business delivered growth versus the same period in the prior year of $6.5 million as the secondary markets for mortgage-related bonds improved from the market dislocation in March.
It remains important to note the results from our fixed income and structured finance businesses can be volatile as market rates, spreads and volumes can change significantly from period-to-period.
As noted earlier, the securities team made significant progress in launching their new operating system during the second quarter.
While this is a significant milestone, the team will continue working over the coming quarters to enhance and optimize the system.
Turning to Page 21.
Given the uncertainty surrounding the economy, specifically related to the pandemic, we're updating our 2020 commentaries, but we're not providing updated guidance or outlook.
While it is not clear exactly how the economy will rebound, or the timeline of that rebound, which we believe will be directly linked to the success in managing the virus and subsequent outbreaks, we remain focused on delivering against those items that we can control.
We're committing to the -- we're committed to the ongoing safety of our associates and our clients as well as helping our clients work through these unprecedented challenges that the pandemic has presented us all.
We remain committed to executing our platform growth and efficiency initiatives and delivering against our 2021 commitments.
Lastly, and most important, we are focused on delivering prudent growth across all of our business lines, while maintaining a moderate risk profile and delivering long-term shareholder value.
| q2 earnings per share $1.08 from continuing operations.
q2 earnings per share $1.42 including items.
|
We sincerely hope everyone is continuing to stay healthy and safe.
Finally, we'll be referring to adjusted results and outlook.
That release has further information about these adjustments and reconciliations to comparable GAAP financial measures.
Let me start with the headlines for the full year results.
We delivered strong top and bottom line growth and exceeded our previous outlook.
We significantly increased our brand and capability investments and improved our market shares.
We generated excellent cost savings and cash flow, and we returned significant cash to shareholders.
Now let's cover the details of our results, starting with sales.
Full year net sales were $19.1 billion.
That's up 4% year-on-year and included a 2 point drag from currency rates.
Organic sales grew 6%, with healthy underlying performance and increased demand related to COVID-19.
Volumes were up 4%, and net selling prices and product mix each increased 1%.
Mike is going to provide some more color on our top line and market share performance in just a few minutes.
Moving on to profitability.
Full year adjusted gross margin was 37.1%, up 210 basis points year-on-year.
Adjusted gross profit increased 10%.
We generated $575 million of cost savings from our FORCE and restructuring programs.
That was well above our initial target and slightly better than we expected in October.
For 2021, we're targeting $400 million to $460 million in total cost savings.
Commodities were favorable by $175 million in 2020 although they turned inflationary in the fourth quarter.
We're planning for commodity inflation of $450 million to $600 million in 2021.
Costs are projected to increase broadly in most areas, including pulp and recycled fiber, resins, superabsorbent and distribution expenses.
Other manufacturing costs were higher in 2020, including costs related to COVID-19.
Foreign currencies were also a headwind, reducing operating profit at a high-single digit rate.
Moving further down the P&L, between the line spending was up 110 basis points as a percent of sales.
That was driven by advertising, which was up 90 basis points.
SG&A spending also increased and included higher incentive compensation, along with capability building investments.
Adjusted operating margin was 18.7%, up 90 basis points, and adjusted operating profit grew 9%.
In terms of Company profitability for 2021, the midpoint of our planning assumptions implies a 70 basis point decline in adjusted operating margin.
And while there are a number of moving pieces, it's likely that adjusted gross margin will be down somewhat more than that.
Turning back to 2020 results.
Full year adjusted earnings per share were $7.74, up 12%.
Our October guidance was for earnings of $7.50 to $7.65.
In addition to the strong growth in adjusted operating profit, the bottom line benefited from higher equity income, a lower share count and a slight decline in adjusted effective tax rate.
Now let's turn to cash flow [Technical Issues] Cash provided by operations was an all-time record $3.7 billion, up $1 billion year-on-year, reflecting outstanding working capital performance and strong earnings.
Cash flow is expected to be down year-on-year in 2021, driven by higher cash taxes and working capital.
Nonetheless, cash flow should remain strong and well above 2019's level.
Capital spending was $1.2 billion in 2020, in line with plan and the prior year.
We plan to spend between $1.2 billion and $1.3 billion in 2021, including activity for our restructuring program and a pickup in growth projects.
Based on an initial outlook at longer-term opportunities, we believe spending will be elevated again in 2022.
On capital allocation, dividends and share repurchases totaled $2.15 billion.
That's the 10th consecutive year we've returned at least $2 billion to shareholders.
Let me finish with a short update on our restructuring program.
We continue to make significant progress as we head into the last year of this program.
We're about 85% to 90% through the total pre-tax charges, which we've increased somewhat to reflect delays as a result of COVID-19 and costs for additional savings opportunities.
So far, we've generated $420 million of savings and expect to achieve between $540 million and $560 million of savings by the end of 2021.
Our original savings estimate was $500 million to $550 million.
Finally, at this point cash payments are about 75% to 80% complete.
Overall, it was an excellent year financially, while we invested more in the business for the long term and navigated the COVID-19 environment.
Hey, let me begin by saying that I'm very proud of our KC team and our accomplishments in 2020.
We worked tirelessly to protect the health and safety of each other by setting and maintaining strict safety protocols, all of which are in place today.
We kept our global supply chain running and safely served the needs of our consumers and customers, and in many cases, delivering record output.
At the same time, we delivered healthy top line growth across our portfolio, gained market share, invested to strengthen long-term brand fundamentals and delivered strong financial results.
Looking more closely at our business segments, we saw excellent performance in Personal Care, with 5% organic sales growth and strong share performance.
In North America, organic sales rose 6%, driven by broad-based growth in baby and child care.
Our market shares were up nicely on both Huggies diapers and GoodNites youth pants.
In D&E markets, personal care organic sales were also up 6% despite volatile market conditions.
More specifically, Personal Care organic sales were up double digits in China, India and South Africa; up high single digits in Eastern Europe; and up low-single digits in Latin America.
We also improved our share positions in many D&E markets.
Looking at our other segments.
Organic sales were up 13% in Consumer Tissue and down 7% in K-C Professional.
As expected, both businesses experienced the effect of COVID-19 and the shift to more consumers working from home.
We're pleased with how our K-C team managed through that volatility.
To meet elevated demand in Consumer Tissue, we significantly reduced our SKU count and leveraged our global supply network to increase production, including support from KCP.
We continue to focus on category expanding and brand building programs while improving our market execution.
Those actions helped us gain market share for Kleenex facial tissue in North America and Europe.
In KCP, where the washroom category continues to be a significant part of our business, we made good progress pivoting to growth opportunities in other parts of the business, including in wipers and safety products.
Sales of those products were up double digits in North America.
Importantly, we grew or maintained market share in approximately 60% of the 80 key cohorts that we track.
I'm pleased to see our brands winning in the marketplace.
Overall, our results were strong, and I'm encouraged by the way we executed in 2020.
Next, I'll turn to our outlook for 2021.
We expect a more challenging environment, especially compared to last year.
More specifically, we expect some of the net benefit from COVID dynamics, including higher consumer demand, to reverse.
In addition, commodity costs are rising globally, and we're also reflecting our latest view on economic conditions and birth rate trends.
Despite these factors, we're confident in our ability to deliver top line growth and expect to strengthen our market positions and improve our Company for long-term value creation.
Our plans call for total sales growth of 4% to 6% in 2021, and that includes 2 points from the Softex acquisition and a 1 to 2 point benefit from currencies.
We expect to grow organic sales 1% to 2%.
We plan to leverage and scale our brand-building capabilities and investments that we've made over the past two years.
We have a healthy innovation pipeline, including near-term launches for Huggies in North America, China, Eastern Europe and Latin America, and we've also upgraded products for our global Kotex brand in several markets.
We expect to benefit from selective pricing actions and other revenue management programs, but we're not currently planning for broad-based list price increases.
And we'll continue to make capability and technology investments to drive long-term success.
On advertising, spending should be similar to 2020 levels, and this reflects the increases we made over the last two years and confidence in the strong ROIs from digital.
We believe this level of investment is sufficient to support our growth plans in the current environment.
On the bottom line, we're targeting adjusted earnings per share of $7.75 to $8.
That's even to up 3% year-on-year.
We're focused on delivering our annual plan, while managing the quarter-to-quarter volatility that could be higher than normal in this environment.
Finally, because of the different COVID dynamics in 2020 and 2021, we think it is relevant to consider our performance over both years.
So on that basis, using the midpoint of our 2021 outlook, we're projecting to grow organic sales approximately 4% and to increase adjusted earnings per share 7% on average over that two-year period.
Those growth rates are slightly above our medium-term objectives.
In conclusion, we're on track with KC Strategy 2022, and we're managing effectively through a very challenging environment.
We're improving our top line and strengthening our brands, our market positions and our Company for the long term.
We continue to be optimistic about our opportunities to deliver balanced and sustainable growth and create shareholder value.
| net sales in 2021 are expected to increase 4 to 6 percent.
adjusted earnings per share in 2021 are expected to be $7.75 to $8.00.
qtrly personal care segment sales of $2.3 billion rose 5%.
kimberly-clark- authorized new $5 billion share repurchase program which supplements current $5 billion authorization expected to be completed later in 2021.
|
I'm Dan Glaser, President and CEO of Marsh McLennan.
Joining me on the call today is Mark McGivney, our CFO; and the CEOs of our businesses, John Doyle of Marsh; Peter Hearn of Guy Carpenter; Martine Ferland of Mercer; and Nick Studer of Oliver Wyman.
Nick has led many of Oliver Wyman's major practices in his 23 years with the business and I look forward to seeing Oliver Wyman continue to grow and thrive under his leadership.
Marsh McLennan had an outstanding second quarter.
We are well positioned in benefiting from the abundance of opportunities.
We are stronger and have broader capabilities post the JLT acquisition.
We are benefiting from what may be the strongest economic rebound in nearly four decades, led by our largest region, the U.S. There is high demand for our advice and solutions in this time of uncertainty and in the face of challenging market conditions.
We are seeing a flight to quality and stability, which is contributing to high levels of new business growth and client retention and is helping us to attract talent.
And there is a long runway for growth as we think about major protection gaps around the world, new emerging risks, digitization, workforce of the future and underpenetrated markets such as small commercial.
We are focused on capitalizing on these opportunities, and I am proud of our execution in the quarter.
We generated record second quarter revenue and earnings, the best underlying growth of any quarter in two decades, and we are poised for an excellent year.
The strength of our results was broad-based with each of our businesses and virtually all of our major geographies seeing an acceleration in growth.
Our adjusted earnings per share increased by an impressive 33%, and we generated margin expansion despite challenging expense comparisons.
As we look ahead, the economic outlook for the U.S. and most of the major countries we operate in is encouraging.
However, the pandemic is not over yet.
Vaccine hesitancy creates risk and there are many parts of the world where vaccine availability is limited.
As a result, much of the world is experiencing another wave of the pandemic with rising case counts due to the spread of variants.
In addition, the shape of this economic recovery is very different from any we have seen before.
Some industries are thriving, while others are being impacted by supply chain disruption, inventory issues and labor shortages.
Navigating this dynamic landscape is challenging, even confounding for some businesses.
The growth opportunity for Marsh McLennan is significant during this time of uncertainty and recovery.
We are aiding and guiding our clients through the complexities of the new normal as well as helping them tackle issues like climate risk, cyber, diversity and inclusion, employee safety and well-being and workforce disruption.
Our ability to provide differentiated high-quality solutions to our clients rest on our talent and expertise.
Our colleagues are our Number one competitive advantage.
And with the potential for industry consolidation, we see a meaningful opportunity to invest in hiring and deepen our world-class talent pool.
We have strong momentum.
And as we mentioned last quarter, our efforts are focused on resurgence and expansion.
Let me provide some examples of how we are helping our clients address complex issues of the day, specifically two major challenges: cybersecurity and climate change.
Cybersecurity is one of the greatest risks facing society.
Supply chain and ransomware attacks continue to rise with a number of recent high-profile attacks affecting organizations across all sectors and segments from technology to critical infrastructure and healthcare.
Marsh & McLennan is helping clients manage cyber risk.
Increasingly, we are bringing our businesses together to leverage all of our expertise, data and relationships with public and private partners to help clients become more resilient.
Our growth in participation in cyber extends well beyond the placement of insurance, under the leadership of Tom Doyle, we are leveraging the collective capabilities of Marsh, Guy Carpenter and Oliver Wyman to bring cyber solutions from across our enterprise to clients.
Not only are we helping clients with risk transfer through our insurance businesses, but through our cyber risk assessment tools, we help clients measure and quantify their cyber risk exposure to better inform decisions about cybersecurity, risk mitigation and transfer strategies.
We also help clients with incident response before, during and after events as well as part of our broader efforts to help clients build resilience in the face of a constantly evolving threat landscape.
A second defining challenge of our time is climate change.
Climate and the broader topic of ESG are complex multidimensional challenges, virtually all companies face.
The threats to the changing time may present obvious questions for companies touching everything from strategy to resilience to their workforce and how they communicate.
Even if climate change is a long-term threat, the issue is proximate and has immediate consequences as firms deal with calls for action, strategies to respond and more input from various stakeholders.
Led by Nick Studer, we are bringing together our businesses to help our clients anticipate climate risks and opportunities.
For example, Oliver Wyman is working with our insurance businesses to support clients in the transition to a low-carbon economy and manage climate risk.
We are assisting clients with the development of carbon-light business models and to derisk investment in sustainable technologies.
At Marsh and Guy Carpenter, we are helping to develop innovative climate solutions to bridge protection gaps.
We assist clients with stress testing models, outline the impact of climate change, and providing risk management and insurance services to protect against climate impacts.
And Mercer's responsible investment business helps steward the fiduciaries of investment pools understand how a change in climate could impact investment returns in the future and anticipate them today.
Overall, we are uniquely positioned to help our clients with their most pressing challenges.
Let me spend a moment on current P&C insurance market conditions.
The second quarter marks the 15th consecutive quarter of rate increases in the commercial P&C insurance marketplace.
The Marsh Global Insurance Market Index showed price increases of 13% year-over-year versus 18% in the first quarter.
The pace of price increases continue to moderate but still remains high, reflecting elevated loss activity and concerns about inflation and low interest rates.
Global property insurance was up 12% and global financial and professional lines were up 34%, driven in part by steep cyber increases, while global casualty rates are up 6% on average and U.S. workers' compensation rates declined modestly in the quarter.
Keep in mind, our index skews to large account business.
However, U.S. small middle market insurance pricing continues to rise as well, although the magnitude of price increases is less with the large complex accounts.
Guy Carpenter's global property catastrophe rate online index increased 6% at midyear.
In the second quarter, the market was more orderly and balanced than a year ago, reflecting adequate capital and an increased willingness to deploy capacity.
Measured and moderate single-digit rate increases were typical after two years of double-digit rate increases.
However, programs that had significant losses saw higher increases and capacity remains constrained on certain lines of business, most notably, cyber.
Concerns remain around inflation, losses in certain lines, extreme weather events and the beginning of a new hurricane season.
It is in times like these where our expertise and capabilities shine.
We are working hard to help our clients navigate the current environment.
Now let me turn to our fantastic second quarter financial performance.
We generated adjusted earnings per share of $1.75, which is up 33% versus a year ago, driven by strong top line growth and continued low levels of T&E.
Total revenue increased 20% versus a year ago and rose 13% on an underlying basis, the highest quarterly growth in two decades.
Underlying revenue grew 13% in RIS and 12% in consulting.
Marsh grew 14% in the quarter on an underlying basis, the highest quarterly underlying growth in nearly two decades and benefited from stronger business and renewal growth.
Guy Carpenter grew 12% on an underlying basis in the quarter, continuing its string of excellent results.
Mercer underlying revenue grew 6% in the quarter, the highest in almost a decade.
Oliver Wyman posted record reported underlying revenue growth of 28%.
Overall, the second quarter saw adjusted operating income growth of 24%, and our adjusted operating margin expanded 90 basis points year-over-year.
As we look out for the rest of 2021, we are well positioned.
With 9% underlying revenue growth year-to-date, our full year growth will be strong.
We expect favorable market dynamics to persist for at least the remainder of the year.
Although the pace of growth could moderate versus the second quarter as year-over-year comparisons become more challenging.
We also expect to generate margin expansion for the full year and strong growth in adjusted EPS.
Our results were excellent with record second quarter revenue to earnings, the best quarterly underlying growth in two decades, meaningful margin expansion, and significant growth in adjusted earnings.
Highlights from our second quarter performance included the strongest underlying growth at Marsh since the first quarter of 2003; the strongest at Guy Carpenter in 15 years; solid rebound at 6% at Mercer; and record reported underlying growth at Oliver Wyman.
Second quarter growth in adjusted earnings per share was also impressive, rising at the fastest pace of any quarter in more than a decade.
Consolidated revenue increased 20% in the second quarter to $5 billion, reflecting underlying growth of 13%.
Operating income in the quarter was $1.2 billion, an increase of 39% over the prior year.
Adjusted operating income increased 24% to $1.2 billion, and our adjusted operating margin increased 90 basis points to 26.4%.
GAAP earnings per share was $1.50 in the quarter and adjusted earnings per share increased 33% to $1.75.
For the first six months of 2021, underlying revenue growth was 9%, and adjusted operating income grew 22% to $2.6 billion.
Our adjusted operating margin increased 170 basis points.
Our adjusted earnings per share increased 26% to $3.74.
Looking at Risk Insurance Services.
Second quarter revenue was $3.1 billion, up 21% compared with a year ago or 13% on an underlying basis.
Operating income increased 37% to $950 million.
Adjusted operating income increased 22% to $927 million, and our adjusted operating margin expanded 30 basis points to 32.4%.
For the first six months of the year, revenue was $6.4 billion, with underlying growth of 10%.
Adjusted operating income for the first half of the year increased 19% to $2 billion with a margin of 34.5%, up 110 basis points from the same period a year ago.
At Marsh, revenue in the quarter was $2.7 billion, up 23% compared with a year ago, 14% on an underlying basis.
Even excluding the impact of the revenue adjustment we reported a year ago, underlying revenue at Marsh was up 12%.
Growth in the quarter was broad-based and was driven by robust new business growth and solid retention.
The U.S. and Canada region delivered another exceptional quarter with underlying revenue growth of 15%, the highest result since we began reporting this segment.
In international, underlying growth was 13%, EMEA was up 16%, Asia Pacific was up 10% and Latin America grew 2%.
For the first six months of the year, Marsh's revenue was $5 billion, with underlying growth of 11%.
U.S. and Canada underlying growth was 12% and international was up 9%.
Guy Carpenter's second quarter revenue was $488 million, up 13% compared with a year ago or 12% on an underlying basis.
Growth was broad-based across all geographies and specialties.
Guy Partner has now achieved 7% or higher underlying growth in six of the last eight quarters.
For the first six months of the year, Guy Carpenter generated $1.4 billion of revenue and 8% underlying growth.
In the Consulting segment, revenue in the quarter was $1.9 billion, up 17% from a year ago or 12% on an underlying basis.
Operating income increased 35% to $344 million.
Adjusted operating income increased 34% to $356 million, and the adjusted operating margin expanded by 220 basis points to 19.5%.
Consulting generated revenue of $3.8 billion for the first six months of 2021, representing underlying growth of 8%.
Adjusted operating income for the first half of the year increased 31% to $726 million.
Mercer's revenue was $1.3 billion in the quarter, up 6% on an underlying basis, representing a meaningful acceleration from the first quarter.
Career grew 15% on an underlying basis, reflecting the rebound in the economy and business confidence.
Wealth increased 4% on an underlying basis, reflecting strong growth in investment management offset by a modest decline in defined benefit.
Our assets under delegated management grew to $393 billion at the end of the second quarter, up 28% year-over-year and 3% sequentially, benefiting from net new inflows and market gains.
Health underlying revenue growth was 4% in the quarter, driven by strength internationally.
Oliver Wyman's revenue in the quarter was $618 million, an increase of 28% on an underlying basis.
The second quarter results represent a sharp rebound from the contraction we saw in the second quarter last year.
For the first six months of the year, revenue at Oliver Widen was $1.2 billion, an increase of 19% on an underlying basis.
Adjusted corporate expense was $62 million in the second quarter.
Foreign exchange was a modest benefit to earnings in the quarter.
Assuming exchange rates remain at current levels, we expect FX to have a minimal impact on earnings per share for the remainder of the year.
However, the net benefit credit was $71 million in the quarter.
For the remaining two quarters of the year, we expect our other net benefit credit will be mostly consistent with the level in the second quarter.
Investment income was $19 million in the second quarter on a GAAP basis and $18 million on an adjusted basis and mainly reflects gains on our private equity portfolio.
Interest expense in the second quarter was $110 million compared to $132 million in the second quarter of 2020, reflecting lower debt levels in the period.
Based on our current forecast, we expect approximately $110 million of interest expense in the third quarter.
Our adjusted effective tax rate in the second quarter was 24.4% compared with 25% in the second quarter last year.
Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation.
Excluding discrete items, our effective adjusted tax rate was approximately 25.5%.
Our GAAP tax rate was 31.6% in the second quarter, up from 26.2% in the second quarter of 2020.
The increase reflects a $100 million impact from the revaluation of deferred tax liabilities due to an increase in the U.K. statutory tax rate that goes into effect in 2023.
Through the first half of the year, our adjusted effective tax rate was 24.4% compared with 24% last year.
Based on the current environment, we continue to expect an adjusted effective tax rate between 25% and 26% for 2021, excluding discrete items.
As we currently look out for the balance of the year, we expect our top line growth to remain strong, reflecting the economic rebound and favorable environment.
Keep in mind the second quarter faced the most favorable year-over-year comparison for revenue growth.
As we progress through the rest of the year, this, combined with continued normalization of expenses will result in more challenging comparisons.
However, our businesses have momentum, and we expect positive trends to continue, resulting in strong performance in the second half and a terrific full year.
Turning to capital management, our balance sheet.
We ended the quarter with $10.8 billion of total debt.
This reflects repayment of $500 million of senior notes in April, which completed our JLT-related deleveraging.
Our next scheduled debt maturity is in January of 2022 when $500 million of senior notes mature.
We continue to expect to deploy approximately $3.5 billion and possibly more capital in 2021, of which at least $3 billion will be deployed across dividends, acquisitions and share repurchases.
The ultimate level of share repurchases will depend on how the M&A pipeline develops.
Last week, we raised our dividend 15%, which is the largest increase since the third quarter of 1998.
We also repurchased 2.4 million shares of our stock for $322 million in the second quarter.
Our cash position at the end of the second quarter was $888 million.
Uses of cash in the quarter totaled $993 million and included $241 million for dividends, $322 million for share repurchases and $430 million for acquisitions.
For the first six months, uses of cash totaled $1.4 billion and included $478 million for dividend, $434 million for share repurchases and $473 million for acquisitions.
Overall, we had an exceptional second quarter, positioning us well to deliver strong growth in both revenue and adjusted earnings in 2021.
And operator, we are ready to begin Q&A.
| q2 adjusted earnings per share $1.75.
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I'll then hand the call over to our Head of Operations, Dave Striph, who will speak to the results of our Operating Asset segment.
Jay Cross will provide updates on our development activity in Ward Village.
And finally, our CFO, Correne Loeffler, will conclude the call with a review of our financial results before we open the lines for Q&A.
With that, let me start out by saying our positive second quarter results marked a significant milestone for the Howard Hughes Corporation.
During this time last year, COVID-19 emerged as a significant obstacle that we had to navigate for the better part of the year.
Despite the enormous challenges of the past year, our team of dedicated employees, irreplaceable assets and highly sought after communities withstood the various hurdles presented by the pandemic.
I am pleased to report that all of our business segments are demonstrating great strength and resiliency and now have either surpassed or are closely approaching pre-pandemic levels.
Our Master Planned Communities continue to generate strong results with the acceleration of land sales driven by robust home buyer demand, demand that began to strengthen in the second half of last year and is carried into the first half of 2021.
An integral part of our strategy is our ability to sell residential land to homebuilders at higher prices over time, driven by the amenities created by our commercial developments that are integrated throughout our communities.
During the quarter, our commercial assets delivered strong year-over-year and sequential NOI growth in our Operating Asset segment with notable improvements across retail, hospitality and the Las Vegas Ballpark.
Turning to condo activity in Hawaii.
Ward Village has continued to experience elevated sales despite being limited to a mostly virtual condo tour experience.
All three towers currently under construction are now 86% presold and are all progressing on time and on budget.
Finally, at the Seaport, we experienced improvement with the continuation of the greens, increased rooftop events and robust restaurant activity, all of which continue to drive increased foot traffic to the area.
Now taking a deeper dive into the drivers of our MPC segment.
Over the past several quarters, our communities located in the Las Vegas and Houston regions were able to capitalize on the demand from out-of-state migrations as homebuyers living in densely populated high-cost states set a better quality of life with a focus on expansive open spaces and best-in-class amenities.
This view was further solidified by the latest midyear report released in July by the Robert Charles Lesser Corporation, where our communities in Summerlin and Bridgeland ranked among the top-selling Master Planned Communities in the country.
Summerlin was ranked as the third top-selling MPC in the U.S. and was the top-selling MPC in Nevada.
Bridgeland was ranked 13th on the national list.
While some of the pandemic-driven migration trends that I just highlighted have moderated, regional builder inventories have been depleted and remain at or near all-time lows.
Additionally, homebuilders have recently shifted to a just-in-time home delivery strategy in order to combat supply chain constraints, which have also contributed to a reduced available supply.
Overall, housing demand within our communities has remained strong, and new home permits have remained elevated, all of which point to increased homebuilder demand for land to replenish their depleted inventories.
During the quarter, our MPCs delivered tremendous results as the strength in land sales, combined with earnings from our Summit joint venture in Summerlin, helped drive the segment's earnings higher.
In addition, new home sales, a leading indicator of future land sales, grew 23% year-over-year.
Summerlin had an all-around great quarter, selling 49 acres of residential land, while also increasing its price per acre 14% compared to the same period last year.
Builders continue to purchase more of our land to keep up with demand, which is evidenced by the closing of three super pad sites during the quarter.
Additionally, Summerlin saw a 66% year-over-year increase in new home sales, demonstrating the demand from homebuyers in this region remains strong.
Another significant driver to Summerlin's success was derived from the earnings generated at The Summit, our joint venture with Discovery Land.
The Summit's increase in earnings was due to closing of 16 units during the quarter versus three units during the prior year period.
In Bridgeland, land sales softened in the quarter with 25 acres of residential land sold compared to 38 acres in the prior year period.
Bridgeland's new home sales slowed a bit during the quarter as well, as homebuilders paused the selling of lots and began listing homes on the market at a much later stage in the construction process.
A change in sales strategy for homebuilders in Bridgeland that was driven by ongoing supply constraints that impacted material costs and delivery times.
We view both the decline in land sales as well as the decline in home sales this quarter as a temporary pause driven by this change in homebuilder sales strategy that meaningfully limited supply and was not the result of any change in underlying demand.
As builders now begin to release these partially constructed new homes to the market and return to the more traditional model of selling lots, we expect that sales will rebound in the coming quarters.
The Woodland Hills delivered positive results across the board with significant year-over-year increases in land sales, new home sales and growth in the price per acre of land sold.
The results produced by this MPC continue to impress and have maintained an accelerated pace over the past several quarters.
Turning to the Seaport.
We continue to experience numerous areas of improvement with the reopening of the Manhattan economy.
We have begun hosting various rooftop events, such as high school and college graduations and, most notably, ESPN's Annual SB awards.
We continue to see strong demand for the future events at The Rooftop, which is a great sign coming out of the pandemic.
We've also made tremendous progress with our restaurant space.
During the quarter, we increased the number of open restaurants from two to seven.
Of these openings, two were related to concepts by acclaimed chef, Andrew Carmellini, restaurants Carne Mare and Mister Dips.
Both of these have displayed very strong initial results.
Lastly, we relaunched our Summer Concert Series on The Rooftop at Pier 17, which was canceled last year due to the pandemic.
We held our first concert in late July to a sold-out crowd.
And have several more concerts lined up through October, several of which are already sold out.
With that, I'll hand the call over to Dave Striph.
Results of the second quarter that David just highlighted clearly display the strength of our business as the economy continues to reopen.
In particular, our Operating Asset segment generated robust results that I would like to touch on in more detail.
Our commercial properties delivered improved results during the quarter as the portfolio continues to inch closer to pre-pandemic levels.
Our Operating Assets segment generated NOI of $57.9 million in the quarter, which was a material improvement year-over-year and sequentially.
The results delivered in the second quarter by our retail properties were one of the top highlights from our portfolio of high-quality assets.
Retail NOI increased for the third consecutive period totaling $14.8 million in the quarter, increasing 72% year-over-year and 23% sequentially.
While we generally experienced improvements throughout the majority of our retail assets, the largest drivers of this impressive performance were concentrated in Downtown Summerlin, Ward Village and the Outlet Collection at Riverwalk.
Specifically in Downtown Summerlin, we are beginning to see activity surpass pre-pandemic levels as sales per square foot in June totaled $668 compared to $636 in June of 2019.
Our retail assets have continued to improve with consecutive increases in collection rates, which have been steadily improved to 80% from a low of 50% in the second quarter of last year.
Hospitality was another sector severely impacted by COVID, which caused our hotels to shutter for an extended period of time just over one year ago.
Our hotels have experienced a meaningful recovery and during the quarter, generated $2.7 million of NOI compared to a slight loss in the prior quarter and a $1.8 million loss in the prior year period.
The improved occupancy at our hotels was largely driven by an increased volume of leisure travelers during May and June.
The Las Vegas Ballpark had a tremendous quarter, generating quarterly NOI of $3.1 million.
This was substantially higher than the $1.1 million loss reported during the prior year period due to the cancellation of the Minor League Baseball season in 2020.
For 2021, the season began in May, and our team, the Las Vegas Aviators has hosted several games at full capacity with additional games scheduled to continue through the majority of the third quarter.
The continuous lease-up of our latest multifamily assets helped drive quarterly NOI to $7.4 million, a 94% increase year-over-year and a 29% increase sequentially.
Just as we have seen robust demand in single-family housing, interest remains high for available units at our multifamily properties.
With most of our assets leasing at or above pro forma projections, we have additional projects underway in Bridgeland, Summerlin and Downtown Columbia to further capitalize on this momentum.
Office NOI increased 2% sequentially to $26.3 million as strong leasing velocity more than offset the tenant expirations experienced during the prior quarter.
I'm pleased to report that we experienced a rapid increase in office leasing momentum during the quarter, specifically in the Woodlands.
Year-to-date, we have executed 216,000 square feet of new and renewal leases with 95% of that activity occurring in the second quarter.
In addition, we have nearly 300,000 square feet of leases in progress, predominantly concentrated in the Woodlands.
This provides a strong pipeline of opportunities that could potentially close in the second half of 2021.
Furthermore, we have limited lease expirations that do not exceed 10% of our office portfolio during a given year until 2025.
With that, I will hand the call over to our President, Jay Cross.
As you can tell from the comments thus far, demand within our communities from both the residential and commercial perspective remains strong.
As such, we need to ensure that our communities are equipped with the right products that residents and tenants are seeking.
Last quarter, I highlighted the commencement of two million square feet of construction across several asset types, including multifamily, office and a condo tower.
We've made great progress on the initial construction phase of these projects.
And while we have encountered material shortages in some instances due to the supply constrained market, we do not expect any material impacts over the course of development.
This is due to our rigorous budgeting process and ongoing supply chain management.
There are a number of additional projects on the horizon as we continue to see an abundance of opportunities to diversify our product mix across the portfolio.
For instance, in Bridgeland, we continue to experience strong demand for housing and see a need to offer additional products into the market.
As I mentioned during our Investor Day and on last quarter's call, we plan to develop a single-family for rent community in Bridgeland that will encompass 263 homes distributed across three product types.
This is a first for Howard Hughes and will offer a complementary product between single-family for purchase and our multifamily offerings.
The thesis is to provide tenants the flexibility of renting while still having access to many of the offerings a traditional home can provide such as three- and four-bedroom configurations, private outdoor space and an attached garage.
The typical renter might be an executive looking for a temporary housing solution, a single parent or young couples for the family seeking a temporary home as they save to make a down payment for their first home.
The single-family for rent project is still in the preplanning stages, and we look forward to providing additional updates in the coming quarters.
Seaport, we continue to make great strides on the development front.
Tin Building remains on track for completion by the end of 2021, and we look forward to having an official brand opening in the spring of '22.
The exterior of the building is largely complete, the interior is well along and the integration of omnichannel capabilities for enhanced mobile ordering and delivery will establish the Tin Building as a one-of-a-kind food home.
At 250 Water Street, we continue to advance our plans for this site following the New York City Landmark Preservation Commission's approval of our proposed design for a 28-story mixed-use building.
The proposal is now moving through the city's land use review process to obtain final approvals anticipated later this year.
Additionally, we have agreed with the city on an extension to our ground lease to 99 years, subject to a separate land use review process, which will also include our contribution to the Seaport Museum's revival, improvements to the Esplanade and the opening of an important drive way around the Tin Building.
This separate process is also on track for year-end completion.
Shifting our attention to Hawaii.
At Ward Village, condominium sales continued to progress at elevated levels.
During the quarter, we contracted to sell 45 condos, which has further reduced our already limited supply of available units.
The pace of continued sales has been incredible, especially when one considers the impacts of Hawaii's COVID-related travel restrictions.
Last quarter, we broke ground our latest tower, Victoria Place.
And of its 349 units, only 23 condos remain, which speaks to the level of demand we are seeing in Ward Village.
Our other two towers under construction, 'A'ali'i and Ko'ula are well sold at 87% and 81% and remain on time and on budget, with completion expected in the fourth quarter of 2021 and 2022, respectively.
Finally, we sold out our third condo tower in Hawaii during the quarter with the closing of the final unit at Anaha for $12.9 million.
During the second quarter, our operational teams were able to capitalize on improving market conditions and delivered improved financial performance across all of the company's business segments.
First, our MPCs delivered strong results in the quarter with earnings before taxes, or EBT, of $69.8 million, which is a 10% increase compared to an EBT of $63.4 million in the prior quarter and a 66% increase compared to an EBT of $42.2 million in the prior year period.
Next, our operating assets generated $57.9 million of quarterly NOI, which represented a 20% increase compared to an NOI of $48.4 million in the prior quarter, and a 42% increase compared to an NOI of $40.8 million in the prior year period.
Lastly, we sold 45 condo units in Hawaii, just one shy of the 46 units sold in the prior quarter and a 246% increase compared to the 13 units sold in the prior year period.
At the Seaport, we recorded a $4.4 million loss in NOI, which is only 1% lower compared to the prior quarter and 18% lower compared to an NOI loss of $3.7 million in the prior year period.
Despite the loss in NOI, we experienced a meaningful improvement in visitor traffic.
It was driven by an increase in events and strong restaurant activity.
Even with the impact of labor shortages, several of our restaurant concepts were still able to meet or exceed their stabilization targets based on recent sales per square foot.
This demonstrates the strength of the customer demand.
We are very pleased with our quarterly performance and look forward to continuing this momentum into the second half of the year.
Taking a look at GAAP earnings.
For the second quarter, we reported a net income of $4.8 million or $0.09 per diluted share compared to a net loss of $34.1 million or $0.61 per diluted share during the prior year period.
The increase in net income from the prior year period was primarily driven by strong results generated by our MPC and Operating Assets segments.
Aided by our strong second quarter performance, I am pleased to report that we remain on track to meet all of our previously disclosed guidance targets established at the beginning of the year.
To reiterate our 2021 guidance, we expect MPC EBT to range between $210 million to $230 million and expect operating asset NOI to range between $195 million to $205 million.
For the first half of 2021, our G&A totaled $42.1 million, representing a 31% decrease compared to $61.3 million in the prior year period.
Based on our current run rate, we expect G&A to be within our guidance range of $80 million to $85 million in 2021.
Based on the presale volume at 'A'ali'i as well as our other sales at Ko'ula and Anaha, we remain confident we can generate between $100 million to $125 million of condo profits in 2021, which was our original guidance for the full year.
Once construction is complete at 'A'ali'i in the fourth quarter, we will close on the units currently under contract and begin to recognize the associated sales proceeds.
Now turning our attention to noncore asset sales.
In May, we sold Monarch City, a 229-acre land parcel outside of Dallas, resulting in a book gain of $21.3 million before realizing a noncash tax expense of $4.6 million.
This sale generated net proceeds of $49.9 million, bringing our total net proceeds from noncore asset sales to $263.7 million since the fourth quarter of 2019.
We will continue to pursue the sale of our other noncore assets and remain focused on achieving maximum value for these dispositions.
Finally, as we turn our attention to the balance sheet.
We continue to maintain a robust liquidity position and a strong balance sheet.
We ended the quarter with just over $1.2 billion of liquidity that comprised of $1.1 billion of cash and $185 million of undrawn revolving credit facility.
Over half of our debt issuances don't mature until 2026 or later.
And we have ample liquidity to address our near-term maturities as well as to fund our net equity requirements for our development projects.
Our strong financial position provides us the flexibility to nimbly execute on future projects, targeting outsized risk-adjusted returns.
Before we open up the lines for Q&A, I'd just like to take a minute to reiterate a few key points.
First, our business is designed to deliver perpetual cycle of value creation.
As we sell land to homebuilders, new residents move into our communities and create a need for commercial amenities.
As we build out these amenities by constructing commercial assets, it helps drive the overall value of our land hire.
We have nearly 10,000 acres of raw land across the country that enables us to repeat this process for decades to come.
This model remains true for our condo developments in Ward Village, but on a vertical level, where we have nearly five million square feet of entitlements remaining.
Second, our strong balance sheet leaves us well positioned to evaluate opportunities and react quickly based on current market conditions.
As Jay mentioned, we have already commenced two million square feet of development in the first half of 2021, and are in the early stages of planning for additional projects.
Third, our management team is now fully established.
We come from unique backgrounds with diverse expertise in development, finance and operations that when mended together, position us to nimbly execute and deliver superior results.
Combined with the support of our Board, we're all aligned and focused on creating meaningful value for all of our stakeholders.
Lastly, we finished the first half of 2021 with strong operational and financial performance across the board.
We believe our business is poised for continued growth, and we are well positioned heading into the second half of 2021 as we remain on target to achieve our full year guidance.
With that, I'd now like to begin the Q&A section of the call.
We'll answer the first few questions that have been generated by Say Technologies and will be read by John Saxon.
John, can you read the first question?
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Before we begin I would like to direct you to our website www.
To start the call I'd like to provide a brief recap of our quarterly performance and cover the highlights of both our MPC segment and the Seaport.
Our Head of Operations Dave Striph will cover the results of our operating assets segment; followed by our President Jay Cross who will provide details on our development activity and speak to the results at Ward Village.
And finally our CFO Correne Loeffler will conclude the call with a review of our financial results before we open the lines for Q&A.
Before we dive into the results of the quarter I would first like to highlight the release of Howard Hughes 2020 annual ESG report which was published just a few days ago and can be found on the Sustainability portion of our website.
This report displays the impactful ESG results we have produced so far and reflects our commitment to environmental and social best practices which are integrated throughout our communities across the country.
Now on to the highlights of the quarter.
We closed out the third quarter of 2021 with strong results across all segments as Howard Hughes continues to capitalize on the high levels of demand that exist throughout our various mixed-use communities.
To put our performance in perspective most of HHC's year-to-date results in 2021 have surpassed the year-to-date pre-COVID activity of 2019.
MPC EBT is up 29%.
Operating asset NOI is higher by 1% even with lingering impacts from the pandemic.
And Ward Village condo sales were just shy of 2019 levels despite having limited available inventory.
And this was all accomplished while reducing our G&A cost by 30%.
During the third quarter we saw healthy land sales driven by superpad sales in Summerlin.
Our operating asset NOI grew for the fourth consecutive quarter.
Condo sales in Ward Village accelerated despite a shrinking supply of available units under construction and the Seaport saw steady improvements from the return of the concert series at Pier 17 and the growing popularity of our unique restaurants.
We expect these results to grow stronger especially with the recent addition of Douglas Ranch our latest MPC spanning 37000 acres in Phoenix West Valley.
In October we announced our $600 million all-cash acquisition of this fully entitled shovel-ready MPC which further adds to our depth of opportunities.
By strategically redeploying the net proceeds from our noncore asset dispositions we now have the ability to transform this blank canvas into a leading community focused on sustainability and technology a community that is entitled for 100000 homes 300000 residents and 55 million square feet of commercial development.
Following this transaction we are still left with a healthy cash position to continue executing on our existing development pipeline to meet the growing demand within our MPCs.
While we have already had approximately two million square feet of development underway we're pleased to announce new commercial projects in the medical office and single-family for rent sectors which Jay will touch on in a moment.
But we're not stopping there.
We've long believed that Howard Hughes trades at a steep discount relative to its net asset value.
As such we are pleased to announce our recent Board-approved share buyback program amounting to $250 million.
We believe there is great value that is yet to be reflected in our stock price and view this buyback initiative as an excellent use of capital that when coupled with our development projects will help deliver meaningful value.
All of these recent announcements put a significant amount of capital to work to unlock tremendous value for our dedicated shareholders.
Now let's turn to the performance of our master planned communities.
Our MPCs had another great quarter despite encountering headwinds including supply constraints the Delta variant and weather delays particularly in Houston.
Housing supply still remains low throughout Houston and Las Vegas while demand continues to persist at elevated levels which leaves us well positioned to deliver residential land at appreciating prices.
Homebuilders are currently sitting on record low inventory and they will need to replenish their depleted landholdings in order to meet its outsized demand.
During the third quarter our MPCs recorded earnings before taxes of $54.1 million a 48% increase compared to last year largely driven by the robust superpad sales activity in Summerlin as well as the strong performance of our Summit joint venture.
In addition to these impressive results we continue to see a steady pace of new home sales.
Proving the strength of our communities remains clearly intact.
So far in 2021 there have been 2163 new homes sold in our MPCs a 6% increase over last year indicating further demand lies ahead.
Overall we're seeing a lot of positive momentum when it comes to land sales.
And looking ahead we expect our fourth quarter to be the strongest quarter yet.
As such we are raising our full year 2021 MPC EBT guidance by $60 million at the midpoint to a range of $275 million to $285 million primarily due to stronger-than-expected superpad sales in Summerlin.
This is our second time raising MPC guidance in 2021 as this segment continues to exceed our expectations.
Speaking of Summerlin this MPC drove a substantial portion of the positive results for the quarter selling 47 acres mostly made up of superpads.
This MPC generated $45.6 million in EBT a staggering 130% increase compared to the prior year period.
Additionally year-to-date new home sales have eclipsed over 1200 units and are 20% higher over the same period in 2020 which if you recall was one of the strongest years in Summerlin's history.
Another significant driver to Summerlin's results has been our joint venture at the Summit our exclusive 550-acre community in Summerlin.
The total earnings from our share of equity during the quarter totaled $8.3 million driving year-to-date earnings to $54.6 million versus only $4.4 million during the first nine months of 2020.
The activity at the Summit over the last year has been tremendous and these positive results have been primarily attributed to an influx of California buyers purchasing these custom lots and built product.
Turning over to Houston.
Our Bridgeland MPC experienced a decline in land sales as supply constraints continues to have an impact.
As we highlighted last quarter a majority of the homebuilders have extended their lead times for home deliveries due to ongoing supply disruptions that have resulted in higher material costs and delayed delivery times.
We've started to see some of these bottlenecks subside and expect a more normalized environment heading into next year.
This quarter's land sales were also impacted by inclement weather as significant rainfall in the Houston area delayed horizontal development resulting in slower lot deliveries to homebuilders.
Despite these factors demand in the area remains incredibly strong.
We view the significant imbalance between undersupply and robust demand as a strong catalyst for elevated activity as we move into 2022.
Lastly in the Woodlands Hills despite lower quarterly land sales due to the similar impacts experienced in Bridgeland the residential price per acre grew 18% over the prior year period to $353000 while new home sales were up 15% which points to future growth ahead as we accelerate activity across this MPC.
Moving over to the Seaport.
We saw heightened activity throughout the quarter as events and concerts at Pier 17 helped draw in spectators.
During the quarter NOI improved 43% compared to the same period in 2020 indicating the return to normalcy is near.
In July we launched our 11-week summer concert series on the Pier 17 rooftop.
Of the 30 concerts hosted 20 were fully sold out.
The turnout for these contracts proved to be very strong with approximately 74000 guests in attendance representing 90% of our available ticket inventory.
In addition to concerts we hosted several other major events including the SPs in July and the world tour for the Fujis who debuted at Pier 17 for their first show together in 15 years.
It's these type of special events that continue to set the Seaport apart from other destinations in Manhattan.
All of these events help drive substantial traffic to our restaurants.
We saw an uptick in activity as more and more locals and tourists experience our variety of cuisines from acclaimed New York City chefs.
As a result our restaurant saw their average monthly sales increased 65% versus last quarter.
While labor constraints have marginally improved we continue to see improvements in this space quarter after quarter.
Many of our restaurants are now closely approaching their stabilization targets as higher volume has contributed meaningfully to the growth of our bottom line.
Overall we see the Seaport heading in the right direction and the upcoming completion of the Tin Building followed by its grand opening in the first half of 2022 will help bring the Seaport closer to stabilization.
With that I'm going to stop and hand the call over to Dave Striph.
Our operating assets had a standout quarter as our portfolio delivered strong sequential and year-over-year NOI growth.
For the third quarter we reported $60.6 million of NOI.
When you layer in the activity from our three hotels that were sold in September this segment generated $62.9 million.
This marks the fourth consecutive increase in quarterly NOI as our portfolio of income-producing assets continues to expand.
As the economy continues to reopen and activity within our regions improves we have seen a corresponding increase in our retail NOI.
These assets generated $16.1 million of NOI during the third quarter the highest level since the first quarter of 2019.
This is in large part due to a stronger tenant base coming out of the pandemic in addition to consistent increases in collections.
For the third quarter we collected 83% of our retail rents with Summerlin leading the charge for the highest collections in our portfolio.
As we have highlighted previously our retail at Ward Village has been materially impacted over the last several quarters due to sharp declines in tourism as a result of the pandemic.
However as travel restrictions to Oahu have been recently eased we've seen a corresponding improvement in our retail performance.
In fact Ward was the largest contributor to the sequential increase in retail NOI partly as a result of a onetime payment of deferred rent of approximately $1.4 million.
We expect our retail portfolio to continue on this path of growth as collections work back to pre-pandemic levels coupled with the continuous lease-up of our remaining space to creditworthy tenants.
At the Las Vegas Ballpark we were able to host the remainder of the aviator season at 100% capacity.
This resulted in $5.4 million of NOI a 74% increase over the last quarter where the beginning of the season was limited to 50% capacity to comply with COVID-19 protocols.
This is a stark comparison to the same period in 2020 where the ballpark lost nearly $1 million as the season was canceled entirely due to the pandemic.
Our multifamily assets produced $9.2 million of NOI during the third quarter a 24% sequential increase almost exclusively attributable to strong leasing momentum at our most recent developments.
In 2020 we completed construction on three multifamily projects between the Woodlands and Columbia.
And during the third quarter these new developments made up 2/3 of the increase in sequential NOI growth.
In addition to this robust leasing velocity we've been able to push rents higher and are currently commanding some of the highest rents compared to our surrounding metro areas.
In addition to our existing product we have three more multifamily developments underway in Downtown Columbia Bridgeland and Summerlin to meet this ongoing demand which will drive our NOI even higher.
Our office assets have experienced steady increases in NOI over the past few quarters despite a sluggish recovery in the return to office environment.
For the third quarter we generated $27.8 million in NOI a 6% increase sequentially and a 17% increase compared to the same period last year.
The bulk of this increase was driven by the roll-off of free rent at select assets including 6100 Merriweather our latest office building in Downtown Columbia.
Overall we are seeing a noticeable increase in leasing activity and expect our pipeline of opportunities to accelerate into 2022 as tenants look for additional space and folks continue to return to an office setting.
To build on the momentum we are seeing within our operating asset portfolio we are pleased to announce some new product types in addition to our traditional mix.
Recently we have expanded into the medical office space to continue to provide residents with the highest quality convenient medical care.
We have noticed a growing need for this type of asset as the volume of residents in our communities continues to grow.
With that we are pleased to announce the launch of two medical facilities spanning 106000 square feet throughout Downtown Columbia and the Woodlands.
In Downtown Columbia we will launch our first medical office building on the shoreline of Lake Kittamaqundi.
This new development will sit adjacent to our successful Whole Foods in the former Rouse headquarters building helping to establish Downtown Columbia as a prominent health and wellness destination.
Encompassing approximately 86000 square feet we have already secured an anchor tenant for roughly 20% of the entire space.
We expect to break ground on this project during the first half of 2022 and this will kick start our major development pipeline in the Lakefront District.
In The Woodlands we will launch development on a 20000 square foot build-to-suit medical office building for Memorial Hermann.
This project will serve as a primary local facility to cater to the medical needs of nearby residents and is expected to break ground by the end of this year.
Lastly in Bridgeland we will be constructing our first single-family for rent community which will commence in the first half of 2022.
These 263 homes will span a combined 328000 square feet and offer a unique hybrid between single-family homes for sale and multifamily for rent adding yet another new product to our operating asset portfolio.
Given this is an extension of multifamily we plan to leverage the expertise of the property managers who oversee our existing portfolio in Houston to assist in managing this build-to-rent community.
In total these three projects represent over 430000 square feet and $114 million of development as we continue to put our capital to work and enhance our stream of recurring income.
We have already had a number of developments under construction in Summerlin Columbia and Bridgeland so the announcement of these additional developments demonstrates the immense demand we are seeing throughout all our regions.
Moving to the Seaport.
Construction of the Tin Building is now in the final stages and will be substantially complete by the end of the year.
The launch of the Tin Building has been highly anticipated and our team has been working in close partnership with the Jean Georges team to prepare for the grand opening of this 53000 square foot food hall in the first half of 2022.
Lastly we continue to make great strides through New York City's ULURP process to obtain the necessary approvals for the development of a 26-story mixed-use building at 250 Water Street.
In October the City Planning Commission granted us approval for this project another hurdle passed through this rigorous land use process.
We are nearing the end of our review which we expect to conclude before the end of the year at the New York City Council.
The prospective development would replace the one acre parking lot with market rate and affordable residences commercial and community space further enhancing the character and vibrancy of this neighborhood.
We look forward to updating you on our continued progress as we continue to close in on the final stages of this process.
At Ward Village the pace of condo sales continues to exceed all expectations.
Despite having less inventory under construction the number of condos contracted during the quarter has only grown.
Across our three recent towers 'A'ali'i Koula and Victoria Place we were 90% presold as of the end of the quarter with Koula and Victoria Place still under construction.
This robust velocity has led to the presales launch of our eighth tower The Park.
Presales activity at The Park began in July.
And as of the end of October we have already contracted 64% of the total units.
The sales activity across these four towers just in the third quarter translates to 316 contracted units secured by hard deposits during a period of time when travel to the island of Oahu was discouraged surrounding Delta variant concerns.
The pace of these sales is truly remarkable.
We've been able to establish a mark on this community where residents want to live and our historical sales pace has reflected increasingly faster sellouts with the launch of each new tower.
Subsequent to the end of the quarter we completed construction on 'A'ali'i and began welcoming residents to their new homes in October.
As of November two we closed on 495 units totaling $332 million in net revenue revenue that will be recognized on our fourth quarter income statement and will contribute meaningly to our bottom line.
With that I'd like to now hand the call over to our CFO Correne Loeffler who will review our third quarter financial performance.
The results of the third quarter clearly demonstrates the strength of our business as we continue to benefit from the strong demand throughout our communities across the country.
In summary our MPCs produced $54.1 million of earnings before tax or EBT during the third quarter a 22% decrease compared to the last quarter and a 48% increase compared to the prior year period.
It's important to note that while EBT decreased from the last quarter it was largely attributed to nonrecurring costs such as the early extinguishment of debt upon the retirement of our Woodlands and Bridgeland credit facility.
In addition the top line only declined slightly due to the lack of commercial land sales in Summerlin compared to the last quarter.
Our operating assets recorded a $62.9 million of NOI when including the contribution from the three Woodlands-based hotels which represented a 9% increase compared to the last quarter and a 65% increase compared to the prior year period.
As Dave touched on earlier the strong performance was due to a continued improvement across our retail portfolio a strong Minor League season at our ballpark robust lease-up activity at our multifamily assets and the roll-off of free rent at select office assets.
At Ward Village we contracted 316 condo units which were made up of 61 units from our three towers under construction and 255 units at the park which launched presales during the quarter.
Combined sales at 'A'ali'i Koula and Victoria Place were up 36% compared to the prior quarter and increased 154% compared to the prior year period.
Finally at the Seaport we recorded a $3.6 million loss in NOI resulting in a 19% improvement over the last quarter and a 43% improvement compared to the prior year period.
Taking a look at GAAP earnings for the third quarter.
We reported net income of $4.1 million or $0.07 per diluted share compared to net income of $139.7 million or $2.51 per diluted share in the prior year period.
The decrease in net income from the prior year was attributed to a onetime noncash gain of $267.5 million for the third quarter of 2020 which was related to the deconsolidation of our 110 North Wacker office tower in Chicago.
If we remove this onetime gain our quarterly earnings were substantially higher than our prior year period due to strong activity to play throughout the entire business.
With only one quarter remaining to finish out the full year we remain on track to meet or exceed all previously disclosed guidance targets for 2021.
As David mentioned earlier our MPC segment has done particularly well which has led us to raise our EBT target for the second time this year.
Our previous guidance range for 2021 was $210 million to $230 million.
We are now raising our guidance by $60 million at the midpoint thus revising our range to $275 million to $285 million as we are expecting a strong end to the year.
Given the recovery we are experiencing in our operating assets we are raising our full year NOI guidance by $5 million to a range of $200 million to $210 million.
We are raising this segment's guidance despite the fact that we will not receive any hospitality-related NOI during the fourth quarter as we just sold our Woodlands hotels in September for $252 million.
The sale of these assets generated $120 million of net proceeds and brings our total net proceeds from noncore asset sales to $376 million since the announcement of our strategic transformation plan in late 2019.
We are also revising our full year condo profit guidance at Ward Village by $7.5 million at the midpoint.
Our previous guidance range for 2021 was $100 million to $125 million.
With elevated condo sales following the completion of 'A'ali'i in October we are expecting condo profits to range between $115 million to $125 million.
Please note that this target excludes the $20 million repair cost incurred at Waiea during the first quarter which we fully expect to be reimbursed for.
Lastly we remain on track to meet our previously disclosed G&A guidance of $80 million to $85 million for 2021.
Now let's take a look at our balance sheet for the quarter.
We ended the third quarter with $1 billion of cash on hand leaving us plenty of runway to execute on the recent capital initiatives we discussed earlier.
Additionally we closed on several financings at attractive rates while at the same time extending our maturity profile.
A couple of our recent financings include two construction loans for our latest project in Downtown Summerlin a $75 million loan for our 1700 Pavilion office development and a $59.5 million loan for our Tanager Echo multifamily development.
In addition we refinanced The Woodlands and Bridgeland credit facility into a new $275 million loan secured by Bridgeland notes receivables and land to support future horizontal development.
Lastly subsequent to quarter end we closed on a $250 million loan for 1201 Lake Robbins resulting in net proceeds of $248 million which helps elevate our overall cash position.
Additional activity following the close of the quarter include the repayment of 'A'ali'i construction loan upon the completion of the project.
We continue to push out our near-term maturities and remain focused on executing new financings to support our latest development projects as well as securing long-term funding for our stabilized assets.
We're going to open up the lines for Q&A.
But before we do I just want to hit on a few key points.
First we remain committed to driving our net asset value higher on a per share basis and are laser-focused on closing the gap between our stock price and the true inherent value of Howard Hughes.
And the actions taken over the last quarter to deploy capital into projects that we believe will achieve outsized risk-adjusted returns reflects that strategy.
We acquired a new fully entitled shovel-ready MPC.
We announced the launch of three new development projects and we announced the $250 million share buyback.
All of these initiatives will unlock tremendous value for our shareholders in the near medium and long term.
Second our balance sheet remains strong even after allocating capital to the various projects I just mentioned.
Our disciplined capital allocation approach has allowed us to conserve capital and leaves us with sufficient excess liquidity to evaluate additional opportunities to further expedite growth.
In addition the cash flow generated by future land sales condo sales and recurring NOI combined with the proceeds from our remaining noncore asset sales will only drive our cash position higher.
Third our financial results through 2021 represents the strength of our business as we are now exceeding pre-COVID levels and the guidance targets we have established for the full year points to an even stronger fourth quarter ahead.
With that we'd now like to begin the Q&A section of the call.
We will answer the first few questions that have been generated by Say Technology and will be read by John Saxon.
John can you please read the first question?
| compname reports q3 earnings per share $0.07.
q3 earnings per share $0.07.
qtrly earnings per share $0.07.
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Actual results may differ materially from those indicated.
The non-GAAP financial measures are not meant to be considered superior to or a substitute for results from operations prepared in accordance with GAAP.
In accordance with Regulation G, you can find the comparable GAAP measures and reconciliations on the Investor Relations section of our website.
The strength of our leading non-clinical portfolio was clearly demonstrated in our second quarter financial performance.
Robust industry fundamentals are leading to unprecedented client demand across most of our businesses, and we're extremely well-positioned to succeed in this environment.
Second quarter organic growth-revenue growth was in the mid-teens, even after normalizing for last year's COVID-19 impact and exceeded the long-term low double-digit target that we recently provided at our Investor Day in May.
Clients are increasingly choosing to partner with us for our flexible and efficient outsourcing solutions, the scientific depth and breadth of our portfolio, and our unwavering focus on flawlessly serving the diverse needs.
Utilizing our capabilities enables them to drive greater efficiency and accelerate the speed of their research, non-clinical development and manufacturing programs.
We believe that the efforts we have made and continue to make to differentiate ourselves from the competition now critical as clients choose to work with a smaller number of CROs who offer broader scientific capabilities.
Due to the sustained demand, we are keenly focused on the execution of our strategy.
We are strengthening our portfolio as we did through the acquisition of gene therapy CDMO, Vigene Biosciences in late June, strategically adding staff and capacity to accommodate the robust demand and support our clients and enhancing our digital enterprise to provide greater connectivity and exceptional service to them.
We believe we will make these investments and remain well-positioned to achieve our operating margin target of 22.5% in 2024.
We believe the success of our strategy is reflected in our second quarter performance.
So let me provide some of the highlights.
Quarterly revenue surpassed $900 million for the first time and a $914.6 million in the second quarter of 2021, represented a 34% increase over last year.
Organic revenue growth of 24.1% was increased by approximately 8%, when compared to last year's COVID-19 impact in the second quarter of 2020, with the greatest impact in the Research Models and Services segment.
Even after normalizing for the COVID impact, we reported mid-teens organic growth, with double-digit increases across all three business segments.
The operating margin was 20.8%, an increase of 350 basis points year-over-year.
The improvement was principally driven by the RMS segment, reflecting operating leverage from significantly higher sales volume for Research Models, due in part to the comparison to last year's COVID-19 impact.
Notwithstanding this favorable year-over-year comparison, we were pleased with the margin progression in the first half of the year and are on track to achieve a full year operating margin of approximately 21% or 100 basis points higher than last year.
Earnings per share were $2.61 in the second quarter, an increase of 65.2% from $1.58 in the second quarter of last year.
This result widely exceeded our prior outlook of more than 50% earnings growth for the quarter, primarily as a result of the exceptional demand environment.
Based on the second quarter performance and our expectation for sustained demand through the remainder of the year, we are increasing our revenue growth and non-GAAP earnings per share guidance for 2021.
We now expect organic revenue growth in a range of 13% to 15%, 100 basis point increase from our prior range.
Non-GAAP earnings per share are expected to be in the range from $10.10 to $10.35, which represents 24% to 27% year-over-year growth and an increase of $0.35 at midpoint from our prior outlook.
We attribute this exceptional performance and outlook to the success of our ongoing efforts to enhance our position as the leading non-clinical contract research and manufacturing organization, as well as the pace of scientific innovation that's fueling a significant increase in biotech funding and FDA approvals, both of which are tracking to near record levels through the first half of the year.
I'd like to provide you with details on the second quarter segment performance, beginning with the DSA segment.
Revenue was $540.1 million in the second quarter, an 18.1% increase on an organic basis over the second quarter of 2020, driven by broad-based demand for both Discovery and Safety Assessment Services.
COVID only had a small impact on the DSA segment last year, so it wasn't a meaningful driver of the year-over-year growth.
Safety Assessment business continued to perform exceptionally well, reflecting robust demand from both biotech and global biopharma, clients and price increases.
Bookings and proposal volume continued to achieve record highs in the second quarter, with strength across all regions and major service areas.
The strength of biotech funding is enabling clients to meaningfully invest in early stage programs.
And due to the unprecedented demand, we are now booking work into next year.
As I mentioned last quarter, clients are expanding their preclinical pipelines and intensifying their focus on complex biologics to ensure they do not delay their research, we believe clients are securing space with us further in advance, which, in turn, provides us with greater visibility.
To support our clients, we are continuing to add staff, capacity and the resources necessary to effectively manage the current demand environment and provide our clients with a timely, efficient and high-quality service that they have come to expect from Charles River.
We believe these investments position Safety Assessment business well and will support low double-digit organic revenue growth in the DSA segment this year.
We believe the combination of the robust funding environment as well as our deep scientific expertise and willingness to forge flexible relationships with our clients led to another exceptional quarter for the Discovery business.
Our comprehensive portfolio of oncology, CNS, early discovery and antibody discovery capabilities, which we recently enhanced through the Distributed Bio and Retrogenix acquisitions, is resonating with clients, and clients are increasingly choosing to outsource -- to integrated Discovery partners like Charles River.
Despite the robust funding, biotech clients continue to maintain limited or no internal infrastructure, opting instead to invest in their pipelines and utilize our services to move their programs forward.
To support the robust demand from biotech and global biopharmaceutical clients, we will continue to strengthen our portfolio by expanding our scale, our science and our innovative technologies through a combination of internal investment, M&A and our strategic partnership strategy.
By doing so, we are enabling our clients to remain with one scientific partner from Target ID through IND filing and beyond and solidifying our position as the leading nonclinical CRO.
The DSA operating margin increased by 30 basis points to 23.5% in the second quarter.
Leverage from the robust DSA revenue growth was the primary driver of the margin improvement.
Foreign exchange reduced the DSA operating margin by 150 basis points in the quarter as revenue and costs are not naturally hedged at certain DSA sites, including our Safety Assessment operations in Canada.
We continue to expect the DSA margin will be in the mid-20% range for the year.
RMS revenue was $176.7 million, an increase of 44.5% on an organic basis over the second quarter of 2020.
Approximately 33.4% of this growth was attributable to the comparison to last year's COVID-related revenue impact from client site closures and disruptions, which reduced research model order activity.
Adjusted for the COVID impact, the RMS growth rate was above 10% as strong research activity across biopharmaceutical academic and government clients led most RMS businesses to grow above their targeted growth rates.
Robust demand for research models in China continued to be the primary driver of RMS revenue growth.
There has been a resurgence of research activity this year, and model volumes far exceed pre-COVID levels.
Several other western markets, the client base in China has transitioned from one dominated by academic and government accounts to a vibrant mid-tier biotech and CRO client base, which now represents the majority of our clients in China.
We believe the expansion of our client base is fueling increased demand.
And to accommodate the growth, we are continuing to expand our model and services offering and our geographic and our geographic footprint in Western and Southern China.
We are currently experiencing strong double-digit revenue growth in China.
Demand for Research Models outside of China was also quite strong.
We believe this correlates with the increased level of non-clinical research that's being conducted by biopharmaceutical and academic clients in Western markets.
Research investments have led to biomedical breakthroughs and new drug modalities, and we believe the global focus on scientific innovation is sustainable.
We also continue to win new academic clients in the second quarter, resulting from the COVID-19-related client shutdowns last year and more recently from digital engagements targeting the academic client base.
Research Model Services also performed very well.
GEMS is benefiting from strong outsourcing demand as our clients seek the greater flexibility and efficiency they gain when we manage their proprietary model colonies.
The greater complexity of scientific research and the proprietary models that our clients are creating further reinforce the value proposition for the GEMS business.
Clients need for greater flexibility and efficiency is also driving demand for our Insourcing Solutions, or IS business, particularly for our CRADL initiative, which provides both small and large biopharmaceutical clients with turnkey research capacity at Charles River sites.
In addition to expanding our existing CRADL presence and adding clients in the Boston, Cambridge and South San Francisco biohubs, we're also looking to expand into other regions to provide a flexible capacity solution for our clients in emerging biohubs.
Utilizing CRADL also provides clients with collaborative opportunities to seamlessly access other Charles River services, which further enhances the speed and efficiency of their research programs.
The revenue growth rate for our self-supply businesses, HemaCare and Cellero, improved in the second quarter, but remain below the targeted level due to continued limitations on donor access.
We believe cell supply revenue will increase during the second half of the year as donor availability and capacity improved.
We have expanded capabilities, including donor capacity at our cell supply sites in Massachusetts and Washington State, which we believe will enable us to further expand our donor base in the US and accommodate the robust demand in the broader cell therapy market.
We expect HemaCare and Cellero will provide the critical tools for our new cell and gene therapy CDMO business, Cognate and Vigene.
We believe this will be highly synergistic for both Charles River and our clients because it will enable us to move client cell therapy programs forward using the same cellular products from research to CGMP production.
The RMS operating margin increased to 27.4% from 9.1% in the second quarter of last year.
The significant improvement was primarily due to the comparison to last year's depressed margin associated with COVID-related client disruptions and the corresponding reduction in Research Model order activity.
Revenue for the Manufacturing segment was $197.8 million, a 26.6% increase on an organic basis over the second quarter of last year.
The increase was driven by strong double-digit revenue growth in both the Biologics Testing Solutions and Microbial Solutions businesses.
COVID-19 did not have a meaningful impact on the segment's revenue last year, but testing on COVID vaccine -- COVID-19 vaccines has helped accelerate Biologics revenue growth rate this year.
Consistent with the first quarter, Microbial Solutions growth rate in the second quarter was well above the 10% level, reflecting strong demand for our Endosafe Endotoxin testing systems, cartridges, and core reagents in all geographic regions, as well as Accugenix microbial identification services.
With COVID related client access restrictions effectively behind us, we were pleased with the strength of the underlying demand for our endotoxin testing platform, which reforms FDA mandated lot release testing for our clients' critical quality control testing needs.
The advantages of our comprehensive portfolio continue to resonate with clients, and we believe that our ability to provide a total microbial testing solution will enable Microbial Solutions to deliver at least low double-digit organic revenue growth this year and beyond, which is consistent with the historical trend pre-COVID.
The Biologics Testing business reported another exceptional quarter of strong revenue growth that was well above the 20% growth target for this business.
Robust demand for cell and gene therapy testing services continue to be the primary growth driver.
There has been a rapid increase in the number of cell and gene therapy programs in development to approximately 3,000 programs now in the pipeline, with approximately two-thirds in the preclinical phase, which is expected to continue to fuel the strong growth.
COVID-19 vaccine work was also a meaningful driver of Biologics second quarter growth, but the underlying Biologics growth trends remained above the 20% level, even without the incremental COVID-19 testing revenue.
We believe cell and gene therapies will continue to be significant growth drivers over the long-term, and demand for COVID-19 vaccine testing is showing no signs of abating.
We believe the commercial production of COVID vaccines will continue for many years to come, supporting the demand for our services.
These factors are contributing to the strength of the demand environment, and we continue to build our extensive portfolio of manufacturing services to ensure we have available capacity to accommodate client demand.
The Manufacturing segment second quarter operating margin declined by 420 basis points to 33.2%.
The primary driver of the decline primary driver of the decline was the addition of Cognate's CDMO business as well as higher production costs in the Microbial business.
Cognate is a profitable business with a solid operating margin, but its margin is below the Manufacturing segment.
Coupled with the addition of Vigene in the third quarter, we expect a full year Manufacturing margin slightly below the mid-30% range.
However, beyond 2021, we expect this headwind to gradually dissipate as we drive efficiency and as the significant growth we anticipate generates greater economies of scale and optimizes throughout our CDMO sites.
Early in the second quarter, Cognate BioServices officially joined Charles River, followed by Vigene Biosciences in late June.
Aligned with HemaCare and Cellero, these businesses form the core of our cell and gene therapy offering, and we believe they will be highly complementary to our Biologics business and our portfolio as a whole.
We are pleased with the initial progress on the integrations and the addition of the cell and gene therapy CDMO services to a comprehensive portfolio, which is resonating with clients.
Our clients are beginning to explore opportunities to streamline their biologics development workflows by using Cognate's and Vigene's services, and their legacy clients are already looking to utilize other products and services within the Charles River portfolio to drive greater efficiency in their development and manufacturing activities.
We believe the acquisition of Vigene Biosciences with its viral vector-based gene delivery solutions, fulfills our objective to create a comprehensive cell and gene therapy portfolio, which spans each of the major CDMO platforms.
Gene-modified cell therapy, viral vector and plasmid DNA production.
In combination with Cognate's Memphis-based operations, we have established an end-to-end gene-modified cell therapy solution in the US, which we believe is critical to support our clients more seamlessly.
Our goal is to enable clients to conduct analytical testing, process development and manufacturing for these advanced modalities, with the same scientific partner, enabling them to achieve their goal of driving greater efficiency and accelerating the speed to market.
As a result of the successful execution of our strategy to date, we believe that our portfolio is the strongest it has ever been.
Our efforts to enhance our scientific capabilities, deliver flexible outsourcing solutions and provide greater value to our clients have made Charles River an important partner for our clients.
With the biopharmaceutical industry benefiting from record funding levels, we are experiencing robust demand for our essential products and services.
To support this demand and to continue to enhance the value we provide to clients, we will continue to move our growth strategy forward.
Acquisitions and strategic partnerships remain vital components of our strategy, as we endeavor to expand the scientific expertise, global reach and innovative technologies that we can offer clients across all three of our business segments.
Investing in our scientific capabilities as well as internally on the necessary staff resources in our digital enterprise will help us ensure that we can meet the needs of our clients.
The successful execution of our strategy will not only enable us to enhance our position as our clients' partner of choice from concept to nonclinical development to the safe manufacture of their life-saving therapeutics.
It will also allow us to achieve our longer-term financial targets of low double-digit organic revenue growth and an average of approximately 50 basis points of operating margin improvement beyond 2021.
And now, I'll ask David to give you additional details on our second quarter results and updated 2021 guidance.
Before I begin, may I remind you that I'll be speaking primarily to non-GAAP results, which exclude amortization and other acquisition-related charges, costs related primarily to our global efficiency initiative, our venture capital and other strategic investment performance and certain advances.
Many of our comments will also refer to organic revenue growth, which excludes the impact of acquisitions and foreign currency translation.
Once again, we are very pleased with another strong performance in the second quarter.
Robust revenue and earnings-per-share growth outperformed our prior outlook.
Organic revenue growth of 24.1%, including 8% related to last year's COVID-19 impact and operating margin expansion of 350 basis points, were the primary drivers behind earnings-per-share growth share growth of 65.2% to $2.61.
These results also reflect a favorable comparison to the second quarter of last year in which we experienced the peak of the COVID-related impact and client disruptions.
Based on our strong second quarter results and expectations for the underlying strength of demand to continue, we have increased our full year financial guidance and now expect to deliver organic revenue growth in a range of 13% to 15% for the full year.
Primarily as a result of the enhanced growth prospects this year, and to a lesser extent, a favorable tax rate, we raised our earnings per share guidance by $0.35 to a range of $10.10 to $10.35, which represents year-over-year growth of 24% to 27%.
By segment, our updated outlook for 2021 reflects the strong business environment.
For RMS, we continue to expect organic revenue growth in the high teens, driven by the Recovery in Research Model order activity from the impact of the COVID-19 pandemic last year, as well as exceptional growth in China.
Our outlook for DSA is unchanged, with low double-digit organic revenue growth for the full year, reflecting continued strength in early stage research activity.
For the Manufacturing segment, we now expect to achieve high-teens organic revenue growth.
Our revised outlook is based on exceptionally strong demand in Biologics, driven primarily by cell and gene therapy programs and an increase in contribution from the Microbial Solutions business, which is expected to return to at least low double-digit growth for the full year.
Including the acquisitions of Cognate and, more recently, Vigene Biosciences, Manufacturing's reported revenue growth rate is expected to be in the low to mid-40% range.
With regard to operating margin, our expectations for segment contributions remain mostly unchanged from our prior outlook, with the RMS operating margin meaningfully above 25% for the full year, DSA in the mid-20% range and Manufacturing slightly below the prior mid-30% outlook, principally reflecting the addition of Vigene in late June.
Lower unallocated corporate costs contributed to the second quarter margin expansion, totaling 5.6% of revenue or $51.2 million in the second quarter, compared to 6.1% of revenue last year.
Our scalable infrastructure enables us to drive greater efficiencies even as we continue to make investments to support the growth of our businesses and meet the needs of our clients.
We continue to expect unallocated corporate costs to be in the mid-5% range as a percentage of revenue for the full year.
The second quarter non-GAAP tax rate was 20.4%, representing a 60 basis point decline from 21% in the second quarter of last year.
The decrease was due to a favorable excess tax benefit associated with stock-based compensation, which resulted from increased equity exercise and award activity at higher stock price levels during the quarter.
This benefit was partially offset by higher tax expense associated with the UK tax law change.
or the full year, we are reducing our tax rate outlook to a range of 19.5% to 20.5% from our prior outlook of a tax rate in the low 20% range, principally driven by a higher benefit from stock-based compensation.
Total adjusted net interest expense for the second quarter was $20.8 million, an increase of $3.7 million sequentially and $1.7 million year-over-year, due to higher debt balances primarily to fund the Cognate acquisition.
At the end of the second quarter, we had an outstanding debt balance of $2.7 billion, representing gross and net leverage ratios of about 2.5 times.
Subsequent to the end of the second quarter, we completed the acquisition of Vigene on June 28.
On a pro forma basis, including Vigene, our gross leverage ratio remained below three times, which we attribute to our robust free cash flow generation that has enabled us to repay debt ahead of our expectations.
For the full year, we now expect total adjusted net interest expense to be slightly below our prior outlook in a range of $82 million to $85 million, primarily reflecting the accelerated debt repayment.
Free cash flow was $140.2 million in the second quarter, an increase of 3.5% over the $135.5 million for the same period last year.
The primary drivers of the increase were our strong second quarter operating performance and distributions from our VC investments, partially offset by higher capital expenditures.
In view of our robust results in the first half of the year, we have increased our free cash flow outlook by $65 million and now expect free cash flow of approximately $500 million for the full year.
capex was $46.4 million in the second quarter last year, compared to $26.8 million last year.
The increase was due primarily to the timing of projects.
Some investments, which were slowed or deferred during the COVID-19 disruptions last year are now back on track.
We continue to expect capex to be approximately $220 million for the full year.
A summary of our revised financial guidance for the full year, including all recent acquisitions, can be found on slide 39.
For the third quarter, our outlook reflects a continuation of the strong demand environment.
We do expect that growth rates will normalize from the second quarter levels, because we have anniversarized the peak of the COVID-19-related revenue loss last year.
Accordingly, we expect organic revenue growth in the low to mid-teens range and reported revenue growth in the low 20% range.
You should note that we are not forecasting a meaningful difference between the first half and second half organic growth rate after normalizing last year's COVID impact, which is not surprising as we believe the robust demand environment is showing no signs of abating.
We expect low double-digit earnings-per-share growth when compared to last year's third quarter level of $2.33.
I will remind you that the DSA operating margin in the third quarter of last year included a 50 basis point benefit from a discovery milestone payment, which will impact the year-over-year comparison.
In closing, we are very pleased with our second quarter results, which included another quarter of robust revenue, earnings and free cash flow growth.
We continue to be focused on the continued execution of our strategy and achieving our financial and operational targets, which will move us forward toward our longer-term targets for 2024.
| q2 revenue $914.6 million versus refinitiv ibes estimate of $880.4 million.
q2 non-gaap earnings per share $2.61.
increases 2021 guidance.
sees fy revenue growth, organic 13% - 15%.
sees fy non-gaap earnings per share estimate $10.10 - $10.35.
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Click the earnings materials box in the center of the page.
Jochen, let's get started.
As we look to 2021, it remains important to remember the unprecedented year that was 2020.
I am however very pleased with the pace of recovery we've seen across our business and strong numbers reflecting the implementation of our new strategy as demonstrated by the positive financial results this quarter.
We continue to manage through the impacts of COVID-19 with the extraordinary efforts of our global team, keeping employee safety and community well-being at the forefront.
We've overcome global shipping and supply chain challenges, adeptly managing the effects of disruption, ensuring that we were able to continue building and delivering the world's most iconic motorcycles.
As you can see today, the actions we've taken to reshape the business through The Rewire leading into the early months of our Hardwire execution are already having a positive impact on our results in particular in the most important North American region.
We can see the initial signs of consumer excitement and optimism returning, even if parts of the world are still lagging due to continued COVID related lockdowns and delayed vaccination efforts.
As we start to execute our five-year strategic plan, The Hardwire, I'm confident Harley-Davidson in 2021 is a significantly leaner, faster and more efficient organization and will continue improving and delivering in line with our H-D Number One culture.
I will talk more about stage one of The Hardwire later, but before I hand over to Gina, I'd like to address the announcement we made yesterday regarding the amended tariff ruling by the EU.
The decision taken by the EU is unprecedented, unfair and is a deliberate attempt to create a competitive disadvantage against our European competitors.
We are committed to fighting it and have launched an immediate legal challenge in Europe as we firmly believe that the original ruling on our BOI remains correct and should therefore be overturned.
Every big bike we sell in America comes straight from the hands of our hard working men and women of Wisconsin and Pennsylvania.
It bears repeating, if not for the tariffs, which are now threatening our recovering export potential, we could be investing in jobs at our American facilities, leading the world in electric innovation, research, engineering, design and advanced manufacturing.
Instead, we are facing huge tariffs in trade war -- in a trade war not of our making.
So as you saw from the numbers, we delivered a very strong quarter and I'll hand it over to Gina for more details.
As Jochen mentioned, we had a good start to our fiscal year with first quarter results reflecting stronger demand and an improved economic outlook.
Operating income of $346 million was well ahead of last year with growth coming from both our reported segments.
The Motorcycles and Related Products segment delivered $228 million which is $143 million better than last year, driven by units, a stronger product mix with growth in our Touring and Cruiser families and lower operating expense versus a year ago.
The Financial Services segment delivered $119 million of operating income, $96 million better than last year due to lower actual losses and a lower loss provision.
We delivered earnings per share of $1.68 with no significant restructuring charges taken within the quarter.
Internationally, the impact of COVID was felt more deeply as many key countries remained under stay at home protocols and shipping networks were severely strained by COVID related challenges.
The TAM declines were driven by a 30% net reduction in the number of dealers and price increases taken across the portfolio as we work to restore profitability within those markets.
Across the dealer network, worldwide retail inventory of new motorcycles was down 48% versus a year ago behind our strategic shift on supply and inventory management.
Inventories were up 60% over Q4 as we work to build back inventory ahead of riding season.
It's important to remember that our strategic shift and inventory management will result in 2021 Q1 through Q3 inventories being lower than our historical averages.
This shift is continuing to improve profitability and strengthen pricing dynamics with Q1 motorcycle transaction pricing in the United States up materially across all families, most of which are at or near MSRP.
Looking at revenue, total motorcycle segment revenue was up 12% in Q1, 3 points of this growth came from volume on motorcycle units and parts and accessories as we benefited from the retiming of the new model year launch and the lapping of the 2020 COVID shutdowns.
One point of growth came from pricing and incentives as we eliminated the corporate discounts and incentives as part of The Hardwire strategy to rebuild the desirability of our brand and products.
And finally, we realized 6 points of growth from mix as the increased contribution from Touring more than offset the unit declines in our less profitable small cruiser models.
Absolute gross margin percent of 34.1% was up 5.1 points versus prior year driven by stronger volume, favorable mix and the lapping of heavier promotional periods in Q1 of last year.
As anticipated, while we did realize higher logistics spend in the quarter, we were able to offset with other savings across our supply chain.
Total operating margin of 18.5% was up significantly versus prior year due to the drivers already noted, lower operating expense.
The lower expense was the result of The Rewire actions executed last year as well as some timing shifts in our Hardwire related investments.
We do expect the favorability realized in the quarter tied to these Hardwire initiatives to be retimed and spent back in subsequent quarters.
The Financial Services segment operating income in Q1 was $119 million, up over $95 million compared to last year.
Net interest income was down due to higher average outstanding debt as we proactively managed liquidity during the ongoing pandemic.
The total provision for credit losses decreased $102 million from Q1 2020 driven by an allowance decrease of $82 million and lower actual credit losses of $20 million.
The provision adjustment reflects an improved economic outlook and appropriately represents the estimated lifetime losses in our portfolio at the end of the quarter.
Actual retail credit losses continue to be down versus last year as a result of lower delinquencies as customers were supported by the recent federal stimulus packages and continued elevated levels of COVID related loan payment extensions granted to qualified customers.
Focusing in on HDFS' base business, new retail originations in Q1 were up 25.8% versus last year behind higher new motorcycle sales as well as strong used motorcycle origination volume.
Market share for new U.S. retail financing remains strong at 63.5%.
At the end of Q1 2021, HDFS had approximately $1.7 billion in cash and cash equivalents on hand and approximately $1.6 billion in availability under its committed credit and conduit facilities for total available liquidity of $3.3 billion.
Cash and cash equivalents remained elevated, but were down approximately $800 million from Q4 2020 levels as we gradually pull cash back down to normalized levels.
HDFS continues to manage its debt to equity ratio between 5 times and 7 times, and well within the debt covenants of no higher than 10 to 1.
HDFS' retail 30-day plus delinquency rate was 2.14%, down 123 basis points compared to the first quarter of last year.
The retail credit loss ratio was also favorable at 1.4%, a 133 basis point improvement over last year.
The favorable delinquency performance is largely due to federal stimulus assistance and elevated levels of COVID related extensions.
The vast majority of the extended accounts have made at least one payment after the expiration of their extension period.
While we do expect the delinquency rate to normalize over time, given the influx of stimulus funding and the improved economic condition, It's likely losses could remain low through most of the year.
Wrapping up with Harley-Davidson, Inc financial results, we delivered first quarter operating cash flow of $163 million, up $171 million over prior year.
Key drivers of the improved cash flow were improved net income and lower inventory levels.
Cash and cash equivalents ended the quarter at $2.3 billion, which is $856 million higher than Q1 last year, but $937 million less than the end of Q4 2020 as we gradually worked down the higher cash balances that were held in the face of the pandemic.
Finally, the Company's Q1 effective income tax rate was 24%, slightly lower than Q1 2020.
Looking forward to the balance of the year, a number of factors occurred in the quarter that had given us confidence in taking our guidance up over the previous estimate.
First, we have better clarity on the cost impact of the supply chain challenges and our ability to adapt, which we had built in as a significant headwind in our original plan.
Also, the economic outlook is much improved with filing unemployment numbers, a newly approved federal stimulus in the U.S. and continued progress on the global COVID vaccine rollout.
Finally, we have also been able to get a much better read on profitable demand for our new model year '21 motorcycles, which is stronger than we had anticipated, particularly in our most profitable segments of Touring and large Cruiser.
As a result of these factors, we are raising our motorcycle segment revenue growth to be 30% to 35%, an increase from the previously communicated growth range of 20% to 25%.
Moving on to Motorcycle segment operating income margins, assuming a successful outcome regarding the EU tariff situation, our updated guidance is a range of 7% to 9%, up from the previously communicated range of 5% to 7%.
This 200 basis point increase reflects an improved demand outlook and confidence in our ability to continue navigating through the global supply chain headwinds.
However, if we are unable to reach resolution, negating the additional EU tariffs, the impact would bring us back to our original guidance of 5% to 7%.
The Financial Services segment operating income growth guidance is now 50% to 60%, an increase from the previously communicated range of 10% to 15% driven primarily by the loss provision adjustment.
Lastly, capital expenditures guidance remains flat to our original guidance of $190 million to $220 million.
Given that, we've added Slide 12 to help provide transparency on how our revenue and profit margin is split.
We expect approximately 60% of our revenue to come in the first half of the year as we ride the momentum of our model year launch through the riding season.
As we get into the back half, we'll start to see inventories come down from the peak in Q2, and in Q4, we will change over the factories to begin production on model year '22.
Finally, remember that we will begin lapping the impact of cost savings actions we took in the face of the pandemic and our Rewire savings initiatives beginning in Q3.
The patterns on inventory and shipments will be similar to what we experienced in the back half of 2020.
We believe the substantial changes implemented with The Rewire have set us up to a win, and we will not rest here.
We will continue to explore additional opportunities as The Hardwire strategic plan is implemented and as we continue to deliver organizational speed, alignment and efficiency.
As we close this first quarter, we can see that we've been through a significant transformation over the course of the past year.
These changes are manifested in strong first quarter results and reinforce our decision to move the model year to coincide with the start of riding season for the first time in our modern history.
This new journey is powered by Harley-Davidson number one, a high performing winning organization based on our ten defined leadership principles and built on the powerful vision and mission of Harley-Davidson.
Through the pandemic and into this first quarter we have seen the willingness and growing capabilities of our team to win.
Our future successes will only come from an effort by everybody in our team.
As you know, The Hardwire and its success is rooted in desirability in our ambition to enhance our position as the most desirable motorcycle brand in the world.
Desirability is a motivating force driven by emotion.
It's in our DNA, it's embedded in our vision and it's at the heart of our mission and it's part of our 118 year legacy.
Done right, Harley-Davidson's desirability preserves the value of our customers' purchases, builds our brand beyond our riders, ensures loyalty and drives engagement.
Our strategic ambition for desirability is very simple: Design engineer and advance the most desirable motorcycles in the world reflected in quality, innovation and craftsmanship; build a lifestyle brand valued for the emotion reflected in every product and experience for riders and non-riders alike, and; focus on our customers, delivering adventure and freedom for the soul.
Desirability provides the framework of our Hardwire strategic plan and the framework for our success measures.
I will now address a few specific highlights for the quarter delivered against some of The Hardwire strategic priorities.
I'm increasingly more confident of the market conditions and consumer appetite for our brand, our iconic motorcycles and our new products.
The pandemic has provided a reminder of the power of getting outside, reconnecting with our community and the significant freedom and adventure that our brand represents.
We've experienced significant demand in the market for our products and our brand, especially since March of this year.
And the demand we are seeing is strongest in our most profitable segments.
This improved mix is resulting in stronger year-over-year motorcycle segment margins and can be attributed directly to our desirability and Rewire efforts.
This quarter has demonstrated the increasing strength of the market and the enduring power of our brand in both the USA and Canada as well as Asia.
Despite the continued impacts of the pandemic especially in Europe, we also see post pandemic potential as part of our streamlined market strategy.
We maintain a long-term focus on sustained, profitable and desirable growth in line with The Hardwire strategy, and we are excited by the initial impacts.
As we begin to execute against our strategy of 70:20:10 skewed to our stronghold segments of Touring, large Cruiser and Trike, we will work hard to continue to solidify our position as leaders, acknowledging that these segments are the most attractive of the global market in terms of our profit focus.
With The Hardwire, we also made a commitment to introduce a series of models that align with our commitment to further increase desirability and to drive the legacy of Harley-Davidson in our core segments.
In this context, today, I'm pleased to introduce our new icons collection and this year's icon model, the Electra Glide Revival.
Launching April 26th, icons will be extraordinary adaptations of production motorcycles, which look to our storied past and bright future.
Produced only once, each model will have a limited serialized production run of 1,500 bikes and deliver on what Harley-Davidson has always done so well; Iconic design and historic moments.
A new icons collection model will be released within each model year with no more than two models being released in any given year.
Production will be enough to fill allocation of approximately one per dealer globally, making each icon a rare and highly coveted model for our riders, while increasing the overall desirability of our brand.
When we announced The Hardwire, we also identified a focused expansion into new segments.
They are attractive and profitable segments that deliver a balanced combination of volume, margin and potential.
And they're well aligned with our product and brand capabilities with a clear path to leadership.
By narrowing our focus on those opportunities that meet these criteria, we make our intention clear.
We are in them to win, supported by the right allocation of time and energy balanced with the right investments in product, brand and go to market capabilities.
This gets me to PR and marketing launch of the Pan America, our first Adventure Touring bike.
With the Pan America, we see the potential to build on our off-road heritage and to innovate into the high growth and attractive margin segment of adventure touring.
We are targeting a new customer, but a new customer that wants the craftsmanship, heritage and legacy of Harley-Davidson and wants to be part of our community.
Pan America was launched globally on February 22nd at a virtual launch viewed by over 350,000 participants across the world.
We partnered with movie star Jason Momoa to produce launch content that build desirability and excitement for Pan America around the launch.
If you haven't already watched Everything is a Road: The Path to Pan America, I'd encourage you to do so.
To date, the Pan America has received widespread global media acclaim with over 2 billion media impressions at a 97% positive media sentiment.
With the Pan America launch earning [Indecipherable] reports endorsement as I quote, The most important model released in memory signaling a shift in both philosophy and demographic.
The press riding reviews that have been going on for several weeks now around the world have also been exceptional with overwhelmingly positive feedback from around the world.
The launch delivered a full sellout of the pre-order allocation, which is currently in production and on schedule to be delivered to our dealers around the work from May onwards.
Adventure touring is the largest segment in many European markets and is a largely untapped market in North America.
We believe this bike places us in a position to take market share in Europe and become market leader in the segment in North America.
There's also clear affinity for the bike in other high-potential global markets with the Pan America being awarded best bike of 2021 at the 42nd Bangkok International Motor Show.
Looking forward, we have great plans to expand on Pan America with unrivaled innovation and design in new products that will reach new audiences, as we look to unlock new customers and opportunities.
Following on from the Pan America launch, we continue to execute on our priority to selectively compete in attractive segments where we can profit and win.
And we're excited for the upcoming launch of our next product from the RevMax platform, which will redefine the premium middleweight Cruises segment.
We intend to increase the profitability of our offerings overall in the small to mid sized Cruiser segment and change the competitive landscape.
Leading in electric, combustion remains the core of our business, however we see great potential for long-term growth in electric vehicles.
With LiveWire widely regarded as the leading electric motorcycle in the world, we're excited about our future in this space.
Earlier this year, we announced our intentions to work toward a dedicated EV division, and this work is now in full swing.
This division will allow for dedicated level of strategic focus required to deliver desirable growth in this segment.
In the quarter, we hired our Chief EV Officer to help guide this focus as we look to build on the success of LiveWire and win in Electric.
By investing in electric technology, it remains our intent to be at the forefront of innovation and development as we look to be the pioneers in EV.
We'll be telling you more about our dedicated EV plans in Q2.
Growth Beyond Bikes, we've always been about more than a machine and our related businesses are huge opportunities for long-term expansion of the brand.
Parts and accessories and general merchandise form part of the Harley-Davidson lifestyle and together with HDFS played an important role in inspiring existing and new customers to discover the adventure.
Each business plays an important role in our overall vision and mission.
We see enormous potential to grow our customer base, both with riders and non-riders shaping our future success as a global lifestyle brand.
In parts and accessories with customization as part of our heritage, we continue working toward enhancing our position as the destination for high quality parts for all our riders both with new and used motorcycles.
As part of this new approach to our P&A business, the Pan America reveal included both P&A and general merchandise designed specifically for Harley-Davidson Adventure Touring motorcycles and riders.
Harley-Davidson's heritage underpins our general merchandise business.
It is authentic to motorcycle culture and puts us in an unique position to reach beyond motorcycle riders and into the sport and lifestyle space.
With prominent brand collaborations in the works for general merchandise, we see long-term potential to leverage our brand value.
We'll be telling you more about this important strategic pillar for future growth in the second half of the year.
As evidenced by strong performance this quarter, HDFS is a strategic asset with a track record of delivering growth and profitability.
It is our goal to make HDFS the preferred choice for all Harley-Davidson riders by building digital capabilities and that rival the innovators of financial services.
HDFS' is integral to Harley-Davidson's success and with expansion in Europe on the horizon, we are excited about its future.
Led by HDFS earlier this month, as you know, we announced H-D Certified, the first certified pre-owned Harley-Davidson motorcycle program designed to lead our industry, satisfy our existing loyal riders and also reach new customers venture into Harley ownership for the first time.
H-D Certified is a strategic effort to strengthen our competitive position and is part of our new approach to the used motorcycle marketplace, aligned to the strategic priorities of The Hardwire, targeting long-term profitable growth.
In partnership with our strong dealer network, we want to enhance the overall customer experience encouraging brand loyalty while supporting growth in parts and accessories, general merchandise and HDFS built around the used Harley-Davidson market.
To date, over 350 of our U.S. dealers have signed up to the program representing 63% of the U.S. dealer network on the day of launch.
Each certified pre-owned motorcycle will be sold with a 12 month limited warranty on the engine and transmission and will include a 12 month complimentary membership in HOG, our Owners Group.
In addition, special financing rates will be available through H-D Invest [Phonetic] to support the program.
We believe H-D Certified will drive Harley-Davidson connectivity and engagement with our customers and enhance the overall customer experience, allowing more riders to have access to our motorcycles providing them with an added level of confidence in their purchase and an invitation into the Harley-Davidson community.
Few words to summarize.
The strong Q1 financial performance despite the supply chain challenges of the quarter and an increase in demand, gives us the confidence to increase our guidance as Gina mentioned to deliver a strong performance for the full year.
That said, we expect the unprecedented pandemic related supply chain and logistics challenges to continue and recognize the potential associated risks well into the year.
Our brand is powerful and it is one of the most recognized globally.
With 118 years of uninterrupted heritage, craftsmanship and iconic design, we are unique.
No other brand even comes close to Harley-Davidson.
We've been through significant change, but I believe this change has set us up to be stronger than ever before.
We will not rest until we are best-in-class in everything we do.
| harley-davidson inc delivers q1 gaap diluted earnings per share of $1.68.
delivered q1 gaap diluted earnings per share of $1.68.
qtrly motorcycles and related products (motorcycles) segment revenue up 12 percent.
qtrly revenue $1,423 million, up 10%.
harley-davidson - bottom-line results reflect q1 significant net income improvement with strong results in motorcycles and financial services segments.
qtrly motorcycles & related products segment revenue up 12 percent amid strong retail demand for touring motorcycles.
sees 2021 motorcycles segment revenue growth to be 30 to 35 percent.
sees 2021 motorcycles segment operating income margin of 7 to 9 percent.
sees fy 2021 capital expenditures of $190 million to $220 million.
|
Joining us today are Tom O'Hern, chief executive officer; Scott Kingsmore, senior executive vice president and chief financial officer; and Doug Healey, senior executive vice president of leasing.
2020 was an extraordinarily tough year in so many ways for all of us.
Once COVID stormed the U.S. in mid-March, all of our centers closed, and our tenants quit payment.
We quickly adopted significant measures to conserve liquidity, much as we had done during the Great Financial Crisis.
We persevered through those dark days of the second quarter, we got most of our centers opened by mid-summer, and all of our centers opened by early October with no further closures.
It was a herculean effort by the Macerich team, and I'm very proud of their efforts.
There were not a lot of good days, but we battled through it.
Rent collections, for example, during April and May were 35%, that grew to 80% in the third quarter.
And as of today, the fourth-quarter rent collections were at 92% and rising by the week.
2020 was a year of crisis, but we made it through the year, and things are improving by the week.
The COVID daily infection cases are down significantly throughout our markets.
The positivity rate is dropping, and hospitalizations are down significantly compared to a month ago.
We now have two vaccines in distribution with a third on the way.
Currently, 10% of the U.S. population has had at least one dose of the vaccine, and distribution is accelerating.
Not that the COVID battle is over, but it is much, much better than it was even three months ago, some level of normalcies returning, including restaurant dining and going to the mall.
Our shoppers have returned.
In fact, December sales were approaching 85% of pre-COVID levels even in the midst of a surge in COVID cases.
Gradually, restrictions on capacity and indoor dining are being lifted, and that will help both our traffic and our sales.
COVID, among many other things, had the impact of accelerating bankruptcies of dozens of retailers that otherwise likely would have gone into bankruptcy over the next several years but instead, we're accelerated into 2020.
The result is our occupancy level is at 90%, which is the lowest since the Great Financial Crisis.
However, within two years post-GFC, we were back to full occupancy.
We expect a similar recovery post-COVID.
We have worked through most of the bankruptcies from 2020.
And fortunately, the vast majority of those have been reorganizations, not liquidations.
The biggest bankruptcy of the year was JCPenney.
Of our 27 JCPenney locations, only two locations closed, Green Acres and Kings Plaza, both in New York.
I'm happy to report that we have leases out for signature on both of those locations and should be able to make announcements in the very near future.
As you say goodbye to 2020 and gladly watching in the rearview mirror, we are very optimistic about 2021 and the recovery of our business.
Although '21 is going to be a transitional year, it will be much better than 2020 in almost every respect.
Most of the tenant COVID workout agreements will have some impact on us in '21, both in terms of rent relief, as well as higher-than-normal vacancy rates.
That being said, we expect to see occupancy gains in the second half of the year and a gradually improving leasing environment.
Rent collections have improved significantly, up from a September collection rate of 77%, and are now above 90% in the fourth quarter.
January is also trending above 90%.
We have come to agreement on COVID workouts with over 93% of our top 200 tenants.
Leasing activity picked up significantly in the fourth quarter.
Volumes, in fact, were 90% of pre-COVID levels of the fourth quarter of 2019.
We even have a variety of gated attractions that are planning to open this year, including, Candytopia, ModelLand, and the Museum of Ice Cream.
Many of our replacement tenants in the former Sears locations will also open in 2021.
Our 2021 lease expirations are 60% leased today, with the majority of the balance in the letter of intent stage.
Looking at the balance sheet, most of our 2021 loan maturities have been successfully extended, and negotiations are well under way to renew our line of credit, which matures in the third quarter.
Retailer traffic and sales continue to pick up with traffic at 80% of pre-COVID traffic and sales, on average, 85% of pre-COVID levels.
We expect improvements in both traffic and sales as we progress through 2021.
The cost-reductions and cost-containment measures we adopted when COVID hit will be continued into 2021.
And the final point for me, once again, we have been recognized as a leader in sustainability and have achieved the No.
1 Global Real Estate Sustainability Benchmark Ranking in the North American retail sector.
That makes six straight years for that honor.
Highlights of the financial results for the quarter are as follows.
Funds from operations for the fourth quarter was $0.45.
That's down from the fourth quarter of 2019 at $0.98 per share.
Same-center net operating income for the quarter was down 33%, and year to date is down 22%.
As you will see, these results are unchanged relative to what was filed last week on February 1.
Changes between the fourth quarter of 2020 versus the fourth quarter of 2019 were driven primarily by the continuing impact of COVID-19 and are as follows, and the figures I'm citing are at the company's pro-rata share.
One, $38 million decline from COVID-related rent abatements across permanent and temporary leasing revenue line items.
Fourth-quarter abatements were elevated relative to the third-quarter abatements of $28 million, and this was largely due to the protracted summer closures of several large properties in New York and in California.
This resulted in delayed negotiations with tenants at those properties.
Cumulatively for the year, in 2020, we granted $56 million of abatements.
Number two, $19 million of COVID-related decline in common area and ancillary revenues, including specialty leasing and temporary tenant revenue, percentage rent revenue, business development revenue, and parking revenue.
These declines were generally a continuation of what we experienced in the second and third quarters but were exacerbated in the fourth quarter given the seasonal nature of these types of income.
However, looking forward into '21, we do anticipate growth in each of these more transient income line items, assuming conditions at our properties improve as we do expect.
In total, for all of 2020, these line items were down $43 million.
Number three, general top-line revenue decrease is totaling approximately $12 million, driven primarily by COVID-related occupancy decreases.
Number four, $6 million of bad debt expense in the form of reversals of lease revenue for tenants on a cash basis pursuant to GAAP, that was about $5 million, and then bad debt expenses of about $1 million.
As a result of the COVID-related disruption to our business, the bad debt expense line item was significantly elevated in 2020 at $62 million.
This was a $52 million increase versus $10 million of bad debt expense in 2019.
Number five, there was an $8 million decrease from loss or gain on un-depreciated asset sales or writedowns on consolidated assets.
This included a $5 million impairment charge in the fourth quarter of 2020 for undeveloped land that is currently under contract for sale and is expected to close in 2021.
And lastly, offsetting these items, straight-line rent increased $19 million in the fourth quarter.
This was driven by applying straight-line rent averaging to all rental assistance lease amendments executed during the fourth quarter.
So to summarize some of the major impacts of COVID that impacted real estate NOI in 2020, and again, all these figures are at the company's share, we highlight the following: number one, $56 million of one-time retroactive abatements of rent.
These concessions were granted to local business owners and entrepreneurs, to restaurants and other food uses, and then selected cases to national tenants in order to secure near-term lease expirations and to achieve other landlord favorable concessions.
Number two, a $43 million of decline in common area and ancillary revenues, percentage rent and temporary -- or excuse me, and parking revenues.
Again, these are transient line items, and we would expect those to bounce back.
And number three, we wrote-off an extra $52 million of bad debt expense relative to 2019.
Plus, in addition, we had another $11 million of rent that was reversed for tenants that are accounted for on a cash basis.
So when you add all that up, collectively, it's roughly $162 million of pandemic-driven NOI decline just among those three categories.
2021 FFO is estimated in the range of $2.05 per share to $2.25 per share.
While certain guidance assumptions are provided within our supplemental filing, I'd like to provide some further details.
This guidance range assumes no further government-mandated shutdowns of our retail properties.
We are not providing same-center NOI guidance at this time given continued expected impacts of COVID-19 in early 2021.
But we do anticipate growth in the same-center NOI starting in the third quarter of '21.
And in fact, at this time, we expect strong double-digit growth in the second half of 2021.
Anticipated progress on vaccination efforts, continued fiscal stimulus from the federal government, significant pent-up demand from our market consumers, and softer comparables in the last half of the year informed this thinking for ramped up growth later in 2021.
In terms of FFO by quarter, we estimate the following cadence: 21% in the first quarter, 24% in 2Q, 25% in 3Q, and the balance 30% in the last quarter.
We view 2021 as a transitional year as we pivot away from the disruption and widespread closures caused by COVID during 2020.
We do expect that the first-quarter '21 will include lingering effects of COVID, including from retroactive rent adjustments relating to 2020.
Trough occupancy appears to have been contained to roughly 88%, which we estimate to be at the end of the first quarter.
And we do believe there's an opportunity to grow occupancy later part in the year and certainly over the coming years, which should fuel future operating growth.
Again, more details of the guidance assumptions are included in the company's Form 8-K supplemental financial information.
Now, on to the balance sheet.
As addressed in detail within our recent filings, over the last few months, we have successfully extended four secured mortgage loans, totaling over $660 million for extension terms ranging up to three years.
Those loans included mortgages on Danbury Fair, Fashion Outlets of Niagara, FlatIron Crossing, and Green Acres Mall.
We do anticipate securing similar extensions on remaining mortgages that mature in 2021, including from Green Acres Commons, for which we are currently working on a two-year extension.
In November, the company financed the previously unencumbered Tysons Vita, this is a residential tower at Tysons Corner.
The loan is a $95 million mortgage loan, bearing fixed interest at 3.3% for 10 years.
At closing, this generated $45 million of incremental liquidity to the company, and there is some incremental funding capacity remaining under this line item.
As mentioned in our recent filings, we continue to make progress on the renewal of our line of credit.
Cash on hand at year-end was $555 million.
As Tom previously noted, collection efforts are now over 90%.
This improved collection environment is a direct byproduct of the extensive efforts by a vast many within the company to negotiate thousands of agreements with our retailers.
I can tell you, we are extremely proud of those efforts, as Tom has already noted.
As a result, we do anticipate further improvement in collections into 2021.
And in addition, we estimate the collections of both contractually deferred and delayed rent collections in 2021 that relate to 2020 billed rents in the approximate range of $60 million to $75 million.
During 2021, we expect to generate over $200 million of cash flow from operations, and this is after recurring operating and leasing capital expenditures and after dividend.
This assumption does not include any potential capital generated from dispositions, refinancings, or issuances of common equity.
This operating cash flow surplus will be used to delever the balance sheet, as well as to fund our development pipeline.
And as for development, we expect to spend less than $100 million in 2021, excluding further development expenditures on One Westside, which recall, is independently funded by a construction loan facility.
In the fourth quarter, much of our focus, again, was working with retailers to secure rental payments and improve our collection rates.
Looking at our top 200 rent-paying national retailers, we now have commitments with 176, which is up considerably from last quarter.
But more importantly, we now have received payments, or we've worked out deals totaling 93% of the total rent these top 200 pay.
And as a result, our collections continued to improve.
As of today, collection rates increased to 89% in the third quarter and 92% in the fourth quarter of 2020.
Occupancy at the end of the third quarter was 89.7%, that's down 110 basis points from last quarter and down 4.3% from a year ago.
This is primarily due to store closures from the unprecedented amount of bankruptcies and early abandonments that occurred throughout 2020.
Temporary occupancy was 5.9%, and that's down 50 basis points from this time last year.
Trailing 12-month leasing spreads were a negative 3.6%, and that's down from 4.9% last quarter and down from 4.7% in 2019.
Average rent for the portfolio was $61.87 as of December 31, 2020, and this represents a 1.3% increase compared to $61.06 as of December 31, 2019, and a 0.7% decrease compared to $62.29 at September 30, 2020.
2021 lease expirations continue to be an important focal point.
And to date, we have commitments on 60% of our expiring square footage, with another 40%, or the balance, in the letter of intent stage, disregarding tenants who have closed or have indicated they intend to close.
In the fourth quarter, we signed 217 leases for 900,000 square feet.
This represents 80% more leases and 1.5 times the square footage when compared to the third quarter of 2020.
This also represents 90% of the square footage that we signed in the fourth quarter of 2019.
Noteworthy leases signed in the fourth quarter include Athleta at Danbury Fair, Louis Vuitton at Scottsdale Fashion Square, Swarovski at La Encantada and Los Cerritos, Madison Reed at SanTan, four renewals with Sephora at Eastland, FlatIron Crossing, Vintage Faire, and Pacific View, as well as a five-store package with Charming Charlie's at Green Acres, FlatIron, Fresno, La Encantada, and Pacific View.
Turning to openings in the fourth quarter.
We opened 59 new tenants in 236,000 square feet, resulting in a total annual rent of over $10 million.
Henckels at Fashion Outlets of Chicago.
In the international arena, we opened another three stores with Lovisa at Deptford Mall, Queens Center, and Kings Plaza, along with Quay Australia at Los Cerritos.
In the large-format category, we opened DICK's Sporting Goods at Vintage and Round 1 at Deptford Mall, both in former Sears locations.
The digitally native and emerging brands continue to open bricks-and-mortar stores.
In the fourth quarter, we opened Amazon 4-Star and Madison Reed at 29th Street, Amazon Books at Los Cerritos, and Purple at Tysons Corner.
Now, let's move to 2021 and our pipeline.
Our pipeline remains strong, vibrant, and exciting.
We already have signed leases totaling approximately 494,000 square feet, all scheduled to open in 2021, and this list continues to grow.
Later this year, we look forward to opening an amazing two-level, 11,000-square-foot flagship Dior store at Scottsdale Fashion Square, the first and only Dior in all of Arizona.
And joining Dior will be Louis Vuitton Men, further marking Scottsdale Fashion Square as the one and only true luxury destination in the market, and the state for that matter.
Primark is well under construction and will open its highly anticipated 50,000 square foot store at Fashion District Philadelphia in September of this year.
Other impactful openings to look forward to this year include Dave & Buster's at Vintage Faire, Kids Empire, and Madison Reed at SanTan, Tyra Banks' ModelLand at Santa Monica Place, XLanes at Fresno Fashion Fair, San Bernardino County offices at Inland Center, Bourbon & Bones at SanTan Village, Cooper's Hawk Winery at Boulevard Shops, Shake Shack at 29th Street, Uncle Julio's at South Plains, Faherty at Village of Corte Madera, Lucid Motors at Tysons Corner, and Scottsdale Fashion Square and Marine Layer at Broadway Plaza.
And that's just to name a few.
And when we look at deals still in lease negotiation, we have yet another 435,000 square feet to open in 2021, and this number grows daily.
Lastly, I'm often asked during this unprecedented time of bankruptcies and store closures, who's left to fill this space?
What we need to remember is this pandemic only accelerated the demise of those retailers who are already struggling pre-pandemic.
What's not talked about are those retailers who were strong going into the pandemic and actually came out stronger on the other end.
Perhaps it's because they had great product and offered great value or perhaps it's because they had strong omnichannel business and used their online strategy to actually increase customer awareness and acquisition.
Think Lululemon, DICK'S Sporting Goods, Target, Peloton, and Blue Nile, and there are so many others.
Or how about the strong traditional retailers with significant open-to-buys looking to capitalize on some great new available space in some of the best centers in the country?
I'm talking about retailers such as Aerie, Madewell, Free People, Levi's, Sephora, Arhaus, Aritzia, Old Navy, Athleta, just to name a few.
Or brand extensions such as Offline by American Eagle, Gilly Hicks by Abercrombie & Fitch, or DICK's Sporting Goods' new experiential concept.
Or new and emerging brands like Alo Yoga, Faherty, Psycho Bunny, and Tonal or new electric car manufacturers such as Lucid, Polestar, and VinFast.
And we're deep in discussions with all these retailers and many, many more.
However, we know our shoppers want more than just traditional retail.
And that's why we continue to focus on bringing alternative uses to our campuses and not just retail, uses like office, residential, hospitality, medical, wellness, education, fitness, grocery, service, and even storage.
And that's why we continue to refer to our properties as town centers because that's what they're becoming.
They're transformational, and they'll be something for everyone.
And they have to be because that's what our modern-day shopper wants.
| compname posts quarterly ffo per share $0.45 excluding items.
quarterly ffo per share $0.45 excluding items.
mall portfolio occupancy was 89.7% at december 31, 2020 compared to 94.0% at december 31, 2019.
sees 2021 ffo per share-diluted $2.05 - $2.25.
|
With me on the call today are Vic Grizzle our CEO; and Brian MacNeal, our CFO.
Actual outcomes may differ materially from those expected or implied.
Both are available on our website.
I'm pleased to be with you today from our corporate campus in Lancaster, Pennsylvania.
Armstrong, like many companies, is adapting to a new normal of hybrid work activity.
Here at Armstrong, safety protocols are in place and our physical spaces have undergone a first phase of modifications to allow our organization to return to the office safely.
We're actively working on more permanent changes to our facilities, including the use of new ceiling and grid solutions to create healthier spaces for our staff and visitors.
Our manufacturing and distribution facilities continue to operate well and safely.
Quality and service levels are high and our connectivity to customers, enabled by our digital tools, remains excellent.
Overall, demand in the quarter improved sequentially much as we had expected.
On a seasonally adjusted basis, Q3 was 14% better than Q2, down 11% versus 25%.
In addition, we saw sequential improvement within the quarter, as daily Mineral Fiber sales improved from down 15% in July to down 11% in September.
And October has continued this trend and is progressing better than September.
Our top seven territories, which had lagged significantly in the second quarter, returned to the overall national average during the quarter.
But the New York Metro area, our highest AUV territory, continues to lag.
Overall, sales of $247 million were down 11% a quarter versus prior year.
Volume was down 10% and Mineral Fiber AUV was slightly negative.
Positive like-for-like pricing improvement and favorable product mix were offset by negative channel mix and negative territory mix, primarily driven by the lag in New York metro area.
In addition, sales to big box customers were up in the quarter versus 2019, which is good from a volume perspective, but given the lower sales price in this channel, it was also a headwind to mix.
While the overall demand trends in the quarter progressed largely as expected, there were some developments that we observed that I want to share with you to provide context on the market conditions.
As expected, construction activity picked up in the territories most impacted by COVID-related restrictions in the second quarter, namely the seven largest territories we referenced on our last call.
The easing of state and local regulations on job sites and the increasing ability of contractors to work with the newly imposed restrictions both helped this situation.
However, as the quarter progressed we saw delays emerge in previously less impacted territories, namely the South and the Midwest following the migration of the virus.
This shift in regional activity reflects the impact of increasing COVID cases on construction activity and the overall uneven nature of the market reopening.
New construction activity has fared pretty well overall, as existing projects continue toward completion, while smaller and midsized renovation projects experienced greater headwinds.
In our conversations with our customers, it is clear that there remains a lot of near-term uncertainty as building owners work to determine the best path forward to adapt their facilities to enable the safe return of occupants.
This is also true with schools, with some remodel activity remaining on hold, as many students learn from home.
Also in the quarter we continued to experience softness in our low visibility flow business.
These are the small discretionary repair/remodel type projects that flow through our distribution partners and often without a specification.
In addition to the uneven opening of the markets, we also experienced minor business interruptions in the quarter due to protest activity in certain cities and Hurricane Sally which closed our Pensacola, Florida plant for a few days.
The Armstrong team and our partners continue to earn my admiration as they overcome obstacles and continue to deliver for our customers.
Adjusted EBITDA in the quarter of $92 million was down 19% from 2019.
The pandemic-driven volume decline is really the entire story as the business continues to operate well and as expected otherwise.
Brian will provide more details on our financial results in a moment.
But it has been an impressive performance by our operations team in an extraordinary environment.
I could not be more proud of the work that they have done thus far.
Despite the challenges in the market, our strong cash flow performance continues, and we remain on track to deliver over $200 million in adjusted free cash flow.
Based on this continued strong cash flow generation and our confidence to continue to do so, our Board has approved a 5% increase in our regular quarterly dividend to $0.21 per share and we are restarting our share repurchase program.
The third quarter was also notable, in that we completed two M&A transactions.
The previously discussed, acquisition of Chicago-based Turf Design, the leading provider of custom felt-based ceilings and walls and then on August 24, we acquired Moz Designs.
Moz is a Northern California-based designer and fabricator of custom architectural metal ceilings, walls, dividers and column covers.
Moz brings unique capabilities that can be utilized to improve the product offerings of our three existing metal ceiling facilities, and further strengthens our already leading position in the growing category of metal ceilings and walls.
This transaction marks our seventh acquisition since 2017.
We are truly building an unmatched platform of specialty ceilings and walls and we are not done.
Our M&A pipeline continues to grow as we see more and more opportunities to build out the most unique set of capabilities in the industry, and our financial strength allows us to do so.
Today, I'll be reviewing our third quarter results.
Beginning on slide 4, for our overall third quarter results, sales of $246 million were down 11% versus prior year, a significant sequential improvement from the second quarter when year-over-year sales were down 25%.
Adjusted EBITDA fell 19% and margins contracted 370 basis points, again a substantial sequential improvement from the second quarter when year-over-year EBITDA was down 36% and margins contracted 590 basis points.
Adjusted diluted earnings per share of $1.07, fell 22% and adjusted free cash flow declined by $53 million versus the prior year.
I'll address the reasons for this decline in a moment.
Our cash balance at quarter-end was $139 million, and coupled with $315 million of availability on our revolver, positions us with $454 million of available liquidity, down $33 million from last quarter as we completed the Turf and Moz acquisitions during this past quarter, and down $24 million from the third quarter of 2019.
Net debt of $542 million is $4 million higher than last year as a result of our acquisitions, partially offset by cash earnings and the receipt of $19 million from the sale of our Qingpu plant in China, which was idled.
As of the quarter-end, our net debt to EBITDA ratio was 1.5 times versus 1.6 times last year as calculated under the terms of our credit agreement.
Our covenant threshold is 3.75 times, so we have considerable headroom in this measure.
Our balance sheet is in solid shape.
In the quarter, we did not repurchase any shares as our repurchase program remains suspended to preserve liquidity in light of the COVID-19 impact on the market.
Last week, our Board of Directors approved the restart of the program.
Going forward, we will look to return to our customary approach of repurchasing shares subject to our normal processing protocols.
Since the inception of the repurchase program, we've bought back 9.6 million shares at a cost of $596 million for an average price of $62.13.
We currently have $604 million remaining under our share repurchase program, which now expires in December of 2023.
Slide 5, illustrates our Mineral Fiber segment results.
In the quarter, sales were down 14% versus prior year, but sequentially improved from the prior quarter when year-over-year sales declined 26%.
COVID-19 driven volume declines were the key driver.
AUV was a headwind, as positive like-for-like pricing and favorable product mix, were offset by the channel and geographic mix issues that Vic mentioned.
While sales in our key seven territories improved sequentially and converged with the performance in other territories, performance within these key seven territories was inconsistent and was a headwind to overall price and mix for the Mineral Fiber segment.
AUV in the remaining territories was positive.
Adjusted EBITDA was down $20 million or 21% as the volume decline fell through to the bottom line and AUV was a drag.
Continued manufacturing productivity and cost reduction initiatives, lower raw material and energy costs, and SG&A cost management were all positive in the quarter.
WAVE equity earnings were down due to lower sales and also as a result of a year-to-date true-up of allocated costs from Armstrong and Worthington.
Moving to Architectural Specialties segment on slide 6, sales were up 1% as the acquisitions of Turf and Moz contributed almost $8 million in the quarter and offset COVID-driven organic sales decline of 12% which were sequentially better than the 22% decline we experienced in the second quarter.
While current period sales activity was challenged given state and local restrictions, we continue to have exciting wins and have been awarded the Kansas City International Airport and the Princeton University Residential College projects.
These jobs will ship in 2021 and 2022 and demonstrate our continued ability to win complex and iconic projects.
Despite flat sales direct margins expanded significantly driven by the higher margins of the Turf and Moz acquisitions relative to our base business and ongoing productivity in the network particularly at acquired facilities.
Fixed manufacturing costs and SG&A were up driven by the costs of Turf and Moz.
Slide seven shows our consolidated results for the quarter and clearly illustrate the impact of COVID-related volume declines.
Slide eight shows adjusted free cash flow performance in the quarter versus the third quarter of 2019.
Cash flow from operations was down $48 million, largely driven by volume due to COVID-19.
Also in the quarter despite lower income in Q3 2020, we actually paid $14 million more in cash taxes than in the third quarter of 2019.
This is largely driven by timing in certain discrete items in the base period.
Not included in this cash flow bridge are two significantly positive non-recurring cash items.
In the quarter, we applied a $27 million tax refund related to the sale of our international operations.
And we received $19 million from the sale of our closed Qingpu facility in China.
We have received an additional $2 million from the sale in October and this transaction is now complete.
Slide nine shows our year-to-date results.
As you can see sales were down 12%, adjusted EBITDA is down 18%, and adjusted free cash flow is down 16%.
Slide 10 is our year-to-date bridge.
Again, COVID-related volume declines are the main driver followed by the geographic and customer AUV issues we've called out.
For the year product mix and like-for-like pricing are both positive contributors to sales, but mix is a headwind to EBITDA due to geographic and channel mix.
Input costs, deflation and the savings we are driving in manufacturing and SG&A despite our acquisitions helped mitigate the sales fall through the EBITDA.
Slide 11 reflects our year-to-date free cash flow.
As with the quarter, operating cash flow was impacted by volume declines due to COVID-19, the tax refund in Qingpu sales proceeds mentioned earlier are excluded.
Capital expenditures reflects the delaying actions we are taking to finalize or to prioritize cash in the near-term.
Interest expense is lower as a result of our refinancing in September of 2019.
WAVE earnings were impacted by volume declines.
Slide 12 is our guidance for the year.
We now anticipate full year revenues in the range of $920 million to $935 million or down 10% to 11%.
Overall the decline will be entirely volume as we anticipate AUV to be essentially flat for the full year.
EBITDA will be in the range of $320 million to $330 million as the sales decline drops down and is partially offset by productivity and the impact of our cost containment actions.
Actions are in place to drive $40 million to $45 million of savings in manufacturing and SG&A down slightly by $5 million from our previous outlook as we invest for future growth.
Our cash flow guidance is adjusted from our prior outlook as we have taken capital expenditures up, acquired the working capital of Turf and Moz and adjusted the seasonal trajectory of our fourth quarter to account for continued sequential improvement.
These are challenging times but Armstrong is laser-focused on controlling what we can control investing to drive growth and building on an already best-in-class platform.
Our ability to execute two meaningful acquisitions during a global pandemic is testament to our focus and confidence.
I have no doubt that we will emerge on the other side of this crisis in an even stronger position to grow and create value.
Healthy spaces is the dominant topic in commercial construction conversations today.
92% of architects and designers surveyed said they are having conversations with their clients on how to make their spaces healthier and safer.
And it's a universally known fact that we spend 90% of our lives indoors.
And even though healthy spaces have always been important this pandemic has made it an even greater priority, possibly the highest priority and the standards for which health and safe are measured are being raised to a whole new level.
At Armstrong, we have been the leading supplier of ceilings and spaces where healthy has mattered the most in operating rooms, in ICU wards and other isolation room applications.
Now, we are bringing that experience to today's conversation about creating healthy spaces and how to create one.
We believe a healthy space and safe space is a space that protects us and fosters a feeling of well-being and comfort that allows people to be at their best.
So where do ceilings come in?
You're already familiar with how ceilings play a role in acoustics and aesthetics and in making the most of natural and supplemental light in interior environments, all of which are part of the healthy spaces equation.
As the structural capstone of any space, the right ceiling system can make a meaningful difference by bringing the additional elements of healthy spaces together.
Our ceiling grid and partition solutions contribute to maximizing ventilation and minimizing the transmission of harmful pathogens.
In most buildings, the ceiling system is part of the supply and return air ducting.
We're already very in tuned with that with our current solutions for healthcare spaces.
We are now adapting this technology to be more affordable and effective in the office, the classroom and other settings to meet the new definition and the new standards for a healthy space.
I'm very pleased to introduce a new family of products called 24/7 Defend.
These products represent innovative new solutions against harmful pathogens and other particles in indoor environments.
Our 24/7 Defend product family already includes infusion partitions and CleanAssure disinfectable products, which are proven cleanable products.
What's new is the AirAssure family of gasketed ceiling tile products that self-seal to the grid system and a new integrated VidaShield ultraviolet air purification and ceiling tile system.
When placed in our standard grid system, AirAssure gasketed ceiling panels form a tight seal and reduce air flow leakage into the plenum by 300% over standard ceiling panels.
Reducing air leaks significantly increases the effectiveness of air ventilation and filtration systems allowing more air to flow through the return air vents where it can be filtered and purified and ensuring greater air quality.
In addition to allowing more filtering and cleaning of air vent spaces, AirAssure can also reduce the risk of pathogens traveling between spaces in a building, further protecting a greater number of people.
In addition to offices and healthcare facilities, this is vital for schools and senior living facilities as they are being asked to create more isolation rooms to prevent the spread of infections.
Reducing air leakage with AirAssure is an easy way to retrofit existing rooms and is available with our popular Sustain and Total Acoustics solutions.
Now in a complementary way, the new patented scientifically proven VidaShield system pairs an active ultraviolet air purification system with Armstrong ceiling panels to provide cleaner, safer air in any commercial space.
An unobtrusive drop in ceiling system that draws air into a chamber above the ceiling exposes the air to UV light, neutralizing harmful pathogens and then returning clean air to the room.
VidaShield can be used as a stand-alone solution or for even better results it can be integrated with AirAssure panels.
Together these two new solutions reduce the risk of indoor air transmission of harmful pathogens.
This pandemic is serving as a catalyst to renovating commercial spaces to create healthy and safer spaces unlike anything we've seen before.
And we believe it will continue to evolve for many years to come because healthy spaces are now essential.
These new products are just the beginning of 24/7 Defend family as we have solutions in our innovation pipeline that we will add to this family in the coming quarters.
Armstrong is a clear leader in the commercial construction market and we have been for many, many years.
As the need for healthier buildings evolves, we will be at the forefront driving positive change in our industry.
We believe these changes in the short and long-term will allow market leader like Armstrong to further grow our business and bolster our competitive advantage.
Together with our industry-leading position, our digitalization investments and now with our expanding health spaces platform Armstrong is well positioned for profitable top line growth.
With appending renovation renaissance in the medium-term and a whole new way of thinking about commercial interior spaces longer-term, we are both ready for and excited about the possibilities ahead.
And this is all aligned with our commitment to continue to deliver strong returns for our shareholders and to making a positive difference by creating healthier spaces where people live, work, learn, heal and play.
| sees fy 2020 sales $920 million to $935 million.
sees 2020 ebitda of $320 million-$330 million.
quarterly adjusted earnings per share $1.07.
|
For today's call, Jeff will begin by covering a summary of our second quarter results and by providing a current status of our global operations.
Roop will then discuss the second quarter results in more detail, including a cash and balance sheet summary and our third quarter guidance.
Jeff will wrap up with an outlook by market sector and an update on our strategic initiatives before we conclude the call with Q&A.
Our second quarter results were achieved against the backdrop of mandatory facility shutdowns, component constraints, and extra processes required to keep everyone safe.
During Q2, we achieved revenue of $491 million, which was down sequentially from Q1, but supported by strong demand in our Medical and Semi-Cap sectors.
Non-GAAP gross margin for the quarter was 7% and non-GAAP earnings per share were $0.07.
Our non-GAAP earnings include $4 million or $0.10 per share of COVID related costs that we could not fully anticipate as we entered the quarter.
In addition to these COVID costs, we experienced other production inefficiencies as a result of the current pandemic environment.
Our overall performance was helped by the aggressive cost reduction actions taken earlier in the quarter.
Our cash conversion cycle for the quarter was 84 days.
Despite operating challenges, we generated $23 million in cash flow from operations and returned $6 million of cash to shareholders as part of our recurring quarterly dividend payment.
As we look forward, I wanted to step back and offer a few perspectives.
I'll do that on Slide 4.
Since I joined Benchmark last year, we've made a lot of positive changes and all of these have been supported by an amazing team.
From the hard work required to execute on our strategic initiatives and goals that we outlined last year, to overcoming unique challenges presented by the unprecedented global pandemic of today, let me simply say our team has risen to the occasion.
Before I arrived, the company had embarked on a strategy to diversify the markets we serve and drive our portfolio mix with a greater concentration in higher value markets.
In the past year, we have worked further to align the customers where we can add the most value and these efforts have paid off.
Today we enjoy a diverse portfolio of products across many high growth and high value sectors.
That being said, we are not immune to the current recession that this disease has caused and we have an unprecedented amount of demand changes in our portfolio that's required a lot of the team's attention to ensure we capitalize on new opportunities while mitigating any risks.
We believe this diverse portfolio and exposure to high value segments will allow us to expand our quarterly revenue through the balance of the year.
Supply chain in our complex high mixed environment is a constant focus, and our recent results have been supported by the strong performance of our supply chain team.
During the second quarter and due to the team's efforts, we were not significantly impacted by component shortages, but they did in some places contribute to operational inefficiencies.
Further, our revamped go-to-market organization has grown the manufacturing and engineering services opportunity pipeline by over 30% in the past 12 months, and have delivered three quarters of sequential growth in bookings, which bodes well for our long-term growth potential.
As we look out to the end of the year, we are still on track to exit 2020 with at least 9% gross margin and we expect to build on this momentum into 2021.
As the global pandemic continues to evolve, we have expanded protocols focused on keeping a safe work environment for our employees.
Our actions are informed by the best practices published by the CDC, the WHO and local authorities, and we've completed a Company Employee Survey to solicit direct feedback on our actions to date and ensure our employees agree that we are maintaining a safe work environment.
Where possible we are continuing to permit about 20% of our employees to work from home.
We have shifted our customer engagements to a virtual environment with real time video supported factory tours as we limit travel to protect our teams.
We even hosted a virtual grand opening of our new Phoenix operation with Governor Ducey and Mayor Gallego.
Our teams have adapted well to the new reality, and we are finding creative ways to stay close to our customers and continuing to collaborate with them on solving new challenges.
In Asia, China and Thailand we are fully operational through the second quarter.
As we entered Q2, our Penang, Malaysia operations, which includes our largest precision machining facility operated at 50% capacity based on local restrictions, which were subsequently lifted at the end of April.
From the 1st of May, Malaysia has been fully operational.
Our European sites in the Netherlands and Romania were fully operational in the second quarter and remains so today.
Across the US, our five operations in California were impacted by shelter-in-place orders through April.
Since early May and to the present all California locations as well as our other US sites are fully operational.
In Mexico, we have two operations in Tijuana and one in Guadalajara.
The 100% shutdown that impacted our Tijuana operations was lifted in mid-May after we passed some inspection and were given authorization to operate by the Baja's state.
There has been a phase return to work since this time and the Tier 1 sites are now operating at approximately 75%.
Our Guadalajara facility has been essentially operating at 75% productivity due to at-risk employees being required to stay home for the Jalisco state government restrictions.
We are staggering shifts and other protocols in our Mexican operations to keep our employees safe and optimize output.
This has been and remains a highly dynamic environment.
As shelter-in-place orders were lifted in the US, we had hoped the country could maintain the declining infection curve.
Unfortunately this has not happened.
As the incident rate domestically increases, there could be temporary shutdowns of one of our facilities at any given time.
And we stand ready to execute decontamination protocols beyond our normal safe work in cleaning procedures.
Our operation teams will continue to maintain our safety first approach, while managing schedules to ensure we meet delivery obligations to our customers.
Over to you, Roop.
I hope everyone and their families are staying healthy and safe.
Let me start by echoing Jeff's sentiment on the incredible efforts of our teams to support our customers through a very dynamic environment.
As we manage through the COVID crisis, our priorities remain centered on one, the health and safety of our employees.
Two, delivering for our customers.
Three, maintaining a healthy balance sheet and four, ensuring the financial flexibility to run our operations through uncertainty.
Total Benchmark revenue was $491 million.
Medical revenues for the second quarter increased 14% sequentially and were up 18% year-over-year from continued new product ramps, strength throughout our medical customers and increasing demand for critical devices necessary to support the COVID-19 fight, including X-ray and ultrasound devices, ventilators and diagnostic equipment, which we estimate is approximately a third of our sequential growth.
Semi-Cap revenues were up 5% in the second quarter and up 39% year-over-year from continued strong demand across our Semi-Cap customers.
A&D revenues for the second quarter decreased 26% sequentially due to approximately $15 million lower revenue from our commercial aerospace programs, which is approximately 30% of the sectors revenue.
The remaining decline in the sector is related to defense program timing changes, whether that is the end of certain programs or transitions to new programs.
Demand from our defense customers for security solutions, aircraft, munitions and satellites remained strong.
We expect continued strong demand in Q3 and Q4 2020 including new programs ramping which should result in sequential revenue growth.
Industrial revenues for the second quarter decreased 15% sequentially.
Demand for products in the oil and gas industry, which is approximately 20% of our revenue, continued to be generally soft and will likely stay soft for the remainder of the year.
In addition demand decreased for goods that support the commercial building and transportation infrastructure markets.
Overall, the higher value markets represented 81% of our second quarter revenue.
In the traditional markets, computing was up 20% quarter-over-quarter from new program ramps and two engineering and manufacturing programs in high-performance computing.
Telco was down 10% sequentially.
We saw pockets of strength in demand for network infrastructure, which was offset by lower demand for broadband and commercial satellite applications.
Our traditional markets represented 19% of second quarter revenues.
Our top 10 customers represented 44% of sales for the second quarter.
Our revenue of $491 million reflects a decrease on a quarter-over-quarter basis.
Our GAAP loss per share for the quarter was $0.09.
Our GAAP results include restructuring and other one-time costs totaling $5.7 million.
$3.3 million is related to the severance and other items for the announced closure of our Angleton site which Jeff will cover in more detail in his initiatives update.
$1.2 million is related to the completion of our San Jose closure and the remaining is due to other various restructuring activities around our network.
Our previously announced San Jose site closure has been completed on schedule and within our original cost estimates.
Turning to Slide 10.
For Q2, our non-GAAP gross margin was 7%, a 140 basis points sequential decline.
As Jeff stated earlier, our results were negatively impacted by $4 million of costs related to COVID-19 including site shutdown days pursuant to government orders, idle and not fully productive labor costs, personal protective equipment and incremental freight charges.
The majority of these costs impacted our gross profit.
We expect the second quarter to be the lowest quarterly gross margin in fiscal year 2020, and we still believe that we can exit 2020 at, at least 9% of gross margin.
Our SG&A was $28.5 million, a decrease of $3.1 million sequentially and $3 million year-over-year due to the cost containment measures, which we have continued, including salary reductions for certain management personnel, including the executive team, freezing travel, reducing discretionary spending and delaying hiring in addition to our reduction in variable compensation expense.
Operating margin was 1.2%, a decrease from 2.3% in Q1 due to lower revenue, reduced gross margin offset by the lower SG&A.
In Q2 2020, our non-GAAP effective tax rate was 29%, which was higher than expected for the quarter due to the distribution of income across our network and certain discrete tax items.
The higher tax impact was approximately $0.01 per share.
Non-GAAP earnings per share was $0.07 for the quarter and non-GAAP ROIC was 5.9%.
Our cash balance was $356 million at June 30, with $194 million available in the US.
We did repatriate cash in Q2.
We will continue to repatriate future quarters when appropriate, while also balancing our foreign site's cash flow requirements.
Our cash balances include $30 million of proceeds from borrowings under our revolving line of credit.
At June 30, we were at a positive net of debt cash position of approximately $183 million which was higher than the end of Q1 by approximately $12 million.
We believe we've got -- we have a strong capital structure and our liquidity position provides flexibility to manage our business through the current environment.
We generated $23 million in cash flow from operations and $13 million free cash flow after netting $10 million of capital expenditures.
Our accounts receivable balance was $302 million, a decrease of $16 million from the prior quarter.
Contract assets were $154 million at June 30 and $160 million at March 31.
Payables were down $11 million quarter-over-quarter.
Inventory at June 30 was $364 million, up $26 million quarter-over-quarter.
Turning to Slide 12 to review our cash conversion cycle performance.
Our cash conversion cycle days was 84.
The primary driver for the slightly higher cycle days was the effect from the increase in inventory.
Inventory days increased due to mix changes from customers late in the quarter and advanced inventory purchases to support long production cycles for products in our Semi-Cap and Medical sectors.
Along with the inventory increase, we did see a corresponding increase in customer cash deposits, which is used to offset advanced inventory purchases.
Now turning to Slide 13 for a capital allocation update.
In Q2, we continued to pay a quarterly cash dividend of approximately $5.8 million.
As a reminder, we increased our recurring quarterly cash dividend to $0.16 per share on February 3, 2020.
We expect to continue the recurring quarterly cash dividend.
We suspended our share repurchase program in Q2, and we are not planning any share repurchases in the third quarter.
Turning to Slide 14 for a review of our third quarter 2020 guidance.
We expect revenue to range from $490 million to $530 million.
Our non-GAAP diluted earnings per share is expected to be in the range from $0.26 to $0.30 or a midpoint of $0.28.
We expect to generate cash flow from operations for the full year even considering the challenging COVID-19 environment.
Capex for the year will be approximately $30 million to $35 million as we prioritize investments to support new customers and expand our production capacity for future growth.
Implied in our guidance is a 2.9% to 3.1% operating margin range for modeling purposes.
The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs.
We expect to incur restructuring and other non-recurring costs in Q3 of approximately $800,000 to $1.2 million.
Other expenses net is expected to be $2.4 million, which is primarily interest expense related to our outstanding debt.
We expect that for Q3, our non-GAAP effective tax rate will be in the range of 20% to 22%, because of the distribution of income around our global network.
The expected weighted average shares for Q3 are 36.7 million.
This guidance takes into consideration all known constraints for the third quarter and assumes no further significant interruptions to our supply base, operations or customers.
The guidance also assumes no material changes to end market conditions due to COVID-19.
Following Roop's guidance for the third quarter, I wanted to provide additional color on our view of demand by sector for the second half of 2020 on Slide 16.
As I stated earlier in the call, our global operations are at or near our planned staffing levels with the exception of Mexico.
Given our current operational state, our ability to fulfill demand remains high.
Through the second quarter and early in July, we have gained a better picture of the demand outlook from customers in each of our market verticals, and have a current snapshot of what our revenue trends could look like in the second half.
I want to reinforce, this is just a snapshot because there will likely be puts and takes across our sub sectors as we move forward.
I will start with the Medical sector where demand grew almost 14% sequentially from Q1 and is forecasted to remain strong throughout the rest of the year from new program ramps in imaging systems and for critical care and diagnostic devices supporting COVID-19.
On the flip side, our core medical products that supports cardiac, renal and orthopedic therapies have seen demand reductions in the second half that have offset some of the increases as hospitals and clinics are deferring planned procedures and elective surgeries based on hospital capacity.
We expect demand for these products to increase when the COVID crisis lessens.
But the end result for our portfolio, is that we believe it will remain at the Q2 level for the balance of 2020, which still represents double-digit year-over-year growth.
In Semi-Cap, the demand recovery for semiconductor capital equipment continues based on the current forecast from our customers.
On the strength of this demand, we expect sequential quarterly revenue growth for the rest of the year further supported by some new program ramps as well.
Our competitive position remains very strong and we look forward to increasing our industry leading precision machining position in this sector.
Our A&D sector is comprised of approximately 70% defense related products and 30% aerospace.
Demand for radar, missiles, military aircraft and satellite communication devices remains strong, and we expect continued strength in the second half.
However as Roop referenced earlier in our Q2 results, demand for commercial aircraft programs are not showing any signs of recovery in the second half of this year.
Moving to the Industrial sector.
We see limited recovery for customers supporting oil and gas through 2020, which represents approximately 20% of sector revenue.
We are also seeing softer demand for commercial and transportation infrastructure markets, as many of our customers' projects have been deferred.
As a bright spot, we are seeing strength in testing instrumentation and IoT related products.
Similar to Industrials, the traditional markets of Computing and Telco will remain mixed.
We see strength in Computing as we saw in Q2 with very complex high performance computing projects landing in the second half.
However, these programs tend to be project orientated.
So it's important that the end customer scheduled supports installing these machines in the year.
Demand from customers we support in security computing and enterprise data centers will remain muted given the lockdown on enterprise IT capital spending.
On the Telco side, we've seen increases in network infrastructure products, supporting greater work from home bandwidth demand, but this has been offset by declines for next generation network build out and in some commercial satellite applications.
Despite a challenging global backdrop that is most of our business development team grounded, we had our third sequential growth quarter of bookings growth.
Our marketing team has been instrumental in working with our operation and sales teams on virtual tours and capability demonstration that is becoming a part of the new norm in our business.
Fortunately, the demand environment remains favorable for outsourcing, as many companies continue to pivot to more variable design and manufacturing cost models.
In the Medical sector, we were awarded programs for a fall detection system and a new drug delivery device, which have both coupled with front-end engineering projects.
Also, as we stated last quarter, we were awarded new ventilator programs that are being rapidly transferred into manufacturing revenue for Benchmark.
In Defense, we were awarded a number of new programs including design and manufacturing for space module electronics, and for optical sensors for military applications.
In Industrials, we were awarded a new product that will come to market for microbial cleaning in commercial venues, which has become a critical application in the new normal of living with COVID and beyond.
I'm also pleased to announce that we have partnered with CoreKinect to provide IoT ecosystem hardware from our new Phoenix EMS operations.
Our new business pipeline is strong across our targeted sectors and we remain very encouraged about the prospects for continued outsourcing wins in the coming quarters.
During the first half of 2020, even with the significant challenges brought on by the pandemic, we've continued to make progress on our strategic initiatives, and I wanted to share a few updates as we close the call today.
Benchmark is in the services business, and one of our top priorities is to deepen our relationship with customers as a strategic partner and trusted innovation collaborator.
I can report that customer satisfaction which I review with the team weekly remains very high.
During the crisis, there is a heightened level of communication and coordination required in serving customers and as I noted last quarter, I have personally received multiple inputs on the discipline and excellence of our teams.
In fact, in Q2, we received three service excellence awards from our top customers recognizing our performance during this pandemic.
As I stated earlier in the call, I couldn't be prouder of our organization.
In addition, we are partnering with Applied Materials on their SuCCESS2030 Sustainability Initiative and participated in their announcement at SEMICON West earlier this month.
Benchmark is committed to supporting ESG initiative and are excited when we can further these actions working closely with a valued customer.
Turning now to growing our business, with our revamped go-to-market organization, we have had our third consecutive quarter of sequential growth in new program wins.
We have the right team on the field and we'll continue to reap benefits from the investment in this area.
We are making progress in our Medical, Semi-Cap and Defense accounts and starting to see early results with new engineering and EMS wins in our Industrial sector.
We continue to drive enterprise efficiencies.
Against a very challenging macro backdrop, our teams have maintained focus on meeting the needs of our customers and our operating performance is improving.
We have also continued our global footprint optimization program, which we started almost a year ago.
The objective of this program is to utilize ongoing voice of the customer feedback to align our geographic capabilities and footprint to meet customer needs.
The outcome of our most recent round strategic reviews, is that we decided to close our Angleton Texas operations.
We plan to consolidate many of the programs into other Benchmark manufacturing operations, which will improve utilization and efficiencies.
This initiative isn't just about closing factories.
As we are also looking at where we want to expand our investment and footprint.
In support of that in June, we announced our newest facility with the virtual grand opening of Benchmark Phoenix.
This new state-of-the-art facility in Phoenix features RF design in manufacturing circuit fabrication Micro-E, SMT, systems integration and testing all under one roof.
This enables us to provide the proverbial one-stop shop for sophisticated customers, looking for extremely densed hybrid circuit designs, who might also have a need for Micro-E or SMT assembly on the same design.
And with our new facility, they don't need to look any further.
The customer response for this type of advanced manufacturing operation has been very positive and we look forward to the growth from this operation.
Finally, I want to close with our initiative on engaging talent and shift in culture.
First, Benchmark has a great cultural foundation and the work we've completed over the past year, since I joined, is a testament to the support we provide each other in this organization.
At Benchmark, we are committed to advancing diversity and inclusion efforts at all levels in the company.
In this endeavor, we are committed to more transparency, education and diversity training, and talent recruitment to improve our pipeline of diverse future leaders.
We look forward to sharing details on our progress in the future as part of our increasing focus on environmental, social and governance affairs.
Now, let me wrap up.
The senior leadership team is engaged in driving these initiatives and the level of collaboration throughout our organization is energized.
We remain committed to our long-term strategy and we'll use this unprecedented time of change to hone our skills, rightsize our operations and expand our technical capabilities, so that we will emerge with a stronger organization and business in the years to come.
| q2 non-gaap earnings per share $0.07.
q2 gaap loss per share $0.09.
q2 revenue $491 million versus refinitiv ibes estimate of $474.3 million.
sees q3 2020 non-gaap earnings per share $0.26 to $0.30 excluding items.
sees q3 2020 gaap earnings per share $0.21 to $0.26.
sees q3 2020 revenue $490 million to $530 million.
|
These statements are based on how we see things today.
Actual results may differ materially due to risks and uncertainties.
Some of today's remarks include non-GAAP financial measures.
These non-GAAP financial measures should be -- should not be considered a replacement for and should be read together with our GAAP results.
Tom will provide an overview of the current operating environment, while Rob will provide some details on our second quarter results as well as some shipment trends for the third quarter.
We delivered solid financial results in the second quarter as our entire Lamb Weston team continues to execute well through this challenging environment.
That's only possible because of their ongoing commitment to serving our customers, suppliers and communities.
Our second quarter results also reflect operating conditions that were generally similar to what we experienced in the first quarter.
Overall restaurant traffic in the US was resilient by holding steady at around 90% of pre-pandemic levels for much of the quarter.
However, traffic and frozen potato demand rates continued to vary widely by channel.
Traffic at large chain restaurants were essentially at prior year levels as quick service restaurants continued to leverage drive-through, takeout and delivery formats.
Traffic at full service restaurants was 70% to 80% of the prior year levels for much of the quarter.
However, traffic began to soften in November as governments reimposed social and on-premise dining restrictions in an effort to contain the resurgence of COVID and as the onset of colder weather tempered outdoor dining opportunities across many markets.
Traffic and demand at non-commercial customers, which includes lodging, hospitality, healthcare, schools and universities, sports and entertainment, and workplace environment was fairly steady at around 50% of prior year levels for the entire quarter.
In retail, consumer demand continued to be strong with weekly category volume growth between 15% and 20% versus the prior year.
Outside the US, restaurant traffic in fry demand were uneven across markets and varied within the quarter.
In Europe, which is served by our Lamb Weston Meijer joint venture, fry demand during much of the quarter was similar to last year, but softened the 75% to 85% of prior year levels during the latter part of the quarter as governments reimposed social restriction and as the weather turn colder.
As you may recall, unlike in the US, QSRs in Europe generally have only limited drive-through capabilities.
Demand in our other key international markets was mixed.
In China and Australia, demand was near prior year levels.
In our other key markets in Asia and Latin America, overall demand improved sequentially from our first quarter, but remained well below prior year levels.
Going forward, we expect many of the softer traffic and demand trends that we began to see in November to carryover into our fiscal third quarter.
The sharp resurgence in COVID in the US and Europe has led government to imposed even more rigid social restrictions, In addition, we expect outdoor restaurant dining traffic in our largest markets to fall further as we enter the coldest months of the year in the northern hemisphere.
Not surprisingly, we expect traffic at full service restaurants will continue to be disproportionately affected.
Major QSR chains in the US should be able to continue to hold up well due to their ability to serve customers via drive-through and delivery.
Retail should also benefit as consumers eat more meals at home.
And as Rob will discuss later, while still early, our shipments to those channels in December support that view.
So on one the hand in the near term, we anticipate facing even more challenging and volatile operating conditions than what we experienced in the first half of our fiscal year.
On the other hand, we believe this COVID induced shock to demand is temporary.
We're confident in the strength of the frozen potato category and do not see any structural impediments to recovery in demand and growth over the long term.
As COVID vaccines become more widely available in the coming months and as the virus is more broadly contained, we expect governments will gradually less social restrictions.
This should lead to steady growth in restaurant traffic as the year progresses.
We believe this growth will lead to overall frozen potato demand approaching pre-pandemic levels on a run rate basis by the end of calendar 2021.
In the meantime, we're confident in our business fundamentals, the pricing capacity utilization and potato supply and our ability to manage through the pandemics impacts on our manufacturing operations.
Our recently announced increase in our quarterly dividend in the planned resumption of our share repurchase program reinforce our conviction in the strength of our business and the category, as well as our commitment to support customers and create value for our stakeholders.
In summary, we delivered solid Q2 results and are executing well in a challenging environment.
We expect frozen potato demand has softened in the near term due to reduced traffic, following government reimposed, social restrictions as well as the onset of colder weather, and we're optimistic that the increasing availability of COVID vaccines will enable restaurant traffic to gradually improve as the year progresses and that demand will approach pre-pandemic levels by the end of calendar 2021.
As Tom noted, we delivered solid financial results in the second quarter, as our teams continued to manage through an ever changing demand environment as well as COVID-related disruptions to our manufacturing and distribution networks.
For the quarter, net sales declined 12% to $896 million.
Sales volume was down 14% largely due to fry demand at restaurants and foodservice being negatively impacted following government imposed restrictions to contain the spread of COVID, as well as colder weather beginning to limit outdoor dining across many of our markets.
Overall, as Tom described earlier, restaurant traffic and our sales volumes in the US stabilized at approximately 90% of pre-pandemic levels, although performance varied widely by sales channel.
International sales were mixed but improved sequentially versus our first quarter.
Price mix increased 2% driven by improved price in our Foodservice and Retail segments as well as favorable mix in retail.
Gross profit declined $62 million as lower sales and higher manufacturing costs more than offset the benefit of favorable price mix and productivity savings.
As we discussed in our previous earnings call, we expect that our manufacturing cost to increase in the quarter.
This was partly due to processing potatoes from the 2019 crop through early September, which is a couple of months longer than usual.
We did this in order to manage finished goods inventories in light of the pandemics impact on fry demand.
Processing older crop results in increased cost due to significant -- due to higher raw material storage fees and lower recovery rates.
Since we typically carry upwards of 60 days of finished goods inventory, we realize the impact of these costs in our second quarter income statement as we sold that inventory.
We also realized higher manufacturing costs due to input cost inflation, primarily related to edible oils, raw potatoes and other raw ingredients.
Overall, our input cost inflation was in the low-single digits.
Finally, we continue to realize incremental costs and inefficiencies resulting from the pandemic's disruptive effect on our manufacturing and supply chain operations.
As a reminder, these costs largely relate to labor and other cost to shutdown, sanitize and restart manufacturing facilities impacted by COVID.
Cost associated with modifying production schedules reducing run-times and manufacturing retail products on lines primarily designed for foodservice products and cost per enhancing employee safety and sanitation protocols, as well as for incremental warehousing, transportation and supply chain costs.
Specifically in the quarter, we had notable disruptions in our facilities in Idaho, as well as lesser ones in some other facilities.
We expect to continue to incur COVID-related costs through at least the remainder of fiscal 2021.
As a result, we consider these costs and disruptions as part of our ongoing operations and are no longer disclosing these costs separately.
SG&A declined by nearly $8 million in the quarter, largely due to lower incentive compensation expense accruals and a $3.5 million reduction in advertising and promotional expense.
The decline was partially offset by investments to improve our operations and IT infrastructure, which included about $5 million of non-recurring consulting and training expenses associated with implementing Phase 1 of our new ERP system.
Equity method earnings were $19 million, which is up $4 million versus last year.
Excluding the impact of unrealized mark-to-market adjustments equity earnings increased about $2 million due to better performance by our European joint venture.
However, like in the US, our shipments softened during the latter part of the quarter reflecting the effect on restaurant traffic of governments reimposing, social restrictions, as well as colder weather on outdoor dining.
EBITDA, including joint ventures was $213 million which is down $48 million.
The decline was driven by lower income from operations and it was partially offset by higher equity method earnings.
Diluted earnings per share in the quarter was $0.66, down $0.29 largely due to lower income from operations.
EPS was also down due to higher interest expense reflecting our higher average total debt and the write-off of some debt issuance costs as we paid off the term loan, a year early.
The decline was partially offset by higher equity earnings.
Moving to our segments.
Sales for our Global segment, which generally includes sales for the top 100 North American based QSR and full service restaurant chains, as well as all sales outside of North America were down 12% in the quarter.
Volume was down 11% due to softer demand for fries outside the home, especially in our international markets.
Shipments to large chain restaurant customers in the US of which approximately 85% are to QSRs approach prior year levels as QSRs leveraged drive-through and delivery formats.
However, some of that strength also reflected pulling forward sales of customized and limited time offering products from the third quarter.
International sales, which historically comprised about 40% of segment sales, we're at about 80% of prior year levels in the aggregate, but vary by market.
Shipments in China and Australia approached prior year levels.
Our shipments to other parts of Asia and Latin America, improved sequentially as customers and distributors in many of these markets were able to right-size inventories, however, they remained well below prior year levels.
Price mix declined 1% as a result of negative mix.
Price alone was flat.
Global's product contribution margin, which is gross profit less A&P expense declined 28% to $93 million.
Lower sales volume, higher manufacturing costs, and unfavorable mix drove the decline.
Sales for our Foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American restaurant customers, declined 21% in the quarter.
Segments to smaller chain and independent full service and quick service restaurants tracked around 70% to 80% of prior year levels through much of October, but slowed to 60% to 70% in November, following government's reimposing, social restrictions and as colder weather tempered restaurant traffic in some of our markets.
Shipments to non-commercial customers improved modestly since summer but remain at around 50% of prior year levels, with strength in healthcare more than offset by continued weakness in the other channels.
Price mix increased 4% behind the carryover benefit of pricing actions taken in the latter half of fiscal 2020.
Mix continued to be unfavorable with some hard hit independent restaurants looking to reduce costs by purchasing more value-added products rather than the premium Lamb Weston branded ones.
While we've regained much of this business since the pandemic first struck last spring on a year-over-year basis, it remains a mix headwind.
Foodservices product contribution margin declined 21% to $88 million.
Lower sales volumes, higher manufacturing costs and unfavorable mix drove the decline and was partially offset by favorable price.
Sales for our Retail segment increased 7% in the quarter.
Price mix increased 7%, primarily reflecting favorable mix benefit of selling more of our higher margin branded portfolio of Alexia, Grown in Idaho and licensed restaurant trademarks.
Sales of our branded products were up about 30% which is well above category growth rates, which ranged between 15% and 20%.
The increase in our branded volume was offset by the loss of certain low margin, private label volume that began late in the second quarter of fiscal 2020, as well as an additional amount that began a couple of months ago.
As a result, we expect private label losses to continue to be a headwind.
Retail's product contribution margin increased 6% to $30 million.
The increase was driven by favorable mix and lower A&P expense and was partially offset by higher manufacturing costs.
Moving to our cash flow and liquidity position.
We are comfortable with our liquidity positioned and confident in our ability to continue to generate cash.
In the first half, we generated nearly $320 million of cash from operations, which is down about $25 million versus last year, due to lower sales and earnings.
We spent $54 million in capex, including expenditures for our new ERP system.
We paid $67 million in dividends and a few weeks ago, announced a 2% increase in our quarterly dividend.
In addition, we plan to resume our share repurchase program this quarter.
As you may recall, we temporarily suspended our buyback program in late fiscal 2020 in order to help preserve our liquidity during the early days of the pandemic.
As we discussed in our previous earnings call, in September, we amended our credit agreement to put in place a new three-year $750 million revolver.
At the same time, using a portion of the more than $1 billion of cash on hand, we prepaid the approximately $270 million outstanding balance on the term loan that was due in November of 2021.
At the end of the second quarter, we had more than $760 million of cash on hand and our new revolver was undrawn.
Our total debt was $2.75 billion and our net debt to EBITDA ratio was 3.1 times.
Now turning to our shipments so far in the third quarter.
Broadly speaking, in the US, demand at QSRs and at retail are holding up well, while traffic at full service restaurants continues to soften.
Specifically, US shipments in the four weeks ending December 27, were approximately 85% of prior year levels.
In our Global segments, shipments to our large QSR and full-service chain customers in the US, were more than 95% of prior year levels.
We expect that rate will largely continue for the remainder of the third quarter.
In our Foodservice segment, shipments to our full service restaurants regional and small QSRs and non-commercial customers in aggregate were 60% to 65% of prior year levels.
That is largely in line with what we realized during the latter part of the second quarter.
We anticipate that shipments to full-service restaurants and small and regional QSRs will continue to soften as social restrictions broaden and as winter weather takes a bigger bite out of outdoor dining.
Shipments to non-commercial customers, which have historically comprised about 25% of the segment's volume were roughly half of prior year levels and will likely remain soft for the remainder of the quarter.
In our Retail segments, shipments were above prior year levels with strong volume of our branded products, partially offset by a decline in shipments of private label products.
We believe that this rate will largely continue for the remainder of the quarter.
Outside the US, overall demand has slowed, but it's varied by market.
In Europe, shipments by our Lamb Weston Meijer joint venture were approximately 85% of prior year levels, continuing the softer demand that we realized during the latter part of the second quarter.
We believe that shipments will continue to soften due to severe social restrictions and colder weather.
Shipments to our other international markets, which primarily include Asia, Oceana, Latin America were mixed.
In aggregate, international shipments so far in the quarter have been softer than what we realized during the latter half of the second quarter.
As a reminder, all of our international sales are included as part of our Global results.
In short, other than at US QSRs, which can leverage drive-through access, global demand for fries at restaurants and foodservice will be soft in the third quarter, following government's reimposing restrictions to combat the resurgence of COVID, as well as colder weather in our Northern Hemisphere markets limits outdoor dining opportunities.
With respect to contract pricing, after completing discussions for contracts that were up for renewal, we expect pricing across our domestic large chain restaurant portfolio in aggregate to be flat versus prior year.
Outside of these large chain restaurant contracts, on balance, domestic pricing is holding up well.
However, we continue to see increased competitive activity in more value-added oriented products in some international markets and to a lesser extent in some value tiered domestic market segments.
With respect to costs, the potato crop in our growing regions in the Columbia Basin, Idaho, Alberta, and the upper Midwest is consistent with historical averages in aggregate.
We don't see any notable impact on cost outside of inflation.
Crop in our growing areas in Europe is also broadly consistent with historical averages, which should help ease cost pressures there versus last year.
However, we do expect to continue to incur additional cost as a result of COVID's disruptive impact on our manufacturing and supply chain operations and we expect that we'll continue to do so until the virus is broadly contained.
Now here's Tom for some closing comments.
Let me just quickly sum up by saying while the near-term environment will be volatile.
We believe that the restaurant traffic will gradually recover to pre-pandemic levels by the end of calendar 2021.
We'll continue to focus on the right strategic and operating priorities to serve our customers and build upon the long-term health of the category in order to create value for our stakeholders.
| q2 earnings per share $0.66.
q2 sales $896 million versus refinitiv ibes estimate of $876.8 million.
qtrly volume declined 14 percent.
north america and europe shipments will remain soft during remainder of quarter.
expect demand will remain soft in the coming months, especially at full-service restaurants.
lamb weston - believe restaurant traffic may approach pre-pandemic levels later this calendar year if vaccines and other measures are successful.
plan to resume share repurchase program in january 2021.
announced a 2% increase in quarterly dividend.
|
These statements are based on how we see things today.
Actual results may differ materially due to risks and uncertainties.
Some of today's remarks include non-GAAP financial measures.
These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results.
Tom will provide an overview of the current operating environment and our recently announced investment in China, while Rob will provide some details on our third quarter results as well as some shipment trends for the fourth quarter.
We delivered solid sales volumes in the third quarter as restaurant traffic and consumer demand improved as governments gradually ease social and on-premise dining restrictions in some markets.
While still down year-over-year, the rate of volume decline improved sequentially in both the US and in our key international markets from what we realized during the first half of our fiscal year.
Again, this was largely in response to governments easing restrictions as the quarter progressed and demonstrates that consumers are ready to go out as restaurants expand dining capacity.
Specifically, overall restaurant traffic in the US was between 85% and 90% of pre-pandemic levels.
Traffic at large quick service chain restaurants continued at roughly prior-year levels as they leveraged drive-thru, takeout and delivery formats.
After a slow start to the quarter, traffic at full service restaurants recovered to 70% to 80% of prior-year levels.
Traffic began to pick up later in the quarter as some governments gradually lifted social and dining restrictions that were put in place, due to the resurgence of COVID and as a relatively mild winter weather provided more outdoor dining opportunities.
While we expect this momentum will continue, we're mindful that some of this performance may be due to customers and distributors restocking inventories prior to an expected boom in restaurant traffic in coming months.
In contrast, demand in non-commercial customers, which includes lodging and hospitality, healthcare, schools and university, sports and entertainment, and workplace environments, remain around 50% of prior-year levels for the entire quarter.
We're confident that demand from these customers will return, but realize the recovery to pre-pandemic levels may take some time as governments slowly lift restrictions for larger gatherings.
In retail, demand in the quarter was strong with weekly category volume at 115% to 125% of prior-year levels as consumers continued to eat more meals at home.
Outside the US, restaurant traffic and fry demand has been mixed.
In Europe, which is served by our Lamb-Weston/Meijer joint venture, fry demand in the quarter was 80% to 85% of prior-year levels.
However, we believe that demand rate is likely to soften as governments reimposed severe social restrictions in response to the resurgence of COVID infections.
Demand in most of our international markets in Asia, Oceania and Latin America improved in the quarter.
Our shipments in China were strong.
Demand in our other key markets in the aggregate remain below prior-year levels, but continue to improve sequentially versus the first half of the year as well as in each month of the quarter.
So while demand in Europe remained soft, we feel good about the demand trends in the US and most of our key international markets.
And we expect governments will continue to gradually roll back social restrictions in the months ahead as more of their citizens get access to vaccines.
This should serve to unlock pent-up consumer demand to visit restaurants and other food service outlets and ultimately, demand for fries.
As a result, we remain optimistic the overall frozen potato demand will steadily approach pre-pandemic levels on a run rate basis by the end of calendar 2021.
The progress we made on sales volume in the quarter was offset by the pandemic's continued effect on our supply chain operations.
As Rob will discuss later, COVID-related disruption significantly affected our production, transportation, and warehousing networks leading to significantly higher costs as we focused on customer service, while dealing with the pandemic's impact in some of our communities and workforce.
In addition, decisions that we made in the first half of the year to defer certain capital, repair and maintenance projects further reduced our flexibility to manage disruptions and drove incremental manufacturing and distribution costs.
So in summary, in the third quarter, we delivered solid top line results.
Operating in a pandemic environment has been and will continue to be challenged, and we expect it will continue to incur our higher costs across our supply chain in the near term.
First, we will provide our normal update for this year's potato crop when we report earnings in July and October.
Second, as you may have seen a couple of weeks ago, we announced that we're building a new French fry processing facility in China at a total investment of around $250 million.
This greenfield facility will complement our planned Shangdu and is expected to add about 250 million pounds of frozen potato product capacity.
We anticipate starting up the plant sometime during the back half of calendar 2023.
We chose to build this plant in China because it's a fast-growing 1 billion pound plus market and a key driver to our international growth.
This new plant enables us to support customers in China using in-country supply, which is something that our larger customers there increasingly want as they continue to expand.
In addition, our new facility will allow us to further diversify our manufacturing base and mitigate risks or potential trade disruptions as we look to drive international growth.
So in summary, in the third quarter, we delivered solid top line results as demand continued to gradually recover, but incremental costs related to pandemic-related disruptions pressured earnings.
We expect that the increasing availability of COVID vaccines and the easing of government-imposed social restrictions will allow restaurant traffic to gradually improve as the year progresses.
And we remain optimistic that overall frozen potato demand will approach pre-pandemic levels on a run rate basis by the end of calendar 2021.
As Tom noted, in the third quarter, we delivered solid sales results as overall demand continued to improve, but the pandemic's disruptive impact on our manufacturing and distribution operations significantly increased our costs.
Specifically in the quarter, net sales declined 4% to $896 million.
Sales volume was down 6%, largely due to the pandemic's impact on fry demand, but improved through the quarter after a slow start.
Importantly, that rate of volume decline improved sequentially from the 14% decline that we realized during the first half of fiscal 2021.
Most of the sequential improvement was within our Global segment and largely reflects a steady recovery in shipments in our key international markets.
Stronger sales of limited-time offering products in the US also contributed to the Global segment's recovery.
In addition, we saw a sequential improvement in our Foodservice segment led by casual dining, as well as continued strength by our branded offerings in our Retail segment.
Improved price in our Retail and Foodservice segments as well as favorable mix in Retail drove the increase.
Price was up in our Global segment, although this was offset by negative mix.
Gross profit declined $54 million as lower sales and higher manufacturing and distribution costs more than offset the benefit of favorable price/mix and productivity savings.
Let's focus on cost of goods sold.
As Tom noted, the higher costs were largely a result of the pandemic's disruptive impact across our supply chain.
The resurgence of COVID in many of the communities where our plants are located greatly affected our manufacturing workforce.
At times, the combination of infected and quarantined employees significantly affected our ability to staff production lines and other key roles at a number of our facilities.
The consequences were: First, we lost days of production, which resulted in a number of our plants operating well below normal utilization rates and reduced our ability to cover fixed overhead costs.
In addition, recall that a year ago, we decided to continue paying employees despite production lines being down due to COVID.
While we believe that was a right thing to do to support our production teams, it has had an impact on our cost structure.
Second, focusing on maintaining customer service levels required us to quickly adjust production schedules to accommodate workforce and manufacturing line availability.
This drove incremental costs and inefficiencies.
In many cases, we shifted production from one facility to another even though the alternate facility may not be the most effective in terms of cost or throughput for that specific product.
That negatively impacted line speeds, throughput, and raw potato recovery rates.
And third, the number of effective employees and facilities meant that we incurred even more costs related to temporary shutdown and restart of manufacturing facilities.
Compounding these disruptions in the quarters were our decisions to defer certain capital, repair and maintenance projects on our production lines that were originally scheduled for the first half of fiscal 2021.
We planned on undertaking these capital and maintenance projects once the demand environment and our operations were more stable during the second half of the year.
While deferring these projects was prudent in light of the uncertainty surrounding COVID, executing them at the same time as another COVID wave impacted our plants led to additional disruption in our manufacturing capabilities and further limited our flexibility to adjust production schedules across our network.
This drove additional costs and inefficiencies on top of the staffing-related issues I described.
The pandemic-induced volatility in our production facilities also had a downstream impact on our transportation and warehousing operations.
We generally prefer to rely on rail more than trucking to move product from our production facilities and warehouses to our distribution centers and customers across the country.
However, late changes to production schedules required us to switch significant volume from rail to trucking, which is more flexible, but also higher cost in an effort to maintain customer service levels.
In addition, we typically employed trucks using contracted carrier rates as opposed to securing spot trucking, which tends to be higher cost.
Spot trucking has also had significant rate increases over the past six months, but because of the disruption to our production schedules and again to prioritize customer service, we leaned more on expensive spot trucking.
So our transportation costs significantly increased because of an unfavorable mix of rail and trucking, as well as an unfavorable mix of contracted and spot trucking.
As you would expect, our warehousing costs also increased with the additional handling required across our distribution network.
Finally, while the pandemic-related effects on our supply chain were the primary drivers of our cost increases, we also realized higher cost due to input cost inflation in the low-single-digits.
We expect that rate will begin to tick up in the coming quarters as edible oil and transportation costs continue to increase.
While our costs were higher in the quarter, we are starting to see the benefits of our supply chain team's work around a series of initiatives we call Win As One [Phonetic].
These initiatives build upon the Lamb Weston operating culture productivity programs that we have in place.
Broadly speaking, Win As One seeks ways to reduce our variable and fixed cost, increased production throughput on existing assets and improved working capital, especially inventories.
In the couple of the plants where the team has implemented these new ways of working, asset utilization is at or above pre-pandemic utilization rates, and we're seeing the benefit in the cost structures in those facilities.
As the team continues to roll out these programs to the rest of the network and as infection and quarantine rates decline through vaccination programs we're supporting for our production employees, we expect our cost structure and utilization rates will begin to normalize.
Longer term, we expect these initiatives to enhance margins, drive cash flow and strengthen our culture of continuous improvement.
Since we only began to roll out Win As One at a couple of our plants few months ago, we're not providing any specifics on activities or targets today.
We anticipate giving investors more insight into this program as we gain more traction.
Moving to the segments -- moving on from cost of sales, excuse me, our SG&A increased $8 million in the quarter.
The increase was largely due to investments we're making behind the Win As One initiatives I just described.
Equity method earnings were $11 million.
Excluding the impact of unrealized mark-to-market adjustments and a comparability item in the prior-year quarter, equity earnings declined about $11 million.
Two factors drove the decline.
First, fry demand in Europe fell as much of the region remained in lockdown and as colder weather affected outdoor dining.
Second, our joint ventures also realized higher production costs related to COVID disrupting their manufacturing and distribution operations.
Adjusted EBITDA, including joint ventures, was $167 million, which is down $61 million.
Lower income from operations drove the decline.
Adjusted diluted earnings per share in the quarter was $0.45, which is down $0.32, mostly due to lower income from operations.
EPS was also down due to higher interest expense reflecting our higher average total debt resulting from actions we took to -- in late fiscal 2020 and early fiscal 2021 to enhance our liquidity position.
Now, moving to our segments.
Sales for our Global segment, which generally includes sales for the top 100 North American based QSR and full service restaurant chains, as well as all sales outside of North America, were down 2% in the quarter.
Volume was down only 2%, which is much better than the minus 12% we realized during the first half of fiscal 2021.
Shipments to large chain restaurant customers in the US, of which approximately 85% are to QSRs, increased nominally versus prior year.
QSRs continue to perform well as they continue to leverage drive-thru and delivery formats.
As I mentioned earlier, US QSRs were also aided by the return of some noteworthy limited-time product offerings.
International shipments, which historically comprise about 40% of the segment's volume, were about 95% of prior-year levels in the aggregate.
That's up from around 75% of prior-year levels that we realized during the first half of fiscal 2021.
In the third quarter, shipments in China were strong versus the prior year when demand was negatively impacted by COVID.
Shipments to our other key markets strengthened as the quarter progressed and were generally stronger in developed markets than emerging ones.
Price/mix was flat with positive price offset by unfavorable mix.
Global's product contribution margin, which is gross profit less A&P expense, declined 27% to $79 million.
Higher manufacturing and distribution costs as well as unfavorable mix drove the decline.
Sales for our Foodservice segment, which services North American foodservice distributors and restaurant chains generally outside the top 100 North American restaurant customers, declined 22%.
After a slow start, shipments to smaller chain and independent full service and quick service restaurants recovered to about 90% of prior-year levels for the entire quarter as governments gradually ease social and indoor dining restrictions.
We believe that some of the sales volumes strengthening during the last few weeks of the quarter may reflect distributors' restocking inventory in anticipation of more governments lifting social restrictions in the spring.
However, it's difficult to gauge the extent of that benefit.
In contrast, shipments to non-commercial customers remained at around 50% of prior-year levels, with continued strength in healthcare more than offset by weakness in other channels such as travel, hospitality, and education.
Price/mix increased 2% behind the carryover pricing benefit of pricing actions we took in the second half of fiscal 2020.
This was partially offset by unfavorable mix versus the prior year due to lower sales of premium products.
As we've discussed in previous earnings calls, we've regained much of this business since pandemic first struck last spring, but on a year-over-year basis, it remained a mix headwind for the quarter.
Foodservice's product contribution margin declined 30% to $70 million.
Lower sales volumes, higher manufacturing and distribution costs, and unfavorable mix drove the decline and was partially offset by favorable price.
Sales for our Retail segment increased 23%, with volume up 13%.
Sales of our branded portfolio, which include Alexia, Grown in Idaho and licensed restaurant trademarks, were up about 45%, continuing the strong growth trend we've seen since the start of the pandemic and well above category volume growth rates that have been between 15% and 25% in the quarter.
The increase in our branded volume was partially offset by the loss of certain low-margin private label volume, which will continue to be a headwind on volume through the remainder of the fiscal year.
Price/mix increased 10%, primarily reflecting the favorable mix benefit of selling more of our higher-margin branded products.
Retail's product contribution margin increased 15% to $33 million.
The increase was driven by favorable mix and was partially offset by higher manufacturing and distribution costs, as well as $1 million increase in advertising and promotional expense.
Moving to our cash flow and liquidity position.
We continue to be comfortable with our liquidity position and confident in our ability to continue to generate cash.
At the end of the third quarter, we had nearly $715 million of cash on hand and our revolver was undrawn.
Our total debt was more than $2.7 billion and our net debt-to-EBITDA ratio was about 3.5 times.
In the first three quarters of fiscal 2021, we generated nearly $375 million of cash from operations, which is down about $60 million versus last year due to lower sales and earnings.
We spent $107 million in capex and paid $101 million in dividends.
In addition, in the third quarter, we resumed our share buyback program and bought back nearly $13 million worth of stock at an average price of just over $77.00 per share.
Now, turning to our current shipment trends.
Please note that instead of providing a comparison to last fiscal year's fourth quarter, we're providing comparisons to the fourth quarter of fiscal 2019.
We're doing this since fourth quarter of fiscal 2020, which includes March, April and May of 2020, includes the severe impact of government-imposed social restrictions at the beginning of the COVID pandemic.
It was also the height of personal and economic uncertainty for many businesses and individuals.
As such, we believe the fourth quarter of fiscal 2019 provides a more meaningful comparison for investors to understand the current condition of our business.
Broadly speaking, we're optimistic about the recent restaurant traffic and shipment trends in the US and many of our key international markets other than Europe.
US shipments in the four weeks ending March 28 were approximately 90% of levels during a similar period for the fourth quarter of fiscal 2019.
In our Global segment, shipments to our large QSR and full service chain restaurant customers in the US were more than 85% of fiscal 2019 levels, and we expect that rate will largely continue for the remainder of the fourth quarter.
In our Foodservice segment, shipments to our full service restaurants, regional and small QSRs, and non-commercial customers in aggregate were approximately 90% of fiscal 2019 levels.
We anticipate that shipments for these customers will largely continue at similar rate for the remainder of the fourth quarter.
Shipments to non-commercial customers, which have historically comprised about 25% of the segment's volume, remained at around half of fiscal 2019 levels.
We expect these shipment rates will likely remain soft for the rest of the quarter and will likely take time to fully recover from pre -- to pre-pandemic levels.
In our Retail segment, shipments were approximately 110% of fiscal 2019 levels, with strong volume growth of our branded products partially offset by a decline in shipments of private label products.
We believe this rate may gradually decline during the remainder of the fourth quarter, as consumers begin to shift purchases of fries to dining at restaurants as governments lift social restrictions.
Outside the US, overall demand varies by market.
In Europe, shipments by our Lamb-Weston/Meijer joint venture were about 85% of fiscal 2019 levels.
Demand has softened over the past few months as governments in some of our larger markets such as Italy and France reimposed stricter social restrictions to combat a resurgence in COVID infections.
In addition, other than in the UK, vaccination efforts across Europe have lagged well behind rates in the US.
As a result, we anticipate shipments may slow during the remainder of the fourth quarter.
Shipments to our other international markets, which primarily include Asia, Oceania and Latin America, were approximately 75% of fiscal 2019 levels in aggregate.
As I discussed earlier, international shipment rates have steadily improved over the past few months, and we expect that will continue during the remainder of the fourth quarter as governments slowly ease social restrictions and as the current congestion at shipping ports begins to clear up.
For those markets that are currently already operating under more lenient social restrictions, we anticipate that current shipment rates for those countries will largely remain at current levels.
In short, although Europe is challenging, we believe overall shipment and restaurant trends in the US and most of our international markets will remain favorable as governments continue to roll back social restrictions and vaccine becomes more widely available.
These trends will keep us on a path of steady progress in restaurant traffic, which we believe will lead to overall frozen potato demand approaching pre-pandemic levels on a run rate basis by the end of calendar 2021.
With respect to costs, in the fourth quarter, we expect to incur a similar level of incremental pandemic-related manufacturing and distribution costs as we did in the third quarter.
We experienced significant disruption in our production facilities, transportation, and warehousing networks in January and February, and this continued into March.
We will realize some of the costs related to these disruptions in the fourth quarter as we ship finished goods' inventory produced during these months.
Now, here's Tom for closing comments.
Let me just quickly sum up by saying, we continue to prioritize ensuring the health and safety of our employees during these challenging times by adhering to strict COVID protocols in all of our manufacturing locations and encouraging all our workers and their families to get vaccinated as soon as possible.
We're confident that the near-term pandemic-related pressures on our manufacturing and distribution networks are temporary and that our cost structure will normalize once we get past COVID.
In addition, we believe that the investments we're making in our supply chain will improve our cost structure over the long term.
We feel good about the trends in restaurant traffic and frozen potato demand in the US and most of our key international markets and remain optimistic that overall frozen potato demand will approach pre-pandemic levels on a run rate basis by the end of calendar 2021.
And finally, as shown with our investments for a new facility in China and to expand chopped and formed capacity in Idaho, we're focusing on the right strategic and operating priorities to serve our customers and build upon the long-term health of the category in order to create value for all our stakeholders.
| compname reports q3 earnings per share $0.45.
for 4 weeks ended march 28 europe shipments were approximately 85% of q4 fiscal 2019 levels.
for 4 weeks ended march 28 north america shipments were approximately 90% of q4 fiscal 2019 levels.
q3 earnings per share $0.45.
q3 sales $896 million versus refinitiv ibes estimate of $819.9 million.
|
CNA's strategic discussion is hosted by its CEO, Dino Robusto and its interim CFO, Larry Haefner.
During the call today, we might also discuss non-GAAP financial measures.
Jim, over to you.
Andrew Tisch has decided to step away from his executive responsibilities at Loews Corporation at the end of December.
I could not have asked for a better partner than Andy who has served Loews with complete dedication for the last 50 years.
During his tenure, he has successfully led a number of our subsidiaries and functional areas, while also fostering open communication, collaboration and respect throughout the organization.
We are all fortunate to have been the beneficiaries of his wisdom and expertise and we are grateful that he will continue to serve as Co-Chairman of the Loews Board and as a member of the CNA Board.
Loews had another strong quarter across the board with good performance from each of our consolidated subsidiaries.
CNA continues to be a success story for Loews.
The company's underlying combined ratio decreased by 1.5 points, driven by the expense ratio, which was 30.7% compared to 31.8% in the prior year quarter.
The underlying loss ratio was also lower at 60.2% compared to 60.5% in the prior year.
CNA's P&C gross written premiums increased by 10% and net written premiums increased by 5%.
Note that the increase in net written premiums is lower than for gross written premiums due to additional reinsurance that the company has purchased in its strategy to protect the insurance portfolio from large loss events.
The value of this incremental protection was fully on display this past quarter with the mitigated losses CNA reported on Hurricane Ida.
CNA had pre-tax investment income of $513 million, pretty much flat with the prior year's quarter.
Limited partnerships had a great quarter and the fixed income portfolio continues to provide consistent earnings even with headwinds from the historically low interest rate environment.
We continue to be very pleased with CNA's results.
In other news, Loews Hotels made an exciting announcement in early October.
The company broke ground on the Loews Arlington Hotel and Convention Center, a new project in the tried and true entertainment hub of Arlington, Texas, which sits between Dallas and Fort Worth.
When it opens in early 2024, the hotel will have 888 rooms and over 250,000 square feet of meeting and event space.
For those not schooled in the hotel industry, that's a whole lot of rooms and a whole lot of meeting space.
Once again, Loews Hotels is acting both as the owner and the operator of this project.
Industry dynamics generally do not allow for companies in the hotel space to perform this double role, and as a result, Loews Hotels is a leader within this niche of the market.
Playing to these strengths has served Loews Hotels well and we believe it will continue to do so.
This will be Loews Hotels' second property in Arlington following in the strong footsteps of Live!
by Loews which has had a successful opening in 2019 and whose occupancy rate has generally remained strong throughout the pandemic; a testament to this market's resilience and the team's focus.
The new hotel is consistent with Loews Hotels growth strategy, which is built on two pillars.
The first pillar is owning and operating hotels associated with immersive destinations.
Loews Hotels' two decades long partnership with Universal Orlando is a great example of the strength of this pillar.
Our hotels in Arlington will also clearly benefit from built-in demand drivers since our guests will have access to all the sports and entertainment destinations close to the hotels, including the Dallas Cowboys AT&T Stadium and the Texas Rangers Globe Life Field.
The second pillar of Loews Hotels growth strategy is the company's focus on owning and operating hotels with 300-plus keys that have strong group business and ample meeting space.
Loews Hotels has a well-earned reputation for successfully operating hotels that cater to this type of business.
The two Arlington Hotels combined will offer nearly 1,200 guestrooms and more than 300,000 square feet of meeting and event space and these properties offer unique local experiences and are equally attractive to leisure and good customers.
Loews Hotels has continued to see strong demand for leisure travel and improving interest for group travel.
For the third quarter, the occupancy rate for owned and joint venture hotels was almost 72% as opposed to about 35% in the first quarter of this year.
Our resort hotels continue to do considerably better than our properties in urban settings, and about 60% of Loews Hotels' rooms are in resort destinations.
As the U.S. economy and the hotel industry continue their recovery, we are confident that Loews Hotels will once again be a growth engine for Loews Corp.
Next I wanted to talk about Boardwalk.
The demand for natural gas is increasing and Boardwalk is well-positioned to take advantage of this change.
We see the increased demand coming from increased domestic consumption and from international markets via LNG exports.
Boardwalk transports natural gas under fixed fee take-or-pay contracts with mostly investment-grade customers which limits its commodity and volumetric risk.
The company currently has $9 billion of revenue backlog with a weighted average contract life of seven years.
As the transition toward clean energy unfolds, we believe that gas will continue to be an important fuel used the world over.
Finally, let me update you briefly on share repurchases.
From July 1 through last Friday, we repurchased 6.2 million shares of Loews common stock for just over $337 million.
Year-to-date, we've bought back 15.7 million shares for $830 million, which is 5.85% of the shares outstanding at the beginning of the year.
As I've often said, we believe that Loews still trades at a significant discount to our view of its intrinsic value so we'll continue to let our share repurchase activity speak for itself.
And with that, let me hand the call over to David.
For the third quarter, Loews reported net income of $220 million or $0.85 per share compared to net income of $139 million or $0.50 per share in last year's third quarter.
Let me describe the quarter in a nutshell before getting into more detail.
CNA's performance was driven by strong property casualty underwriting income before catastrophe losses, healthy net investment income, and a net reserve release in the Life & Group segment.
These positives were partially offset by significant weather-related catastrophe losses.
Boardwalk's operating results benefited from strong transportation revenues generated by its growth projects and increased utilization throughout its system.
And Loews Hotels continue to emerge from the COVID-induced downturn with its resort properties, especially those in Florida, leading the charge.
Loews Hotels generated positive net income for the first time since the fourth quarter of 2019.
Let me now dig more deeply into the third quarter and the year-over-year comparison.
All three of our consolidated subsidiaries, CNA, Boardwalk and Loews Hotels, recorded materially higher year-over-year net income contributions, with CNA leading the charge.
I would encourage you to review the transcript for more details.
In the meantime, let me provide a few highlights.
CNA contributed net income of $229 million, up from $192 million in Q3 2020.
The main drivers of the year-over-year increase were higher property casualty underwriting income before cat losses and the absence of three charges that occurred last year, two of which were in the Life & Group segment, a charge from the unlocking of the long-term care active life reserve, a charge from strengthening the structured settlement claim reserve, and a less significant charge from the early retirement of debt.
Conversely, higher catastrophe losses than in last year's third quarter detracted from the year-over-year comparative results.
Focusing on property casualty underwriting income.
The combination of a 6% increase in net earned premium and a 1.5 point improvement in the underlying combined ratio led to a 27% increase in CNA's underlying underwriting gain, which excludes cat losses and prior year development.
Net cat losses in the quarter were $178 million pre-tax, including $114 million for Hurricane Ida.
Last year's Q3 cat losses were modestly lower at $160 million pre-tax driven by three Southeast hurricanes and the Midwest derecho.
CNA's expense ratio, which just a few years ago hovered in the mid-30s, came in below 31%, down from 31.8% in Q3 2020 and 31.6% last quarter.
This is the lowest expense ratio posted by CNA in about 13 years.
CNA's consolidated after-tax net investment income was essentially flat year-over-year as returns on limited partnership and common stock investments were robust in both periods.
CNA conducts its annual reserve reviews for its Life & Group segment in the third quarter.
Last year, the company booked a net reserve charge of $83 million pre-tax for its long-term care and structured settlement books of business.
This year, the comparable number was a net reserve release of $38 million pre-tax as CNA had no change in its long-term care active life reserve, a $40 million pre-tax release from its long-term care claims reserve, and a de minimis charge related to structured settlements.
We consider this favorable outcome a further indication of CNA's enhanced insight into and prudent reserving around the long-term care business.
CNA ended the quarter with total assets of $66.5 billion, shareholders' equity of $12.7 billion and consolidated statutory surplus of approximately $11.1 billion.
Boardwalk contributed net income of $38 million, up from $20 million in Q3 2020.
The main driver of the year-over-year increase was higher natural gas transportation revenue, driven, like last quarter, by growth projects recently placed in service and higher system utilization.
Boardwalk's EBITDA, which is shown and defined in our quarterly earnings supplement, was $186 million in the quarter and $635 million year-to-date.
Through nine months, natural gas transportation throughput increased by more than 11% year-over-year across the system.
Turning to Loews Hotels.
Loews Hotels contributed net income of $13 million; a dramatic improvement from the $47 million net loss posted in Q3 2020.
Adjusted EBITDA, which is defined in our earnings supplement and excludes non-recurring items, rebounded from a $38 million loss last year to a positive $59 million in Q3 2021; close to $100 million swing.
The year-over-year improvement was driven by a dramatic revenue increase as all properties, including all 9,000 rooms at the Universal Orlando Resort, were open for the full quarter.
This was the first time all 9,000 rooms in Orlando were open for a full quarter.
On Page 11 of our quarterly earnings supplement, there is a good snapshot of Loews Hotels year-over-year and sequential operational improvement, which highlights the drivers of the company's revenue increases during this COVID period.
With more available rooms, higher occupancy and healthy average daily rates, revenues have climbed markedly since the depths of the pandemic.
We have invested $32 million in Loews Hotels year-to-date, all in the first quarter.
Given the company's stronger than expected cash flow, the parent company does not expect to invest any further cash in Loews Hotels during the remainder of this year.
Turning to the Corporate segment.
The parent company's investment portfolio generated a pre-tax net investment loss of $30 million as compared to income of $23 million last year.
The loss stemmed from the performance of the equity portfolio.
The parent company portfolio of cash and investments stood at $3.6 billion at quarter end with about 80% in cash and equivalents.
During the quarter, as Jim mentioned, we repurchased 6.2 million shares of our common stock for $333 million and we received about $92 million in dividends from CNA.
After quarter end, we spent less than $5 million repurchasing our stock.
As of last Friday, there were under 254 million shares of Loews common stock outstanding, down about 6% since the beginning of the year and about 25% over the past five years.
Loews continues to be characterized by strong cash flow into the parent company and an extremely liquid balance sheet with cash and investments far exceeding parent company debt.
I will now hand the call back to Jim.
We've got plenty more time with David as CFO, so more about him and Jane at a later date.
And now, Mary, back to you.
| compname reports net income of $220 mln for the third quarter of 2021.
compname reports net income of $220 million for the third quarter of 2021.
q3 earnings per share $0.85.
|
Last night, we released a set of supplemental slides which address third quarter results.
They are available on our website.
An Appendix to these slides features additional disclosures, GAAP reconciliations and other information which you should also review.
In fairness to all participants, please limit yourself to one question and one follow-up.
With that, over to Michel.
As I reflect on the journey MetLife has been on these past two years, I am more convinced than ever that we are focused on what matters most.
We are a purpose-driven company at a time when stakeholders will accept nothing less.
We have the right strategy to see us through even the most turbulent environments and we have a strong culture of execution that gives our shareholders confidence.
All of these attributes were on display in the third quarter of 2021.
Starting with our financial results, adjusted earnings were $2.1 billion, up 31% year-over-year.
Adjusted earnings per share were $2.39, up 38% year-over-year.
Excluding total notable items in both periods, adjusted earnings were up 24% and adjusted earnings per share was up 31%.
Looking at the quarterly performance of the enterprise as a whole, variable investment income was outstanding, underlying PFOs were strong, and expense discipline held firm.
The main area where we have seen headwinds is from elevated COVID claims.
In key respects, the third quarter of 2021 looks very much like the first quarter with exceptionally strong VII more than offsetting excess mortality.
On the investment side, our private equity portfolio returned $1.5 billion in Q3, its highest quarterly contribution in 2021 and the major contributor to VII, which was well above the top end of our implied quarterly guidance range.
On underwriting, in our U.S. business, the Group Life mortality ratio was elevated at 106.2% in Q3 on higher claim severity and frequency due to a shift younger in the age distribution of COVID death.
Our Latin America business incurred COVID losses of $137 million in Q3.
Two aspects of our underwriting results are noteworthy.
From a social perspective, paying COVID claims is precisely how life insurance companies make a positive difference in the world.
The human toll of the pandemic on families is catastrophic but where life insurance is present, the financial burden is eased.
This is our purpose to help prepare the financial damage after life's most destabilizing moments.
Pandemic to-date in our U.S. Group business, which incurred U.S. life claims of around $2.1 billion.
Life insurance is not like other businesses where losses are just losses.
Every underwriting claim represents a beneficiary who is receiving the financial help they were promised.
From a financial perspective even though our Life businesses have been hit with the most severe pandemic in more than a 100 years, they remain profitable.
MetLife has actually paid out more in COVID-related claims in 2021 than we did in 2020 and yet our adjusted earnings per share are higher this year than last year as is our adjusted return on equity.
What has enhanced MetLife's capacity to pay outsized claims while still generating exceptional earnings is our strategic decision to allocate a prudent portion of our investment portfolio to private equity.
While not a direct COVID offset, the valuation of our PE and VC funds with significant technology exposure has benefited from global capital flows to this growth sector.
The return on our PE portfolio in the quarter was an outstanding 12.6% and stands at approximately 36% year-to-date.
The gains on our well-seasoned portfolio are not mere accounting marks.
Year-to-date we have received $1.9 billion in cash distributions from our PE funds.
Since 2016, the figure is $7.6 billion.
While we often reinvest PE cash proceeds as funds mature and terminate, the cash generated is steady and significant.
Turning to the underlying performance of MetLife's businesses, we are seeing solid momentum.
In U.S. Group Benefits, adjusted PFOs grew 13% year-over-year.
Excluding Versant Health, PFO growth was 6.2% on strong jumbo sales and persistency.
And we expect to end the year near the top end of our guidance range.
In voluntary benefits, which for us consists of accident and health, legal plans and pet insurance we saw strong double-digit PFO growth in the third quarter.
The trend in sales is even stronger.
Year-to-date sales are up 40% over the prior period and we remain on track for a record sales year.
While Group sales can fluctuate from year-to-year due to jumbo cases, we believe the robust U.S. job market and the competition for talent are creating a strong tailwind.
In connection with open enrollment season this fall, we conducted consumer research on benefit preferences among millennials who are now the largest age group cohort in the U.S. with more than 70 million members.
Millennials are expressing strong interest in both traditional benefits such as life insurance and dental and in voluntary benefits such as legal plans and pet insurance.
Another top desire is for help with financial planning.
MetLife entered this space in late September with a digital financial wellness tool called Upwise, which helps us connect with employees directly.
The app is designed to address the emotional barriers to financial progress and help people tackle debt, save more or even create a digital will.
Within our RIS business, after a quiet first three quarters, we have already booked four cases totaling $3.5 billion of pension risk transfer deals in the first month of the fourth quarter.
Next Tuesday, marks the 100th anniversary of the first group annuity contract MetLife ever write with the William Rudge Printing Company.
We are pleased to be a leader in the business of helping companies honor their retirement promises they have made to their workers.
Last month, MetLife released the results of our Annual Pension Risk Transfer Poll.
We only survey companies that want to derisk.
Of the 253 respondents, nearly seven in tenth have pension plan assets of $500 million or more and 93% intend to divest all of their defined benefit pension liabilities at some point in the future, up from 76% in 2019.
Elsewhere in RIS, excluding PRTs from both periods, adjusted PFOs were up 70% year-over-year.
There were two main drivers.
The first was longevity reinsurance, a market we entered in the UK last year.
The second was post retirement benefits where we take on blocks of retiree life insurance from employers.
This is an attractive adjacency to our Group business that play's to MetLife's competitive advantages.
In Latin America, we delivered exceptional sales growth in the quarter, up 45% year-over-year on a constant currency basis.
In fact, sales were higher in Q3 2021 than they were in Q3 2019 before the COVID pandemic began.
In most markets across the region we saw double-digit growth in both sales and PFOs.
Moving to cash and capital, MetLife ended the third quarter with $5.1 billion of cash at its Holding company.
During the quarter, we paid $400 million in common stock dividends, and repurchased $1 billion worth of outstanding common shares with another $233 million repurchased so far in Q4.
We have $2.5 billion remaining on the $3 billion share repurchase authorization we announced in August.
We are on track to return more than $5.5 billion of capital to shareholders in 2021 and we continue to strive for a balanced mix between business investment and capital return.
In 2020 for example, we returned $2.8 billion to shareholders and invested approximately $5 billion in organic growth and M&A.
Our test for capital deployment remains consistent.
Does it clear our risk adjusted hurdle rate?
As John will describe in greater detail, the new business we wrote in 2020, a period when interest rates were at all-time lows was the most attractive of the past five years.
It had the shortest payback period, the highest internal rate of return, and the highest value of new business relative to the amount of capital deployed.
This was the natural outgrowth of our accelerating value initiative.
By optimizing our portfolio of businesses, shifting our product mix to be more capital efficient and fully embracing an efficiency mindset, we have consistently improved VNB over time and it is now an integral part of our capital allocation process.
This year, in addition to organic growth, we increased the stake in our India joint venture, PNB MetLife to 47% from 32%.
India is one of the five secular growth markets we identified in our Next Horizon Strategy.
Consistent with that strategy, we are increasing our exposure to a market where PNB MetLife has access to more than 200 million customers across 15,000 sales locations.
In September, we held an in-depth session with our Board of Directors to pressure test every aspect of our Next Horizon Strategy.
We've done this each year on my tenure as CEO.
As representatives of our shareholders and shareholders themselves, our Board challenged us to make sure we are positioned and on track to deliver on our goals.
I believe the alignment between the Board and management is as strong as it's ever been and our shared commitments remain clear, focus on deploying capital to its best use, simplify the company to improve efficiency and the customer experience and truly differentiate ourselves in the marketplace.
I'll start with the 3Q '21 supplemental slides, which provide highlights of our financial performance, details of our annual global actuarial assumption review and updates on our valued new business metrics and our cash and capital positions.
Starting on page 3, we provide a comparison of net income to adjusted earnings.
Net income in the third quarter was $1.5 billion or $541 million lower than adjusted earnings.
Net derivative losses of $172 million were primarily driven by the strengthening of the U.S. dollar in the quarter.
In addition, our actuarial assumption review accounted for $76 million of the variance between net income and adjusted earnings.
In total, the assumption review reduced net income by $216 million, including a notable item to adjusted earnings of $140 million.
The table on page 4 provides highlights of the actuarial assumption review with the breakdown of the adjusted earnings and net income impact by business segment.
We have kept our U.S. mean reversion interest rate unchanged at 2.75% and maintain our long-term mortality assumptions despite the near-term impacts from COVID-19.
Most of the net income impact was in MetLife Holdings and Asia.
For MetLife Holdings, the primary driver was a refinement to the variable annuity lapse rate function to better reflect policyholder behavior based on withdrawal status.
In Asia, the largest impact was due to the lowering of the earned rate assumption in Japan where we assume current earned rates for a long-term rate assumption.
On page 5, you can see the year-over-year comparison of adjusted earnings by segment excluding notable items in both periods.
Adjusted earnings, excluding notable items were $2.2 billion, up 24% and up 23% on a constant currency basis, primarily driven by strong returns in our private equity portfolio.
Adjusted earnings per share excluding notable items was $2.56, up 31% year-over-year on both a reported and constant currency basis aided by Capital Management.
Moving to the businesses starting with the U.S.; Group Benefits adjusted earnings were down 72% year-over-year driven by unfavorable underwriting margins in Group Life, which I'll discuss in more detail shortly.
Regarding non-medical health, the interest adjusted benefit ratio was 70.7% in 3Q of '21 at the low end of its annual target range of 70% to 75% but higher than the prior year quarter of 67.4%, which benefited from extremely low dental utilization and favorable disability incidence.
Volume growth, the addition of Versant Health and favorable expense margins were partial offsets to the decline in year-over-year results.
Group Benefits continues to have strong topline growth.
Year-to-date sales were up 40% primarily due to higher jumbo case activity.
Adjusted PFOs in the quarter were up 13% year-over-year driven by solid volume growth across most products, including voluntary and the addition of Versant Health.
Retirement Income Solutions or RIS adjusted earnings were up 60% year-over-year.
The primary driver was higher variable investment income, largely due to strong private equity returns.
Favorable underwriting margins and volume growth also contributed to year-over-year performance.
RIS investment spreads were 256 basis points, up 100 basis points year-over-year due to higher variable investment income.
Spreads excluding VII were 93 basis points, down 5 basis points year-over-year and sequentially primarily due to lower paydowns in our portfolios of residential mortgage-backed securities and residential mortgage loans.
RIS liability exposures including UK longevity reinsurance increased 4% year-over-year due to solid volume growth across the product portfolio.
With regards to pension risk transfers as Michel noted, we have already completed $3.5 billion of transactions in the fourth quarter and continue to see an active market.
Moving to Asia, adjusted earnings were up 31% on both a reported and constant currency basis, primarily due to higher variable investment income.
Asia's solid volume growth also contributed to the strong performance driven by higher general account assets under management on an amortized cost basis, which were up 7% on a constant currency basis.
Lower accident and health utilization in the prior period was a partial offset.
Asia sales were down 12% year-over-year on a constant currency basis, reflecting pressure from COVID-related lockdowns in the regions.
Asia year-to-date sales were up 10% on a constant currency basis and remain on target to achieve double-digit growth in 2021.
Latin America adjusted earnings were down 35% and down 38% on a constant currency basis, primarily driven by unfavorable underwriting margins due to elevated COVID-19 related claims mainly in Mexico.
The impact to Latin America's third quarter adjusted earnings was approximately $137 million.
While the situation remains fluid, we have seen COVID-related hospitalizations and deaths in Latin America significantly decline in October.
Favorable investment and expense margins as well as lower taxes versus the prior year quarter were partial offsets.
While Latin America's adjusted earnings have been pressured by elevated COVID-19 related claims, sales and persistency throughout the region remains strong.
Latin America adjusted PFOs were up 22% year-over-year on a constant currency basis and sales were up 45% on a constant currency basis, driven by solid growth across most markets.
EMEA adjusted earnings were up 20% on both a reported and constant currency basis, primarily driven by volume growth across the region and favorable underwriting margins, primarily in the Gulf.
We expect EMEA adjusted earnings to decline in the fourth quarter due to the timing of certain technology investments across the region.
EMEA adjusted PFOs were down 2% on a constant currency basis and sales were down 5% on a constant currency basis, reflecting divested businesses, partially offset by growth in Turkey and Europe.
MetLife Holdings adjusted earnings, excluding notable items in both periods were up $271 million year-over-year.
The increase was primarily driven by strong private equity returns.
Underwriting margins did reflect higher life claims severity than expected during the third quarter of 2021.
However, the life interest adjusted benefit ratio of 53.3% was within our annual target range of 50% to 55%.
In addition, LTC new claims returned to more normal levels in the quarter versus very low new claims submissions in the prior year quarter.
Corporate and other adjusted loss was $131 million in both periods.
Lower tax benefits were mostly offset by higher net investment income year-over-year.
The company's effective tax rate on adjusted earnings in the quarter was 20.6% and within our 2021 guidance range of 20% to 22%.
Now, I'll provide more detail on Group Benefits mortality results on page 6.
This chart reflects our Group Life mortality ratio for the first three quarters of 2021, including the COVID-19 impact on the ratio and on Group Benefits adjusted earnings.
Group Life mortality ratio 106% in the third quarter of 2021, which is well above our annual target range of 85% to 90%.
COVID reported claims in 3Q of '21 were roughly 18 percentage points, which reduced Group Benefits' adjusted earnings by approximately $290 million.
The primary drivers were higher claim frequency and severity.
Approximately 40% of U.S. COVID deaths in the quarter were under age 65, about double the rate of the first quarter of this year and the highest percentage in any quarter since the pandemic began and therefore having a greater proportional impact on the working-age population.
In addition, we estimate that the quarter included roughly 1 to 2 incremental percentage points impact on the mortality ratio from claims that appear to be COVID-related, but were not specifically identified as COVID on the death certificate.
Despite the impact from COVID, Group Benefits remains a profitable and growing business for MetLife.
Group Benefits reported adjusted earnings of roughly $450 million year-to-date and adjusted PFO growth of 13%.
Now let's turn to page 7.
This chart reflects our pre-tax variable investment income over the last five quarters, including approximately $1.8 billion in the third quarter.
This very strong result was mostly attributable to the private equity portfolio, which had a 12.6% return in the quarter.
As we have previously discussed, the private equities are generally accounted for on a one quarter lag.
While all private equity asset classes performed well in the quarter, our venture capital funds, which account for roughly 23% of our PE account balance of $12.8 billion were the strongest performer across subsectors with a roughly 18% quarterly return.
Page 8 highlights VII by segment for the first three quarters of 2021 including $1.4 billion post tax in the third quarter.
The attribution of VII by business is based on the quarterly returns for each segment's individual portfolio.
As we have previously noted, RIS MetLife Holdings, and Asia generally account for 90% or more of the total VII and are split roughly one-third each although it can vary from quarter-to-quarter.
The VII results in the quarter were more heavily weighted toward RIS and MetLife Holdings as Asia's private equity portfolio is less mature and has a smaller proportion of venture capital funds I referenced earlier.
Turning to page 9, this chart shows our direct expense ratio over the prior five quarters and full year 2020 including 11.1% in the third quarter of '21.
As we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results.
Our third quarter direct expense ratio benefited from solid top line growth and ongoing expense discipline.
This did include approximately 20 basis points from premiums that relate to participating cases and 20 basis points from a single premium Group Life sale in RIS.
In addition, the impact from seasonal enrollment costs and timing of certain technology investments are expected to be more heavily weighted to the fourth quarter.
Therefore, we do expect the direct expense ratio to be elevated in 4Q.
Now let's turn to page 10; this chart reflects new business value metrics from MetLife major segments for the past five years, including an update for 2020.
Consistent with our Next Horizon Strategy, we continue to have a relentless focus on deploying capital and resources to the highest value opportunities.
As evidence of that commitment, MetLife's invested $3.2 billion of capital in 2020 to support new business, which was deployed at an average unlevered IRR of approximately 17% with a payback period of six years.
New business written in 2020 reflects our disciplined approach to building profitable growth while creating value, generating cash and mitigating risk.
Despite the sales challenges in 2020 associated with lockdowns related to the pandemic, we were able to increase our value of new business and IRR while lowering our cash payback period versus 2019.
Now, I will discuss our cash and capital position on page 11.
Cash and liquid assets at the Holding companies were $5.1 billion as of September 30, which is down from $6.5 billion at June 30, but still well above our target cash buffer of $3 billion to $4 billion.
The sequential decrease in cash at the Holding companies include the net effects of share repurchases of $1 billion, payment of our common stock dividend of roughly $400 million, subsidiary dividends as well as holding company expenses and other cash flows.
In addition, we had a long-term debt repayment of $500 million in the third quarter.
Our next long-term debt maturity is not until September 2023.
Next, I would like to provide you with an update on our capital position.
For our U.S. companies, preliminary third quarter year-to-date 2021 statutory operating earnings were approximately $4 billion, while net income was approximately $3 billion.
Statutory operating earnings increased by approximately $1 billion year-over-year primarily driven by higher variable investment income and lower variable annuity rider reserves.
Year-to-date 2021 net income increased by roughly $400 million as compared to the first nine months of 2020.
The primary drivers were higher operating earnings and net investment gains, which was partially offset by derivative losses.
We estimate that our total U.S. statutory adjusted capital was approximately $19.7 billion as of September 30, 2021, up 16% compared to December 31, 2020.
Favorable operating earnings and net investment gains were partially offset by derivative losses and dividends paid to the holding company.
Finally, the Japan solvency margin ratio was 960% as of June 30, which is the latest public data.
In summary, MetLife delivered another very strong quarter, driven by exceptional private equity returns, solid top line growth, ongoing expense discipline and the benefits of our diverse set of market-leading businesses and capabilities.
While earnings power of our Group Benefits and Latin America businesses has been dampened by COVID-19 excess mortality, we are pleased with the momentum behind these market-leading franchises.
In addition, our capital, liquidity and investment portfolio remains strong and position us for further success.
Finally, we are confident that the actions we are taking to be a simpler and more focused company will continue to create long-term sustainable value for our customers and our shareholders.
| qtrly earnings per share $1.77; qtrly adjusted earnings per share $2.39.
book value of $77.24 per share at quarter-end, up 1% from $76.20 per share at september 30, 2020.
|
Last night, we released a set of supplemental slides which address second quarter results.
They are available on our website.
An appendix to these slides features additional disclosures, GAAP reconciliations and other information which you should also review.
In fairness to all participants, please limit yourself to one question and one follow-up.
With that, over to Michel.
MetLife's outstanding financial results in the second quarter provides further evidence of the tremendous progress we're making on the pillars of our Next Horizon strategy.
We're continuing to focus with the right capital allocation and investment decisions.
We're continuing to simplify with exceptional expense discipline and we're continuing to differentiate with enhancements to our market-leading Group Benefits platform that are helping to drive record sales.
When it comes to our strategy, we've transitioned from a period of execution risk to one of additional opportunity.
Net income in the second quarter was $3.4 billion, up from $68 million a year ago.
The primary drivers were growth in adjusted earnings, the gain we booked on the sale of our Auto and Home Business and derivative gains in the current quarter relative to derivative losses a year ago.
Strong net income drove book value per share, excluding AOCI, other than FCTA growth, of 8%.
Adjusted earnings in the second quarter were $2.1 billion or $2.37 per share, up 186% from $0.83 per share a year ago.
As in the first quarter, our investment portfolio generated exceptionally strong variable investment income.
Private equity remained the key driver of VII.
As you know, private equity returns are reported on a one quarter lag, so the strong Q2 performance reflected gains from Q1.
We reported private equity gains of 9.7% in the second quarter compared with a negative 8.2% a year ago.
Equity markets continued to perform well from April through June, which we anticipate being reflected in our Q3 earnings.
When we unveiled our Next Horizon Strategy at Investor Day in December 2019, we pointed to the scale and expertise that we have in investments as a competitive advantage for MetLife.
The strategic approach we have taken on private equity is a case in point.
Our decision to sell most of our $2.5 billion hedge fund portfolio and increase the allocation to private equity has provided a better match for our long-dated liabilities, while creating significant value for our shareholders.
This was no accident, but the latest in a series of successful investment decisions from de-risking our portfolio ahead of the financial crisis to selling Peter Cooper Village/Stuyvesant Town nearer [Phonetic] market top.
Turning to our reporting segments.
John McCallion will provide a complete overview shortly.
I would like to focus on how our results show that COVID-19 is both still with us but lessening in its impact.
From an underwriting perspective, we've seen a sizable improvement, but we are still experiencing excess mortality.
In the quarter, the Group Life mortality ratio was 94.3%, below the 106.3% from last quarter but still above the top end of our guidance range.
In Latin America, we had $66 million of COVID losses, again, below the $150 million of COVID losses from Q1, but still above normal.
Yet, at the same time, COVID-19s economic grip is easing somewhat.
At MetLife, we see this emerging in sales trends.
In the U.S. Group business, sales through the first half of 2021 are 39% higher than they were in the first half of 2020 and if current trends hold, 2021 will be a record sales year.
In Latin America, sales are up 55% year-over-year.
On a year-over-year basis, Asia sales are up 42%, while EMEA sales are up 20%.
So while we are not out of the woods, we are starting to see a clearing in the trees ahead.
The path of the pandemic is something outside of our control, but as we have demonstrated over the past year and a half, we are not standing still.
We are moving ahead with urgency to accelerate our strategy.
To further differentiate our Group Benefits business, we acquired Versant Health and immediately became the third largest vision care provider in the United States.
Versant has now been part of our results for two quarters and in Q2, it contributed 6 points of year-over-year growth in U.S. Group premiums, fees and other revenues, consistent with our expectations.
Year-over-year request for vision care proposals are up more than 20% among our national account customers.
We are pleased with how our new vision care offering is performing in the marketplace and expect it to contribute meaningfully to growth going forward.
Similarly, we have enhanced our pet insurance offering to make it even more attractive to customers.
We now offer telehealth concierge services, rollover benefits from the prior year, and family plans covering multiple pets.
In what we believe is a first for the industry, we also cover pre-existing conditions when an employee switches to MetLife pet Insurance from another carrier as long as the condition was covered by the prior plan.
More than 500 employers now offer MetLife pet insurance as a voluntary benefit to their employees and we believe our best-in-class product will continue to make gains in this highly attractive and underpenetrated market.
To strengthen our focus, we made a decision to sell our businesses in Poland and Greece to NN Group.
This was another promise we made at Investor Day to continue to look at our portfolio through the lens of strategic fit and ability to achieve scale and clear our hurdle rate.
Since that time, we have sold or reached agreements to sell our businesses in four markets and we will continue to apply this disciplined approach.
In early April, we also closed on the sale of our Auto and Home Business to Farmers Insurance for $3.94 billion in cash.
The 10-year strategic partnership we forged allows each company to focus on its core strengths: Farmers' 90 years of P&C underwriting and service excellence and MetLife's unrivaled distribution reach in the U.S. Group Benefits space.
The simplified pillar of our strategy was evident in our exceptional expense management.
In the quarter, we delivered a direct expense ratio of 11.4% and we now expect to beat our 12.3% target ratio, not only for all of 2021, but for 2022 as well.
We are making this commitment despite selling our Auto and Home Business, which operated at a lower expense ratio than the overall enterprise.
As we have said many times, we are embedding an efficiency mindset across everything we do that is central to our ability to deliver continuous improvement.
At MetLife, we no longer have expense reduction programs.
We do not need them.
What we have instead is a publicly disclosed direct expense ratio target that we have brought down by 200 basis points over the past five years and promise to keep there.
This is how we hold ourselves accountable and this is how investors can hold us accountable as well.
Our strategic decision to sell Auto and Home contributed to a $6.5 billion cash buffer as of June 30, well above our target range.
We repurchased $1.1 billion of common shares in the second quarter and another $248 million of common shares so far in the third.
And yesterday, our Board approved a new $3 billion share repurchase authorization.
This is on top of the $475 million we have remaining on our December 2020 authorization.
We believe that investing in responsible growth, steadily increasing our common dividend, and buying back common stock are all vital parts of a balanced approach to creating long-term shareholder value.
COVID-19 continues to present MetLife with the opportunity and the obligation to step up for our employees, our customers and our communities.
That work is ongoing.
We are in a new phase of the pandemic.
The primary focus now is on vaccinating as many people as possible.
Nothing will do more to prevent needless tasks and a potential resurgence of the lockdown measures that caused so much economic harm.
As we did over 100 years ago with our visiting nurses program, MetLife has mobilized to make a positive contribution to advance public health.
First and foremost, this means doing all we can to give our own employees and their families access to the vaccines.
Examples from our markets include giving employees paid leave to get vaccinated, covering vaccine-related expenses such as travel and child care, and holding free vaccine clinics for employees and their families in locations as varied as Oriskany, New York and Osaka, Japan.
But it also means helping to vaccinate the broader population as well.
In Nagasaki, Japan, we've opened 6,500 square feet of our headquarters as a free vaccination site.
MetLife Foundation has committed $500,000 to delivering vaccines to underserved communities across the U.S. and our medically trained staff are volunteering to administer doses at vaccine sites.
In closing, to perform as well as we have through a pandemic highlights some fundamental truths about MetLife.
We have an all-weather strategy that holds up well to stress.
We have an investment portfolio that captures meaningful upside.
We have competitive advantages that enable us to grow in the most attractive markets and we have a relentless focus on execution.
At our 2019 Investor Day, we said our Next Horizon Strategy would generate tangible benefits for shareholders: a 12% to 14% adjusted ROE; $20 billion of distributable cash over five years; and an additional $1 billion of operating leverage to self-fund growth.
We are on track to meet every one of those commitments.
I will start with the 2Q '21 supplemental slides which provide highlights of our financial performance and an update on our cash and capital positions.
Please note, in the appendix, we have also provided an updated 25 basis points sensitivity for our U.S. long-term interest rate assumption.
Starting on Page 3.
We provide a comparison of net income to adjusted earnings in the second quarter.
Net income in the quarter was $3.4 billion or approximately $1.3 billion higher than adjusted earnings.
This variance was primarily due to the net investment gains of $1.3 billion, of which $1.1 billion relates to the sale of our Property & Casualty business to Farmers Insurance.
Our investment portfolio and our hedging program continue to perform as expected.
Additionally, adjusted earnings include one notable item of $66 million related to a legal reserve release.
On Page 4 you can see the year-over-year comparison of adjusted earnings by segment excluding notable items.
As I previously noted, there was one notable item of $66 million in 2Q of '21 and no notable items for the prior year period.
Adjusted earnings per share, excluding the notable item, was $2.30, benefiting from strong returns in our private equity portfolio but show most of the year-over-year variance.
Moving to the businesses, starting with the U.S., Group Benefits adjusted earnings were flat year-over-year as volume growth and the Versant Health acquisition largely offset unfavorable underwriting margins.
Group Life mortality improved sequentially but remained elevated in the quarter.
I will discuss in more detail shortly.
Regarding non-medical health, the interest adjusted benefit ratio was 73.8% in 2Q of '21, within its annual target range of 70% to 75%, but higher than the prior year quarter of 58.5%, which benefited from extremely low dental utilization and favorable disability incidence.
We've seen a return to more normal utilization rates for non-medical health and expect this trend to continue.
Therefore, we expect the interest adjusted benefit ratio to remain within its annual target range for the remainder of the year.
Overall, business fundamentals for Group Benefits remained healthy, highlighted by strong top-line growth and persistency.
Group Benefits sales were up 39% year-to-date, primarily due to higher jumbo case activity and remain on track to deliver a record sales year in 2021.
Adjusted PFOs were $5.6 billion, up 29% year-over-year.
Several factors contributed to the strong year-over-year growth, including a $500 million impact relating to dental premium credits and the establishment of a dental unearned premium reserve, both reducing premiums in the second quarter of 2020, which collectively contributed 13 percentage points to the year-over-year growth rate.
In addition, 4 percentage points were related to higher premiums in the current quarter from participating contracts, which can fluctuate with claim experience.
After considering these factors, underlying PFO growth for Group Benefits was roughly 12%, driven by solid volume growth across most products, including continued strong momentum in voluntary and the addition of Versant Health.
Looking ahead to the second half of the year, while Group Benefits reported PFO growth rates will be impacted by the dental unearned premium reserve release in Q3 and Q4, we expect the underlying PFO growth to maintain its strength and resilience for the remainder of 2021.
Retirement and Income Solutions or RIS adjusted earnings were $654 million, up $462 million year-over-year.
The primary driver was higher variable investment income, largely due to strong private equity returns.
This was partially offset by less favorable underwriting margins compared to 2Q of '20.
RIS investment spreads were 224 basis points, up 199 basis points year-over-year, primarily due to higher variable investment income.
Spreads, excluding VII, were 98 basis points, up 13 basis points year-over-year due, in part, to sustained paydowns in our portfolios of residential mortgage loans and residential mortgage-backed securities, a partial recovery in real estate equities and lower LIBOR rates.
RIS liability exposures, including U.K. longevity reinsurance, grew 8% year-over-year due to strong volume growth across the product portfolio, as well as separate account investment performance.
With regards to pension risk transfers, we continue to see a robust PRT pipeline.
Adjusted earnings were up 103% and 91% on a constant currency basis, primarily due to higher variable investment income.
Asia's solid volume growth also contributed to the strong performance driven by higher general account assets under management on an amortized cost basis, which were up 7% and 6% on a constant currency basis.
Additionally, while against a weak 2Q of '20, Asia sales were up 42% year-over-year on a constant currency basis, demonstrating the resiliency in the business.
Latin America adjusted earnings were down 27% and 38% on a constant currency basis, primarily driven by unfavorable underwriting and unfavorable equity markets related to the Chilean encaje, which had a negative 1.5% return in the quarter versus a positive 14% in 2Q of '20.
This was partially offset by favorable investment margins.
COVID-19-related claims improved sequentially.
The impact on Latin America's second quarter adjusted earnings was approximately $66 million after tax.
While Latin America's bottom line has been dampened by the elevated COVID-19-related claims, the underlying fundamentals of the business remain robust as evidenced by strong sales and persistency throughout the region.
Latin America adjusted PFOs were up 12% year-over-year on a constant currency basis and sales were up 55% driven by solid growth in all markets.
EMEA adjusted earnings were down 19% and 23% on a constant currency basis, primarily driven by higher COVID-19-related claims in the current period compared to low utilization in the prior year period.
Solid volume growth was a partial offset.
The current quarter has also benefited from a favorable refinement to an unearned premium reserve positively impacting adjusted PFOs and adjusted earnings by approximately $15 million after tax.
In addition, Poland increase contributed roughly 10% to run rate earnings that will be reported in divested businesses beginning in the third quarter.
EMEA adjusted PFOs were up 8% on a constant currency basis and sales were up 20% on a constant currency basis, primarily due to higher credit life sales in Turkey and solid growth in U.K. employee benefits.
MetLife Holdings adjusted earnings were up $515 million year-over-year.
The increase was primarily driven by strong private equity returns.
In addition, life underwriting margins were favorable.
The life interest adjusted benefit ratio was 47.1%, lower than the prior year quarter of 59.1% and below our annual target range of 50% to 55%.
Corporate and Other adjusted loss, excluding the favorable notable item of $66 million related to a legal reserve release, was $126 million.
This result compared favorably to the adjusted loss of $289 million in 2Q of '20 due to higher net investment income, lower expenses and lower preferred stock dividends.
The company's effective tax rate on adjusted earnings in the quarter was 21.6% and within our 2021 guidance range of 20% to 22%.
Now, I will provide more detail on Group Benefits mortality results on Page 5.
The Group Life mortality ratio was 94.3% in the second quarter of 2021, which is above our annual target range of 85% to 90%.
COVID reported claims in 2Q of '21 were roughly 4.5 percentage points, which reduced Group Benefits adjusted earnings by approximately $75 million after tax.
Additionally, the quarter included a higher level of life claims above $2.5 million and an additional level of excess mortality that appears to be COVID-related.
These, collectively, impacted the ratio by an additional 2.7 percentage points or $40 million after tax.
There were approximately 50,000 COVID-19-related deaths in the U.S. in the second quarter of '21.
While still elevated, total debts have moderated versus the prior year and sequential quarters.
Looking ahead, we expect COVID-19-related deaths in Group Benefits to continue to trend lower.
Now let's turn to Page 6.
This chart reflects our pre-tax variable investment income over the last five quarters, including approximately $1.2 billion in the second quarter of 2021.
This very strong result was mostly attributable to the private equity portfolio, which had a 9.7% return in the quarter.
As we have previously discussed, private equities are generally accounted for on a one quarter lag.
Our second quarter results were essentially in line with PE industry benchmarks.
While all private equity asset classes performed well in the quarter, our venture capital funds, which accounted for roughly 22% of our PE account balance of $11.3 billion with the strongest performer across subsectors with a roughly 19% quarterly return.
On Page 7, second quarter VII of $950 million post-tax is shown by segment.
The attribution of VII by business is based on the quarterly returns for each segment's individual portfolio.
As we have previously noted, RIS, MetLife Holdings and Asia generally account for approximately 90% or more of the total VII and are split roughly one-third each, although it can vary from quarter-to-quarter.
VII results in 2Q of '21 were more heavily weighted toward RIS and MetLife Holdings, as Asia's private equity portfolio is less mature and has a smaller proportion of the venture capital funds that I referenced earlier.
Turning to Page 8.
This chart shows our direct expense ratio over the prior five quarters and full year 2020, including 11.4% in the second quarter of '21.
As we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results.
In 2Q of '21, our favorable direct expense ratio benefited from solid top-line growth and ongoing expense discipline, as well as lower employee-related benefits in the quarter.
We expect the direct expense ratio for the remainder of 2021 to be elevated compared to the first half of 2021 due to timing of investments and seasonality.
But as Michel noted, we expect full year '21 and '22 direct expense ratio to be our 12.3% guidance.
Now I will discuss our cash and capital position on Page 9.
Cash and liquid assets at the holding companies were approximately $6.5 billion at June 30, which is up from $3.8 billion at March 31 and well above our target cash buffer of $3 billion to $4 billion.
The sequential increase in cash at the holding companies was primarily due to the proceeds received from our P&C sale to Farmers Insurance of $3.9 billion.
In addition, HoldCo cash includes the net effects of subsidiary dividends, payment of our common stock dividend, a $500 million redemption of preferred stock, share repurchases of $1.1 billion, as well as holding company expenses and other cash flows.
Next, I would like to provide you with an update on our capital position.
For our U.S. companies preliminary second quarter year-to-date 2021, statutory operating earnings were approximately $2.8 billion, while net income was approximately $1.6 billion.
Statutory operating earnings increased by approximately $1.2 billion year-over-year, driven by lower variable annuity rider reserves and an increase in investment margin.
Year-to-date 2021, net income decreased by $286 million as compared to the first half of 2020.
The primary drivers were derivative losses, mostly offset by increases in operating earnings and net investment gains in the current six-month period compared to large derivative gains in the prior year's six-month period.
We estimate that our total U.S. statutory adjusted capital was approximately $18.5 billion as of June 30, 2021, up 9% compared to December 31, 2020 when excluding our P&C business sold to Farmers.
Favorable operating earnings and net investment gains were partially offset by derivative losses and dividends paid to the holding company.
Finally, the Japan solvency margin ratio was 873% as of March 31, which is the latest public data.
The sequential decline in the Japan SMR from 967% at December 31 reflects seasonal dividends and the rise in U.S. interest rates in the quarter ending March 31.
In summary, MetLife delivered another strong quarter, driven by exceptional private equity returns, good business fundamentals, ongoing expense discipline, and the benefits of our diverse set of market-leading businesses and capabilities.
While higher mortality due to COVID-19 has masked the earnings power of Group Benefits in Latin America, the strength of these franchises remain healthy and intact.
In addition, our capital, liquidity and investment portfolio are strong, resilient and position us for success.
| q2 adjusted earnings per share $2.37.
|
I'll start today with a review of guest cruise operations, along with a summary of our first quarter cash flows.
Then I'll provide an update on booking trends and finish up with adjusted EBITDA and net income expectations.
Turning to guest cruise operations.
During the first quarter 2022, we restarted 10 additional ships, resulting in 60% of our fleet capacity in guest cruise operations for the whole of the first quarter.
This was a substantial increase from 47% during the fourth quarter 2021.
As of today, 75% of our fleet capacity has resumed guest cruise operations.
Agility to continuously adapt to the ever changing landscape has been one of our greatest strengths during the pandemic.
In the first quarter, we continued to demonstrate this scale as we adjusted restart dates to optimize our guest cruise operations.
And we now expect each brand's full fleet to be back in guest cruise operations for its respective summer season where we historically generate the largest share of our operating income.
I am happy to report that just last week, we announced plans for our Australia restart, commencing at the end of May after the government advised that cruising would be permitted beginning in April.
For the first quarter, occupancy was 54% across the ships in service.
We never expected to achieve our historical 100-plus percent occupancies for the first quarter since many of these sailings were confirmed just a number of months before departure, which resulted in less than the normal booking lead time.
However, we had anticipated first quarter occupancy would exceed the 58% achieved in the fourth quarter of 2021.
We started the quarter with over 55% cabin occupancy booked for the first quarter and expected to improve upon that during the quarter.
However, during the first quarter 2022, as a result of the omicron variant, we experienced an impact on bookings for near-term sailings, including higher cancellations resulting from an increase in pretravel positive test results, challenges in the availability of timely pretravel tests and disruption than omicron caused on society during this time.
All of this inhibited our ability to build on our cabin occupancy book position for the first quarter 2022 during the first quarter, resulting in occupancy for the first quarter 2022 at 54% being lower than the 58% occupancy we achieved in the fourth quarter of 2021.
Despite all that, during the first quarter, we carried over one million guests, which was nearly a 20% increase from the fourth quarter 2021.
Once again, our brands executed extremely well with Net Promoter Scores continuing at elevated levels compared to pre-COVID scores.
Revenue per passenger day for the first quarter 2022 increased approximately 7.5% compared to a strong 2019 despite our lucrative world cruises and exotic voyages being shelved this year.
Our revenue management teams held on price when we experienced an impact on bookings for near-term sailings, optimizing our longer-term prospects for future revenue and pricing.
Once again, our onboard and other revenue per diems were up significantly in the first quarter 2022 versus the first quarter 2019, in part due to the bundled packages as well as onboard credits utilized by guests from cruises canceled during the pause.
We had great growth in onboard and other per diems on both sides of the Atlantic.
Increases in bar, casino, shops, spa and Internet led the way onboard.
Over the past 2.5 years, we have offered and our guests have chosen more and more bundled package options.
In the end, we will see the benefit of these bundled packages in onboard and other revenue.
As a result of these bundled packages, the line between passenger ticket and onboard revenue is blurred.
For accounting purposes, we allocate the total price paid by the guests between the two categories.
Therefore, the best way to judge our performance is by reference to our total cruise revenue metrics.
On the cost side, our adjusted cruise cost without fuel per available lower berth day, or ALBD as it is more commonly called, for the first quarter 2022 was up 25%.
I did say adjusted cruise costs and not net cruise costs, a term we had previously used.
The calculation of adjusted cruise costs and net cruise costs are the same.
The increase in adjusted cruise costs without fuel per ALBD is driven essentially by five things: first, the cost of a portion of the fleet being in pause status; second, restart related expenses; third, 15 ships being in dry dock during the quarter, which resulted in nearly double the number of dry dock days during the first quarter versus the first quarter 2019; fourth, the cost of maintaining enhanced health and safety protocols; and finally, inflation.
Remember, that because a portion of the fleet was in pause status during the first quarter and the higher number of dry dock days, we spread costs over less ALBDs.
This will again result in a doubling of the dry dock days during the quarter compared to 2019, which will impact adjusted cruise cost without fuel per ALBD during the second quarter.
We anticipate that many of these costs and expenses driving adjusted cruise costs without fuel per ALBD higher will end during 2022 and will not reoccur in 2023.
As a result of all of the above, we expect to see a significant improvement in adjusted cruise costs, excluding fuel per ALBD, from the first half of 2022 to the second half of 2022 with a low double-digit increase expected for the full year 2022 compared to 2019.
Next, I'll provide a summary of our first quarter cash flows.
We ended the first quarter 2022 with $7.2 billion in liquidity versus $9.4 million at the end of the fourth quarter.
Looking forward, we believe we remain well positioned given our liquidity.
The change in liquidity during the quarter was driven essentially by four things: first, an improved negative adjusted EBITDA of $1 billion due to our ongoing resumption of guest cruise operations despite the impact of the omicron variant.
We had thought adjusted EBITDA was going to improve more.
But as I said before, the omicron variant inhibited our ability to grow occupancy during the quarter, which limited the improvement in adjusted EBITDA.
Second, our investment of $400 million in capital expenditures net of export credits.
Third, $500 million of debt principal payments.
And fourth, $400 million of interest expense during the quarter.
Now let's look at booking trends.
Since the middle of January, we have seen an improving trend in booking volumes for future sailings.
Recent weekly booking volumes have been higher than at any point since the restart of guest cruise operations.
During the first quarter, we increased our booked occupancy position for the second half of 2022, albeit not at the same pace as a typical wave season due to the omicron variant.
As a result, the cumulative advanced book position for the second half of 2022 is at the lower end of the historical range.
However, we believe we are well situated with our current second half 2022 book position given the recent improvement in booking volumes, coupled with closer in booking patterns and our expectation for an extended wave season.
We continue to expect that occupancy will build throughout 2022 and return to historical levels in 2023.
And importantly, I am happy to report that prices on these bookings for the second half of 2022 continue to be higher with or without future cruise credits, or more commonly called FCCs, normalized for bundled packages as compared to 2019 sailings.
Our cumulative advanced book position for the first half of 2023 continues to be at the higher end of the historical range, also at higher prices with or without FCCs normalized for bundled packages as compared to 2019 sailings.
This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison as that was a high watermark for historical yields.
I will finish up with our adjusted EBITDA and net income expectations.
We all know that booking trends are a leading indicator of the health of our business.
With improved recent booking trends leading the way, driving customer deposits higher, positive adjusted EBITDA is clearly within our sights.
Over the next few months, we expect ship level cash contribution to grow as more ships return to service and as we build on our occupancy percentages.
However, as I've already said, adjusted EBITDA over the first half of 2022 has been or will be impacted by the restart-related spending and dry dock expenses as 39 ships, over 40% of our fleet, will have been in dry dock during the first half of fiscal 2022.
Given all these factors combined, we expect monthly adjusted EBITDA to continue to improve and turn consistently positive at the beginning of our summer season.
We continue to expect a net loss for the second quarter of 2022 on both a U.S. GAAP and adjusted basis.
However, we expect the profit for the third quarter of 2022.
For the full year, we do expect a net loss.
Looking to brighter days ahead in 2023, with the full fleet back in service all year, 8% more capacity than 2019 and improved fleet profile with nearly a quarter of our capacity consisting of newly delivered ships, continuing momentum on our outstanding Net Promoter Scores and occupancy returning to historical levels, we are looking forward to providing memorable vacation experiences to nearly 14 million guests and generating potentially greater adjusted EBITDA than 2019.
| q1 2022 ended with $7.2 billion of liquidity, including cash, short-term investments and borrowings.
for cruise segments, revenue per passenger cruise day ("pcd") for q1 of 2022 increased approximately 7.5% compared to a strong 2019.
as of march 22, 2022, 75% of company's capacity had resumed guest cruise operations.
since middle of january, company has seen an improving trend in weekly booking volumes for future sailings.
recent weekly booking volumes have been higher than at any point since restart of guest cruise operations.
occupancy in q1 of 2022 was 54%, a 20% increase in guests carried over prior quarter.
expects to have each brand's full fleet back in guest cruise operations for its respective summer season.
believes monthly adjusted ebitda will turn positive at beginning of its summer season.
expect improvement in occupancy throughout 2022 until it returns to historical levels in 2023.
expects adjusted cruise costs excluding fuel per albd for full year 2022, to be significantly higher than 2019.
anticipates that many of costs and expenses will end in 2022 and will not reoccur in 2023.
expects to see a significant improvement in adjusted cruise costs excluding fuel per albd from first half of 2022 to second half of 2022.
company continues to expect a net loss for q2 of 2022 on both a u.s. gaap and adjusted basis.
expects a profit for q3 of 2022.
|
Our conference call slides have been posted on our website and provide additional information that you may find helpful.
Sales were $454 million in the quarter, an increase of 22% from the first quarter of last year and an increase of 18% at consistent translation rates.
The effect of currency translation added 4 percentage points of growth or approximately $11 million in the first quarter.
Reported net earnings totaled $105.7 million for the quarter or $0.61 per diluted share.
After adjusting for the impact of excess tax benefits from stock option exercises, net earnings totaled $101.6 million or $0.58 per diluted share.
Gross margin rates were strong in the quarter, up 120 basis points from the first quarter of last year as the favorable effects from currency translation, realized pricing and factory volumes were partially offset by the unfavorable impact on material costs and mix related to the significant growth in the lower margin contractor segment.
We saw material cost increase throughout the quarter, which negatively impacted our gross margin rate.
At current factory volumes, we expect that pricing and strong factory operating performance will continue to offset higher material costs for the remainder of the year.
We also experienced supply chain disruptions in the quarter with regards to logistics capacity and component availability across most of our factories.
The purchasing and manufacturing teams are working to address these disruptions and we are not currently losing orders or have had any of our manufacturing lines shutdown.
We expect these challenges to continue in the second quarter.
Operating expenses increased $10 million in the quarter, including $2 million related to currency translation, $5 million of increases in sales and earnings based expenses and $2.5 million in new product development as we continue to invest in our growth initiatives.
Other non-operating expenses decreased $5 million due to an improvement in the market valuation of investments held to fund certain retirement benefit liabilities.
The effective tax rate was 16% for the quarter, which is 5 percentage points higher than the first quarter of last year, due to a decrease in excess tax benefits related to stock option exercises.
Cash flows from operations totaled $102 million, compared to $54 million in the first quarter of last year.
The majority of this increase was due to an increase in earnings in the quarter.
Capital expenditures were $21 million and dividends paid were $31.6 million.
A few comments as we look forward to the rest of the year.
Based on current exchange rates, the effect of currency translation will continue to be a tailwind for us with the full year effect estimated to be 2% on sales and 5% on earnings with the most significant impact occurring in the first half of the year.
We expect unallocated corporate expense to be approximately $30 million and can vary by quarter.
Our 2021 full year tax rate is expected to be approximately 18% to 19%, excluding any effect from excess tax benefits related to stock option exercises.
Capital expenditures are estimated to be $140 million, including $90 million for facility expansion projects.
Finally, 2021 will be a 53 week year with the extra week occurring in the fourth quarter.
Q1 was a solid quarter as we delivered growth in every segment and every region with the exception of process in EMEA which was down low-single-digits.
In addition to good performance by our commercial teams, I want to specifically recognize our manufacturing, purchasing, warehousing and logistics folks for successfully dealing with both external supply chain issues and rising material prices.
Contractor continued strong performance with record Q1 sales and earnings as revenue growth in all regions exceeded 30% for the quarter.
Residential construction activity remains solid and the home improvement market is robust.
Contractor North America continues to see strong out-the-door sales in both propane and home center and we're working hard to keep up with the demand.
Favorable volume and continued discretionary expense management drove solid operating earnings during the quarter.
The outlook for the Contractor business remains positive for the year, however, comparisons do get much tougher in the second half.
The Industrial segment grew low teens during the quarter, with improvement in all regions.
Order rates were strong throughout the quarter, with growth in all major product categories.
Overall demand in this segment remains broad-based with many of our key end markets improving as customer facilities begin to reopen to outside vendors.
Process segment sales grew in Q1 with improving end market conditions, particularly in the Americas and Asia Pacific.
All major product categories were up with the exception of oil and gas and incoming order rates accelerated throughout the quarter.
Similar to industrial end market growth was broad-based and benefited from improved factory access.
A couple of comments on our outlook as we head into the second quarter.
Incoming orders remain solid and last year's second quarter was our trough.
So we expect a good Q2.
Second half comparisons will get significantly more difficult as our business accelerated in Q3 and Q4.
Although the second half economic environment is uncertain, we will continue to aggressively pursue our key long-term growth strategies and investments.
| compname reports qtrly diluted net earnings per common share, adjusted $0.58.
qtrly diluted net earnings per common share $0.61.
qtrly diluted net earnings per common share, adjusted $0.58.
|
I hope everyone is staying healthy and safe.
Let's start on slide four.
We are making great progress this year at DTE for our team, our customers and our communities positioning us to deliver for our investors.
This progress has produced a strong second quarter and positions us well for continued growth.
Our company celebrated Juneteenth together last month with a series of virtual meetings, we pay tribute to this important day with global community partners.
A number of employees offered reflections on what the day means to them personally.
Overall, it was a great way to come together and honoured a significant holiday.
We continue to focus on service excellence for our customers and delivering clean, safe and reliable energy as we continue our clean energy transformation.
DTE Electric received approval from the MPSC to further expand the voluntary renewable program MIGreenPower, while also making it even more affordable, including increased access for low-income customers.
Additionally, we partnered with Ford Motor Company to install new rooftop solar and battery storage technology at the Ford Research and Engineering Center.
The array includes an integrated battery storage system and will be used to power newly installed electric vehicle chargers.
This can generate over 1,100 megawatt hours of clean energy.
We also continue to support the communities where we live and serve.
We were also recognized by Points of Light for the fourth consecutive year as one of the Civic 50.
This award highlights DTE as one of the top 50 community-minded companies nationwide and corporate citizenship.
We also launched a Tree Trim Academy to create 200 high-paying jobs in Detroit.
DTE has a need for Tree Trimmers, and the community has a need for good high-quality jobs.
It will also help us continue to improve electric liability as Trees account for over 70% of our customer outages.
On the investor front, we completed the spin of the midstream business.
Now DTE Midstream is a stand-alone company and DTE Energy is a predominantly pure-play utility with 90% of operating earnings coming from our utilities.
The transaction went very smoothly and was well received by all stakeholders.
We didn't miss a beat on a very strategic transaction and many said, we made it look easy.
We delivered a strong second quarter with earnings of $1.70 per share and we are raising our 2021 operating earnings guidance and continue to pay a strong dividend.
DTE is continuing to deliver successful operating results.
At DTE Electric, we made another significant step toward our goal of reducing carbon emissions as we retired River Rouge Power Plant in the second quarter.
For over 60 years, the River Rouge Power Plant delivered safe, reliable and affordable energy for community throughout, Southeast Michigan.
River Rouge is one of the three coal-fired power plants, DTE is retiring by the end of 2022, which is an integral part of our company's clean energy transformation.
We continue to look at ways to accelerate our coal fleet retirements and potentially file our updated IRP before September of 2023.
We continue to expand on our voluntary renewable program, which is exceeding our high expectations.
In the first quarter, we announced the commitment of new customers to MIGreenPower, including the State of Michigan, Bedrock and Trinity Health.
During the second quarter, we signed up a number of new large customers, including Detroit Diesel, which is now one of our largest voluntary renewable customers.
The program continues to grow at an impressive rate.
So far, we've reached 950 megawatts of voluntary renewable commitments with large business customers and approximately 35,000 residential customers.
We have an additional 400 megawatts in the very advanced stages of discussion for future customers.
MIGreenPower is one of the largest voluntary renewable programs in the nation and helps advance our work toward our net 0 carbon emission goal while helping our customers meet their decarbonization goals.
We have made progress with our expedited tree trimming program, which is greatly improving reliability for our customers and have received Michigan Public Service Commission approval to securitize the tree trimming costs along with costs associated with the River Rouge Power Plant retirement.
At DTE Gas, we are on track to achieve net 0 greenhouse gas emissions by 2050.
We began the second phase of construction on our major transmission renewal project in Northern Michigan in June.
The project includes the installation of a new pipeline as well as facility modification work which will reduce the risk of significant customer outages.
Project is on track to be in service by the first quarter of next year.
Last quarter, we announced our New CleanVision Natural Gas Balance program.
This program provides the opportunity for customers to purchase both carbon offsets and renewable natural gas.
We enable them to reduce their carbon footprint.
We are proud of how fast the program is growing.
Finally, we have over 3,000 customers subscribed, and we are looking forward to seeing it become as successful as our voluntary renewable program at DTE Electric.
On our Power and Industrial business, we continue to add new projects as we began construction on a new RNG facility, our large dairy farm in South Dakota.
This will be P&I's largest dairy RNG project to date.
Project will directly inject RNG into the Northern Natural Gas system for sale into the California transportation fuels market.
Facility is expected to be in service in the third quarter of 2022.
We are also in advanced discussions on several new industrial energy and RNG projects and we'll provide updates on these as they progress.
P&I was also recognized by the Association of Union Contractors with the 2020 Project of the Year Award for the Ford Dearborn cogeneration project.
Overall, I am extremely proud of the team's accomplishments year-to-date, and I'm looking forward to more successes in 2021 and beyond.
Now moving on to slide six.
As I said, we've had a very strong start to 2021.
We are raising our operating earnings guidance midpoint from $5.51 per share to $5.77 per share, moving our year-over-year growth and operating earnings per share guidance from 7.4% to a robust 12.5%.
We are able to use some of this favorability to position the company to continue to deliver in future years.
We mentioned in Q1, we were deep into planning for 2022 in a great level of detail.
With all of this work, we feel great about achieving a smooth 5% to 7% growth trajectory into 2022 and through the five-year plan.
You are not going to see any surprises from us in our growth rate in 2022 in spite of the area roll off [Phonetic] and the converts coming due.
90% of our future operating earnings will be from our two regulated utilities, where we have a large investment agenda with $17 billion of capital investment in our five-year plan, focused on clean energy and customer reliability.
Overall, we feel very confident with our performance in 2021 and our future operational and financial performance.
Dave, over to you.
Let me start on slide seven to review our second quarter financial results.
Total operating earnings for the quarter were $329 million.
This translates into $1.70 per share.
You can find a detailed breakdown of earnings per share by segment, including our reconciliation to GAAP reported earnings in the appendix.
I'll start the review at the top of the page with our utilities.
The second quarter was a really warm quarter for us here in Michigan.
In fact, it was the seventh warmest on record.
DTE Electric earnings were $238 million for the quarter, which was $19 million higher than the second quarter of 2020, primarily due to higher commercial sales, rate implementation and warmer weather offset by nonqualified benefit plan gains that we had in 2020.
As we mentioned in the first quarter call, we've taken steps to reduce the variability of these investments going forward.
Moving on to DTE Gas.
Operating earnings were $7 million, $4 million lower than the second quarter of last year.
The earnings decrease was driven primarily by the warmer weather in 2021, offset by new rates.
Let's keep moving to the Gas Storage and Pipelines business on the third row.
Operating earnings for GSP were $86 million.
This was $16 million higher than the second quarter of 2020, driven primarily by the LEAP pipeline going into service and strong earnings across the pipeline segment.
On the next row, you can see our Power and Industrial segment operating earnings were $34 million.
This is a $9 million increase from second quarter last year due to new RNG projects beginning operation.
On the next one, you can see our operating earnings at our Energy Trading business were $21 million, which is $16 million higher than second quarter earnings last year due primarily to strong performance in the gas portfolio.
Year-to-date through the second quarter, this positions us positive to our expectation and our original guidance for the year.
Finally, Corporate and Other was unfavorable $22 million quarter-over-quarter, primarily due to the timing of taxes and higher interest expense.
Overall, DTE earned $1.70 per share in the second quarter of 2021, which is $0.17 per share higher than 2020.
Moving on to slide eight.
Given the strong start to the year, we were able to use this favorability to position ourselves to continue to deliver for our customers and investors in future years.
And we are also increasing our 2021 operating earnings per share guidance midpoint $5.51 per share to $5.77 per share.
The increase in guidance is due primarily to warmer-than-normal weather, sustained continuous improvement, and uncollectible expense variability at DTE Electric, higher REF volumes at P&I, and stronger performance of energy trading due to the realization of gains from a small, long physical storage position during the extreme cold weather event in Texas in the first quarter.
In the third quarter, we are seeing additional sales upside for Electric compared to our plan and higher than planned REF volumes at P&I.
We are continuing to explore opportunities to support future years through our invest strategy and to support future customer affordability.
As you can see on the slide, there is no Gas Storage and Pipeline segment in our operating guidance for this year.
The GSP segment will be classified as discontinued operations starting in the third quarter.
We continue to focus on maintaining solid balance sheet metrics.
Due to our continued strong cash flows, DTE is targeting no equity issuances in 2021 and has minimal equity needs in our plan beyond the convertible equity units in 2022.
We have a strong investment-grade rating and targeted an FFO-to-debt ratio of 16%.
With the proceeds from the spin-off of DTM, we are retiring long-term parent debt of approximately $2.6 billion after debt breakage costs.
These were NPV-positive transaction and immediately earnings per share accretive as we were able to retire a higher interest rate debt to support our current plan and to deliver our 5% to 7% operating earnings per share growth rate.
We feel great about our second quarter accomplishments, and we are confident in achieving our increased 2021 guidance and continuing to deliver on our long-term 5% to 7% operating earnings per share growth rate.
Our utilities continue to focus on our infrastructure investment agenda specifically investments in clean generation and investments to improve reliability and the customer experience.
We continue to focus on maintaining solid balance sheet metrics and are targeting no equity issuances in 2021.
In closing, after executing a successful spin of our midstream business, DTE continues to be well positioned to deliver the premium, total shareholder returns that our investors have come to expect over the past decade with strong utility growth and a growing dividend.
| compname says operating earnings for q2 were $329 million, or $1.70 per diluted share.
operating earnings for q2 were $329 million, or $1.70 per diluted share.
|
We appreciate you joining us today and hope you're staying safe and well.
We are pleased with the strong start to 2021 and ongoing recovery in our automotive and industrial businesses.
The GPC team remained focused on solid execution and in delivering strong financial results through improving sales trends, increasing operational efficiencies and enhancing customer value.
Through the quarter, we operated thoughtfully with the physical and mental well-being of our employees the top priority as our 50,000-plus GPC teammates are the core of our success.
Turning now to our first quarter financial results.
Total sales for the quarter were $4.5 billion, up 9% from last year and significantly improved from the 1% sales decrease in the fourth quarter of 2020.
Gross margin was also a positive, representing our 14th consecutive quarter of year-over-year gross margin expansion and our teams in the field continued to do a great job of managing our expenses through ongoing cost actions and the carryover of expense reductions implemented last year.
These results drove a 41% increase in operating profit and an 8.1% operating margin, which is up 180 basis points from the first quarter of last year.
Our strong operating performance drove net income of $218 million and diluted earnings per share of $1.50, up 88%.
We also continued to fortify our balance sheet ensuring ample liquidity and solid cash flow.
We are proud of our teams and we are encouraged by our results and we intend to build on this momentum throughout 2021.
Turning now to our business segments.
Automotive represented 66% of total sales in the first quarter and Industrial was 34%.
By region, 73% of revenues were attributable to North America with 16% in Europe and 11% in Asia-Pac.
Total sales for Global Automotive were $3 billion, a 14% increase from 2020 and much improved from a 1% increase in Q4 of 2020.
Comp sales were up 8%, improved from a 2% decrease in the fourth quarter and segment profit margin was up 250 basis points, driven by strong operating results in each of our automotive operations.
Sales were driven by positive sales comps across all our operations with 15% comps in Europe and Asia-Pac, 7% comps in the US and 3% comps in Canada.
The ongoing global economic recovery, including financial stimulus in the US, improving inventory availability, favorable weather conditions and our focus on key growth initiatives were all sales drivers in the quarter.
We would add that while we continue to expect a reasonable level of inflation as we move through 2021, price inflation was not a factor in our first quarter sales.
In Europe, sales were much improved from Q4 as our team capitalized on the strengthening sales environment, despite lockdown throughout the region.
In addition, initiatives to grow key accounts, enhance inventory availability and the ongoing launch of the NAPA brand continued to prove effective in driving profitable growth and market share gains.
For the quarter, our teams in France and the UK outperformed in the region with strong double-digit sales comps.
We would also call out a much improved performance by our team in the Benelux region.
The strong sales recovery combined with excellent expense controls produced a 500-basis point improvement in operating margin.
So a terrific start to the year for our European operations.
In Asia-Pac, our Automotive sales remained in line with the mid-teen growth we experienced through the second half of 2020.
For the quarter both retail and commercial sales held strong as the region operated through multiple lockdowns associated with the pandemic.
Retail sales, which represent over 40% of our total sales volume through our Repco stores continued to outperform posting a 33% increase in March and plus 24% in the quarter.
Our commercial sales continued to accelerate as well posting double-digit sales growth in the quarter.
We continued to benefit from the strength in online sales, which reached record highs at three times pre-COVID levels.
Finally building on the NAPA brand name has been well received and we remain focused on growing our NAPA presence in the region.
Summing it up, this group continues to perform at a very high level on both the top and bottom lines, resulting in a 150-basis point improvement and profit margin for the quarter.
In North America comp sales in the US were up 7% helping this business post a 180-basis point increase in profit margins.
In Canada, we operated through a variety of regional lockdowns which impacted our larger markets of Ontario and Quebec.
Comp sales were up 3% and operating margin was up 130 basis points.
Sales in the US, which posted its strongest quarterly comp since the first quarter of 2015, were driven by solid growth in both the retail and commercial segments.
This was our first quarter of positive commercial comps since pre-pandemic and our team produced record sales volumes in the month of March.
In addition, both ticket and traffic counts were positive on both our retail and commercial transactions, marking our first increase in traffic counts since several quarters.
By region, the Atlantic, Midwest and West Groups posted the strongest growth, although we would also call out our Northeast Group, which produced solid growth in the quarter.
This is notable as this region of the US has been most affected by the COVID-19 lockdowns over the past 13 months.
Likewise, we would add that product sales in categories such as batteries, tools and equipment and brakes were strong this quarter.
We are especially encouraged to see the rebound in our brakes business which generally is a positive indicator for our commercial business.
On the retail side, which continues to outperform with strong double-digit growth, we continued to drive sales via investments in retail specialists and store refreshes, as well as targeted promotions.
We would also call out our ongoing omnichannel investments and the increase in B2C online sales, which reached record levels in the quarter and were up 150% from the prior year.
Our commercial sales, our other wholesale category of independent garage customers, continued to generate strong growth.
We have been encouraged by the number of new accounts we are serving.
Clearly our investments in increasing the number of professional salespeople on the street has been effective in attracting new customers to NAPA.
We were also pleased to see improved sales with our NAPA AutoCare and major account customers which posted positive sales growth for the first time in several quarters.
Sales to the fleet and government group were down year-over-year, but sequentially improved from the fourth quarter and we look for further improvement in sales for this segment.
As we look ahead, we are excited for the growth opportunities we see for our Global Automotive segment.
We expect further improvement in aftermarket fundamentals such as increased miles driven, a growing vehicle fleet and an increase in vehicles aged six to 12 years, all favorable for the industry.
We can assure you we remain focused on our initiatives to deliver customer value and ultimately sell more parts for more cars.
These plans include further enhancing our inventory availability, strengthening our supply chain and investing in our omnichannel capabilities.
In addition, we expect to expand our global store footprint with additional bolt-on acquisitions, changeovers and new greenfield stores to further enhance our competitive positioning.
So now let's discuss the global Industrial Parts Group.
Total sales for this group were $1.5 billion, flat with last year.
Comp sales were down 2%, improved from the 4% decrease in Q4 and reflecting the third consecutive quarter of improving sales trends.
March was a breakout month with the North American Motion team posting a 7% increase in average daily sales and achieving record sales volumes.
This was a tremendous accomplishment and another turning point for GPC in our emergence from the pandemic.
The ongoing recovery over the last nine months is in line with the continued improvement in the industrial economy which you can see in several key indicators for our business.
For perspective, PMI was 64.7% in March, an increase of 4.2 points from December 31st.
In addition, industrial production increased by 2.5% in the first quarter, the third consecutive quarter of expansion, following the significant downturn in the second quarter of 2020.
Importantly, we can see these positive indicators translating to more activity with our customers, which are operating at higher run rates as well as releasing capital project orders.
The strengthening sales environment, along with our initiatives to drive growth and control cost produced an 80 basis point margin improvement with segment profit margin at 8.3% versus 7.5% last year.
Diving deeper into our Q1 sales.
We will start by saying that inflation remains a non-factor in our numbers thus far.
That said, we are seeing more pricing activity and expect another year of 1% to 2% price inflation from our suppliers.
For the quarter, we experienced improving sales trend among virtually all product categories and industries served.
We were especially encouraged by the recovery in the equipment and machinery aggregate and cement and wood and lumber sectors, all key industry groups for us.
In addition, we continue to benefit from the build-out of our omnichannel capabilities with digital sales up two times from the first quarter in 2020.
A key driver of our digital growth relates to our inside sales center which is generating incremental sales to new Motion customers.
While still a relatively small percentage of total sales, we are excited by the potential for future sales growth.
We also remain focused on growing our services and solution businesses to expand our expertise and sales opportunities in areas such as equipment repair, conveyance and automation.
We have made several bolt-on acquisitions to build scale in these areas and our services and solutions capabilities remain a key consideration in our overall M&A strategy for the Industrial business.
to further ensure profitable sales growth, we continue to enhance our pricing and category management strategies.
In addition, we plan to continue to optimize our supply chain network and further improve our productivity, while delivering exceptional customer service.
Closing out our Industrial comments.
We remain bullish about our Motion business and we are excited to see this team moving back into a growth mode.
So now I'll conclude my remarks by providing a brief update on our ESG initiatives.
As outlined in our Corporate Sustainability Report, GPC embraces our responsibility to innovate in ways that provide for our environment, our associates and the communities in which we operate.
In Q1 we expanded our training and development programs to ensure personal growth and enhance our comprehensive well-being program focused on the emotional, financial and physical health of our GPC teammates.
Additionally, we continue to make progress in the advancement of our corporate commitment to diversity and inclusion, we are actively recruiting talent that is representative of the communities we serve, training our teammates to mitigate unconscious bias and model inclusive behaviors while strengthening partnerships that support our D&I initiatives.
Finally, we remain focused on our mission to be good corporate citizens where we both work and live.
Since 1928, we have been giving back to communities and causes that make a difference and that legacy continues in 2021.
First I want to congratulate the global GPC team on the performance this quarter.
As Paul mentioned, our team delivered solid performance in the first quarter and have strong momentum.
The environment has improved compared to 2020, but we remain cautious as global uncertainty continues to be a part of doing business each day.
Areas of attention for us include COVID-19, inflation, global logistics and product and labor availability.
We also have more challenging year-over-year comparisons that will require sustained momentum during the second half of the year.
Despite the uncertainty, the GPC team is energized and focused to deliver performance.
I'll now share some additional perspective on our strategic initiatives in progress.
The foundation of our priorities is based on the customer experience and understanding their needs and working to exceed their expectations.
We are analyzing and listening to customer feedback and are corresponding to strength and opportunities.
In the simplest terms, our customers need us to be easy to do business with, reliable and helpful.
This independent data reinforces our priorities and serves as a guiding principle in terms of required action and strategic investment.
To deliver a best-in-class customer experience we have opportunities to simplify and integrate our existing operations.
The global teams are executing multi-year plans to realign teams, streamline processes, improve operational productivity and reduce costs.
These initiatives will not only create operating efficiency, but also enable faster team execution, deliver a better customer experience and accelerate profitable growth.
I'd like to highlight a few initiatives that illustrate our efforts to simplify and integrate.
For example, we're working to optimize facilities footprint and coverage, simplify and integrate disparate legacy IT systems, streamline back-office support functions, offshore non-customer facing functional activities and centralize GPC indirect sourcing processes as a few examples.
As we simplify and integrate, we're simultaneously investing in our core business and positioning for the future.
Our strong cash flow, solid capital structure and disciplined capital allocation provide the flexibility needed to continue to make these investments.
Key pillars of our core investments include talent, sales force effectiveness, digital supply chain and emerging vehicle technologies.
A few highlights of our progress across the key pillars during the quarter include.
We continue to take deliberate action across the globe to recognize high potential talent, infuse new capabilities into the organization and recruit diverse talent that is representative of the communities we serve.
Examples include category management, digital, emerging vehicle technology and field leadership roles to name a few.
Talent will always be a priority area of investment as we strive to be an employer of choice for teammates that share our GPC values and want to play a leadership role in our exciting future.
Two, sales force effectiveness.
Data and analytics to understand our unique customer segments, the different needs of each segment and associated strategies to serve the segment is a foundational element of sales force effectiveness.
The sales efforts reflect our omnichannel initiatives and include an increasing mix of both traditional selling and digital strategies.
As an example, the US automotive team revamped its sales intensity with new reporting tools to track customer visits, digital tools to communicate with field sales teammates and enhanced virtual product and skills training.
In addition, in 2021, the US automotive team adjusted compensation programs to better align incentives with profitable growth.
As I mentioned, digital is a foundational priority as we deliver a best-in-class customer experience and accelerate profitable growth.
Our businesses delivered excellent performance via digital channels in the quarter.
We continue to see strong increases versus prior year across our global digital channels.
Digital still represents a relatively small portion of our total sales and we're excited about the compelling digital vision our teams are executing.
Related, we continue to invest in foundational digital elements, including catalog, search and other critical customer experience elements, such as ease of ordering, pricing and analytics.
Our supply chain initiatives are focused to ensure we have the right product available in the right market at the right time.
We are continuously executing inventory, facility, productivity, logistics and technology strategies to achieve this goal.
One solid example is the success the US Industrial team enjoyed with recent facility automation investments that delivered a 500% labor productivity improvement.
Other select examples would be enhanced workforce management and delivery tracking tools in the US automotive business.
Lastly, emerging vehicle technologies.
We aspire to lead as it relates to the opportunities that emerging vehicle technologies present for our automotive industries.
We believe we have a unique position to leverage including our scaled global footprint, diverse portfolio, leading global brands, established customer-supplier relationships and one GPC team approach.
Through our planning process, we developed a multi-dimensional strategy to address electric vehicle trends.
A few select highlights include the alignment of talent 100% dedicated to developing and executing EV strategies, product and category management strategies with existing and new SKUs, global supplier councils with existing strategic partners, advisory groups leveraging our 25,000 global repair center relationships and partnerships with strategic EV market participants.
Lastly, strategic bolt-on acquisitions are a key part of our GPC growth strategy.
We utilize acquisitions to acquire new customers, further penetrate existing priority markets, enter new geographies, acquire product and service capabilities and acquire talent.
We also believe our acquisition capabilities position us well as we selectively consider and test new business models.
Our acquisition pipeline remains active and actionable given the fragmentation of our markets.
We believe our scale, market-leading brands, global footprint and unique culture position us to be an acquirer of choice.
We will remain selective and disciplined as we execute this important part of our strategy.
Similar to the approach utilized for our 2019 cost savings plan, the global teams develop tools in a monthly cadence to create visibility and status on initiatives.
This approach not only helps drive performance but also helps to share best practices around the globe as one GPC team.
In summary, I hope today's remarks reinforce our sense of focus and global teamwork.
We will remain agile as the global environment continues to evolve.
And we will remain focused on what we can control as we execute through the balance of the year and beyond.
And I'll now turn it to Carol to review the financial performance details.
We will begin with a review of our key financial information and then we will provide an update on our full-year outlook for 2021.
Total GPC sales were $4.5 billion in the first quarter, up 9% from last year and improved from the 0.7% decrease in the fourth quarter.
Gross margin was 34.5%, a 60-basis point improvement compared to 33.9% in the first quarter last year.
Our steady progress in improving gross margin continues to reflect the positive impact of a number of initiatives, including our pricing and global sourcing strategies.
And we also benefited from a sales mix shift to higher gross margin operations.
We would add that the level of supplier incentives in the quarter were in line with last year and neutral to gross margin.
And as Paul mentioned earlier, there was minimal impact of price inflation in our first-quarter sales and this is true for gross margin as well.
As we move through the year, we will continue to execute on our initiatives to drive additional gross margin gains via positive product mix shifts, strategic pricing tools and analytics, global sourcing advantages and also strategic category management initiatives.
Our selling, administrative and other expenses were $1.2 billion in the first quarter, up 4.6% from last year, or up 5.3% from last year's adjusted SG&A.
This reflects an improvement to 26.8% of sales this year, which is down nearly 100 basis points from 27.7% last year.
So tremendous progress and primarily due to the favorable impact of our cost savings generated in 2020 as well as ongoing cost control measures and also improved leverage on our stronger sales growth.
Our progress in these areas was slightly offset by rising costs and freight expenses which we're closely managing and planned increases in our technology spend which supports our strategic initiatives as Will covered earlier.
Our total operating and non-operating expenses were $1.3 billion in the first quarter, up 2.2% from last year or up 2.1% compared to last year's adjusted expenses.
First quarter expenses include the benefit of approximately $20 million related to gains on the sale of real estate and favorable retirement plan valuation adjustments that are recorded to the other non-operating income line.
All in, our total expenses for the quarter improved to 28.1% of sales, down 190 basis points from 30% in 2020.
Total segment profit in the first quarter was $361 million, up a strong 41% on the 9% sales increase.
And our segment profit margin was 8.1% compared to 6.3% last year, a 180 basis point increase.
In comparison to 2019, our segment profit margin has improved by 100 basis points.
So solid improvement and our strongest first quarter profit margin since 2015, a reflection of the positive momentum we're building in our businesses.
Our net interest expense of $18 million was down from $20 million in 2020 due to the decrease in total debt and more favorable interest rates relative to last year.
The corporate expense line was $31 million in the quarter, down from $55 million in 2020 due primarily to the favorable real estate gains and retirement plan adjustment discussed earlier.
Our tax rate for the first quarter was 23.8% in line with the reported rate last year and improved from the prior year adjusted rate of 26.5%.
This improvement primarily relates to the favorable tax impact of stock options exercised as well as the previously mentioned real estate gains and retirement plan adjustments.
Our first quarter net income from continuing operations was $218 million with diluted earnings per share of $1.50.
This compares to $0.84 per diluted share in the prior year or an adjusted diluted earnings per share of $0.80 for an 88% increase.
So now let's turn to our first quarter results by segment.
Our Automotive revenue for the first quarter was $3 billion, up 14% from the prior year.
Segment profit of $236 million was up a strong 65% with profit margin at 8% compared to 5.5% margin in the first quarter last year.
The 250 basis point increase in margin was driven by the continued recovery in the Automotive business and the execution of our growth and operating initiatives.
We were pleased to have each of our automotive businesses expand their margins for the third consecutive quarter.
In addition, we're encouraged that our first quarter margin also compares favorably to the first quarter of 2019, up 120 basis points.
So a broad recovery across our operations and we look for a continued progress in the quarters ahead.
Our Industrial sales were $1.5 billion in the quarter, flat with last year and improved sequentially for the third consecutive quarter, which is consistent with the strengthening industrial economy.
Our segment profit of $125 million was up 10% from a year ago and profit margin was up 80 basis points to 8.3% compared to 7.5% last year.
The improved margin for Industrial reflects the third consecutive quarter of margin expansion in both our North American and Australasian industrial businesses and it's also up by 90 basis points from the first quarter of 2019.
So another quarter of strong operating results for Industrial, which we expect to continue with stronger sales growth projected through the remainder of the year.
So now, let's turn our comments to the balance sheet.
We continue to operate with a strong balance sheet and ample liquidity and the financial strength to support our growth strategy.
At March 31st, total accounts receivable is down 27% from last year, which is primarily a function of the $800 million in receivables sold in 2020.
Our inventory was up 6% from the prior year and accounts payable increased 14%.
And our AP to inventory ratio improved to 124% from 116% in the last year.
We are pleased with our progress in improving our overall working capital position and we continue to believe we have opportunities for further improvement.
Our total debt is $2.6 billion at March 31, down $1 billion or 28% from last March and down $60 million from December 31st of 2020.
We significantly improved our debt position throughout the course of 2020 with the issuance of new public debt and a new revolving credit agreement that provide for expanded credit capacity and more favorable rates.
With these positive changes to our debt structure, our total debt to adjusted EBITDA has improved to 1.8 times from 2.5 times last year.
Additionally, we closed the first quarter with $2.6 billion in available liquidity, which is up from $1.1 billion at March 31st last year and in line with December 31st.
We also continue to generate strong cash flow, generating $300 million in cash from operations in the first quarter, which is up from $28 million in the first quarter last year.
With a strong start to the year, including the increase in net income and the improvement in working capital, we continue to expect cash from operations to be in the $1 billion to $1.2 billion range and free cash flow of $700 million to $900 million.
Our key priorities for cash include the reinvestment in our businesses through capital expenditures, M&A, the dividend and share repurchases.
We invested $48 million in capital expenditures in the first quarter, an increase from $39 million in 2020.
Looking forward, we have plans for additional investments in our businesses to drive growth and improve efficiencies and productivity.
We continue to expect total capital expenditures of approximately $300 million for the year.
As you heard from Will earlier, strategic acquisitions remain an important component of our long-term growth strategy.
We continue to cultivate a strong pipeline of targeted names and we expect to make additional strategic bolt-on acquisitions to complement both our Global Automotive and Industrial segments in the months and quarters ahead.
In the first quarter we paid a cash dividend of $114 million to our shareholders.
The Company has paid a cash dividend to shareholders every year since going public in 1928 and our 2021 dividend of $3.26 per share represents our 65th consecutive annual increase in the dividend.
We have actively participated in a share repurchase program since 1994.
While there were no repurchases in the first quarter, the Company is currently authorized to repurchase up to 14.5 million additional shares and we will resume share repurchases in the months and quarters ahead.
Turning to our outlook for 2021.
In arriving at our updated guidance, we considered several factors including our past performance, current growth plans and strategic initiatives, recent business trends, the potential for foreign currency fluctuations, inflation and the global economic outlook.
In addition, we consider the continued uncertainties due to market disruptions such as with COVID-19 and its potential impact on our results.
With these factors in mind, we expect total sales for 2021 to be in the range of plus 5% to plus 7%, an increase from our previous guidance of plus 4% to plus 6%.
As usual, these growth rates exclude the benefit of any unannounced future acquisitions.
By business, we are guiding to plus 5% to plus 7% total sales growth for the Automotive segment, an increase from plus 4% to plus 6% and a total sales increase of plus 4% to plus 6% for the Industrial segment, an increase from plus 3% to plus 5%.
On the earnings side, we are raising our guidance for diluted earnings per share to a range of $5.85 to $6.05, which is up 11% to 15% from 2020.
This represents an increase from our previous guidance of $5.55 to $5.75.
We enter the second quarter focused on our initiatives to meet or exceed these targeted results and we look forward to reporting on our financial performance as we go through the year.
Looking ahead, the GPC team is excited for the ongoing recovery in the global economy and the growth prospects we see for both Auto and Industrial.
Our strong balance sheet provides us the financial flexibility to pursue strategic growth opportunities and we remain focused on executing our plans to capture profitable growth, generate strong cash flow and drive shareholder value.
As a result, we are optimistic that we can deliver strong financial results in the quarters ahead.
| q1 gaap earnings per share $1.50 from continuing operations.
q1 sales rose 9.1 percent to $4.5 billion.
raises 2021 outlook for revenue growth and diluted eps.
sees 2021 total sales growth 5% to 7%.
sees 2021 earnings per share $5.85 to $6.05.
sees 2021 free cash flow $700 million to $900 million.
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For a list of factors which could affect our future results, including our earnings estimates.
In addition, we will also be presenting certain non-GAAP financial measures.
Our third quarter reflected strong demand for our products and services, with order trends accelerating during the period.
The strength of our business was even more impressive considering the ongoing headwinds created by the COVID-19 pandemic, which continued to disrupt economic activity around the world.
We've been able to maintain cohesion throughout the EnerSys workforce despite a number of positive, symptomatic and close contact cases among our employee base.
Those cases can lead to disruption in daily production schedules as workers are sent home in order to comply with COVID-19 protocols.
EnerSys continues to emphasize social distancing, hygiene, the use of masks and reminding our employees to follow the same guidelines in their personal activities, which has helped to mitigate the impact compared to many companies, but we have not been immune.
Despite the ongoing challenges caused by COVID-19, the demand for EnerSys products was clear during the period as we reported strong third quarter fiscal '21 adjusted earnings of $1.27 per diluted share, which included a $0.10 benefit from the settlement of our claim related to the September 29 fire in our Richmond, Kentucky facility less $0.03 per share in foreign currency losses.
Energy Systems benefited from telecom driven 5G growth in the Americas and our motive power business saw marked revenue and earnings improvement over the second fiscal quarter.
Our specialty segment continued its positive momentum in our third quarter, bolstered by our growing transportation backlog.
I'd now like to provide a little more color on some of our key markets.
But before I begin, I would like to comment on how many of our customers across all of our lines of business have signaled increasing demand and alerted us to be ready.
There seems to be pent-up demand which should accelerate near-term growth.
Our largest segment, Energy Systems, has struggled in recent quarters from slow broadband orders.
The MSOs had focused on increasing node capacity for their work-from-home demand.
Those MSOs have now resumed strong orders for our products, which increased their networks power capacity.
Even more encouraging, MSO participation in recent wireless spectrum auctions and their enunciation of their intention to carry their 5G and 4G traffic on their own networks validates the broadband growth assumptions of our Alpha acquisition strategy.
Telecom 5G growth is also accelerating in the Americas, confirming their commitment to invest in their networks to increase capacity and reliability.
Our 5G small cell powering project collaboration with Corning is progressing even better than we had hoped.
In this quarter, we believe the network investment in 5G has, for the first time, surpassed the existing 4G network spend.
It is also encouraging to see data center markets improving.
In addition to our traditional businesses, renewable energy markets continue to expand with incredible opportunities for storage applications.
The new administration has clearly focused on this emerging market.
We plan to respond by updating our product offering using the same modular approach from our other lines of business.
We will share more specifics with you on how we will participate in renewable energy storage and EV charging in coming calls.
When you consider forklifts, we are currently the leader in charging electric vehicles globally, and this technology is easily transferred.
Lastly, we are beginning to see the positive impact of the global alignment of the Energy Systems organization as we leverage regional expertise and key account development.
Our motive power business showed considerable improvement in the period compared to the second quarter, delivering higher sequential revenue and operating earnings.
Our order rates have surpassed the pre-COVID levels of a year ago despite sporadic pandemic-related restrictions, particularly in EMEA.
The Hagen, Germany restructuring is ahead of schedule and forecasted to beat its budget.
Although those restructuring benefits have not yet impacted our earnings, they will grow in magnitude throughout calendar year 2021, reaching nearly a $20 million annual run rate by the end of fiscal year 2022.
Another exciting development is the launch of our NexSys iON lithium motive power batteries.
Several OEMs continue to accelerate their adoption of this chemistry, and our sales team is focusing efforts for NexSys iON products on the portions of the market with the most demanding duty cycles.
The third segment of our business, Specialty, maintained its positive momentum with another strong quarter, which was slowed only by the ongoing impact of COVID on our capacity ramp, thereby delaying our ability to meet surging demand.
Our transportation backlog continued to grow as we added a significant number of customers to the ODYSSEY channels.
We currently are working with nearly every major player in the aftermarket distribution channel, along with many key truck OEMs and fleet operators.
TPPL gained further traction in the quarter.
The high-speed line is up and running, and we are adding a second shift to our Springfield plant and bringing on additional oxide and pasting capacity.
We're also encouraged by several new awards in our aerospace and defense business.
Before wrapping up, I'd like to take a minute to talk about some exciting advancements we've made on the technology front.
We mentioned our lithium launch for motive power.
Our customers have begun to order our new NexSys iON products, and initial customer feedback is very positive.
We have also achieved our first OEM approval and continue to work with other material handling manufacturers.
The demand for fully integrated products has significantly increased for our Energy Systems group.
To ensure necessary product development keeps up with the market's pace of change, we are aggressively hiring engineers.
Our emphasis is on telecom, home and industrial energy storage.
Moreover, we are accelerating the development of high-voltage electric vehicle fast-charging stations using batteries to speed the process.
A considerable number of the building blocks have already been developed for our material handling program, allowing extension into these new markets with substantial growth potential.
Our ability to stay on the cutting-edge of new technology development, while continuing to leverage core lead acid products, will further enhance our competitive edge in the quarters and years ahead.
In conclusion, I continue to be humbled by our employees' ability deliver in the face of the ongoing global pandemic, quickly adapting to unforeseen challenges by remaining focused on delivering the products and services our customers have come to expect.
Our overall strategy remains unchanged: one, to accelerate higher-margin maintenance-free motive power sales with NexSys iON and NexSys PURE; two, to grow the portfolio of products in our Energy Systems business, particularly in telecom, with fully integrated DC power systems and small cell site powering solutions which will accelerate our growth from 5G; three, to increase transportation market share in our Specialty business; and finally, to reduce waste through the continued rollout of our EnerSys operating system.
As we continue to execute on each of these initiatives, the strength of the EnerSys platform and our position as the global leader in stored energy solutions will drive additional long-term value for our shareholders for years to come.
With that, I'll now ask Mike to provide further information on our third quarter results and fourth quarter guidance.
I am starting with slide eight.
Our third quarter net sales decreased 2% over the prior year to $751 million due to a 3% decrease from volume, net of a 1% increase from currency.
On a line of business basis, our third quarter net sales in the motive power were down 4% to $304 million, while Energy Systems net sales were down 2% at $337 million, while specialty increased 7% in the third quarter to $109 million.
Motive power suffered a 5% decline in volume due to the pandemic, net of a 1% increase in FX.
Energy Systems had a 4% decrease from volume, net of a 2% improvement from currency.
Specialty added 6% in volume improvements and 1% increase from currency.
There were no notable changes in pricing, and we had no impact from acquisitions.
On a geographical basis, net sales for the Americas were down 1% year-over-year to $499 million, with a 1-point decrease from currency.
EMEA was down 4% to $194 million on a 9% volume decline, net of a 5% improvement in currency, while Asia was flat at $58 million.
Please now refer to slide nine.
On a sequential basis, third quarter net sales were up 6% compared to the second quarter, driven by volume improvements.
On a line of business basis, Specialty increased 5%, with NorthStar continuing to contribute its capacity for transportation sales.
And motive power was up 15% as it rebounds from the pandemic, while Energy Systems was down 1%.
On a geographical basis, Americas was up 4%, EMEA was up 13% and Asia was up 4%.
Now a few comments about our adjusted consolidated earnings performance.
As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding the highlighted items.
Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items.
On a year-over-year basis, adjusted consolidated operating earnings in the third quarter increased approximately $15 million to $78 million, with the operating margin up 210 basis points.
On a sequential basis, our third quarter operating earnings improved $12 million or 110 basis points to 10.4%.
We settled our claim for the Richmond fire, which was -- which resulted in a $6 million benefit in the quarter.
$4 million was a gain on the replacement of equipment reflected in operating expenses from the property policy, while $2 million was a final recovery on the business interruption policy and is credited to cost of sales.
Operating expenses when excluding highlighted items were at 14.8% of sales for the third quarter compared to $16.4 million in the prior year as we reduced our spending by $15 million year-over-year and by 100 basis points sequentially.
Excluded from operating expenses recorded on a GAAP basis in Q3, our pre-tax charges of $22 million, primarily related to $6 million in Alpha and NorthStar amortization and $12 million in restructuring charges for the previously announced closure of our flooded motive power manufacturing site in Hagen, Germany.
Excluding those charges, our motive power business achieved operating earnings of 13.3% or 330 basis points higher than the 10% in the third quarter of last year, due primarily to the insurance claim recovery of $6 million described earlier.
On a sequential basis, motive power's third quarter OE also increased 420 basis points from the 9.2% posted in the second quarter, due primarily to sequential increases of nearly $5 million in recovery of the business interruption and other proceeds from the Richmond fire.
OE dollars for motive power increased nearly $9 million from the prior year despite lower volume due to its lower operating expenses and $6 million in insurance recovery, while OE increased $16 million from the prior quarter on higher volume and $5 million for more in insurance recovery.
The Richmond fire damage which has since been repaired or replaced and now a more capable, safer facility is in operation.
Please see our 10-Q for more specifics on cash received and the related accounting.
Meanwhile, Energy Systems operating earnings percentage of 7.4% was up from last year's 6.3%, but down from last quarter's 8.8%.
OE dollars increased $3 million from the prior year, primarily from lower operating expenses, but decreased $5 million from the prior quarter on lower volume and higher operating expenses.
Specialty operating earnings percentage of 11.9% was up from last year's 10.1% and up from last quarter's 11.4%.
OE dollars increased nearly $3 million from the prior year on higher volume and lower operating expenses while increasing $1 million from the prior quarter on higher volume.
Please move to slide 11.
As previously reflected on slide 10, our third quarter adjusted consolidated operating earnings of $78 million was an increase of $15 million or 23% from the prior year.
Our adjusted consolidated net earnings of $55 million was nearly $11 million higher than the prior year.
Improvements in the adjusted net earnings reflect the rise in operating earnings, net $3 million in foreign currency losses, primarily on unfavorable rate changes on intercompany borrowings.
Our adjusted effective tax rate of 17% for the third quarter was slightly higher than the prior year's rate of 16%, but in line with the prior quarter's rate of 17%.
Discrete tax items caused most of these variations.
Fiscal 2019's full year rate was 17%, while our fiscal 2020 rate was 18%, which is consistent with our current expectations for fiscal 2021.
EPS increased 22% to $1.27 on higher net earnings.
We expect our final quarter of fiscal 2021 to increase slightly -- the outstanding shares to it increased slightly from the third quarter as higher share prices increased dilution from employee stock programs.
As a reminder, we still have nearly $50 million of share buybacks authorized, but have no immediate plans to execute any repurchases with perhaps the exception of the modest annual repurchase made to offset employee stock plan dilution.
Our recently announced dividend remains unchanged.
We have also included our year-to-date results on slides 12 and 13 for your information, but I do not intend to cover these in detail.
Our balance sheet remains strong, and we are well-positioned for us to navigate the current economic environment.
We now have nearly $489 million of cash on hand, and our credit agreement leverage ratio is below 2.0 times, which allows over $600 million in committed additional borrowing capacity.
We expect our leverage ratio to remain below 2.0 times for the balance of fiscal 2021.
We generated over $218 million in free cash flow through three quarters of fiscal 2021.
Our Q3 free cash flow generation was very strong at $41 million despite the drag of rising working capital from increased revenue.
Capital expenditures year-to-date of $54 million were at our expectations.
Our capital expectation for fiscal 2021 of $75 million has expanded again slightly as the economic outlook improved.
Our major investment programs, those being: the lithium battery development; continued expansion of our TPPL capacity, including the NorthStar integration; the integration of our high-speed line and the transition in NorthStar products for European markets to our French factory are all progressing as planned.
Our high-speed line has completed its commissioning and is expanding to a second shift this month.
Even with these investments, we have also retained the agility to flex our manufacturing footprint as needed.
Our closure announced last November of our Hagan, Germany facility has progressed better than our expectations in terms of speed and cost.
So we believe we will begin enjoying about half of the expected $20 million per year of savings next fiscal year, with the full benefit thereafter.
We anticipate our gross profit rate to remain near 25% in Q4 of fiscal 2021 as lower utilization in some of our factories over the holidays and from enhanced COVID restrictions will impact our P&L in Q4.
We have initiated price increases in our fourth quarter to mitigate the rising costs of many of our non-led inputs, which should maintain our margins.
As David has described, we believe motive power markets are recovering, while our Energy Systems and Specialty markets continue to have bright prospects.
With some of the uncertainty from our election and the pandemic behind us, we currently feel we have enough visibility to provide guidance in the range of $1.25 to $1.31 in our fourth fiscal quarter.
| qtrly adjusted earnings per share $1.27.
|
In addition, we will also be presenting certain non-GAAP financial measures.
Then I will take a step back and provide an update on how we're tracking against the strategic initiatives we laid out at our 2019 Investor Day a little more than a year ago.
As we entered our second quarter, the COVID-19 pandemic continued to disrupt economic activity unevenly in markets around the world.
However, we began to see a rebound from the viruses impact on our business throughout the period and actually exited the quarter with [Technical Issues] very close to pre-pandemic levels.
The US and Chinese motive power markets have recovered much faster than Western Europe, while Energy Systems and Specialty were less impacted by COVID.
We continue to build on the cost reductions we instituted early in the first quarter, while always staying ready to flex operations backup in response to demand recovery.
As you may recall, our model allows us to quickly adjust our capex and opex without impacting our revenue growth objectives or our quality of service.
Many of the opex initiatives we have put in place will enable us to maintain an improved level of operational efficiency with our new global line of business alignment even as the demand ramps up.
All of our major facilities remain open and we continue to prioritize the safety of our employees as COVID cases rise around the world.
Despite the ongoing headwinds caused by COVID-19, the diversified nature of our business was evident during the quarter as we reported solid second quarter fiscal 2021 adjusted earnings of $1 per diluted share.
Our Specialty segment was particularly strong, especially in the transportation portion of our business.
Energy Systems turned in a solid quarter with the beginnings of 5G uptick becoming apparent.
And while our Motive Power business still lagged Q2 prior year overall, our maintenance free TPPL NexSys PURE products have continued to outperform.
It appears that the COVID market disruption is accelerating our customers' interest in our new dual chemistry NexSys products.
This conversion to maintenance free combined with the lingering impact of COVID in Europe and our overall productivity improvements drove our decision to close our legacy flooded Motive Power factory in hog in Hagen, Germany.
Due to improving business conditions and our streamlined cost structure, we generated exceptionally strong cash flow during the quarter, enabling an incremental $86 million in net debt reduction to achieve debt leverage of just under 2.1 times.
We did this while still investing in the business.
I'd now like to provide a little more color on some of our key markets.
Our largest segment, Energy Systems performed well during the quarter, despite the impact of the pandemic.
In the Americas, we saw growing momentum throughout the second quarter with improved order rates for broadband and continued robust demand for battery systems, particularly on the telecom front.
Combined EMEA and APAC delivered double-digit year-over-year revenue growth.
Global telecom carriers remain committed to investing in their networks to increase capacity and reliability.
In the Americas, the completion of the T-Mobile merger has led to large purchases for our cabinets, batteries and electronics, as a complete system for their 5G ramp up.
In addition to the direct benefits of the merger the mandated DISH spin off presents a significant opportunity for EnerSys in the quarters ahead as this fourth quarter nationwide provider looks to build their own 5G network.
The broadband business continues to be a story of short-term pain that will inevitably lead to exciting long-term growth for EnerSys.
The COVID induced work and school from home policies have stressed all broadband networks and resulted in the MSOs focusing near-term network capex on capacity augmentation over longer term network hardening programs.
There is no denying that the reallocation of budgets has negatively impacted our business over this period.
However, there is a clear light at the end of the tunnel as two of our largest broadband customers have recently begun allocating increased capex to network powering and we have seen improved order rates in Power Project approvals, driving an upcoming recovery for our broadband segment.
Factoring in this positive trend along with the industries clear need for long-term network power infrastructure to support increased 5G power consumption.
We expect the broadband business to transition from a headwind to a tailwind in the near future.
As noted earlier, our new maintenance free NexSys products are being well received in the market.
I am pleased to say we have started the launch of our NexSys iON lithium motive power batteries and are in the early stages of testing and validation globally with key forklift OEMs. We have also initiated pre-launch end-user site demonstrations globally with very positive results in several large accounts.
Our sales team is focusing the NexSys iON products on the portions of the market with the most demanding duty cycles.
For example, we trialed NexSys iON at a Carpet Mill that runs their fork trucks nearly 24/7, where there is very little time to recharge the batteries.
The increased capacity and excellent charge acceptance of NexSys iON allowed the customer to keep running while charging only during breaks.
The new third-generation TPPL motive power pack is also progressing on schedule, with respect to the high-speed line commissioning.
And we've -- as we've discussed previously, this new product family will be using large format carbon enhanced TPPL batteries coupled with a match battery management system.
The carbon additive when controlled correctly will provide the user with a significant increase in energy throughput resulting in longer life.
Further, the addition of a battery management system integrated with the vehicles and the chargers will allow the same experience as our lithium family of products.
The third segment of our business Specialty, had another outstanding quarter particularly in light of the ongoing impact of COVID.
Our results in this segment are being driven by our success in transportation where our backlog remains strong and over the road new truck demand is improving.
The automotive aftermarket business was very strong in the quarter following several recent contract wins, along with continued success and retail channels with distributors such as NAPA.
We have continued to increase EnerSys's market share in the transportation sector by leveraging our technology platform with TPPL.
Our defense business improved sequentially in the second quarter as our thermal products continue to win more awards.
Our ongoing expansion of these thermal products used in munitions also continues to progress.
The majority of these programs have capitalized on our industry-leading cobalt disulfide battery technology that provides lighter weight and extended operating times for applications in air and missile defense, air to ground weapons, and hypersonics.
Our satellite business continues to shine as well.
Now that I've given you a brief overview of our second quarter results and the prevailing trends in each of our business segments.
I wanted to take a look back at the strategic initiatives we outlined in our October 2019 Investor Day, which very much remain our core areas of focus today and we are seeing excellent progress in each of these.
As a reminder, they include the following global initiatives.
One, growing the portfolio of products in our Energy Systems business, particularly in telecom with fully integrated DC power systems and small cell side powering solutions, which will accelerate our revenue growth from 5G.
Two, accelerating higher margin maintenance free Motive Power sales with NexSys iON and PURE.
Three, increasing transportation market share in our specialty business; and fourth, reducing waste through continued rollout of our EnerSys Operating System.
Our acquisition of the Alpha Technologies Group two years ago created the only fully integrated AC and DC power supply and energy storage provider for broadband telecom in energy storage systems.
It positioned EnerSys to provide a single source solution for fiber connectivity enclosures, small cell power, power conversion, power distribution, and energy storage back up with a nationwide engineer furnish and install organization to turnkey and maintain the project.
The opportunity we initially saw in office coming to fruition as large customers expanded their spending patterns from just batteries to EnerSys's complete systems offering.
We expect this trend to continue in the quarters ahead.
AT&T opportunities are improving for us as they deploy 5G infrastructure for macro and RAN sites, while our strategic collaboration with Corning to speed 5G deployment through a next generation touch safe line powering system for small cells is advancing.
This collaboration will leverage Corning's industry leading fiber, cable and connectivity expertise and EnerSys's Technology leadership in their remote powering solutions.
It has been endorsed by one of our largest telecom customers.
We are excited by this opportunity in all of the actions we are seeing on the 5G front, to help you better understand the impact it is already having on our business.
It is worth noting that we have already seen $50 million of 5G-related revenue lift during this year, which we believe is only the tip of the iceberg for this long-term growth driver.
Unfortunately, the 5G benefit was masked by the reallocated capex spending from our larger broadband customers during the quarter as discussed earlier.
We remain more excited and bullish than ever about the longer term impact 5G will have on our business, especially with the new technologies we are deploying to assist our customers in this mega trend.
As a result, we are projecting steady 6% plus CAGAR of Energy Systems sales over the next five years.
Our next strategic initiative maintenance free Motive Power is well on track to our five-year plan.
In the quarter for example, while Americas flooded lead acid battery sales were down 25% year-on-year; Americas Motive Power TPPL NexSys sales were up 25% in the same period.
As this trend continues and demand resumes, maintenance free will comprise a larger portion of our Motive Power revenue and the higher gross profit margins will have an even more dramatic impact on our profitability.
We are now estimating that our maintenance free NexSys offerings will grow to be the majority of our battery business by fiscal year '25.
We are pleased to say that the next generation initiatives growing transportation market share in the Specialty segment has been a resounding success over the past 12 months.
The transportation business in the America's continues to improve as we see signs -- as we sign up new customers for ODYSSEY TPPL products in the premium automotive and trucking spaces.
While still impacted by shutdowns from COVID, we grew our Transportation business by 64% this quarter with the integration of NorthStar and are currently limited only by TPPL capacity that will increase dramatically when the high speed line is fully operational.
We are well positioned to capitalize on the strong backlog and ongoing demand for our long-term -- and our -- as our long-term transportation sales outlook matches our planned capacity over the next five years.
At this point the integration of NorthStar is nearly complete, ODYSSEY branded automotive products are now being produced in NorthStar factories and our new high-speed line is proceeding through its commissioning in the newest plant with commercial revenue expected before the end of this calendar year.
NorthStar factors report to a TPPL global leadership team to more effectively share best business practices with our three other TPPL factories.
Managing TPPL under one global team has been critical to our ability to integrate NorthStar and increase production capacity in such a short period of time.
Despite completing the integration, however, we've been hampered by under absorption at our factories due to COVID, as well as the inefficiencies inherent in all start-ups.
These inefficiencies include the time necessary to hire new people and train them on new products and systems.
This was more challenging in a period when many government incentives paid them to stay unemployed.
These short-term manufacturing inefficiencies have masked other areas of operational improvement, which will contribute to shareholder value in years to come.
While we are clearly on the right track and beginning to see the benefits of each of these initiatives, we estimate COVID-19 has delayed our progress against our Investor Day model by three to four quarters.
With that in mind, during his portion of the call, Mike will provide an update on the plan we laid out during Investor Day.
I'd like to conclude by saying that despite the challenges we've continued to confront with the pandemic, I am very proud of how our team has operated in this new environment.
Looking ahead, we are extremely excited by the accelerated 5G build out and the significant opportunity for our industry-leading TPPL product provide us customers continue to seek a maintenance free solution to their critical power needs.
With that, I'll now ask Mike to provide further information on our second quarter results and go forward guidance.
However, I am starting with Slide nine.
Our second quarter net sales decreased 7% over the prior year to $708 million, due to an 11% decrease from volume, a 1% decrease in pricing, net of 1% increase from currency and a 4% increase from acquisitions.
On a line of business basis, our second quarter net sales in Motive Power were down 21% to $264 million and Energy System net sales were down 1% at $341 million, while Specialty increased 24% in the second quarter to $104 million.
Motive Power suffered a 21% decline in volume, due to the pandemic and a 1% decline in price, net of a 1% increase in FX.
Energy Systems had a 4% increase from the NorthStar acquisition and a 1% improvement from currency offset by decreases of 1% and 5% in pricing and volume respectively.
Specialty had 17% from the NorthStar acquisition less 9% in volume improvements and 1% increase from FX, net of a 3% decline in price and mix.
On a geographical basis, net sales for the Americas were down 8% year-over-year to $481 million with an 11% volume drop and a 1% price decline, net of a 4% increase from acquisitions, offset by 1% decrease from currency.
EMEA had a 6% -- was down 6% to $172 million on 13% volume and 2% price declines with 5% improvements in currency and 4% from acquisitions, while Asia was up 3% to $56 million, due primarily to currency.
Please now refer to Slide 10.
On a sequential basis, second quarter net sales, were up slightly, compared to the first quarter driven by translation improvements.
On a line of business basis, specialty increased 17% with NorthStar starting to contribute its capacity for transportation sales, while Motive Power was flat and Energy Systems was down 4% on soft broadband revenues.
On a geographic basis, Americas were down 2%, EMEA was up 8%, while Asia was up 1%.
Now few comments about our adjusted consolidated operating earnings performance.
As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding highlighted items.
Accordingly my following comments concerning operating earnings and my later comments concerning diluted earnings per share excluded all highlighted items.
On a year-over-year basis, adjusted consolidated operating earnings in the second quarter decreased approximately $9 million to $66 million with the operating margin down 50 basis points.
Lower commodity cost and operating expenses were not enough to offset the volume declines and higher manufacturing costs.
However, on a sequential basis, our second quarter operating earnings improved 70 basis points to 9.35%.
Operating expenses when excluding highlighted items were at 15.7% of sales for the second quarter, compared to 16.1% in the prior year as we reduced our spending by $11 million year-over-year and nearly $3 million sequentially.
Excluded from operating expenses recorded on a GAAP basis in Q2, our pre-tax charges of $11 million, primarily related to $6 million in Alpha and NorthStar amortization and $3 million in restructuring charges.
Excluding those charges, our Motive Power business segment achieved an operating earnings percentage of 9.2%, which was 120 basis points lower than the 10.4% in the second quarter of last year, due to the 21% lower volume mentioned earlier in driving a $11 million drop in operating earnings.
On a sequential basis Motive Power's second quarter OE also dropped to 120 basis points from the 10.4% margin posted in the first quarter, due primarily to the reduction of $2.3 million in recovery on business interruption proceeds from the $3.8 million in Q1, down to $1.5 million.
The recovery on our business interruption claim from the Richmond fire has nearly concluded as has most of the reconstruction of the facility.
We received $5 million in April, which was reflected in last fiscal year's fourth quarter results.
We received another $4 million in May, which was recorded in the first quarter of fiscal '21 and we received over $1 million in July, which are reflected in Q2's results.
We expect to collect another $2 million on the matter, bringing the total recovered to nearly $13 million.
Overall, the claim including property loss and cleanup along with the business recovery, totaled approximately $45 million.
Energy Systems operating earnings percentage of 8.8% was up from last year's 8.6% and up from last quarter's 8%.
OE dollars decreased $0.5 million from the prior year primarily from lower operating expenses and increased $2 million from the prior quarter on lower commodity costs and operating expenses.
Specialty operating earnings percentage of 11.4% was down from last year's 12.3%, but up from last quarter's 6.5%.
OE dollars decreased nearly $2 million from the prior year on higher volume -- excuse me, they increased nearly $2 million from the prior year on higher volume and increased $6 million from the prior quarter on higher volume and lower manufacturing variances.
Please move to Slide 12.
As previously reflected on Slide 11, our second quarter adjusted consolidated operating earnings of $66 million was a decrease in $9 million or 12% from the prior year.
Our adjusted consolidated net earnings of $43 million was nearly $10 million lower than the prior year.
The decline in adjusted net earnings reflect the decline in operating earnings, as well as a $4 million foreign currency loss, primarily on unfavorable exchange rates for intercompany balances.
Our adjusted effective income tax rate of 17% for the second quarter was lower than the prior year's rate of 18% and lower than the prior quarter's rate of 21%.
Discrete tax items caused most of these variations.
Fiscal 2019s full-year tax rate was 17%, while our fiscal 2020 tax rate was just below 18%, which is consistent with our expectations for fiscal 2021.
EPS decreased 19% to $1 on lower net earnings.
We expect our third fiscal quarter of 2021 to remain near the $43.1 million of weighted average shares outstanding in the second quarter.
As a reminder, we still have nearly $50 million of share buybacks authorized, but have no immediate plans to execute any repurchases with perhaps the exception of the modest annual repurchase made to offset employee stock dilution.
Our recently announced dividend remains unchanged.
We have included our year-to-date results on Slides 13 and 14 for your information, but I do not intend to cover these in detail.
Our balance sheet remains strong and well positioned for us to navigate the current economic environment.
We now have nearly $414 million of cash on hand and our credit agreement leverage ratio is now 2.1 times, which allows over $600 million in additional borrowing capacity.
We expect our leverage to remain below 2.5 times in fiscal 2021.
We generated over $87 million in free cash flow in the second fiscal quarter of 2021.
Our first half free cash flow generation was very strong at $177 million.
Our receivable collections also remained very good with our DSO matching its historical low.
Capital expenditures of $40 million were at our expectations for the first half of the fiscal year.
Our capex expectation for fiscal '21 of approximately $65 million to $70 million has expanded slightly as the economic outlook has improved.
Our major investment programs, those being lithium battery development continued expansion of our TPPL capacity, including the NorthStar integration.
The installation of our high-speed line and the transition of NorthStar products for the European market to our French factory are all progressing as planned.
Our high-speed line is being commissioned this month and should soon commence operations.
Even with these investments, we've had retained the agility to flex our manufacturing footprint as needed.
Our decision announced last night to close our Hagen, Germany facility after nearly 25-years of group ownership reflects our assessment that; one, the transition of maintenance free solutions for forklifts; two, the collective oversupply of flooded batteries for forklifts in EMEA along with; three, the continued slump in demand from the pandemic and other market conditions.
It was the decision we struggled with given the strength of the workforce and our lengthy ownership of that facility.
It will cost in excess of $80 million with 75% being cash charges for severance, decommissioning, cleaning and closing open contracts with vendors, but it should payback in under four years and we can handle all expected demand from our other existing factories.
We anticipate our gross profit rate to remain near 25% in Q3 of fiscal '21, as the lower utilization in some of our factories over the July to September months will not hit our P&L until this third fiscal period, which we are now in.
We expect expanding margins thereafter.
As we had previously mentioned, we recently took the time to refresh our outlook from that provided on our Investor Day last fall.
As Dave mentioned, we still feel the core of our expectations remain intact beyond the nine to 12 month delay due to the pandemic in reaching our previously provided target for an additional $300 million in incremental adjusted net earnings.
We believe the most profound updates are that; number one, the conversion to maintenance free solutions for Motive Power is progressing faster than initially expected, thus precipitating the closure of our Motive Power factory in Hagen, Germany.
Number two, our increased confidence in our solutions for the 5G build out.
Number three, stronger-than-expected demand in the automotive aftermarket.
Number four, our planned TPPL capacity expansions will still satisfy our projected needs; and five, our performance in this recession has been as we predicted on Investor Day, if a recession were to occur.
As Dave described, we believe Motive Power markets are recovering, while our Energy Systems and Specialty markets continue to have bright prospects.
With some of the uncertainty from our elections in the pandemic behind us, we currently feel we have enough visibility to provide a guidance range of $1.17 to $1.21 in our third fiscal quarter.
| sees q3 adjusted earnings per share $1.17 to $1.23.
|
A transcript of this earnings conference call will be available within 24 hours at investor.
These statements rely on assumptions and estimates which could be inaccurate and are subject to risk.
On Slide 4, you will see our agenda.
With us on the call today are Mark Clouse, Campbell's President and CEO and our Chief Financial Officer, Mick Beekhuizen.
Mark will share his overall thoughts on our second quarter performance and end market performance by division.
Mick will discuss the financial results of the quarter in more detail and review our guidance for the full year fiscal 2021.
Mark will come back to share his perspective on our outlook beyond the pandemic, and we will close the call with an analyst Q&A.
We have now passed the one-year mark of working within this challenging COVID-19 environment and I'm very proud of their continued performance and dedication.
Campbell delivered strong second quarter results with growth in all three key financial metrics.
Organic net sales increased 5% with continued demand across both divisions, fueled by accelerating in-market results including positive share progress across most of the portfolio and a strong holiday period.
Net sales were tempered by continued Foodservice weakness following a resurgence of COVID-19 cases in December, which led to greater away from home restrictions as well as some supply constraints given these cases lead to increased absenteeism rate in our plants during the month.
The Foodservice weakness and supply constraints each created about a point of headwind in the quarter versus our expectations.
The labor situation has since improved significantly and we continue to make steady progress on supply going into the second half of the year.
We reacted quickly to these headwinds, appropriately shifting spending to reflect this pressure, but where supply was available, we executed our planned increased investment in advertising and consumer promotion on our core brands.
Taking everything into account, we had 8% adjusted EBIT growth and 17% adjusted earnings per share growth, leading to a very good quarter.
By segment, Meals & Beverages posted 6% net sales growth, punctuated by a very successful soup season and the continued strong performance of brands like V8 and Prego.
This was partially mitigated by declines in Foodservice.
The Snacks business delivered another solid quarter with sales growth of 4%, largely driven by our power brands in salty snacks including Kettle Brand potato chips, Late July snacks and Cape Cod potato chips as well as Pepperidge Farm Farmhouse bakery products.
Most notably, we achieved the primary objective we outlined in our Q1 earnings call, to return to share growth.
Nearly 75% of our portfolio held or increased share in the second quarter versus the prior year.
This included meaningful share improvement in key focus areas like ready-to-serve soup, Prego and Snyder's of Hanover pretzels, with continued momentum on condensed soup, V8, our salty snacks portfolio and Goldfish.
There were a few exceptions, such as Swanson broth where we knew we'd be challenged on supply.
We feel very good about how we are addressing the challenges on broth by expanding overall capacity and growing Pacific Foods, which was the fastest growing broth brand in measured channels in the second quarter.
E-commerce continued to be an important growth channel for us with in-market dollar consumption increasing 89% over the prior year.
With the click-and-collect fulfillment model representing slightly more than a third of our e-commerce retail sales, we are sharply focused on partnering with our customers to deliver value to our consumers, including bundling products for easy meal prep and inspiring creative snacking options.
Turning to Slide 7, within the Meals & Beverages division, we had another strong quarter with consumption growth of 9%, principally due to volume gains.
We delivered on our objective of share growth and saw positive in-market consumption growth in almost all categories led by condensed soups, Prego, V8 beverages, ready-to-serve soup and Pacific Foods soups and broth.
We continue to execute our plans and feel great about our progress against our Win in Soup strategy, led by a great start to soup season and a strong holiday period.
In fact, U.S. soup sales grew 10% with strength across all categories.
This was fueled by more than a third of the in-market consumption growth coming from new buyers.
The number of retained soup buyers in this quarter is the highest since the pandemic started almost a year ago.
Our condensed soups were, once again, the highlight of the quarter with double-digit net sales growth and continued share gains, especially among millennials.
With a 0.7 share increase, condensed had its 8th consecutive quarter of share gains, an amazing run that started well before the pandemic.
This performance was driven by our quality improvements, strong advertising, and the retention of new households.
Additionally, during the important holiday season, the number of buyers of condensed cooking soups grew double-digits and we continue to grow household penetration this quarter versus prior year.
Year-to-date, our condensed soups have the highest household retention rate within the entire Meals & Beverage division.
Within ready-to-serve, share improved this quarter driven by strong base velocity growth in Chunky and improved availability.
Chunky had an exceptional quarter with double-digit net sales gains and in-market consumption growth, outpacing competition and increasing share nearly 2 points with growth among all cohorts, including millennials.
Pacific Foods is now the fastest growing wet soup brands on a dollar share basis, outperforming against competitors on many fronts by delivering on-trend innovation and impactful advertising.
This important growth engine continues to perform above our expectations.
In the second quarter, Pacific Soup and Broth outperformed the category posting dollar consumption growth of 25%, the 5th consecutive quarter of share gains driven by brand strength and a meaningful increase in household penetration.
We are thrilled with the performance of Pacific Foods and are equally excited about our robust innovation pipeline that includes new canned offerings as well as additional plant-based products.
As I mentioned earlier, Swanson broth struggled on share, as we expected.
We continued to recover on supply throughout the quarter and we are making steady progress through a combination of expanding internal capacity and bringing on additional co-manufacturing.
In the most recent period, we are seeing both share and supply levels improve, a trend we expect to continue through the balance of the year.
Beyond soup, a stand out in the Meals & Beverages portfolio was Prego which maintained its Number 1 share position in the Italian sauce category for the 21st consecutive months and has widened the gap against competitors.
Prego sales growth came primarily from the gain of an additional 4 million new households across all demographic cohorts.
Our V8 beverages also performed very well this quarter, delivering its fourth straight quarter of both share and household gains.
Notably in Q2, these gains were across all sub-brands of the business and we saw new households coming into the V8 portfolio, driven by both V8 Original and V8 +Energy.
Overall Meals & Beverages delivered a strong quarter as it continued to drive relevance with its brands to a younger consumer base and delivered share gains in many of its key categories.
Let's turn to the Snacks segment, which represents about half of our total annual revenue.
Our performance was, again, fueled by our power brands, which grew dollar consumption by 8% over the previous year.
Within the power brands, our salty snacks brands grew dollar consumption by double-digits and realized share growth.
This was in part due to the implementation of our capacity expansion projects as well as increased A&C investments to support our media campaigns and innovation, including Snyder's of Hanover Pretzel Rounds and Twisted Sticks.
On the Snyder's of Hanover brand, the combination of successful innovation, fundamental execution and brand activation led to share growth, double-digit dollar consumption and nearly 5 million new households, turning around what had been a challenging share period.
Our Pepperidge Farm Farmhouse products also delivered exceptional results across bakery and cookies, growing dollar consumption by 41% and household penetration by 1.5 points.
On Goldfish, we improved our performance according to the plan we outlined last quarter, returning to growth in net sales and improved dollar consumption.
We adapted marketing content during the holidays with digital partnerships focused on new ways for the consumer to enjoy Goldfish such as movie night snack mixes or classic lunch combinations with Campbell's tomato soup, all leading to positive engagement metrics and increased purchase intent.
Additionally, we are launching new flavors within Flavor Blasted Goldfish which continued to grow consumption by double-digit.
As you'll see on Slide 9, the is only the beginning of what is arguably our strongest slate of innovation yet, which includes Twisted pretzel sticks and better for you options like Late July veggie tortilla chips.
We are very excited about the breadth of our Snacks pipeline in the second half of the fiscal year, which will complement what we have on deck later this year for Meals & Beverages.
Overall, we feel very good about our Snacks performance and the steady growth it delivered as we provide consumers with elevated snacking experiences through our unique and differentiated portfolio of power brands.
We also made significant steps on value capture, including the recent transition to SAP to streamline and improve capabilities.
Looking ahead, we believe we have additional runway to improve Snacks' profitability with further network optimization opportunities and we remain confident in our long-term strategy and our ability to deliver additional cost savings.
With the strong results in the second quarter and our overall first half performance, we are confident in the outlook for the full year.
Turning to Slide 11.
As Mark just shared, we, once again, delivered strong results with another quarter of sales growth, driven by continued elevated consumer demand as well as growth in adjusted EBIT and adjusted EPS.
Our top line growth of 5% reflected healthy in-market consumption of approximately 8% in the quarter, tempered by declines in Foodservice and some COVID-19 related supply challenges that Mark discussed.
Adjusted EBIT increased 8% as higher sales volumes were only partially offset by higher adjusted administrative expenses.
Adjusted earnings per share from continuing operations increased by 17% to $0.84 per share, reflecting an increase in adjusted EBIT as well as lower adjusted net interest expense.
Year-to-date, our organic net sales which excludes the impact from the sale of the European chips business increased 7% driven by strong end market consumption growth in both Meals & Beverages and Snacks.
Adjusted EBIT increased 13%, reflecting higher sales volume, improved adjusted gross margin performance, and higher adjusted other income, offset partially by increased adjusted administrative expenses.
Year-to-date, our adjusted EBIT margin increased year-over-year by 110 basis points to 18.5%.
Adjusted earnings per share from continuing operations increased 23% to $1.86 per share, reflecting the increase in adjusted EBIT and lower adjusted net interest expense.
I'll review in the next couple of slides our second quarter results in more detail and provide guidance for the full fiscal year 2021.
Breaking down our net sales performance for the quarter, reported and organic net sales increased 5% from the prior year.
This performance was largely driven by a 4 point gain in volume across the majority of our retail brands, partially offset by declines in foodservice and in partner brands within the Snyder's-Lance portfolio.
Additionally, we took a strategic approach to dining back promotional spending in both segments where we faced supply constraints.
And those actions, net of price and sales allowances, contributed 1 point to net sales growth.
Our adjusted gross margin decreased by 10 basis points in the quarter to 34.3%.
While product mix was slightly negative in the quarter we're estimating a 50 basis point gross margin improvement from better operating leverage within our supply chain network as we increased our overall production.
Net pricing drove a 90 basis point improvement due to lower levels of promotional spending in the quarter.
Inflation and other factors had a negative impact of 330 basis points, a little over half of the increase was driven by cost inflation as overall input prices, on a rate basis, increased approximately 3% which we expect to continue to be a headwind for the rest of the fiscal year.
The remainder was driven by increases in other operational costs and continued COVID-19 related costs.
Inflation in the quarter was partially offset by our ongoing supply chain productivity program which contributed a 140 basis point improvement and included initiatives, among others, within procurement and logistics optimization.
Our cost savings program, which is incremental to our ongoing supply chain productivity program, added 50 basis points to our gross margin.
Moving on to other operating items; adjusted marketing and selling expenses decreased $3 million or 1% in the quarter.
This decrease was driven primarily by the benefits of cost savings initiatives and lower marketing overhead cost, largely offset by an 8% increased investment in A&C.
These investments primarily reflect higher levels of media spend to support our salty snacks brands, including new product launches as well as our soup business as we continue to drive usage through new recipes, inspire meal solutions, and support our innovation.
Adjusted administrative expenses increased $17 million or 13%, driven primarily by higher benefits related costs and higher general administrative costs, partially offset by the benefits from our cost savings initiatives.
Overall, our adjusted marketing and selling expenses represented 10.2% of net sales during the quarter, a 70 basis point decrease compared to last year.
Adjusted administrative expenses represented 6.7% of net sales during the quarter, a 50 basis point increase compared to last year.
Moving to the next slide, we have continued to successfully deliver against our multi-year enterprise cost savings initiatives.
This quarter, we achieved just over $20 million in incremental year-over-year savings.
We expect an additional $40 million to $50 million evenly spread over the balance of fiscal 2021, on track to deliver $75 million to $85 million of cost savings for the fiscal year with the majority of the savings from the Snyder's-Lance integration.
We remain on track to deliver our cumulative savings target of $850 million by the end of fiscal 2022.
To help tie this all together, we are providing an adjusted EBIT bridge on Slide 16 to highlight the key drivers of performance this quarter.
As discussed, adjusted EBIT grew by 8%.
This was driven by the increase in demand for our products with sales gains contributing $40 million of EBIT growth, which was partially offset by the previously described adjusted gross margin decline.
In addition, the increase in adjusted administrative expenses was only partially offset by lower adjusted marketing and selling expenses, lower adjusted R&D expenses and higher adjusted other income.
Our adjusted EBIT margin increased year-over-year by 40 basis points to 17.2%.
The following chart breaks down our adjusted earnings per share growth between our operating performance and below the line items.
Adjusted earnings per share increased $0.12 from $0.72 in the prior year quarter to $0.84 per share.
Adjusted EBIT had a positive $0.07 impact on adjusted EPS.
Adjusted net interest expense declined year-over-year by $17 million delivering a $0.04 positive impact to adjusted EPS, as we have used proceeds from completed divestitures in fiscal 2020 and our strong cash flow to reduce debt.
The impact from the adjusted tax rate was nominal, completing the bridge to $0.84 per share.
In Meals & Beverages, net sales increased 6% to $1.3 billion, primarily reflecting strong volume growth, driven by in-market consumption for many of our U.S. retail products, including gains in U.S. Soups, V8 beverages, Prego pasta sauces, and Campbell's pasta; partially offset by declines in Foodservice driven by COVID-19 related restrictions.
Net sales of U.S. Soup, including Pacific Foods, increased 10% compared to the prior year, primarily due to volume gains in condensed soups and ready-to-serve soups.
Across the division, we moderated promotional activity in part due to supply constraints, particularly on broth.
Operating earnings for Meals & Beverages increased 7% to $258 million.
The increase was primarily driven by sales volume growth, offset partially by a lower gross margin and higher administrative expenses.
Within Snacks, net sales increased 4% driven by volume gains fueled by the majority of our power brands and lower levels of promotional spending on supply constrained brands.
The sales gains were driven by our salty snacks brands within the power brand portfolio namely Kettle Brand potato chips, Late July snacks, Cape Cod potato chips and Pop Secret popcorn as well as our fresh bakery products including Pepperidge Farm Farmhouse products.
Partially offsetting sales gains were declines in partner brands within the Snyder's-Lance portfolio as well as declines in Lance sandwich crackers, resulting from supply constraints in the quarter.
Operating earnings for Snacks increased 6% driven by sales volume gains and lower selling expenses, partially offset by higher marketing investment, administrative expenses and a lower gross margin.
I'll now turn to our cash flow and liquidity.
Fiscal year-to-date cash flow from operations decreased from $663 million in the prior year to $611 million, as changes in working capital were only partially offset by higher cash earnings.
Although we continued to make progress on working capital, we are lapping significant benefits in accounts payable in the prior year.
Our year-to-date cash from investing activities was largely reflective of the cash outlay for capital expenditures of $132 million, which was $35 million lower than the prior year, primarily driven by discontinued operations.
Our year-to-date cash outflows for financing activities were $405 million, reflecting cash outlays due to dividends paid of $215 million, which were comparable to the prior year, reflecting a quarterly dividend of $0.35 per share.
In December, we announced an increase in the quarterly dividend to $0.37 per share or an increase of 6%, which from a cash flow perspective, will be reflected in the third quarter.
Additionally, we reduced our debt by $176 million.
We ended the quarter with cash and cash equivalents of $946 million.
We expect to utilize the majority of this cash during the second half of the fiscal year for repayment of upcoming debt maturities of $721 million and $200 million in March and May respectively.
We expect net sales for fiscal 2021 to declined 3.5% to 2.5%.
Excluding the impact from the 53rd week in fiscal 2020 and impact of the European Chips divestiture, we expect organic net sales to decline 1.5% to 0.5%.
We expect adjusted EBIT of minus 1% to plus 1% as we will lap that initial COVID-19 demand surge in the second half of our fiscal year, combined with headwinds from increased promotional activity, partially offset by lower year-over-year COVID-19 related expenses and last year's one-time marketing investments.
We continue to expect net interest expense of $215 million to $220 million and an adjusted effective tax rate of approximately 24%.
As a result, we expect adjusted earnings per share of $3.03 to $3.11 per share, representing year-over-year growth of 3% to 5%.
The earnings per share impact of the 53rd week in fiscal 2020 was estimated to be $0.04 per share.
With respect to our guidance, let me add that we expect the third quarter to be somewhat more challenged from a net sales and EBIT perspective than Q4, as the before mentioned COVID-19 related demand surge was more pronounced in the third quarter of fiscal 2020 while the benefit from COVID-19 related costs and one-time marketing investments will disproportionately benefit our fourth quarter comparison.
Additionally, we expect our third quarter to be impacted by some isolated supply challenges as we navigate the recent winter storms.
In particular, we experienced about two weeks of disruption at our Paris, Texas plant, which produces Pace and Prego.
We expect improving momentum as we go forward.
Regarding capital expenditures; in light of the current operating environment with limited access to our factories, we now expect to spend 10% below the $350 million we had previously indicated for the full year, largely driven by the impacts from COVID-19 on the operating environment.
We delivered another strong quarter with a return to positive share growth in the majority of our portfolio and growth in all three key financial metrics, despite all the challenges of COVID-19.
Before we conclude, I want to share my perspective on the key factors underpinning our confidence in our outlook beyond the pandemic.
By now, I know you've heard a great deal about the stickiness of all new households gain throughout the pandemic from essentially all of our peers with a wide range of data and facts supporting that thesis.
We very much agree and we see similar trends in our own research and data.
I'd like to conclude today with three critical and differentiating points, key factors that served to underscore Campbell's advantage position going forward and will fuel our future growth trajectory.
Importantly, two of them have very little to do with COVID-19 or the stickiness of new households.
The first is our Snacks business which, as I mentioned earlier, consists of a unique and differentiated portfolio of brands that represent approximately 50% of the Company's annual revenues.
This business was growing before and a pandemic and we expect to sustain or exceed those historical growth rates going forward.
Snacks also includes a margin structure, which we believe still has significant opportunity for improvement versus the snacking peer group average, even after we deliver our current value capture.
We are finalizing our plans to unlock more value and we look forward to sharing more details with you as we move forward.
Second, no matter where you stand on the retention of new households gained during the pandemic, it is undisputable that Campbell's business, particularly our Meals & Beverages division and especially Soup is coming out of this period more advantaged and with renewed relevance.
Nearly 13 million new households purchased Campbell Soup since the initial peak of the pandemic, of which almost a third are millennials, outpacing both key competitors and the category average.
We have also seen macro behaviors like quick-scratch cooking take root and our research indicates more than 30% of the consumers are cooking more with Soup since the start of the pandemic.
Additionally, we believe increased at home lunches will endure as many people are expected to work from home more often post pandemic.
Beyond the role that our Meals & Beverages offerings play in the lunch occasion, snack-foods accompany nearly 30% of all lunches, which bodes well for our entire portfolio.
We've conducted extensive consumer research in an effort to determine sentiment, model consumer behavior exiting the pandemic, and sharpen our plans to ensure the sustainability of our recent gains.
The consumers who we've surveyed had an overall high level of satisfaction with Campbell's products in our Meals & Beverages and Snacks portfolio.
In fact, about four out of five new users surveyed said they were very or extremely satisfied with our brands.
As a result of this high satisfaction, those surveyed told us they'll continue to count on our brands going forward, turning to us for things like cooking solutions and quick lunches and meals.
This gives us every reason to believe consumers will continue to purchase our brands well after the pandemic.
Even more importantly, 70% of the consumers surveyed told us our brands better met their needs than competitive products.
These same consumers also told us that taste and convenience of our brands were the top drivers of overall satisfaction.
We feel this sets us up well for continued share progress going forward.
The research also has provided us with actionable insights in our opportunities to strengthen the retention of our consumers.
These include areas such as adding more convenient packaging options and sizes across our portfolio, developing new and inspiring recipes and satisfying consumer's need for permissible and more intense Snacks by providing a variety of flavors and healthier ingredients.
This specificity will focus our plans and innovation to target the areas with the highest probabilities of retaining these new consumers, particularly younger consumers for our brands.
For the third and final differentiating point that underscores our strong position going forward, we look to the strength of our balance sheet.
Given the cash generative nature of our business and our reduce leverage, which is now below 3 times, we are well positioned to generate significant cash flow, well above our ongoing commitment to base capital investments and dividends in the next three years.
This can and will be a source of opportunity that can be invested in high ROI initiatives or other actions to drive value creation.
So to wrap it up.
Our mission is clear.
Number one, sustain or accelerate our historical Snacks growth while improving margins; number 2, solidify our Meals & Beverages business as a steady and stable contributor behind recent transformational consumer trends and trial; and number 3, deploy what will be significant capital to fuel this growth and create differentiated value.
We look forward to sharing more in the months ahead about this next chapter as Campbell moves from turnaround to sustainable growth.
| compname reports q2 adjusted earnings per share $0.84.
q2 adjusted earnings per share $0.84 from continuing operations excluding items.
q2 adjusted earnings per share $1.86 excluding items.
fiscal 2021 adjusted earnings per share guidance of $3.03 to $3.11.
qtrly net sales, both reported and organic, increased 5% to $2.28 billion.
sees fy2021 net sales from continuing operations down 3.5% to down 2.5%.
sees fy2021 organic net sales from continuing operations down 1.5% to down 0.5%.
campbell soup - qtrly growth driven by 4% increase in volume & mix as at-home food consumption remained elevated due to covid-19.
remains on track to deliver annualized savings of $850 million by end of fiscal 2022.
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I appreciate you joining us today to discuss our first quarter fiscal year 2021 results.
Before reviewing the quarter, I would like to express my continued gratitude to AAR's employees.
The majority of our people have continued to come to work every day throughout the pandemic to ensure AAR's uninterrupted support of its customers, and I'm grateful for their dedication and commitment, and proud of our team's ability to continue to navigate a truly unprecedented decline in commercial passenger flying.
Turning to the results.
Our sales for the quarter decreased 26% from $542 million to $401 million and our adjusted diluted earnings per share from continuing operations decreased 70% from $0.57 per share to $0.17 per share.
Our total sales to commercial customers decreased 48% from the prior year, while sales to government and defense customers increased 10%, reflecting new contract awards and significant shipments out of our Mobility business against the previously announced $125 million Cargo Pallets contract.
For the quarter, sales to government and defense customers were 56% of the total.
In response to the current environment, we have taken a number of actions to align our costs with the lower levels of demand.
But we've also gone further to position the company for improved margins as demand recovers.
Over the last three years, we have consolidated -- three quarters, we have consolidated three facilities, a permanent reduction to our fixed and variable costs, and exited or restructured several underperforming contracts.
We have also taken steps to focus on our core aviation services offering by completing the divestitures of our Airlift and Composites businesses.
All of these actions have simplified our portfolio, improved efficiency in our operations and set us up to drive higher returns on capital.
In addition to this progress, we continue to win new business during the quarter.
We announced a three-year contract with the Royal Netherlands Air Force to repair F-16 jet fuel starters.
We also announced two new contracts won by our Airinmar subsidiary, which provides component repair cycle management and aircraft warranty solutions.
We were selected by both Frontier Airlines and Air Methods, the world's largest civilian helicopter operator to provide a full suite of warranty and value engineering services.
In addition to the wins this quarter, we saw stabilization in certain of our businesses.
Our order volume in trading and distribution were consistent throughout the quarter at a level above what we saw in April and May, but well below pre-COVID levels.
In our MRO business, as we head into the fall, we incurred -- we are encouraged by the loading we expect to see in our hangars.
While our customers continue to operate in an uncertain environment and their maintenance schedules could change, the early indications are positive relative to our earlier expectations.
We are in a constant contact with our commercial customers globally and are continuing to look for ways to support them during this difficult time.
In our Government business, where we saw growth during the quarter, we continue to pursue new opportunities and the pipeline remains full.
As John mentioned, we continue to take action to reduce our costs and exit underperforming activities in the quarter.
These actions and other items resulted in predominantly non-cash pre-tax charges of $37.3 million.
Also, as previously disclosed, we received financial aid under the CARES Act in the quarter.
The total amount received was $57.2 million, of which $48.5 million was a grant and $8.7 million was a low interest pre-payable loan.
In the quarter, we utilized $8 million of the CARES Act grant and $3 million of other non-U.S. government labor subsidies for a total of $11 million.
This amount is included in the GAAP income statement but excluded from adjusted earnings.
As of the quarter-end, the unutilized portion of the grant was $40.8 million, which was recorded as a current liability.
This amount will flow through the P&L, as it is utilized, which we expect to be complete by mid-Q4.
Turning to some additional financial detail in the quarter.
SG&A expense was $45.3 million for the quarter.
On an adjusted basis, SG&A was $39.7 million, down $10.5 million from the prior year quarter, which reflects the reduction of our overhead cost structure.
In the quarter, adjusted SG&A as a percentage of sales was 9.9%.
Net interest expense for the quarter was $1.6 million compared to $2.1 million last year, which reflects the lower interest rate in the period.
During the quarter, we generated $39.8 million of cash in our operating activities from continuing operations.
This includes the $48.5 million grant portion of the CARES Act funding and a net use of cash of $18.6 million, as we reduce the level of our accounts receivable financing program.
Excluding the CARES Act and accounts receivable financing program impacts, cash flow provided by operating activities from continuing operations was $9.9 million.
Additionally, as we are focused on lowering our working capital, we were able to reduce inventory by $19 million during the quarter.
Also, we repaid $355 million of our revolving credit facility during the quarter.
We had previously drawn the full balance as a precautionary measure.
Our net debt at quarter-end was $149.3 million and unrestricted cash was $107.7 million.
Our balance sheet remains strong with net leverage of 1.1 times and availability under our revolver of approximately $355 million and we have no near-term maturities.
In light of the current macro environment, we are pleased with our Q1 performance.
Our Government business continues to be healthy, our cargo end markets continue to generate demand and our balance sheet remains strong.
As discussed on the Q4 call, given the uncertainty in the market, at this stage, we are not providing guidance for the rest of the year.
Having said that, looking forward more generally, although, the trajectory of the recovery remains uncertain, we expect the aftermarket to recover faster than the OEM market.
Within the aftermarket, we expect used serviceable material, in which AAR is the global leader, to be prioritized by operators over higher cost alternatives.
We also expect to see more material become available to support this demand as aircrafts are permanently retired and parted out.
This, along with the maintenance deferrals occurring for both airframe and engine, should drive an increased need for services out of our Trading, Distribution and MRO businesses as the commercial market recovers.
While the timing of the recovery is unknown, we believe that the actions we have taken and are continuing to take to adjust our cost structure and reposition our portfolio, combined with the strength of our team, the airlines' need for lower cost solutions and our balance sheet, uniquely position us to benefit from an eventual return of demand and to emerge an even stronger and more profitable company.
| q1 adjusted earnings per share $0.17 from continuing operations excluding items.
q1 sales $401 million versus refinitiv ibes estimate of $381.7 million.
|
Both are available on the Investors section of our website, hudsonpacificproperties.com.
Moreover, this quarter, we've once again included certain disclosure prompted by COVID-19 business changes which we won't maintain once business operations normalize.
They will be joined by other senior management during the Q&A portion of the call.
We had a very strong second quarter in terms of our financial results.
We've also had a very busy start to our third quarter, executing on our growth strategy for Sunset Studios.
And I'll talk a little bit about that more in a moment.
The big picture, the tech and media industries continue to flourish in our markets.
Venture investment and fundraising are at record levels.
The IPO market is strong, tech employment and hiring have recovered to essentially pre-pandemic levels, and media companies are spending billions to produce a backlog of content.
Over the last few months, we've seen a real momentum toward the return of office, and we're optimistic that's going to continue.
Growing vaccination rates, combined with statewide reopenings in California in mid-June in Washington at the end of June and forthcoming in Vancouver after Labor Day, led companies to begin implementing and formalizing plans.
We are still in a wait-and-see mode regarding any major adjustment space configurations or needs.
But even with variance, we're expecting heading into fall, most companies will move forward toward at least a partial reoccupancy of existing space, potentially coupled with vaccine mandates.
We're already seeing this from a few of our larger office tenants.
Essentially, all of our major studio tenants, Netflix, HBO, CBS, Disney, ABC, Amazon, have resumed and are scheduled to imminently resume active production or on our lots with safety protocols in place.
Production is now an overdrive given content demand and pandemic-related shutdowns, particularly here in Los Angeles, where we are building a state-of-the-art global studio portfolio to meet that demand.
To that end, I'm sure many of you saw, we made two very exciting major announcements over the last week around our expansion of our Sunset Studio platform.
The first, Sunset Glenoaks, will be the largest purpose-built studio in the Los Angeles area in over 20 years.
The project is in Sun Valley, minutes from Burbank where Disney, NBC Universal and Warner Media are headquartered and many other production companies like Netflix are located.
We're going to build approximately 240,000 square feet, adding another seven stages to our portfolio for a total investment of approximately $170 million to $190 million.
We're finalizing plans and budgets that could start construction as early as fourth quarter of this year and complete the project in the third quarter of 2023.
This is a 50-50 joint venture with Blackstone and we're on point for development, leasing and property management.
The second transaction, which we announced on Monday, mark Sunset Studio's first expansion out of the U.S. into the U.K. Something I've often noted was on our agenda.
The U.K. has a long history of global production in a media center.
It is a deep pool of talent, crews and services to support productions, regional infrastructure and generous and long-standing tax credits.
Further, investment in the U.K. film and TV investment has grown dramatically over the last five to seven years, while supply and purpose-built studios remains limited.
We're in the entitlement and planning stages to build what will ultimately be one of the three largest purpose-built studios in the U.K. and one of the highest quality production facilities globally for TV and film.
The site comprises 91 acres on undeveloped land, about 17 miles north of London and Box Borne Harpeture, minutes from public transit and close to the Heathrow Airport as well as Central London.
This facility will provide great access to other major studios, production houses, crew and talent.
We purchased the site for GBP120 million through a 35-65 JV with Blackstone.
And although it's early, we anticipate a total investment of around GBP700 million.
We'll be responsible for development, over site, leasing and property management and we're setting up a local office and a small team to manage the day-to-day reporting to our team here in Los Angeles.
Part of what's so exciting about the Sunset Studio's newest L.A. and U.K. locations is we're reimagining how studio facilities can best support future productions, be it through architectural design, high-tech infrastructure or sustainable buildings and operations.
We're at the very positive preliminary marketing conversations with major production companies related to both projects, and we can either master lease or multi-tenant these facilities.
It's still early, and we have a lot of interest and flexibility so far.
Finally, I want to congratulate the Hudson Pacific team on winning the NAIOP's 2021 Development of the Year Award.
It's one of the industry's most prestigious awards and NAIOP's highest honor It's also a reflection of our company's leadership and innovation across every aspect of our business.
NAIOP's recognition is especially meaningful given it's based mostly on our exceptional performance throughout 2020 which, of course, was a very atypical and challenging year.
So again, very, very proud of the Hudson Pacific team.
Our second quarter rent collections remained strong at 99% for our overall portfolio and 100% for office and studio properties.
We've collected 100% of our deferred rents due today.
Physical occupancy at our office buildings currently ranges from 5% to 55%, depending on the asset.
At the lower end, our properties largely occupied by tenants communicating an end of summer or early fall return.
As physical occupancy has improved, so has our parking revenue, which grew 12% in the second quarter compared to the quarter prior.
Office leasing activity continues to accelerate across our portfolio and markets, especially in terms of the inquiries and tours.
This activity translated into strengthening fundamentals more so in some markets like Silicon Valley, which in the second quarter had stable rents, declining vacancy and significant positive net absorption.
In line with these trends, our deal pipeline that is deals in leases, LOIs or proposals stand slightly above our long-term average at 1.4 million square feet.
That's up 75% compared to the second quarter last year and 35% year-to-date, despite our having completed over one million square feet of deals so far in 2021.
To that end, we signed 510,000 square feet of deals in the quarter, once again, in line with our long-term average with 19% GAAP and 12% cash rent spreads.
Our weighted average trailing 12-month net effective rents are up close to 10% year-over-year.
There are two primary drivers of this increase: First, our effective rents are up slightly, about 8%; and second, our annual TIs per square foot are down 30% and mostly due to executing more renewal leases.
Separately, our trailing 12-month lease term and renewal deals also increased from 4.5 to about five years year-over-year and term has also extended from pandemic lows.
Our deal activity this quarter was split relatively equally between the Bay Area with the preponderance along the Peninsula and in the Valley, and the Pacific Northwest, that is Seattle and Vancouver with a handful of deals in Los Angeles.
We maintained our stabilized lease percentage at 92.7%.
Our in-service lease percentage dipped 30 basis points due to the inclusion this quarter of Harlow, which we delivered a company three in April.
But for Harlow, which is 54% leased.
Our in-service lease percentage would have risen 40 basis points to 91.8%.
We have 4.4% of our ABR expiring over the rest of the year with about 55% coverage on that space.
Our remaining 2021 expirations are about 12% below market.
For expirations, we addressed in the first half of the year, we renewed or backfilled close to 70%.
Touching on our office developments, we're on track to deliver One Westside to Google in the first quarter of next year potentially sooner.
We're also set to close on the podium for Washington 1000 late in the fourth quarter at which point, we'll have a year to further evaluate tenant interest and broader market conditions and to finalize our time line to start construction.
In the second quarter, we generated FFO, excluding specified items, of $0.49 per diluted share compared to $0.50 per diluted share a year ago.
Second quarter specified items consisted of $1.1 million or $0.01 per diluted share of transaction-related expenses and $0.3 million or $0 per diluted share of onetime prior period supplemental tax expense related to Sunset Gower compared to $0.2 million or $0 per diluted share of transaction-related expenses a year ago.
FFO beat our own expectations at the midpoint of our guidance by $0.02 per diluted share.
This was primarily due to the reversal of reserves against uncollected cash rents and straight-line rent receivables and savings on operating expenses, some of which we expect to incur in the second half of the year.
Second quarter NOI at our 44 consolidated same-store office properties decreased 2.1% on a GAAP basis, but increased 4.9% on a cash basis.
For our three same-store studio properties, NOI increased 17% on a GAAP basis and 29.3% on a cash basis.
Adjusting for the onetime supplemental property tax expense at Sunset Gower, NOI for our same-store studio properties would have increased by 22.8% on a GAAP basis and 35.8% on a cash basis.
At the end of the second quarter, we had $0.9 billion in liquidity with no material maturities until 2023, but for the loan secured by our Hollywood Media portfolio.
This loan matures on Q3 2022 and has three 1-year extensions, our average loan term is 5.2 years.
In late July, in preparation of funding our U.K. Blackstone JV, we drew down $50 million on our revolver, resulting in $550 million of undrawn capacity, we funded our remaining pro rata acquisition costs with cash on hand.
Our AFFO continued to grow in the second quarter, increasing by $11.4 million or nearly 24% compared to Q2 2020.
This occurred even while FFO declined by $3.6 million for the same period.
Again, this positive AFFO trend reflects the significant impact of normalizing leasing costs and cash rent commencements on major leases following the burn off of free rent.
Now I'll turn to guidance.
As always, our guidance excludes the impact of unannounced or speculative acquisitions, dispositions, financings and capital market activity.
In addition, I'll remind everyone of the potential COVID-related impacts to our guidance, including variants like Delta and evolving government mandates.
Clearly, the uncertainty surrounding the pandemic makes projecting the remainder of the year difficult, and we assume our guidance will be treated with a high degree of caution.
As noted, many companies are still determining return to work requirements and the impact on space needs.
Because of this, for example, our guidance does not assume a material increase in parking and other related variable income.
Overall, we assume full physical occupancy and related revenues will not return to pre-COVID levels in 2021.
That said, we're providing both full year and third quarter 2021 guidance in the range of $1.90 to $1.96 per diluted share excluding specified items and $0.47 to $0.49 per diluted share excluding specified items, respectively.
Specific items for the full year 2021 are the $1.1 million of transaction-related expenses and the $1.4 million of prior period supplemental property tax expense referenced in our second quarter SEC filings.
There are no specified items in conjunction with our third quarter guidance.
We appreciate your continued support.
Stay healthy and safe, and we look forward to updating you next quarter.
| q2 ffo per share $0.49 excluding items.
sees fy ffo per share $1.90 - $1.96.
|
They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations.
For a discussion of these risks and uncertainties, please see the risks described in our most recent annual report on Form 10-K and subsequent filings with the SEC.
We may also discuss non-GAAP financial measures during today's call.
I'll give some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss the current portfolio in more detail.
Also joining us on the call to participate in the Q&A are our President, Kevin Collins, our CFO, Lee Fegley; and our COO, Dave Lyle.
I am pleased to announce earnings available for distribution for the third quarter came in at $0.10 per share.
Book value ended the quarter at $3.25 per share, which represents an increase of 1.2%.
This increase in book value combined with our $0.09 dividend produced an economic return of 4% for the quarter.
The portfolio remains predominantly agency focused with substantially all of our entire $8.8 billion portfolio plus $1.5 billion notional in TBA invested in agency mortgages.
Our liquidity position remains strong as we held $788 million of unrestricted cash and unencumbered investments at quarter end.
After underperforming sharply during second quarter, agency mortgage performance stabilized during the quarter as positive performance from higher coupons generally offset underperformance from the bottom of the coupon stack.
Higher coupons benefited from slowing speeds as signs of prepayment burnout spurred investor demand.
Lower coupon struggled as the market ready for the onset of asset purchase tapering by the Federal Reserve.
Looking ahead, we believe that earnings available for distribution will continue to be supported by attractive dollar rolls and slow speeds on our specified pool collateral as well as by an attractive reinvestment environment characterized by wider spreads and continued strong funding markets.
While the near-term technical picture for mortgage remains supportive of valuations, we are cautious over the next several quarters as the decrease in purchases by the Federal Reserve and the likely increase in seasonally driven supply remains headwinds.
I'll stop here and let Brian go through the portfolio in more detail.
I'll begin on slide four in the upper left-hand chart, which details the changes in the U.S. treasury yield curve since year-end.
As indicated by the light blue line, the third quarter ended with interest rates largely unchanged with a modest flattening twist at the 10-year portion of the curve resulting in the difference between the yield on the 30-year and five-year U.S. treasuries falling by 12 basis points.
Treasury note in the first five weeks of the quarter.
Improving economic data, increased inflation expectations, indications of a peak in COVID cases, and clear signals from the Federal Reserve on the time line for tapering asset purchases at the September FOMC meeting led to a reversal in rates during the last couple of weeks of the quarter with a 10-year largely unchanged at 1.49% at quarter end.
Conversely, swap spreads reversed the tightening in the first half of the year and widened back to year-end levels, as displayed in the lower left-hand chart, resulting in higher swap rates across the curve during the quarter and benefiting those with a higher percentage of their hedges and interest rate swaps.
Despite short-term funding rates remaining attractive, the decline in interest rates in the first half of the quarter and increase in interest rate volatility led to a reduction in commercial bank demand for agency mortgages with monthly purchases of approximately $28 billion per month compared to the $46 billion per month average in the first half of the year.
Moving on to slide five, where we provide more detail on the agency mortgage market.
In the upper left-hand chart, we show year-to-date agency mortgage performance versus swap hedges in generic 30-year 2%, 2.5% and 3% coupons, highlighting the third quarter in gray.
As you can see, lower coupon 30-year 2% and 2.5% coupons modestly underperformed during the quarter, while 30-year coupons 3% and higher outperformed.
Lower coupons underperformed largely due to the increased expectations for asset purchase tapering in the fourth quarter as well as the previously mentioned decline in commercial bank demand and increase in interest rate volatility.
Higher coupons benefited from the perceived peak and prepayment speeds as indications of modest prepayment burnout for higher coupon borrowers continued.
Specified pool payups, as indicated in the chart on the top right, improved as interest rates fell during July and remained elevated relative to the second quarter through the end of September.
We have seen a reversal of this move so far in the fourth quarter as the recent modest increase in mortgage rates and decline in refinancing activity has dampened demand for prepayment protection.
Implied financing in the TBA market, shown in the lower right-hand chart remains attractive in lower coupons with financing rates drifting modestly lower, while still volatile, higher up the coupon stack, as indicated by the purple line representing the 30-year 3% TBA.
We believe the pine demand technicals should remain supportive of the dollar roll market in the near term despite reduced demand from the Federal Reserve, and we are likely to maintain a significant allocation in TBAs as a result.
slide six provides detail on our Agency RMBS investments and our activity during the third quarter.
While our overall allocation to the sector was largely unchanged, we modestly reduced exposure to lower coupons through paydowns and invested the proceeds in 30-year 3.5% specified pools, increasing our coupon diversification and higher coupon allocation by approximately $300 million.
We continue to actively manage our specified pool holdings, rotating $2.1 billion into more attractive alternatives within the sector while mitigating our exposure to elevated pay-ups.
Our specified pool holdings had a weighted average payout of 0.9 points as of September 30, an increase from 0.6 points as of June 30.
Despite our rotation away from higher pay-up loan balance stories into new production, which is reflective of the market's increased demand for specified pools during the quarter.
As noted on the previous slide, we have seen a reduction in demand for prepayment protection so far in the fourth quarter as our weighted average pay up has declined back to the June 30 average of 0.6 points.
The weighted average yield on our Agency RMBS holdings improved seven basis points to 2.11% as of quarter end, while prepayments on our holdings remained low at 7.3% CPR for the quarter.
We believe the strength of the dollar roll market and wider spreads represent attractive investment opportunities with ROEs on lower coupon dollar rolls in the mid-teens and 9% to 11% on specified pools.
Our remaining credit investments are detailed on slide seven with non-Agency CMBS representing nearly 60% of the $108 million portfolio.
Our allocation to credit remained stable during the quarter with no asset sales and limited price movements overall.
Our $73 million of remaining credit securities are high quality with 90% rated single A or higher and we remain comfortable with the credit profile of our remaining holdings.
Although we anticipate limited near-term price appreciation, we believe these assets are attractive holdings at 100% are held on an unlevered basis and provide attractive unlevered yields.
Lastly, slide eight details our funding book at quarter end, as shown in the chart on the upper left.
Repurchase agreements collateralized by Agency RMBS remain unchanged at $7.9 billion as of September 30.
Given the modest decline in our holdings and hedges associated with those borrowings also remain unchanged at $5.3 billion notional of pay fixed received floating interest rate swaps.
The weighted average interest rate on our hedge book remained unchanged at 41 basis points, while a modest extension in the maturities of our repurchase agreements led to a two basis point increase and the average funding rate to 12 basis points.
In order to hedge additional exposures further out the yield curve, we continue to hold $1.3 billion notional of forward starting interest rate swaps with starting dates in 2023.
Our economic leverage when including TBA exposure ticked modestly lower during the quarter to 6.5 times debt to equity as we remain conservatively positioned.
Spread widening of nearly 30 basis points since May supports an attractive investment environment in the Agency RMBS sector with ROEs ranging from high single digit on specified pools to mid-teens on TBA.
And we believe valuation should be relatively well supported in the near term despite the reduction in Fed purchases as commercial bank demand remains robust and supply declines.
| invesco mortgage capital inc - qtrly earnings available for distribution per common share of $0.10.
invesco mortgage capital inc - qtrly book value per common share of $3.25 compared to $3.21 at q2 2021.
|
There is an inherent risk that actual results and experience could differ materially.
You can find a discussion of our risk factors, which could potentially contribute to such differences, in our Form 10-K filed earlier today.
My first two official months back at Fluor have been extremely busy.
The immediate priority was to reset and communicate our longer-term strategy and the corresponding organizational structure.
As you know, we announced the new Fluor management team in January.
Our collective focus is on the end markets where we have the right technical expertise to add value for our clients, while earning a suitable return for our shareholders.
The recent changes that have been implemented align our business around the strategic priorities identified for Fluor in the near term.
As a reminder, our four strategic priorities are to: number one, drive growth across the portfolio; two, pursue contracts with fair and balanced terms; three, foster a high-performance culture with purpose; and four, reinforce financial discipline.
For a longer-term view of Fluor's opportunities and key focus areas, please tune in to our Strategy Day from last month if you haven't had a chance to view it yet.
Strategy Day kicked off one of the more exciting eras of change and growth in Fluor's long history.
And we are confident that the strategic plan as outlined will deliver a directional earnings range between $3 and $3.50 per share by 2024.
We ended the year with a backlog of $25.6 billion and full year new awards of $9 billion.
New awards clearly reflected the impact of the pandemic and its pressure on our clients.
They also reflect our stringent pursuit criteria and strategy to reduce risk.
Across our end markets, we saw clients delay capital spending plans while they waited for uncertainty from the pandemic to subside.
Based on conversations with our clients, we are starting to see positive momentum and expect to see new awards pick up in the second half of 2021.
We continue to see good prospects across our portfolio and are completing front-end work scopes to populate our future backlog.
However, lower awards in 2020 will create a headwind for 2021 earnings.
Before talking about what we are seeing for 2021, I want to reinforce that the people of Fluor have tackled the challenges of 2020 with a resilience and energy that was unmatched.
These challenges have made us all more adaptive, and I believe that the organization is truly motivated to successfully take the company forward into its next chapter.
Now let's turn to our business lines and how we are aligning our priorities with the opportunities ahead.
Turning to Slide 4.
As we move into 2021, our urban solutions end markets are gaining momentum, specifically, in mining.
We are seeing high demand for metals such as copper and iron ore.
Last year, we booked a significant North American steel project as well as several front-end studies that we expect will convert to follow-on EPCM awards in late 2021 and beyond.
Late last year, we achieved patent completion for the BHP Spence copper project in Chile.
We've had a long-term relationship supporting BHP's capital efforts, and we are proud to be completing another successful project for them.
We are also encouraged by the opportunities we are seeing in our advanced technologies and life sciences end markets.
Here, we are pursuing data centers and semiconductor opportunities in North America and major life sciences prospects in Europe.
In addition, Fluor has just been selected for a large biotech project in Europe, and we are finalizing contract details now.
This confirms our strategy to leverage front-end technical solutions into full EPC awards.
Contract signature is expected by the end of Q1 2021, and we look forward to sharing more specifics at that time.
Advanced technologies and life sciences is well positioned to support our clients for advanced manufacturing projects.
This includes opportunities arising from the U.S. government's executive order that is focused on the domestic supply chain for critical materials, including semiconductors, batteries, pharmaceuticals and rare earth elements.
Moving to Slide 5.
In Infrastructure, we are well positioned for select opportunities in the U.S. due to urbanization and an aging infrastructure system.
Furthermore, we believe these opportunities could be enhanced with the introduction of a federal infrastructure spending bill.
As a reminder and as messaged previously, infrastructure margins will be under pressure as legacy zero-margin projects are worked down through the year.
Approximately 35% of our infrastructure revenue will come from zero-margin work in 2021.
As we discussed during Strategy Day, we will be very selective in the infrastructure projects we pursue in the future.
Each pursuit must have the right scope, the right client, the right location, the right contract terms, the right size and, importantly, the right execution team and resources.
Our goal is to deliver predictable earnings and not chase top line growth.
This will be especially apparent in our infrastructure pursuits going forward.
Turning to Slide 6.
The management team is very excited about the work we are doing in Mission Solutions and the opportunities we see in supporting our government clients going forward.
As you know, we are keenly focused on growing our presence in the intelligence, cyber and mission-critical infrastructure and operations markets.
Furthermore, we continue to support the DOE and the National Nuclear Security Administration with its nuclear security, environmental remediation and energy projects and operations.
We expect that work to be a strong baseload for Fluor in the coming years.
While we are optimistic about our prospects in Energy Solutions in 2021, we don't expect our clients to resume capital spending at a meaningful pace until later in 2021 and beyond.
We are having productive conversations with our energy clients and are well positioned to meet their growing needs.
Importantly here, we are living in an ever-changing world, and Fluor continues to enhance its capabilities in the energy transition space.
We fully expect this market to begin a larger part of our prospect pipeline as clients pivot themselves toward a lower carbon economy.
Next, our chemicals clients see recovery in key sectors of the market, which are anticipated to translate into additional capital expenditures.
This includes the specialty chemicals market, where we continue to see positive signs of investment with our existing clients and significant activity with ongoing pursuits.
Also, future consumer demand in the battery market is translating into additional client investments associated with lithium and related battery chemicals.
Now let me give you a brief update on some of our key projects, starting with LNG Canada.
Moving to Slide 8.
At our Strategy Day, Project Director Phil Park gave a full update on the good progress at LNG Canada and Kitimat.
Earlier this month, the project received approval for its construction ramp-up plan from the Office of the Public Health Officer and Northern Health.
We are coordinating with government and health authorities as our workforce on site increases, and we focus on our spring and summer construction program.
Moving on to the Purple Line project.
As mentioned on the third quarter call, a settlement was reached between our Purple Line JV and the Maryland Transit Authority.
We received the first payment in the fourth quarter and expect a second payment in the second half of 2021.
This month, the design-build team for the Tappan Zee bridge filed a lawsuit against the New York State Throughway Authority for unapproved change orders.
As a team, we agreed we had exhausted all other options for resolution and believe we are owed compensation.
While we don't have a timeline for the resolution of these legal actions, we will keep you updated as the situation proceeds.
With respect to our two challenged government projects, I'm pleased to report that on the Radford project, we have turned overall 113 systems to our clients, and we are essentially complete.
The F.E. Warren project continues to make steady progress.
Finally, we remain confident in the viability of our NuScale initiatives.
And as stated last month, we are currently evaluating new investors and looking to reduce our ownership stake and capitalize on this clean energy investment.
I'm very encouraged by the levels of interest we are seeing and believe that NuScale can provide sizable returns for Fluor over time.
The main topic I'll discuss today are: One, an overview of our 2020 financial performance; Two, an update on our liquidity and financial position; Three, an update on our initiatives; and Four, our outlook for 2021.
You'll see that today's results are presented in alignment with our old reporting segments and includes Stork as part of continuing operations.
Starting with our Q1 2021 results, we will be presenting our financials aligned with our three new business segments: Urban Solutions, Mission Solutions and Energy Solutions.
At that time, we also expect to report Stork as discontinued operations.
We will maintain another segment which will principally represent NuScale.
Our Radford and F.E. Warren projects will move back into Mission Solutions.
As David said, Radford is essentially complete with all 113 systems turned over to BAE, while Warren will flow through at zero margin until its completion.
Turning to Slide 10.
For 2020, Fluor reported a net loss from continuing operations attributable to Fluor of $294 million or a loss of $2.09 per diluted share.
During the year, we recognized the following significant charges, most of which were recorded in quarter one: $298 million for impairments of goodwill and tangible assets, investments and other assets; $60 million for current expected credit losses associated with Energy & Chemicals clients; $146 million for impairments of assets held for sale included in discontinued operations, of which $12 million related to goodwill; as well as significant forecast revisions for project positions due to COVID-19-related schedule delay and associated cost growth.
Corporate G&A expenses for 2020 was $241 million, up from $166 million a year ago.
For the full year, $47 million was due to foreign exchange currency losses predominantly driven by the weakening of the U.S. dollar, and $42 million was attributable to the professional fees associated with the 2020 internal review.
Our increased compensation expense of 2020 was primarily due to the impact of a higher price on stock-based compensation as our share price increased from the date of the grant to the end of the year.
We achieved an estimated run rate savings of $140 million annually in our overhead expenses due to actions taken in 2020.
It's important to note that these savings are spread across the business lines and in corporate overhead.
As I mentioned last month, we expect to achieve an additional $100 million of annual savings over the next three years as we rationalize overhead to the new shape of our business.
During the fourth quarter, we exited two of our European infrastructure P3 investments and received cash of approximately $20 million.
We also have two North American joint ventures that we expect to exit later in 2021.
Moving to Slide 11.
Our ending cash balance was $2.2 billion, up from 2019.
Domestic available cash represented 32% of this total.
We expect to see our cash holding steady around $2 billion through the year, with debt retirement being offset by divestitures and the liquidity improvement measures we have discussed in the past.
Operating cash flow for the full year was $186 million, which included approximately $375 million of cash to fund our legacy projects.
Additionally, our debt-to-capitalization requirement on this amendment facility was expanded to 0.65 times, which gives us more flexibility in current borrowing capacity as we assess our capital needs moving forward.
We believe this is the appropriate size facility we need to support our business given the shift in our strategy as well as another good example of our efforts we are making around the organization to make Fluor fit for purpose.
In 2020, we continued the process of monetizing our investment in AMECO, an equipment rental business; earlier in the year, we sold our operations in Jamaica, closed our operations in Mexico and sold the equipment rental business owned by Stork.
We announced on our Strategy Day call that we have received a letter of intent for our AMECO North America business and are now reviewing options for the remaining South America business.
Our two main financial priorities in 2021 are further stabilizing our capital structure, which we plan to primarily do with debt retirement and divestitures, and booking a pipeline of work that fits our revised pursuit criteria and our strategies.
We are introducing our 2021 adjusted earnings per share guidance of $0.50 to $0.80 per diluted share for continuing operations.
This excludes NuScale-related expenses and any impact from foreign currency gains or losses, restructuring or impairments.
This also reflects Stork being a discontinued operation.
As David said, we expect to see new awards begin to pick up in the back half of 2021 with significant earnings per share growth in 2022 as we begin to work these projects.
Though we do not give quarterly guidance, Q1 results have historically reflected higher G&A expenses.
While we are seeing green shoots around the business, the lingering effects of the pandemic will continue to keep awards depressed for the next few months.
Furthermore, our existing backlog is still being impacted by the pandemic.
Though our projects are back online for the most part, government restrictions have slowed down our progress and the rate at which we are able to grow our clients.
Turning to Slide 13.
Our assumptions for 2021 include: a slight decline in revenue as compared to 2020, adjusted G&A expense of approximately $40 million to $50 million per quarter and a tax rate of approximately 28%.
We anticipate average full year margins of 2% to 3% in Urban Solutions, 2.5% to 3% in Mission Solutions and margins of 2.5% to 3.5% in Energy Solutions and improving as the year progresses.
These margins include the remaining impact of zero-margin work flowing through the business.
We also anticipate 2021 capital expenditures to be below $100 million as we divest our AMECO business this year.
As David reaffirmed, we maintain our long-term guidance of $3 to $3.50 of earnings per share by 2024.
We are taking the necessary first steps by strengthening our balance sheet and focusing our growth on end markets where we see the best opportunities for revenue and margin expansion.
With the COVID headwinds starting to subside, we will see a resumption of project awards to drive our profits over the next several years.
Operator, we're ready for our first question.
| sees 2021 adjusted earnings per share $0.50 to $0.80 (not sees q4 adjusted earnings per share $0.50 to $0.80).
full year new awards of $9.0 billion; ending backlog $25.6 billion.
2021 adjusted earnings per share guidance established at a range of $0.50 to $0.80.
|
I'm joined today by Scott Buckhout, CIRCOR's president and CEO; and Abhi Khandelwal, the company's chief financial officer.
These expectations are subject to known and unknown risks uncertainties and other factors, and actual results could differ materially from those anticipated or implied by today's remarks.
You can find a full discussion of these factors in CIRCOR's Form 10-K, 10-Qs and other SEC filings also located on our website.
2020 was another transformational year for CIRCOR.
And despite the continued challenges presented by COVID-19, our team made significant progress on executing our strategic plan.
I'm proud of the resilience and efforts of the entire CIRCOR team in navigating such a challenging year while continuing to deliver for our customers and shareholders.
s we saw throughout the year, our diversified product portfolio across multiple end markets and geographies helped mitigate the impact of a weaker macro environment.
Our defense business delivered strong results for the year, which mostly offset lower demand for our commercial products.
Our differentiated technology and market positions enabled us to increase prices across the portfolio.
We executed well throughout this year's downturn and exited the year with positive momentum.
With the health and safety of our employees as our foundation, we focus on the things we control.
We achieved decremental margins of 25% for the year through value-based pricing and difficult but necessary cost actions of $45 million.
Aerospace and defense improved their margins by 290 basis points despite lower volume.
Notably, aerospace and defense won 20 new programs, including 60 defense and four in commercial.
We continue to implement the CIRCOR operating system across the company, resulting in improved operational performance.
CIRCOR is well positioned to take advantage of an eventual market recovery in 2021 and beyond.
With the sale of instrumentation and sampling and distributed valves earlier in the year, our exit from upstream oil and gas is complete.
We continue to invest in innovation, launching 49 new products in 2020 versus 33 in 2019.
We delivered on our free cash flow commitments throughout the year and ended with strong free cash flow of $20 million in the fourth quarter.
And finally, we reduced our debt by $126 million or 22%.
I want to highlight some new mission-critical technology we introduced in 2020.
On the defense side, our new missile arming switches are designed to operate in more severe environments with respect to temperature, radiation and G-force.
We launched self arming switches in support of various missile programs, including hypersonic applications.
On the commercial side, we introduced a switch, which activates the aircraft's location transmitter in case of an in-flight emergency.
In industrial, we launched a series of new gas pressure reduction systems to help our customers in Marine, Medical and public utility industries.
These systems help our customers transport and manage high-pressure industrial gas, LNG and CNG, biomethane fuels and medical oxygen.
Now, I'd like to provide some financial highlights from the fourth quarter.
We booked orders of $168 million in the quarter, which was flat sequentially and down 25% organically.
Sequentially, industrial was up 12% in the quarter.
A&D had lower orders sequentially, down 21% and due to the timing of large naval program orders that pushed into 2021.
Revenue in the quarter was $208 million, up 10% sequentially, driven by strong defense deliveries, mainly on U.S. Naval programs and moderate growth across most end markets in industrial.
Adjusted operating income was $23 million, representing a margin of 11.2%, up 200 basis points from the prior quarter.
Margin improvement was driven by sequential volume recovery, pricing, cost actions and productivity.
As a result of improved operating income, the company delivered $0.66 of adjusted earnings per share.
Finally, we generated strong free cash flow of $20 million during the fourth quarter, as we exited the year with operational cash flow unencumbered by transformation disbursements.
We are providing both comparisons due to the significant impact of COVID-19 on our end markets and year-over-year comparison.
Starting with industrial on Slide 4.
In Q4, industrial segment orders were up 12% sequentially, down 22% organically.
The industrial segment saw a sequential recovery in all major end markets, driven by opening economies.
Revenue in the quarter was $131 million, up 4% from prior quarter and down 13% organically.
Sequential improvement was primarily driven by strength in aftermarket sales across the portfolio.
We exited the year with an operating margin of 9%, a sequential improvement of 160 basis points, driven by price increases and cost actions taken throughout the year.
Lower sales volume continued to drive a lower operating margin versus prior year.
Turning to Slide 5.
Our aerospace and defense segment booked orders of $47 million in the quarter, down 21% sequentially and down 33% versus prior year.
Both declines are primarily driven by timing of large defense program orders and the ongoing impact of COVID-19 on our commercial business.
We remain confident in the segment's growth outlook in 2021.
Revenue in the quarter was $78 million, up 25% from prior quarter.
Strong defense deliveries mostly offset the COVID-19 impact, on commercial Aerospace, resulting in only 3% lower revenues versus by year.
Finally, operating margin was 24% in the quarter, roughly flat sequentially and year over year.
Pricing, up 3%, combined with factory and cost actions drove strong margins in line with prior year despite lower revenue.
Moving to Slide 6.
For Q4, the effective tax rate was approximately 14%.
The company took a non-cash charge of approximately $15 million to record a valuation allowance against its remaining deferred tax assets in Germany.
This non-cash charge is acquired under GAAP accounting rules.
This charge does not impact our non-GAAP after tax results for the quarter and is not expected to have an impact on our future non-GAAP after tax results.
Looking at special items and restructuring charges, we recorded a total pre-tax charge of $13.4 million in the quarter.
The acquisition-related amortization and depreciation was a charge of $12 million with the remaining charges associated with restructuring activities in the quarter.
Interest expense for the quarter was $8.5 million, down $2.3 million compared to last year as a result of lower debt balances.
Other income was approximately $1 million, primarily driven by pension income.
Finally, corporate costs were $7.8 million in the quarter.
Turning to Slide 7.
As Scott mentioned previously, our free cash flow was $20 million in the fourth quarter, up 11% compared to 2019.
Free cash flow was positively impacted by improved operating income and lower working capital, particularly inventory.
Reducing working capital remains one of our top priorities, and we expect further improvement in 2021.
We used the proceeds from the sale of our instrumentation and sampling business to reduce our net debt to $443 million, a reduction of $126 million or 22% year over year.
Free cash flow generated in 2021 will be used to further pay down debt and we continue to target leverage ratio of two to two and a half tiems net debt to adjusted EBITDA.
Now, I will hand it back over to Scott to provide some color on our end markets.
Let's start with our industrial outlook on Slide 8.
As Abhi mentioned, signs of order recovery were evident in the fourth quarter across most major industrial end markets after hitting the bottom in Q3.
Geographically, we continue to see growth in China and India, and we started to see signs of recovery in Europe and North America in the quarter.
Downstream orders were up sequentially, driven by an increase in aftermarket orders, but down significantly versus last year due to a difficult compare.
We're expecting Q1 industrial revenue to come in between down 1% and up 4% year over year.
We expect to see a normal seasonal dip in revenue sequentially in Q1 versus Q4.
We're starting to see improvement in our short-cycle end markets, including machinery manufacturing, chemical processing and wastewater as consumer demand starts to improve.
We're also expecting a mid-single-digit increase in aftermarket as global economies open up and consumption increases.
Downstream oil and gas revenue is expected to be down as refiners continue to manage capex.
We're seeing a similar customer capex dynamic across midstream oil and gas, power generation and building construction, but to a lesser degree.
We expect these end markets to improve further as the year unfolds.
Pricing is expected to be a benefit of roughly 1%, consistent with prior quarters.
Moving to aerospace and defense.
aerospace and defense orders in Q4 were down sequentially and versus prior year.
Both declines were primarily driven by the timing of large defense program orders and the ongoing impact of COVID-19 on our commercial businesses.
We expect order strength across our defense programs to continue through 2021, driven largely by the joint strike fighter and multiple missile and drone programs.
We expect a modest improvement in commercial orders as aircraft utilization improves and OEM production rates increased through the year.
We remain confident in this segment's growth outlook in 2021.
Revenue in the first quarter is expected to be down 7% to 12% versus prior year.
defense revenue is expected to be down 1% to 5% due to the timing of large defense shipments and lower U.S. defense spares orders leading into the quarter.
We anticipate growth of 5% to 10% from our other OEM group, which includes products for drones, missiles and helicopters.
in the Rafal fighter and jet in Europe.
Commercial revenue is expected to be down between 35% and 40%, in line with the broader commercial aerospace market.
Our market position on both Boeing and Airbus aircraft is strong, and we expect revenue to improve throughout the year in line with aircraft utilization and production rates.
Pricing is expected to be a benefit of 1% in the quarter, but in line with 2020 for the full year.
Now, I'll hand it over to Abhi to discuss our guidance.
Before jumping into full-year guidance, I'd like to share a few more expectations for the first quarter.
In addition to the revenue guidance that Scott provided, we're expecting incremental margins of 30% to 35% in industrial and decremental margins of 30% to 35% in aerospace and defense.
Decremental margins in aerospace and defense are slightly higher than our full-year 2020 decrementals due to the expected mix of OEM and aftermarket revenue.
We're also planning for corporate cost of $8.5 million, higher than our expected full-year run rate, due to the timing of certain expenses, such as RFPs.
Interest expense is expected to be roughly $8.5 million in Q1.
Finally, free cash flow for Q1 will be negative due to seasonality of annual disbursements.
Now, moving to full-year 2021 guidance.
We are expecting organic revenue growth of 0% to 4%, and with aerospace and defense expected to grow at low to mid-single digits and industrial at low single digits.
We are planning for a continued slow recovery in commercial Aerospace, where we expect to be better than 2020, but remain significantly lower than pre pandemic levels.
Our defense business remains healthy as we continue to win new business and deliver on growing U.S. defense programs.
In our industrial end markets, we expect to see modest recovery with downstream activity improving in the back half of 2021.
We're expecting adjusted earnings per share of $2 to $2.20, a 40% to 54% increase versus 2020.
This improvement is driven by top-line growth and improved margins from price increases, structural cost out in 2020 and ongoing productivity.
Finally, we're planning to deliver free cash flow as a percent of adjusted net income of 85% to 95%.
We feel that this guidance reflects what we are seeing in our end markets and the operational improvements that we can control within the four walls of CIRCOR.
We're confident in our ability to deliver these results, not only for our shareholders but for our customers, suppliers and employees.
Now I'll hand back to Scott to wrap up.
To summarize, we remain focused on delivering our strategic priorities.
In 2021, we're taking actions to further improve our customers' experience and our operational and financial performance.
We remain focused on attracting, developing and retaining the best talent while fostering a diverse and inclusive culture.
We continue to invest in growth through innovative new products, aftermarket support technology to enhance our customers' experience and regional expansion.
Value-based pricing continues to be a top priority, leveraging our differentiated technology and our strong market positions in the niches where we compete.
The CIRCOR operating system will continue to drive operational improvement and margin expansion.
And by enhancing free cash flow through efficient working capital management, we'll continue to delever the balance sheet.
| compname reports q4 adjusted earnings per share $0.66.
q4 adjusted earnings per share $0.66.
q4 revenue $208 million versus refinitiv ibes estimate of $207.6 million.
for 2021, expects organic revenue growth in range of 0 to 4%.
for 2021, adjusted earnings per share is expected to be in range of $2.00 to $2.20.
|
This is Craig Lampo, Amphenol's CFO.
And I'm here together with Adam Norwitt, our CEO.
I will provide some financial commentary and then Adam will give an overview of the business as well as current trends.
Then we will take questions.
In addition, as a result of our previously announced two for one stock split effective on March 4, 2021, all share and per share data discussed on this earnings call is on a post-split basis.
The company closed the first quarter with sales of $2.377 billion and GAAP and adjusted diluted earnings per share of $0.53 and $0.52, respectively.
Sales were up 28% in U.S. dollars, 25% local currencies and 23% organically compared to the first quarter of 2020.
Sequentially, sales were down 2% in U.S. dollars, 3% in local currencies and 4% organically.
Orders for the quarter were $2.734 billion, which was up 27% compared to the first quarter of 2020 and up 9% sequentially, resulting in a very strong book-to-bill ratio of 1.15:1.
Breaking down sales into our two segments.
The interconnect business, which comprised 96% of sales, was up 28% in U.S. dollars and 25% in local currencies compared to the first quarter of last year.
Our cable business, which comprised 4% of our sales, was up 17% in U.S. dollars and 18% in local currencies compared to the first quarter of last year's.
Adam will comment further on trends by market in a few minutes.
Operating income was $465 million in the first quarter of 2021.
Operating margin of 19.6% was down 100 basis points sequentially compared to the fourth quarter of 2020 adjusted operating margin and up a strong 260 basis points compared to the first quarter of 2020.
The year-over-year improvement in operating margin was primarily driven by normal operating leverage on the higher sales volumes, combined with the benefit of a lower cost impact resulting from the COVID-19 pandemic, partially offset by the impact of a more challenging commodity and supply chain environment.
The sequential decline in operating margin was driven by normal conversion on the reduced sales levels as well as a more challenging commodity and supply chain environment.
From a segment standpoint, the interconnect segment -- in the interconnect segment, margins were 21.5% in the first quarter of 2021, which increased from 19.1% in the first quarter of 2020 and decreased 100 basis points sequentially.
In the cable segment, margins were 8.8%, which increased from 7.6% in the first quarter of 2020 and decreased from 10.3% in the fourth quarter.
Given the continuing challenges posed by the COVID-19 pandemic, we are very proud of the company's performance.
Our team's ability to effectively manage through this crisis is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster a high-performance, action-oriented culture, which has enabled us to capitalize on the many opportunities for incremental sales, while driving strong operating performance in this very dynamic market environment.
The company's GAAP effective tax rate for the first quarter was 23.9%, which compared to 15.9% in the first quarter of 2020.
On an adjusted basis, the effective tax rate was 24.5% in the first quarter of both 2021 and 2020.
On a GAAP basis, diluted earnings per share increased by 33% to $0.53 compared to $0.40 in the prior year period.
Adjusted diluted earnings per share increased by 49% to $0.52 from 35% -- $0.35 in the first quarter of 2020.
The company continues to be an excellent generator of cash.
Cash flow from operations was $321 million in the first quarter or 97% of GAAP net income.
And net of capital spending, our free cash flow was $243 million or 74% of net income.
From a working capital standpoint, inventory days, days sales outstanding and payable days were 85, 73 and 59 days, respectively, all within their normal ranges.
During the quarter, the company repurchased 2.4 million shares of common stock for approximately $153 million.
And during the month of April, the company repurchased a small amount of remaining stock authorized under our existing stock repurchase plan.
The elevated level of cash on hand at the end of the first quarter was driven by borrowings under the company's U.S. commercial paper program in anticipation of the MTS closing in early April.
Total debt was $4.6 billion, and net debt was $2.3 billion.
Total available liquidity at the end of the quarter was $4.1 billion, which included total cash and short-term investments on hand.
First quarter 2021 EBITDA was $559 million, and our net leverage ratio was 1.0 times.
Following the close of the quarter, on April 7, we completed the acquisition of MTS, which Adam will discuss in more detail in a moment.
The MTS acquisition was funded by a combination of cash and cash equivalents on hand as well as additional borrowings under the company's U.S. commercial paper program.
On a pro forma basis, including the MTS acquisition and the anticipated divestiture of the test and simulation business, total available liquidity and net leverage at March 31, 2020 would be $3.2 billion and 1.4 times, respectively.
Until the divestiture of the MTS test and simulation business has closed, we will account for and report the test and simulation business as a discontinued operation.
As such, the expected sales and earnings of the test and simulation business are not included in our guidance.
Our guidance also excludes cash and noncash expenses that will be expensed in the second quarter related to the MTS acquisition.
These expenses, which we expect to total approximately $85 million or $0.12 per share, include costs related to the early extinguishment of debt, noncash purchase accounting-related expenses, external transaction expenses, severance and other costs.
In conjunction with the divestiture of the test and simulation business, the company will also incur certain additional cash tax-related and other acquisition-related costs, which will not be included in income from continuing operations.
Our guidance does incorporate the expected results of the MTS Sensors business, which as previously announced, is expected to generate $350 million in sales and $0.05 in diluted earnings per share in the first 12 months after closing.
And I certainly hope that you, your family, your friends and all of your colleagues are continuing to stay safe and healthy.
As Craig mentioned, I'm going to highlight some of our achievements in the first quarter.
I'll then discuss our trends and our progress across our diversified served markets.
And then finally, I'll make a few comments on our outlook for the second quarter.
And of course, we'll have time for Q&A at the end.
Our results in the first quarter were substantially better than we had expected coming into the quarter as we exceeded the high end of our guidance in sales as well as adjusted diluted earnings per share.
Sales grew a very strong 28% in U.S. dollars and 25% in local currencies.
And on an organic basis, sales increased by 23%.
And we had organic growth in nearly all of our end markets and driven particularly by growth in the automotive, mobile devices, industrial and IT datacom markets.
And I'll talk about each of those markets in a few moments.
Craig mentioned, we booked record orders in the quarter of $2.734 billion, and that represented a very strong book-to-bill of 1.15:1.
Despite continuing to face a range of operational challenges related to the ongoing pandemic as well as increased costs related to commodities and supply chain pressures, our operating margins were very healthy in the quarter, reaching 19.6%, which was a 260 basis point increase from last year's levels.
Craig mentioned our adjusted diluted earnings per share grew a very robust 49% from prior year, which is again an excellent reflection of the Amphenol organization's strong execution.
We generated operating and free cash flow of $321 million and $243 million in the first quarter, respectively, both clear reflections of the high quality of the company's earnings.
I just want to say how proud I am of our team this quarter.
And our results once again reflect the discipline and agility of our entrepreneurial organization as we continue to perform well amid the very dynamic and challenging environment.
And I'd like to make a few comments on our acquisitions in the quarter.
First, as we announced on April 7, we were very pleased to close on the acquisition of MTS Systems earlier than originally anticipated.
Also, as previously announced, we had signed an agreement to sell the MTS test and simulation business to Illinois Tool Works for a sale price of $750 million.
And that is -- that remains subject to certain post-closing adjustments and excludes transaction-related expenses.
We expect this sale to close following the receipt of all required regulatory approvals.
We especially look forward to the strength of the combined breadth of our company's highly complementary sensor product portfolios, which, we believe, will enable us to offer our customers an expanded array of innovative technologies across multiple end markets.
We expect the MTS Sensors business to add approximately $350 million of sales and $0.05 in adjusted diluted earnings per share in the first 12 months after closing.
More importantly, though, we look forward to realizing the long-term benefits of the opportunities created by the collective strengths of Amphenol and MTS Sensors for many years to come.
We're truly excited about this significant acquisition, which ultimately has positioned Amphenol as one of the broadest and most diversified sensor companies in the industry.
In addition to the MTS acquisition, we also closed on two other small acquisitions during the first quarter.
In February, we acquired Euromicron, a manufacturer of highly engineered fiber optic interconnect solutions for the mobile networks and IT datacom markets.
Based in Germany, with annual sales of approximately $25 million, Euromicron represents a great addition to our interconnect product offering for customers across the European communications market.
And then in March, we completed the acquisition of Cabelcon from Corning Inc. Cabelcon, which also has sales of approximately $25 million, is a Denmark-based designer and manufacturer of high-technology connectors and interconnect assemblies, primarily for customers in the European broadband market.
Our ability to identify and execute upon acquisitions and then to successfully bring these new companies into Amphenol remains a core competitive advantage for the company.
Now turning to our trends across our served markets.
I would just comment that we remain very pleased that the company's balanced and broad end market diversification continues to create great value.
We believe this diversification mitigates the impact of the volatility of individual end markets while continuing to expose us to leading technologies wherever they may arise across the electronics industry.
This diversification has become ever more valuable given the many market dynamics related to the COVID-19 pandemic.
Now turning first to the military market.
The military market represented 11% of our sales in the quarter.
And as we had expected coming into the quarter, sales grew by 3% from prior year and were essentially flat organically with growth in naval, unmanned aerial vehicles, communications and vehicle ground systems, offset by declines or flat performance in other applications.
Sequentially, our sales were modestly down by about 3%.
Looking into the second quarter, we expect sales to grow in the low double digits from these first quarter levels as we benefit from the addition of MTS Sensors together with the increased demand for interconnect products.
We're especially excited by the addition of the sensors products of MTS to our military product offering.
Together with our already leading interconnect products as well as our broad exposure across virtually all defense programs, we look forward to supporting the continued adoption of next-generation electronics into a wide array of military hardware.
The commercial aerospace market represented 2% of our sales in the quarter.
And not surprisingly, and as expected, sales were down significantly, declining by 47% from prior year as the commercial aircraft market continued to experience unprecedented declines in demand for new aircraft due to the ongoing pandemic-related disruptions to the global travel industry.
Sequentially, our sales were a bit better than expected, moderating by just 3% from the fourth quarter.
And looking into the second quarter, we do expect a sequential improvement in sales as we benefit from our recently completed acquisitions.
Regardless of the ongoing challenging environment in commercial air, our team working in this market remains committed to leveraging the company's strong interconnect and sensor technology position across a wide array of aircraft platforms and next-generation systems integrated into those airplanes.
The industrial market represented 24% of our sales in the quarter.
Sales in industrial in the first quarter were better than expected, growing a very strong 33% in U.S. dollars and 33% organically.
This was driven by robust growth in battery and electric heavy vehicle applications, rail mass transit, heavy equipment, instrumentation, factory automation, alternative energy and medical, really a broad performance across many of the segments.
On a sequential basis, sales grew by a better-than-expected 6% versus the fourth quarter.
Looking into the second quarter, we expect the industrial market to once again grow in the low teens versus the first quarter.
And as we benefit from the addition of MTS Sensors, while continuing to gain momentum in many segments of the industrial market.
The acquisition of MTS Sensors has expanded our range of sensors sold into the industrial market, adding position, vibration, force and shock sensors that are used in a wide array of industrial applications.
Together with our existing sensor operations, we now have a diversified range of sensors supporting virtually all of the segments of the industrial market that we serve.
I remain truly proud of our team working across the industrial market around the world.
Our high-technology interconnect antenna and sensor offering positions us strongly with customers who are accelerating their adoption of electronics, no matter the application.
The automotive market represented 22% of our sales in the quarter, and sales in this market were also much stronger than we expected, growing 52% in U.S. dollars and 44% organically, as our team was able to execute strongly in the face of a robust and broad recovery in the automotive market.
In particular, we saw very strong growth of our products that are used in electric and hybrid electric vehicles in the quarter.
A great confirmation of our global team's long-term efforts at designing in high-voltage and other interconnect and sensor products into these important next-generation platforms.
Sequentially, our sales increased by 6% from the fourth quarter.
Now as has been widely reported, there are a variety of supply chain challenges facing the automotive industry.
Accordingly, as we look toward the second quarter, we do expect a modest sequential decline in sales as the global supply chain disruptions temporarily impact certain pockets of new vehicle production.
I'm extremely proud of our team working in the automotive market.
They have really demonstrated their agility and resiliency through these most turbulent times and thereby, have secured the company's position with our customers across the automotive market.
We look forward to benefiting from their efforts long into the future.
The mobile devices market represented 12% of our sales in the quarter.
Sales in this market increased by a better-than-expected 51% from prior year, with strength across all product types, including particularly in wearables and laptops.
Sequentially, our sales declined by 35%, which was a bit better than our expectations coming into the quarter and is within the typical range of first quarter seasonality that we have seen traditionally in the mobile devices market.
Looking at the second quarter, we anticipate a further high single-digit sequential sales decline, which is also not atypical for this market in the second quarter.
While mobile devices will always remain one of our most volatile markets, our outstanding and uniquely agile team is poised as always to capture any opportunities for incremental sales that may arise in 2021 and beyond.
Our leading array of antennas, interconnect products and mechanisms continues to enable a broad range of next-generation mobile devices, thereby positioning us well for the long term.
Now turning to the mobile networks market.
This market represented 6% of our sales in the quarter, and sales did grow from prior year by 4% in U.S. dollars and 1% organically, as strength from products sold to OEMs was offset in part by a moderation of our sales to network operators.
We were encouraged, though, to realize a better-than-expected sequential growth of 19% in the mobile networks market in the quarter as mobile network operators increased their spending on next-generation networks.
Looking to the second quarter, we do expect a modest increase in sales from these first quarter levels, helped by the addition of Euromicron, which expands our offering for mobile networks operators in Europe and positions us well to support future network upgrades.
Our team continues to work aggressively to expand our position in next-generation equipment and systems around the world.
And as our customers ramp up the investment of these advanced networks, we look forward to benefiting from the increased potential that comes from our unique position with both original equipment manufacturers as well as mobile network service providers.
The information technology and data communications market represented 19% of our sales in the quarter.
Sales in the quarter were stronger than expected, rising 25% in U.S. dollars and 24% organically from prior year, really on broad-based strength across networking, storage and server applications.
While we had expect sales to decline coming out of the fourth quarter, we were pleased to realize actually a sequential growth of 6% as customers continue to increase their demand for our high-technology products, use service providers and in data centers around the world.
Looking to the second quarter, we expect a further increase of sales in the mid-single digits from these levels as customer demand continues to accelerate.
We remain very encouraged by the company's outstanding technology position in the global IT datacom market.
Our customers around the world, no doubt about it, are continuing to drive their equipment to ever higher levels of performance in order to manage the dramatic increases in demand for bandwidth and processor power.
In turn, our team remains singularly focused on enabling this continuing revolution in IT datacom with our unique, high-speed, power and other interconnect products.
Finally, the broadband market represented 4% of our sales in the quarter, and sales grew by a very strong 16% from prior year as broadband spending levels remained elevated.
On a sequential basis, sales grew slightly from the fourth quarter.
We do expect a high-teens sequential sales increase in the second quarter as customers continue to upgrade the capacity of their networks to support the significant increase in demand for bandwidth and as we benefit from our recent acquisitions, including Cabelcon.
The addition of Cabelcon expands our offering for broadband customers in the European market, which enables us to provide a more diversified range of products for their next-generation networks and the related upgrades.
We look forward to continuing to offer this expanded product offering to broadband service operators around the world, all of whom are working to increase bandwidth to support the expansion of high-speed data applications to homes and businesses.
Now turning to our outlook, and given the current still dynamic market environment as well as assuming no new material disruptions from the COVID-19 pandemic and constant exchange rates.
For the second quarter, we now expect sales in the range of $2.415 billion to $2.475 billion and adjusted diluted earnings per share in the range of $0.53 to $0.55.
This would represent strong sales growth of 22% to 25% and adjusted diluted earnings per share growth of 33% to 38% compared to the second quarter of last year.
And I would just note that the second quarter of last year, as you will recall, was already a strong recovery quarter for the company coming out of the first quarter.
I remain confident in the ability of our outstanding management team to adapt to the ongoing challenges that are in the marketplace and to capitalize on the many future opportunities to grow our market position and expand our profitability.
The entire Amphenol organization remains committed to delivering long-term sustainable value, all while prioritizing the continued safety and health of each of our employees around the world.
And with that, operator, we'd be happy to take whatever questions there may be.
| q1 adjusted earnings per share $0.52.
q1 gaap earnings per share $0.53.
q1 sales $2.377 billion.
sees q2 adjusted earnings per share $0.53 to $0.55 from continuing operations.
sees q2 sales $2.415 billion to $2.475 billion.
sees q2 sales up 22 to 25 percent.
on april 27, 2021, co's board approved a new three-year, $2 billion open market stock repurchase plan.
|
They involve risks, uncertainties and assumptions and there can be no assurance that actual results will not differ materially from our expectations.
For a discussion of these risks and uncertainties, please see the risks described in our most recent Annual Report on Form 10-K and subsequent filings with the SEC.
I'll give some brief comments before turning the call over to our Chief Investment Officer, Brian Norris to discuss the current portfolio in more detail.
After a tumultuous start to the year brought on by the impact of the COVID-19 pandemic, the financial markets continue to recover during the third quarter.
At IVR, we have made tremendous progress in implementing our Agency MBS focused strategy and opportunistically reducing our exposure to credit assets.
For the quarter core earnings came in at $0.06 share, exceeding our recently increased dividend of $0.05.
Book value is $3.47 at quarter end, which represents an increase of about 9.5% for the quarter.
The combination of the increased dividend and our book value appreciation produced an economic return of 11% for the quarter.
The improvement in book value has continued since quarter-end, as we estimate that book value is up approximately 6% since quarter-end through last Friday.
During the quarter, we purchased $5.6 billion in specified pool agencies and invested an additional $900 million in Agency TBAs.
This brought our allocation to agency mortgages up to 93% of assets and 60% of equity.
We also reduced our credit exposure significantly selling $1.1 billion of credit assets, while repaying the remaining balance of our secured loans that were collateralized by credit.
This leaves us with a notably smaller credit portfolio that is completely unencumbered.
As you look out over the next several quarters, our outlook is quite constructive.
We have continued to make progress in reallocating the portfolio during October, as additional credit sales combined with agency investments will continue to improve our earnings power.
We remain positive on agency mortgages, as we expect demand from the Federal Reserve and commercial banks to remain strong.
While the economic outlook remains uncertain, we expect to Fed to remain supportive by continuing large-scale asset purchases and by keeping short-term interest rates low for the foreseeable future.
Post-election, we expect interest rate volatility to remain subdued, which is also supportive of agency mortgage assets.
Increased levels of prepayments remain a potential headwind, but our focus on purchasing specified pool collateral helps to mitigate that risk.
I'll stop here, and let Brian go through the portfolio.
I'll begin on Slide 4, which summarizes our Agency RMBS assets and trading activity during the third quarter.
Consistent with the strategic transition we've communicated since June, we purchased $5.6 billion of Agency RMBS specified pools during the quarter.
Strong demand for our credit assets provided opportunities for dispositions at attractive prices, freeing up capital for allocation to the agency-focused strategy.
As detailed on the chart on the top left, we were able to source attractively priced new issue collateral stories, including loan balance, low FICO, high LTV and geo pools, which consists exclusively of borrowers in slower paying states such as New York, Florida and Texas.
We also focus a significant portion of our purchases on new production pools originated and serviced exclusively by banks in order to mitigate our exposure to pay-up premiums, while benefiting from improved prepayment protection relative to non-bank originators and servicers.
While pay-ups on our specified pool holdings range from less than a 0.25 point up to 4 points, the weighted average pay-up on our portfolio was approximately 1.25 points, representing approximately $70 million of market value at quarter end.
We believe low mortgage rates and historically fast prepayment speeds should continue to keep pay-up premiums near current levels, as strong demand for prepayment protection support valuations.
All purchases in the quarter consisted of 30-year collateral with coupons ranging from 1.5% to 3%, with the majority in 2s and 2.5s, as indicated in the chart on the bottom left.
Given our expectation for continued pressure on prepayment speeds at mortgage rates fell to all time lows, we focused our purchases on lower coupon pools, which typically experienced experienced slower prepayments due to lower mortgage rates on the underlying loans and benefit from lower purchase prices which reduces the negative impact of prepayments.
In addition, these coupons have been targeted by the Federal Reserve as a part of their bond purchase program, the valuations also benefit from positive supply and demand technicals.
Our specified pools paid only 1.8% CPR during the quarter, reflective of the focus in newly issued lower coupon pools, given mortgage loans tend to pay slowly in the months immediately after after closing, before prepayments typically begin to ramp higher around month six.
This dynamic benefited the performance of our Agency RMBS pools during the quarter as the weighted average yield was an impressive 1.91%.
The prepayment protection in our specified pools and active management should lessen the impact of faster prepayment speeds due to further seasoning of our holdings in the months ahead.
In addition, we added $900 million notional in agency TBA contracts, given the attractive implied financing rates and hedged carry available in the forward market for Agency RMBS, due to the significant demand from the Federal Reserve and commercial banks for lower coupon pools.
Given the current attractiveness of certain TBA contracts due to this favorable technical environment, we expect our investments in Agency TBA to grow commensurate with the growth in our overall assets, as we continue to implement our agency-focused strategy.
Turning to Slide 5, and as John mentioned, we made significant progress in reducing our credit exposure during the quarter.
Demand for our credit assets was robust, and the notable improvement in valuation drove the majority of our gain in book value.
In particular, higher quality CMBS was the beneficiary of the June launch of the TALF program, as spreads tightened dramatically in the AAA and AA rated assets we financed at the Federal Home Loan Bank through our captive insurance subsidiary.
Substantial credit dispositions at attractive valuations allowed us to pay off our secured loan at the FHLB in August, and redeploy capital into Agency RMBS investments, which further improved the earnings power of the portfolio, allowing us to increase our third quarter dividend to $0.05.
Slide 5 details the seasoning and senior capital structure positioning of our remaining credit investments as of September 30.
As shown in the chart on the left, our credit assets consist of predominantly seasoned investments with over 80% of our holdings issued prior to 2015.
In addition to the benefits of seasoning, given the improvement in property valuations over the past five years, our CMBS credit holdings also benefit from substantial credit enhancement, as detailed in the chart on the right, with over 82% of our holdings maintaining at least 10% of credit support.
In addition 69% of our remaining credit investments are rated A or higher.
We've been encouraged by the renewed investment demand for CMBS, which has led to spread tightening and contributed to book value appreciation.
The pace of spread tightening slowed over recent weeks however, as increasing concerns related to the COVID-19 pandemic combined with heavy focus on the U.S. election dampened investor demand.
We believe yesterday's positive announcements regarding the timing and efficacy of the vaccine should prove beneficial for our credit holdings, as the global economy continues to navigate the pandemic.
Regardless of near-term headlines, we believe our bonds are well positioned for long-term incremental spread tightening given the notable subordination detailed on Slide 5 and favorable supply and demand dynamics.
Slide 6 details the growth of our funding and hedge book during the third quarter as shown in the chart on the upper left.
After paying off our secured loans at the FHLB in August, all of our remaining credit holdings were held on an unlevered basis, eliminating the mark-to-market funding risk on that portion of our book.
Repurchase agreements collateralized by Agency RMBS grew to $5.2 billion as of September 30 and hedges associated with those borrowings also grew during the quarter to $4.6 billion notional of fixed-to-floating interest rate swaps.
Interest rates on our borrowings drifted lower during the quarter and that settled in near 0.2%, and we took advantage of historically low interest rates further out the yield curve to lock-in low funding cost to be a longer maturity interest rate swaps, given the potential for a steepening yield curve as the Federal Reserve keeps short-term rates anchored for the foreseeable future.
Our economic leverage, when including TBA exposure increased to 5.1 times debt-to-equity as of September 30, indicating significant progress toward the transition to the agency-focused strategy.
Given notable changes in the portfolio since quarter-end, Slide 7 summarizes the progress we made in continuing to transition the portfolio through the end of October.
Demand for our credit assets continued during the month, as we were successful in disposing of $112 million of credit exposure at attractive valuations.
These sales provided further opportunities to continue the ramp in Agency RMBS, as we purchased $1 billion of specified pools and an additional $300 million notional in Agency TBA contracts, bringing our total to $6.5 billion of pools and $1.2 billion of TBA.
Our borrowings and hedging grew commensurate with these purchases, with repurchase agreements of $6.2 billion hedged with $5.2 billion notional of interest rate swaps at month end.
As noted on Slide 7, our liquidity position remains substantial, with $351 million of unlevered credit investments in addition to $340 million of unrestricted cash, combining to represent approximately 8.5% of our investment portfolio.
The Agency RMBS market continues to be well supported by the Federal Reserve purchase program as well as significant commercial bank demand.
And our credit assets continue to recover from the impact of the COVID-19 pandemic and March's liquidity crisis.
While the prepayment environment in Agency RMBS remains challenging, we believe our careful selection of prepayment protection and active management will mitigate the negative impact of what has become a highly efficient process for mortgage loan refinancings.
Lastly, monetary policy remains very supportive.
We expect that to continue well into 2021 as the Federal Reserve communicates a desire to maintain an accommodative stance over the medium term.
And now, we will open the line for Q&A.
| q3 core earnings per share $0.06.
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Before we begin, I want to mention that we'll be referring to slides, which can be viewed in the investor relations section on nordstrom.com.
Participating in today's call are Erik Nordstrom, chief executive officer; Pete Nordstrom, president and chief brand officer; and Anne Bramman, chief financial officer, who will provide a business update and discuss the company's fourth quarter performance.
Our fourth quarter results were marked by sequential sales improvement, strong digital growth, improved profitability, and continued progress in executing on our long-term strategy.
Looking back on the fiscal year, revenue increased 38% versus 2020 and we delivered an EBIT margin of 3.4%, in line with our guidance.
Importantly, we've made progress on our strategic initiatives and have line of sight to achieving, in the coming year, the financial targets we presented at our 2021 Investor event.
Our team continues to work with urgency to build additional capabilities to better serve customers, expand market share, and deliver greater profitability.
We are laser focused on the three key areas we outlined in the third quarter: improving Nordstrom Rack performance, increasing profitability and optimizing our supply chain and inventory flow.
Starting with Nordstrom Rack.
Last quarter, we undertook a thorough analysis of the business and developed prescriptive plans to optimize the customer experience and improve our performance.
As we raised inventory levels and improved average price points in our stores, we posted a sequential sales improvement of 320 basis points in the fourth quarter.
Though we are in the early stages of implementation, the Rack results and improving store customer satisfaction scores reaffirm our confidence in the plans we've outlined.
Nordstrom Rack is a unique mix of brands with limited distribution in the off-price sector.
Customers are drawn to the Rack to purchase sought-after brands at a terrific price.
Rack faces a unique challenge as off-price procurement of the same top brands that we carry at Nordstrom is particularly difficult in the current environment with production constraints and lower levels of clearance product.
As a result, we are executing a multilayered plan to both expand our offerings of the most coveted brands we carry as well as source from new vendors to ensure we have the selection our customers want.
In Q4, we improved our in-stock position at the Rack by increasing the flow of inventory, making more frequent deliveries to our stores, partnering with brands to prioritize Rack deliveries and focusing our sourcing efforts on core categories that matter most to customers such as shoes and apparel.
We're also increasing our opportunistic use of pack and hold inventory, allowing us to buy larger quantities of select relevant items when available then hold a portion of it to deploy in periods with high demand, tight supply, or system constraints.
As we improve our supply of premium brands and fine-tune our assortment to better align with customer needs, we expect to achieve a better balance of price points at the Rack.
Finally, we are taking action to strengthen Rack's brand awareness and drive traffic.
We are pleased with the results of our more reasons to Rack marketing campaign, which showed a meaningful increase in future purchase intent.
Through this comprehensive set of actions, we anticipate continued improvement in Rack performance throughout fiscal 2022.
To be clear, we are confident in our ability to profitably grow our Rack business and won't be satisfied until we do so.
We delivered significant improvement in merchandise margin this quarter.
Pete will take you through our progress to date and our plans to deliver incremental improvement in 2022 through strategic pricing and category management.
Within SG&A, we rationalized our overhead cost structure in 2020 and remain committed to sustaining our expense discipline.
Given the significant macro-related pressure in fulfillment and labor costs that we're facing currently, the team is taking action to mitigate the overall impact from those pressures, including optimizing our supply chain to drive efficiencies.
We expect that the supply chain optimization work streams we began implementing this quarter will enhance the customer experience and drive top line growth while also driving efficiencies in labor and fulfillment in 2022.
Pete will provide more detail on our plans for supply chain improvement in a moment.
Turning to fourth quarter performance.
In addition to sequential improvement in our Rack banner, we saw strong enterprise digital growth of 23% versus 2019 and increased utilization of the interconnected capabilities delivered by our market strategy.
Nordstrom banner sales were flat, while gross merchandise value, or GMV, increased 2% in the fourth quarter versus 2019.
We continue to see significant disparity in geographic performance.
The Southern U.S., where 44% of our stores were located, was a source of strength for the Nordstrom banner, outperforming the Northern U.S. by approximately 7 percentage points.
Notably, suburban locations outperformed our urban locations by 10 percentage points in the fourth quarter as city centers have been disproportionately impacted by the effects of the pandemic.
In addition to the three focus areas that I've discussed, the team continues to make progress in the key strategic growth priorities we laid out at our investor event last year, winning in our most important markets and increasing our digital velocity.
Starting with our priority to win in our most important markets.
We are leveraging a strong store fleet that positions us physically closer to the customer.
Our strategy links our omnichannel capabilities at the local market level, allowing us to drive customer engagement through better service and greater access to product no matter how customers choose to shop.
This platform is a unique differentiator, delivering unmatched convenience and providing customers with four times more product available for next-day pickup, a one-day reduction in average shipping time and the ability to pick up orders at the Nordstrom, Nordstrom Local, or Nordstrom Rack location of their choice.
We continue to scale the enhanced options we launched in 2020, like the expansion of order pickup and ship to store to all Nordstrom Rack locations with order pickup reaching a record high 11% of Nordstrom.com sales this quarter.
And one-third of next-day Nordstrom.com demand was picked up at Rack stores, demonstrating the power of integrating capabilities across our two banners and across our digital and physical platforms.
We are encouraged by increases in order pickup demand, a leading indicator of future growth as customers utilizing in-store pickup have higher engagement and spend three and a half times more than customers who don't utilize the service.
Increasing Buy Online, Pick Up In-Store utilization is advantageous as it is both our highest satisfaction customer experience and most profitable customer journey.
Customers clearly value the strength of our omnichannel model as evidenced by a dramatic increase in spend when they engage across our multiple channels, banners, and services.
For example, the average customer that shops across both banners, in-store and online spends over 12 times more than a customer utilizing a single channel and banner.
We also continue to evolve our approach to get closer to our customers than ever before, building deeper connections through our loyalty program and differentiated service model.
Our Nordy Club loyalty program is a powerful engagement driver with 67% sales penetration in 2021.
Our core customers remain highly engaged with loyalty customer accounts exceeding 2019 levels.
We're also pleased to see customers responding well to our assortment and services with new customer acquisition activity returning to 2019 levels.
We continue to advance our digital tools, including virtual style boards and style links to allow our salespeople to offer our customers highly relevant recommendations, both in-store and digitally.
This year, remote selling sales volume increased 63% versus last year.
We're encouraged by the results of this program with very high customer satisfaction scores and average customer spend over six times that of an average Nordstrom customer.
With regard to increasing our digital velocity, we maintained strong growth at Nordstrom.com and NordstromRack.com this quarter with digital sales increasing 23% over the fourth quarter of 2019.
With continued growth in digital, our total penetration has increased by 9 percentage points over the past two years to 44%.
In the fourth quarter, we also saw a record high mobile app usage with mobile users representing approximately 70% of total digital traffic.
Though we still have much work to do on our transformation, progress we've made gives us confidence in our strategic plans and business outlook for 2022.
We believe there is a meaningful opportunity ahead for us to better serve customers by improving Rack performance and transforming our supply chain, leading to increased profitability and shareholder value creation.
We have line of sight to achieving the financial targets outlined at our 2021 Investor event while building the capabilities to profitably grow market share beyond that.
We look forward to sharing our continued progress in the quarters ahead.
Our people are truly our greatest asset.
I'd like to talk about our category performance during the fourth quarter then follow with an update on our initiatives to increase gross margin, improve supply chain and inventory flow, and transform our merchandising model.
Starting with the category performance.
We were pleased to see continued strength in our luxury categories in the fourth quarter with designer and fine jewelry posting strong double-digit growth over 2019.
Beauty also had a double-digit increase driven by strong growth in our Nordstrom banner and the launch of an expanded offering in the Rack.
And pandemic-related categories continued to outperform, particularly home and active with sales up 52 and 22%, respectively, compared to 2019 levels.
Our core categories in apparel and shoes, which collectively make up more than 70% of our business, are not quite back to 2019 levels but they are recovering.
We saw signs of renewing customer interest in post-pandemic occasion-based categories with improving trends in dresses, men's sportswear, outerwear, and women's shoes.
Now on to our initiatives.
We believe we have a meaningful opportunity to improve both the customer experience and our financial outcomes through our efforts around merchandising and inventory flow.
This quarter, we made significant progress improving our merchandise margin versus 2019.
As we enter the holiday season, our team focused on driving sales and engaging customers through our compelling holiday offering while also increasing profitability.
Leveraging advanced analytical tools, we identified opportunities to expand holiday gifting and increase our promotional effectiveness by optimizing the pace and depth of markdowns.
We're very encouraged by the results with merchandise margins up 235 basis points over 2019, and we see more opportunity to drive additional margin improvements in '22.
To provide the best possible assortment for our customers, we are also using a data-driven, customer-centric approach to optimize our category management.
Through this work, we are defining the role of each category at Nordstrom and Nordstrom Rack and then optimizing our assortment for the role each category plays.
Our goal is to attract new customers, increase share of wallet with existing customers, and improved merchandise margins by focusing on the most highly sought-after items.
Women's Denim is a great example of the potential in our category management work.
Denim has always been an important category for our customers and a strong performer for us too.
But our analysis highlighted an opportunity to lean into it as more of a destination category.
In response to our analysis, we increased inventory depth for the most highly sought-after jeans to ensure that we are in-stock for our customers, piloted a dedicated in-store Women's Denim shop to better highlight our extensive selection and make it easier to shop, and planned a campaign aligned with April's Earth Month to showcase a curated group of denim brands with a focus on sustainability.
We are very pleased with the initial results we've seen with our category management initiative and plan to build on this momentum in 2022.
While we continue to develop these merchandising capabilities, we're simultaneously focused on improving our supply chain and inventory flow.
We've all been dealing with global supply chain disruptions for a while now with product scarcity, order cancellations, and shipment delays.
Entering the fourth quarter, we took an aggressive approach to securing product for the holiday season and early spring.
This helped to ensure that we are in stock for our customers.
However, these supply chain challenges have recently begun to improve a bit, and order cancellations weren't as significant as we anticipated.
As a result, our ending inventory was higher than planned but we expect to cut our sales to inventory spread in half by the end of the first quarter.
We've learned a lot from our experience navigating pandemic-related supply chain disruptions and revolving our network processes and capabilities across several fronts.
First, improving the consistency and predictability of unit flow through our network; second, improving velocity and throughput in our distribution and fulfillment centers; third, increasing delivery speed; and finally, expanding the selection for in-store shopping as well as same day and next day pickup.
These actions will improve the customer experience, increase sell-through, and reduce markdowns by allowing us to place the right assortment with the right depth closer to the customer.
They will also help us improve our expense efficiency.
We expect to see benefits from these actions beginning in the first half of fiscal 2022 with more to follow in the second half.
As we look ahead, we are excited about the ongoing transformation of our business and our plans to deliver enhanced experiences to our customers and value to our shareholders.
We continue to scale our Nordstrom Media Network, which allows our brand partners to directly connect with Nordstrom customers through on and off-site media campaigns to increase traffic, sales, and engagement.
We grew the concept in 2021 with some of our best brands, and we're pleased with the value it brought to our customers and partners.
We look forward to expanding this program over the next two to three years.
We are also delivering newness, selection and inspiration to our customers by partnering with brands in new ways.
Our alternative partnership models have gained approximately 300 basis points as a percent of Nordstrom banner GMV since 2019, reaching 10% today.
We launched over 300 new brands in partnerships this year, including Open Edit, Farm Rio, Fanatics, and ASOS DESIGN.
We also grew and scaled top brands through 2021, including Nike, Ugg, Tory Burch, Adidas, Free People, and Luxottica.
We've also scaled brands that started out as direct-to-consumer partners such as SKIMS, On Running, LL Bean, Good American, and Vuori.
And we continued to grow our business in designer and luxury brands, including Chanel, Gucci, Saint Laurent, Dior, and Burberry.
After growing choice count by 50% this year, we entered 2022 with record-high selection.
We'll continue to significantly expand our choice count, leveraging our category management process and enhanced analytics to deliver a curated, relevant assortment that attracts new customers while expanding wallet share with our existing customers.
In closing, as we enhance our capabilities, the customer remains at the center of our work.
We are transforming our approach and leveraging deeper insights to give the customer more choices while increasing relevance and profitability.
As we improve our supply chain and merchandising ecosystems, we'll deliver a better experience through faster and more flexible fulfillment, providing newness at the right price with the right quantities where and when our customers want it, all while improving our agility and productivity.
I'd like to begin with a review of our results, then take you through our outlook for fiscal 2022.
Overall, net sales increased 23% in the fourth quarter compared to the same period in fiscal 2020, and decreased 1% compared to the same period in fiscal 2019.
Total revenue finished the year up 38%, in line with our guidance.
In the fourth quarter, Nordstrom banner sales were flat while GMV increased 2%.
As alternative vendor partnership models have become a more significant portion of the business, GMV provides an additional measure of our top line performance.
Nordstrom Rack sales declined 5% in the fourth quarter, a sequential improvement of 320 basis points over the third quarter as we raised inventory levels and improved average price points in our stores.
And as Erik mentioned, we are executing a multilayer plan to improve Rack's performance and capture market share in the off-price sector.
Our digital business continues to grow with fourth quarter sales increasing 23%.
Gross profit as a percentage of net sales increased 340 basis points primarily due to increased promotional effectiveness, fewer markdowns, and leverage in buying and occupancy costs.
Ending inventory increased 19%, with approximately half of the inventory increase due to planned investments to ensure in-stock merchandise availability.
As Pete indicated, we plan to reduce our sales to inventory spread by half by the end of the first quarter.
Total SG&A as a percentage of net sales increased 340 basis points in the fourth quarter as a result of continued macro-related fulfillment and labor cost pressures.
We made purposeful investments in both store and fulfillment center staffing as we prioritize serving our customers and navigating the continued COVID-related disruption.
These increased expenses were partially offset by continued benefits from resetting the cost structure in 2020 and a $32 million noncash asset impairment charge in 2019.
EBIT margin was 6.8% of sales for the fourth quarter, an improvement of 10 basis points.
For the year, EBIT margin was 3.4%, toward the high end of our guidance.
We continue to strengthen our financial position, ending the year with $1.1 billion in liquidity, including $800 million fully available on our revolver a leverage ratio of 3.2 times.
Now turning to our outlook for fiscal 2022.
I'll begin by outlining the macroeconomic assumptions underlying our projections.
We expect that wage growth and higher employment levels will support consumer spending in 2022.
Potential headwinds include the impact of inflation, which could reduce overall discretionary income, and geopolitical risk to the economy and financial markets.
We are seeing encouraging early signs of a resumption of activities such as travel, in-person social events, and return to office after being delayed by the omicron variant.
At the same time, we continue to be prepared for the potential of further pandemic-related disruptions in consumer behavior and global supply chain.
Taking all these factors into consideration, we are assuming a roughly even balance of upside and downside macroeconomic risk relative to current conditions and are planning accordingly.
Our 2022 outlook reflects our plans to drive top line growth through our interconnected digital and physical assets and deliver continued improvement in Nordstrom Rack performance.
As we derive more benefits from our pricing and category management improvements as well as planned mid-single-digit average retail price increases, we expect continued merchandise margin improvement.
Finally, we plan to partially offset inflationary freight and labor costs with greater productivity from the actions we were taking to optimize our supply chain.
Today, we are providing our fiscal 2022 business outlook with comparisons to 2021.
For the fiscal year 2022, we expect revenue growth of 5% to 7%.
We anticipate that seasonality between the first and second half of the year will be consistent with pre-COVID levels, resulting in higher year-over-year growth rates in the first half as we lap softer comparisons from early 2021.
We also expect that year-over-year sales growth will be roughly consistent between Q1 and Q2, with the anniversary sales shifting back to the second quarter.
We expect EBIT margin of approximately 5.6 to 6% for the full year.
We anticipate that EBIT margin improvements will also be consistent between the first and second half of 2022 as a result of increased operating leverage, improvements in gross and profit margins and greater expense efficiencies.
Our plan assumes that first quarter EBIT will be slightly better than breakeven.
Our effective tax rate is expected to be approximately 27% for the fiscal year.
Given solid top line growth, coupled with progress on our productivity initiatives, we expect diluted earnings per share of $3.15 to $3.50 for the year, which excludes the impact of share repurchases, if any.
Turning now to capital allocation.
Our first priority is investment in the business to serve our customers and deliver the highest quality experience.
We're planning capital expenditures at normalized levels of 3% to 4% primarily to support supply chain and technology capabilities.
Our second priority is reducing our leverage.
We are committed to an investment-grade credit rating and remain on track to decrease our leverage ratio to approximately 2.5 times by the end of 2022.
Our third priority is returning cash to shareholders.
Subject to completion of our year-end audit and the related certification process with our bank group, we expect to be in a position to resume returning cash to shareholders in the first quarter.
We anticipate completing that process by mid-March and discussing with our board shortly thereafter the resumption of a quarterly dividend at an appropriate rate.
As you've heard today, we delivered results in line with our guidance and demonstrated progress against our strategic initiatives.
We now have a clear line of sight to achieving our investor event targets in the coming year.
Though there is more work ahead, the early indicators we're seeing was improving Rack performance and increased merchandise margin give us confidence in our plan.
We also made significant progress on our merchandising strategies throughout 2021.
Choice count is now at an all-time high with more than 300 new brands launched last year in growth and alternative partnership model, all of which position us to grow sales by delivering newness, selection and inspiration to our customers.
Our stores and fulfillment centers are fully staffed and ready to serve customers no matter how they want to shop.
We continue to act with a sense of urgency to achieve greater profitability and cash flow as we optimize across platforms and drive scale.
In closing, we remain excited about the future of our business, the work ahead and our ability to deliver significant shareholder value over the long term.
We'll now move to the Q&A session.
| expects fiscal 2022 earnings per share of $3.15 to $3.50.
qtrly sales in the home, active, designer, beauty and kids categories had the strongest growth compared with q4 2019.
nordstrom - continued to navigate supply chain disruptions throughout q4 by accelerating receipts and investing in improved in-stock levels.
nordstrom - inventory levels at q4 were higher than planned, but co expects to reduce inventory relative to sales during q1 2022.
nordstrom - anticipates that it will be in a position to resume returning cash to shareholders in q1 2022.
nordstrom sees 2022 ebit margin of 5.6 to 6.0% of sales.
nordstrom sees 2022 revenue growth, including retail sales and credit card revenues, of 5 to 7 percent versus fiscal 2021.
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I'm pleased that you're joining us for DXC Technology's third quarter 2022 earnings call.
Our speakers on the call today will be Mike Salvino, our president and CEO; and Ken Sharp, our EVP and CFO.
In accordance with SEC rules, we provide a reconciliation of these measures to their respective and most directly comparable GAAP measures.
A discussion of these risks and uncertainties is included in our annual report on Form 10-K and other SEC filings.
And I hope you and your families are doing well.
Today's agenda will begin with an update on Q3, which was another strong quarter of operational execution for DXC.
Next, I will cover how we are consistently delivering on our transformation journey.
As a result of this execution, organic revenue, margin, and earnings per share all continue to improve.
In addition, you will see the outstanding results for book-to-bill and free cash flow.
The best part about this performance is we expect it to be sustainable.
And then I will hand the call over to Ken to share our Q3 results along with our Q4 and full year guidance.
Regarding our Q3 performance, our revenues were $4.09 billion compared to $4.03 billion in Q2.
Organic revenue continued to improve as we progressed from minus 2.4% in Q2 to minus 1.4% in Q3.
I see this as a significant improvement as only a year ago, our organic revenues were minus 9.7%.
I was also very pleased to see the organic revenue growth in GBS accelerate, from positive 3.4% in Q2, to positive 7% in Q3.
Our strategy to grow DXC relies on GBS consistently growing, and we are clearly delivering against this piece of our growth strategy.
Our adjusted EBIT margin was 8.7%, up 170 basis points as compared to last year driven by our operational work that we are doing to optimize our business.
Our non-GAAP diluted earnings per share was $0.92 in the quarter, which is up 10% as compared to $0.84 last year.
While the quarter was strong across the board, the 2 strongest financial results were book-to-bill and free cash flow generation.
We delivered $5 billion in bookings for a book-to-bill of 1.23 times.
This gets us to a book-to-bill of 1.08 times on a trailing 12-month basis.
And in Q3, we delivered $550 million in free cash flow.
Now let me turn to the progress we are making on our transformation journey.
The first step of the journey is to inspire and take care of our colleagues.
Hiring was a major focus of ours.
And we ramped up our hiring engine to meet the high level of demand and to activate more project work.
In the quarter, we increased our headcount by 3% and increased project work by 13%.
We continue to see our people-first strategy and our virtual-first model is resonating in the market and helping us in our recruiting efforts.
We recently hired Kristie Grinnell as our new CIO.
And she specifically called out our virtual-first model as one of the key items that drew her to DXC.
In addition, I am pleased with how we continue to deliver for our people through the COVID pandemic.
It is due to all these points that our attrition at DXC has stabilized and it remains below industry average.
Focus on the customer is the next step of our transformation journey and continues to be the primary driver of our success in improving organic revenue.
A key metric that we measure is our Net Promoter Score, and I'm happy to report that we continue to see improvement.
Currently, our 12-month rolling NPS score is at the upper end of the industry best practice range of 20 to 30.
Another piece of our growth strategy is to run our customers' mission-critical systems, which mainly make up our GIS business, and ultimately have these customers award us new work.
Running these mission-critical systems builds trust with our customers.
This strategy is being successful because we are winning more work from our customers in both GIS and GBS, and our revenues are clearly not going backwards.
A great example of this strategy working is the new agreement with Lloyd's.
When I started DXC a little over two years ago, Lloyd's was contemplating a significant reorganization without DXC, which would have caused a negative impact to our revenue.
Running Lloyd's' mission-critical systems well has built trust that enabled us to be chosen to build the future at Lloyd's, which will be the most advanced insurance marketplace in the world.
DXC will rearchitect and develop a cloud-native platform running on AWS to replace their legacy mainframe platform.
Simply put, leveraging the trust we have built with our customers by running their mission-critical systems is how we are stabilizing our revenues and setting ourselves up for growth.
Now let me turn to our cost optimization program.
We continue to make progress in optimizing our cost and delivering for our customers without disruption.
Managing our cost includes executing portfolio-shaping initiatives.
We have identified businesses with roughly $500 million in revenues that are not strategic and will not help us grow.
Selling these businesses will improve our organic revenue growth and our overall margin.
We expect the sale of these businesses to result in an additional $500 million in proceeds within the next 12 months.
At the same time, we are focused on prudently investing in assets that will enable us to grow.
A great example of this is our recently announced relationship with ServiceNow.
Here, we are leveraging our proprietary technology called Platform X, which is a data-driven intelligent automation platform that helps us detect, prevent and address issues before they happen within our customers' cloud and on-prem IT estates.
NelsonHall named DXC's Platform X as a leader in cognitive and self-healing IT infrastructure management, reflecting DXC's ability to deliver immediate results through automation.
Next, seize the market is where we are focused on, cross-selling to our existing customers and winning new work.
We had a strong quarter of bookings, totaling $5 billion and a book-to-bill of 1.23 times.
58% of the bookings were new work and 42% were renewals.
We are winning in the ITO market.
And this is helping us with our organic revenue growth, significantly limiting the declines from double-digit to low single-digit negative declines.
Modern Workplace is following a very similar path.
Our strong 12-month book-to-bill of 1.1 times gives us confidence that, like ITO, we can take this business from double-digit to low single-digit decline in the next 12 months.
Analytics and Engineering is a great story as we are converting our strong book-to-bill of 1.29 times on a 12-month basis and growing this business 18.7% in Q3, which is helping us consistently grow our GBS business.
We are seeing increased opportunities in the market.
We have shown the ability to win, and the investment we have made in execution is paying off, with good deals turning into good revenue as you can see in ITO and Analytics and Engineering.
Turning to Slide 11.
Our transformation journey remains on track, with strong progress across all four key metrics.
Organic revenue improved 100 basis points from Q2 to a decline of 1.4%.
Adjusted EBIT margin is up to 8.7%.
Year-over-year, our adjusted EBIT margin expanded 170 basis points, while we substantially reduced our restructuring and TSI expense.
Q3 book-to-bill was 1.23 times and 1.08 times on a trailing four quarters.
From our perspective, looking at book-to-bill over a trailing four quarters is more meaningful than looking at one quarter in isolation.
Non-GAAP diluted earnings per share was $0.92, up $0.08 compared to the prior year.
Our earnings per share expanded despite $0.23 of headwinds from taxes.
The tax rate headwinds were more than offset by increased margins and lower interest expense.
Moving to our segment results on Slide 12.
GBS continued its strong performance, accelerating organic revenue growth to 7%, our third consecutive quarter of organic revenue growth.
GBS is benefiting as we leverage our relationships with our platinum customers.
Our GBS business has higher margins and lower capital intensity.
So as we grow this business, it has a disproportionately positive impact on margins and cash flow.
Our GBS profit margin was 16.2%, up 200 basis points compared to the prior year.
GIS organic revenue declined 8.3%.
GIS profit margin was 4.8%, an improvement of 110 basis points compared to prior year.
Our focus with GIS heretofore has been on improving delivery, to deliver for our customers while stabilizing the margins.
As we set up for next year, we are putting in place a program to drive cost out of GIS to move the margins forward.
Turning to our enterprise technology stack.
Analytics and Engineering revenue was $545 million and organic revenue was up 18.7%.
We continue to see high demand in this area.
Of note is the success we are seeing with our platinum customer channel.
Applications organic revenue increased 4.8%, also accelerating.
BPS, our smallest layer of the enterprise technology stack, generated $116 million of revenue, and organic revenue was down 8.3%.
We expect the declines in this business to moderate as we move forward and put our new strategy in place.
For our GBS layers of our technology stack, our book-to-bill was 1.28 times and 1.17 times on a trailing 12-month basis.
Cloud and Security revenue was $471 million and organic revenue was down 12.2%.
IT Outsourcing revenue was $1.11 billion and organic revenue was down 1.9%.
Let me remind you that this business declined 19% in Q3 FY '21.
This is a significant improvement that we indicated last quarter.
We expect IT Outsourcing to continue to decline in low single digits, ideally 5% or better.
Lastly, Modern Workplace revenue was $561 million, and organic revenue was down 16% as compared to prior year.
We remain positive about our prospects.
And our strong book-to-bill of 1.11 times over the trailing 12 months is expected to stabilize Modern Workplace as we move through FY '23.
For our GIS layers of the technology stack, our book-to-bill was 1.18 times and 1.01 times on a trailing 12-month basis.
As you think about organic revenue growth prospects for GIS, our focus on improving the quality of revenue by expanding margins, reducing capital intensity and driving cash flow may create headwinds for organic revenue growth.
For example, using our capital to buy laptops, bearing the risk and ultimately recovering our cash over three to four years with relatively low returns does not feel like a great economic model.
At the end of the day, we would prefer to provide our offerings and services and forego the revenue associated with buying the assets to improve the underlying economics.
Next up, let me touch on our efforts to build our financial foundation.
This quarter, we made particularly strong progress with cash generation and continued reduction of restructuring and TSI expense.
With regard to financial discipline, remediating our material weakness is a top priority.
We are in the late stage of our efforts to remediate the material weakness, and we have fully implemented our 11-point remediation plan.
As a result, we expect to remediate our material weakness in Q4.
I should note, as it relates to the material weakness in governance more holistically, we are clear-eyed on how we think about governance.
We do not find our current governance score to be acceptable.
We are working hard to ensure we improve its trajectory like many things at DXC.
We are finishing the unfinished homework, creating a sustainable business brick by brick.
In addition to our material weakness remediation, we are committed to improving our pay practices.
As part of good governance, our board members and management are continuing to engage with our shareholders to proactively take their feedback as we work together to design and set our short-term and long-term incentive structure.
Our focus is to set metrics and targets that are highly aligned to what our shareholders want, all the while incentivizing management to improve the company's performance, creating an enduring and sustainable business.
The execution of the transformation journey has made measurable improvement, allowing us to put the business on a firmer financial foundation, expanding margins, and generating and keeping more cash.
Slide 15 shows the results of the structural improvements we have made.
We reduced our debt from $12 billion to $4.9 billion and are now below our targeted debt level.
We have reduced our quarterly net interest expense to $23 million, a $31 million reduction as compared to prior year.
As you recall, we were able to term out a significant portion of our debt last quarter with principally all of our outstanding borrowings at fixed rates.
We expect to continue the lower interest expense at approximately $25 million per quarter.
We also continue to make progress on reducing restructuring and TSI expense.
This reduction contributed $195 million to cash flow during the quarter as compared to the prior year.
Further, this also achieves one of our goals of narrowing the difference between GAAP and non-GAAP earnings.
I should note that while we have been reducing restructuring and TSI expense, we have also been able to expand margins.
Lastly, as you can see, we have also reduced operating lease cash payments from $156 million in the third quarter of the prior year to $117 million in the third quarter of FY '22.
Moving to Chart 16.
Let's talk about the focus we've brought to capital expenditures, including capital leases.
Our capital expenditures were reduced from $219 million in Q3 FY '21 to $146 million in Q3 FY '22.
We are closely managing our capital lease originations, which ultimately means our capital lease debt and associated payments continues to decline.
In FY '20, we had a $270 million quarterly run rate for originations while our last two quarters averaged less than $60 million.
We made $207 million of capital lease payments in Q3 last year, which is now down to $184 million in the current quarter.
For Q4, we expect a further reduction of capital lease payments to approximately $140 million.
A metric we like to look at to gauge capital efficiency is capital expenditures and capital lease originations as a percentage of revenue.
We are now tracking at 5.2% for two consecutive quarters, down from roughly 10% in FY '20.
Clearly, our focus has been on improving our cash flow.
Specific to new business, we have been focused on structuring our transactions to have lower capital intensity, potentially trading off revenue in favor of cash flow.
As you can see, from my prior comments, our focus on driving structural changes has improved our ability to generate and hold on to more cash.
Cash flow from operations totaled an inflow of $696 million.
Free cash flow for the quarter was $550 million, an increase of $956 million as compared to prior year and moves our year-to-date free cash flow to $650 million or $150 million above our full year guidance.
Further, cash in the quarter was negatively impacted by two previously disclosed payments, totaling approximately $130 million.
These payments were offset by much stronger performance due to improvements in the business and benefits from timing on payments and receipts in the quarter.
We expect this timing to create some headwinds in Q4 cash flow.
Slide 18 shows our trended cash flow profile.
Our progress in Q2 and Q3 gives us confidence as we work toward delivering our longer-term FY '24 guidance of $1.5 billion in free cash flow.
Moving to Slide 19.
Let's revisit our relatively simple capital allocation formula.
We are targeting a debt level of approximately $5 billion and a cash level of $2.5 billion.
With debt at our target debt level, cash over $2.5 billion is excess cash, which we expect to deploy.
Based on this formula, we expect to self-fund stock repurchases of $1 billion over the next 12 months.
The $1 billion in repurchases will be funded from a combination of cash generated from operating our business as well as proceeds from our portfolio-shaping efforts.
We recently executed a number of sale agreements and expect to divest businesses and assets with approximately $500 million of revenue and will generate $500 million of proceeds in the next 12 months.
These businesses are not synergistic and cannot be leveraged more broadly in our platinum channel.
As you will see in our 10-Q, we entered into an agreement to sell our German financial service subsidiary that includes both of our banks for approximately $340 million.
As noted in the liquidity section of our previously filed financials, the German financial services business has cash held on deposit for the bank's customers.
The current cash balance related to these deposits is $670 million.
We also announced an agreement for the sale of our Israeli business for $65 million.
The valuation for these assets are accretive to our valuation.
Further, we do not expect these divestitures to create headwinds related to achieving our FY '24 longer-term guidance for organic revenue growth, adjusted EBIT margin, and free cash flow.
We continue to assess our portfolio to ensure we have businesses that are aligned to our strategy and not a distraction for our management team.
Now let me cover our progress on share repurchases.
In Q3, we repurchased $213 million of common stock, bringing our FY '22 year-to-date repurchases to $363 million or 10.6 million shares.
Our share repurchases are self-funded.
As noted, we expect to repurchase $1 billion of our common stock over the next 12 months as we firmly believe our stock is undervalued.
Turning to the fourth quarter guidance.
Revenues between $4.11 billion and $4.15 billion.
If exchange rates were at the same level as when we gave guidance last quarter, our fourth quarter revenue guidance range would be $20 million higher.
Organic revenue declined, minus 1.2% to minus 1.7%.
Adjusted EBIT margin in the range of 8.7% to 9%.
Non-GAAP diluted earnings per share of $0.98 to $1.03 per share.
For Q4, we expect a tax rate of approximately 26%.
As we look to the end of FY '22, I would like to update our current fiscal year guidance.
Based on the strengthening U.S. dollar, our revenues are expected to be negatively impacted by approximately $40 million.
We now expect to come in at approximately $16.4 billion.
Organic revenue growth range of minus 2.2% to minus 2.3%, which is slightly lower than our previous range.
Adjusted EBIT margin, 8.5% to 8.6%.
We continue to expand margins while significantly lowering restructuring and TSI expense and are now guiding to $400 million for FY '22.
To put this all in context, we expect to spend $500 million less on restructuring and TSI spend than last year, while expanding margins by over 200 basis points.
Our focus is to embed these types of expenses over time into the normal performance of the business and believe we have taken significant strides in doing so.
Non-GAAP diluted earnings per share of $3.64 to $3.69.
Lastly, we are increasing free cash flow guidance to over $650 million, $150 million improvement to our prior FY '22 guidance.
Fourth quarter cash flow is expected to be impacted by timing, which boosted Q3 cash flow and in addition, a $100 million payment in Q4 to terminate a financial structure put in place a number of years ago.
We are reaffirming our guidance for FY '24.
This reflects our strong execution and driving forward on our transformation journey.
Overall, we are making great progress driving efficiency in the business and generating strong free cash flow.
We are utilizing those cash flows to drive significant value for our shareholders through our stock repurchase program.
Let me leave you now with a few key takeaways.
As I think about finishing out FY '22, we are making great progress.
During our June investor day, we committed to making progress on all nine of these points, and let me quickly give you an update on each.
Win in the market and a book-to-bill of greater than 1x.
Our trailing 12-month average is now 1.08 times.
This year, we produced relatively stable revenues in Q2, Q3, and we expect this to continue in Q4.
Strengthening the balance sheet.
Our debt is now at $4.9 billion, and our refinancing has significantly lowered our interest expense.
Achieved organic revenue growth of minus 1% to minus 2% in FY '22.
This is where we're coming up a little short, anticipating negative 2.2% to negative 2.3% organic revenue growth.
Remediate material weakness and improve governance score.
As Ken indicated, we will remediate the material weakness in Q4, and we have plans to continue to improve our governance score.
Reduce restructuring and TSI.
We have taken it from over $900 million to roughly $400 million in FY '22.
We have expanded margins every quarter throughout FY '22.
Improve free cash flow.
We exceeded the $500 million guidance for FY '22.
And finally, resume capital deployment to shareholders.
We have repurchased $363 million and plan to do another $1 billion over the next 12 months.
In addition to this progress, we are also committed to portfolio-shaping.
What this means is we are making the right bets and investments like what we are doing with Platform X and ServiceNow and divesting assets that are not core to our strategy and will not help us grow.
Our portfolio-shaping is anticipated to drive $500 million in excess cash in the next year.
In closing, I am confident that by staying focused on our transformation journey, we will continue to deliver on our commitments both in the short term and the long term.
| dxc technology - q3 non-gaap earnings per share $0.92.
dxc technology - q3 revenue fell 4.6 percent to $4.09 billion.
dxc technology - sees fy 2022 non gaap diluted earnings per share $3.64 to $3.69.
intends to self-fund $1 billion of additional share repurchases over next twelve months.
|
We appreciate your continued interest in the company.
I'm Jim Gustafson, vice president of investor relations.
Each quarter, for the last two years, I hope it's the last time that the pandemic is the start of my discussions with you, yet COVID continues to evolve and have a direct impact on our world, especially on our healthcare system.
Similar to what's been seen in the general population, COVID infections within our patient population spiked significantly in late December through January.
At a peak during the second week of January, the new case count was more than twice as high as a peak from last winter.
Gratefully, the mortality rate to date with the latest surge has been lower than in prior surges.
For the fourth quarter, we estimate that the incremental mortality due to COVID was approximately 1,100, compared to approximately 1,600 during the third quarter.
Despite the challenges associated with COVID, I continue to be in awe at the resilience and dedication of our teammates across the DaVita Village.
From our direct patient caregivers to our corporate teammates, all are unrelenting in their commitment to provide high-quality care, respond to quickly changing environment, and show incredible compassion and support for our patients.
For the balance of my remarks, I will cover five topics: transplant; labor market; our supply chain; Integrated Kidney Care, IKC; and then I will wrap up with our fourth-quarter results and our outlook.
Transplant is a preferred treatment option for most of our patients and during 2021, despite the challenges posed by the COVID pandemic, we celebrated that nearly 8,000 DaVita patients received a transplant, exceeding our pre-pandemic level.
With that said, the transplant process is long and complicated with an average wait time of between four and five years for an organ.
Staying active on the waitlist for such a long time is difficult.
As a result, patients sometimes miss their window or a transplant.
We've been working to address some of these challenges through our industry-leading transplant smart education program and our partnership with The NKF to help more patients find living donors.
In early January, we announced the acquisition of MedSleuth, whose software enables closer partnerships and better coordination between transplant centers, nephrologists, and kidney care providers, with all three working together to support our patient transplant journey.
These efforts can also benefit another meaningful goal of ours, to improve health equity.
Many process and outcome results in transplant are quite inequitable, different by race and ethnicity, economic means, and insurance coverage.
We believe it doesn't have to be this way, removing barriers to access, making process as easy as possible, and providing strong care coordination and support through the transplant journey can all contribute to making transplant not just more available, but also more equitable for our patients.
Now let me shift to an update on the labor markets.
I've been fortunate enough to be part of DaVita Village for over 20 years and in all that time across my many roles, I've never experienced the labor market as challenging as we face today.
To help deal with the challenge, we have provided incremental pay-in benefits to help our frontline caregivers during COVID.
We've also accelerated wage increases with a particular focus on our teammates in the clinic.
As previously communicated, we expect higher-than-usual wage increases in 2022, which will put some additional pressure on our cost structure going forward.
We believe this investment in our people will contribute to our ability to track and retain the talent needed to achieve our long-term objective.
That said, the labor markets remain highly dynamic and will continue to be a swing factor for the year.
Over the years, in particular, during the pandemic and natural disasters, we have navigated many supply chain challenges.
To date, our supply chain has proven very resilient.
Currently, we're working through a supply shortage primarily related to dialysis, which is a fluid solution used in hemodialysis to filter toxins and fluid from the blood.
The shortage has rippled through the entire kidney care community and as a community, we have once again come together in support of our dialysis patients and thus far, have been able to provide uninterrupted life-sustaining care.
We expect that these challenges related to dialysis will remain with us until the second quarter.
We now have confirmation on the markets where we will partner with physicians under the federal government's new five-year CKCC demonstration.
These programs added approximately 12,000 ESKD patients and an additional 12,000 CKD patients across 11 value-based programs in different markets.
We're engaging with our nephrologist partners to develop personalized care plans for each covered patient and identify opportunities to improve clinical outcomes and lower cost for each patient.
Participating in these and other programs will more than double the number of patients we serve in value-based care arrangements.
In light of our upfront cost of these programs and the lag of shared savings payment, as we discussed in November, we continue to expect that our operating loss in 2022 in our U.S. ancillary segment will increase by approximately $50 million, although this could increase or decrease depending on the number of new arrangements we enter into during the year.
We believe that we are well-positioned for the future and in particular, to deliver positive clinical and financial results in our IKC business over the long term.
Now, let me finish with fourth-quarter results and our updated outlook.
Despite the negative impact of the omicron surge, our fourth-quarter results were slightly above the midpoint of our revised guidance.
This resulted in a full-year adjusted operating income increase of approximately 3% over 2020.
Adjusted earnings per share from continuing operations grew by approximately 26% year over year, and we generated more than $1.1 billion of free cash flow, which we largely deployed to return capital to our shareholders.
For 2022, we expect adjusted operating income guidance of $1.525 billion to $1.675 billion.
The midpoint of this guidance range is $35 million below our expectations from Capital Markets Day last November, which is primarily driven by our updated views on COVID and labor costs.
As we said previously, while 2022 will be a transition year due to some near-term investment and challenges that we're facing, we continue to believe that we're well-positioned to perform across the kidney care continuum in the years to come.
We still believe we can deliver the long-term compounded annual growth of adjusted operating income of 3% to 7% that we discussed at Capital Markets Day.
As Javier mentioned, our fourth-quarter results were slightly above the midpoint of our revised guidance.
Q4 results included a net COVID headwind of approximately $80 million, an increase relative to the quarterly impact that we experienced in the first three quarters of the year primarily due to the impact of the incremental mortality from the delta surge in Q3 and some temporary labor cost increases.
For the year, we experienced a net COVID headwind of approximately $200 million.
As Javier said, the incremental mortality due to COVID in the fourth quarter was approximately 1,100, compared to approximately 1,600 in Q3.
While it's too early to accurately forecast incremental mortality in 2022, given the significant uptick in infections in January, we expect COVID-driven mortality in the first quarter to be at or above what we experienced in Q4.
U.S. dialysis treatments per day were down 135 or 0.1% in Q4 compared to Q3.
The primary headwind was the increase in mortality and higher missed treatments as a result of the ongoing COVID pandemic.
U.S. dialysis patient care cost per treatment were up approximately $6 quarter over quarter, primarily due to the increased wage rates and health benefit expenses.
Our Integrated Kidney Care business saw an increase in its operating loss in Q4, which is due primarily to positive prior-period development in our special needs plans recognized in the third quarter and increased costs incurred in Q4, including preparation for new value-based care arrangements effective in 2022.
Our adjusted effective tax rate attributable to DaVita was 16% for the fourth quarter and approximately 22% for the full year.
The adjusted effective tax rate was lower quarter over quarter, primarily due to a favorable resolution of a state tax issue during Q4.
Finally, in 2021, we repurchased 13.9 million shares of our stock, reducing our shares outstanding by 11.5% during the year.
We have repurchased to date an additional 1.4 million shares in 2022.
Now looking ahead to 2022, our adjusted OI guidance is a range of $1.525 billion to $1.675 billion, and our adjusted earnings per share guidance is $7.50 to $8.50 per share.
The midpoint of the OI guidance range is $37 million below the $1.635 billion that we discussed during our recent Capital Markets Day due to offsetting puts and takes.
First, we have a tailwind from both higher final Medicare rate update, as well as a partial extension of Medicare sequestration relief.
However, this is more than offset by headwinds due to the recent COVID surge, as well as incremental wage rate pressure.
At the midpoint of our guidance range, we have incorporated the following assumptions related to COVID: excess patient mortality due to COVID of 6,000.
This, along with our normal growth drivers, would result in a total treatment growth range of approximately 1.5% to 1%.
A year-over-year improvement to COVID-driven costs such as PPE, which will be largely offset by the loss of revenue from Medicare sequestration relief beyond Q2 2022.
As you would expect, the high and low end of our guidance incorporates a range of COVID scenarios for 2022.
There are scenarios could lead us to performance above or below this range.
In addition to COVID, the expected headwinds I talked about on the Q3 earnings call and at our Capital Markets Day remain.
As a reminder, we expect to incur expenses related to the biggest portion of the industry effort to counter the expected ballot initiative in California.
Our guidance assumes an incremental increase of between $100 million and $125 million in labor costs above a typical year's increase, which is $50 million higher than what we communicated at Capital Markets Day.
Third, we anticipate a year-over-year incremental operating loss in the range of $50 million as we continue to invest to grow our IKC business; and fourth, we will also begin to depreciate our new clinical IT platform, which we expect to be approximately $35 million in 2022 and will begin in Q2.
A few additional things to help you with our current thinking about 2022.
We expect to offset a significant amount of these incremental costs with continuing MA penetration growth above historical levels and strong management of nonlabor patient care costs.
We are forecasting our tax rate at 25% to 27% due to nondeductibility of valid expense.
Regarding seasonality, remember that Q1 had seasonally higher payroll taxes and seasonal impact of copayments and deductibles.
The vast majority of our ballot-related expenses will fall in Q3.
We have historically experienced higher G&A in Q4.
Looking past 2022, we continue to expect compounded annual OI growth relative to 2021 of 3% to 7% and compounded annual adjusted earnings per share growth relative to 2021 of 8% to 14%.
Finally, we expect free cash flow of $850 million to $1.1 billion in 2022.
As we communicated at Capital Markets Day, we expect free cash flow to remain above adjusted net income with that difference contracting over time.
Operator, please open the call for Q&A.
| davita fourth quarter 2021 results.
4th quarter 2021 results.
sees 2022 adjusted diluted net income from continuing operations per share attributable to davita inc. $7.50 to $ 8.50.
sees 2022 free cash flow from continuing operations $850 million to $1,100 million.
|
Such statements involve risks and uncertainty, such that actual results may differ materially.
As we transform our company, I'm pleased with our performance in the first quarter of fiscal 2021.
We had strong financial results and we made progress on our digital transformation.
Our team was able to effectively serve our customers through our broad product portfolio and diverse paths to market.
At the same time, our gross margins were in line with those in the fourth quarter even on lower sequential sales and we continue to generate a significant amount of free cash flow.
I'm pleased and grateful for the outstanding way our team has continued to manage through the pandemic.
We remain diligent about protecting the health and well-being of our associates and ensuring the continuity of our operations.
Turning to first quarter highlights.
We are committed to making the communities in which we operate better.
We published our second annual EarthLIGHT report, highlighting the company's priorities, actions and metrics for environmental, social and governance matters.
We continue to wisely deploy capital by repurchasing 2.6 million shares of the company's common stock for $255 million.
We successfully reintroduced ourselves to the debt capital markets through the issuance of a $500 million 10-year bond with a coupon of 2.15%.
Proceeds were used largely to repay our existing term loans.
We are making strong progress on the execution of our digital transformation.
So I'll provide more updates on that progress later in the call.
Finally, we have added talent to the organization.
As we build out our technology organization, we have added outstanding data science, product management and engineering talent.
As we further [Technical Issues] team, Candace Steele Flippin joined Acuity in November as our Chief Communications Officer.
Candace will work with me and our team to define and amplify our company's narrative among our stakeholders.
I'm very pleased with the quality of people who are joining our team.
I will add some additional insights to our financial performance for the first quarter of fiscal 2021.
By way of context, for the past decade, we have provided our best estimates of the impacts of volume and price mix on net sales.
Our intent when we began providing this information was to reflect the impact of the conversion of our lighting products to LED.
Today, our lighting business is fundamentally different.
For example, our product life cycles are shorter and our pace of innovation has increased.
We frequently and successfully introduced new features and benefits of products rather than just direct product substitutions.
Therefore, we believe our historical reference to price mix is no longer meaningful and is less descriptive of how we manage our business.
Going forward, we believe the change in net sales is better described by the activity in our key sales channels.
To help with this transition, I will provide the historical explanation to you this quarter so that you can bridge the gap.
In the future, our explanations for changes in net sales will be aligned with our disaggregated revenue disclosure in the 10-Q.
Should acquisitions have an impact in the future, we will provide that impact if it is meaningful.
Net sales for the three months ended November 30, 2020, of $792 million decreased 5% compared with the prior-year period, due primarily to an estimated 4% decrease in the change in product prices and mix of products sold, as well as an estimated 1% decrease in sales volume.
Both fiscal 2021 first quarter price mix and volume were adversely affected by the negative impacts of the COVID-19 pandemic.
Also recall that last year's first quarter benefited from price increases put in place to offset tariffs.
Looking sequentially from the fourth quarter using the same calculations, price mix decreased 1%.
Due to the changing dynamics of our product portfolio, it is not possible to precisely quantify or differentiate the individual components on a comparable basis of volume, price and mix.
And as noted previously, we will not be quantifying this in the future.
Now, I would like to highlight the key changes in our sales channels.
I'm encouraged with the net sales of $599 million through our independent sales network in which we saw a modest decrease of 3% due to the negative impact of the pandemic.
Turning to our direct sales network, we continue to experience weakness in large industrial projects that we believe have been postponed due to the pandemic.
Sales in this channel of $76 million were down 9.5% in the quarter.
Our retail sales channel continues to be a bright spot with net sales up 3% to $55 million, driven largely by higher demand primarily for residential products.
Finally, a key impact of the pandemic has been and continues to be delayed or canceled projects by large retail customers in our corporate accounts channel.
Net sales in this channel of $24 million were down 28% as compared to the prior year.
These retrofit opportunities were delayed or canceled as these customers were limiting the activity in the stores.
In the first quarter of fiscal 2021 and 2020, we had some adjustments to the GAAP results that we find useful to add back in order for the results to be comparable.
We believe adjusting for these items and providing these non-GAAP measures provide greater comparability and enhanced visibility into our results of operations.
We think you will find this transparency very helpful in your analysis of our performance.
I would like to highlight that our current quarter's gross profit margin of 42% was consistent with our fourth quarter gross profit margin even on lower sales.
Gross profit margin was $332 million, down approximately $23 million from the year-ago period.
This decrease in gross profit was due primarily to the decline in volume and lower price on certain products, as well as the changing mix of products sold, partially offset by our aggressive cost reduction efforts and productivity improvements.
Our SD&A expenses decreased approximately $19 million compared to the year-ago period.
This decrease in SD&A expense was due primarily to decreased employee cost, including lower stock compensation, lower freight and commissions associated with decreased sales and the reduction of cost in response to lower sales.
Reported operating profit was $86 million, compared with $84 million in the year-ago period, while adjusted operating profit for the first quarter of 2021 was $104 million, compared with adjusted operating profit of $119 million in the year-ago period.
Reported operating profit margin was 10.8%, an increase of 80 basis points compared to the prior year.
Adjusted operating profit margin was 13.2%, a decrease of 110 basis points compared with the margin reported in the prior year.
The effective tax rate for the first quarter of fiscal 2021 was 24.7% compared with 22.9% in the prior-year quarter.
The increase in the effective tax rate was due primarily to the recognition in the first quarter of fiscal 2021 of unfavorable discrete items related to the deductibility of certain compensation.
We currently estimate that our blended effective income tax rate before discrete items will approximate 23% for fiscal 2021.
Our diluted earnings per share for the first quarter of fiscal 2021 was $1.57, an increase of $0.13 per share or 9%.
Our adjusted diluted earnings per share this quarter of $2.03 was $0.10 lower than the prior year.
The decrease was primarily due to lower pre-tax income and a higher effective tax rate, partially offset by lower diluted shares outstanding.
I'm pleased with our positive cash flow from operations and the improvement in our working capital days, driven by improvements in accounts receivable and inventory.
We generated $124 million of net cash provided by operating activities for the quarter ended November 30, 2020.
We invested $11 million or 1.4% of net sales in capital expenditures during the quarter.
We currently expect to invest approximately 1.5% of net sales in capital expenditures in fiscal 2021.
Additionally, during the first quarter of fiscal 2021, we repurchased 2.6 million shares for approximately $255 million or an average price of $100 per share.
We have approximately 5.1 million shares remaining under our current share repurchase board authorization.
At November 30, 2020, we had a cash and cash equivalents balance of $507 million.
We've demonstrated our ability to generate cash and use that cash to create shareholder value through investments in our business, dividends to shareholders and share repurchases during the quarter.
Our company is a unique combination of domain expertise in the industries that we serve and in the technology that will change them.
Our core lighting business is a durable performer in all markets, including the current market.
And we are executing on the transformation of this business.
We are in the process of making a better, smarter and faster to transform the service levels to our customers and the vitality of our product portfolio.
Distech and Atrius are attractive, valuable and strategically impactful technology assets that we believe we can build upon over time.
We are demonstrating consistent cash generation, and we have the opportunity to use that cash to grow our current businesses and invest in new businesses, while managing our capital structure, including share repurchases.
I'll now turn to our Q1 performance.
As Karen mentioned, net sales of $791 million were 5% below the prior year.
I'm particularly pleased with the performance in our retail sales channel, which was up 3% over last year's first quarter and in our independent sales network, which was down 3% as compared to the prior year.
As I described last quarter, our broad portfolio enables us to flex where there is opportunity, which this quarter included strength in warehouse and logistics, education and residential verticals.
Throughout the pandemic, we've seen broad disparity of performance across geographies and that continued in the first quarter.
We also manage productivity and cost relative to price to maintain our gross margin at 42%.
Throughout the pandemic, we've maintained our investment in product development.
We are introducing new lighting and controls products, as well as improving and evolving parts of our product and solutions portfolio.
We are increasing the impact of software in our product portfolio.
In the first quarter, we had a major firmware release for our nLight AIR product.
This release is called ABT, Autonomous Bridging Technology and is designed to increase the overall range of the nLight AIR system in networked environments by 300%, taking connectivity more reliable.
We've increased our focus on contractors and making their lives easier.
We launched the Compact Pro High Bay fixture by Lithonia Lighting during the quarter.
This is a new addition to our contractor select portfolio and is the most compact High Bay on the market, making it easier and quicker to install.
Contractors and distributors continue to respond favorably to our contract select portfolio.
This portfolio of products has enabled us to respond to discretionary opportunities in the independent sales network and to serve the needs of customers in the retail channel.
Sales growth in these products continue to meaningfully outpace the market.
We expanded our capabilities to provide a broad portfolio of leading germicidal UV products.
In addition to our relationships with Ushio, PURO and Violet Defense we had an agreement to purchase and resell the UV Angel Clean Air disinfection system, as well as pursue joint development of UV light disinfection products.
We now have the ability to serve multiple end use alternatives and are in the market, selling a variety of GUV products.
We are uniquely positioned to support customers with our luminaire, controls and building management portfolio.
We continue to make progress on our digital transformation that we call better, smarter, faster.
I'm pleased with the team we are creating to deliver on our platform and how we are enabling more customer-centric sales and operations.
For example, we are streamlining and enhancing our product catalog to make the process of finding, configuring and ordering products simpler and faster.
We are also increasing our ability to communicate with and update our contractors, distributors and agencies with more detailed status notifications.
We were offering them the ability to know in real time the status of the product orders.
We will continue our work to increase these service levels.
We've successfully recruited talented data scientists to leverage our data and build products powered by machine learning algorithms.
I'm excited about the progress we've made on our digital transformation to date and look forward to further enhancements for our customers.
Effectively allocating capital is an important part of how we will create value for our company.
Our priorities remain to first, grow our current businesses; second, grow our company through acquisitions; third, maintain our dividend; and fourth, create value through repurchasing shares.
In the first quarter, we repurchased 2.6 million shares of stock for $255 million.
Since we restarted our program during the fourth quarter, we have repurchased almost 8% of the company's stock.
We also successfully reintroduced ourselves to the debt capital markets during the fourth quarter.
We issued a $500 million 10-year bond at 2.15%.
We're pleased to lock in this capital for this duration at these rates.
As you can see in the first quarter, we continued to demonstrate our ability to generate cash and our ability to deploy that cash for long-term value creation.
As we look ahead, while we still see uncertainty in the end markets we serve, we are cautiously optimistic about improvement during calendar year 2021.
We are using the breadth of our product portfolio and the strength of our go-to-market teams to deliver solid top line performance.
At the same time, we are managing our costs well, while continuing to invest in our business for the future so that we will become a larger, more dynamic company.
As we look to grow, we believe that both for business performance, as well as for the understanding of our company, we should more clearly separate our lighting, lighting controls and components business and our intelligent buildings business.
To that end, later this fiscal year, we plan to reorganize our business into two units; Acuity Brands Lighting and Intelligent Buildings.
Acuity Brands Lighting will include our lighting, lighting controls and components businesses and Intelligent Buildings will include Distech and Atrius.
This new structure will better position Acuity to meet our customers' needs and strengthen our innovation through better prioritization and alignment within each unit.
We also believe this change will provide improved visibility with respect to the operational performance and underlying results of these businesses.
We are a company that delivers for our customers, our associates, our communities and our shareholders.
| q1 adjusted earnings per share $2.03.
q1 earnings per share $1.57.
q1 sales $792 million versus refinitiv ibes estimate of $788.1 million.
|
I'm Bennett Murphy, Senior Vice President, Investor Relations.
You have an opportunity to ask questions after today's remarks by the management.
Before we discuss our results for the quarter, I want to comment on the distribution industry's recent milestone regarding the proposed settlement agreement to address opioid-related claims of U.S. state attorneys generals and political subdivisions in participating states.
Throughout the litigation process, we have been consistent in stating our desire to address the normalcy of the opioid challenge by bringing solutions to the table.
If the industry's proposed agreement and settlement process leads to a final settlement, it would collectively provide thousands of communities across the United States with substantial financial support.
Clearly, the process is in an advanced stage, and we will not comment deeply at this time.
We take our role in the supply chain seriously and continue to close with stakeholders concerning these complex matters.
AmerisourceBergen will continue to work diligently and, alongside partners, combat drug diversion while supporting real solutions to help address the crisis in the communities where we live, work and serve.
Turning now to our results for the third quarter of fiscal 2021.
AmerisourceBergen delivered yet another quarter of exceptional results driven by a high level of execution, purpose-minded team members and continued focus on delivering differentiated value.
These results reflect continued strong performance across AmerisourceBergen's businesses as we capitalize on our differentiated pharmaceutical-centric value proposition and as our team successfully executes on our key strategic initiatives.
This strength and execution continue to create value for our shareholders.
And today, we are again raising our fiscal 2021 full year guidance, which Jim will discuss later in greater detail.
I will focus my remarks today on the key strategic pillars that are driving our strong performance, as well as how, with the addition of Alliance Healthcare, AmerisourceBergen continues to be well positioned to create value for all our stakeholders.
AmerisourceBergen remains next-minded, and we are focused on continuing to enhance our ability to provide global healthcare solutions as we support pharmaceutical innovation and access, both in the United States and internationally.
In the United States, our Pharmaceutical Distribution business continues to benefit from our industry-leading customer relationships, our leadership in specialty distribution and commercialization services and strong end market trends, including an earlier than expected return to pre-COVID prescription utilization trends in the June quarter.
Our leading customer base includes our Good Neighbor Pharmacy and Elevate Provider Network members.
They are proving daily that community pharmacies are at the forefront of providing quality and equitable care and maintaining deep levels of trust with their patients and communities.
In fact, for the fifth year in a row, Good Neighbor Pharmacy was ranked highest among brick-and-mortar chain drug store pharmacies by J.D. Power.
This is the tenth time we have received that honor in the past 12 years, and it is a testament to community awareness of the value of the quality care and experience patients receive at GNP member pharmacies.
We held our annual Thoughtspot Conference last week, and I was touched and inspired by the stories that our members shared through the entrepreneurship, expertise and deep community roots, community pharmacies prove that they do more than just [draw] prescriptions.
They are critical promoters of health equity across the U.S., often driving above and beyond to provide holistic care and health education at the local level, particularly in under-resourced communities.
Since beginning of the pandemic, community pharmacies have stepped up fearlessly to meet the unprecedented challenges of a global health crisis and show the world why community pharmacies are integral to our communities.
The value proposition of community-based care has never been clearer.
Another relevant example is on the animal side.
The growth in pet ownership has increased demand for our veterinarian customers as pets are a cherished part of the family and the care a veterinarian provides is valued.
This positive trend over the last year has long-term benefits for our business as MWI is well positioned with key anchor customers and services.
On the human health side, access to local trusted expertise care remains vital, particularly for those dealing with complex health challenges that bring them into the care of specialty physician providers.
As I've said from the onset of the pandemic, we are conscious of the negative impact that restricted measures have on patients when they have less access to screenings and tests that help doctors identify serious health issues.
This has particularly impacted patients who are used to a doctor or healthcare facility.
But now our customers have begun to see a normalization in new patient trends.
And as a result, patients are more effectively being diagnosed and gaining access to treatment.
This is a clear positive for patient care.
As the leading provider of specialty distribution and commercialization services, we will continue to play our role in supporting pharmaceutical innovation and access as patients visit volumes continues to normalize.
Our specialty physician services business had strong performance this quarter and continues to differentiate AmerisourceBergen with leading value-added services, such as those through our physician GPOs.
Additionally, bio centers continue to be a positive for our customers, our business and the healthcare system overall as they provide room for new innovative products to come to market.
The innovations in CAR T and cell and gene therapies and the potential applications of the new mRNA technology offers the medical community new potential tools in the treatment of serious diseases that previously alluded truly effective care.
AmerisourceBergen is well positioned to support all these innovations through our specialty distribution and manufacturer services offerings.
Our unique ability to provide value-added expertise in conjunction with innovative solutions and quality service enhance our partnerships and grow our business.
With strong partnerships, relationships and a leading portfolio of solutions to support a wide pipeline of practices and products, AmerisourceBergen is uniquely positioned to capitalize on the market opportunities provided by global pharmaceutical innovation as we drive growth in our business and help our partners tackle some of the most critical challenges based in healthcare.
We have a strong foundation in place across our businesses.
And in June, we took another significant step forward by closing the Alliance Healthcare transaction and welcoming their talented team to the AmerisourceBergen family.
The acquisition of Alliance Healthcare is the next evolution of enhancing our ability to provide innovative and global healthcare solutions and is a critical component to our future success.
Alliance Healthcare is a strong and diversified pharmaceutical distribution and manufacturer services company with leading market positions across an attractive portfolio of both established European markets and high-growth emerging markets.
In addition to their traditional wholesale business, Alliance Healthcare operates a range of leading higher-margin innovation businesses serving both upstream partners and downstream customers.
The acquisition of Alliance Healthcare extends our distribution reach built by our market-leading services capabilities and expands on our key differentiators.
Specifically, AmerisourceBergen's leading portfolio of key anchor customers now includes a long-term relationship with Boots in the U.K. and a network of independent pharmacies across Europe through the Alphega pharmacy network.
Since the completion of the transaction, we have gotten the chance to know about the business and the people and Alliance Healthcare better, and we remain very positive about the opportunity that this landmark achievement provides AmerisourceBergen as we are positioned for a differentiated global growth platform.
This includes our dedication to further strengthen our portfolio of solutions and customer relationships to lead with market leaders in every segment and to supporting patient access wherever a prescription is needed.
Second, AmerisourceBergen's leadership in specialty is further enhanced with key commercialization services in new markets.
By leveraging the expertise and capabilities of our World Courier business, along with Alliance's Alloga and Alcura, we elevate our ability to be a differentiated solution provider for global manufacturers as they develop and commercialize pharmaceuticals around the world.
This is complementary to the solutions that we provide at World Courier, which continues to play a key role of providing global specialty logistics through growth traditional commercial offerings and direct-to-patient clinical trial capabilities.
We remain dedicated to expanding on our leadership in specialty and to enhancing our capabilities to support global pharmaceutical innovation.
Third, AmerisourceBergen focuses on delivering best-in-class services and efficiency, and this transaction enhances our ability to develop innovation solutions that are fundamental to our success operationally and commercially.
Our innovative mindset means that we embrace the advanced technologies, data and analytics, and now we can further support positive outcomes through our expanded global platform.
This fiscal quarter, we were selected as the industry leader award winner at the 2021 SAP Innovation Awards for our work in developing SAP Advanced Track and Trace for Pharmaceuticals.
This technology tracks millions of daily shipments at the batch level and further strengthens the pharmaceutical supply chain in the U.S. The value of a resilient and sustainable global pharmaceutical supply chain is vital and the ability to support pharmaceutical innovation to a global footprint with broad leadership and local expertise provide differentiated value for our partners.
AmerisourceBergen stakeholders recognize the value we create, the importance of our purpose and the critical nature of the service and the infrastructure that we provide.
Fourth, AmerisourceBergen continues to build upon our history of corporate stewardship, which focuses on advancing our people and culture, protecting the company's financial health and ensuring the long-term sustainable value creation.
With Alliance Healthcare, we are now an even more global [Indecipherable] company, and we are committed more than ever to advancing the value of our talent and culture.
Over the past year, we have invested in enhancing our talent and diversity and inclusion strategies to enable more growth opportunities within our increasingly inclusive workplace.
In the future, we plan to provide dedicated development opportunities for high-potential employees of additional underrepresented groups.
Investing in our leadership development and talent and culture is important to our long-term sustainable growth, which is supported by diverse and inclusive teams.
This focus is important to ensuring we capture the value of our collective differences and reflect our social commitment as we continue to strategically focus on delivering on all elements of ESG.
Our ESG strategy is foundational to AmerisourceBergen, our leadership, our Board and our people.
Recently, AmerisourceBergen joined the Science-based Targets initiative as we continue to line our business with best practice organizations around the world.
At the local level, we continue to be deeply committed to our communities.
This past year, we launched myCommunityImpact, Matching Gifts and Dollars for Doers Program, and we recently made it available to all global employees.
Our philanthropic efforts have been recognized by DiversityInc, ranking us 8th in their annual 50 [list] in philanthropy rankings.
With their unwavering passion and support, AmerisourceBergen is well positioned to capitalize on our global footprint to provide leading pharmaceutical distribution services and to leverage our expertise as an innovative commercialization services provider internationally.
We remain confident in our pharmaceutical-centric strategy, our capabilities as partner of choice with market-leading manufacturer services and our role in continuing the acceleration of pharmaceutical innovation.
By providing differentiated value to our stakeholders, focusing on our customers, expanding on our leadership in specialty and executing, innovating and supporting pharmaceutical innovation globally, we are well positioned to create long-term stakeholder value as we remain united in our responsibility to create healthier futures.
Before I discuss our third quarter results, I want to comment on the Pharmaceutical Distribution industry's continued progress toward reaching a negotiated resolution to substantially address the nationwide opioid litigation.
The proposed settlement agreement represents an important step toward achieving a broad resolution of governmental opioid claims and aligns with the legal accrual the company recorded in the fourth quarter of its fiscal year ended September 30, 2020.
AmerisourceBergen appreciates the enormity of the opioid epidemic, and this broad industry resolution is an important step toward delivering a meaningful relief to communities across the United States.
Turning now to our business.
AmerisourceBergen remains focused on our differentiated and innovative value proposition to deliver long-term growth and value creation to our stakeholders.
Powered by our purpose-driven team members, we will continue to execute on our pharmaceutical-centric strategy on an enhanced global platform to serve both upstream partners and downstream customers.
Having joined AmerisourceBergen myself through an acquisition and experience several acquisitions during my tenure, I have seen firsthand a thoughtful and strategic approach AmerisourceBergen takes to successfully integrate acquired companies.
We enjoy working with our incredibly talented new team members and learning more not only about their businesses, but also about how much we culturally have in common.
As we have said since announcing the acquisition, Alliance Healthcare is a strong and efficient business, and we look forward to working together to continue to provide innovative solutions to our customers and stakeholders.
My remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated.
Growth rates and comparisons are made against the prior year June quarter.
First, I will review our adjusted quarterly consolidated results and our segment performance.
Second, I will cover the upward revision to our fiscal 2021 guidance.
Turning now to discuss our third quarter results.
We finished the quarter with adjusted diluted earnings per share of $2.16, an increase of 17%, which was driven by the continued strong performance across AmerisourceBergen's businesses and also benefited from the one month contribution from the Alliance Healthcare acquisition.
Our consolidated revenue was $53.4 billion, up 18%, driven by revenue growth in both the Pharmaceutical Distribution Services segment and Other, which includes Alliance Healthcare and our Global Commercialization Services and Animal Health businesses.
Consolidated gross profit increased 32% to $1.6 billion, driven by increases in gross profit in each operating segment.
In the quarter, gross profit margin increased 33 basis points from the prior year quarter to 3.05%.
This was primarily due to the acquisition of Alliance Healthcare, which has a higher gross profit margin and increase in sales of specialty products in Pharmaceutical Distribution Services and growth in some of our higher-margin businesses.
Regarding consolidated operating expenses, operating expenses were $996 million, up 38% year-over-year due to the addition of the Alliance Healthcare business and also includes the internal investments we are making across our business with a focus on continuing to offer innovative services and solutions to our partners.
These investments are important as they ensure we continue to create differentiated value and support our long-term growth.
Turning now to consolidated operating income.
Our operating income was $631 million, up 24% compared to the prior year quarter.
This increase was driven by increases in both the Pharmaceutical Distribution Services segment and Other, which I will discuss in more detail when I review segment-level performance.
Operating income margin grew six basis points to 1.18% as a result of the contribution from the Alliance Healthcare acquisition and growth in higher-margin businesses.
Moving now to our net interest expense and effective tax rate for the third quarter.
The net interest expense was $51 million, up 36% due to debt related to the Alliance Healthcare acquisition.
Our effective income tax rate was 21%, up from 18.8% in the third quarter of fiscal 2020, which benefited from a discrete tax item.
Our diluted share count was 208.9 million shares, a 1.6% increase due to the dilution related to employee stock comp and the weighted average saving impact of the June issuance of two million shares delivered to Walgreens as a part of the Alliance Healthcare acquisition.
Turning now to adjusted free cash flow and cash.
Our adjusted free cash flow was strong in our fiscal third quarter, bringing our year-to-date free cash flow number to $1.2 billion, while our cash balance was $2.6 billion.
This completes the review of our consolidated results.
Now I'll turn to our segment results.
Pharmaceutical Distribution Services segment revenue was $49.3 billion, up 13% for the quarter driven by increased sales of specialty products and solid performance broadly across our Pharmaceutical Distribution businesses.
Across our distribution businesses, we are seeing better and earlier-than-expected utilization trends as there have been more normalized physician interaction patterns leading to new patient starts.
Pharmaceutical Distribution Services segment's operating income increased about 13% to $484 million.
AmerisourceBergen continues to benefit in the quarter from our leadership in specialty, where there has been a notable return to pre-COVID strength and continued positive biosimilar trends.
I will now turn to Other, which includes Alliance Healthcare MWI, World Courier and AmerisourceBergen Consulting.
Alliance Healthcare is in our results for the month of June and had strong performance out of the gate.
In the quarter, Other segment's revenue was $4.1 billion, up 128%, driven by the Alliance Healthcare acquisition and growth across the remaining operating segments.
Excluding the impact of Alliance Healthcare, Global Commercialization Services and Animal Health revenue was up 22%.
Other segment's operating income was $147 million, up 77% primarily due to the Alliance Healthcare acquisition and strong performance at both MWI and World Courier.
Excluding the impact of Alliance Healthcare, Global Commercialization Services and Animal Health operating income was up 21%, reflecting the solid fundamentals of the businesses.
World Courier has continued its exceptional performance, providing high- specialty logistics around the globe.
Despite challenges in global logistics due to limited international cargo space, the team has delivered industry-leading solutions and expertise to support our customers and partners.
Looking ahead, the business is highly complementary to Alliance Healthcare's Alloga and Alcura businesses, and we are excited to offer an integrated suite of solutions on our enhanced global platform to serve our manufacturer customers.
Turning now to MWI.
The pandemic has truly encouraged all of us to focus on the health and wellbeing of our communities and families.
And this includes our animal companions.
Over 12 million families in the U.S. have gained pets since the pandemic began, and since pet owners view their pets as family members, the focus on health and wellbeing is a positive market trend for our MWI companion business.
In the production animal market, our investments in technology solutions and the unique offering of value-added services position the business to support long-term global demand for protein.
MWI's strong execution and customer relationships have allowed the business to remain a best-in-class provider that is well positioned to capture these positive market trends.
That concludes our segment-level discussion, and I will now turn to our 2021 guidance.
Following the closing of the Alliance Healthcare acquisition back in June, we updated our 2021 guidance for revenue, adjusted diluted earnings per share and weighted average shares to reflect the expected contribution from Alliance Healthcare and the weighted average share count impacted the two million shares of stock that we delivered to Walgreens.
Given the continued strong performance of AmerisourceBergen's businesses, we are again raising our earnings per share guidance from a range of $8.90 to $9.10, up to a range of $9.15 to $9.30, reflecting growth of 16% to 18% from the previous fiscal year.
We are also updating other financial guidance metrics for fiscal 2021, including a meaningful increase to our expectations for consolidated and segment adjusted operating income.
First, I'll begin with operating expenses.
Operating expenses are now expected to be approximately $3.9 billion due to the Alliance Healthcare acquisition.
As a reminder, when you consider your models, Alliance Healthcare has higher margins for gross profit, operating expenses and operating income as evidenced by the update to our fiscal 2021 guidance for consolidated operating expenses to reflect the four months of Alliance Healthcare.
Next, turning to operating income.
We now expect operating income to be approximately $2.6 billion.
This is a result of raising our Pharmaceutical Distribution operating income guidance to the low double-digit growth range given the strong trends we have continued to see in our business, including specialty, which was further bolstered by patient referral activity this quarter.
This rate also reflects our expectation for operating income in Other of approximately $610 million to $620 million.
Excluding the contribution from Alliance Healthcare, operating income growth for Global Commercialization Services and Animal Health group is expected to be in the low double-digit range for fiscal 2021, driven by the strong performance of the World Courier and MWI.
Finally, turning to free cash flow, we have raised our free cash flow guidance to be approximately $1.7 billion, up from approximately $1.5 billion.
As it pertains to fiscal 2022, our corporate planning process remains unchanged.
We will provide comprehensive financial guidance at the end of our current fiscal year.
This approach allows for guidance to be fully informed by the output of our year-end business planning process.
That being said, we want to remind you three important items from fiscal 2021 as you consider your models.
First, through the end of June, the financial contribution from sales of COVID-19 therapies has declined in line with the expectations we have shared since the first quarter.
COVID therapy distribution contributes roughly $0.25 to our fiscal 2021 adjusted earnings per share guidance, and the benefit from that exclusivity is not expected to repeat in fiscal 2022.
Second, we will have higher interest expense in fiscal 2022 driven by the debt related to the Alliance Healthcare acquisition.
Third, for the fourth quarter of fiscal 2021, we expect our weighted average shares to be almost 211 million shares due primarily to the fully planned impact of the two million shares of our stock delivered to Walgreens at the close of the Alliance Healthcare acquisition.
Our share count will continue to tick higher in 2022 due to normal employee stock comp-related solution and the fact that we have committed to prioritize paying down $2 billion in total debt over the next two years and [lower] shareholder purchases.
Moving past these modeling reminders.
The strength of AmerisourceBergen is undeniable and is exemplified by our continued exceptional results quarter-after-quarter.
This is the sixth quarter since the pandemic began and our results demonstrate the resilience and strength of our company.
I am thoroughly impressed by the execution and performance across our businesses that has positioned us for continued success.
Our pharmaceutical-centric foundation, market-leading talent and competitive positioning enable us to capitalize on market trends and continue to deliver strong results.
AmerisourceBergen remains focused on creating long-term financial value, and we continue to work diligently to build our corporate stewardship initiatives to ensure the work we are doing benefits all stakeholders.
We are focused on continuing to build robust talent development programs so that all our team members feel they have opportunities to grow and learn.
In our communities, we're supporting nonprofit partners through our foundation to expand access to quality healthcare, promote health equity and provide resources to ensure prescription drug safety.
In addition, we aim to be environmental stewards in the communities where we live and work through initiatives like our commitment to using sustainable packaging to reduce the use of single-use plastics and working closely with our partners to optimize delivery routes to minimize our greenhouse gas emission footprint.
We look forward to providing further updates on our ESG progress as we continue to find ways to make a positive impact on the people, planet and communities where we live and work.
As we focus in on the end of our fiscal year with strong momentum and continued outperformance across our business, it is important to take a moment to reflect on the important accomplishments we have already had this year.
First, our teams continue to execute and leverage our capabilities to create differentiated value for our stakeholders.
Second, our future growth has been further solidified by our acquisition of Alliance Healthcare.
Third, our purpose-driven culture continues to empower our team members that think, plan and act decisively to do what is right for our people, partners and communities.
And finally, we continue our long-term commitment to strategically invest in our businesses and talent to ensure that AmerisourceBergen will continue to deliver long-term sustainable value for all our stakeholders.
As we look to the future, I'm proud of the resilient foundation we have built while we facilitate pharmaceutical innovation and remain united in our responsibility to create healthier futures.
| q3 adjusted non-gaap earnings per share $2.16 excluding items.
adjusted diluted earnings per share guidance range raised to $9.15 to $9.30 for fiscal 2021.
revenues of $53.4 billion for q3, a 17.7 percent increase year-over-year.
adjusted free cash flow for fy 2021 to be approximately $1.7 billion, up from approximately $1.5 billion.
|
During today's call, we will reference non-GAAP metrics.
I am pleased to report record first quarter results.
We grew our sales to $761 million, sales were up 20% and earnings per share was up 26% versus last year.
It was an encouraging quarter for Donaldson, particularly given the backdrop of well documented supply chain disruptions, labor shortages and significant cost inflation.
In the face of these challenges, our team rose to the occasion and delivered, and I am proud of what we accomplished.
As we look to the remainder of the year, we expect the macro headwinds to persist.
While we are well positioned to deal with these challenges, there is no doubt that we will feel near-term impacts.
To address these macro challenges, we are pulling many levers, including raising prices to mitigate the impact of cost increases, utilizing our geographically diverse manufacturing and distribution footprint to meet the needs of our global customers and to mitigate labor-constraint issues, particularly in the U.S. and aggressively recruiting and competing for talent to expand our strong team of dedicated employees.
As we navigate the year, we are also investing for future organic and inorganic growth.
We continue to spend on our R&D to ensure we remain the leader in what we do best, technology-led filtration.
I'm also pleased to have two new acquisitions under our belt.
First, we recently announced the acquisition of Solaris Biotech.
Solaris is a designer and manufacturer of bioprocessing and filtration equipment used in food and beverage, biotechnology and other life sciences markets.
We've been working hard to expand our reach in the life sciences, and this acquisition is the first step in our string of pearls strategy to get there.
We can now leverage Solaris' technology and customer relationships to advance our capabilities in this space.
I am confident in our ability to scale the Solaris business with our commercial capabilities and strong balance sheet.
Our second recent acquisition was that of P-A Industrial Services.
We closed this transaction on November 1 with a purchase price of $4 million.
While the company only generates a little under $4 million in revenue today, this acquisition allows us to support our Industrial segment with the addition of a services business.
Donaldson and P-A Industrial share the vision of delivering superior service along with great products to help our customers' operations run better.
We believe we are heading into the balance of the year from a position of strength.
And we feel good about our ability to navigate the near-term challenges, while still building our business for the future.
With that said, we are raising our top and bottom line guidance for fiscal 2022 based on a few factors; first quarter results, higher sales expectations driven in part by incremental pricing and operating expense leverage.
We will share more details about our fiscal '22 outlook later in the call.
So I'll now provide some context on our first quarter sales.
Total sales were $761 million, which is up 20% from last year, due in part to last year's softness related to the pandemic.
In Engine, total sales were $527 million, up 21% with our first-fit businesses leading the charge once again.
Sales in Off-Road were $94 million, up 45%.
Nearly half of the first quarter growth was driven by Exhaust and Emissions, reflecting a production ramp up related to new emission standards in Europe.
As we've talked about before, the strength in this business does create mix pressure on margin.
Beyond Exhaust and Emissions, first quarter sales in Off-Road also benefited from increased levels of equipment production across end markets and geographies.
The exception was in the Asia Pacific region where we compared against the sales increase of nearly 40% in the prior year.
In On-Road, first quarter sales were $32 million or down 1.5% year-over-year.
North America had the biggest decline, reflecting the discontinuation of some directed-buy equipment to a large OEM customer.
Importantly, excluding this impact, total On-Road sales would have been up about 12% globally and up 7% in North America.
As we look forward, we believe On-Road will be under additional pressure for the remainder of the year as many customers continue to struggle with supply chain issues, including the persistent chip shortage.
In Engine Aftermarket, sales in the first quarter were $374 million, an increase of 18% from the prior year.
Aftermarket sales were up in all geographies and both channels.
Independent channel sales grew in the mid-teens and OE channel sales were up in the low-20s.
Our innovative proprietary products are always a big piece of the Aftermarket story.
These products accounted for about 30% of total Aftermarket sales and grew about 20% year-over-year.
Our independent channel is benefiting from continued strength in less mature markets.
Brazil, Russia and South Africa put up impressive growth rates in the first quarter, and we are excited about our prospects in these geographies.
In the OE channel of Aftermarket, proprietary products are again contributing to our growth.
In the first quarter, sales of these products were up in the mid-20% range and they now account for nearly 40% of our Aftermarket OE channel sales.
Included in these figures is PowerCore, which achieved another quarterly record for Aftermarket sales and increased more than 18%.
Moving to Aerospace and Defense, first quarter sales of $28 million were up 23% year-over-year as the commercial aerospace industry rebounds from the pandemic-related pressure a year ago.
Activity remains below pre-COVID levels in Aerospace, so there should be more growth to come as the industry continues to recover.
Lastly on Engine, I will quickly talk about China.
Engine sales were down about 6% in the quarter.
However, this is against a 40% increase last year.
The increase last year reflects a faster rebound in China from the pandemic than we saw in other parts of the world.
Overall, we remain pleased with our progress in the region.
We are winning new business with local Chinese manufacturers.
And over time, we continue to expand our share in this massive market.
Now on to Industrial.
The Industrial segment had another solid quarter with total sales increasing 17% to $234 million.
Sales of Industrial Filtration Solutions or IFS, grew 23% to $166 million with two-thirds of the increase coming from industrial dust collection.
We had strong sales growth of new equipment and replacement parts, which reflects more investment and industrial capacity utilization.
Process Filtration sales also contributed to first quarter growth in IFS.
Process Filtration sales, which serve the food and beverage market, grew over 30% due to growth in new equipment and replacement parts in Europe.
First quarter sales of Special Applications were $52 million, up 23% with strong contributions across our product portfolio, including notable increases in our disk drive and membranes businesses.
Also within Special Applications, first quarter sales of venting products grew 19%.
We continue to build share in strategic markets, including high-tech vents for batteries and powertrains in the auto industry and expect venting solutions to contribute to our growth for years to come.
First quarter sales of Gas Turbine Systems or GTS were approximately $17 million, down 28% to almost entirely to timing of orders.
Our outlook for the year has not changed and we expect to make up first quarter revenue shortfalls in the second quarter.
Overall, we are off to a strong start for fiscal 2022 and I feel confident about our ability to successfully navigate this uncertain and volatile environment.
To sum up the first quarter, our employees did an excellent job delivering solid results in a tough environment.
First quarter sales grew 20%, operating income was up 23% and earnings per share of $0.61 was 26% above the prior year.
First quarter operating margin increased 40 basis points to 14.1%.
The increase was from leverage on higher sales, which was partially offset by gross margin pressure.
Driving into gross margin a bit further, the impact of raw material cost inflation built through the quarter.
This impact was compounded by the fact that we were experiencing a deflationary environment one year ago.
As we look at the remainder of the year, we will be impacted by ongoing inflationary headwinds.
We will continue to build on the success we have had implementing price increases in several of our businesses to offset the cost pressure.
That said, the full impact of the pricing benefits may take longer to materialize due to certain large OEM customers.
We are in ongoing discussions with these customers, and we'll continue to drive toward offsetting the incremental costs we are currently absorbing.
On the operating expense front, we are pleased with our discipline and success in optimizing our levels of spend.
We continue to invest in our Advance and Accelerate portfolio.
This spend was offset by controlled expense management elsewhere in the organization.
First quarter operating expense as a percent of sales was favorable by approximately 160 basis points, driven primarily by volume leverage.
Other expense was favorable this quarter by $1.5 million, mostly due to a pension curtailment charge we took in the first quarter of last year.
Turning to the balance sheet and cash flow statements, I'd like to highlight a few things.
Our first quarter cash conversion ratio was 32%, down meaningfully from last year, driven primarily by investments in inventory to further support our increasing demand.
Inventory this quarter were up $60 million sequentially and $115 million year-over-year, mainly due to the impact of inflation, a commitment we made to increased levels of inventory to ensure we're adequately prepared to meet demand and supply chain challenges we have had internally with our customers on order deliveries.
As a result, working capital was $71 million, net use of cash this quarter versus a $33 million benefit last year.
First quarter capital expenditures were $18 million as we invested in various projects, including PowerCore capacity expansion in North America.
This quarter, we continued with our track record of returning cash to shareholders.
We repurchased 1.3% of our outstanding shares for $103 million and we paid dividends of $27 million.
Our strong balance sheet and financial flexibility has been an important asset, while operating in this challenging supply environment.
We ended the quarter with a net debt to EBITDA ratio of 0.7 times.
Now I'd like to walk through our fiscal '22 outlook.
We are now expecting fiscal 2022 sales to be up between 8% and 12% with the nominal impact from currency translation.
This increase from our previous guidance of 5% to 10% is driven by Q1 results as well as benefits from additional pricing actions that will be implemented and rolling over the balance of the year.
We continue to expect a greater sales year-over-year increase in the first half versus the second, driven in large part by prior year comparisons.
From a segment perspective, we've increased our full year sales expectations for both Engine and Industrial.
For the Engine segment, we expect the revenue increase between 8% and 12%, up from our previous expectation of between 5% to 10%.
Within Engine, sales of our first-fit businesses are forecasted to be mixed.
Off-Road sales are expected to grow in the high-teens versus last year due to increased levels of equipment production and the continued success of new program wins in our Exhaust and Emissions business.
The Off-Road forecast is up slightly from the low-double-digit growth we've previously projected.
In On-Road, we are seeing a slowdown in demand from some of our customers as they grapple with their own supply chain issues.
Based on first quarter results and our current order trends, we now expect On-Road sales to be down low-single-digits versus our previous guide of up low-single-digits.
For Engine Aftermarket, we are increasing our expectations slightly to high-single-digit growth from our previous guidance of mid-single-digit growth.
Equipment utilization remained strong and we are continuing to gain share with proprietary products.
Our outlook for Aerospace and Defense has not changed.
We are still forecasting low-double-digit growth for the year, due in large part to comping against the COVID-related market weakness in fiscal '21.
Now on to the Industrial segment.
We expect sales to be up between 7% and 11%, which brings up the bottom end of our previous guidance range of 6% to 11% by a point.
Sales of Industrial Filtration Solutions are planned up in the low-double-digit range consistent with the guidance we gave last quarter.
Improved sales of new equipment and replacement parts, particularly dust collection as well as strength in process filtration will continue to be the drivers.
In terms of IFS, I would just like to mention that while revenue related to our recent acquisition of Solaris Biotech will follow in the segment, we do not expect a material impact this fiscal year.
Solaris bookings for this calendar year are expected to be approximately EUR11 million.
And revenue related to those bookings should flow through over the next several quarters.
We continue to expect fiscal '22 sales up high-single-digits.
As Tod noted in his remarks, the first quarter sales decrease was a result of timing, and we do expect to recover those sales.
Special Applications revenue is forecasted to be up low-single-digits versus our initial guidance of down low-single-digits, reflecting stronger than expected growth across the portfolio in the first quarter.
Now let's move to operating margin.
We maintained our expectation for a full year rate between 14.1% and 14.7%.
As a reminder, last year's adjusted operating margin was 14%.
Expense leverage will be the primary driver of the year-over-year benefit.
On gross margin, given what we saw in the first quarter and the trends we are seeing in raw material, freight and labor crisis, we believe the inflation headwind will be more significant than we originally planned.
We expect to offset the higher costs with pricing over time.
However, the net impact on gross margin will be greater than anticipated.
And we now expect gross margin to be down 50 to 100 basis points from the prior year.
To expand further on this point, last quarter we said we expected to pay 8% to 10% more for our raw materials this year, which equated to about 300 basis points.
That estimate is now 12% to 14% or a little shy of 400 basis points.
Additionally, freight and labor costs have now become a more significant headwind than we anticipated, which results in additional 100 basis points of gross margin pressure.
So as a result of these dynamics and our typical seasonality, we should see operating margin improve in the second half of the year versus the first half.
Based on our updated forecast, we plan for a new earnings per share record of between $2.57 and $2.73, implying an increase from last year's adjusted earnings per share of 11% to 18%.
Just briefly on the balance sheet and cash flow outlook.
In terms of capital expenditures, we are lowering our planned spend for this year to a range of between $90 million and $110 million.
So essentially, a $10 million reduction to the range we provided in September of $100 million to $120 million.
The macro headwinds we've been talking about this quarter are impacting almost every part of our business.
Given supply chain uncertainty and other variables, the timing of execution on some of our capacity expansion projects could be slowed.
So we felt it prudent to bring the range down in line with current expectations.
In terms of free cash flow, increased inventory levels, partially offset by the lower capex, result in a reduction to our free cash flow conversion forecast to between 70% and 80%, down from our initial guidance of 80% to 90%.
On share repurchases, we still plan to repurchase about 2% of our outstanding shares this fiscal year.
In summary, I am pleased with our first quarter results.
I am also confident our business model is equipped to manage the uncertain times ahead.
While the results of our more recent pricing actions will take a bit of time to flow through our financials, we are taking the right steps to protect our margins and deliver record level of sales and profit this fiscal year.
We are also committed to managing the business for long-term, and we'll continue to make thoughtful investments for future growth.
As we look to the rest of the fiscal year and beyond, I would like to touch on a few key paths we are pursuing to build on our success and push the company forward to the next stage of its evolution through profitable growth.
First, we are continuing to invest in our existing Advance and Accelerate solutions, including Process Filtration, dust collection and replacement parts and Engine Aftermarket.
Second, we are diversifying the company's offerings, both organically and inorganically, to ensure we meet the needs of our existing and future customers globally.
On the organic side, we are committed to our R&D.
We previously invested $15 million for our materials research center, which will enable further development of our polymer-based chemistry solutions.
It is also important to note, we increased our R&D budget this fiscal year by 10% over last year.
On inorganic diversification, the recent acquisitions of Solaris and P-A Industrial Services are just the beginning.
Solaris is the first inorganic step on our journey to create a life sciences business.
We are excited about the value we can add through our global market reach, science and technology, filtration capabilities and our ability to invest for future growth.
This, combined with Solaris' market reputation and product portfolio, are a winning combination.
Third, we are investing in our people and recruiting the right talent to drive the company forward.
We have made people investments in areas such as life sciences, food and beverage and ESG.
Donaldson employees with their dedication and hard work are the core of our business.
Before we close, I also want to touch on our ESG efforts as this is an important part of our culture.
We began global implementation of our environmental health and safety policies in 2018.
Safety and greenhouse gas emission reductions are near-term priorities, and we're making progress.
We are well on our way of reducing CO2 emissions by 6,000 metric tons by the end of fiscal 2022.
Our company is geographically and culturally diverse.
We have strong governance, including a seasoned board with balanced tenure.
Also critically important is the alignment of the compensation of our board and management with shareholder interest.
So as I look out over the long-term, I strongly believe we have the right strategy in place to continue delivering value to our stakeholders for years to come.
| compname reports q1 earnings per share of $0.61.
q1 earnings per share $0.61.
q1 2022 operating margin increased to 14.1% from 13.7% in 2021.
donaldson increases fiscal 2022 sales and earnings per share guidance.
raising our fiscal 2022 sales and earnings outlook.
macro-economic headwinds are creating a different path to achieving our results than we previously anticipated.
donaldson company - gross margin is under additional pressure as raw material, freight, and labor costs have climbed beyond our original expectations.
to partially mitigate pressure by raising prices in most markets.
fiscal 2022 gaap earnings per share is now expected to be between $2.57 and $2.73.
sales growth during first half of year is expected to outpace second half of year.
currency translation is expected to be a nominal headwind in fy22.
fy22 net sales are projected to increase between 8% and 12% year-over-year.
|
These documents can be found on our website at marathonoil.com.
We'll also hear from Mike, Dane and Pat before we get to our question-and-answer session.
While I get the privilege of talking about our company's impressive results and outlook today, it is their hard work that makes all of this possible.
Through our commitment to capital discipline and our differentiated execution, we are successfully delivering outsized financial outcomes for our shareholders, highlighted by more than $1.3 billion of free cash flow year to date.
For our $1 billion full year 2021 capital budget, at forward curve commodity pricing, we now expect to generate well over $2 billion of free cash flow this year, at a reinvestment rate below 35% and a free cash flow breakeven below $35 per barrel WTI.
We are successfully delivering on all of our financial and operational objectives and achieving bottom line results that we will put head-to-head against any other energy company and against any other sector in the S&P 500.
This strong financial performance has enabled us to pull forward our balance sheet targets.
And this further improvement to our already investment-grade balance sheet has given us the confidence to dramatically accelerate the return of capital to equity holders.
Under our unique return of capital framework, our shareholders get the first call on cash flow, a minimum of 40% of our total cash flow from operations in the current price environment.
Consistent with our commitment to shareholder returns and our objective to pay a competitive and sustainable base dividend, we have raised our base dividend by 20% this quarter.
This is the third quarter in a row that we have increased our base dividend, representing a cumulative 100% increase since the end of 2020, a sign of the increased confidence we have in our business.
We are also targeting approximately $500 million of share repurchases during the fourth quarter with $200 million already executed.
At a free cash flow yield north of 20%, we believe our equity offers tremendous value.
Additionally, there remains a dislocation between our equity and strengthening commodity prices coupled with a more mature business model that underwrites repurchases through the cycle.
Further, buying back our stock for good value provides the added potential of significantly reducing our share count, meaningfully improving all of our per-share metrics even under a maintenance scenario and increasing our longer-term capacity for continued per share base dividend increase.
Looking ahead to fourth quarter, including our base dividend and planned share repurchases, we expect to return approximately 50% of our total cash flow from operations to equity holders, fully consistent with our return of capital framework that prioritizes the shareholder first.
Our financial flexibility and the power of our portfolio in the current commodity price environment provided the confidence for our board to also increase our total share repurchase authorization to $2.5 billion, to ensure we can continue executing on our return of capital plans as we progress through 2022.
And perhaps most importantly, everything that we are doing is sustainable, backed by our five-year benchmark maintenance scenario and our ongoing pursuit of ESG excellence through top quartile safety performance, significant reductions to our GHG intensity and best-in-class corporate governance.
Third quarter operations were again solid, demonstrating that we remain on track to achieve or outperform all of the key 2021 financial, operational and ESG-related objectives that we established at the beginning of the year.
First and foremost, our consistent execution is translating to outsized financial outcomes, highlighted by over $2 billion of expected free cash flow, with a material sequential increase expected in the fourth quarter, a full year 2021, reinvestment rate below 35% and full year corporate free cash flow breakeven $35 per barrel WTI.
Our gas capture during third quarter also exceeded 99%, as we continue to reduce our GHG emissions intensity.
There is no change to our $1 billion full year 2021 capital budget.
Raising our spending levels this year has never been a consideration, consistent with our commitment to capital discipline.
There is also no change to the midpoint of our full year total company oil or total company oil equivalent production guidance.
We're also raising our full year 2021 EG equity method income guidance for the second consecutive quarter to a new range of $235 million to $255 million due to stronger commodity prices.
This is a 30% increase from the guidance we provided last quarter and a 120% increase relative to our initial guidance at the beginning of the year.
Our full year production and EG equity method income guidance truly contemplate an unplanned outage we experienced in EG late in the third quarter.
Looking ahead to fourth quarter, we expect to finish the year strong with our total company oil production increasing to between 176,000 and 180,000 barrels of oil per day in comparison to 168,000 barrels of oil per day during the third quarter.
Our quarterly production volumes are all subject to some normal variability associated with well timing.
But this more significant sequential increase is due largely to deferred Bakken production associated with third-party midstream outages, strongly well performance and solid base production management.
We also expect our fourth quarter total company oil equivalent production to be similar to the third quarter at 345,000 barrels of oil equivalent per day, with a sequential increase in the U.S. offsetting a sequential decrease in Equatorial Guinea associated with the previously referenced outage.
As I noted last quarter, our financial priorities are clear and unchanged, generate strong corporate returns with significant sustainable free cash flow, all prove our already investment-grade balance sheet and return significant capital to shareholders.
Early in the third quarter, we retired $900 million in debt, bringing total 2021 gross debt reduction to $1.4 billion and achieving our targeted $4 billion gross debt level.
With this milestone, we no longer feel the need to accelerate additional debt reduction.
And going forward, we plan to simply retire debt as it matures.
And please note that we have no significant maturities in 2022.
This balance sheet repositioning was achieved well ahead of our original schedule, which opened the door to begin returning a significant amount of capital to equity holders.
To be clear, these are returns beyond our base dividend which we just increased for the third consecutive quarter.
Our base dividend is actually up 100% over that time period, now at $0.06 a share per quarter and the $50 million of annual interest savings were realized due to lower gross debt will help fund a significant portion of this base dividend increase.
Our equity return framework calls for delivering a minimum of 40% of cash from operations to shareholders when WTI is at or above $60 a barrel.
This is a peer-leading return of capital commitment.
It is also competitive with any sector in the S&P 500.
Our fourth quarter is shaping up to be an exceptionally strong free cash flow quarter due to a combination of higher commodity prices and oil volumes quite a bit stronger than the third quarter.
At recent strip pricing, this could take our operating cash flow to approximately $1.1 billion or about a 25% sequential increase versus the third quarter.
Add to that an expected increase in dividend distributions from EG and lower capex relative to the third quarter peak and fourth quarter free cash flow could almost double to north of $850 million.
So in Q4, we expect to have lots of flexibility to exceed our 40% of operating cash flow, a minimum threshold for equity returns.
In fact, through our base dividend and approximately $500 million of share repurchases, we expect to return approximately 50% of our operating cash flow to investors during the fourth quarter while further improving our cash balance and net debt position.
As we also mentioned, we believe that buying back our stock in a disciplined fashion makes tremendous sense.
There are many opportunities in the market right now that provide a sustainable free cash flow yield north of 20%.
Stepping back, the full year 2021 financial delivery is exceptional, $140 million in base dividends, $1.4 billion in debt reduction and $500 million of share repurchases representing a total return to investors combined debt and equity of over $2 billion or over 60% of our expected full year operating cash flow at strip commodity prices.
Our actions in 2021 have successfully repositioned the balance sheet and kicked off a strong track record of equity returns.
Going forward, we're going to stay laser-focused on our financial priorities and our return of capital framework, taking into account our cash flow outlook when making return decisions.
Because our framework is based on a minimum percentage of cash flow from operations and not free cash flow, the equity investor will have the first call on cash, not to drill a bit.
We recently completed our 2021 REx drilling program, which was focused on the continued delineation of our contiguous 50,000 net acre position in our Texas Delaware oil plant.
As a reminder, this is a new play concept for both the Woodford and Meramec that was secured through grassroots leasing at a very low cost of entry and with 100% working interest.
This is essentially an exploration bolt-on that is complementary to our already established position in the Northern Delaware.
We brought online our first multi-well pad during the third quarter.
And while it is still very early, initial production rates in both Woodford and Meramec are exceeding our predrill expectations.
More specifically, one of the Woodford wells achieved an IP30 of almost 2,100 barrels of oil per day at an oil cut of 66%.
This appears to be the strongest Woodford oil well ever drilled in any basin.
And while we don't yet have 30-day rates for the other two wells, early indicators, including IP24s are all very positive.
A primary objective of this three-well pad was to execute our first spacing test in the playing.
To date, we are seeing no evidence of interference between the Woodford and Meramec, consistent with our expectations due to over 700 feet of vertical separation between the two zones.
As I stated, it's still early and we need more production history to draw stronger conclusions, but we are certainly encouraged by the initial results from this first spacing test, including the record Woodford productivity.
The second objective was to continue to progress our learnings and cost improvements and completed well costs.
We expect to ultimately deliver well costs comparable to those achieved in the SCOOP and are aggressively leveraging our substantial experience in Oklahoma to that end.
In total, we have now brought online nine wells since play entry that have successfully delineated our position.
The six wells with longer dated production have collectively demonstrated strong long-term oil productivity.
Oil cuts greater than 60%, low oil ratios below one and shallow declines.
Looking ahead to 2022, you should expect us to continue to integrate our learnings and progress our understanding of this promising play.
However, we will do so in a disciplined manner and within our strict reinvestment rate capital allocation framework.
I will close with a quick summary of how we have positioned our company for success and a preview of what to expect from us in 2022.
Spoiler alert, there will be no surprises in 2022 and no compromise with respect to our capital return framework.
If we focus on the financial benchmarks that matter, we are delivering top-tier capital efficiency, free cash flow yield and balance sheet strength.
Our 2021 capital rate of sub-35% and capital intensity as measured by capex per barrel of production are both the lowest in our independent E&P peer group, a strong validation of our leading capital and operating efficiency.
We are also one of the few E&Ps expecting to deliver a 2021 reinvestment rate at or below the S&P 500 average.
We're also delivering top quartile free cash flow yield this year among our peer group and well above the S&P 500 average.
And we are doing all of this with an investment-grade balance sheet at sub-onetime net debt to EBITDA, a 2021 leverage profile also well below both our peer group and the S&P 500 average.
In short, we are successfully delivering outsized financial performance versus our peer group and the broader market with the commodity price support we are experiencing this year.
Yet perhaps more importantly, we are well positioned to deliver competitive free cash flow and financial performance versus the broader market at much lower prices than we see today, all the way down to the $40 per barrel WTI range.
This is the power of our sustainable cost structure reductions, our capital and operating efficiency improvements and our commitment to capital discipline, all contributing to a sub-$35 per barrel breakeven.
Looking ahead to 2022, our differentiated capital allocation framework that prioritizes the shareholder at the first call on cash flow generation will not change.
Our commitment to capital discipline will not waver with maintenance oil production, the case to beat, as we finalize our 2022 budget.
We believe the right business model for a mature industry prioritizes sustainable free cash flow, a low reinvestment rate and meaningful returns to equity investors, not growth capital.
Recall that we introduced a unique five-year maintenance scenario earlier this year that featured $1 billion to $1.1 billion of annual spending, $1 billion of annual free cash flow at $50 WTI and a 50% reinvestment rate.
Given we are no longer living in a $50 per barrel environment and that prices are currently north of $80 per barrel, it is both prudent and reasonable to consider some level of limited inflation up to about 10% that would yield modest pressure on the maintenance scenario capital range.
Yet importantly, this modest level of inflation pales in comparison to the uplift to our financial performance in the current environment, with a 2022 maintenance scenario free cash flow potentially on the order of $3 billion at recent strip pricing or nominally three times the $50 benchmark outcome.
And under such a maintenance scenario, we are positioned to lead the peers once again with a 2022 free cash flow yield above 20%, far in excess of the S&P 500 free cash flow yield of approximately 4%.
Our minimum 40% of cash flow target translates to about $1.6 billion of equity holder returns next year.
But that is a minimum and we see significant headroom to drive that number higher.
At the expected 4Q run rate of 50% of CFO, 2022 equity holder returns would increase to approximately $2 billion, while still improving our cash balance and net debt position.
Even at a more conservative $60 per barrel oil price environment, our minimum 40% of cash flow targets still translates to about $1.1 billion of equity holder returns in 2022.
And applying 2022 consensus estimates to the return frameworks disclosed by our peers, only confirms our leading return of capital profile, with a double-digit cash distribution yield to our equity investors in 2022.
The confidence in this outsized delivery is further supported by recent board action to increase our share repurchase authorization to $2.5 billion to ensure we have sufficient runway to continue delivering on our return of capital commitment next year.
To close, our company was among the first to recognize the need to move to a business model that prioritizes returns, sustainable free cash flow, balance sheet improvement and return of capital.
We have also led the way in better aligning executive compensation to this new model and with investor expectations.
We are successfully executing on our model today, delivering both financial outcomes and ESG excellence that are competitive not just with our direct E&P peers but also the broader market.
With that, we can open up the line for Q&A.
| q3 oil-equivalent production of 345,000 net boed.
no change to midpoint of 2021 total company oil or oil-equivalent production guidance.
marathon oil's 2021 capital expenditure guidance of $1 billion remains unchanged.
marathon oil - raising its fy 2021 equatorial guinea equity method income guidance for second consecutive quarter to new range of $235 million to $255 million.
company expects q4 total oil-equivalent production to be similar to q3 production of 345,000 net boed.
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Our conference call slides have been posted on our website and provide additional information that may be helpful.
Sales totaled $374 million this quarter, a decrease of 8% from the first quarter last year.
While acquisitions added one percentage point of revenue growth this quarter, changes in currency translation rates decreased sales by approximately one percentage point.
Net earnings totaled $73 million for the quarter or $0.42 per diluted share.
After adjusting for the impact of excess tax benefits from stock option exercises, net earnings totaled $65 million or $0.38 per diluted share.
Our gross margin rate was 53.2% in the first quarter, approximately the same as last year.
Favorable realized pricing nearly offset the adverse effects of lower factory volume, unfavorable product and channel mix and changes in currency translation rates.
Operating expenses decreased by $3 million from the first quarter last year as reductions in volume and earnings-based expenses more than offset higher product development and occupancy costs.
Reported income tax rate was 11% for the quarter, approximately three percentage points lower than last year, primarily due to an increase in excess tax benefits related to stock option exercises.
After adjusting for this effect and other nonrecurring tax benefits, our tax rate for the quarter was 20.8%, similar to last year.
e grew $250 million on our $500 million credit facility during the first quarter to increase our cash position and preserve financial flexibility.
The proceeds from the advance are available to be used for working capital, general, corporate or other purposes.
This will add approximately $1 million to quarterly interest expense.
Cash flows from operations totaled $54 million in the first quarter as compared to $51 million last year, slightly above the first quarter last year.
Capital expenditures totaled $19 million in the first quarter.
We also paid cash dividends of $29 million.
For the full year 2020, capital expenditures are expected to be approximately $70 million, including approximately $50 million for facility expansion projects.
During the first quarter, we made share repurchases of approximately $90 million, including $8 million, which had not yet settled at the end of the quarter.
Cash used for repurchases was partially offset by issuances of $37 million.
The purchase of approximately 2.1 million shares in the first quarter will largely eliminate dilution in 2020.
We may make further opportunistic share repurchases going forward.
Due to economic uncertainty, we have withdrawn our revenue guidance for the remainder of 2020.
However, I will take a moment to talk about the effect of lower sales and unabsorbed factory costs in hypothetical terms.
As an example, the sales declined by 20% and factory volumes declined by an equivalent amount, while also maintaining our infrastructure then the unfavorable effect of unabsorbed cost on gross margin rate is expected to be about two to 2.5 percentage points.
If the sales declined by 30% and factory volumes declined by the same amount while maintaining our infrastructure, the unfavorable effect is expected to be about 3.5 or four percentage points on gross margin rate.
Although, factory volumes are challenging, we expect that favorable realized pricing, lower commodity cost in our normal practice of implementing productivity improvement projects will also continue and will favorably contribute to gross margin rate.
With a revenue decline of 8% in the first quarter, we saw a decline in operating earnings of 14% or decremental margins of 47%.
If revenues declined similarly in the next quarter, we would expect a similar decline in profitability.
At a 30% decline in revenue, similar to current booking trends while maintaining our expense base, decremental margins are expected to be around 65%.
Although, our decremental operating margins can be steep during periods of revenue decline, as shown in our historical trends, we are able to remain profitable with our current cost structure even with a substantial reduction in sales.
For final comments, looking forward to the rest of the year.
Based on current exchange rates and the same volume and mix of products and sales by currency in the prior year, the effective exchange is currently expected to be a headwind of approximately 1% on sales and 3% on earnings in 2020.
Unallocated corporate expenses are expected to be approximately $30 million for the full year 2020 and can vary by quarter.
The effective tax rate is expected to be approximately 20% to 21% for the full year, excluding any FX from excess tax benefits related to stock option exercises or other onetime items.
Rather than rehash the reported numbers, I'll try to shed some light on what we saw as Q1 progressed.
Coming into 2020, we had anticipated a difficult start to the year in our Asia Pacific business.
The declining order rates in the second half of 2019 and continued weakness in core automotive and industrial markets, we anticipated a tough Q1 for Asia Pacific when we issued our annual revenue outlook.
What we haven't fully anticipated in our outlook, of course, was the global impact of the virus.
The broad-based shutdown of businesses in China compounded an already difficult Q1 for us in the region.
Our Industrial segment is about 60% of our revenue in AP and suffered the worst.
From an operations and supplier standpoint, we were able to work through the shutdowns in China without impacting our global ability to build and ship orders.
Our business in the Americas and EMEA was generally in line with our outlook early in the quarter with particular strength in our Contractor segment.
As the virus hit EMEA and then the U.S., we saw our incoming order rate plummet, and while it's bounced around week-to-week, we've been running about 30% below prior years since mid-March.
While there are a few end markets that remain positive, such as semiconductor and sanitary, those exposures for Graco are small.
Nearly all of our major end markets across regions and segments have experienced double-digit declines in recent weeks.
Specific to Contractor Americas, the propane channel outperformed the home centers in Q1, with both channels showing positive out-the-door sales.
From incoming order rate perspective, in recent weeks, the pattern has reversed and home centers have been outperforming the propane channel.
Globally, Graco sales activity has been significantly hindered as access to industrial end users is difficult with stay-at-home orders in place, contractor selling events and other trade shows have been canceled and capital spending is being curtailed across industries.
With the exception of the short China shutdown I already referenced, all our major production and distribution facilities have remained open and fully operational.
When it became clear that the virus is going to be a global problem, we established the goal for every Graco production facility worldwide.
The goal has two elements: one, no Graco employee or person living in their immediate household ends up in the ICU or dead; and two, we keep our operations running.
To this end, we've implemented a number of practices to try to protect those employees with the highest risk of having serious complications from the virus, up to and including sending some high-risk employees home with full pay until we feel comfortable they can return.
For the rest of our employees, we have people working from home, if they can be productive or practicing social distancing, sanitation and good hygiene if they need to be at work.
We've had a few people test positive, and I've been very proud of the reaction of other employees.
They stayed calm and cool and carried on.
None of our high-risk employees have tested positive.
It seems quite clear to me based upon what we know about the virus and consistent with Graco culture that we can manage safety without shutting down.
Despite a significant drop in our bookings, my plan is to keep our payroll intact for the time being.
In addition, we will continue to make investments in our growth strategies, including our 2021 new product plans, our live based capital investments, new market initiatives and acquisitions.
This will pressure our P&L in Q2, and you can expect high decremental margins, as Caroline has outlined for you.
Our balance sheet is solid.
We have a strong team.
And for now, I prefer not to manage the short term to be less worse, but instead prepared to leap forward when conditions improve.
We took a measured approach during the 2008, 2009 crisis, and I believe our investors were amply rewarded over the following decade.
If business conditions do not improve, we will, of course, take appropriate actions.
Our balance sheet and cash flow remains strong.
We borrowed $250 million under our revolving credit facility in order to increase our cash position and preserve our financial flexibility.
We will use the proceeds from borrowings to fund our strategic initiatives, including acquisitions and share buybacks, if good buying opportunities present themselves.
Due to economic uncertainty, we're withdrawing our 2020 revenue guidance for the remainder of the year.
In conclusion, we expect the short term to be difficult with continuing declines in revenue and profitability.
However, we will execute our growth plans and weather the storm.
Our factories are running and employee morale remains high.
Our long-term focus and global distribution channel will position us well to capitalize when our end markets rebound.
| graco inc - withdraws 2020 revenue guidance due to economic uncertainty.
graco inc qtrly net sales $373.6 million, down 8%.
graco inc qtrly earnings per share $0.42.
graco inc qtrly adjusted earnings per share $0.38.
graco inc - q1 sales did not meet our expectations and deteriorated as quarter progressed.
graco inc - graco is well positioned financially and strategically to operate without making major changes.
|
Specifically, during the call, you will hear references to various non-GAAP financial measures, which we believe provide insight into the company's operations.
Reconciliation of non-GAAP numbers to their respective GAAP numbers can be found in today's materials and on our website at www.
On slide three, you see our GAAP financial results at the top of the page for the first quarter.
Below that, you see our adjusted operating results, which management believes enhances the understanding of our business by reflecting the underlying performance of our core operations and facilitates a more meaningful trend analysis.
Many of the comments that management makes on the call today will focus on adjusted operating results.
As you saw in yesterday's release, Ameriprise is off to a strong start in 2021.
We're continuing the positive momentum from the past several quarters, as you can see in our first quarter metrics and financial results.
Regarding the environment, equity markets continue to rally in the first quarter as vaccinations increased and activity accelerated with the U.S. beginning to open back up.
The economy is gaining strength with the further fiscal stimulus as well as better employment data.
With this backdrop, key for us is that we remain focused on serving our clients.
Engagement is high, activity is strong, and we're bringing in record client flows across the business.
We ended the quarter with assets under management and administration of 36% to $1.14 trillion, a new high.
In addition, we recently announced the strategic acquisition of the BMO EMEA Asset Management business.
Taking a step back, and looking at Ameriprise overall, I feel really good.
We're executing well and delivering on our strategy for growth that we discussed with you.
We continue to transform Ameriprise with Wealth Management and Asset Management now representing over 75% of operating earnings.
You've seen the financials.
Revenues are up 10% to over $3 billion.
Earnings per share also increased nicely in the quarter of 27% ex the NOL benefit a year ago, even with low short-term interest rates this year versus last year's quarter, and ROE remains very strong at 30%.
While we continue to invest strongly in the business, we are managing expenses thoughtfully.
With our strong financial foundation and free cash flow generation, we returned more than $490 million to shareholders in the quarter through dividends and our ongoing repurchase program, which is comparable to the last few quarters.
Yesterday, we announced another 9% increase in our quarterly dividend, our 17th increase since becoming public 16 years ago.
Let's discuss Advice & Wealth Management, where we've been executing well and driving growth.
We're benefiting from the strategic investments we've been making to deliver a differentiated client/advisor experience built on advice.
We've been on a multiyear journey to take our client experience to the next level.
A big part of that is the training and support we provide advisors and ensuring that the new digital tools and capabilities are fully integrated within their technology ecosystem.
One of our more significant investments, our CRM platform, is increasingly serving as the hub for advisors allowing them to collaborate with clients while driving efficiencies.
And we've seen good uptake as advisors integrate these capabilities into their practices.
This strong engagement is helping to drive good client activity, excellent flows and new client acquisition as we continue to build on our momentum from last year.
Our total client net flows was strong at $9.3 billion in the quarter, with total client assets of 36% to $762 billion.
Our investment advisory business continues to grow nicely.
In the quarter, wrap net inflows were more than $10 billion, up 55% over last year.
This is another record for us and reinforces our excellent client advisor engagement and focus on organic growth.
Transactional activity continued gaining strength in the first quarter, picking up 12% over last year, with good volume across a range of product solutions.
Even with clients putting more of the cash back to work, client cash balances remain elevated at more than $40 billion.
And advisor productivity was strong, up 8%, adjusting for interest rates.
And we're bringing on new advisors.
Our virtual recruiting program is driving good results with 93 advisors joining us in the quarter.
Advisers recognize what we have to offer in terms of our culture, technology and high level of support.
And as more states reopen their businesses and economies, we're looking forward to connecting with more advisors in person as we move through the balance of the year.
We also continue to build out the Ameriprise Bank, where total assets grew to $8.8 billion in the quarter.
As we discussed, we plan to move additional deposits to the bank over the course of this year.
Pledge and margin loan volumes increased nicely in the quarter as our advisors engage with their clients with our lending solutions from a liquidity perspective.
Wrapping up AWM, even with interest rates at all-time lows, AWM margin increased 90 basis points sequentially, ending the quarter at a strong 20.7%.
Turning to our Retirement and Protection Solutions business, we're off to a good start and continue to adapt to the low interest rate environment.
We have been very proactive in this climate as we serve client needs and prudently manage the business.
Variable annuity sales increased nicely, up 33%, driven by our success of structured product, as well as our annuities without living benefits.
As a result, the percentage of VA sales without living benefits grew to 64% of total sales in the quarter.
With regard to insurance, our focus has been on our flagship VUL product rather than IUL.
In fact, VUL sales were up 76%.
We're focused on making sure we have the right product for this rate environment while maintaining strong underwriting.
Overall, I feel good about how the Retirement Protection Solutions business is performing in this challenging environment.
As part of this strategy, we are actively pursuing a reinsurance transaction for the remaining closed block of fixed annuities, and we feel we can execute it in the near term.
Turning to Asset Management, we're generating strong results.
Our team is engaged, serving clients' evolving needs well and driving profitable growth.
I'll speak to the strength of the quarter and then comment on BMO's EMEA acquisition.
With the continuation of positive flows in markets, assets under management were up significantly, increasing 32% to $564 billion.
We're investing in the business, including in transforming how we use data.
This is both within investments in terms of our use of data and our research as well as in distribution.
In addition, and also key, is the thought leadership we provide and how we are targeting the right advisors to drive meaningful engagement.
Regarding investment performance, our teams consistently generate strong performance for our clients.
It's across all categories: equities, fixed income and asset allocation strategies.
As an active manager, our research expertise is a key differentiator.
I'd highlight that Columbia Threadneedle ranked in the top 10 and over the one, five and 10-year time frames in the recent Barron's Best Fund Family ranking, one of only two firms that ranked in the top 10 across all-time periods.
We also won seven Lipper Awards in the U.S. this year and over 22 awards in EMEA over the last year.
This level of performance bodes very well in terms of earning future flows.
This shows the breadth and strength of our product lineup.
So with this type of investment performance and the strong execution of our plan, you saw that flows continue to be quite strong.
In the quarter, we had net inflows of $4.9 billion, an improvement of $7.3 billion from a year ago.
Excluding legacy insurance partner outflows, net inflows were $6.2 billion.
Global retail net inflows were $4.6 billion, largely driven by the traction we've seen in North America.
We're driving high engagement with clients and intermediaries, including with the larger broker-dealers and independents.
Sales and flows traction is broad, and we're working hard to maintain that.
In the quarter, we had nine funds that generated over $250 million in net inflows, including five equity and four fixed income funds.
In EMEA, we've seen good flows in Continental Europe in a number of key markets.
In the U.K., we remained in outflows.
However, we saw improvement in the quarter as the economy started to reopen there more fully, and we're hopeful that investor sentiment will strengthen.
In terms of Global Institutional, we had net inflows of $1.6 billion ex legacy partner outflows, driven by our results in EMEA.
We've made considerable progress in strengthening our consultant relations and client service globally.
Consultants have increased their ratings on a number of key strategies in recent quarters.
This is important in terms of our ability to gain additional mandates from existing clients and grow our sales pipeline.
As you saw earlier this month, we announced our strategic acquisition of BMO's EMEA asset management business.
The acquisition is right in line with our strategy that we consistently discuss with you.
It will add complementary capabilities and solutions with their established strengths in responsible investing, liability-driven investing, fiduciary outsource management and European real estate.
It will also expand our scale in other traditional asset classes, especially in European fixed income, and recent flow trends in their EMEA business have been favorable.
In addition, post close, BMO's North American Wealth Management clients will have the opportunity to access a broad range of Columbia Threadneedle investment management solutions.
From an asset management perspective, we gained important geographic diversity.
Upon close, EMEA's AUM will increase significantly to 40% of total AUM at Columbia Threadneedle, which provides a good balance to the U.S. business.
We've always been a disciplined acquirer, and we expect this transaction will add to our strategic growth and generate a good return over time.
Importantly, as we executed, the team will remain focused on maintaining our strong business momentum.
So, for Ameriprise overall, we're in an excellent position.
The business is performing really well and delivering strong results.
Based on the current environment, we feel comfortable that we'll continue to generate strong returns with a strong balance sheet and substantial free cash flow.
Ameriprise delivered a strong quarter of financial results and excellent business metrics, which are a direct result of our continued execution of the strategic priorities.
We continue to demonstrate strong performance in our core growth businesses of Advice & Wealth Management and Asset Management, driven by ongoing organic growth and expense discipline.
At the core, we remain focused on accelerating our mix shift through specific actions.
For example, our recently announced strategic acquisition of BMO's EMEA asset management business will expand key capabilities in attractive and growing market segments, while also adding to traditional asset classes.
This provides a larger combined capability to meet client needs.
We have high confidence in the financial benefits from the acquisition as well.
It will be accretive on a cash and operating basis by 2023, generating a 20%-plus IRR and have a payback period consistent with the Columbia acquisition of eight years.
In addition, we have established a strong partnership with BMO in North America, which we expect to generate strong profits.
We are actively engaged in a fixed annuity reinsurance process and anticipate finalizing the transaction shortly.
Lastly, we continue to effectively manage our risk profile and continued profit mix shift to lower risk and higher-margin retirement and protection solution offerings.
Our diversified model continues to generate robust-free cash flow and strong balance sheet fundamentals.
We remain on track to return approximately 90% of adjusted operating earnings to shareholders in 2021.
Ameriprise's strong underlying business performance and activity levels in our core growth businesses continue to neutralize headwinds from short-term interest rates.
As a reminder, this will be the last quarter where we have a reduction in short rates, sorting the year-over-year comparison.
Excluding the impact from interest, Ameriprise adjusted net operating revenue grew 13%.
Advice & Wealth Management and Asset Management businesses' profitability continues to increase, with adjusted pre-tax operating earnings up 35%.
General and administrative expenses continue to be well managed.
Excluding the impact of share price appreciation on compensation, G&A expenses were up 2% as we remain disciplined executing reengineering initiatives.
In total, we delivered excellent underlying earnings per share growth of 27%, excluding the net operating loss tax benefit and very strong margins in the quarter.
Turning to slide seven.
As Jim mentioned, Advice & Wealth Management continued to deliver excellent organic growth during the quarter, with total client assets up 36% to $762 billion.
In response to the request from many of you, we are now disclosing total client flows, which increased 21% to $9.3 billion.
From a product perspective, we had a terrific growth in our wrap flows, up 55% to $10.4 billion.
Cash balances remain elevated at $40.4 billion, with a substantial opportunity for clients to put cash back to work in the future.
On page eight, financial results in Advice & Wealth Management were strong, with underlying adjusted operating earnings up 30% to $389 million after the $78 million interest rate headwind.
Adjusted operating net revenues were up 16% to $1.9 billion, driven by client flows, improved transaction activity and higher market levels.
On a sequential basis, revenues increased 6% from strong performance despite fewer fee days in the current quarter.
Expenses remain well managed and we continue to exhibit strong expense discipline.
G&A expense increased only 2% including higher volume-related expenses, bank expansion, investments for future growth and elevated share-based compensation.
Pretax adjusted operating margin was 20.7%.
Adjusting for interest rates, the margin would have been 215 basis points higher.
On a sequential basis, pre-tax operating earnings increased 11% and pre-tax adjusted operating margin expanded 90 basis points.
Turning to page nine.
The significant growth in asset management was due to our investment engine that is driving revenue growth through consistent investment performance and compelling thought leadership leading to increased client engagement.
Net inflows in the quarter was $6.2 billion, excluding legacy insurance partners, an $8 billion improvement from a year ago.
Adjusted operating revenues increased 21% to $828 million, reflecting cumulative benefit of inflows, favorable mix shift toward equity strategies and market appreciation.
The prior year quarter included an unfavorable impact from a performance fee adjustment.
General and administrative expenses grew 12% from higher compensation expense related to strong performance, Ameriprise share appreciation, as well as the costs associated with increased activity levels.
Adjusted for compensation-related expense, G&A increased a more moderate 5%.
Putting this together, pre-tax adjusted operating earnings grew 45% with a 43.9% margin.
We continue to be very encouraged by the continuation of positive flow trends and strong profitability.
Let's turn to page 10.
Retirement and Protection Solutions continue to perform in line with expectation in this market and rate environment.
While we have a strong book of business from a risk perspective, we continue to execute our strategy to improve it further.
In the quarter, 64% of retirement product sales did not have living benefit guarantees.
This sales shift is already having an impact on our in-force block, with the account value of living benefit riders down from 65% to 63%.
In protection, sales were flat, as we continue to see a meaningful increase in higher-margin VUL and a significant decline in index universal life.
These mix shifts are expected to continue going forward.
Financial results continue to be in line with expectations.
Pretax adjusted operating earnings increased 10% to $183 million.
We had a steep drop-off in claims following January's high level, and we were approaching pre-COVID levels of claims by the end of March.
This business is very well managed.
Net amount at risk remains among the lowest in the industry, and our hedging remains very effective.
Let's turn to page 11.
In total, the corporate and other segment had a $21 million loss in the quarter, which was a $29 million improvement from the prior year.
Excluding closed blocks, the loss in the corporate segment was $63 million, which included a $15 million investment gain, largely offset by $11 million of higher share-based compensation expense.
The year ago quarter had $11 million benefit from Ameriprise share price depreciation.
Long-term care had $46 million of earnings in the quarter.
The high COVID-related mortality and terminations that we saw in January declined in February and March and were approaching pre-COVID levels by the end of March.
This benefit was partially offset by the COVID claims level on life insurance.
Fixed annuities had a $4 million loss related to the low interest rate environment.
As I mentioned, we are making good progress on our fixed annuity reinsurance transaction.
Now let's move to the balance sheet on the last slide.
Our balance sheet fundamentals remain extremely strong.
Including our liquidity position of $2.3 billion at the parent company, substantial excess capital of $2 billion, 96% hedge effectiveness in the quarter and a defensively positioned investment portfolio.
Adjusted operating return on equity in the quarter remained strong at 30%.
We returned $491 million to shareholders in the quarter through dividends and buyback.
We just announced a 9% increase in our quarterly dividend, and we are on track with our commitment to return 90% of adjusted operating earnings to shareholders this year.
| increased its quarterly dividend 9 percent to $1.13 per share.
|
It's good to be with everyone.
We continue to see a customer-first culture taking hold throughout our stores, fulfillment centers, and corporate offices.
Maintaining this emphasis on the customer will remain key as we work to grow across categories and new areas.
During the quarter, we focused on expanding our selection, accelerating delivery speeds, and improving the customer experience.
We also made long-term investments in our infrastructure, talent, and technology.
We believe our emphasis on the long term is positioning us to build what will ultimately become a much larger business relative to where we are in 2021.
We've also been exploring emerging opportunities in blockchain, NFTs, and Web 3.0 gaming.
With this context in mind, here are a few recent initiatives of note.
We continued growing our catalog by adding new products across consumer electronics, PC gaming, and other categories with significant addressable markets.
Some of the brands we've established new and expanded relationships with include Samsung, LG, Razer, Vizio, Logitech, and Asus just to name a few.
Sales attributable to these new and expanded brand relationships helped to drive growth in the quarter.
We also began implementing new assortment strategies within our stores, including an expansion of PC gaming merchandise across approximately 60% of U.S. locations.
With respect to hiring, we kept adding talent across the organization, including specialists with experience in e-commerce, UI/UX, blockchain, operations, and supply chain.
Over the course of 2021, we have made more than 200 senior hires from some of the top technology companies.
We also recently added a new office in Seattle and have identified an office location in Boston, positioning us within two tech hubs with strong local talent markets.
Having footprints in these cities will help us attract and retain tech-focused teams with expertise in e-commerce and other areas.
Shifting gears to our fulfillment network, we've started shipping orders from Reno, Nevada while increasing shipments from York, Pennsylvania.
Our expanded network is continuing to help us improve shipping times to customers across the U.S. Additionally, we recently announced a plan to hire up to 500 associates at our new customer care facility in South Florida.
The facility, which is now operational, will be a key part of our new U.S.-based customer care operation.
Lastly, we've further strengthened our financial position by securing a new $500 million ABL facility, which closed early in November and includes improved liquidity and terms.
The facility provides reduced borrowing costs, lighter covenants, and more flexibility.
Let me now turn to our financial results for the quarter.
Net sales increased 29.1% to just under $1.3 billion, compared to just over $1 billion during the same period in 2020.
As indicated in the past, long-term revenue growth is the primary metric by which we believe stockholders should assess our execution.
SG&A was $421.5 million, or 32.5% of sales, compared to $360.4 million or 35.9% of sales in last year's third quarter.
We reported a net loss of $105.4 million, or $1.39 per diluted share, compared to a net loss of $18.8 million or loss per diluted share of $0.29 in the prior-year third quarter.
There were no one-time transformation, transaction, or related costs during the period.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of over $1.4 billion, nearly $1 billion higher than the end of the third quarter last year.
We continue to maintain a sizable cash position even while front-loading investments in inventory to meet heightened demand and mitigate the full impact of global supply chain issues.
At the end of the quarter, we had no borrowings under our ABL facility and no debt other than a $46.2 million low-interest unsecured term loan associated with the French government's response to COVID-19.
Total liabilities compared to the third quarter of last year were down $262.1 million.
Capital expenditures for the quarter were $12.5 million, bringing year-to-date capex to $40.7 million.
We anticipate capex will continue to increase as we make pragmatic investments in our infrastructure and tech.
In the third quarter, cash flow from operations was an outflow of $293.7 million, compared to an outflow of $184.6 million during the same period last year.
In order to meet customer demand and drive sales growth amid the tight supply chain, we grew our inventory to $1.14 billion as of the close of the quarter, compared to $861 million at the close of the prior year's third quarter.
In terms of our outlook, we're not providing formal guidance at this time.
Before wrapping up, I do want to quickly reinforce some key points about our go-forward operating philosophy.
Our emphasis on the top line stems from our leadership team's significant e-commerce experience and belief that revenue growth is critical.
We believe revenue growth will translate to scale and market leadership.
And from there, scale and market leadership will translate to greater free cash flows over time.
Our focus on the long term means we will continuously prioritize growth and market leadership over short-term margins.
I'll leave it there for this quarter.
As always, we appreciate all the enthusiasm and support from our customers, employees, and stockholders who we believe are the best in the world.
| qtrly loss per share $ $1.39.
|
For today's call, Jeff will begin by covering a summary of our second quarter results, including new program wins.
Roop will then discuss our detailed second quarter results, including a cash and balance sheet summary and third quarter 2021 guidance.
Jeff will wrap up with an outlook by market sector, a progress update on our strategic initiatives for the year and second half outlook before we conclude the call with Q&A.
Throughout the past 18 months, we've rallied through the uncertainty surrounding the pandemic and made decisions to increase our investments in new opportunities, which we believe are starting to bear fruit.
We've had to make difficult trade-offs during this unprecedented time, but we never lost focus on prioritizing the safety and well-being of our employees and meeting the growing needs of our customers.
This approach has served us well as we progressed our strategy in a volatile operating environment.
Revenues benefited from the continued momentum in the semi cap market as well as stronger demand from customers deploying broadband infrastructure solutions in our Telco sector.
Additionally, we are seeing early signs of recovery in some subsectors of the industrial markets.
Roop will provide more specific color on the constrained component situation, but our teams are facing a heavy workload and significant disruptions in manufacturing planning based on the continued volatility of extended lead times, tight supply and allocations that are limiting the ability to meet customer demand.
In the second quarter, we estimate that we left approximately $50 million of demand on the table and most of this demand is rolled into future quarters.
Given component constraints, we estimate we may leave $100 million of unfulfilled demand in this quarter, demonstrating the strength of end customer orders.
We continue to work closely with our customers to optimize output based on component availability.
During the quarter, we also faced disruptions in our Malaysian operations from the ongoing COVID pandemic where government regulations reduced staffing levels to 60% and required our team to replan our workforce and shift patterns through most of the second quarter.
Even with these challenges, I'm proud to report our teams in Penang delivered on their customer demand and achieved their targets for the quarter.
Government restrictions have recently eased, now allowing 80% of the workforce capacity and our leadership team continues to do a phenomenal job managing through reduced staffing and intermittent work stoppages to keep our employees healthy and maximize production.
Now turning to profits.
With improving revenue, our non-GAAP gross margins improved 50 basis points to 8.8%, and non-GAAP operating margins improved 20 basis points to 2.5%.
As a reminder, our non-GAAP operating margins include stock compensation expenses, which were approximately 70 basis points in the second quarter.
Earnings per share of $0.27 was above the midpoint of our guidance, and we had another solid quarter of cash conversion cycle results at 64 days.
Our team continues to pull together, execute with excellence and deliver on our growth strategy through the first half of 2021.
We believe this momentum will continue through the rest of the year and demonstrate the benefits of scale in our model.
In addition to strong sequential and year-over-year revenue growth, we had another strong quarter of bookings, where the outsourcing and new deal opportunity environment remains strong.
Now I'd like to highlight a few key wins in the quarter.
In the medical sector, we were awarded new manufacturing programs for cardiac monitoring, blood transfusion and an in vitro diagnostics.
Our winning value proposition in this sector resonates with customers and is supported by our 30-year quality track record of building Class III life-sustaining devices by FDA standards.
In Semi-Cap, we continue to win new programs, which are additive to our already strong demand in this sector.
In Q2, we added a new Semi-Cap customer to our portfolio where we will be building process controllers for coding equipment.
With existing customers, we were awarded new design and manufacturing projects for work cell handlers and power rack electronics.
This quarter, we had great wins in semi cap across precision machining, engineering services and electronics manufacturing.
In the A&D sector, we were awarded new manufacturing programs for electronic warfare and defense satellites as well as a design program for ruggedized electronics for land-based combat vehicles.
In industrials, we are very excited about a major new customer win to manufacture solar battery storage solutions, which could provide meaningful growth to our industrial sector.
And finally, in Computing & Telco, we continue to win new high-performance computing programs where we have unparalleled manufacturing expertise for large form factor, high-density electronics manufacturing.
High-performance computing will be a key contributor to our growth over the next 12 months.
Our new business pipeline remains strong across all of our sectors, and we expect these bookings to fuel growth in support of our midterm model and longer-term growth plans.
All in all, I'm very excited about the meaningful opportunities we are winning, the increased attach rate of engineering services and the level of new prospective wins that our business development teams are engaging in.
Roop, over to you.
Total Benchmark revenue was $545 million in Q2, which was at the higher end of our guidance driven by continued strong performance in Semi-Cap and improving revenue in Industrials and Telco.
Medical revenues for the second quarter were relatively flat sequentially as expected.
We expect Medical revenues to be higher for the second half of 2021 as compared to the first half of 2021 due to new program ramps and improving demand.
Semi-cap revenues were up 23% in the second quarter and up 60% year-over-year from continued demand strength from our front-end wafer fab equipment customers where we saw increased demand from each of our top customers.
Our revenue in this sector is primarily precision machining and large electromechanical assembly which are less impacted from the global component shortages.
A&D revenues for the second quarter increased 8% sequentially and 9% year-over-year from continued strong demand in our Defense programs for surveillance vehicles, secure communications and computing and military satellite programs.
Our commercial aerospace revenue was flat sequentially.
Industrial revenues for the second quarter were slightly better than expected from slight improvements from building infrastructure and commercial construction programs.
Overall, the higher-value markets represented 82% of our second quarter revenue.
Revenues from computing and Telco sectors, our traditional markets, were flat quarter-over-quarter.
We saw strong demand in Telco from new and existing programs in commercial broadband and commercial satellites but a high-performance computing program that was expected to ramp in Q2 was pushed to the second half of 2021.
Our traditional markets represented 18% of second quarter revenues.
Our top 10 customers represented 46% of sales in the second quarter.
Our GAAP earnings per share for the quarter was $0.20.
Our GAAP results included restructuring and other onetime costs totaling $1.6 million related to restructuring activities.
In Q2, we completed the closure of our Angleton, Texas site as planned.
For Q2, our non-GAAP gross margin was 8.8%.
This is 20 basis points better than the midpoint of our second quarter guidance, driven by higher revenues and a better mix.
On a sequential basis, we were up 50 basis points as a result of our higher revenue, improved productivity and utilization, somewhat offset by higher variable compensation expenses and higher-than-expected U.S. medical costs.
Our SG&A was $34 million, an increase of $3.5 million sequentially due to higher variable compensation expenses and higher U.S. medical costs.
Non-GAAP operating margin was 2.5%.
In Q2 2021, our non-GAAP effective tax rate was 20.3% as a result of the mix of profits between the U.S. and foreign jurisdictions.
Non-GAAP earnings per share was $0.27 for the quarter, which is $0.01 higher than the midpoint of our Q2 guidance and $0.06 sequential improvement.
Non-GAAP ROIC was 7.5%, a 110 basis point increase sequentially and 160 basis point improvement year-over-year.
Our cash conversion cycle days were 64 in the second quarter, an improvement of one day from Q1.
Turning to slide nine for an update on liquidity and capital resources.
The cash balance was $370 million at June 30, with $135 million available in the U.S.
Our cash balances decreased $30 million sequentially.
The decrease in cash is primarily the result of procuring a higher level of inventory to support future revenue growth and to better manage the increasing lead times for components and current broad supply chain constraints in the marketplace.
We generated $4 million in cash flow from operations in Q2, and our free cash flow was a use of $9 million of cash after capital expenditures.
As of June 30, we had $133 million outstanding on our term loan with no borrowings outstanding on our available revolver.
Turning to slide 10 to review our capital allocation activity.
In Q2, we paid cash dividends of $5.8 million and used $17 million to repurchase 566,600 shares.
As of June 30, we had approximately $174 million remaining in our existing share repurchase authorization.
In Q3, we expect to repurchase shares opportunistically while considering market conditions.
We expect revenue to range from $555 million to $595 million, which at the midpoint represents a 9% year-over-year improvement.
We expect that our gross margins will be 9% to 9.4% for Q3, and SG&A will range between $34 million and $35 million.
The sequential increase in gross margins is expected due to higher revenues and improved absorption.
We are still targeting gross margins for the full year to be 9%.
Implied in our guidance is a 3.1% to 3.4% non-GAAP operating margin range for modeling purposes.
The guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs.
We expect to incur restructuring and other nonrecurring costs in Q3 of approximately $800,000 to $1.2 million.
Our non-GAAP diluted earnings per share is expected to be in the range of $0.33 to $0.41 or a midpoint of $0.37.
We expect our capex plans for the year to be between $50 million and $60 million.
We expect -- we estimate that we will generate approximately $80 million to $100 million of cash flow from operations for fiscal year 2021.
This range contemplates the higher inventory levels to support growth for our customers through the year.
Other expenses net is expected to be $2.1 million, which is primarily interest expense related to our outstanding debt.
We expect that for Q3, our non-GAAP effective tax rate will be between 19% and 21% because of the distribution of income around our global network.
The expected weighted average shares for Q3 are approximately $35.7 million.
As you're aware, end market demand continues to be strong.
However, we continue to see component supply chain constraints across all commodity categories.
Overall, lead times continue to extend and more components are being placed on allocation by suppliers.
Several commodities are impacted yet semiconductors remain the most constrained.
We are maintaining close alignment with our suppliers and distributors to minimize disruptions to existing orders and to secure supply in support of customer demand increases.
We are actively working with customers to replan mix and redesign some products to enable alternate component sourcing.
In general, our ability to fulfill upside demand is challenging due to component constraints but we do believe these actions still give us confidence that we will grow revenue in 2021 in the high single digits.
In summary, our guidance takes into consideration all known constraints for the quarter and assumes no further significant interruptions to our supply base, operations or customers.
Guidance also assumes no material changes to end market conditions in our operations due to COVID.
Following Roop's comments on our third quarter guidance, I wanted to provide some additional details on our view of demand by sector.
for the quarter and the remainder of 2021.
This is shown on slide 13.
For the second quarter, we expect revenue to be up sequentially by about $30 million.
This strength is led by expected sequential growth in computing and A&D with continued strong demand in semi cap.
After 60% year-over-year growth in Q2, we expect our Semi-Cap sector will remain at Q2 revenue levels as demand still remains robust, but we are constrained in the near term by mechanical sub-tier suppliers.
Based on signals from our customers in the front-end wafer fab processing space, demand will remain at high levels for the balance of 2021 and through next year, supported by increasing demand for semiconductor capital equipment.
With this ongoing demand strength and signals from our customers, we are revising our outlook for this sector upward from 20% to greater than 30% revenue growth over 2020 levels.
This sector is clearly outperforming our expectations for this year.
In A&D, where we grew 8% in Q2, we expect continued growth in third quarter led by increased demand for ruggedized electronics for ground-based military vehicles and secure communication devices.
While commercial Aero demand in the second half is stabilizing, we still expect the A&D sector to remain flat for 2021 as defense strength does not offset aero weakness for the full year.
In the computing sector, we expect strong revenue growth in 2021 from high-performance computing projects with the largest revenue growth in the second half of 2021.
If there are no further component decommits or design delays, computing could be up over 50% sequentially in the third quarter.
As we continue to win new projects in this targeted subsector, we expect continued strength in high-performance computing revenues in 2022.
In the Medical sector, we're expecting revenue to grow sequentially in Q3 and Q4.
For our portfolio, we see revenue growth across our base business in the second half.
Additionally, we have new program ramps contributing to second half growth.
We still expect Medical to have a growth year, but as always, new medical program revenue is subject to the timing of product qualifications.
In the Telco market, where we had good growth in the second quarter, we expect stable demand in the second half of '21, which will lead to 2021 being a solid growth year from strong performance in broadband communication products.
In Industrials, we are pleased to see the order book increasing for our customers supporting the oil and gas market, transportation infrastructure and Building Systems.
With this demand improvement forecasted in the second half and a tremendous number of new program ramps in Q4, this sector has the potential to achieve greater than 10% growth for this year.
We remain focused on our longer-term strategic initiatives and progress against these even as we deal with short-term challenges created by the pandemic and this constrained supply environment.
Growing revenue remains a top priority at Benchmark.
Our go-to-market team is doing a great job executing our sector development strategies with wins in our targeted subsectors where we have an advantaged position based on our technology and the track record of success with complex programs.
Our booking levels for both manufacturing and engineering services remain strong.
We'll continue to invest in a sustainable infrastructure and our talent for sustainable growth.
We are in data collection mode to support our intended reporting against the global reporting initiative, which will increase our transparency and further support our stand-alone sustainability report, which we plan to publish next year.
We are also expanding our diversity and inclusion efforts by developing a multiyear continuous improvement road map, supported by robust plans and actions with accountability held by the entire senior leadership team.
This road map includes increased training, some enhanced policies and recruiting strategies for our internal organization as well as the ongoing commitment to Board diversification.
You may have seen our recent announcement where one of our Board members, Merilee Raines left our board.
We have certainly appreciated her service and wish her well.
Lynn is an outstanding director and sits on three public companies where she currently holds two board chairs and one audit share position.
Her vast experience and history of operational execution will provide additional capabilities and insight to our already talented slate of directors.
Lastly, we are laser-focused on growing earnings.
From our second quarter results to the midpoint of our Q3 guide, we're expecting a greater than 30% sequential earnings improvement.
These expected results are enabled by our continued revenue growth trajectory.
Our target to sustain gross margins at 9% for the full year and our commitment to control our expenses.
In summary, on slide 15, I'm very excited about our progress in the first half and remain optimistic about our second half outlook.
Given the continuing strong demand outlook in Semi-Cap, improving demand in industrials and expected second half ramps in high-performance computing.
We are revising our full year growth outlook to high single digits for 2021.
Of course, this assumes no worsening component supply constraints or broader pandemic impacts.
With this revenue growth and mix, we're expecting sequential quarterly improvement in both gross and operating margins in both three and 4Q.
On the gross margin line, we are still targeting to achieve 9% for the full year 2021.
With these results, we are still expecting operating cash flows between $80 million and $100 million.
Through the first half of 2021, we repurchased $30 million of stock and may continue to purchase the stock opportunistically as well as continue our recurring quarterly dividend which we raised last quarter as part of our capital allocation plan.
In closing, I remain excited about the overwhelming positive indicators that we are seeing from our teams and our customers.
I'm excited about how 2021 is shaping up and look forward to providing you an update in our October earnings call.
| q2 non-gaap earnings per share $0.27.
q2 gaap earnings per share $0.20.
sees q3 non-gaap earnings per share $0.33 to $0.41 excluding items.
sees q3 gaap earnings per share $0.27 to $0.35.
sees q3 revenue $555 million to $595 million.
q2 revenue $545 million versus refinitiv ibes estimate of $531.7 million.
|
Joining me on the call today are Gene Lee, Darden's CEO; and Rick Cardenas, CFO.
We plan to release fiscal 2021 third quarter earnings on March 25 before the market opens followed by a conference call.
Rick will then provide more detail on our financial results and share our outlook for the third quarter.
And then Gene will share some closing comments.
As -- we continue to operate in a very fluid environment, and I was pleased with our ability to once again deliver strong profitability in an unpredictable sales environment.
Total sales from continuing operations were $1.7 billion, a decrease of 19.4%, same-restaurant sales decreased 20.6% and diluted net earnings per share from continuing operations were $0.74.
The last two weeks of the quarter negatively impacted our same-restaurant sales by approximately 200 basis points as we quickly went from 97% of our dining rooms being opened in the middle of the quarter to only 80% being open at the end of the quarter.
During the quarter, we remain focused on four key priorities.
The health and safety of our team members and guests, in restaurant execution in the complex operating environment, deploying technology to improve the guest experience and transforming our business model.
The health and safety of our team members and guest has always been our top priority.
We continue to follow latest guidance from the CDC as well as our own enhanced safety protocols to create a safe environment for everyone.
This includes daily team member health monitoring, requiring mask for every team member, enhanced cleaning procedures and social distancing protocols.
I'm proud of the commitment our teams make every day to keep our guests and each other safe.
Second, our restaurant teams remain focused on our Back-to-Basics operating philosophy to drive restaurant level execution that results in great guest experiences whether our guests are dining with us or ordering curbside to-go.
Our teams have been operating in this environment for 10 months, and they have become very adept at adjusting to the ever-changing COVID restrictions, but it's still not easy.
That's why we remain committed to our simplified operations, including streamline menus, processes and procedures which continue to strengthen our execution and our guest satisfaction metrics confirm that our restaurant teams are doing a great job delivering exceptional guest experience in this challenging environment.
Third, we continue to deploy technology to improve the guest experience.
Our brands benefit from the technology platform Darden provides, allowing each of them to compete more effectively by harnessing the power of our digital tools, including the 25 million email addresses in our marketing database.
During the quarter, Olive Garden LongHorn Steakhouse launched refresh websites and all our brands continue to use their digital storefronts effectively.
More than 55% of our off-premise sales during the quarter were fully digital transactions where guest ordered and paid online.
And at Olive Garden, 20% of our total sales for the quarter were digital.
During the quarter, we also rolled out Curbside I'm Here, which allows our guests to easily notify the restaurant that they've arrived to pick up their curbside to-go order by simply tapping on a link embedded in a text message.
As a result, our operators are spending less time on the phone and more time focused on ensuring orders are accurate and on-time, which is leading to improved guest satisfaction scores.
We also introduced Wait List Visibility, allowing guest to see their place on the waiting list using their phone regardless of whether they've checked in online or in person.
And we're working on several other initiatives, including streamlining our online checkout process and adding additional mobile payment options to provide even more convenience for our guest.
We continue to accelerate our digital journey, and I'm encouraged by the progress we are making.
Finally, we continue to view this environment as a rare opportunity to transform our business model for long-term growth.
We continue to make investments in our team members, product quality and portion sizes to ensure we emerge even stronger and better positioned to grow share.
Olive Garden same-restaurant sales declined 19.9% as capacity restrictions continue to limit their top-line sales.
Olive Garden began November with 56 dining rooms closed, and that number accelerated to 208 by the end of the month.
However, they were able to deliver strong average weekly sales during the quarter of more than 73,000 per restaurant, retaining 80% of last year's sales.
Olive Garden also continue to realize operational efficiencies and strengthened margin as a result of their simplified menu and the elimination of promotional activity, including discounts.
In the current limited capacity environment, their reduced marketing spend was focused on showcasing the convenience of their off-premise experience, while featuring compelling core menu items rather than limited time promotions.
This led to increased segment profit margin, while making additional investments in abundance and value.
Additionally, off-premise sales grew 83% in the quarter, representing 39% of total sales.
Enabled by the technology investments I mentioned earlier, Olive Garden improved their to-go experience and achieved another all-time high in guest satisfaction for having orders ready to pick up at the time promised.
Finally, Olive Garden successfully opened three new restaurants in the quarter.
LongHorn Steakhouse had another solid quarter.
Same-restaurant sales declined 11.1%.
Almost 20% of their restaurants grew same-restaurant sales in the quarter.
They also successfully opened three new restaurants during the quarter.
The LongHorn team remains laser focused on their strategy of increasing the quality of their guest experience, simplifying operations to drive execution and leveraging their unique culture to increase team member engagement.
During the quarter, the team did a great job of managing controllable costs while their simplified menu drove improved labor productivity.
Finally, LongHorn grew off-premise sales by more than 175%, representing 22% of total sales.
For the second quarter, total sales were $1.7 billion, a decrease of 19.4%.
Same-restaurant sales declined 20.6%, EBITDA was $206 million and diluted net earnings per share from continuing operations were $0.74.
Our second quarter start was encouraging with weekly sales building on results from the first quarter.
However, as COVID-19 cases began increasing in November and many state and local governments reimposed dining room restrictions, the last two weeks of the quarter trended down significantly.
We estimate that this downward shift in sales over the last two weeks negatively impacted operating income by approximately $15 million.
Turning to the P&L.
Food and beverage expense was 30 basis points higher than last year, primarily driven by investments in food quality and increased to-go packaging.
Restaurant labor was 140 basis points lower than last year with hourly labor improving by over 310 basis points, driven by operational simplification.
This was partially offset by deleverage and management labor due to sales declines and $3 million of emergency pay net of retention credits as we reinstated our emergency pay program for our team members impacted by dining room closures.
Restaurant expense per operating week was 13% lower than last year, driven by lower repairs, maintenance and utilities expenses.
However, sales deleverage resulted in restaurant expense as a percent of sales coming in 170 basis points higher than last year.
We reduced marketing spend by almost $50 million this quarter with total marketing 210 basis points favorable to last year.
Restaurant level EBITDA margin was 17.9%, 140 basis points above last year despite the sales decline of 19%.
General and administrative expenses were negatively impacted by $8 million of mark-to-market expense on our deferred compensation.
This is related to significant appreciation in both the Darden share price and equity markets this quarter.
As a reminder, due to the way we hedge this expense, it is mostly offset in the tax line.
Our hedge reduced income tax expense by $6.4 million, resulting in a net mark-to-market reduction to earnings after-tax this quarter of $1.7 million.
The effective tax rate of 8.3% this quarter was lower by 5.1 percentage points due to the tax benefits from the deferred compensation hedge I just mentioned.
After adjusting for this, the normalized effective tax rate for the second quarter would have been 13.4%.
Looking at our segment performance this quarter.
Olive Garden, LongHorn Steakhouse and our Other segment, all saw a segment profit margin increase despite sales declines.
This was driven by our continued focus on simplified operations, which significantly reduced direct labor and lower marketing expenses.
Our Fine Dining segment profit margin of 18.8% was impressive, although below last year, driven by a 30% sales decline.
We ended the second quarter with $770 million in cash and another $750 million available in our untapped credit facility, giving us over $1.5 billion of available liquidity.
We generated over $150 million of free cash flow in the quarter and improved our adjusted debt to adjusted capital to 58% at the end of the quarter, well within our debt covenant of 75%.
The board declared a quarterly cash dividend of $0.37 per share, 50% of our Q2 diluted earnings per share within our long-term framework for value creation.
We will continue to have regular discussions with the board on our future dividends.
As I mentioned earlier, the quarter started with sales building upon first quarter results.
As dining room closures increased, these improving sales trends reversed.
As of today, we have approximately 77% of our restaurants operating with at least partial dining room capacity versus a peak of 97% in the middle of the second quarter.
Moving forward, we may experience further dining room closures and increasing capacity restrictions in the third quarter.
As you may recall, in our last earnings call, we mentioned that the third quarter is historically our peak seasonal sales quarter, driven by the Christmas, New Year's and Valentine's Day holidays as well as travel time during this time of year.
At that time, we also stated that it will be more difficult to increase on-premise average unit volumes if capacity restrictions do not ease.
Current dining room closures, capacity restrictions and reductions in travel will exacerbate our same-restaurant sales comparison to last year due to the higher sales -- seasonal sales from last year.
Additionally, there are still uncertainties surrounding further capacity limitations and dining room closures and the duration of these impacts.
Given all these factors, we are providing a broad range of expectations for the third quarter.
We expect total sales to be between 65% and 70% of prior year levels, resulting in total sales of between $1.53 billion and $1.65 billion, EBITDA between $170 million and $210 million and diluted net earnings per share from continuing operations between $0.50 and $0.75 on a diluted share base of 132 million shares.
With dining rooms closures increasing, we are focusing on our playbook of expense management and off-premise sales.
While there is encouraging news on the broad distribution of COVID-19 vaccine in the spring, we currently don't anticipate meaningful sales trend improvements until some time in the fourth quarter of fiscal 2021.
Despite the short-term headwinds we faced with sales trends, operational complexity and impacts to our team members, I'm confident we are making the right decisions for the long-term to create a better guest experience and strengthen our business.
And consistent with our messaging last quarter, we continue to believe we can achieve 100% of our pre-COVID EBITDA dollars at approximately 90% of pre-COVID EBITDA -- pre-COVID sales, while continuing to make appropriate investments in our business.
Rick's career represents what our industry is all about.
He joined Darden as a Buster at Red Lobster 1984 and has worked extremely hard mastering many functions.
On January 4, he will become the President of the world's largest full service restaurant company.
He's been a great partner to me over the last five years, and I look forward to working side-by-side with him in his new role.
Additionally, we announced that Raj Vennam will become our Chief Financial Officer.
Raj began his career at Darden in 2003, and has done an exceptional job in every role he has held.
His promotion recognizes the significant contributions he has made to our individual brands as well as the greater organization.
With a brilliant mind and a keen understanding of our industry, Raj is the perfect person to take over for Rick.
I'm excited to see him expand his role in the company as CFO.
Rick and Raj are here with me in the room today, and I want to take this opportunity to congratulate both of them.
I want to close by recognizing our team members in the restaurants and at the support center.
I can't say enough about the dedication they've demonstrated throughout the year.
Their focus, commitment and determination is exceptional.
With multiple jurisdictions implementing dining room closures, we know many team members will not get the hours they needed during this holiday season.
That is why we have reintroduced our emergency pay program that will provide three weeks of emergency pay to team members who are furloughed from their restaurant when dining rooms are closed.
Our [Technical Issue] our greatest competitive advantage, and we are committed to taking care of them.
I wish you all a safe and a happy holiday season.
| sees q3 earnings per share $0.50 to $0.75 from continuing operations.
qtrly negative blended same-restaurant sales of 20.6%.
qtrly diluted net earnings per share from continuing operations were $0.74.
sees fiscal 2021 q3 total sales between 65% to 70% of prior year.
sees fiscal 2021 q3 ebitda of $170 to $210 million.
qtrly same-restaurant sales down 19.9% for olive garden.
|
As Christine mentioned, I'm Christine Cannella, Vice President, Investor Relations with Fresh Del Monte Produce Inc. Joining me in today's discussion are Mohammad Abu-Ghazaleh, Chairman and Chief Executive Officer; and Eduardo Bezerra, Senior Vice President and Chief Financial Officer.
You may also visit the company's website at freshdelmonte.com for a copy of today's release, as well as to register for future distributions.
With that, I am pleased to turn today's call over to Mohammad.
I'm pleased with our overall performance in the third quarter.
Net sales totaled $1.1 billion, gross profit increased 42% from last year's third quarter, and we generated earnings per share on an adjusted basis of $0.35 per share, up from a loss per share of $0.14 a year ago.
During the quarter, we continued to make progress on our strategic objectives, as we transform our company to a value-added higher margin business.
Disrupting the legacy of being a volume based banana business.
Much of the improvement came from our fresh and value-added business segment.
Most notably, our fresh-cut fruit product line in North America.
We continue to see strong demand from existing and new customers.
Our new fresh-cut unit in Yokohama, Japan is on track to open in the first quarter of 2020, and we have begun expansion of our existing fresh-cut facilities in the UK.
This will allow us to keep pace with global demand trends and expand our foodservice and retail customer base.
Our vegetable business through Mann Packing also performed well during the third quarter.
As part of our meals and snacks product line, we were excited to see the launch of our Better Break line of vegetable rich convenience snacks.
We are moving ahead, as well with some of our newest and biggest opportunities.
For example, we continue to grow our foodservice partnerships across the Middle East, Asia and Europe, which is increasingly a focus of new business for us.
We are also on schedule to open our fresh food and beverage store in the United States during the first quarter of 2020 in Coral Gables.
This concept has proven itself in the Middle East and we are looking forward to the possibilities in the United States.
We are about to bring our new state-of-the-art avocado packing facilities online in Mexico, which will give us even more control over our supply.
This should improve our margin and secure new additional sourcing opportunities to serve the rapidly expanding consumer market for avocados.
We recently released on our website, the latest corporate social responsibility report highlighting Fresh Del Monte's commitment to making a better world tomorrow.
Sustainability has always been a part of who we are and what we do every day.
We recognize setting and meeting our sustainability goals is an opportunity for us to positively impact people and the environment.
We look forward to building on our momentum as we advance our efforts to meet all our corporate responsibility goals and make a better way tomorrow.
In summary, we remain committed to transforming the company growing our product lines, increasing shareholder value and inspiring healthier lifestyles for generations to come.
Our financial performance in the third quarter demonstrates that our strategy to evolve Fresh Del Monte to our value-added, efficient, profitable and more focused business is under way.
For the third quarter of 2019, adjusted net income per diluted share was $0.35, compared with an adjusted loss per diluted share of $0.14 in 2018.
Net sales were in line with the prior year period.
Adjusted gross profit increased 42% to $75 million in the third quarter of 2019, compared with $53 million in 2018.
Adjusted operating income for the quarter increased to $25 million, compared with $3 million in the prior year.
And adjusted net income was $17 million, compared with an adjusted net loss of $7 million in the third quarter of 2018.
Turning to our business segments and key product lines.
In our fresh and value-added business segment for the third quarter of 2018, net sales were $653 million, compared with $640 million in the prior year period.
Primarily as a result of higher net sales in our fresh-cut fruit, avocado and vegetable product line, partially offset by lower net sales in our pineapple and non-tropical product lines.
Gross profit increased 27% to $54 million, compared with $42 million in the third quarter of 2018, primarily due to higher gross profit in our fresh-cut, pineapple and vegetable product lines.
Our gross profit margin for the segment improved by 1.6 percentage point, maintaining the growth trend of the first half of 2019.
In our pineapple category, net sales decreased to $102 million, compared to $112 million in the prior year period.
The result of lower production volumes, due to adverse growing conditions in our production areas.
The decrease was offset by higher selling prices in North America and Europe.
Overall volume was 20% lower, unit pricing was 14% higher and unit cost was 7% higher than the prior year period.
In our fresh-cut fruit category, net sales were $145 million, compared with $132 million in the prior year period, primarily due to higher sales volume and higher selling prices in North America.
Overall volume was 10% higher, unit pricing was 1% higher and unit cost was 2% lower than the third quarter of 2018.
In our fresh-cut vegetable category, net sales increased to $124 million, compared with $123 million in the third quarter of 2018.
The increase was primarily the result of higher selling prices.
Volume was 9% lower, unit pricing was 11% higher and unit cost was 9% higher than the prior year period.
In our avocado category, net sales increased to $98 million, compared with $85 million in the third quarter of 2018, supported by higher selling prices as a result of tight industry supply.
Volume decreased 8%, pricing was 26% higher and unit cost was 28% higher than the prior year period.
In our fresh vegetable category, net sales increased to $46 million, compared with $40 million in the third quarter of 2018, due to higher sales volume and increased selling prices.
Volume increased 9%, unit price increased 6% and unit cost was 1% lower.
In our non-tropical category, which includes our grape, berry, apple, citrus, pear, peach, plum, nectarine, cherry and kiwi product lines.
Net sales decreased to $32 million, compared with $42 million in the third quarter of 2018, primarily due to planned rationalization of low-margin products in this category beginning in 2018.
Volume decreased 22%, unit pricing was in line with the prior year period and unit cost was 2% lower.
In our prepared food category, which includes our traditional canned products and meals and snacks product lines.
Net sales increased, due to higher sales volume, gross profit was impacted by lower selling prices in the traditional prepared product lines.
In our banana business segment, net sales were $386 million, compared with $397 million in the third quarter of 2018, primarily due to lower net sales in North America and Asia, partially offset by higher sales in the Middle East and Europe.
Overall volume was 7% lower than last year's third quarter, worldwide price increased 4% over the prior year period and total worldwide banana unit cost was 3% higher than the prior year period and gross profit increased to $17 million, compared with $10 million in the third quarter of 2018, reflecting a 1.7 percentage point increase in gross profit margin.
Now moving to selected financial data.
On selling, general and administrative expenses, we were in line with the prior year period.
Regarding foreign currency, our foreign currency was impacted at the sales level for the third quarter with an unfavorable impact of $7 million, and at the gross profit level the impact was unfavorable by $2 million.
Interest expense, net for the third quarter was $6 million compared with $7 million in the third quarter of 2018, due to lower debt and volume.
Income tax expense was $3 million during the quarter, compared with income tax expense of $1 million in the prior year, mainly due to higher taxable earnings in North America.
At the end of the quarter, our cash flow -- cash from operating activities was $130 million, compared with net cash provided by operating activities of $271 million in the same period of 2018, primarily due to lower accounts payable and accrued expenses, partially offset by higher net income.
At the end of the quarter, we were able to reduce our debt by an additional $50 million to $590 million from $640 million at the end of the second quarter of 2018.
In October 2019, we amended and restated our $1.1 billion unsecured credit agreement and extended the credit facility until October 2024, with a more favorable rate.
We also included an accordion feature that could increase the availability by, up to $300 million.
And we are pleased to have the continued support of our lenders and appreciate the confidence they maintain in Fresh Del Monte's future.
As it relates to capital spending, we invested $94 million on capital expenditures in the first nine months of 2019, compared with $119 million in the same period in 2018.
This is a 33% or $0.02 increase over the dividend paid in September 2019.
This concludes our financial review.
| compname reports q3 adjusted earnings per share $0.35.
q3 adjusted earnings per share $0.35.
company increases dividend 33% from $0.06 to $0.08 per share.
company extends credit facility until 2024.
|
Our actual results, capital and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our most recent annual report and quarterly report filed with the SEC.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Erik and I have worked together for a long time, and I know he will do a great job.
For the second quarter 2019, Hilltop reported net income of $57.8 million or $0.62 per diluted share, which represents a 77% increase compared with the $0.35 reported during the same quarter last year.
Additionally, Hilltop delivered a return on average assets of 1.74% and a return on average equity of 11.6%.
This quarter reflected the strength and diversification of our business model with the bank, mortgage business and broker-dealer all delivering significant year-over-year pre-tax income growth.
Average loans held for investment excluding broker-dealer loans grew by $740 million or 13% compared to the prior second quarter.
The large drivers were our Bank of River Oaks acquisition in Q3 2018 and our national warehouse lending business, which increases average balance by $225 million or 81% from second quarter 2018.
We continue to make paying a healthy pipeline of unfunded commitments and aim to prudently grow our loan portfolio by fostering our bank value relationships.
This was a strong quarter for PrimeLending as reflected by improvements versus Q2 2018 in both gain-on-sale margin and operating costs.
Also, the structured finance business at HilltopSecurities yielded a net revenue increase of $31 million compared to prior year from optimal market conditions and the strategic alignment with the capital market business.
Through the first six months of 2019, we have returned $40 million to our stockholders in dividends and share repurchases.
Under our Board-authorized share repurchase program, $25 million remains available through January 2020.
Credit quality remains a high priority, and we continue to focus on maintaining our underwriting discipline.
For the second quarter, nonperforming assets were $53 million, down slightly linked quarter and down $32 million compared to the second quarter 2018.
Moving to page four.
The bank had a healthy quarter with pre-tax income increasing by $13.5 million or 41% from prior year.
This increase was partially driven by a reduction in noninterest expense of $7.3 million attributed to a wire fraud and indemnification asset amortization in Q2 2018 as well as operational efficiency within the business.
Additionally, higher yields on higher loans balances delivered net interest income growth of $5.5 million despite lower accretion during the period.
In the second quarter, the bank closed two underperforming branches resulting in 62 full service branches.
Mortgage pre-tax income of $21.8 million for the quarter, an improvement of $8.4 million from Q2 2018, was the result of disciplined pricing and expense management despite a 4% decline in origination volume.
Multiple initiatives implemented during the second half of 2018 resulted in $6 million lower fixed cost and $4.3 million higher origination and closing costs fees.
Gain-on-sale margins increased by 15 basis points from Q2 2018, though remained stable over the trailing 12 months.
With elevated refinancing volume, we expect margin compression to persist and remain focused on delivering profitable volumes through the second half of 2019.
The broker-dealer reported a very strong quarter with a pre-tax margin of 18.9% on increased net revenues of 35% versus prior year.
The increase was largely driven by structured finance, which experienced higher production levels and strong secondary market margin at 10-year rates decline.
We feel good about the path of our new CEO, Brad Winges, and his leadership team are on to build upon HilltopSecurities established business line.
Results were relatively stable compared to prior year in our insurance business as we reported a pre-tax loss of $2.8 million for the quarter with a combined ratio of 113%.
Notably, we have begun to realize written premium growth in Texas and other core states.
In January, we introduced our platform for growth and efficiency initiatives, which includes a broad set of projects to operate -- to lower operating cost and build a foundation for future growth.
During the quarter, we benefited from the previously referenced mortgage efficiency and capital market strategic alignment initiatives as well as realized savings from our consolidated shared services and strategic sourcing.
While we expect the benefits to largely materialize in 2021, we are encouraged by the profits being made.
This past quarter, I traveled with several of our business leaders to our major markets in Texas and nationwide and met with employees from across all lines of businesses.
It gave us the opportunity to have candid roundtable discussions and learn about what our people are seeing in the market.
I came back inspired by our leadership and overwhelmed by the quality of our people in the field.
The strength of Hilltop is in our talented people and the impact they have on our customers and communities.
I'm starting on page five.
As Jeremy discussed, for the second quarter of 2019, Hilltop reported $57.8 million of income attributable to common stockholders equating to $0.62 per diluted share.
During the second quarter, Hilltop reported a $700,000 recovery and provision for loan losses.
In the quarter, the bank recaptured $6.2 million of allowance for loan loss, principally related to ongoing improvement in the oil and gas portfolio and a significant recovery from a previously classified oil and gas loan.
The second quarter provision includes approximately $3 million of net charge-offs or 18 basis points of average bank loans on an annualized basis.
Credit quality during the quarter remains solid.
But even with the recent strong performance, we are monitoring our portfolio rigorously to evaluate areas that may be experiencing any weakness.
Currently, we do not see any industries or concentrated exposures that are experiencing material deterioration.
During the second quarter, revenue-related purchase accounting accretion was $6.4 million and expenses were $2 million, resulting in a net purchase accounting pre-tax impact of $4.4 million for the quarter.
In the current period, the purchase accounting expenses largely represent amortization of deposits and other intangible assets related to prior acquisitions.
Related to the purchase loan accretion, as the purchase portfolio balances continued to decline, we expect scheduled interest income related to purchase loan accretion to average between $4 million and $6 million per quarter for the remainder of 2019.
Hilltop's capital position remains strong with a period in Common Equity Tier 1 ratio of 16.32% and a Tier 1 leverage ratio of 13%.
I'm moving to page six.
Net interest income in the second quarter equated to $108 million, including $6.4 million of purchased loan accretion.
Net interest income increased $3 million or 3% versus the same quarter in the prior year.
The growth in net interest income was driven by asset growth, including the acquired loans in Houston and improvement in net interest margin, which expanded by three basis points versus the prior year period.
Net interest margin equated to 3.49% in the second quarter and included 23 basis points of purchase accounting accretion.
The prepurchase accounting taxable equivalent net interest margin equated to 3.26%, which improved by eight basis points versus the same period in the prior year.
On a linked-quarter basis, taxable equivalent prepurchase accounting net interest margin declined by 12 basis points, resulting from lower yields on loans held for sale and the six basis point increase in the interest-bearing deposit costs.
During the second quarter, long-term interest rates and more directly 10-year rates continued to decline that began earlier in the year.
Year-to-date, the 10-year treasury yield has declined by approximately 65 basis points, which has a direct impact on Hilltop's loans held-for-sale yields, albeit on a lag basis.
Overall, the average yield on loans held for sale during the second quarter dropped by 32 basis points to 460 basis points, putting pressure on net interest margin during the quarter.
Given the continued declines in the 10-year rates during the second quarter, we expect that yields on loans held for sale will continue to decline further during the third quarter.
In addition, bank loan yields have increased as compared to the same period prior year, but the competitive pressure continues to intensify on both new and renewed loans.
As expected, we've seen deposit betas continue to increase even as the Federal Reserve did not move short-term rates higher.
Hilltop's cumulative beta for interest-bearing deposits in December of 2015 has been approximately 46%, remaining below our through-the-cycle model ranges of 50% to 60%.
With the change in market sentiment and the market's indication that the Fed could reduce rates throughout the remainder of 2019, we expect the deposit cost will reach peak levels later this year.
With the combination of lower loan held-for-sale yields and somewhat higher deposit costs, we expect additional pressure on net interest margin for the remainder of the year.
Therefore, we are maintaining our full year average prepurchase accounting net interest margin outlook of 3.25% plus or minus three basis points.
We will continue to revisit our assumptions based on the outcome of future Federal Reserve rate movements, yield curve shifts and asset liability flows across our portfolios.
Quarterly average gross earning assets increased by $268 million versus the same period in the prior year.
Second quarter earning asset growth was driven by the BORO acquisition and growth in our national warehouse lending business, which provides warehouse financing to third-party mortgage companies.
Growth was impacted by lower average loans held for sale, which declined by $282 million versus the prior year period.
I'm moving to page seven.
Total noninterest income for the second quarter of 2019 equated to $313 million.
Second quarter mortgage-related income and fees increased by $2.8 million versus the second quarter 2018.
During the second quarter of 2019, the competitive environment in mortgage banking remained intense as Hilltop's mortgage origination volumes declined by $147 million or 4% versus the same period in the prior year.
While mortgage volumes were challenged, gain-on-sale margins remained relatively stable during the second quarter at 333 basis points.
With the recent decline in the primary mortgage rate, the business experienced improvement in the refinance market as refinance volumes grew by 28% versus the prior year.
Given the improvements in the market related to lower long-term rates, we expect that full year origination volume in 2019 will be in line with full year 2018 production levels.
Regarding mortgage gain-on-sale margins, given the current competitive dynamics, our projected mix of origination business and our expectations on market rate, we expect the gain-on-sale margins will trend lower throughout the balance of 2019.
Other income increased by $35 million, driven primarily by improvements in sales and trading activities in both capital markets and structured finance services at HilltopSecurities.
Favorable market conditions resulted in a 25% increase in structured finance mortgage-backed security volumes and improved secondary spreads.
These businesses continue to realize the benefits of the investments we've been making to improve our structuring and distribution capabilities since the third quarter of 2018.
I'm moving to page eight.
Noninterest expenses increased in the same period in the prior year by $5 million to $344 million.
The growth in expenses versus the prior year were driven by an increase in variable compensation of $18 million at HilltopSecurities and PrimeLending.
This increase in variable compensation was going to strong fee revenue growth in the quarter.
Over the past five quarters, we've continued to make progress in aligning our businesses to the current market conditions and driving efficiencies across the franchise.
Through these efforts, headcount, nonvariable compensation, professional services costs and marketing and development expenses continue to trend lower as we make progress against our efficiency initiatives.
During the second quarter, Hilltop incurred $2 million in costs related to the ongoing core system enhancements, and we do expect that these related expenses will increase for the remainder of 2019.
Moving to page nine.
Total average HFI loans grew by 11% versus the second quarter of 2018.
Growth versus the same period in the prior year was driven by loans acquired in Houston during the third quarter of 2018 and growth in our mortgage warehouse lending business.
Based on current production trends, seasonal and scheduled paydowns, the current competitive environment and our focus on high-quality conservative underwriting, we continue to expect the full year average HFI loans will grow between 4% and 6% in 2019.
Turning to page 10.
As previously noted and as shown on this chart on the top right of the slide, Hilltop's businesses have maintained solid credit quality as nonperforming assets have declined $32.5 million from the same period in the prior year.
The allowance for loan loss to HFI loans ratio equates to 83 basis points at the end of the second quarter of 2019 and the decline from the first quarter of 2019 reflects the aforementioned allowance recapture.
It is important to note that we maintain approximately $90 million of remaining discounts across the purchase loan pools, and these discounts provide additional coverage against future losses.
Moving to page 11.
Average total deposits are approximately $8.3 billion and have increased by $483 million versus the second quarter of 2018.
Interest-bearing deposit costs have risen by six basis points from the first quarter of 2019 as competitive pressures remain and clients are actively seeking higher rates of return on their deposits by migrating monies from noninterest-bearing and savings products into higher-yielding money market, CD and investment products.
We continue to focus on growing deposits through the expansion of existing relationships and new client acquisition while managing overall deposit cost as aggressively as possible while remaining competitive.
Moving to page 12.
During the second quarter of 2019, PlainsCapital Bank continued to demonstrate solid improvement in profitability, generating approximately $47 million of pre-tax income during the quarter.
The quarter's results reflect the benefits of the growth in the Houston market, the affirmation allowance recaptured, which equated to $6.2 million and improvement in the efficiency ratio versus the prior year period of 10.6%.
The improvement in the efficiency ratio was driven by both revenue growth and lower expenses versus the prior year period.
Of note, the second quarter of 2018 included $4 million of expense related to the previously reported wire fraud and $2 million loss share related expenses.
The focus at PlainsCapital remains consistent: provide great service to our clients, drive profitable growth while maintaining a moderate risk profile and delivering positive operating leverage by balancing revenue growth and expense efficiency.
I'm turning to page 13.
PrimeLending generated a pre-tax profit of $22 million in the second quarter of 2019 driven by the efficiency efforts that the leadership team at PrimeLending executed during the third and fourth quarters of 2018 and has continued in the 2019.
While origination volumes declined by 4% versus the same period in the prior year, the combination of back-office efficiencies and branch performance management have yielded significant reduction in operating expenses, which declined by approximately $6 million versus the same period in the prior year.
Further supporting the improved results is our focus on pricing and fees.
Mortgage origination fees have increased from the same period in the prior year by 12 basis points, which yielded a small increase in fees versus the prior year even as origination volumes declined.
The focus for PrimeLending is to generate profitable mortgage volume, continue to focus on operational efficiencies and successfully launch our new mortgage loan operating system.
Turning to page 14.
HilltopSecurities delivered a pre-tax profit of $22 million for the second quarter of 2019, driven by solid execution in the structured finance and capital markets businesses, which have benefited from both our ongoing investments in structuring, sales and distribution and improved market conditions.
While activity was strong in the quarter, results from both of these businesses can be volatile as market rates, spreads and volumes can change significantly from period to period.
Related to Public Finance, while revenues declined modestly versus the same period in the prior year, we are investing in our franchise to support long-term growth by strategically hiring bankers to support client expansion and acquisition.
Based on current market activity, we expect results in this business to continue to improve throughout the remainder of 2019.
The focus for HilltopSecurities is to grow profitable revenue, optimize operating expenses, manage marketing liquidity risks within a moderate risk profile and finalize the deployment of the new core operating system.
Moving to page 15.
National Lloyds recorded a $3 million pre-tax loss for the quarter, which reflects seasonal increases in storm activity and client-related losses.
During the second quarter, the business delivered modest improvement in written premiums in our core states.
Growth in these core states remains the primary focus for 2019.
I'm moving to page 16.
For 2019, we're maintaining the full year outlook for our key balance sheet items, loans and deposits.
Given the actual changes in market interest rates and our expectation for rates over the coming quarters, we are adjusting our full year net interest income range lower to reflect our asset-sensitive position at PlainsCapital, the impact of lower market rates on loan-held-for-sale yields and our expectation of increasing deposit costs.
To reflect the strength in our fee businesses, we are adjusting our noninterest income outlook higher to reflect the results during the first half of 2019 and the improvement in current market conditions.
Our noninterest expense outlook range is slightly higher as variable expenses will continue to be correlated to our fee revenue businesses.
Lastly, as credit quality has remained solid and as a result of performance in the first half of 2019, we are adjusting our full year provision outlook range lower.
This outlook represents our current expectations with respect to the markets, rates and overall economic activity.
These, however, may change throughout the remainder of the year, and we will provide updates as necessary on our quarterly calls going forward.
| hilltop holdings q2 earnings per share $0.62.
q2 earnings per share $0.62.
|
Today we have Vic Grizzle, our CEO; Brian MacNeal, our CFO to discuss Armstrong World Industries' third quarter 2021 results, our rest of the year outlook, and progress on our growth initiatives.
Both are available on our Investor Relations website.
These statements involve risks and uncertainties that may differ materially from those expected or implied.
We delivered strong third quarter topline growth, up 19% versus 2020 results with Mineral Fiber sales increasing 15% and Architectural Specialties sales improving 31%.
Adjusted EBITDA of $99 million was 8% ahead of prior year results.
We are pleased to have achieved these results against the backdrop of a choppy market recovery, increasing inflation, and supply chain disruptions throughout the construction industry.
Unrelated to these challenges, we also experienced a rare manufacturing equipment failure causing lower-than-expected production rates in September, which Brian will discuss in greater detail in a moment.
Despite these challenges and the rare production issue, we reaffirmed the midpoints of our full-year 2021 guidance and expect to have a strong finish to the year.
To that point, these continue to be unprecedented times.
Inflation remains a strain on raw material, freight, labor, and energy costs throughout the construction industry.
At AWI, we have moved proactively throughout the year to increase prices and stay ahead of these inflationary pressures.
And consistent with our performance over the past decade, we have successfully stayed ahead of inflation.
We recognize this is unique and it's a testament to the strength of our industry-leading service model and the high-quality innovative products we manufacture that allows us to earn those price increases in the marketplace.
Specifically within our Mineral Fiber segment, we reported third quarter AUV growth of 14% which is the highest level we've achieved since we separated from the flooring business in 2016.
And this growth was largely driven by like-for-like pricing improvements.
And not unrelated to inflationary pressures, supply chains throughout the economy have also been under unprecedented pressure.
Again our teams throughout the organization, have been on top of their game.
They have remained agile and dedicated to limiting disruptions to our customers and partners.
This is critical because of our best-in-class service model is an important component of our value proposition to our distributors and to the contractors who depend on them.
Because of this importance, we set a high bar for our service performance.
While many companies may track two or three service performance metrics, we track six as part of what we call our perfect order measure.
These include order fill accuracy, on-time delivery, shipping damage, billing accuracy, product defects, and returns.
And I can share with you with great satisfaction that this measure not only remained above our 90% threshold throughout 2021 for the Mineral Fiber segment in particular but it's improved in the third quarter.
So I'm proud of how our teams have executed to handle these unprecedented challenges internally to meet our customers' needs.
Now externally, these challenges have impacted our business in the form of project delays, impacting both our Mineral Fiber and Architectural Specialties segments.
Despite these challenges, Mineral Fiber sales volumes increased in the third quarter versus prior year on the strength of the R&R part of our business that has more than offset the impact of these project delays and the lower new construction activity.
Our sales rate per shipping day also showed sequential improvement in the quarter.
In fact, September sales rate per day eclipsed that of 2019, and the quarterly results for this metric has now improved sequentially for the last five quarters.
From a profitability perspective, the Mineral Fiber segment generated strong gross margins compared to prior year, reflecting positive like-for-like pricing, improved mix, and our ability to overcome the production headwind I mentioned earlier, with other productivity efforts, and in fact, this was the best gross margin level since 3Q of 2019.
Our WAVE joint venture delivered another strong quarter as they have maintained excellent pricing discipline to stay ahead of inflationary pressures.
We're also pleased with the performance of one of the Group's newest innovation called SimpleSoffit.
Now like many of our innovations, we've introduced SimpleSoffit drive efficiencies for our customers and for those who ultimately install our products.
Soffit framing is a common design feature that requires a significant use of labor and materials on commercial construction jobs and has a variety of complexities based on interior design and the accommodation of HVAC systems.
Given the pressures on labor, we realized creating savings in this area could be a significant value generator for our customers.
What the team at WAVE introduced are prefabricated soffit framing systems that are engineered using our automated design software to match the design specs and come prepackaged and easy to handle flat boxes.
Because of their design, our SimpleSoffit systems can be installed up to 3 times faster than traditional methods, with less material and labor hours.
SimpleSoffits are making a significant difference in terms of speed and cost on the sites where they have been used, including some high profile projects such as the new PG&E headquarters in California, The Kansas City International Airport and for hockey fans out there, the UBS Arena at Belmont Park, where the New York Islanders will drop the puck for the first time in mid-November.
We're very excited about how this new innovative product has gained traction and the value it's creating for our customers.
In the Architectural Specialties, the segment had a strong top-line quarter as well, improving -- and improving margin performance.
In addition to the contributions from our 2020 acquisitions, sales and earnings from the organic business rebounded nicely from prior year lows.
We've also successfully introduced price increases for these products and that is helping address some of the inflationary pressures on this segment as well.
New construction and major renovation activity improved but was uneven due to project delays, even with those challenges and our continued growth investments in this segment, Architectural Specialties' EBITDA margin improved 350 basis points sequentially and I expect these improvements to continue back above the 20% level.
We remain optimistic about the '22 and '23 outlook for Architectural Specialties, given the fact that we are on track to exit 2021 with a very strong order backlog and bidding activity remains robust.
As new construction activity regains momentum we expect sales growth to further accelerate in this segment.
The broader industry indicators that we track also support our growing optimism for both the AS and the Mineral Fiber segments.
As many of these have continued to improve or remained in positive territory in the third quarter.
GDP forecast remained above 5%, the Architectural Billing Index ended September well into expansionary territory at 56.6, up from August reading of 55.6, similar to the second quarter of Dodge data for both bidding and construction starts improved double-digits.
These are strong indicators for growth in 2022 and 2023 and with our recent investments, we are well-positioned to capture additional growth as the market recovers.
Today, I'll be reviewing our third quarter 2021 results and our updated guidance for the year.
On Slide 5, we begin with our consolidated third quarter 2021 results.
Adjusted net sales of $292 million were up 19% versus prior year.
Adjusted EBITDA grew 8% and EBITDA margins contracted 320 basis points.
EBITDA margins contracted due to continued investments in SG&A and lower manufacturing productivity.
Adjusted diluted earnings per share of $1.17 was 9% above prior year results.
Adjusted free cash flow was 28% above prior year results.
Our balance sheet remains healthy as we ended the quarter with $439 million of available liquidity, including a cash balance of $94 million and $345 million of availability on our revolving credit facility.
Net debt at the end of the quarter was $533 million and our net debt to EBITDA ratio of 1.5, as calculated under the terms of our credit agreement, remains well below our covenant threshold of 3.75.
In the quarter, we repurchased 187,000 shares for $20 million, for an average price of about $107 per share.
As of September 30, we had $544 million remaining under our repurchase program, which expires in December 2023.
Last week, we announced a 10% increase in our quarterly dividend, this is our third increase in the last three years and when paired with our share repurchases, is a reflection of our commitment to our balanced and disciplined capital allocation priorities that continue to be investing in the business, expanding into adjacencies through acquisitions, and returning capital to shareholders.
You can see our consolidated third quarter EBITDA bridge from the prior year results on this slide as well.
The $8 million adjusted EBITDA gain was primarily due to favorable AUV driven by positive like-for-like pricing and favorable channel mix, increased volume driven by the 2020 acquisitions, and contributions from WAVE equity earnings.
This favorability was partially offset by higher SG&A costs, increased input cost on freight raw, materials, and energy, and an increase in manufacturing cost driven by the 2020 acquisitions.
The increase in SG&A was driven by more normalized discretionary spending compared to the prior year cost reductions, an increase in variable compensation, investments for future growth in our Healthy Spaces and digital initiatives, and the 2020 acquisitions.
Not surprisingly, like many other manufacturing companies, we felt inflation impacts throughout our supply chain, albeit less than some other building product companies.
Our strong supplier partnerships have never been more important and our teams have done a great job of managing through this challenge.
We expect inflationary pressure to continue into the fourth quarter, we now see cost of goods sold inflation somewhere in the 4.5% to 5% range for the full year 2021.
As demonstrated historically and in this quarter, we will work to drive like-for-like pricing above inflation.
Our Mineral Fiber segment results are on Slide 6.
In the quarter, sales increased 15%, mostly due to favorable AUV previously mentioned.
We saw sequential improvement in our sales per shipping day metric and continue to track this closely in comparison to both 2020 and 2019.
AUV fell through to EBITDA at historical highs, as a result of the price increases we announced in February, May and August, and again is the outcome of our ability to price ahead of inflation.
Mineral Fiber segment adjusted EBITDA increased 10%, driven by the AUV gains and another strong quarter of equity earnings from the WAVE joint venture.
The team at WAVE has done a great job of pricing ahead of the steel inflation and managing issues across the supply chain.
These gains were partially offset by higher SG&A spending due to the return of prior-year cost reductions, increased variable compensation and investments to support our growth initiatives.
Input cost trended higher this quarter due to raw material, energy and freight inflation, which remains a top focus area for us as we end the year and prepare for 2022.
In addition, we experienced a $3 million headwind due to unplanned maintenance activities at two of our larger plants.
This caused downtime at both plants and drove lost productivity, higher scrap costs and additional freight cost to maintain our best-in-class service levels.
Both situations where remediated during the quarter and I'm happy to report that the plants are running very well in October.
This is an atypical event for AWI.
As many of you know, we consistently drive plant productivity year after year.
Moving to Architectural Specialties or AS segment on Slide 7.
Third quarter adjusted net sales grew 31% or $19 million with the 2020 acquisitions in terms of Turf, Moz, Arktura, contributing $16 million and organic sales increasing $3 million.
AS segment adjusted EBITDA increased 1% as improved sales from the 2020 acquisitions and the organic business more than offset project push outs, higher SG&A, and increased manufacturing costs.
The adjusted EBITDA margin for the segment improved 350 basis points sequentially from the second quarter but contracted 500 basis points when compared to the third quarter 2020 results.
This segment is still being pressured by inflationary conditions continued along with a recent spike in project delays due to commercial construction labor disruptions and supply chain challenges.
The project push outs are delaying some revenue to Q4 and 2022.
In September, we announced an additional round of price increases for AS products, which have already gone into effect.
We've had AS price increases in each quarter of 2021.
Slide 8 shows the drivers of our consolidated results for the nine-month period, including a breakout of the impact for our 2020 acquisitions.
Sales for the first nine months of the year were up 18% and adjusted EBITDA increased 10%.
The year-to-date results are driven by higher volumes as the second quarter lapped a prior year more significantly impacted by the pandemic, favorable AUV, and increased WAVE equity earnings, which were partially offset by higher SG&A spend and increased manufacturing in input costs.
Adjusted diluted earnings per share increased 12% to $3.28.
Slide 9 shows year-to-date adjusted free cash flow performance, which is flat versus the prior year.
Increases in cash earnings, working capital improvements, and WAVE-related dividends were offset by an increase in income tax payments and higher capex spending following a reduced prior year in an effort to manage cash and liquidity during the pandemic.
Our cash generation through the first nine months is in line with our expectations.
We summarize our updated guidance for 2021 on Slide 10.
Please note, this guidance update assumes no significant pandemic-related shutdowns or material job delays due to supply chain issues.
We are narrowing our guidance ranges for all key metrics and now we expect year-over-year revenue growth of 17% to 18%, adjusted EBITDA growth of 13% to 15%, adjusted earnings per share growth of 14% to 16%, and adjusted free cash flow of down 7% to 2%.
The right side of the page highlights updates for the prior -- from the prior guidance communicated in July.
You'll notice the increase in Mineral Fiber AUV range from 9% to 11% as our teams continue to do a great job of realizing price from our three Mineral Fiber increases this year.
We're bringing down the range of our Mineral Fiber volume to 1% to 2% as near-term choppiness remains and projects are delayed into the out months and 2022.
We continue to invest in our Healthy Spaces and digital initiatives and believe they will be meaningful contributors to our future growth.
But the larger impact on volume for the current year is the project delays previously discussed.
This is a shift in contribution between the 2020 acquisitions and the organic business to the AS segment as revenue impacts are felt from the project delays.
We now expect the 2020 acquisitions to contribute about 30% growth and AS organic in the mid-to-high single-digit range.
In conclusion, I'm proud of the work our teams have accomplished throughout the third quarter in the face of supply chain challenges and a renewal of COVID-19 concerns.
It certainly wasn't easy but they delivered a solid quarter.
These are challenging times but I remain optimistic that our investments in the future, whether it's in people, growth initiatives, innovation, or partnerships, will unlock the next level of growth for AWI.
Before we get into the Q&A session, let me share a little bit more about how we see our current position and the progress on key initiatives and what that means for the future here at Armstrong.
Inflation and supply chain challenges are likely to persist into next year.
But at AWI, we're demonstrating that we can manage our way through this, successfully delivering price ahead of inflation and minimizing the impact from supply chain disruptions.
Market conditions are continuing to improve albeit and an uneven and choppy-like fashion.
Despite the unevenness in the recovery, we have remained focused on strengthening our competitive advantage and improving our long-term growth trajectory.
Our strong financial position has allowed us to continue investing in our growth initiatives, such as Healthy Spaces and digital innovation and those efforts are progressing well and gaining traction.
Our Healthy Spaces product sales have continued to improve quarter-on-quarter and there are clear signs of the growing recognition of the role ceilings can play in ensuring indoor spaces are healthy.
For example, we have seen a significant uptick in our demand for health zone products.
This is the first line of our Healthy Spaces solutions.
As a reminder, these products were introduced a few years back to meet the needs of the healthcare environments in terms of disinfectibility and washability, which are now attributes important to any and all indoor spaces.
On a year-to-date basis, sales of these products have increased 38% versus 2020 and over 20% versus 2019 levels.
What's most encouraging is that approximately 60% of these sales are now coming from outside of the healthcare vertical.
This is validating the broader need and the transferability of existing Healthy Spaces solutions to more general-purpose applications such as offices, schools, and hospitality.
VidaShield and AirAssure, the two products that we introduced at the end of last year, again still early days, but the progress is encouraging.
Sales of these products in the third quarter doubled from the second quarter sales levels.
And we have more than doubled the number of active projects in the quarter and are conducting several trials on large-scale projects.
On the digital front, we continue to invest across several initiatives with a focus on speed and cost benefits for our customers.
One such initiative is project Works, which is our digital design and pre-construction service.
This service automates the design process from concept to builder materials, drastically increasing the speed of design while allowing design iterations along the way in minutes or in hours versus days.
In addition, once the design is complete, we can provide an accurate builder materials that makes the lives of contractors much easier.
This is a service that is deepening our collaboration with architects, designers, and contractors in a mutually beneficial way.
It's helping us secure additional specifications and ultimately to sell more products into more commercial spaces.
We are excited about the number of projects being processed by project Works and how it's strengthening Armstrong's leadership position in the commercial construction industry.
In summary, our advancement of digital and product innovation, despite the ongoing challenges of the evolving COVID pandemic is a testament to the power of focus we have as an America's-only ceiling and specialty walls company.
This power and focus has been critical throughout the pandemic as we kept all of our plants in operation and made no cuts to our sales and marketing efforts.
Our unique and powerful focus has also helped us manage through the challenges of inflation and supply chain disruptions to maintain our long track record of achieving price over inflation and maintaining our best-in-class service levels.
Throughout this uncertain period, we have not slowed our efforts to execute on our company strategy.
Our customer relationships are stronger now than ever and our ongoing product in digital innovation is providing important top-line growth opportunities.
As our markets continue to recover, we are in an excellent position to capitalize on this recovery and to deliver increased levels of value creation for our shareholders.
| compname reports q3 adjusted earnings per share $1.17.
qtrly adjusted earnings per share $1.17.
|
Joining me on the call today are Gene Lee, Darden's Chairman and CEO; Rick Cardenas, COO; and Raj Vennam, CFO.
We plan to release fiscal 2021 fourth quarter earnings on June 24 before the market opens, followed by a conference call.
It's hard to believe it's been a year since the pandemic began to significantly impact our business.
When I reflect back on everything that has transpired, it is clear to me the strategy we developed six years ago provided a strong foundation to help us navigate this period of unprecedented change and uncertainty.
Our portfolio of iconic brands has been focused on executing our Back to Basics operating philosophy while leveraging our four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning and our results oriented culture.
And while our four competitive advantages were critical to our business and operational success this past year, our significant scale and results oriented culture have played an outsized role in our ability to emerge stronger.
Our significant scale enabled us to quickly react to the turbulent operating environment.
The depth and breadth of our supply chain relationships ensured that we could adjust our product supply as needed without experiencing any significant interruptions.
We have our own dedicated distribution network, and the assurance of an uninterrupted supply chain provided consistency and a high level of certainty for our operators.
Our scale also enabled us to significantly accelerate the development of online ordering and several other digital initiatives and cascade them across our brands quickly and effectively.
The robust expansion of our digital platform over the past year has provided us a richer set of first-party data on new and existing guest.
Finally, our scale provided us with multiple levers to pull to ensure we have the liquidity we needed during the early days of COVID-19.
As soon as our liquidity needs were solved for, our brands were able to focus on strengthening their value propositions and transforming their business models.
As our Founder Bill Darden said, the greatest competitive advantage our Company has is the quality of our employees, evidenced by the excellent job they do every day.
Throughout this past year, Darden and our brands have emerged stronger and our success is a direct result of our team members and their relentless commitment to delivering safe and exceptional guest experiences.
That is why we've continued to invest in our team members throughout the past year.
Since March of 2020, we have invested more than $200 million in our people through programs such as paid sick leave, COVID-19 emergency pay and covering insurance payments and benefit deductions for team members who were furloughed.
These investments also include our recent decision to provide all hourly restaurant team members up to four hours of paid time off for the purpose of receiving the COVID-19 vaccine.
In addition, these investments include the one-time bonus we announced today, totaling approximately $17 million, which will impact nearly 90,000 hourly team members.
Beginning Monday, every hourly team member, tipped and non-tipped, will earn at least $10 per hour, inclusive of tip income.
Additionally, we are committed to raising that amount to $11 per hour in January 2022 and to $12 per hour in January 2023.
These investments further strengthen our industry-leading employment proposition.
Lastly, I continue to be impressed and inspired by our team members who have shown extraordinary resilience and passion during the past year.
You are the heart and soul of our Company and on behalf of the management team, we're extremely grateful to you.
As Gene said, it's hard to believe we've been operating in this environment for a year.
In addition to executing our Back to Basics operating philosophy, our restaurant teams have continued to successfully manage through this situation by remaining focused on the four key priorities we established at the onset of the pandemic: one, ensuring the health and safety of our team members and guests; two, simplifying operations and strengthening execution; three, deploying technology to improve the guest experience; and four, transforming our business model.
The health and safety of our team members and guests remains our top priority.
Throughout the past year, our team members have done a fantastic job of upholding our safety protocols while taking great care of our guests.
Today, even as restrictions are easing in some parts of the country, we continue to follow our enhanced safety measures.
This includes daily team member health monitoring, requiring masks for every team member, enhanced cleaning procedures and social distancing protocols.
Our second priority has been to continue finding ways to simplify our operations and drive in-restaurant execution at each of our brands.
This environment gave us a once in a lifetime opportunity to evaluate every aspect of how we operate and make decisions we would not have been able to do in a normal operating environment.
A good example of this work all of our brands have done to streamline menus and remove low preference or low satisfaction items.
This focus makes it easier for our restaurant teams to consistently execute our highest preference items which means we are serving our most popular dishes to more guests.
In fact, a year ago, the top 10 entrees at Olive Garden accounted for about 48% of guest preference, and today they account for approximately 55%.
Reducing the bottom selling items eliminates distractions and allows us to execute at a high level.
We have dramatically reduced low volume items which reduces the need to prepare them, saving time and reducing food waste.
For example, at LongHorn Steakhouse, the number of total items with less than 1% preference is down to eight from more than 25 pre-COVID.
Third, we continue to deploy technology to improve the guest experience and build on the progress we have made over the last 12 months.
When the pandemic began and our dining rooms were closed, we were able to quickly roll out online ordering at our brands that had yet to deploy it.
We also streamlined the curbside to-go pickup process by rolling out the Curbside I'm Here text message notification feature so guests can easily alert us when they arrive.
These technology enhancements and other process improvements helped Olive Garden achieve new all-time high guest satisfaction ratings for delivering on time and accurate off-premise experiences during a quarter that included three busy off-premise days: Christmas Eve, New Year's Eve and Valentine's Day.
In fact, Valentine's Day was our highest sales day since the start of the pandemic.
Also during the quarter, several brands, including Olive Garden LongHorn implemented enhancements to their websites to streamline the online checkout process.
This resulted in a meaningful reduction in order abandonment rates.
Our continuous digital transformation is resonating with our guests.
In fact, during the quarter, nearly 19% of total sales were digital transactions.
Further, 50% of all guest checks were settled digitally, either online or on our tabletop tablets or via mobile pay.
We have made great strides in our digital journey over the past year and we will continue to strengthen our digital platform and provide our brands with the tools to compete more effectively.
And finally, the investments we've made to simplify our business through menu and process simplification have resulted in significant transformation of our business model.
For example, across Darden, our hourly labor productivity has improved by over 20%, with some brands improving by well over 30% such as Cheddar's.
We thought it would be helpful to provide a bit more insight into what the business model transformation has done to Cheddar's P&L.
Year-to-date through the third quarter, Cheddar's has grown the restaurant level margins by over 300 basis points on a year-to-date sales retention of 75%.
When Cheddar's reaches 100% of the pre-COVID sales, we expect their restaurant level margins to be well in the high teens.
While we don't intend to continue to provide this level of detail in the future, this illustration helps to highlight the business model improvements our brands are making.
As we have mentioned previously, the simplifications across all of our businesses are expected to result in a 150 basis points of margin improvement with 90% of pre-COVID sales.
Our business model transformation also strengthens our belief in our ability to open value creating new restaurants across all of our brands.
Due to this transformation, the sales required to exceed our return expectations are much lower today.
In fact, we opened six new restaurants during the quarter and each is exceeding our expectations.
As Gene said, our success is a direct result of their hard work.
Being of service is at the heart of our business and our team members demonstrate that every day through their commitment to our guests and each other.
For the third quarter, total sales were $1.73 billion, a decrease of 26.1%.
Same restaurant sales decreased 26.7%.
EBITDA was $236 million, and diluted net earnings per share from continuing operations were $0.98.
Turning to this quarter's P&L.
Food and beverage expenses were 80 basis points higher than last year, primarily driven by investments in food quality and mix.
Restaurant labor was 20 basis points higher.
As Gene mentioned, we invested approximately $17 million in team member bonuses this quarter.
Excluding the team member bonuses, restaurant labor would have been 80 basis points favorable to last year.
The favorability to last year was driven by hourly labor improvement of 280 basis points due to efficiencies gained from operational simplifications Rick discussed.
The hourly labor improvement was partially offset by deleverage in management labor due to sales declines.
Restaurant expense per operating week was 16% lower than last year, driven by lower workers' compensation, utilities, repairs and maintenance expense.
Restaurant expense as a percent of sales was 250 basis points higher than last year due to sales deleverage.
Marketing spend was $52 million lower than last year, with total marketing 200 basis points favorable to last year.
This all resulted in restaurant level EBITDA margin of 18.4%, only 150 basis points below last year.
Excluding the one-time hourly team member bonus, restaurant level EBITDA margin would have been even stronger at 19.4%.
We impaired one Yard House restaurant this quarter, resulting in a non-cash impairment charge of $3 million.
This location was in Portland, Oregon, and had been temporarily closed since April.
We finalized the legal recovery during the quarter, resulting in favorability of $16 million.
This favorability was partially offset by $8.8 million of mark-to-market expense on our deferred compensation.
Excluding these two items, G&A would have been $86 million this quarter.
As a reminder, the mark-to-market expense is related to significant appreciation in both the Darden share price and equity market this quarter, and due to the way we hedge this expense, it is mostly offset on an after-tax basis.
Our hedge reduced income tax expense by $7.2 million, resulting in a net reduction to earnings after-tax this quarter of $1.6 million.
Our effective tax rate of 2.3% this quarter was unusually low due to two factors.
First, the tax benefit from the deferred compensation hedge I just mentioned reduced the tax rate by 5 percentage points.
Second, the stock option exercises this quarter drove approximately $7 million of excess tax benefit, reducing the tax rate by 4.8 percentage points.
After adjusting for these factors, our normalized effective tax rate for the third quarter would have been 12.1%.
Looking at our segment performance this quarter, Olive Garden saw segment profit margin increase versus last year despite sales declines.
Our continued focus on simplified operations, which significantly reduced direct labor, combined with lower marketing expenses, drove this margin improvement.
Segment profit margin declined for LongHorn as higher than average beef inflation and other investments drove higher food and beverage expense.
In addition, both labor and restaurant expenses were higher as a percent of sales due to sales deleverage.
Segment profit margin declined for Fine Dining and Other segments due to deleverage across the P&L from the significant sales decline year-over-year.
We generated over $240 million of free cash flow this quarter, ending the third quarter with over $990 million in cash.
Our recent performance has given us better visibility into the durability of our cash flows.
Therefore, we will return to our 50% to 60% dividend payout target applied to future earnings to determine our dividend.
To that end, the Board declared a quarterly cash dividend of $0.88 per share, matching our pre-COVID dividend level.
The ability to resume pre-COVID dividend levels just 12 months after suspending it is a testament to the strength of our business model and the durability of our cash flows.
And finally, today we announced a new share repurchase authorization of $500 million which replaces all previous authorizations.
Turning to the fourth quarter.
As of today we have 99% of our dining rooms open with some capacity.
Taking that all into consideration, we currently expect, for the fourth quarter, total sales of approximately $2.1 billion, EBITDA between $345 million and $360 million and diluted net earnings per share from continuing operations between $1.60 and $1.70 on a diluted share base of 132 million shares.
We've also updated our full year outlook for capital expenditures to be between $285 million and $295 million, and we anticipate opening 33 net new restaurants for the year.
We continue to believe we can achieve pre-COVID EBITDA dollars on 90% of pre-COVID sales, resulting in 150 basis points of EBITDA margin growth, and our Q4 outlook falls within this framework.
As we move beyond the fourth quarter, there are additional costs such as training, travel, growth cost, incremental marketing and other investments that we expect will need to come back into the P&L.
And while it's too early to provide insights into fiscal '22 sales and earnings, we did want to provide some preliminary guidance for a few items.
We expect total capital spending between $350 million and $400 million and open approximately 35 new restaurants in fiscal '22.
We also anticipate an effective tax rate in the range of 12% to 13% for fiscal '22.
| compname reports q3 revenue $1.73 bln.
compname reports fiscal 2021 third quarter results; announces team member investments; declares quarterly dividend; authorizes new $500 million share repurchase program; and provides fiscal 2021 fourth quarter outlook.
sees q4 earnings per share $1.60 to $1.70 from continuing operations.
q3 revenue $1.73 billion versus refinitiv ibes estimate of $1.61 billion.
qtrly reported diluted net earnings per share from continuing operations were $0.98.
sees q4 2021 total sales of approximately $2.1 billion.
anticipates opening 33 net new restaurants and total capital spending between $285 and $295 million for full fiscal year.
|
In addition, a slide deck providing detailed financial results for the quarter is also posted on our website.
This quarter, e-commerce data is not included in our category overview due to a restatement of the external validate.
Our team has moved with speed to address the ongoing challenges of operating in this environment, while continuing to focus on keeping each other healthy and safe.
As I will talk about in a moment, while the pandemic-driven demand is the main story, we remain focused on our business strategies to ensure that we are well positioned as the pandemic subsides.
Leading with innovation, operating with excellence, and driving productivity are the keys to our success both now and into the future.
Looking at the results for the quarter, we maintained our top line momentum with strong sales across categories and markets around the world, resulting in organic sales growth of 12.7% with battery up 11% and auto care up 27%, globally.
We delivered adjusted gross margin of 40.7% as we were able to meet the demand while incurring lower incremental costs than we did last quarter.
This combination of strong top line growth and improving margins resulted in adjusted earnings-per-share growth of 38% and adjusted EBITDA growth of 17%.
We were also able to take advantage of low interest rates to refinance a portion of our debt, which will result in significantly reduced interest expense going forward.
We are off to a solid start for the fiscal year.
With lower interest expenses due to the refinancing, we are increasing our outlook for the full year adjusted earnings per share to a new range of $3.10 to $3.40.
In a few minutes, Tim will provide more detail on the results for the quarter as well as our view for the full year.
Let me start with category trends where we continue to see strong consumer demand.
As Jackie mentioned earlier, our category data this quarter does not include e-commerce due to an external database restatement.
Globally, battery category value was up 6.9% and we continue to see consumers purchasing batteries for immediate use.
Consumers have increased the number of devices they own as well as their usage of those devices.
With a gain of 2.5 share points, Energizer is growing faster than the category, driven by distribution gains in the U.S. and in international markets, including Canada, France, Korea and the UK.
With auto care, the U.S. category grew more than 10% as a result of changes in consumer behavior, including an increased focus on cleaning and disinfecting as well as an increase in do-it-yourself activities.
During the quarter, Energizer's auto care share was flat.
Of note during the quarter, we did see strong growth in non-measured channels, including e-commerce, home center and international markets.
In auto care, we are meeting the needs of consumers by rolling out innovation and strengthening our product pipeline.
We recently launched an Armor All disinfectant, as consumers are more focused than ever on keeping their cars clean and disinfected.
We also acquired a small formulations business which to-date has primarily commercialized household disinfectants.
The robust portfolio of innovative cleaning, disinfecting and odor-eliminating formulations we've acquired is an extremely attractive addition to our R&D pipeline and is expected to enhance our leadership in auto care.
In looking at e-commerce, while we don't have consumption data this quarter, based on our sales, we continue to see solid e-commerce performance versus prior period.
Our investments and ongoing focus are paying off and positioning us to lead well into the future.
If we take a step back, the pandemic-driven demand in our categories has been and for the foreseeable future, will continue to be the main story, and while our priority will be to successfully navigate a very complicated operating environment in order to meet this elevated demand efficiently, we are also undertaking initiatives to emerge from this period poised for growth in the future.
As we are nearing completion of our integration efforts, including the recent bolt-on acquisitions, we are also undertaking several initiatives to modernize our core operational capabilities.
Let me take a moment to provide an update on these initiatives.
Despite the challenges of this past year, our integration activities for the battery and auto care acquisitions have continued and are scheduled for completion by the end of 2021.
In the first quarter, we realized $20 million in synergies and we remain on track to achieve $40 million to $45 million in 2021 and to deliver more than $100 million in total synergies.
We also closed on the acquisition of an Indonesian battery plant, which contributed significantly to our ability to meet the strong demand during the quarter and will enable further efficiencies in the future.
In addition to the integration activities, we have launched several significant projects to modernize our core, as the pandemic related shifts have shown very clearly we must become a more digitally advanced organization in order to ensure we can meet the demands of the consumer in a rapidly changing operating environment.
We are transforming our global product supply organization by moving to an end-to-end category structure, which will create greater agility within each category and closer connections to customers and consumers.
We are also investing in our business planning tools and supply planning analytics to provide more predictive insights, which are needed for today's environment.
The end result will be a product supplier organization that is better equipped to capitalize on opportunities while also enhancing our ability to navigate disruption.
These efforts are already paying off as we were able to meet the continued elevated demand, especially in batteries with lower-than-expected COVID-related costs.
This project will continue to be important in the near-term to meet demand and in the medium-term to take better advantage of opportunities across our business.
We are also investing in more advanced data and analytics capabilities, which will enable us to better detect and understand in near real-time, impacts to the business, from shift in consumer behavior and macroeconomic events, such as mix shifts in markets or products.
Armed with the most recent data and insights, our commercial and marketing teams can respond and more effectively connect with consumers and drive growth in our business.
These projects as well as other smaller ones will enhance our ability to operate more effectively and will also drive out costs from the business.
We are committed to the efficient lower cost operating model you have seen from us in the past, while being equally committed to ensuring we have the flexibility to invest in opportunities to drive future growth.
We believe these initiatives will allow us to do both.
Our strategic priorities of leading with innovation, operating with excellence and driving productivity have served us well as we navigated the pandemic and they will remain critical going forward.
However, 2020 also provided significant insight that will enable Energizer to emerge as a stronger, more resilient and dynamic company.
The pandemic reminded us that consumers are at the heart of what we do.
Fundamentally, it was consumer behavior that drove disruption.
As their habits and routines changed, they gravitated to trusted brands and engage with our categories in new and different ways.
They accelerated the changes in how they consume information and ultimately how they shop.
Our consumer insights, combined with our powerhouse brands, enable us to create value, for our retail partners by ensuring we are there to meet consumers where they are going.
Remaining consumer focused, investing in our brands and ensuring we can adapt at the speed in the marketplace are the keys to our success in the future.
We will leverage the best attributes of a large scaled organization with the mentality of a start-up, where small teams are unleashed to focus on critical initiatives.
With that, I will now turn things over to Tim, who will provide more details about our financial performance for the quarter, including our refinancing efforts, capital allocation and our outlook for the fiscal year.
As Mark indicated, our organic revenue growth of 12.7% coupled with cost controls and favorable currency tailwinds resulted in strong adjusted earnings per share of $1.17, adjusted EBITDA of $192 million and adjusted free cash flow of $90 million.
Taking a deeper look at the top line, both our Americas and International segments grew organically more than 12% with batteries up 11% and auto care up more than 27%.
As Mark mentioned, the categories in which we compete continued to experience elevated demand.
In addition, our organic sales growth also benefited from distribution gains that began last summer as well as some shifting of shipments between quarters.
Finally, the growth we are seeing this year is off of prior-year first quarter organic sales decline of 3.4%.
Adjusted gross margin decreased 110 basis points versus the prior year to 40.7%, although this represented a sequential improvement versus the last quarter.
Gross margin was impacted primarily by incremental COVID costs of approximately $12 million, largely related to air freight, fines and penalties and personal protection equipment necessary to meet the sustained elevated demand, end channel customer and product mix as well as increased operating costs resulted from increased tariffs associated with higher volumes, commodity cost and transportation cost, consistent with inflationary trends in the global market.
Partially offsetting these impacts to gross margin, the first quarter benefited from synergies of $13 million and favorable currency exchange rates.
As we exit the first quarter, we believe the incremental COVID costs from air freight and fines and penalties over the remainder of the year will significantly diminish.
However, like many other companies, we anticipate additional cost pressures from increased tariffs, commodities and transportation to impact us over the remainder of the year and we have includes these items in our outlook.
A&P as a percent of net sales was 5.8% versus 6.4% in the prior year, due primarily to the strong top line growth experienced in the current quarter.
Consistent with our priorities, we continue and invest, on an absolute dollar basis, in A&P to support our brands with total A&P up $3 million or 6%.
Excluding acquisition and integration cost, SG&A as a percent of net sales was 13.4% versus 15.1% in the prior year.
This was primarily due to the elevated sales experienced in the current quarter.
On an absolute dollar basis, adjusted SG&A increased $2.7 million, driven in part by higher overheads associated with the top line sales growth and the timing of costs partially offset by synergies of $7 million and lower travel expense due to COVID.
As Mark mentioned, we realized $20 million of synergies in the quarter with $13 million in cost of goods sold and $7 million in SG&A.
For the full year, we continue to expect to realize $40 million to $45 million of incremental synergies.
In total, we have recognized nearly $90 million since we completed the battery and auto care acquisitions and remain on track to realize in excess of $100 million by the end of fiscal 2021.
We also took advantage of accommodating debt markets to refinance our existing short-term secured debt and our 2027 unsecured bonds with a new $1.2 billion term loan.
Based on the new all-in interest rates, we anticipate annualized interest savings of roughly $25 million with about $19 million to be realized over the remainder of fiscal 2021.
We also amended certain covenants in our credit agreement, which will create additional capacity and flexibility in our debt capital structure.
Our net debt to credit defined EBITDA at the end of the quarter was 4.6 times, reflecting improved EBITDA performance and debt pay down during the quarter of $80 million, excluding refinancing activities.
At the end of the quarter, our total debt was approximately $3.4 billion, with nearly 85% now at fixed rates and an all-in cost of debt of approximately 4.3%.
And finally, we continue to drive shareholder returns through our balanced approach to capital allocation, by investing in our business through innovation, brand-building activities and the projects we mentioned earlier to modernize our core and drive cost out of the business, delivering a quarterly cash dividend of $27 million; repurchasing 500,000 shares for $21 million, representing an average price of $42.61; paying down $80 million of debt excluding refinancing activity; and finally, completing two bolt-on acquisitions.
As a result of our strong organic growth in the first quarter and the interest expense savings from the refinancing we undertook in December, we are updating our full year fiscal 2021 outlook for the following key metrics.
Net sales growth is expected to be at the upper end of the range of 2% to 4%, driven in large part by continued elevated battery demand in North America and favorable currency impacts.
Adjusted gross margin rate is expected to be essentially flat on a year-over-year basis in line with our previously provided outlook.
Adjusted EBITDA is expected to be at the upper end of our previously provided range of $600 million to $630 million and free cash flow of $325 million to $350 million remains unchanged due to working capital requirements, in particular, inventory, as we look to rebuild safety stock.
Adjusted earnings per share is now expected to be in the range of $3.10 to $3.40.
I would also like to provide a reminder regarding the quarterly phasing for the remainder of 2021.
Beginning late in our second quarter of 2020 and through today, we have seen elevated demand for both battery and auto care products due to the impacts of COVID.
In 2021, we expect to continue to see net sales growth until we lap those elevated demand, at which point, we will likely start to see year-over-year declines in net sales as we approach a more normalized level of demand.
We expect this will begin to occur toward the end of the second quarter in battery and late in the third quarter in auto care.
With respect to gross margin rates, we expect them to remain consistent throughout the year.
The gross margin rate in this quarter was better than our expectations due to lower than expected COVID costs, the timing of the realization of synergies and the impact of favorable foreign currencies.
While we are increasing components of our outlook for the full year, there remains a great deal of uncertainty over the balance of the fiscal year with respect to the pandemic and related macro factor and impacts, including currencies, commodities and transportation costs.
We have addressed the items that are within our control and continue to improve our execution.
Actions that we have taken, include continuing to drive increased distribution with strong organic growth across all categories and geographies; improving supply chains surety with expanded capacity and significantly reducing incremental COVID cost by the end of the first quarter; and finally, refinancing more than half of our debt portfolio over the past seven months through the accommodative debt markets.
We remain confident that continued focus on our strategic priorities and our balanced approach to capital allocation will allow us to deliver long-term shareholder value.
In the midst of a very uncertain operating environment, we will focus on meeting the demands of today, while building the capabilities we will need to succeed in the post-pandemic period.
Our operating performance in the first quarter is a testament to the efforts of our colleagues around the world to make, ship and deliver the products that our consumers need during this time.
| energizer holdings sees fy adjusted earnings per share $3.10 to $3.40.
sees fy adjusted earnings per share $3.10 to $3.40.
q1 adjusted earnings per share $1.17 from continuing operations.
organic net sales increased 12.7%, or $93.3 million, in first fiscal quarter.
energizer holdings sees 2021 outlook for revenue growth and adjusted ebitda to the high end of previously disclosed outlook range.
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Today, we will discuss our recent results and our outlook for 2021.
Joining in for the Q&A session are Brad Griffith, our Chief Commercial Officer, as well as George Schuller, our Chief Operations Officer.
Before getting started, I would remind everyone that the remarks we make today represent our view of our financial and operational outlook as of today's date, February 17, 2021.
These expectations involve risks and uncertainties that could cause the company's actual results to differ materially.
A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com.
Our remarks today also include certain non-GAAP financial measures.
I'll start today by giving a top-line overview of our financial and operating results for 2020 before providing some thoughts on the impacts of our enterprisewide optimization efforts, as well as our path forward.
As we look back on the year from a broader perspective, 2020 introduced personal and professional challenges to each and every one of us.
I'm incredibly grateful to the men and women of our company for staying laser-focused on operating safely and responsibly, continuing to bring forward new ideas for improvement and remaining committed to delivering for our customers, communities and our shareholders during this extremely difficult time.
We'll provide more color on those shortly.
We're taking steps internally to further girth our preparedness for such events.
That said, I continue to believe strongly that our team's prudent management and unwavering commitment to our enterprisewide optimization efforts underpinned longer term transformational benefits that we started to see throughout our operations, and fully expect to positively impact our financial results in the future.
One key factor we simply cannot control, but rather we must manage through, is the weather.
We estimate the weak winter weather season in both the first quarter and fourth quarter of last year negatively impacted our full-year 2020 operating income by approximately $40 million to $45 million.
Other external factors adversely affecting our business during the calendar year included the wildfires in California and drought conditions in South America, both of which impacted demand timing from our Plant Nutrition customers and multiple hurricanes in the Gulf Coast, which required multiple brief but unplanned shutdowns at our Cote Blanche mines.
In addition, our South American Plant Nutrition business experienced stronger year-over-year agriculture sales volumes and, in local currency, achieved a 16% increase in fourth quarter operating earnings versus 2019.
However, the Brazilian currency weakened by approximately 33% during the year compared to the U.S. dollar, which ultimately hurt our bottom-line in terms of U.S. results.
As we look at full year 2020 on a consolidated basis, net income for the year decreased by approximately 5% and adjusted EBITDA decreased by approximately 8% when compared to 2019 results.
On the positive side, we continue to generate strong positive cash flow from operations totaling over $175 million for the full year.
We also took an aggressive approach to managing our capital plan and I'm pleased we were able to come in 13% below the midpoint of our original guidance for a total spend of roughly $85 million for the year.
Our free cash flow for the full year was just over $90 million and we returned at $99 million to shareholders through our dividend program, which reflects our confidence in the company's ability to deliver cash flow through varying economic and weather-related cycles.
As a result, we formally relaunched what is designed to be a targeted and expedient process for the sale of both of our Chemical and Plant Nutrition businesses in South America.
We intend to use the proceeds from these transactions to continue reducing our debt, further enhance our liquidity and continue our focus on meeting our customer demand for our essential products.
Given the sensitive nature of these matters, we will not be fielding any questions on this topic, but we'll provide more information as it becomes appropriate to do so.
With our multi-year runway of ample liquidity, no material debt maturities due for over three years, capital plan flexibility and improving execution capabilities, our near-term priority is to deploy any incremental free cash flow after dividends, whether from organic generation or strategic transactions, toward continuing our deleveraging process and paying down our debt to further enhance our equity valuation.
Now moving to our Salt segment.
Full-year adjusted EBITDA margins increased approximately 3 percentage points to 29% despite our adjusted EBITDA being lower by 2%.
We also saw continued improved production performance at our flagship Goderich mine.
On a full year basis, production tons out of Goderich have increased 17% from 2019 results and production costs are down 16%.
In addition, during the fourth quarter of 2020, the team was able to achieve its highest production month since its conversion to continuous mining and haulage.
These steadily improving production metrics highlight a sentiment you've heard me communicate before that we've not yet reached our full long-term potential at this operating assets.
I am confident our progress will continue as we build out our new mine plan, helping to ultimately secure Goderich's position as the leading salt mine in North America from both a cost and volume perspective.
When coupled with enhancements that are designed to provide long-term flexibility and optionality to our logistics and procurement teams, we set a course to capture significant value during stronger seasonal demand by meeting the needs of current and new customers alike.
Our Cote Blanche mine also demonstrated strong year-over-year operating performance, while managing through four significant hurricane events in 2020.
These storms resulted in approximately 11 lost production days during the year.
The preparations made by our team to protect the site and ensure the safety of our people allowed us to resume production efficiently and effectively after each event.
This culture of resilience that permeated throughout the organization in 2020 is perhaps best reflected in the operational agility of our Cote Blanche team who were still able to achieve their full year-end production targets, despite having navigated a record hurricane year in the Gulf.
In addition, given the recent announcement of a nearby competitor closing its facility, we are carefully analyzing opportunities to capture value for our portfolio by enhancing relationships with our existing customers, while also potentially putting us in a position to cultivate some new relationships.
I'd also like to give a particular call out to our logistics team, which has worked diligently on reshaping our network of partners to maximize efficiencies across our operations, while maintaining strong service levels for our customers.
As I mentioned previously, our Plant Nutrition business, particularly in North America, faced some unforeseen circumstances of its own this past year, including extreme wildfires and drought.
The resulting conditions from those events delayed the harvest of key crops, particularly tree nuts along with the fall fertilizer application season.
Our team worked to ensure we were well-positioned to capture those sales volumes in the fourth quarter, ultimately, delivering strong year-over-year revenue growth of 16%.
Given this strength, we were able to partially offset some of the unexpected higher costs that we experienced during the year.
Our Potassium+ product continues to be the SOP market share leader in North America and recent pricing dynamics have reinforced our confidence that near term underlying demand remains robust.
We anticipate upcoming harvest in certain key markets to be very strong, which further translates into nutrient deficiencies for the soil and the need for our products.
When coupled with much more positive global backdrop for all fertilizers and the recent surge in pricing, we anticipate steady demand from our North American customers in 2021.
I would also like to point out that our micronutrients products line was able to achieve a full-year gross sales record in 2020 since their acquisition.
Our South American Plant Nutrition business continued to achieve measured growth in local currency, with sales revenue up 18% for the full year 2020.
Our customers on the agricultural side have experienced very attractive fundamentals and we anticipate these sales trends to continue in 2021.
But as has been a recurring theme, the weaker currency has hurt our results in U.S. dollar terms.
Against the backdrop of the challenges we've all faced in 2020, I'm even more impressed with the efforts of our employees to engage and execute on our enterprisewide optimization effort.
As a reminder, this effort is focused on five broad value streams, namely; operations, commercial, logistics, procurement and working capital.
I referenced previously, in my comments, some of the early benefits coming through our Salt segment results from certain of these value streams.
In prior quarters, we highlighted our harvest haul project at our Ogden facility in Utah, the salt mines compaction project at Goderich and the progress we're making with employee engagement through our organizational health focus.
I would now like to highlight some optimization benefits we're experiencing in procurement.
In 2020, we completely transformed that department, moving from a decentralized and transactional function to a centralized high-standard team focused on operations excellence through global strategic sourcing mindset and a performance-driven culture.
We implemented a category management function, a team concept built to bring together procurement with all relevant areas within that segment.
Each team in a category is a cross-functional and cross-regional aligned to business needs and extensive engagement with stakeholders.
During its initial year in this new structure, the department executed over 65 initiatives, driving as much as 10% annualized savings in a number of specific procurement categories such as contractor services, packaging raw materials and equipment spare parts.
In addition to cost savings, this new procurement strategy is expected to reduce the risk of supply chain disruption and provide a market advantage when our customers require a more sustainable and responsible supply chain.
This high degree of focus from our team is expected to produce long lasting benefits and help expand our margins.
As we worked to both navigate external challenges and drive internal improvements over the course of 2020, there was no area of focus given more attention than our responsibility to keep our employees safe and healthy.
As many of you have heard me communicate before, our number one priority as a management team is ensuring our employees go home at the end of their shift as healthy as they arrived.
Our focus on this Zero Harm culture has been critical in our ability to navigate the current pandemic.
For the year, we achieved another step change decline in our Total Case Incident Rate or TCIR.
In addition to achieving a multi-year low for our 12 months rolling TCIR average in 2020, we ended the year with an average of 1.53 and I'm happy to share that our TCIR in December was among the lowest of any month in the history of the company, coming in at 1.23.
As a leading indicator for operational success, this continuous improvement in our primary safety metric highlights our commitment to conducting business in a responsible manner that protects the health, safety and security of all of our employees, contractors and the communities in which we operate.
The COVID-19 pandemic remains an ongoing challenge and we continue to take actions to mitigate its impacts.
In addition, we faced another slow start to the winter season in our served markets.
Yet our talented workforce, advantaged assets and efficient procurement and logistics operations continue to perform with excellence through this adversity, supporting our global customers with essential products proving our resilience as an organization.
While our overall financial performance in 2020 was below our expectations, we were aggressive in our efforts to mitigate the various external headwinds we faced.
We now estimate a combined negative impact to our original operating earnings forecast of roughly $67 million due specifically to weak winter weather in both the first and fourth quarters, a Brazilian currency that progressively weakened throughout the year and COVID-19 impacts, including both cost preventative measures at our sites and reduced demand within certain higher-margin end markets.
While these factors were out of our control, be assured, we are acutely focused on identifying steps we can take to help insulate our businesses from the severity of similar impacts in the future.
Again, what has allowed us to effectively navigate through the past year is the underlying resilience of the markets in which we serve with our essential products, the strength of our advantaged assets and the dedication of our employees to drive improvements through the optimization effort.
We've also maintained close contact with our customers and remained on course with our previously communicated strategic priorities.
I continue to be excited about the future prospects of our company and confident of long-term value our team, at Compass Minerals, can deliver.
First, a quick review of our consolidated results.
Our fourth quarter 2020 consolidated sales revenue and operating income, both declined year-over-year as late winter weather coupled with lower highway deicing average gross sales price pressured Salt results.
Lower year-over-year SOP pricing, along with elevated SOP production costs more than offset Plant Nutrition North America sales volumes improvements.
For the full year, sales revenue and operating income were also lower as we dealt with over $100 million in sales revenue impact and more than $40 million of operating earnings and tax due to weak winter weather.
We also had elevated SOP costs and lower SOP pricing, which were partially offset by stronger year-over-year SOP sales volumes.
Looking now at our Salt segment results.
Total sales in the quarter were $228.5 million, down from $310.9 million in the fourth quarter of 2019, largely due to lower weather-driven demand for deicing products and the effects of customer carryover inventories.
Although the snow event activity was similar to last year's December quarter, this year's winter had been slow to develop with most of the fourth quarter snow events occurring at the tail end of December.
This winter weather impact, combined with high customer inventory levels, resulted in lower deicing salt sales to highway, commercial and big-box retailers.
Total Salt segment sales volumes dropped to 23% compared to fourth quarter of 2019.
Within our Salt segment, highway deicing experienced a 25% sales volume decline and consumer and industrial sales volumes dropped 16% year-over-year.
Looking at our sales by end-use, rather than by business unit, most of the volume weakness was attributable to lower deicing demand.
In other words, combined sales of most of our non-deicing products, such as water conditioning, chemical processing and food and agriculture were not impacted by the weather and were generally flat with the prior year fourth quarter, even after taking into account some lingering slack in demand due primarily to COVID-19 challenges.
Highway deicing prices were down 11% versus the prior year quarter at $59.20 per ton.
However, consumer and industrial average selling prices increased 1% to $169.30 per ton as a broad-based price increases across all non-deicing product groups was mostly offset by lower sales mix of our higher priced deicing products.
Operating earnings for the Salt segment totaled $50.2 million for the fourth quarter versus $80.5 million last year, while EBITDA for the Salt segment totaled $67.6 million compared to $96.5 million in the prior year quarter.
Despite the challenging environment I just described, we are pleased to report minimal EBITDA margin compression in our Salt segment this quarter as our enterprisewide optimization efforts helped lower our unit cash costs and tightened our spending control on SG&A, which helped offset lower average selling prices.
When stepping back and looking at our fourth quarter Salt costs, we ended up at $41 per ton, which is flat with the 2019 fourth quarter.
However, on a mix-adjusted basis, our unit cost is about $1.25 per ton lower than prior year.
So we absorbed a 25% decline in year-over-year fourth quarter Salt sales volume and we were still able to decrease our mix adjusted Salt unit costs versus the prior year.
Improved production and logistics costs in our North American highway business for the full year 2020 helped to offset a 12.4% lower salt revenue and resulted in adjusted operating income declining just 6% and an adjusted EBITDA decrease of only 2% year-over-year.
In addition to improved Goderich mine production, we continued to diligently and aggressively implement initiatives across the organization design to ultimately drive revenue higher and costs lower.
These efforts contributed to the expansion of the Salt segment adjusted operating margin to nearly 21% from about 19% last year and, at the same timem driving adjusted EBITDA margin to 29.3% compared to 26.1% for the full year 2019.
While these initiatives are expected to drive sustainable improvements for all segments over time, we continue to be pleased to see these early benefits in our Salt results.
It's also worth noting that these benefits have been muted a bit, given the difficult weather backdrop and the real value creation potential will be more obvious under better business conditions.
Turning to our Plant Nutrition North America segment.
Fourth quarter total sales revenue increased 15.9% from the prior year to $88.7 million.
We achieved this by delivering a 23% increase in sales volumes, partially offset by a 6% lower average selling prices.
As we have discussed in recent quarters, the extreme wildfire conditions in the Western U.S. delayed the start of the fall application season and, as we expected, shifted the timing of SOP sales volumes for the 2020 fourth quarter.
While we always price to drive the appropriate value proposition for our customers, we continue to maintain our market share for our premium Potassium+ SOP product.
Plant Nutrition North America operating earnings and EBITDA for the fourth quarter were pressured by short-term cost increases associated with feedstock inconsistency, unplanned downtime and related maintenance costs at our SOP facility in Utah, which weighed significantly on the quarterly and full-year results.
In turn, our Plant Nutrition North America EBITDA margin compressed to about 20% in the quarter compared to nearly 34% in the prior year, with operating margins declining about 10 percentage points quarter-over-quarter.
Strong full year sales volumes, partially offset by lower sales prices, helped us deliver a 16.2% improvement in 2020 full year Plant Nutrition North America revenue versus 2019.
These revenue results, coupled with the short-term fourth quarter cost pressure and the previously disclosed $7.4 million inventory adjustment in the third quarter, resulted in a $10.4 million decline in operating income and a $14.6 million decrease in full-year EBITDA.
Excluding the inventory adjustment, full-year operating margin would have been 8.1% compared to 10.9% in 2019, while full-year EBITDA margin would have been 25% versus 32.5% last year.
Because the inventory adjustment is non-recurring and our SOP cost pressure is short term in nature, we expect a sharp rebound in the Plant Nutrition North America EBITDA and operating margin percentages in 2021.
Our Plant Nutrition South America segment delivered a 24% year-over-year increase in fourth quarter 2020 revenue and an 18% increase for the full year, both in local currency.
This was driven by increases in average selling prices for both agriculture and chemical solutions products, along with stronger year-over-year agro sales volume.
Fourth quarter agro revenue was up about 29% versus 2019 and up nearly 23% for the full year.
Even more impressive was our fast growing Ag B2C business unit where strong sales volumes and price drove a 37% increase in both our 2020 fourth quarter and full year revenue when compared to prior year, again, all in local currency.
Strong demand began in early 2020 for many of our Specialty Plant Nutrition products due to the very attractive economics for Brazilian farmers and that trend continued as we finished 2020 and moved into the beginning of 2021.
In local currency, our Plant Nutrition South America fourth quarter and full year 2020 operating earnings increased 16% and 35%, respectively, while EBITDA increased in lockstep by 15% and 25%, as well.
While we're obviously disappointed with our fourth quarter and full year 2020 results, it's important to again point out that the combination of weak winter weather, Brazilian currency devaluation and COVID-19 impacts in both mitigation costs and end market deterioration negatively affected our 2020 full-year operating income by nearly $70 million.
Despite this impact, we were able to hold year-over-year adjusted EBITDA margins flat at 21% and generate more than $175 million cash flow from operations and $90 million of free cash flow.
I would now like to shift gears and spend a few minutes on our 2021 outlook.
As a reminder, when we work through our annual planning process, we utilize an underlying assumption of average winter weather and how that would translate through our upcoming bid season.
There are multiple scenarios we run, but at the end of the day, we focus on what we can control and then manage through the consequences of what the weather and other opportunities or challenges bring by adjusting our plan dynamically throughout the year.
We are extremely disciplined in our approach to capital spending and closely monitor the supply and demand dynamics of both the salt market, particularly in North America, and the specialty fertilizer market where our high-value Potassium+ SOP product has a leading market share in North America.
Should those factors dictate a supply response, we feel strongly that we can quickly adjust to make rational economic decisions and still be ready to meet our customers' needs.
We're optimistic about 2021 as we look for normalized sales volumes in our Salt business and the expectation of even better agriculture fundamentals in both North and South America.
The initial benefits of our optimization efforts have started to register throughout our various segments and while we're not providing specific guidance on the expected benefits, we continue to believe that the long-term commercial and operational advantages from these efforts will be meaningful to our bottom-line.
For the full year 2021, we are expecting consolidated adjusted EBITDA of between $330 million and $360 million, which is a year-over-year increase of about 20%.
While the midpoint of our guidance is at the lower end of last year's full-year guidance, it's important to note that weak winter weather impacts, like those in 2020, are never immediately reset as prior bid season pricing almost always has a significant influence on the following years' average selling prices.
Our annual operating plan anticipates approximately $100 million in 2021 capital spending, as well as free cash flow at levels similar to 2020.
We are forecasting a significant increase in Salt volumes as winter weather normalizes in both North America and the U.K., and we're expecting high-single-digit sales volume growth for our Plant Nutrition South America segment.
Within Plant Nutrition North America, we expect to see volumes down slightly compared to 2020 as we continue to monitor the growing season and balance our customer needs, given the recent ramp-up in pricing.
Importantly, we will continue working to offset any 2021 headwinds through a dual focus on value creation and cost containment through our enterprisewide optimization effort.
While our net debt to adjusted EBITDA ratio ended 2020 at about 4.3 times, it is expected to end 2021 below 4 times.
We expect to also continue to make progress improving our balance sheet and maintaining a very strong liquidity position with very little in near-term debt maturities.
In summary, while 2020 has been a year marked by challenges, not only for our company, but globally, our business model worked and our people withstood the test.
We exercised flexibility, managed external factors beyond our control, executed our plan and worked on our long-term strategy, while continuing to return cash to shareholders.
As we enter the new year, we remain focused on keeping our people safe, optimizing our operations, containing costs and delivering our essential products to satisfied customers around the world.
With that, I will ask the operator to begin the Q&A session.
| assuming average winter weather activity, expects modest salt segment revenue growth for h1 2021 versus 2020.
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These statements are based on management's expectations, plans, and estimates of our prospects.
Today's statements may be time sensitive and accurate only as of today's date, Thursday, February 13, 2020.
We assume no obligation to update our statements or the other information we provide.
Also on the call today are Jojo Yap, our Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Senior Vice President of Operations; and Bob Walter, Senior Vice President of Capital Markets and Asset Management.
We finished 2019 with an excellent fourth quarter to cap up another successful year.
For 2020, we expect more of the same, leveraging our platform to generate more cash flow growth and value creation.
Occupancy at year end was a very strong 97.6% and full year cash rental rate growth was 13.9%, a Company record.
Both of these metrics reflect continued strong tenant demand for logistics space, and the great work of our leasing and operations professionals.
We developed a number of high quality facilities at strong margins, and replenished our pipeline with the acquisition of several exciting new sites and target markets, particularly Miami.
In addition, we continue to shape our portfolio to drive long-term growth as we further increase our capital allocation to higher barrier markets.
Before we get into the specifics of the quarter, let me provide you with a quick overview of the national industrial market.
According to CBRE Econometric Advisors, new supply for 2019 was 224 million square feet compared to net absorption of 183 million.
This marks the first time since 2009 that new supply exceeded net absorption.
Despite this, our outlook for 2020 is similar to that of 2019.
Vacancies remain low and excess new construction continues to be concentrated primarily in larger format buildings in certain sub-markets, most notably Atlanta, Dallas, and Houston.
We continue to see new tenant requirements from a range of industries across all of our markets.
So the overall environment remains very favorable for strong demand and rent growth.
That's also the case for our portfolio.
We've signed leases for approximately 60% of our 2020 rollovers at a cash rental rate increase of more than 9%.
Included in these results is the long-term renewal of our largest rollover, a 675,000 square foot single tenant building in Central Pennsylvania.
Our expirations for the balance of 2020 are fairly granular.
For the full year, we expect cash rental rate growth of approximately 10% to 14% on our new and renewal leasing.
Turning now to a few highlights from our development program.
In the fourth quarter, we placed in-service seven developments totaling 2.1 million square feet with a total investment of $165 million.
Included in this total is our 556,000 square footer at First Aurora Commerce Center in Denver.
As evidence of the strength of this market, we signed a long-term lease for 100% of the space, which commenced shortly after completion of construction.
In total for 2019, we placed in service 13 buildings totaling 4.4 million square feet with an estimated investment of $325 million.
These assets are 91% leased with an estimated cash yield of 6.7%.
This represents an expected margin of 42% to 52%.
At the mid-point, that would translate to a little over $1 per share in NAV accretion.
At year end, our pipeline of completed developments in lease-up and under construction totaled 3 million square feet with a total estimated investment of $277 million and a projected cash yield of 6.9%.
They are 36% leased and have an expected margin of approximately 40% to 50%.
This pipeline includes a few new starts in the fourth quarter on both Coast and in Dallas.
Starting on the West Coast, First Redwood Logistics Center II is a 72,000 square foot building in the Inland Empire West, with an estimated total investment of $12.6 million.
Completion is set for the third quarter with a cash yield of 5.2%.
In Los Angeles, one mile north of the Port of Long Beach, we acquired a 1.8 acre site for $6 million.
It's leased as a surface lot with an in-place yield of 5.4%.
In Northwest Dallas, we broke ground on our 435,000 square foot multi-tenant building at Phase 2 of our First Park 121 with an estimated investment of $31.2 million and a targeted cash yield of 6.7%.
This building is 77% pre-leased.
We expect to complete this development in Q3.
Moving across the country to South Florida, we've been very active in expanding our development pipeline there.
We broke ground on our First Cypress Creek Commerce Center, a three building park totaling 374,000 square feet on land for which we have a 50-year ground lease.
Our estimated total investment for the building is $35.6 million, with a targeted cash yield of 7.1% and completion is slated for Q4.
We also acquired seven acres of land and broke ground on First Sawgrass Commerce Center, a 104,000 square footer in Broward County, estimated investment is $15.3 million, with a targeted yield of 5.8%, completion is expected in Q3.
On our last call, we discussed our 19.6 acre covered land investment in South Florida for $19.8 million.
Recall this site has three below market ground leases that are currently yielding 3.5%.
We also added another 9 acre site in the Miami market for $8.6 million on which we can develop 131,000 square feet.
Thus far, in the first quarter of 2020, we're very pleased to announce the acquisition of a new land site we call First Park Miami.
We acquired 63 developable acres in Medley, a great infill location where land is difficult to come by.
Our acquisition price was $48.9 million and we can build 1.2 million square feet in total on the site.
We will begin the first phase of development this summer, with three multi-tenant buildings totaling approximately 600,000 square feet.
Total estimated investment for these three buildings is approximately $90 million reflecting land, pre-development and construction costs.
Our target stabilized yield is in the mid-5s.
For the year, building acquisitions totaled 542,000 square feet for $67 million with an expected stabilized cap rate of 5.4%.
So far in the first quarter of 2020, we've acquired our first building in the East Bay market of Northern California.
The property is a 23,000 square footer in the I-880 Hayward submarket, purchase price was $4.9 million, and our expected yield is 5.3%.
We completed $155 million of sales in the fourth quarter, comprising 3.6 million square feet and one land parcel.
These sales were consistent with our ongoing portfolio management efforts that support better long-term cash flow growth.
With these sales, our market footprint has significantly changed.
The largest portion of these dispositions came from the sale of substantially all of our Indianapolis portfolio which totaled $98 million and 2.7 million square feet.
Other notable sales included two buildings in St. Louis totaling $13 million and 245,000 square feet.
With just one building remaining in each of these markets, we've moved those properties to the other category in the portfolio reporting section of our supplemental.
Thus far, in the first quarter, we sold 226,000 square feet in Tampa for $26.5 million.
With this sale, we've now effectively exited the Tampa market with just leased land remaining there.
Our efforts in Florida are now focused in the South Florida and Orlando markets.
Given the leasing progress and rollover status of our portfolios in each of these three markets, we felt the time was right to further simplify our market exposure and redeploy these proceeds into higher rental growth opportunities.
For 2019, dispositions totaled $261 million and comprised 5.2 million square feet and four land parcels.
These figures exclude the sale on Phoenix recognized for accounting purposes in the third quarter of 2019 that is scheduled to close in the third quarter.
For 2020, our guidance for sales is $125 million to $175 million.
As is typical, we expect the majority of 2020 sales to be back-end loaded.
Note this guidance does not include the sale of the Phoenix asset I just mentioned.
Based on our strong 2019 performance and outlook, which Scott will discuss shortly, our board of directors declared a dividend of $0.25 per share for the first quarter of 2020.
This is $1 per share annualized, which equates to an 8.7% increase from 2019.
This dividend level represents a payout ratio of approximately 64% of our anticipated AFFO for 2020 as defined in our supplemental.
Another note on AFFO.
At our last Investor Day in November of 2017, we discussed our opportunity to achieve adjusted funds from operations of $200 million in 2020.
If we achieve the mid-point of our overall guidance for the year, we will deliver on that opportunity.
This would represent compound annual growth of 9% over the period.
In the fourth quarter, diluted earnings per share was $0.76 versus $0.40 one year ago.
And for the full year, diluted earnings per share was $1.88 versus $1.31 for the prior year.
NAREIT funds from operations were $0.45 per fully diluted share compared to $0.42 per share in 4Q 2018.
Excluding a $0.01 of income related to insurance settlements for damaged properties, 4Q 2018 FFO was $0.41 per share.
For the full year, NAREIT FFO per share was $1.74 versus $1.60 in 2018.
As Peter noted, occupancy was 97.6% down 10 basis points for the prior quarter.
In the fourth quarter, we commenced approximately 4.1 million square feet of leases, 757,000 square feet were new, 1.3 million were renewals, and 2.1 million square feet were for developments in acquisitions with lease-up.
Tenant retention by square footage was 81.4%.
Same-store NOI growth on a cash basis excluding termination fees was 2.1% and for the full year 2019, cash same-store growth before lease termination fees was 3.1%.
Cash rental rates were up 9.7% overall, with renewals up 8.2% and new leasing 12.4%.
On a straight line basis, overall rental rates were up 20.4% with renewals increasing 18.5% and new leasing up 23.8%.
For the year, cash rental rates were up 13.9% overall which is a Company record and on a straight line basis, they were up 26%.
Moving on to a few balance sheet metrics.
At the end of 4Q, our net debt plus preferred stocks to adjusted EBITDA is 4.6 times and at December 31st, the weighted average maturity of our unsecured notes, term loans, and secured financings was 5.8 years with a weighted average interest rate of 3.9%.
These figures exclude our credit facility.
Our NAREIT FFO guidance is $1.77 to $1.87 per share with a mid-point of $1.82.
Excluding a $0.01 per share of costs related to severance from the closure of our Indianapolis office and costs related to projected vestings of equity awards for retirement eligible employees, FFO guidance is $1.78 to $1.88 per share with a mid-point of $1.83.
The key assumptions for guidance are as follows.
Quarter-end average in-service occupancy for the year of 97% to 98%, we anticipate first quarter occupancy will have a typical seasonal dip, which could be as much as 75 basis points to 100 basis points.
Our bad debt expense assumption for 2020 is $2 million consistent with last year's assumption.
One of our largest tenants, Pier 1 Imports has been in the news lately.
Our guidance assumes that Pier 1 will continue to occupy our 644,000 square foot facility in Baltimore for the entire year, as this facility is a critical part of their supply chain and I note that they are current on their rent.
Also for your information, the expected FFO from the lease to Pier 1 for the period of March through year end is approximately $2.5 million.
Same-store NOI growth on a cash basis before termination fees is expected to be 4% to 5.5%.
And our cash, same-store metric for the first two quarters is expected to be higher than the remainder of the year due to the benefit of burn off free rent related to developments.
Our G&A guidance range is $31 million to $32 million which excludes a $0.01 per share of severance costs from the closure of our Indianapolis office and costs related to projected vesting of equity awards for retirement eligible employees.
Please also note that besides the normal annual increase in expenses, G&A also includes incremental costs related to a new compensation plan, the compensation committee put in place in 2020, which is more tilted toward total stock return than the prior-plan.
Guidance also includes the anticipated 2020 costs related to our completed and under construction developments at December 31st, plus the planned start of First Park Miami.
In total, for the full year of 2020, we expect to capitalize about $0.03 per share of interest related to our developments.
The impact of any future gains related to the final settlement, two insurance claims from damaged properties and guidance also excludes the potential issuance of equity.
We're excited about our new developments through which we can serve the logistics needs of our customers while expanding our portfolio in key markets and creating value for shareholders.
| q4 earnings per share $0.76.
q4 ffo per share $0.45.
cash rental rates were up 9.7% in 4q19 and 13.9% in 2019.
cash same store noi grew 2.1% in 4q19 and 3.1% for year.
first industrial realty trust - excluding approximately $0.01 per share/unit income related to insurance settlements, q4 2018 ffo per share was $0.41.
expect to deliver additional growth in rental rates and cash flow in 2020.
sees 2020 ffo (nareit definition) earnings per share $1.77- $1.87.
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